99% of Businesses Fail Over a Long Enough Time Horizon Ep 663



In this insightful dialogue, the speaker, owner of acquisition.com, shares valuable lessons on transforming a small, owner-dependent venture into a sellable asset. He emphasizes that most businesses fail to sell because they operate as jobs, not assets. He explains the transition from self-employed to business owner involves productizing services, establishing consistent acquisition processes, and replacing oneself in key roles. The speaker outlines the necessity of developing a long-term vision, mastering recruitment, and leadership to attract skilled individuals who can drive the business independently. He concludes by stressing the importance of viewing a business as a sellable asset, which requires time, effort, and a shift from hands-on management to strategic oversight.

Summary Notes

Hiring Challenges and Business Resilience

  • Hiring effective marketers is a common challenge for businesses.
  • Many companies experience turnover in marketing positions, necessitating multiple hires.
  • Business ownership is demanding and requires a long-term vision.
  • Financial motivation alone can lead to burnout; successful business owners often view business as a game.
  • The speaker has built acquisition.com and shares lessons learned for business growth.

"And the thing is, you're going to hire somebody who you think is going to be good at marketing and they're not going to be, and then you got to hire another person, right?"

This quote emphasizes the trial-and-error process often encountered in hiring marketers, highlighting the difficulty of finding the right fit for a business.

"You must have a long term vision that you are committed to because you will burn out if you're only doing it for the money."

This quote underlines the importance of having a long-term vision beyond financial gain to avoid burnout and maintain resilience in business.

Business Longevity and Value Creation

  • The majority of businesses (99%) eventually close, while only 1% are sold or transitioned.
  • The misconception is that businesses close due to poor sales or marketing strategies.
  • The speaker asserts the main reason for business closure is that they lack inherent value.
  • The goal is to transform a "worthless" business into one with significant value.

"99% of businesses end up closing down over a long enough time horizon. Only 1% of businesses ever get sold or transitioned."

This quote presents a stark statistic on business failure rates and sets the stage for discussing the rarity of successful business sales or transitions.

"The real reason is because most businesses are worthless."

This quote succinctly states the speaker's view on why most businesses fail, attributing it to a lack of intrinsic value rather than external factors such as poor sales or marketing.

The Progression from Job to Business Ownership

  • Small business owners often mistake owning a job for owning a business.
  • Robert Kiyosaki's wealth quadrant is referenced to describe the progression from employee to investor.
  • Transitioning from employment to self-employment typically results in a temporary pay decrease.
  • The speaker challenges the notion that having an LLC or employees makes one a true business owner.
  • A litmus test for true business ownership is whether the business can operate without the owner's direct involvement.

"Most of these businesses don't actually have value. And the reason for that is because they are not businesses, they are jobs."

This quote explains the speaker's view that many small businesses lack value because they operate more like self-employment than autonomous enterprises.

"So most of us know most people have jobs first, right? And then they make a certain amount of money, they're relatively skilled, and they think, I could do something like this on my own, right."

This quote describes the common thought process that leads employees to become self-employed, which is often mistaken for true business ownership.

Criteria for a Sellable Business

  • A business must be able to run independently of the owner to be considered sellable.
  • Owners often mistakenly believe their business is independent if they are not involved in fulfillment.
  • The reality is that all aspects of the business, including marketing and sales, must be able to function without the owner.
  • The speaker emphasizes the need to establish reliable acquisition processes to prove a business's autonomy to potential buyers.

"Because for a business to be sellable, it must be an asset that they can run without you."

This quote defines a key criterion for a business to be sellable: the ability to operate independently of the owner.

"What you have to do is prove to what a future buyer would be that this business can operate on its own without you, right?"

This quote reinforces the necessity for business owners to demonstrate that their business can sustain itself without their personal involvement to attract potential buyers.

Consistent Process for Generating Business

  • Businesses need a consistent process to ensure predictable outcomes.
  • Investment of effort or money should have a measurable return.
  • Without this process, a business cannot be considered sellable.

"No matter what it is, you have to have a consistent process where, you know, if you put x effort or x dollars in this side that you will get y outcome on the other side, right?"

This quote emphasizes the importance of having a reliable system in place that translates effort or investment into predictable results, which is crucial for a business to be marketable.

Productization of Services

  • Productizing services means offering a standardized, repeatable service.
  • Customized services are harder to sell and are valued less.
  • A productized service leads to a more sellable business.

"First, you productize your service. It's a consistent thing that you deliver it over and over again."

The quote highlights the first step in making a business sellable, which is to standardize the service offered so that it can be delivered consistently.

Avoiding Earnouts and Risks

  • Earnouts can tie an owner to a business for years without ownership benefits.
  • The buyer of the business gets the upside while the seller takes the risk.

"You're going to have a massive earn out, which basically means you're going to work for the next five years to earn the exact same pay, except you no longer own the business and the person who gives you the earnout has all the upside and you take all the risk."

This quote describes the disadvantages of earnouts, where the seller remains working in the business post-sale, often without the benefits of ownership and with continued financial risk.

Transition from Self-Employed to Business Owner

  • Entrepreneurs must transition from doing all tasks to delegating.
  • Replacing oneself with skilled professionals is necessary.
  • The end goal is to become a shareholder rather than an active owner.

"And so the process of entrepreneurship, of transitioning from self employed, where you literally have 100 hats, to transitioning to business owner, where you take all the hats off your head and you were just a shareholder, which is how I prefer to see it."

The quote captures the essence of transitioning from a self-employed individual, who handles every aspect of the business, to a business owner who delegates tasks and functions more as a shareholder.

The Importance of People in Entrepreneurship

  • Success in business depends on recruiting, hiring, managing, and leading effectively.
  • Attracting high-level talent requires the entrepreneur to have admirable qualities.
  • Understanding the roles one plays in a business is critical for successful delegation and sale.

"The game is about people, right? Once you have the model and you have some of the tactics in the beginning so you can get some initial traction, the rest of it is people, right?"

This quote stresses the importance of people in the growth and operation of a business, suggesting that after initial business models and tactics are in place, the focus should shift to team building and leadership.

Self-Awareness of Roles and Responsibilities

  • Entrepreneurs need to be aware of all the roles they play in their business.
  • Selling a business means transferring not just the product or service but also decision-making capabilities.
  • Identifying and replacing oneself in these roles is key to making a business sellable.

"And this is the piece that I think most people miss, is that they don't even know the hats that they are wearing. You making decisions is a hat. It's an important hat, right?"

This quote points out a common oversight among entrepreneurs, which is not recognizing all the roles they fulfill within their business, particularly the role of decision-making, which is crucial to the operation and sale of the business.

Engagement with Audience

  • The speaker takes a moment to connect with the audience, indicating a desire to engage and network.
  • The invitation to connect on LinkedIn suggests a value placed on community and listener interaction.

"Hey, mozanation, quick break. Just to let you know that we've been starting to post on LinkedIn and want to connect with you."

The quote is a direct address to the audience, encouraging listeners to engage with the speaker on a professional networking platform, illustrating an effort to build a community around the podcast.

Leadership and Business Sellability

  • Leadership is crucial for making a business sellable.
  • A business owner must allocate profit back into the business to pay for roles they personally fill.
  • Replacing oneself in the business with others can lower margins but frees up the owner's time.
  • This process of replacement is lengthy and requires hiring potentially multiple people for one's role.
  • The journey to replace oneself is not easy and demands a long-term vision.
  • Motivation should not be solely financial; deeper inspiration is necessary to avoid burnout.
  • The owner's vision and commitment are diluted through the workforce, affecting employee quality and retention.
  • To scale, a business must grow incrementally to accommodate the workforce needed to replace the owner's tasks.
  • Scalable businesses need sufficient margins and volume to hire quality talent.
  • As businesses grow, they require employees who bring preloaded solutions and experience.

And so there's typically far more leadership that has to occur in order for the business to be sellable.

This quote emphasizes the importance of leadership in preparing a business for sale, indicating that strong leadership is needed to make a business attractive to potential buyers.

What happens is a business will become more sellable as you replace all of the pieces that you're doing, and oftentimes the margin will drop.

This quote suggests that as an owner replaces their roles within the company, the profit margins may decrease, but the business becomes more sellable because it is not dependent on the owner.

You must have a long term vision that you are committed to, because you will burn out if you're only doing it for the money, you will.

The quote underscores the importance of having a long-term vision beyond financial gains to sustain motivation and prevent burnout in the challenging process of making a business sellable.

What happens is the small businesses become big businesses because you need to slowly grow them so that you can accommodate more people who can actually do all of the things that you do.

This quote explains that small businesses must grow methodically to become large businesses, which involves hiring more people to take over the owner's tasks, allowing the business to operate independently of the owner.

Business Scalability and Talent Acquisition

  • Scalability requires hiring multiple people to cover the various roles the owner fills.
  • Hiring is a trial and error process that can be exhausting and time-consuming.
  • Attracting high-quality employees is essential for growth and requires significant gross margins and volume.
  • As revenue increases, businesses can hire people who are more skilled than the owner.
  • The ultimate role of the business owner evolves into recruiting talent and setting the company's vision.
  • Most businesses lack value because they are not scalable, sell customized products to everyone, and the owner is central to operations.

And so for businesses to be scalable, oftentimes they have to have significant enough gross margins and volume to be able to pay for high quality talent, to be able to actually do these things, to take decisions off your plate.

This quote highlights that scalability is contingent upon a business having enough profit and sales volume to afford high-quality talent that can independently manage operations.

Once you start crossing multiplied figures, the people that you are hiring are better than you are at everything.

The quote indicates a tipping point in business growth where employees hired are more skilled than the owner, which is essential for scaling the business further.

The reason that most businesses are worthless is because they sell entirely customized things. They sell it to everyone, which makes it completely unscalable.

This quote explains that a lack of focus on a specific market or scalable product makes most businesses unattractive for sale, as they rely too heavily on customization and the owner's involvement in all aspects of the business.

Business Value and Owner Independence

  • The value of a business is diminished if it relies on the owner for key roles, such as sales and being the public face.
  • A business's value increases when it can operate independently of the owner.
  • Earnouts can tie the owner to the business post-sale, reducing the attractiveness of the deal.

They're the ones who are still heavily involved in the acquisition and the rainmaking.

This quote points out that the owner's deep involvement in client acquisition and generating business (rainmaking) can hinder the business's value by making it too owner-dependent.

Unless the person agreed to a three or five year earnout, which then means that you transfer the ownership to someone else, they get all the upside.

The quote cautions that earnouts, where the seller remains involved to ensure business performance, can be risky and potentially unfavorable for the seller if the business doesn't meet certain milestones post-sale.

Transition from Selling Services to Selling the Business

  • Recognize the business as a sellable asset.
  • The CEO's role is to sell the business, while salespeople sell the products.
  • Transitioning from services to business as the product increases the business's value.

"You as the CEO or the owner, your job is to sell the business. The job of the salespeople is to sell the products."

This quote emphasizes the distinct roles within a company, highlighting the CEO's responsibility to position the business itself as a valuable asset for potential sale, as opposed to just focusing on the sales of services or products.

Creating a Sellable Business

  • Make the business sellable, even if there's no immediate plan to sell.
  • A sellable business provides leverage in negotiations.
  • The less you need the deal, the more leverage you have.

"But you should be making your business sellable."

This quote suggests that business owners should always prepare their business to be attractive to buyers, which in turn provides strategic advantages in various business negotiations.

Negotiation Leverage

  • The best negotiation tactic is not needing the deal.
  • Having leverage means being in a position where you can walk away.
  • Leverage is the key to successful negotiations.

"The way to have the best negotiation is to have the most leverage."

This quote explains that the power in negotiation comes from the ability to not need the deal, which inherently provides a stronger bargaining position.

Business as a Source of Passive Income

  • A sellable business generates significant cash flow with minimal owner involvement.
  • Ownership should not equate to a job; the business should run independently.
  • Aim for a business model that allows for passive ownership, similar to owning shares in a public company.

"If you want to sell your business someday for a lot of money, then the business must be sellable."

This quote underscores the importance of creating a business model that is attractive to buyers because it operates successfully without the owner's constant involvement, thereby increasing its value.

Self-Awareness and Critical Thinking

  • Owners must critically assess their own role within the business.
  • Identify and quantify the tasks the owner performs.
  • Implement processes and delegate tasks to move towards a business that runs independently.

"And so you have to think. And this is the critical self-awareness of thinking."

This quote calls for business owners to honestly evaluate their contributions to the business and to strategize how to systematize and delegate those tasks to make the business more autonomous.

Transition from Employee to Investor

  • Progression from employee to self-employed to business owner and then to investor.
  • Viewing the business as an asset on the net worth balance sheet.
  • The transition to investor perspective helps in understanding the true value of the business.

"And to increase the value of that equity, we have to make it so that it's actually a business."

This quote discusses the evolution of a business owner's role and the importance of developing the business into a standalone entity that contributes to the owner's net worth.

Confronting Business Challenges

  • Acknowledge and define problems to solve them.
  • Hiring and training key positions like marketing director, VP of sales, and chief product officer is crucial.
  • Articulating problems is the first step to making the business sellable.

"Until we can articulate what the problems are, we cannot solve them."

This quote highlights the necessity of clearly identifying business challenges in order to address them effectively, which is a vital part of making the business appealing to potential buyers.

Impact on Net Worth

  • A sellable business separates the owner's value from the business's value.
  • Creating a business that is attractive to buyers can significantly increase the owner's net worth.
  • The goal is to have an asset that generates income independently.

"And then when that happens, your net worth will skyrocket because now you have something that everyone wants, which is an asset that produces cash while you sleep."

This quote encapsulates the ultimate benefit of creating a sellable business: it becomes a desirable asset that enhances the owner's wealth by providing passive income.

What others are sharing

Go To Library

Want to Deciphr in private?
- It's completely free

Deciphr Now
Footer background
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon
Crossed lines icon

© 2024 Deciphr

Terms and ConditionsPrivacy Policy