Turning your muse into a sellable company
I’m going to define a “sellable business” as one that is not dependent on you to thrive. For anyone to want to buy it, your business has to be valuable even after you’ve left. I’m also going to assume you have a muse up and running. If not, refer back to Tim’s advice for creating a muse in The 4-Hour Workweek.
By Tim Ferriss, fourhourworkweek.com
The first step in turning your muse into a sellable business is to reengineer your offering to ensure it meets three criteria important to acquirers:
1. It’s teachable
You need to be able to teach employees or suppliers (or be able to program technology) to do most of the work. That means the delivery of your product or service can’t be dependent on you showing up. If you have developed a yoga DVD and teach yoga classes, you can probably teach others to fulfill DVD orders, but your yoga classes need you. To create a sellable muse, focus on the part of your muse that can run without you.
2. It’s valuable
To create a sellable company, you need to have something others couldn’t easily replicate, which means you need to find a quiet niche without a lot of competition. Recently Tim highlighted Guerrilla Drum Making as a muse that provides customers a video on how to make a drum kit out of everyday products available at Home Depot. While there are a ton of on- and offline music stores, Guerrilla Drum Making has carved out a unique spot in the musical instrument market by helping handy parents and aspiring musicians build a drum kit that is both professional-looking and unique. It’s a nice little niche, one that will allow the owner to control how he gets paid, which is critical to increasing the overall value of a business—more on that in a minute.
3. It’s repeatable
The hardest yet most important part of turning your muse into a sellable company is building a recurring revenue model. When potential acquirers look at your muse, they’re going to want to understand how revenue is going to come in after you are gone. There are six basic models of recurring revenue. In order of least to most valuable in the eyes of an acquirer, they are as follows:
– Consumables: Tim highlighted Hewley shampoo in a recent post. This is a classic “consumable” product since most people need to buy a new bottle of shampoo every month or so. Once customers become loyal to a brand, the company begins to enjoy some recurring revenue.
– “Sunk-Money” Consumables: When you buy a Gillette Sensor razor, you’re much more likely to buy a five-pack of Gillette Sensor blades every month than to buy another brand because you have “sunk money” into the razor and have become invested in a platform.
– Renewable Subscriptions: More valuable than simple consumables in the eyes of an acquirer are subscriptions. In this video of Tim highlighting successful muses, he mentions Everyday Genius, where customers pay first and then get the product over the life of the subscription. Acquirers prefer the predictable nature of subscription revenue over the consumable model of recurring revenue.
– “Sunk-Money” Renewable Subscriptions: A muse ascends to the next rung on the value ladder when customers make an investment to become subscribers. I recently bought an Apple TV box and a $9.99/month Netflix subscription. I’m more likely to renew my Netflix subscription because I have sunk money into the Apple decoder.
– Automatic-Renewal Subscriptions: As valuable as a subscription muse is, an auto-renewal subscription business that has the right to bill customers until they say stop is even better. Unlike a traditional magazine subscription, an auto-renewal subscription means subscribers don’t have to make a conscious re-up decision each year, so the business is more likely to keep them around longer. For example, when you store documents with Iron Mountain, it just keeps billing you until you say stop.
– Contracts: The most valuable form of revenue is guaranteed into the future in the form of a contract. If you are lucky enough to get long-term contracts from your customers, include a “survivor clause” in them to ensure that the customer’s obligations “survive” a change in ownership of your company.
Think of the recurring revenue model as a ladder you want to climb to get the highest possible price for your muse when you’re ready to sell.
Once you have developed a recurring revenue model for your niche product or service that can be delivered without your involvement, the next step in getting the highest price for your muse is to rework your cash flow model so that your business stops sucking cash and instead starts blowing it out.
Here’s why: When acquirers buy your business, they need to write two checks: one to you and a second to fund your muse’s “working capital,” the everyday cash your business needs to meet its immediate expenses. The smaller the check they need to write for working capital, the larger the check they’re willing to write you for the purchase.
You want to change a negative cash flow cycle into a positive cash flow cycle. If you’re paying for inventory before you sell it, your company has a negative cash flow cycle. Try to shift your model so you charge up front or on a subscription basis so that your business generates cash as it grows. This will make it more valuable when you sell it.
Track your statistics like Joe Mauer
In March 2010, Joe Mauer of the Minnesota Twins signed a contract that will pay him $184 million over the next eight years, making him one of the best-paid athletes of all time. One of the amazing things about Mauer is he combines two attributes rarely found in one player: a knack for both getting on base and hitting for power. The combination of these skills is expressed in a statistic called on-base plus slugging (OPS), which merges on-base percentage and slugging percentage—in Mauer’s case, an almost unheard-of 1.031 during contract negotiations. Mauer’s OPS—along with his three Gold Glove Awards and three batting titles—helped his agent Ron Shapiro sell Mauer’s value.
When you go to sell your business, like Mauer, you will need a set of statistics that will help make the case for how valuable your company is in the hands of someone else. Tim has hammered us on this blog about the importance of metrics when growing your muse, so here are a couple of others to track as you shift your muse to the status of “sellable.”
– Addressable Market Size: How many people in your geographic market buy what you sell? For example, let’s say you have developed an English-language subscription for a yoga DVD series that is easy to ship within the United States. Your customers get four new instructional yoga DVDs per year, and you charge $99 annually. If three million Americans participate in yoga at least once per year, you could argue that your addressable market is three million people.
– Market Penetration Rate: What proportion of the target market have you sopped up, and how much is left for the potential acquirer to go after? Let’s say you have sold 3,000 subscriptions since you started your yoga DVD muse. Therefore, your market penetration rate is 0.1%, and an acquirer would realize there is still plenty of field left to plow.
– Cost per Customer Acquired: How much does it cost you to acquire a new customer? Cost per customer acquired further breaks down into cost per lead and your conversion rate. For example, let’s say it costs you $8 to get a lead from Google Adwords, and for every three leads you get, you close one subscription. In this example, your cost per lead is $8 and your conversion rate is 33%, so your cost per customer acquired is $24.
Think about what your business is worth in another’s hands
These statistics become the raw material you need to make the case of what your business will be worth in the hands of an acquirer. For example, let’s imagine a hypothetical magazine called Fit Girl has 800,000 subscribers. The publisher has heard about your yoga DVD subscription and is keen to diversify Fit Girl’s revenue away from the traditional magazine business. She calls you to see if you’re interested in selling your business.
Along with figuring out what she thinks your business is worth on the open market, she is also going to estimate what your business is worth to Fit Girl by making some assumption using the numbers you have been tracking:
– If 1% of the U.S. population likes yoga (your 3 million market size divided by the total U.S. population), then chances are at least 1% of Fit Girl subscribers—physically fit women—are into yoga. In fact, given the readership, Fit Girl might conservatively project its total immediate market for your DVD series to be more like 2% of 800,000, amounting to 16,000 subscribers.
– If you’re picking up subscribers through Adwords for $24 each without your brand being a household name, Fit Girl will reasonably assume it can do at least as well with the power of its name. So the publisher might conservatively use your $24 cost per customer acquired to model out what her cost will be to get the 16,000 subscribers: $24 x 16,000 = $384,000.
In this hypothetical example, Fit Girl would conservatively pick up $1,584,000 worth of subscription revenue at a minimum. And if the stock market is valuing magazine companies at two times their revenue, buying your DVD series would give Fit Girl an easy $3,168,000 ($1,584,000 x 2) bump in market capitalization, which might lead to how the publisher would think about what your business is worth in her hands.
Acquirers will, of course, want to use low-ball industry comparables to value your company. To get the highest price for your business, you’ll have to use your statistics to paint the picture of what the business is worth to them.
The last question you need to answer
With a recurring revenue model for your niche product, you’ll be in a position to sell your muse. The only question left to answer is: when?
That’s a toughie, and only you can answer.
Maybe you’ll run your muse for years, indulging in amazing travel knowing you couldsell when you’re ready. That’s a powerful position to be in. Maybe you’ll decide that, even though your muse is profitable and low stress, it is worth more to someone else than it is to you—which is when you’ll get the highest price for your business and minimize a soul-crushing earn-out.
Having all the cards in your hands starts by transforming your muse into a sellable company.