By Dave Lavinsky
Once they launch their companies, most entrepreneurs fall into a very dangerous trap. What happens is that they get very myopic; they get so close to their businesses that they fail to see the bigger picture.
So, they run their businesses on a day-to-day basis, constantly fighting fires and striving to squeak out a little more profit each year than they did the year before.
Conversely, the most successful entrepreneurs ask two key questions that others don’t.
The first question they ask is “What is the end game?” Then they ask sub-questions such as: Is my goal to run this company until I die? Do I want to eventually sell my company? Or do I want pass it down to family members?
It turns out that the most successful entrepreneurs are the ones who build their companies with the eventual goal of selling them. Why? Because this is where the big bucks are. In fact, research shows that 80% of pentamillionaires (those with a net worth of $5 million or more) are entrepreneurs who started and sold their companies.
Think about it this way: the work required to start and grow a company from $0 to perhaps $10 million is MUCH more valuable than the work required to grow a company from $10 million to $100 million.
With regards to the latter, there’s no shortage of corporate executives who have the skill sets to grow existing brands and companies. But there are few people out there (the ultra successful entrepreneurs) who have the ability to build a company from scratch to the point that a larger corporation wants to buy it.
The second key question that the most successful entrepreneurs ask is “How do I build VALUE that multiple acquirers would want?”
Building value is different than simply running a business. When you simply run a business, typically your goals are to keep the lights on and earn a profit. When seeking to build value, you set different goals.
For example, Shutterfly recently announced that it was acquiring Tiny Prints for $333 MILLION. In making this acquisition, what did Shutterfly value? Well, it valued Tiny Prints’ revenues, customer base, marketing skills, intellectual property and operational processes among other things.
Importantly, Shutterfly did NOT value Tiny Prints’ profitability. In fact, Tiny Prints’ EBITDA (earnings before interest, taxes, depreciation and amortization) was a miniscule 2-3% of its revenues.
So, in addition to thinking about your end game, create a list of the factors that multiple potential acquirers would want to see in your company. Maybe it’s significant revenues. Maybe it’s a high profit margin. Maybe it’s unique products or intellectual property. Etc.
And importantly, once you have this list, make sure you integrate it into your daily, weekly, monthly, quarterly and annual action plans. And rather than looking back each quarter and simply thinking about how much revenues and/or profits you generated, consider how much VALUE you built and how much you progressed toward reaching your end goal.