Summary of "7 Components Of A Sellable Business | Ep 220" by Leila Hormozi

Podcast Title: Build with Leila Hormozi
Host/Author: Leila Hormozi
Episode: 7 Components Of A Sellable Business | Ep 220
Release Date: December 20, 2024
Description: In this episode, Leila Hormozi delves into the seven essential components that make a business highly sellable. Drawing from her extensive experience in scaling businesses and her personal journey from near bankruptcy to building a $100 million enterprise, Leila provides actionable insights for entrepreneurs aiming to create an unshakeable and sellable business.

Introduction

Leila Hormozi opens the episode by sharing her personal success story of selling her first company for $46.2 million and subsequently growing her ventures to over $100 million by the age of 28. She emphasizes the importance of building a business with the option to sell, regardless of the entrepreneur's immediate plans to do so. This mindset not only provides flexibility but also enhances the business's overall value and stability.

Leila Hormozi [00:00]: "Having the option of having a sellable business is better than just having a business."

1. Growth Potential

Definition: Growth potential refers to the capacity and opportunity for a business to expand its revenue. It can be measured by the total addressable market—the total number of people the business can serve.

Leila illustrates this with examples:

• Toothpaste: Large addressable market as many people purchase it.
• Fake Eyelashes: Smaller market, primarily women.

Key Insights:

• Buyers are attracted to businesses with significant growth potential rather than those with limited expansion opportunities.
• The optimal time to sell is when the business is thriving and growing, not when it's struggling.
• Addressing pain points within the business, such as lack of strategic leadership, can enhance its sellability.

Leila Hormozi [05:20]: "When you do want to sell your business, it's usually when your business isn't doing well... Nobody wants to buy a flaming piece of shit."

Example:
Leila discusses her experience with Gym Launch, where they identified multiple growth avenues like expanding to franchises, launching new software, and international expansion. By demonstrating these growth opportunities, they made the business more attractive to potential buyers.

Questions to Assess Growth Potential:

1. What opportunities have I left on the table that someone else can capitalize on?
2. Is my business currently thriving, or am I trying to sell it because I'm in pain?
3. What signs of future growth can I showcase or demonstrate?

2. Unique Value Proposition

Definition: A unique value proposition comprises the distinct benefits a product or service offers to its customers. It can stem from the product itself, the messaging around it, or its pricing strategy.

Leila breaks it down into the Three P's:

• Product: Quality and user experience (e.g., Apple’s seamless product experience).
• Price: Competitive pricing strategies (e.g., Spirit Airlines offering low fares with add-ons).
• Promotion: Creative marketing efforts (e.g., Red Bull’s association with extreme sports).

Key Insights:

• Differentiation doesn’t require complete innovation; even a 20% difference can set a business apart.
• A strong unique value proposition creates a moat around the business, protecting it from competitors.
• Buyers perceive businesses with unique value propositions as lower-risk and higher upside investments.

Leila Hormozi [15:45]: "The more that you can differentiate yourself from the competition, the deeper that moat becomes."

Example:
Gym Launch's unique approach combined operational support with marketing, differentiating it from traditional franchises and marketing agencies. By democratizing information and providing comprehensive operational guidance, they stood out in the marketplace.

3. Diversification of Revenue

Definition: Diversification involves generating income from multiple sources, whether through various products, services, or customer segments.

Key Insights:

• Buyers prefer businesses that aren't overly reliant on a single revenue stream.
• Diversified revenue reduces risk, ensuring that the business remains stable even if one income source falters.
• High revenue concentration (e.g., a marketing agency relying 80% on Facebook ads) is unattractive to buyers.

Leila Hormozi [25:30]: "If you have multiple streams of income, you have financial security. If you have one, you are one step away from a disaster."

Example:
Leila shares her experience evaluating an agency with purportedly over 50 clients, which actually depended on just six. The lack of diversification was a deal-breaker, as losing a few clients could drastically impact revenue.

Advice for Entrepreneurs:

• Assess where your revenue is coming from—customers, products, or both.
• Strive for a balanced revenue distribution to enhance business stability and attractiveness.

4. Cash Flow

Definition: Cash flow represents the money moving in and out of a business. Positive cash flow indicates more money is coming in, while negative cash flow signifies the opposite.

Key Insights:

• Strong positive cash flow assures buyers that the business can sustain itself without additional investment.
• Investors rely on cash flow to service debts and fuel growth.
• Weak cash flow can stem from poor expense management or diminishing product-market fit.

Leila Hormozi [35:10]: "Having strong cash flow is so appealing because it mitigates risk for the buyer."

Example:
Leila explains how her first-business Gym Launch maintained strong cash flow by minimizing overheads and focusing on scalable services. In contrast, Prestige Labs struggled with fluctuating margins due to reliance on external suppliers.

Tips for Improving Cash Flow:

• Manage expenses diligently to maintain positive cash flow.
• Continuously innovate to ensure strong product-market fit and sustained demand.
• Use cash flow to reinvest in the business, creating a self-sustaining growth cycle.

5. Recurring Revenue

Definition: Recurring revenue is income that a business can predictably earn over time, such as through subscriptions, long-term contracts, or maintenance fees.

Key Insights:

• Predictable revenue streams provide stability and reduce the urgency for constant sales efforts.
• Recurring revenue models enhance the strategic capability of the business, allowing for long-term planning.
• Transitioning from one-time sales to recurring models can significantly increase business value.

Leila Hormozi [45:00]: "There is always a way that you can create subscription revenue in your business. It's just a matter of figuring out what someone’s going to do with your product or service after they've bought it once."

Example:
Leila recounts transforming a portfolio company’s one-time purchases into a subscription model, thereby stabilizing and increasing revenue. Similarly, med spas offering memberships with service discounts ensure repeat business.

Questions to Assess Recurring Revenue:

1. Do I have predictable revenue, or am I solely reliant on one-time purchases?
2. How can I convert one-time sales into recurring revenue streams?

6. Financial Performance

Definition: Financial performance evaluates how efficiently a company generates revenue and profit while managing expenses over time.

Key Components:

• Revenue Trends: Indicate market demand and business strength.
• Gross Margin: The difference between sales and the cost of goods sold (COGS). High gross margins suggest scalable products.
• Profit Margin: The net income after subtracting all expenses. High profit margins reflect effective cost management.

Key Insights:

• Strong financial performance attracts investors by demonstrating the business's ability to generate returns.
• High gross and profit margins indicate scalability and efficient operations.
• Investors compare financial performance against alternative investment opportunities, making robust metrics crucial.

Leila Hormozi [55:30]: "If you have strong gross margins and strong profit margin, that is ideal for an investor."

Example:
Gym Launch enjoyed high gross and profit margins due to its service-based model and remote operations, reducing overhead costs. Conversely, Prestige Labs struggled with lower margins due to reliance on external suppliers, highlighting the importance of controlling COGS.

Advice for Entrepreneurs:

• Regularly monitor and understand your margins.
• Identify and address factors limiting margin improvements.
• Strive for economies of scale to enhance financial performance.

7. Strength of Team

Definition: A strong team ensures that the business can grow and operate independently of its founders.

Key Insights:

• Buyers seek businesses that are not overly dependent on the founders, valuing a competent and autonomous team.
• Building a diverse team with varied perspectives fosters innovation and resilience.
• A strong team can maintain or even grow the business in the founders' absence, increasing its attractiveness to buyers.

Leila Hormozi [65:45]: "When somebody buys your business, they want to buy the thing you've made, not you. If you are integral to its functioning, it’s less valuable."

Example:
Leila describes how Gym Launch built a robust leadership team, allowing the business to operate smoothly without her constant involvement. This autonomy reassured buyers of the business's stability and growth potential.

Self-Assessment Questions:

1. If I were to disappear for a month, would my business decline, maintain, or grow?
2. Does my team possess the knowledge and skills to handle all aspects of the business independently?

Conclusion

Leila Hormozi reiterates the significance of building a business with sellability in mind, emphasizing that even if selling isn't an immediate goal, having the option enhances the business's overall value and stability. She underscores the importance of patience, stating that developing a sellable business takes time and strategic effort.

Leila Hormozi [75:00]: "The most undervalued skill when it comes to building a business is patience."

Final Takeaways:

• Focus on the seven components to ensure your business remains open to future opportunities.
• Prioritize sustainable growth, unique differentiation, diversified revenue streams, strong cash flow, recurring income, robust financial performance, and a competent team.
• Cultivate patience and strategic planning to build a resilient and sellable business.

By adhering to these principles, entrepreneurs can create businesses that not only thrive in the present but also offer lucrative exit opportunities in the future.