With recent high-profile acquisitions like Facebook purchasing Instagram for $1 Billion, every hopeful entrepreneur is dreaming of launching a startup and selling 2 years later. So how do you start a business to sell in the future? You must start by understanding that certain types of businesses sell, while businesses with certain business models simply won’t sell.
I believe there are 3 basic categories of businesses that sell.
1. Traction Businesses – Businesses that can demonstrate incredible traction, like Instagram, are probably the easiest type of business to sell, but quite possibly the most difficult type of business to start. An excerpt from the Instagram Wikipedia page demonstrates their incredible traction:
“By December 2010, Instagram had one million registered users. In June 2011 Instagram announced it had five million users and it passed ten million in September of the same year. In April 2012, it was announced that over 30 million accounts were set up on Instagram.”
Businesses that are growing incredibly fast like Instagram don’t need to show revenue, profit, or even a business model in order to find a buyer. All they need to do is show a graph like the following, and they will find a buyer.
I actually don’t think you should set out to try to start the next Instagram simply because it is incredibly risky. I recently published a guest blog post on Under30CEO titled, “Please Don’t Try to Build the Next Instagram.”
Whether it makes sense or not, businesses with traction sell.
2. IP Businesses – Another category of business that is relatively easier to sell is what I call an IP based business. IP stands for intellectual property. Businesses that own important patents or copyrights may not even have to sell a product or service in order to find a buyer. This is common in the drug and medical device industries. If you are able to patent and gain FDA approval for a particular drug or medical device with a large potential market, you won’t have to worry about ever selling a single product. You will undoubtedly find numerous large pharmaceutical companies willing to dish out millions to buy your company simply in order to acquire your intellectual property.
3. Cash Flow Businesses – The last category of businesses that are typically able to find buyers is what I am calling cash flow businesses. These are businesses that just make common sense for someone to buy. These businesses have stable, but growing revenue. They generate cash flow. They will provide the buyer a return on investment based on current revenue and cash flow; whereas, a “traction business” may or may not ever generate revenue. Cash flow businesses are lower risk, which means their growth potential might be lower than a traction or IP based business.
Examples of great cash flow businesses are businesses that generate a monthly fee from their customer like:
- IT Businesses
- Software as a Service Businesses
- Insurance Businesses
That monthly revenue from customers is consistent, and it allows the buyer to determine when they will recoup their investment and start to generate a return on investment.
It isn’t easy to create a business that can sell.
About the Author: Adam Hoeksema is the Founder of ExecutivePlan. ExecutivePlan helps entrepreneurs write business plan executive summaries in order to raise capital.