7 Components Of A Sellable Business | Ep 220
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- I sold my first company for $46.2 million. I wanna share with you the seven key components that I used to go from almost filing for bankruptcy to being worth over $100 million. These principles are for people who either want to sell their business for millions of dollars, live life on their own terms, or really anywhere in between.

And trust me, having the option of having a sellable business is better than just having a business. So why does this matter? I learned this because when I first started my business, somebody asked me, would you want to sell it one day? And it was in my first year of having my business. And I was like, heck no. Why would I ever want to do that? Fast forward five years. I did want to sell my business. And it wasn't because I hated my business. It was because I wanted something different for my life. You don't need to sell your business, but you need to have the opportunity.

Sometimes the business that you have today is a stepping stone to get to the business that you want to have tomorrow. The first component is growth potential. Growth potential is the capacity and opportunity that the business has to expand its revenue. You could also measure growth potential by total addressable market. This is how many people the business could serve in total. For example, if you sell toothpaste, you have a very large total addressable market.

because a lot of people buy toothpaste. On the other hand, if you sell fake eyelashes, you have a smaller addressable market because only women, for the most part, buy fake eyelashes. So why does this matter? Buyers want to know that there's potential to your business, not just risk. We want to know that someone has left meat on the bone. Say you have tapped out all the ways to grow your business.

That's less appealing to a buyer because then they're thinking, "Okay, well, how am I going to keep growing this business in the future?" That's why best time to sell your business is often when you don't want to sell your business. Because most of the time when you don't want to sell your business, it's because your business is doing really well and you're seeing how fast it's growing and you're seeing all the upside and you're recognizing potential over and over again.

When you do wanna sell your business, it's usually when your business isn't doing well. If you desperately want to sell your business, the likelihood that somebody wants to buy it is very low. Nobody wants to buy a flaming piece of shit. What I would recommend is solve for your pain because where you have pain is what's gonna build a better business. For example, two years before we sold our business, it felt so painful because I didn't have any strategic leadership. And so I was the leader for basically every department.

So what I did is rather than sell my business right then is I said, I've got to get leaders in place because I can't even sell my business for a good number if I'm the main person that's needed here. And so what happened is that by the time my business was ready to sell, I was out of pain. In fact, so much so that when I went into the sale process, I was like, I don't even know if I want to sell the business. You know, I don't really care because

I wasn't needed anymore. But that was amazing because what it meant for people looking to buy my business is this is a good investment. It's stable. It's increasing in value. There's lower risk. And so my point is, if you're in a lot of pain right now, that's not a reason to sell your business.

You can sell your business when it's struggling. But the question is, what's the price and what's the terms? A lot of times when you're looking at a deal, the likelihood that you're gonna get the amount of money that you want and that you're gonna be involved as you want is low. When I sold my first company, Gym Launch, we showcased that there was a lot of growth potential left on the table. Our avatar, our total addressable market that our product focuses on,

fit the needs for were Microgym. And what we saw is, okay, let's look at all the ways that we can grow the business that we can speak to, to people that are looking at buying it. And so one of the main ways is that we could go up market. We actually talked about how are we gonna expand to franchises? That's one bucket of expansion that we had. Another bucket of expansion we had is that we had started building a software, but we had never launched it.

technology, another bucket in terms of growth potential. And then the last bucket in terms of growth potential, at one point we had said, let's pivot and look at expanding internationally. So just doing the exact same thing, but doing it in Brazil, for example. And so those were the three buckets that we had so that when we went to market, we were able to say, look at these ways that we can grow. That's not enough, but they're going to say, prove it to me. So what we did is actually we launched

what we called big box, which was we pitched franchisees and we pitched big chain gyms our product. And then we closed six deals that when we went on the market, we could say, look, we just launched this new product. Here's what it looks like. We've already proven it out, but look at all this untapped potential because we know this works. Not only did we show that we had the growth potential, but we also made it real.

So if you're trying to figure out what does growth potential look like for my business, here's the three questions that I would ask myself. What opportunities have I left on the table that someone else can capitalize from?

from? Is my business currently thriving or am I trying to sell it because I'm in pain? What signs of future growth can I showcase or demonstrate to show that my business has long term growth potential? Somebody buying your business is looking at it not just as a business, but an investment. And so if you look at what makes a stable investment, it's something that you know isn't going to disappear over time.

It's something that's going to increase over time. Don't look for the next opportunity until you've maximized the one you're in. My inability to see how big my business could actually be was actually the biggest limiter of my business. That's when I realized most companies stall because the founder runs out of vision, not because the company runs out of potential. It may not be that

there is no path to growth. It may be that you just don't know what that path is and you don't have the vision or you don't have the skills to figure it out. And so if you don't, watch this video and watch the rest of it and find out what else you can do because more businesses, people sell them too early or they shut them down because they think the business is the problem when in fact it's your lack of ability to see a long-term vision for it. The next component is a unique value proposition. It's really just the unique benefits

that a service or a product offers to its customers. A unique value proposition doesn't need to just be the product. It can also be the messaging around the product, or it could be the pricing of the product.

I call like the three P's of a value proposition. There's price, promotion, and product. So to give you an example of each of those things. For product, let's look at a company like Apple. Apple, their unique advantage is the quality of the product. Even from when you get the package, how the box sounds when it opens, to how easy it is to set up the product, Apple has mastered the simple user experience. Now, if you've got price,

Spirit, super low price. You just have to pay for all these extras and add-ons, but you can fly for like $50. The last P is promotion. A great example of this is Red Bull. When they started marketing their energy drink, it was one of the most creative ways. So they really honed into like extreme sports and that's the association they have made that's different from their competition. Whether it's the price, the promotion or the product,

you can figure out a way to differentiate your company. And if you want to sell your company one day, this is something that you want to be able to speak to because the more unique your value proposition is, the more it mitigates risk for a buyer and creates more potential upside. So why does this matter?

Because if somebody is going to buy your business, here's what they want to know. Who's to say that your competitor isn't going to take all your customers tomorrow? Who's to say that another company isn't going to start from scratch and they're not going to just take all of your customers from you? And if you have a unique way of building your product, a unique way of marketing your product or a unique way of pricing your product, then those are all unique ways that you can protect yourself from the competition. I think about it like you're trying to build a moat around your company.

And so it's like, how deep can you make that moat? The more that you can differentiate yourself from the competition, the deeper that moat becomes. So how did I do this with my first business gym launch? The reason that the company even started was that I'd been in the fitness industry for a decade. What became very obvious to myself and to my partner, Alex, was that there was no company

that was able to do what we wanted to create, which was essentially if you really wanted help figuring out how to operate your gym and scale your gym, then you either needed to become a franchise and get access to all their materials, or you need to work with some sort of marketing agency. But in that case, they're only going to run ads for you. People that would sign up to be a franchisee of these very big, well-known franchises became more and more discontent over time, where on this side, people would pay these marketing agencies who didn't really know much about gyms to run ads for them

Nobody understands why the marketing worked. Nobody understood what was happening and nobody had much communication with the agencies about like, what do I do once I get these people in the door? And so we said, wouldn't it be cool if there was a company that existed where you could figure out how to build the operating model for a gym. You could figure out how to get customers and you knew how to do it all yourself.

So you didn't have to become a franchisee and you didn't have to pay an agency and just like blindly hope that they could figure it out for you. And so that's what we did with our product, democratize the information and make sure that all of the people, aka all the business owners have as much information as possible. That is how we were able to differentiate ourselves in the marketplace. A lot of people think being different from your competition means being an innovator in the marketplace. I'm not saying you need to be an innovator. I'm saying you need to be different than your competition.

There's a lot of studies done on this and McKinsey did one that shows that to be different from your competition means that your company is only about 20% different. So it's not like you need to have 100% different company. You just need 20% to be different. You need to understand what that 20% is. So again, what are those three Ps as the ways that you can differentiate your company? So if you're trying to figure out like, do I have a unique value proposition? Ask yourself this, what differentiates me from my competition?

Some of you watching this do not have a unique value proposition. You might have your first business and you're just starting off and you just wanna have a good business and you're not looking to sell it, then you can still make money without having this. It just makes it harder to sell. The next component is diversification of revenue.

This means to generate income from multiple sources. So when I say sources, this can mean like you have multiple products you sell. It also means that you have multiple kinds of customers you sell to or just customers in general. So it's really looking at like how do you get more revenue from different products and from different people? Nobody buying your business wants to feel like they're overly reliant on anything.

If we look at best case, it's that you have a variety of products that you sell to a ton of people and you make a ton of money. So for example, if you are a marketing agency and one client alone is 35 or 40% of your total revenue, that is not diverse. And so that's a risk for somebody because they say, wow, the business could literally get cut by

by 40% tomorrow if this person left. On the other hand, your marketing agency, it's like, okay, well, what sources does the revenue come from? Let's say you offer Facebook ads, SEO, and content management. From all the revenue that you make, only the Facebook ads generate the most. So they generate 80% of the revenue, and then the other two generate the 20%. Someone's gonna say, well, why are those only generating 20%? I would love to see if this was more evenly dispersed.

And so that example, you don't really have diversity of revenue. They want to know that if one thing disappears, your whole business does not dramatically decrease. That's why diversification is important to a buyer. When I look at purchasing a business, the perfect business has lots of clients, lots of revenue streams, lots of products, and lots of platforms that they can acquire clients and promote their products.

I was trying to buy an agency. I finally found one that I really liked and I was like, wow. And when we went into diligence, I had been told that there was 50 some clients.

Well, that 50 some actually turned out to be six. And I said, okay, this doesn't feel great. So I said, like, let me get the phone numbers to their clients. When I called up six of them, two of them told me that they were thinking about canceling. And I was like, yeah, fuck this, I'm out of it. Because what does that mean? If six people drive all the revenue and two of them disappear, then that means the business cuts by 33%. Me, as somebody who actually was looking at buying this business said, hell no, I'm not touching that with a 10 foot pole.

because there was no diversification at all. There's a really good quote by Tony Robbins that is this, "If you have multiple streams of income, you have financial security. If you have one, you are one step away from a disaster." So if you're thinking about selling your business or you want to have a sellable business, ask yourself, where is your revenue coming from? Is it concentrated with customers? Is it concentrated with products?

either one of those things is a little tough for a buyer. Now here's the last thing I want to say to caveat all this. If you just started your business, there's no effing way that you're going to have multiple products with a ton of customers.

And so take all of this with a grain of salt because, you know, me 12 years ago, when I first started my first business, I had none of any of this. So I give this to you as like, if you just started your business, now you at least know what to work towards. Contextualize this for yourself. If you're just starting, don't try and build a million products and get as many customers as possible. Just try and like make money first. The next component is cashflow.

What is this? This is just the money that goes in and out of your business. When you look at your business bank account every day, that is cashflow. So positive cashflow means there's more money coming in than there is going out. Negative cashflow means there's more money going out than there is coming in. We want positive cashflow when we're looking to sell our business. So why is cashflow important? Because cashflow, what it says to somebody that's looking to buy your business is that they can buy your business and not need to put more money in. So when I did my first majority investment, for example,

I wanted to make sure it was a very profitable business because I was putting in $4 million. So I'm gonna put $4 million into this business. I don't wanna put another dime into that business unless I know it can self-fund after that.

I'm already taking all this money as an investor to buy a business. The last thing I want to do is then have to take more of my money and shove it in the business to keep the thing going. And so what you want is you want a business that has positive cash flow so that you can use the money in the business to grow the business. This is why this is important to people buying your business and that having strong cash flow is so appealing. So a lot of people that buy

that buy businesses. Say you're looking at somebody that has raised money, they have a fund and they wanna buy your business to be part of this fund. They're going to come in with money that their investors have given them. And they're gonna give you that money and they're gonna take your business and they're gonna go to the bank. Essentially it's like refinancing the business.

So basically, they're gonna then take all their money back out of the business that they just gave you. That is how private equity works. And that's how people buy businesses most of the time. Why is this so important then that you have strong cashflow? Because how are they gonna pay the debt to the bank

if they don't have money coming from the business. For example, one of the businesses that I sold, what happened is that the buyer bought the business from me, then they took it to the bank, they said, "Can I refinance this business?" They then, every month, using the cash flow from my business, have to pay the bank. That's why cash flow is so important to somebody looking to buy your business, at least anybody serious looking to buy your business.

because they need to know that your business can service the debt that they're gonna put on it. Because they're just looking, how can I mitigate risk to be as low as possible? And you mitigate risk by the moment that I give you 20 million, I then go and say, how do I get that 20 million back from the bank? And that's the game. And so if you want somebody who knows how to play a big game and can actually throw up big numbers and pay good money for your business to buy your business, then you're going to have to understand this. And that is why having strong cashflow is so important for people.

Weak cash flow usually comes from two things.

One is mismanaged resources. So a lot of the times what happens is that somebody starts making money. The ability to make money is not the same as the ability to manage that money. So a lot of people can, they can make cashflow, but they don't know how to manage expenses. And so one of the things that I've seen with a lot of businesses is that the reason that their cashflow is not as strong as it could be is because they're very focused on making money, but they're not focused on keeping that money and being diligent.

And I'll tell you, one of the biggest mistakes I made when we were growing really fast in my first company, we went from zero to $2.5 million a month in less than a year. Because of that, it felt like, oh, I can let people spend more money. Worst mentality Switch could have ever had.

having the mentality that because we have more money, we should spend more money, very bad mentality to have. We should spend more money on the things that grow the business, not the things that support the growth, not software and technology and all these other things. And so now here's the reality. Are we going to spend more money on something? Yes. But

having the mentality that we like now can spend more money on things because we make more, it actually just creates less operational discipline in the business. So what you see in that is like people are overpaying people.

which then they bring in new people and new people are like, why is this person paid this much? All this confusion creates cultural issues. We see that people start outsourcing work that they should be doing because they're like, well, we got money, so we should outsource it to this person. And then you start noticing that the potency and density of work in the company starts to dilute over time. What I will say is this, is that having weak cash flow because you have low operational management, that's not a healthy company either.

And so if you have weak cash flow and you're like, I don't pay attention to anything that happens after the money is made, that could be one reason. The other reason is that you might have low product market fit. Okay, so there are many companies, they cannot demand higher prices. They can't create margin in their business because there's just not enough demand for the product.

So I'll give you an example. We had a portfolio company that they boomed during COVID because they were in the fitness industry. And because of that, they were able to charge like astronomical prices because there was such a demand for their specific type of fitness that they offered to customers. Because of that, the metrics in the beginning were amazing. Cashflow was super strong. What happened was that we moved into like a new era where there was less demand for their product. And because of that, less people bought it at a high price. So eventually,

It was either less customers buy or we lower the price and get more customers. It's because there was less demand for the product because product market fit had started to diminish. And so because of that, we had weaker cash flow. So what that taught me is that you have to constantly be also innovating to make sure that you stay ahead of the curve because if you have weak product market fit, it's hard to do really anything in the business, including produce cash flow. Do I have low product market fit? Do I have weak operational diligence in my company?

either one of those things could be a reason why you don't have strong cash flow in your business. The ideal is that we can use cash flow to create more cash flow. The next component is recurring revenue. This is just the income that a business earns predictably over time. So this could look like subscriptions, long-term contracts, monthly payments coming in,

It could look like maintenance fees. It just means you know that someone paid you and that you know when they're going to pay you again. Versus a lot of businesses, it's like, "They paid me. I don't know if they're ever going to pay me again." And the reason that this is so appealing to somebody who wants to buy your business is because they want to know predictability of revenue and of cash flow. And so when they're looking at your business, there's some businesses that might have like a ton of one-time purchases.

But then they're saying, well, how do I know they're ever going to buy anything from you again? When you have recurring revenue, it takes away a sense of urgency to do things to make money in the business. Because if you're constantly just trying to like make the next sale because you only have one time purchases, it makes it really hard to be strategic in your business. So, for example, there was a company that we invested in about four years ago now, and that company only had one time purchases.

Super strong revenue, super strong margins, but it only had one-time purchases. We know that we can get somebody to buy a product one time, but what would be more valuable is if we can get that person to buy our product and then also go into a subscription. And then what would be even more valuable on top of that is if they don't just go into a subscription, but there's also an upgrade available.

And so what we did is that we took the revenue that we were getting from the one-time purchase and we spread it out onto the subscription and then we increased it with the upgrade. And not only did we increase revenue, but we made a more stable and a more sellable business by doing that. That's where like Starbucks carts come into play. Another example of this is if you go to like a med spa.

You go to a med spa and it's like, I'm going to get Botox done. I'm going to get hair removal done. And they're like, how do I know they're going to buy again? They have memberships where essentially you can get discounts on all of their services if you pay $75 a month every month. If you're a business owner and you're thinking like, wow, I have a lot of one-time purchases. Let's think about something like landscaping. So you go and you do big overhauls and you redo somebody's lawn. And then you're like, well, they're never going to pay me again. That's where maintenance comes in.

maintenance fees are great as subscription fees. There's always a way that you can create subscription revenue in your business. It's just a matter of figuring out what are the things that somebody is going to do with your product or service after you've allowed them to buy it one time, and then how can you offer to do it for them? So if you want to figure out if your business has recurring revenue, ask yourself this: Do I have predictable revenue or am I only making one-time purchases? The next question to that is

How could I turn my one-time sales into recurring purchases? Is it a subscription? Is it a maintenance fee? Is it a membership? There's always something that you can think through. The next component is financial performance. This is how easy is it for the company to generate revenue and profit with lower expenses on a long enough time horizon.

What you have to remember is that the person buying your business, they're buying it as an investment vehicle. And so they want to know when I put my money in, am I sure that I'm going to be able to get my money out one day? They're looking to make more than what they put in. And if your business doesn't have strong financial performance that can't show them that there's the ability to make more on their money, then they could just go to an alternative. You're competing against not just other businesses, but other people.

but other sources of investment vehicles that investors can put their money in. And so that is what, when you're bringing your business to market, you have to think about because that's what they're thinking about is they're thinking, how do I know that this is the best allocation of my capital? So let's break this down. Financial performance really consists of two parts. The first one being revenue. That's really just your ability to sell and sell more over time. So when somebody is buying your business, they're going to look very closely at your revenue trends.

Because revenue trends are a sign of how strong your business is. If your revenue is like this, then their return is going to be like this. If your revenue is like this, then their return is going to be like this. So we want this. We don't want this. And we don't want this.

Strong revenue is an indication of how strong your business is. It means you have demand from the marketplace. It means you have the ability to market and sell. It means you have customers who want to buy your product. And it means that you have future runway to sell more products to more people. Usually, strong revenue is a byproduct of three things: strong brand, strong marketing, and strong sales. It takes effort and it takes talent and it takes skills to create strong revenue in a business.

So that is why the more revenue a business has and the more stable that revenue, the better that is for an investor. So if you're listening to this and you're thinking to yourself, I don't know how my revenue is, I want you to ask yourself this question. What's stopping me from making more revenue?

Is it because you don't have somebody in your marketing department? Is it because your reputation's not that good? People always have the goal of making more revenue. The question is, why aren't you making more? What's stopping you? And that's what we wanna solve to unlock more revenue growth. The next measure of financial performance, we have gross margin. This is how much money remains after the cost of goods. So let me explain what that means. If you make $100 selling stuffed animals, but you buy those stuffed animals

for $20, then your gross margin is $80. That's gross margin. Now on the other hand, we have profit margin, which is how much is left over after not just cost of goods, but also the expenses in your business. Let's say you sell a stuffed animal for $100.

and then you bought that stuffed animal for 20, we're at 80. You gotta pay payroll, you gotta pay for the building, you keep the stuffed animal. And let's say after all that, that costs you $30. So 30 plus 20 is 50, 100 minus 50 is 50. So your profit margin is $50. Both of these things indicate the performance of your business. And the higher both of these numbers are, the better. These numbers indicate different things. Gross margin is usually a great indication of how scalable your product is.

Profit margin is an indication of how you're managing costs in your business. If you have strong gross margins and strong profit margins, that is ideal for an investor. This is crucial because they want to know that they can recoup their investment. So for example, my first business, Jim Launch,

really strong gross margin and profit margin. The reason is because it was a service business, and so there wasn't like fixed cost in terms of, I need to spend $20 on every customer to deliver them goods. The second piece to it is that it was a remote company, so that also greatly reduced overhead. So both of those things allowed both our gross and profit margins to be fairly high. On the other hand, I started Prestige Labs. The gross and the profit margins, like that business never really reached

profit margins over 40%. And the reason for that was because we had to buy all these supplements and we were at the hand of people who supplied the raw material. And they got to put them at whatever price they put them at. And so because we didn't make chemical compounds to make supplements, they dealt us as their hand. So if costs went up for them, costs went up for us.

If one month we dip a little because November, sometimes our profit margin would be 10%, just that dip, it ate into all of our profit. And so we barely had any profit left over. For some businesses, like the one I just mentioned, you won't have high margins or even like mid margins until you have economies of scale, which really means until you get big enough to determine how much things cost or to have influence on how much things cost. So think about it like this.

If you're a factory, let's just say you ship pre-made meals. In the beginning, your margin is going to be much lower because you have to invest in buying a factory, in all the machines, in hiring all the workers, just to make the base amount of units. Once that infrastructure is in place, you actually might not need to add much more cost. You just can produce more

with the resources you already have. And so that is economies of scale. So ask yourself this question. One, do you know your margins? And the second question I would ask is if you do know your margins, what's stopping me from having better margins? The last component is the strength of team. A strong team is one that will grow, not just maintain the business when the founders are not there. Creating a strong team is probably the most valuable thing that you can do to sell your business. It is also the one that takes the most time, is the hardest to do.

But the reason it's so crucial if you want to sell your business is that when somebody buys your business, they would like to buy a business, not a person. They don't want to buy you. They want to buy the thing that you've made. And if you are integral to the thing you made functioning, then it makes it much less valuable. For me, growing my team to the point where I could sell my business for my first business, it took about seven years.

And once I knew that I wanted to bring the business to market, I intentionally was like, okay, I need a CEO and I need a COO because those are two key roles that are needed in this business for it to function independently without myself or Alex involved. When we had our team meet potential buyers, they started asking us all these questions. And I actually realized I actually didn't even know the answer to most of the questions.

because they were actually the ones doing it. And they knew more than we did at that point in time. Our inability to answer questions about our own business was actually a plus for us because the buyers were like, wow, well, your team knew all the answers to all these questions, which tells us they actually do run the company without you. And so we actually see the business as more valuable now that we've met your team. The more that they got to know our team, the more valuable they realized the business was because they realized it could function without us there. So if you're trying to figure out

Do I have a strong team? This is my favorite question to ask myself. If I were to disappear for a month, would my business decline, maintain, or grow? And if it grows, you have a really strong team. If it can maintain, you have a decent team. And if it would decline, then you do not have the team you need to succeed. There comes a point in every business where you need a team that has answers, not just questions. I look for diversity of thought.

when it comes to hiring people. I want people that have different ways of thinking and I can get all those people with different ways of thinking in a room. That's the kind of diversity you want in a business and that's what makes for a strong team. Whether you want to sell your business or you just want a business that can afford you a lifestyle you want and let you build something that has an impact, you want to make sure you have a good team to do it. Even if you don't want to sell now, focus on these seven options to keep it open as an option for you in the future. You know, back when I started my first business, I didn't think I was ever going to want to sell my business.

And then what did I know seven years into it or five years into it? I was like, hey, it's an option. It would change my life immensely. I want to sell it. I think there's so much value in having options even more than there is in which option you choose. It's just the ability to have them. And so if you build your business utilizing these seven components, you will absolutely have that option available to you. And I will leave you with this. The most undervalued skill when it comes to building a business is patience. If

If you heard what I said in multiple times in this video, it took me two years to get my business to a point where it was sell-able. And so if you are in a rush and desperate to sell your business, it is probably not the right time.