If you run a service business and have plans to sell your business someday and cash out, you
may be in for a rude shock. The value you thought you were building in your business may not
be there.
Why not? A number of reasons. Here are a few:
First, buyers may view you as being too personally tied to the business. They worry that the
business is too highly dependent on your personal relationships -- that when you leave, your
clients eventually will leave, too.
Second, in a service business it is not uncommon to rely heavily on one large client – and that’s
risky. John Warrillow writes on his blog:
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When you go to sell your company, an acquirer is going to try and understand how predictable
your revenue stream is. One swing factor will be how exposed you are to any one client. If you
rely on one customer for 25% + of your revenue, an acquirer is going to take a steep discount
on your market price at best, or walk away at worst. Your goal should be to ensure none of your
clients make up more than 5% – 10% of your revenue. That way the impact of losing any one
customer is minimized.
Third, service businesses often have trouble scaling to grow. You’re constrained by the number
of billable hours in a day, month or year. It’s difficult to ramp up growth without adding people –
and that can get expensive. Plus, services involve so many intangible factors, and require such
a wide range of skills, that finding qualified staff can be tough. You may end up going through
lots of trial and error hires (mostly error).
Of course, if you have no plans of ever selling your business, this whole discussion is moot for
you.
But -- if you dream of cashing out someday to fund your retirement, or achieve financial
independence, or just try something new – listen up. Start working now to transform your
business by “productizing” your services. To productize a service means to turn your services
into product offerings. In other words, you position your services to resemble products as much
as possible. That will build value that an acquirer might be willing to pay for.
Here are 5 steps to turn services into products:
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1. Identify something you can replicate repeatedly – The idea behind a product is that you want
to be able to get paid for selling a “thing” and not selling your time. Also, you want to sell the
“same” thing over and over if you are to achieve operational efficiencies and decent profits.
Look around at what you do. Chances are, if you’ve been in business for a while, you have
developed a process you follow closely for at least one service. You may not even realize you
have a distinct process until you set out to identify it – but you have something. If that
something is in reasonable demand, you have the start of a “product.”
2. Document it – Turn your process into a manufacturing-like assembly line. Break it down into
steps that can be performed over and over, by people you can train for the job. Document
those steps in detail so that you can calculate the costs involved, and so that your knowledge is
transferable.
3. Put limits around your offering – Many services are “squishy” and open ended. For a product
you need the opposite -- an offering that is well-defined. Set limits to your offering: time
limitations; the deliverables included; a flat fee price; a name you can refer to your product by.
About Small Business Canada notes:
“You give it a defined scope, fit it into a limited time period, assign it a definite price tag, and
attach a distinctive name. Let's say you are an image consultant, and you've been selling your
time for $75 per hour. Instead, you offer a ‘One-Day Makeover’ at a price of $495, and include a
wardrobe assessment, color consultation, and shopping trip.”
4. Incorporate technology – A technology component for processing sales or delivering your
service further establishes the impression that it is a product. For example, look at how
companies such as LegalZoom have put a website front-end on what are still basically services
– cementing the perception of a product offering. The website streamlines and automates
functions to a large degree, too, with the potential to drive out costs. But the key is that with the
help of technology, it looks like a tangible thing, and so customers perceive it as a product.
5. Build an organization – Even if it’s just you today, over time you will need to involve others in
producing, selling and distributing your product. No one wants to buy a business that is a one-
man or one-woman show – they want to buy a company. Besides, it can’t be just YOU because
YOU are not scalable. Add “labor” to “manufacture” your product, sales reps to sell it, and
management to run daily operations. Build a team that is skilled and knowledgeable, and able
to operate without your daily intervention.
Follow these five steps and you may just have something that grows bigger than you ever
imagined – and one day you can sell.
