Not all businesses are started as a passion project. Many ambitious entrepreneurs aim to create something highly saleable - and build it up to the point where they can exit and cash out. Melvin Jay, founder of Gunna Drinks, offers his five tips for trade sale success
You've heard the stories. The entrepreneur who started in a garden shed and eventually sold out to Google for billions. Little wonder so many small business founders aspire to this. But building your start-up with the long-term goal of a trade sale takes lots of forward planning.
Having myself sold my first company, marketing strategy and innovation consultancy Clear Ideas, to M&C Saatchi for £18.4m, here is my advice to help you to prepare your start-up for a trade sale.
1. Prove your idea
Most founders are good at selling their idea, but executing it can be a completely different matter. Investors hear incredible ideas every day - almost to the point where they're immune to them.
What captures their attention is when a founder has demonstrated that the market is ready for their idea - either by showing very positive early traction or significant market research that shows there is interest.
So how do you prove the market cares about your idea? You need to challenge yourself every day to pressure-test your concept and maximise your points of difference versus potential rivals.
Know your audience and why they would buy your product or service; importantly, learn everything you can about your competitors so you can identify how to improve on their weaknesses. Hint - even if you think you don't have competitors, you do. Even the first motor car had a competitor in the horse-drawn carriage.
Your early adopters and supporters are crucial, so be sure to thank and nurture them regularly. They will help you build your idea into something ready for the mass market. And don't completely ignore your critics. The challenges they present will give you insight to raise your game.
2. Work your team
With a great idea, but not a great team, don't rush to take your product or service to market. All start-ups depend on having a solid team, which will secure a strong foundation for you to launch your idea and run a successful business.
In this era of entrepreneurship, it's unlikely that an individual will succeed in a new venture without an excellent team around them. Beyond the need for a wide portfolio of skills and discipline, there's also the investor element.
Smart investors invest in the team as much as the idea, as they know that a strong team will be able to overcome most challenges and work out how to make money for the business. In their eyes, the stronger the team, the more worthy the investment will be.
If no one is willing to come on board, it might be that your idea or how you sell it isn't strong enough yet - another reason to prove your idea!
3. Sort your funding
Your venture is likely to cost you much more than originally expected, and it will take longer too. You'll need to have a crystal-clear funding strategy, and review this at each different stage of development.
Make sure you understand where the most likely sources of funding will be for your evolving business. Who might the early investors be? Who can you target now that you have a proof of concept and an expanded team with new expertise?
Ideally, you'll have one person in your team dedicated to fundraising for at least 50% of their time.
When you've closed a round of funding, be sure to celebrate your victory - just don't stop there. Start planning the next round immediately, and never stop talking to potential investors.
Understand what they'll need to see from you to commit money to your project, and be sure to stay in touch and let them track your progress - investors like to be kept in the loop.
4. Outsource everything that doesn't create value
It's natural to feel precious about the operations of your business, but it's important to understand which activities truly create value - you must retain control over these - and which it would be better to outsource.
Beyond R&D, programming, sales, marketing and so on, everything else should be outsourced to trustworthy suppliers.
While it may feel like you're forfeiting control, outsourcing does two key things that will help to define your success:
- it ensures that you're able to keep your overheads very low;
- it ensures that you'll spend your time only on activities that create value.
Even when you outsource certain responsibilities, you'll still be able to keep close tabs on how this aspect of your business is being run.
5. Start at the exit and work backwards
Start by identifying early who might be interested in buying a business like yours - then build your business with their needs in mind. Here are a few questions that you should be asking yourself:
- What are the gaps in their portfolio, and what sort of business would fit well within it?
- What would they look for in an acquisition, and what might be a deal-breaker for them?
- How big would you need to be before they'd be interested in you?
- What types of deal have they done before?
Get on your potential acquirers' radar in some capacity as soon as possible. Make yourself known to them, so that they can track your progress from the start.
The founders who are successful in their exit are normally the ones who planned it many years ahead. It can be a scary thing to visualise a scenario with so many unknowns, but that's the difference between a businessperson and a true entrepreneur.