When you decide to sell your business, you also must decide if your business is at its best value. There are a few things you can do with your business to build a more valuable company before selling, but the one of the most important things you can do is to stop selling your time.
One of the eight factors that acquirers look for in the businesses they invest in is your company’s Growth Potential. In simpler terms, all they want to know is how much potential your business has to grow. There is nothing that diminishes your Growth Potential more than billing by the hour or day.
Billing by the hour or day means that customers are renting your time, rather than buying a result. When this happens, your business model is lacking leverage. If you want to grow, you either work harder or hire more people. Since this process can take months, fast growth is practically impossible.
Customers dislike the feeling of being nickeled and dimed and may become dissatisfied with your business model. They understand that billing by time means that you’re more likely to lengthen the time a project takes, while they want a solution in the shortest time. These opposing values can lead to an unhappy customer- destroying the value of your business when you decide you want to sell it.
Peddling time also invites competitors to take your customers. Customers are easily able to compare your business with others offering the same service. This can pressure you into lowering your prices for the customers, leading to your business becoming commoditized.
Take the Kerpen’s for example— Carrie and Dave Kerpen stared Likeable Media, a social media agency in 2006. As Facebook emerged as a dominant platform, marketers were trying to figure out how to monetize users on the platform.
Likeable Media originally followed a business model where they sold their time, but the Kerpen’s quickly realized the limitations with this plan. Customers didn’t want to buy their time, they wanted to buy social content. Marketers wanted a video to post to their Facebook page, or a blog post to publish on their site.
They quickly switched from the hourly billing model to the Content Credit System. They assigned each piece of content several credits. For example, a tweet could be one credit, whereas a video may cost twenty credits. Customers could sign up for an annual allotment of credits that could role over month to month.
Customers happily paid for tangible output rather than an hourly bill. Likeable’s Account Managers also no longer had to justify a project taking longer and would instead suggest the customer buy more credits if they needed more content.
Their innovative billing approach created recurring revenue and their cash flow since customers paid for their credits upfront.
By 2020, Likeable Media was up to more than fifty full time employees, when they caught the attention of 10Pearls, a digital strategy company which acquired the Kerpen’s company for 8.5 times EBITDA, a healthy premium over a typical marketing agency.
If you plan to sell your company in the future, grow your business’ value and stop selling your time— instead, sell your customers’ results.