I sold 3 companies for $50,000,000+ by age 29...[7 tips to sell your business for millions]

What is up? Welcome to my channel. My name is Lalo Hermozi, co-CEO of Acquisition.com, which is a portfolio of businesses that does about $85 million a year in revenue. And I don't do coaching. I don't sell porches. I don't have like anything to advertise to you on this channel. I just make this because I like documenting what I understand and I like sharing things that I think I know something about. And so that being said, I wanted to talk today about something that's really top of mind, which is how to create a sellable business. And this video will be coming out after the news that we have sold two of our main businesses in the last 10 days. And so it was ******* nuts. And I have a lot of videos to make on the topic. And if you saw like the public release that went out and stuff, you know, we kind of said a blurb about it there. But in terms of what I wanted to do to provide value to all of you is I want to share with you what I wish I had known before selling a business, which is, it's really interesting because this past year we actually sold three businesses. We sold a software business, a products, physical products business and a service business. And so it's been nuts. And we did all this because we wanted to consolidate down to just our holding company, Acquisition.com and really focus in there and have practice what we preach, which is focusing. And so that being said, I wrote down seven things that if I had known when we first started the business, I would have focused on more then. Because I'll tell you this, which is when we started our business, I remember someone saying one day you might want to sell. And I thought to myself, because, you know, I'm in uninformed optimism land of this is ******* awesome. I was like, oh my God, I would never want to sell. I can't believe you would even say that. I'm almost like offended. I'm never going to be one of those people. As time goes on, you kind of realize things about yourself. One thing I know about myself and Alex about himself is like, we like to build things and we're really great builders. I'm not necessarily, I can maintain and I can actually be an excellent maintainer, but I do not enjoy it as much. I think at a certain point with every business that we've had, we're kind of like, okay, you know, it's kind of in maintenance, incremental improvement mode, but we really like getting ---- fixed. I like fixing broken stuff and I like building new stuff. And for me, it's mostly teams and infrastructure. That being said, I remember the beginning, you know, we were kind of like poo poo that like, oh, we're not going to sell business. Why do I give a **** anyways? And I wish I hadn't because, you know, later on in 2019, March of 2019 is when we said, let's figure out how to sell this business. It took two years to get it to a point where it was truly sellable. And I will say that one main reason is because like our service business is, you know, it was a dancing Mickey Mouse character guru business. And so we turned it into a real sellable enterprise enterprise. I think it was a really cool process and it was a lot of fun and it was really challenging, but I'm really proud of the work that we did. And I'm so proud of the company it is now. And I'm ******* stoked to take over the industry and take it to the next level. But I want to share the seven things that I learned along the way and that we really honed in on so that we could create a sellable enterprise, an asset, a true business that we own, not a business that owns us or that we have a job in. Let me go through those seven things with you. The first one is financial performance. What I mean by this is what are your margins look like? What does your revenue look like? That's the most obvious thing. But here's why it's important is it shows your ability to sell. That's the first thing. Revenue, you know, people like, why is revenue important? And this seems really, really elementary and obvious, but think about it like this. Revenue is important and revenue growth is important because it shows that you have the ability to sell and to sell more over time. And so that's actually what people are looking at is like, how strong is the ability for you to sell your product to the market? Now, the second thing that goes with that is how and what is your ability to create margin? And the reason that margin is so important is because people that buy your business want to know that they can recoup their investment because most firms out there want to know how long it will take to recoup their investment. And if your margin is slim or next to nothing, right? And you can look, you can Google and see what your industry averages are to figure out your margins and what they should be and what's ideal and what's optimal. The higher your margin is, the more likely they're going to think your business is appealing because it says one, you know how to sell revenue, right? And you know that you can continue to sell more and more because you have strong sales abilities. And then two is margin, which is they can recoup their investment. And so they feel comfortable pursuing that opportunity. I understand. And I know that everyone watching this channel knows those things are important, revenue and margin. But when it comes to why those are important when you're selling, I think it's very under, it is important to understand the delineation. That's the first thing. The second thing is growth potential. You have to leave meat on the bone of your business. And I think that often what people want to do is they want to build their business and they want to sell it when they don't like it anymore. You know, when you don't like your business anymore, it's often when it's sucking and you know, when other people don't like your business, when it's sucking. And so the best time to sell is not when you want to sell. It's often when you don't want to sell, because when you don't want to sell, it means that you have a ******* awesome thing going and other people want to buy it. It makes sense, right? It's two that go hand in hand, which is they have to see like, where's the untapped market. If you've tapped your whole marketplace, which it's hard to believe anyone would, but if you have, then why would they have an interest in buying it? Because they're like, what am I, where's my return going to come from? It's only going to decline. The second piece of that is they don't want to buy a business that's going down, right? And so if, you know, you want to sell your business because now you kind of run out of ideas or you run out of spark or whatever it is, it's not as fun as it used to be, all this stuff. It's usually the business isn't good. And so people don't want to buy it. It's that simple. Like if you desperately want to sell your business, nobody desperately wants to buy your business. So instead, like if you're watching this video and you're killing it right now, and you're crushing it, whether you want to or not, it's probably one of the better times to sell your business. Obviously you have to have a track record. Like if you're in year one, I don't care how good your business is, it's going to be very hard to sell. But if you're three, four or five years in and your business is crushing it and it's murdering it right now, that's probably a fantastic time to sell. So that's the second thing. The third thing is going to be concentration of revenue. So if we think about number one, revenue is your ability to sell, right? And so it's showing them that you have the ability to continue to sell and continue to compound that selling. When you say concentration of revenue, there's two pieces to this, which is most people don't want to buy a business where the majority of the revenue is coming from just a few clients. And so I know a couple of people who have businesses that are great, but they are enterprise and they have like three clients that create like 3 million a year in revenue. And because of that, someone's going to look at that and be like, and what do I do if that one client leaves? Like they're fucked. And so it's not appealing to, especially a financial buyer. They're not going to want to do that. It's too risky for them. They want diversification of revenue, which means you have lots of clients the revenue is spread through. They also want to ensure that you have diversification of revenue in terms of where the revenue is generated. So that can mean a couple of things. Diversification of clients, meaning there's not just a couple of clients that hold all the concentration of the revenue. And then diversification of revenue in terms of where is it coming from? Are you only getting revenue from Facebook? If you're only getting revenue from Facebook, again, that's too risky for them. What if you have Facebook, Instagram, YouTube? That looks much better. And if you want to go a step further than that, then it's just what products do you sell through those multiple channels? So you have multiple products on multiple channels with lots of customers. And so you have to understand that, again, this all comes down to risk. If you're thinking from an investor perspective, they're just thinking, am I going to recoup my investment? And how risky is this? And the less options you have, the less options you have proven out to them, the less likely they're going to want to buy your business because they're going to be worried that it's too risky. So that's number three. Number four is cashflow. This seems obvious again, but if you look at it, actually, so if you read Jeff Bezos' Amazon shareholder letters, really interesting because he talks about this, which is net free cashflow is the number one metric that he always measured. And I think that's really interesting. And we actually started measuring it, I want to say 18 months ago. And that's like our sole guiding North Star metric in any of our companies. But what that does is it determines the ability to finance your own growth as well as take on debt. Okay. And so think about what a buyer wants. One is they don't want to have to sink more money into their investment that they just bought, which was probably expensive. So if somebody buys your business for $10 million, the last thing that they want to do is think that I'm going to have to go shovel out $5 million more dollars to make this thing actually work. That's why net free cashflow is important to them because they want to know that you can self-finance the growth that they intend to put into it. Now, the second thing to that is that if you have healthy net free cashflow, ironically, then it's more likely that you can get debt because they know that the net free cashflow can cover the debt service. People think like, oh, well, if I don't have a lot of cashflow, they can just go take a loan. It's like, you're going to get shittier loans if you have less cashflow because the bank's going to look at it and be like, you can't even service the debt. You have to think about it like that when you think of cashflow. That's why it's so important to a buyer. The fifth item in terms of creating a sellable business is recurring revenue. And this is an obvious one. I don't think I need to talk about this one too much, but it shows stability and long-term investment. And so I'll tell you a conversation I feel like I've had like 16 times with 16 different SaaS founders, which is typically it's a marketer. And then they figure out that they know that they want to create some kind of martech. And so they create this martech and their churn is like through the roof. It's like between 10 and 30% month over month churn. But they're like, but look at my revenue and look at this and that. And I'm like, good ******* luck selling to anybody. Because what that tells me is that you have no customers in 12 months. And so all that that firm's going to be looking at is they're like, cool, you have a lot of revenue, but I have no customers in 12 months of something if your one channel shuts down. And so that's why when there's recurring revenue, it means that there's a long-term perspective of the business and there's no rush. And rush decisions are honestly not good ones in terms of investments. And obviously PE, if they buy risks, they're going to come in, they're going to go quickly, but they're not going to be so quick. They're going to break something. And they also don't want to feel like it's a sinking ship. If you have churn like that, you don't have enough recurring revenue. They feel like it's a sinking ship. And so they don't want to buy it. It's too risky. So that's number five. Now, number six is a principle of business that I'm sure anyone watching this channel again understands, but you have to understand how it's different in terms of when you're selling the business, the perspective, which is having unique value proposition. So what differentiates you from your competitors? It could be product. It could be price. It could be promotion. I think those are the three most common. And I came up with that on my own, thinking like those are the three legs of a company. But a lot of times it's like, where do you fall in terms of price? You can either be a low cost leader or you can be the premium leader. They definitely want one of those. Either of those are appealing businesses, right? Premium leader, meaning your most expensive, most value. Low cost leader mean lowest cost for most value. The second is product. You can have unique value prop, meaning like software. You can have patents. You can have some special methodology. You can, there's something with their product that's different. With anything like an e-commerce or food, it's like you've patented a certain ingredients, things like that. And then when it comes to promotion, it could be that you have a unique marketing hook that you've copyrighted or trademarked or whatever. You have something that's working really well with promotion. And so those are the three things that I've seen that when I've seen buyers look at businesses that they have identified as the reason that business is, has wherewithal. It's because it has some kind of unique value prop that is one of those things. So I can tell you that for our business, when people were evaluating it, everyone said like, you're the leader in the marketplace in terms of our business gym launch. They're like, there's nobody even close to you. And that's that, like you're the leader in the marketplace. And so you can do a lot when you're the leader in the marketplace. And now the last piece, probably the, I mean, in my opinion, it's the hardest. That's probably cause I, I did a lot of it over the last few years, which is the strength of the team. The reason for that is that if a company relies on the founders, it's not a stable asset to purchase. I mean, it can be, but you're going to go with the purchase, right? And so you have to create something that can stand on its own. The reason this is harder is because if you look at like the stats in terms of, you know, CEO succession, all these things, it's rough. It's not that great. And so you have to start planning well in advance. Luckily, this is something that I think we did really well, which is getting in the right people and promoting and investing in the right people. And I can tell you that at the, at a couple of the meetings that we had, where we flew in our executive teams and they met with the buyers after when we had the meeting and they were asking all the questions about the business. It was like a six hour day with one of them. Alex and I didn't really talk. And the reason we didn't talk is like, we really have moved to like board founder seats. And we really did have like a true CEO and COO. And after we, you know, reconvened with the firm after that meeting, they kind of looked at us and they were like, ----, like, this is one of the best teams we've seen. They're like, do you know how most of these meetings, it's the founders that talk the whole time. And the reason that we didn't talk is because we didn't know, like, we didn't know the answers to a lot of their questions because we're truly not the ones running the businesses anymore. And that I think is what creates a truly sellable asset. You know, it's not like we have some crazy burnout or have to work in the business for years, like it's done. And the reason for that is because we didn't have a job in the business. We were just advisors. And that was probably the part that was the hardest, but also the most rewarding is learning to create a team that can truly not just run, but grow a business without you. And so with that, those are the seven things. There's financial performance, there's growth potential, there's concentration of revenue, cashflow, recurring revenue, unique value proposition, and strength of team. If you're looking at like, you want to know at least, maybe you're like, Hey, I don't want to sell it now, but I don't want to eliminate the option. Then look at those things and think to yourself like, okay, next quarter in the next six months, like right now it's beginning of Q1. What are your initiatives that are going to help shore up those pieces so that you can create an asset that if you choose one day you can sell. And so I hope that was useful for you. I hope you enjoyed your walk, break from work, lunch, whatever it may be. And I will see you on the next one.