367: How to build a valuable business that sells – Part 1

Sieva Kazinsky joined me for a live workshop on creating a valuable business and what makes some businesses more valuable than others. In the full workshop we talked about what businesses we pick, why we like certain industries, how we build teams and delegate, and the three skills (sales, hiring, and delegation) that are key to a business owner building an asset that makes money while you sleep.

Sieva stumbled into a class in college on entrepreneurship taught by Paul Orfalea, the founder of Kinko’s, who had sold his business to FedEx and become a billionaire. Sieva’s main takeaway was that Orfalea had found a way to make money while he slept. When we think about great careers like being a doctor, engineer, or lawyer, those jobs will still stop paying you when you stop working. By building a valuable business you can get paid while you sleep, vacation, or work on another business entirely. Paul even took a mandatory three-week vacation for himself every year to step away.

People seem to think that as soon as they start as entrepreneurs they need to be visionaries and make high-level decisions, afraid of rolling up their sleeves and doing real work, but that’s not how it goes. Entrepreneurs need three main tools: capital or cash flow so you don’t stress about money, a network of potential employees, partners, customers, and investors, and operational chops on building processes, hiring, and delegating. In your first business you’ll likely have none of these, and it’s your job to build them.

Some businesses are inherently low-value and some are high-value. Owning an apartment building is one of the simplest forms of business; customers are predictable, the real estate is valuable, and therefore the business is worth more than its cash flow, sometimes up to 20X. On the flip side, a great plumbing business may only sell for 3X its earnings. You can build a more valuable plumbing business that will still pay you while you sleep, but buyers will still pay less than they would for the apartment complex.

The difference in business value comes down to a few factors. A small plumbing business where the owner is operating, working on the job site, and helping out has no competitive moat, there’s nothing to stop another plumbing business from coming in and eating away at their market. A business with a highly involved owner also has little value to the buyer because of the risk of the owner stepping away and operations falling apart. Things like a functioning management team, low owner involvement, brand value, and recurring customers will all look more attractive and more valuable to a buyer who’s looking for a return on their investment.

Knowing your north star will be crucial to your business’s long-term success, even if you don’t get to be a visionary from day one. Sieva’s first business was an education company that he started while in college. He did no research and just wanted to pay his bills. It grew to millions of dollars in revenue but had little profit because he had no idea how to build a truly valuable business.

Sieva’s second business became massively valuable because of that first experience. He knew how to do research and identify a good business. He spent six months talking to people, reading, and meeting with business owners to find out where he should put his efforts before he landed on a clinical trials business. Within two years it had reached $1M annually in cash flow and he was ultimately able to sell it for millions of dollars.

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I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.