If a potential buyer sees your company as risky, he or she won’t want to play. A deal gets done when a compromise is met somewhere in the middle—when both parties strike a balance between risk and reward.

The trick to getting a higher portion of your proceeds upfront is to minimize the risk that the business will fade when you leave. Here are seven things you can do to get more of your money upfront (and less tied to an earn-out):

1. Get your customers to sign long-term agreements.
2. Track your repurchase rate to demonstrate a recurring revenue stream.
3. Document your systems for making your product or service.
4. Give key employees a long-term incentive plan that ties them to the business after the sale.
5. Track your sales pipeline, qualified lead rate and close rate.
6. Delegate your personal accountabilities to key managers.
7. Write down your secrets for generating qualified leads.

Most acquirers will insist on some form of earn-out or “golden handcuffs.” Your job is to get as much cash upfront as you can by reducing their risk—making that seesaw as balanced as possible.

What else have you done to get your company ready to sell?

From Small Business Trends

7 Ways to Get Your Company Ready to Sell

The coffee was made with a Clover–a new machine for brewing coffee that allows for greater customization of each cup. It operates kind of like a French Press, but it works much faster (90 seconds per cup, as opposed to 6 minutes).

I started to quiz the barista about the Clover and learned a little inside scoop about how the unit made it into the Starbucks stores.

It turns out, according to my informant, that the Clover unit was designed by a couple of coffee-loving inventors. The Clover machine was originally designed to be sold to small, independent coffeehouses that were being beaten up by Starbucks’ dominance and needed an innovative new product to woo customers.

The Clover units caught on among coffee aficionados, and Starbucks began to lose customers to some of their independent competitors. Sensing a threat, Starbucks ordered a couple of the $11,000 Clover machines to run a pilot program in a few stores.

The trial was a huge success with Starbucks customers, who liked the freshness and customization delivered by the Clover brewer. Baristas liked the ease of brewing a Clover cup when compared to the slow and cumbersome process of making a French Press brew.

Based on the results of the pilot, Starbucks decided it wanted to install a Clover unit in each of its 5,000 small store format locations. At the time, Clover was an 11-person company. A $55 million dollar purchase order would have been a multiple of their annual sales many times over. Instead of placing the order, Starbucks simply decided to buy the company outright.

Is it possible that the best offer to buy your company will come from your customer’s toughest competitor?

Editor’s Note: This article was previously published at OPENForum.com under the title: “Can You Turn a Purchase Order Into an Offer to Buy Your Company?” It is republished here with permission.

From Small Business Trends

Can a Purchase Order Become an Offer to Buy Your Company?

I have found billing by the hour to be a liability in trying to build a sellable business. Years ago I owned a small design studio that charged by the hour. We had $750,000 in revenue, of which more than 20 percent was flowing to the bottom line, yet the business was worthless because we were simply four people hawking hours.

Billing by the hour reinforces that your firm is just a collection of people and, therefore, that future profits (what acquirers pay for) are contingent on your sticking around. That’s one of the reasons firms that bill by the hour rarely get acquired, and if they do, their owners are bound to sign on for a torturous three- to five-year earn-out, the equivalent of selling their ownership status in return for a glorified job.

Not only does billing by the hour undermine your ability to be acquired; it has a number of nasty side effects while you’re building your business. Billing by the hour:

• Makes customers hesitate before calling you for advice (Wouldn’t you rather be the go-to person for your clients?);
• Creates a negative cash flow cycle because you have to know how many hours were worked before sending a bill;
• Forces employees to fill out time sheets, making them feel as though they work in a sausage factory (No offense to the sausage workers of the world);
• Leaves your customers feeling “nickel and dimed”;
• Provides a disincentive for your employees to work quickly and efficiently, ultimately peopling your company with a bloated and slow-moving set of clock watchers.

The alternative to billing by the hour is to pick a few things you’re really good at-and that your customers ask for-and to come up with a standard formula and a standard price for delivering them. Don’t think it would work in your business? The practice of law is arguably the most addicted to billing by the hour, yet a Toronto-based lawyer named Jane Harvey has a standard set of services for which she charges a flat rate.

Are you still tied to charging by the hour?

From Small Business Trends

6 Reasons to Stop Charging by the Hour

I put that question to the head of mid-market M&A for a Toronto-based investment bank specializing in selling companies (he requested anonymity).

1. Unsolicited bid

“Typically, a client calls us because they have been approached out of the blue by a buyer.” My banker friend went on to explain that an unsolicited advance causes a business owner to start thinking about what his or her business might be worth.

2. Health scare

I asked my contact to reveal the second most common trigger: “It’s typically a health scare,” he said. “The owner, a close friend or spouse has a health issue, which causes them to reflect on how short life really is.”

Interestingly, both of these triggers are externally generated and could lead to a hasty sale with a discounted price. In my experience, you need a proactive plan to sell your business to maximize your valuation.

For example, I’m on the advisory board of a small company based in California, and I’m writing this post on the plane on the way to our next meeting. I just read the company’s board package, and it’s trying to decide between four different growth strategies. It has outlined the possible exit options — complete with potential strategic acquirers — associated with pursuing each plan.

If you want to get the highest price for your business, don’t leave your exit planning up to somebody or something you don’t have control over.

From Small Business Trends

Two Triggers That Cause Business Owners to Press the Eject Button

All of that experimentation usually gets you through the first few months but also creates a business highly dependent on your intuition. If you are feeling your way around, it is hard to train employees and therefore difficult to scale a business into anything more than a glorified job.

Instead of thrashing around in the first few months, follow this formula for starting a business that can grow beyond just you:

Step 1: Pick a product or service that has the potential to scale

Scalable products meet three criteria:

• They are teachable to your future employees (or you can program technology to deliver)
• They are valuable to your potential customers and
• They are repeatable meaning customers have to come back to re-purchase often

Jim Hindman recognized that the typical auto mechanic — reliant on the owner as master mechanic — lacked scalability which is why he picked oil changes as the service to build Jiffy Lube around. Hindman reasoned that he could teach a sixteen your old high school student to change oil, and customers would come back every three months to prolong the life of their car. Hindman sold Jiffy Lube to Penzoil for $43 million.

Step 2: Turn your company into a cash-spitting bank machine

Once you have isolated a product/service that customers value and need to come back for, start charging up front. Think it’s impossible? Remember you are only selling what your customers will find most valuable and need on a regular basis (step 1). If you avoid commoditization, you get to set the terms and charging up front allows you to use your customer’s cash to finance your growth instead of going to a bank or sharing equity.

Michael Dell used to inventory computer parts and wait for the phone to ring. As a result, his company sucked up gobs of cash and almost choked on its own growth. Dell turned his cash flow cycle on its head and started charging customers first and then ordering the inventory on 60-day terms. As a result, he was able to use his customer’s cash to finance his growth in the early days.

Step 3: Start saying “No”

Once you have some cash coming in, start saying NO to anyone asking you for customization. Focus on the product or service that you identified in Step 1. Being a specialist at one thing will make you more referable and preserve your cash and resources.

For example, The School Photograph Company based in Danbury England only does school photos. Schools hire them each year to take the annual classroom shots (repeatable), they hire young photographers happy for the portfolio-building professional experience (teachable) and headmasters hire them because they are the best company in England for getting a group of squirming kids to sit, smile and get back to class in minutes. They don’t do wedding photos. You can’t get The School Photography Company to shoot your son’s t-ball team. Their specialization makes them referable and ultimately an acquisition target.

Follow these three steps and you’ll be on your way to creating more than just a jobyou’ll have a business you could sell one day.

From Small Business Trends

How Your First 100 Days Can Determine The Fate Of Your New Business

With my last company, I remember having days when I felt like it was me against the world-and the world was winning. Without partners to commiserate with, I often felt alone. That is, until I set up an advisory board.

I used my advisory board as part business guide, part support group. Here are three lessons I learned for setting up an effective advisory board:

1. Pick business owners (not your accountant or attorney)

I found the most valuable advisers were other business owners who had accomplished what I was attempting to do. I still paid for the services of an accountant and attorney when I needed technical advice, but keeping these professionals out of my advisory board meetings allowed my meetings to focus on strategic advice on company building.

2. Shut up and listen

I sent my advisory board a one-page summary of the key questions I was grappling with before the meeting. That way, my advisers were “scrubbed in” beforehand, and I could spend the bulk of my time listening to their advice.

3. Report your action steps within 48 hours

Within 48 hours of a meeting, I used to send a quick email to my advisers explaining which of their ideas I planned to implement immediately and which I intended to table for another time. I wanted them to know they were having an immediate and measurable impact.

An advisory board can also play a surprising role when it comes time to sell your business.  Here’s a video of me explaining the secret to using your advisory board to get a higher valuation for your business:

How do you use your advisory board?

From Small Business Trends

3 Tips for Setting Up an Advisory Board

Google paid $50 Million for Aardvark.

Aardvark is a good case study on building a company to be sold. They didn’t try to compete with Facebook for all forms of social media. Instead, Aardvark specialized in getting obscure questions answered by trusted contacts. Google is in a Coke vs. Pepsi- battle with Facebook for dominance of the social media category, so it made sense to look at Aardvark as an acquisition. Could Google have built the same technology? You bet. Could it have acquired Aardvark for less money and time than it would have taken Google to build it from the ground up? Yes again. Aardvark therefore gets acquired.

We all know that becoming the world’s best at something can help you win business; becoming famous for one thing can also help you sell your company.

Strategic buyers are looking to pick up something new they don’t have and couldn’t easily create on their own. Before doing a lot of due diligence, strategic buyers ask three basic questions:

• How much would it cost us to build from scratch?
• How long would it take?
• How much could we buy that company for?

If you offer a hodgepodge of products and services the strategic buyer sells too, it will argue that it would be easier to just build what you’ve created and drop its price below yours or hire a couple of salespeople to go after your customers.

However, if you offer something truly special that is difficult to replicate, the acquirer will want to buy your business instead of wasting the time and money to build it from the ground up.

Becoming a specialist in one thing will not only help you in your marketing; it will also help you get acquired for a premium when you’re ready to exit.

Curious about whether you could sell your business (and for how much)? Take the 10-question Sellability Index Quiz.

Editor’s Note: this article was previously published at OPENForum.com under the title: “The 3 Questions Acquirers Will Ask Before They Buy Your Company” It is reprinted here with permission.

From Small Business Trends

3 Things a Potential Acquirer Wants to Know Before Buying Your Business

I found by offering such a broad set of services, we never really got good at any one thing. We had consultants doing certain types of projects only once or twice a year, so they lacked experience and got intellectually rusty. We needed all sorts of people to offer such a broad set of services, making the business neither scalable nor sellable. Eventually we decided to change models and offer one set of research papers to all of our clients on a subscription basis.

The subscription business started off well enough, but along the way, someone asked us if we still did focus groups. It was like a recovering addict being offered a fix. We jumped at the opportunity to do the project. The problem was that people noticed the crack in our resolve and burrowed a large hole in our claim of being specialists. Clients realized we weren’t totally committed to the subscription model and started asking for customization to our reports and one-off side projects. My employees noticed we had strayed from our offering and started accepting other projects – much like a child seeing his parents say one thing and do another.

Pretty soon, we were running two businesses in parallel with our resources being spread across two completely different models. We were half-pregnant: spread thin, cash flow tightened, project quality slipped and deadlines pushed. After a while, with clients demanding custom work, we had to abandon the subscription model and go back to just doing projects.

After retreating for a few years into the misery of owning an unsellable service business, we took another run at building a subscription business. This time, we told clients we were not accepting custom projects anymore.

We had to start saying no before clients realized we were serious.

I expected good clients to balk and that sales would dip. Instead, a funny thing happened: we started having much better conversations. Clients stopped asking us to do custom work and started asking how our new model could help them achieve their goals. For every one client who said no to our new model, two new ones heard about our unique offer and wanted in. Our salespeople got good at the pitch and were able to sign up 100 enterprise customers as subscribers.

The subscription business is a build-once-sell-many-times annuity model. Our scalability, recurring revenue and focus ultimately allowed me to sell the business in 2008.

Here’s a video that describes how you can identify a scalable product or service of your own:

The point is, we would have never built a sellable subscription business had we not started to turn down the one-off project work. The irony is that saying no actually made my business more valuable, not less.

From Small Business Trends

The Secret to Turning Your Business Into One You Can Sell

Verne Harnish explained to me how Dell used to inventory parts and pay suppliers for the gear they kept on hand to make computers when customers called. The company ran short of cash and almost choked on its own growth. Galvanized by the near-death experience, Michael Dell himself set out to remake his company’s cash flow by charging customers before buying the bits and bobs needed to build the computers they ordered. By reversing the typical cash cycle, he was able to use his customers’ money to fuel his growth, which meant he required very little external money to grow the business.

Positive cash flow cycle businesses are more fun to run — and their also way more valuable. If you would like to sell your business one day, you’ll get more for it if you have a positive cash flow cycle. Positive cash flow businesses are worth more because:

1.) acquirers do not need to commit their capital to funding their day-to-day operations and;

2.) the bottom line is fatter because positive cash flow businesses do not incur financing expenses and they often have some investment income to juice the revenue line.

Highspot is a small, Toronto-based publishing consulting company that charges upfront for everything it does. Co-founder Ross Slater explains the company’s payment policy:

“In the beginning, the cash flow helped us get started without a lot of financing. Now we see prepayment as a mutual commitment to the success of the relationship we’re creating with our clients. By paying upfront, the client commits to participating in the process, and we commit to providing value and delivering on the trust they have placed in us.”

Wonder how he gets away with it? Slater explains,

“We have a clear, staged process that outlines how we operate and what a client receives. The fees for each stage are right on our website, which filters out the tire-kickers. We invoice immediately, then do what we say we’re going to do. We insist that this is the way we do business. We’ll walk away from a situation where a potential client won’t agree.”

Watch the short video below where I explain the cash flow positive model.  When you charge upfront, your company will be worth more when you go to sell — and more fun to run in the interim.

From Small Business Trends

How To Get Paid Like Michael Dell