How to Make Millions By Building Your Company
Mario Esquer in an entrepreneur who develops products and brands for startups to the Fortune 500.
Step #1 – Develop and sell a successful product
Most entrepreneurs focus all of their efforts on this first step. Developing and selling a successful product is extremely difficult, but it’s really only the beginning.
The key word here is successful. Regardless of how great your product is, or how many years of hard work it took you to develop, if the product doesn’t sell like you expected then you will rarely make it to the next step.
Don’t make the mistake of rushing past this step. It’s not uncommon for entrepreneurs to try growing their product line and company before they’ve fully made the first product a success.
If your first product proves itself as a home run, then you can focus your efforts on making more home runs. It’s always best to take many small steps, as quickly as possible, instead of taking a few huge steps. Not only will this reduce your risk, it will increase your chances of ultimate success. In many cases you’ll have to take one step forward, then one step back, before eventually proceeding forward.
Step #2 – Build a company around your product
You probably have already legally created your company during product development, for both branding and tax purposes. If you haven’t, do that as soon as possible.
However, the legal business structure you chose initially while developing the product may not be the best structure as your company becomes profitable.
At least in the U.S., there are three options for legally structuring your business: sole proprietorship (or partnership), LLC, and corporation. The simplest structure is a sole proprietorship or partnership, and the most complex is a corporation.
Usually your best option is to begin by making your company an LLC (Limited Liability Company). Similar to a corporation, choosing LLC as the legal structure for your company will protect your private assets if your company should ultimately fail or be sued.
Unlike a corporation though, an LLC also has the advantage of allowing you to deduct any business losses on your personal income tax form. The odds are your business will be operating at a loss for at least the first couple of years. You’ll want an LLC structure during this time so you can deduct these losses on your personal income tax return.
Once your company becomes profitable, and if you plan to sell part of it one day, then you should probably switch to a C-corporation legal structure.
A C-corporation is the best structure to allow you to sell parts of your company in the future. But don’t rush into a C-corporation before you are confident that your company is profitable.
This is because as a C-corporation you won’t be able to deduct any losses on your personal income. You can only deduct losses from the corporation’s potential future income.
Step #3 – Grow the company
It’s time to grow and scale your company if you have accomplished the following: you have your first product on the market, it is selling successfully, and you are making a profit that can be reinvested into your business.
There are various ways to grow a product based business, including obtaining more customers, expanding your product offerings, increasing your sales prices, and/or reducing your costs. In most cases you’ll need to do a little bit of all these strategies.
Getting more customers should be your first priority. Expanding the number of products that you sell is one way to get more customers. In fact, you may find that when you try to strike deals with big retailers you run into what is known as the one-product wonder barrier.
Many of the largest retailers and distributors simply don’t want the hassle of adding a new manufacturer that only sells one product. Adding a new vendor creates a lot of paperwork, headaches, and risk for a retailer. Retailers may not think it is worth the effort for just a single product.
One way around this barrier is to sell your product to them via a distributor that already sells them other products. Although many distributors also shun taking on suppliers that only offer a single product.
For this reason you’ll eventually need to focus on expanding your product into a full line of products. Sometimes this expansion can be as simple as offering your product in different quantities or colors. For example, a single product could also be sold as a 3 pack, thus creating multiple SKU’s that may appeal to retailers.
Each new product you introduce should be simpler to develop and sell than the first. You already understand the entire process and all of the obstacles. This will allow you to be much more efficient with additional product offerings compared to your first product. As I always tell my son, knowledge (and experience) is power!
Another reason for creating a whole line of related products is you will gain more brand visibility in the retail environment. A single product surrounded by numerous other products may get lost on a retail shelf. However, if you have an entire line of products to display, your brand will become much more visible and sales will typically increase.
Depending on your profit margins you’ll also want to begin working on lowering your production costs so your profit increases. During step one you should focus on minimizing your development costs and risks, not maximizing your profit margins.
But once you reach step three you need to optimize your manufacturing process to minimize your production costs.
This is also the stage where you’ll need to expand your team beyond just yourself and your co-founders if you wish to grow your company quickly.
Step #4 – Organize the company to operate without you
Once you have a successful product line and a full management team in place, it’s finally time to begin removing yourself from the day-to-day activities of the company. This is necessary because it’s very difficult to sell a company that is completely dependent on the founder.
Removing yourself from the equation is definitely a requirement if you plan to one day sell the entire company. If your company still depends on you for its survival, you will never gain top dollar for it. In such a case, any buyer is likely to require what is known as an earnout.
An earnout is when part of the purchase price is contingent upon you sticking around and making sure the company meets certain financial targets. In most cases, its best to avoid the requirement for an earnout period.
Ultimately, you need to ensure that the company can survive without you by putting a competent management team in place. I’m not saying you have to be completely removed from the company. You can still serve as the CEO if desired, but you need to make sure you are replaceable and that a professional CEO could be brought in to take over your role.
Step #5 – Sell that company or at least part of it
You finally have a company that is growing, is profitable, and can operate independently from you personally. Now it’s finally time to sell that company. It will no doubt take you many years to reach this point, typically at least 5-10 years. Although you may hear in the news of startup founders selling much sooner, that is exceptionally rare.
When you do make the decision to sell your company, you’ll need a good Mergers and Acquisitions advisor (M&A advisor) to help you sell your business and to be sure you get the best price possible.
If you’ve achieved the goal of creating a thriving company with a large product line and a full management team, then an M&A advisor is your best choice. The alternative is a business broker, but they focus on smaller, less complex businesses like Mom-and-Pop stores.
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