ADVANCED: The Case For A Product Based Business

Actually it has been scaled, Action Coach is an example.
It's been grown to over 1,000 franchisees. However the franchisees business doesn't have the same intrinsic value from what I can see because I'm not aware of them finding a market to be unsold. Product based franchisees get sold on the open market regularly.

Best,
Ewen

Just joining in the discussion, obviously many businesses are at various stages of success and development with their marketing , lets not get into specifics we know what is meant, and so I do agree with the productisation but how many different shall we call them levels of product do you have to ensure you aren't offering Social Media profile set up in a package to businesses that already have SM set up etc

Dan, what I find fascinating, not a judgement call,
is you are very process minded, yet you fell into the trap
of time creep with customization.

To me, it's like even the best process minds,
get caught by tailor made services.

Thanks for coming in with your recent experience.

Best,
Ewen

That's irrelevant to whether the business is product based or service based however. Go back to my original post where it comes down to People, Processes, Product. Any business that has three aspects in good shape can be sold. It doesn't matter if it's a product business or a service business.

Let me tell a story to make my point. One time I bought at a Sheriff's auction over 20 years ago over 40 truck loads of commercial air conditioners for a few hundred bucks. It took me about two years to sell off the bits. Some I was able to repair and sell for a few thousand a piece, some I broke down for parts and sold, and some I sold just for the metal. The point is, there's no process here to buy the goods. Even though it's a "product" business, so it really can't be sold it was a one time windfall of cash.

I'm just not agreeing with the assertion that any one type of business is more inherently valuable than another because of the type of business that it is. The value of the business is in the cash flow it creates. That value can be altered drastically by many factors of which I don't find service versus product to be as great as the systems like you talk about.

When you sell a business it has much to do with many factors. First you're going to look at your cash flow, because cash is king. Then you're going to get a sales price based upon what types of people, and processes you have in place. A mature business with a management team in place is going to sell for a higher multiple than a do it yourself plumber who is selling a job.

Look at it this way. One person is selling a handyman business with a truck, and all the tools that makes $80k a year. This business is probably going to sell for .75-2x. Maybe $50-150k a year let's call it. It's a service business right? It has some value but not as much as it could have.

Then take a look at a retail shop, it makes the owner the same $80k, and it will sell for around the same multiples .75-2x. It's not inherently more valuable to a business buyer than the plumbing business. Other than perhaps more people might be interested in buying it.

Most businesses under $200k EBITA don't actually sell. It's a micro business issue rather than a service vs product business. They don't get big enough to hire the people or create the processes to sell. But even very high grossing businesses can fail to sell when the processes and people aren't in place. I did work for a client of mine who did medical doctor recruiting, but he refused to hire any employees. He made on average $2-4M a year by himself(Been 10 years so the numbers hazy to be honest). Totally unsellable business because he worked alone. Good job to have though, even if he works like a maniac.

So mostly I would exclude businesses grossing less than a million and netting less than $200k, as they aren't really "businesses" but more jobs. And just for the sake of argument I'd say there's just as many service business as product businesses over $200k. Although you might argue that there are more service businesses below that line and I would agree. A better question might be why are those businesses not over the million dollar mark. And that's mostly because they aren't building better people, processes and products. One of my mentors told me the best thing a fledgling entrepreneur can do when they are first starting to make some profit, is to reinvest that capital in really good people, because good people oftentimes are better than cash in the bank. However most business owners take that cash and buy a car with it.

So if we're looking at businesses over $200k in profit then you can start to see some differentations. Yes many time and people intensive people businesses sell for smaller multiples than lets say manufacturers. But much of the value of these small businesses is in the people and processes. If they have a management chain in place that increases the value. If they have systems, processes and procedures that's another value multiplier. It really comes down to just a few things, how quickly can I get my money back and how easy is this thing going to be to manage and grow if I buy it.

As a general rule a very specialized service business that requires specialized skills can limit the buyer pool, this is true, but not to the point that it's unsellable given the right people, processes and product(Sorry Marcus this Marcos is stealing your terms). There are still strategic buyers. And there are still rollups happening in the middle market with specialized service business. There's an equity firm doing rollups of auto body shops in the South East. And another doing rollups of commercial roofing companies.

Any business can be sold if it's structured in the right way. It's the ones who aren't prepared(ala what Plessard said), that sell for much less than the ones who have a good system in place.

I personally don't have a preference either way, I always think it's about the cash. I want to know how easy it to run, and how much money does it make. What it "does" is secondary.