Building A Business To Sell With John Warrillow

BWB John | Building Business To Sell

Building A Business To Sell With John Warrillow

    Shares

    Listen to the podcast here:

    So you’ve built a great business, but now you’re ready to move on. You want to sell, but you don’t know where to start. To the untrained eye, the world of buying and selling businesses can seem like an endless maze. Thankfully, today’s guest is a master navigator. Let him be your guide! A great entrepreneur himself, John Warrillow also specializes in ensuring success for you as you prepare to sell your business! Buckle down for some sizzling tips that will make your sale a successful one.

    In today’s episode, we’ll discover…

    • How to sell your business without getting eaten by sharks
    • What makes a business attractive to an acquirer…and how to make sure yours measures up
    • Why long term value could make you less profitable in the short term…and why you shouldn’t sweat it
    • How to create a business that can thrive without you..and how to avoid the “Owner’s Trap”
    • 3 tips to increase offers when selling your business and how to start implementing them now
    • How to create a recurring revenue stream (a.k.a. subscription revenue) and why it will add exponential value to any business
    • Why now is the time to buy your next business and how to identify key value levers

    About The Guest: John Warrillow

    BWB John | Building Business To Sell

    John Warrillow is an entrepreneur and author with over 20 years of research experience in the small and medium business (SMB) market. He founded The Value Builder System™ to level the playing field for business owners as they approach their exit. Over 35,000 business owners have taken the Value Builder Questionnaire™, and with the support of Certified Value Builders™ such as brokers, M&A professionals, and coaches, they’re using the statistically-proven methodology to improve company value by up to 71%.

    John’s best-selling book, Built to Sell: Creating a Business That Can Thrive Without You, was recognized by both Fortune and Inc. Magazine as one of the best business books of 2011 and has been translated into four languages. In 2015, John wrote another best-selling book that was released by Random House called The Automatic Customer: Creating A Subscription Business In Any Industry.

    Building A Business To Sell With John Warrillow

    I am very excited to have our guest on the show. It is going to fit into a theme that the audience heard me talking a lot about, which has to do with buying, selling businesses, increasing valuations. Looking at this in a completely different perspective than what you might typically be hearing about, which is to start a business, grow a business, make more sales. One of the reasons I'm excited is because I've been a fan of this author and this expert's work for years now. His name is John Warrillow. I first read his book, Built To Sell, a few years ago and it was such a refreshing read and the way it was written. Some of the key takeaways in it were these foreheadslapping epiphany moments that is like, “This is a completely different way to look at running a business.” In essence, it was all about a parable of telling the story of a person who ran a business. 

    In this case, it was a marketing agency. How they were doing a little bit of everythingcompletely owned by their business and realized that there was no escape unless they got their stuff rightThey created the business in a way that they could exit it if they wanted to. Buying and selling businesses is something I've done to a degree in my own businesses. If you're an audience, you'll hear me talking about it. I've sold businesses, I've purchased them, I'm looking to purchase more and there are a lot of different aspects that make this an amazing way to do business. It's also fraught with complexities that a lot of people aren't shedding the light on.  

    John Warrillow is here with us to shed the light on some of this. He's also the author of an amazing book that I recommend everybody get called The Automatic Customer, which is about how to build continuity as subscription-based recurring revenue into your business. It’s a key driver for increasing the valuation. I don't know exactly where this conversation is going to go, but I am thrilled to have John on the show and let you eavesdrop on a conversation that I've wanted to have for a long time. Without any hesitation, John, welcome to the show.  

    Thanks, Brad. It’s good to be here.  

    BWB John | Building Business To Sell

    The Automatic Customer: Creating a Subscription Business in Any Industry

    It's cool because I've read a lot of your stuffI think that what you've done for business owners is give them a new perspective on how to look at their business. You've got a couple of books. You've got your Value Builder System, you help entrepreneurs and/or business owners sell their business. How would you describe the core of your primary business and how you're serving business owners right now? 

    Our vision as a company is to level the playing field for business owners as they approach their exit. Right now, a lot of business owners start their business, they grow and get to the end of the line and decide to sell it. On the other side of the negotiation table, they're faced with a tough negotiator. It's either a corporate buyer, oftentimes it's a private equity guy and these are guys that went to Stanford, Harvard, Wharton and know every trick in the book. They use that manipulation, financial engineering, and frankly underhanded tactics to take advantage of business owners as they sell their life's work. We all at Value Builder think that's wrong. We think that if you build something that's making an impact on the world, you should be paid for it. That's what we're trying to fix. We're trying to make sure that entrepreneurs get a fair price when they go to sell their company. 

    I've been on both sides of this and I've been on the side with the very first business I sold. I’ve got to admit, I was running it into the ground. I was a distressed seller and I didn't know how I was going to turn it around. My focus was fixed elsewhere and there was a whole bunch of stuff that I didn't even know that I didn't know. I had a relatively sophisticated investor come by. He wasn't just somebody who wanted to buy my business. He was looking for people in my situation. I know I sold it for less than I could have and had I known some other things, but I got a hard lesson in the do's and don'ts.  

    I made a lot of notes. It’s like, “The next business I do, I'm going to have these things in place before I ever go take this shopping to a broker,” which is exactly what I did. I had my business. I was like, “I don't know what I'm going to do. I'm just going to take this to a business broker and see what they can do with it.” Do you find that that's one of the most common paths that business owners who reached that point of going, “I need to escape thisI need to get out of this. I want to sell it?” Do you think that their very first thought is go to business broker? 

    Yeah. We do a lot of work with M&A professionals and business brokers because we licensed our system to them. The flip side of the coin, their biggest frustration is entrepreneurs doing exactly what you did. It’s coming to them when they're exhausted, they're done and they want out. They're like, “Here are the keys. Sell this thing. Give me the check by Friday because I'm done.” That is tough for a broker or an intermediary, and M&A professional to deal with. It takes a long time to sell a company. If you think about it, it's way more sophisticated than a house. There's a lot of work that you generally do before you put a house on the market. You fix all the leaking roof and the leaking faucets. There's a lot of work that you need to do to put a business into shape to get it to sell.  

    There's the process of marketing the business. Google Adwords is a very efficient market. You bid and it's in real time and you can get words to bid on to exactly what the market is willing to pay for them. Businesses are not the same way. It's a very opaque marketplace. There is no true marketplace for businesses. As a result, it takes a long time for a broker and M&A professional to find the right buyers, to socialize the idea with them and to show them the idea, the book. It's a very kludgy, very opaque market. One recipe for making sure you get really screwed when you sell your company is to not doing any of the pre-work and then hand the keys over to a broker at the end and say, “Get me the most you can for it now,” because it's tough at that point. 

    As somebody who has looked at businesses and purchased businesses to buy, everybody's trying to do what's in their best interest. If I smell somebody who doesn't have their stuff together and who doesn't have systems documented and SOPs, it's disorganized, I'm taking a lot of money off the table for the valuation of thatI'm docking them for a lot of things. I'm looking at it on both sides as anybody would, and I'm not even a sophisticated M&A guy. I know enough to do some negotiation points, and that’s what I learned the hard way when I went through with my sale. You’re very familiar with this, but the way that the initial conversation starts off is almost never the way it ends when it's at the closing table because people are looking for all those little points to get you down based upon all the stuff you probably haven't done. 

    It's absolutely right. Not that I would ever advocate for it, but there's a huge opportunity for people to buy businesses at deep discounts for exactly the same reasons that you share. There are business owners doing this, but that's not what we do. We work the other side of the equation. It's to help business owners make sure they maximize the value of their company. You're right. One of the classic ways that we see deals tilt back in favor of the buyer is the buyer will throw in a number. They’re like, “I want to buy your business for say $2 million.” The business owner will say, “That's amazing. That’s fantastic.” The devil is always in the details. One of the classic things you’ve got to look for is what the downstroke is 

    The downstroke is the M&A parlance for what's the minimum amount of money that you as the owner is going to get out of this deal when all is said and done. If the buyer’s going to pay you $2 million for the business, the downstroke is the guaranteed portion. That might be $500,000. It might be $800,000. It might be $1 million depending on how well you structured your business, but you can guarantee it's not $2 million. The other piece is usually an earnout or some form of payment in the future based on what's possible. In a small business, it's often what they call a vendor take back, which is essentially you as the seller of the company is partially financing the buyer to buy your business. They write you a check for part of your business, but then they're borrowing and paying the rest of it over time. Usually you get a small coupon for that. 

    I almost purchased this business. It was an eCommerce business where they were doing between $million and $4 million and it was distressed. He wanted out. My offer to him was, “I'll buy 80% of your business because I want you around to still operate a lot of the piece, but I'll give you some liquidityI'll give you some certainty.” It started off as, “I’ll give you 100% owner financing. Let's call it $1 million to make it easy over the next three yearsI'm going to take that out of your cashflow and make sure I'm guaranteeing it to you with no risk to me.” 

    For a while there he said yes and I was pretty happy about that. We went up to 10% down, 90% owner financing where I was going to be sending him checks from his revenue primarily in order to cover the note payments. It was 100% because he was distressed. He didn't have an exact plan or things in place that helped to add value to it. I knew if I took over this thing, there was going to be a lot of work that I was going to have to do because he didn't do the necessary pre-work to build up his valuation. 

    We're all about trying to intercept business owners, which is why I wanted to do your show well before they get distressed, when they're still running their companies happily in many cases. Maybe they've got an inkling that, “Maybe in the next five or ten years, I might sell.” That's the perfect time to start thinking about how do you structure your business so that it will be attractive to an acquirer. A lot us as entrepreneurs, we use the profit and loss statement as our report card at the end of the year. How'd I do this year, top line, bottom line? That’s fine, but using another document is equally, if not more important, which is the valuation statement. Have you grown the value of your company? If all you're thinking about is profitability, you as the owner would probably do all the selling because you don't have to hire a salesperson. You're probably more passionate. You'd probably get better margins. You can do more selling. You do that, but at the same time, the more you personally do the selling, the less valuable your business will be to acquire. 

    This is dependent upon you.  

    Sometimes, the irony is what makes you more valuable may make you less profitable in the shortterm. By using both, numbers oftentimes compete with each other and they offset one. They provide some tension, which is good. If all you're looking at is, “How much profit did we make?” It's not the whole story. You may get to a point where you built a business that's so centrally dependent on you that you could never sell it. Many entrepreneurs would like to think they're building value that all their hard work is going to get compensated down the road at some point. 

    Value is in the eyes of the beholder. You're value to somebody who wants to buy you purely from a financial perspective. You're a cash cow and they want to buy it. Getting a good return on their cash is totally different than a strategic buyer who's going to come in. The things that you've done will be very valuable to their current existing businesses and realizing, “Should I sell it to a financial buyer? Should I sell it to a strategic buyer?” It is a big decision. 

    The more you can de-risk, the higher you are going to be paid for your business. Click To Tweet

    The motivations are very different. You've done a great job of articulating the financial buyer. They say, “I could put my money in the bank and get nothing. I could put my money in a diversified stock portfolio. In the long run, maybe I'll get seven or eight points, or I could buy this business and hope to get 12%, 15%, 20% return over time.” That's a financial buyer. They're looking at the predictability of your future profits. They're trying to understand how reliable is this company going to predictably generate cash into the future. The more you can de-risk it for them, the higher the multiple they're going to pay for your business. You're right. The strategic is doing some very different math. They're trying to say, “What's this thing worth in our hands?” I'll give you an example. Do you know Stephanie Breedlove? 

    No. 

    She's a great entrepreneur. She's written a book. I can’t remember the name of the book, but it's probably worth picking up. Stephanie Breedlove was at Andersen Consultants, the precursor to Accenture. She has a kid. She's an accountant. She says, “I'm going to hire a nanny, but we want to do it above board. We don't want to pay them cash, so we're going to go get a payroll company to do the payroll.” She calls up ADP and they give her a terrible experience. They give her the runaround and they transferred her calls to five different people. Breedlove after the fifth transfer, it dawns on her that they don't want her business because all she's doing is trying to pay a nanny. ADP thrives on doing payroll for total General Motors, Walgreens or whatever. 

    She goes, “What if I started a company that just does payroll for parents who want to pay a nanny?” That's what she starts. She starts this company called Breedlove and Associates. She has another kid and they built the business. It's not a hypergrowth company. Twenty-five years later, her business is generating $9 million in topline revenue. It’s a good business, but not knocking the flight lights up. She sells it for $54 million, six times the topline revenue. It's such a laughable number. It's almost unfathomable. Six times the profit would be a great outcome for any entrepreneur. She's selling it for six times top line. How does she do that? She sold it to a strategic. Here's what she did. 

    She goes to a company called Care.com, which is a venture-backed website similar to Angie's List where you can find a plumber or whatever. Care.com is the Angie's List of caregivers. If you're in Toledo, Ohio and you need a child babysitter for your kid, you can go in, enter your ZIP code, and it will give you a list of rated childcare providers in Toledo, Ohio. At the time of the Breedlove and Associates’ acquisition, which is the name of Stephanie's company, Breedlove had 10,000 customers. Care.com had seven million subscribers. They reasoned and Stephanie argued that if they sold 1% of the seven million or 70,000 customers, her payroll service would increase the size of the Breedlove revenue by 700% overnight because they've got seven million subscribers.  

    If they can literally crosssell the Breedlove payroll service to 1% of those customers, that business is worth seven times more overnight. If they sold 2%, it's fourteen times bigger. If they sold 10%, you get the math right. Care.com is saying, “It's a big multiple. We've got to pay for Breedlove's company, but it still works out for us in the end if we're successful cross-selling our service. That's a strategic acquisition. It’s very different than, “How predictable is this business going to generate profits for the next ten years?” 

    You advise a lot of companies and talk to a lot of business owners who do this. Are you seeing more people selling to strategic buyers or more of them selling to financial buyers? I haven't thought deeply about this. There's the strategic buyer who's already got something that this plays well into the financial buyer who wants a cash cow. The other one is somebody who in essence want to do something. They want to get out of their job, they want to stop being a doctor or they want to go start a new business or whatever.  

    They want a job or they want to own a business. It's very dependent on the size of the company. For a business that has less than $1 million in annual sales, it's almost always the ladder. It's almost always the individual who wants a job, essentially. They've left the corporate world. They’re not totally comfortable starting a business for themselves, but they've got a little cash and so they want to buy a business. That's very small companies, generally sub-$1 million. In terms of the $1 million to $10 million revenue, you do see some individuals, but that's starting to get a little rich for an individual. You start to see more financial buyers. The threshold that most private equity companies will use. A private equity company would be the quintessential financial buyer. 

    A private equity company will usually use, they all range, but $1 million in EBITDA is a pretty good cutoff rate to attract private equity. If you've got $1 million in EBITDA, pretax profit, you're likely to be able to achieve or attract a lot of private equity at that point, private equity or financial buyers. If you're a $5 million business with 20% margins, you're going to be able to attract private equity. If you're a $10 million business with 10% margins, you can attract private equity. Once the business is up more like north of $10 million certainly, but even north of $20 million or $30 million, that's when strategics start to play a little bit more. Most strategics don't buy a lot of very small companies at the sub $10 million. They're much more likely to be looking at larger businesses. Private equity companies, their game is they buy a company for a low multiple. They might jam a couple of companies together that are similar that there are some synergies between and they'll try to go off and sell off the combined entities for a better multiple to a strategic down the road.  

    BWB John | Building Business To Sell

    Building Business To Sell: What makes you more valuable may make you less profitable in the short term.

     

    When you are prepping to sell, and I’ve read about or seen you talk about some of these points, what do you do to get the most amount of viable offers? What can you do besides taking it to a broker, besides going out there and cold calling yourself? What can a business owner do? Let's say that they've paused in their business, they've done the work, and they’ve started to deploy some of the value building levers that you show them what to do. After homework is done, it's time to take this to market. What can they do to increase the number of offers they get? 

    Go to the industry trade show. That's probably the very best thing to do. Be an active member of your industry, if that means exhibiting, getting the award for the most exciting new company or the lifetime achievement award in that industry. Regardless, you want to make connections and aggressively network in the industry. Most of the big industry players will be going to the industry events with a view of, “What are the companies that we should acquire?” That's one of the hats that they wear. That's going to be a chance to connect with many of the players in the space. You don't have to be as desperately painful about it as, “Would you like to acquire our business?” You'd have a good openended conversation. “We should find a way to work together. I'd love to sit down and talk about if there's some way we could partner together.” Those are all industry codewords for acquisition. You don't have to say that you want to be acquired. You can say, “We should look at a way to do something, partner together, see if there are some synergies between the two companies.” 

    That sounds like a pretty good way to start to attract strategic buyers and talk to the people who are already in your industry. Are there any other ways that you recommend people to attract the strategic buyers or high net worth investors? 

    In particular strategic buyers, look at your current partners and that’s what Stephanie Breedlove did. They had a relatively junior relationship at Care.com. Stephanie Breedlove, the CEO and Founder of Breedlove was working with a marketing manager at Care.com on a joint content place. In other words, Breedlove was supplying some content, some articles to Care.com, but you wouldn't have thought of it as a strategic relationship. It was a very tactical relationship, but that was enough for Breedlove to go to the CEO of Care.com and say, “We've got this junior partnership, but there's got to be more we can do together.” 

    To get in the door, to get that ability to talk beforehand, add value to each other and then see what can be done. 

    Even if it's at a relatively junior level, that's fine. It will allow the CEO to go to the junior person and say, “Tell me about what we're doing with these guys. Tell me more about them. What is she like? Is she legit? Is she credible?” That's all you need to start a conversation. I would look down my list of partners. Who else do we partner with? See if you can go upstream because probably your partnership is with someone, not the CEO, but for the strategic acquisition, it's likely to be initiated first and foremost by either the CEO or a division president, if it's a large company or a corporate development executive. Google as an example has a head of corporate development. A division of Google would certainly have a president that would be on the lookout for acquisitions. The CEO of Google would be looking for massive acquisitions, but not the stuff we're talking about. 

    There are a lot of value levers, you could call it that, people can do during that time period when they decide, “I might want to sell this and I want to increase my valuation of the business.” You've identified a finite number. I know there are a million things that people can do. Maybe one of the driest but most important things is make sure that you've got standard operating procedures and documentation of all the things you do. When somebody comes to buy it, they know they're not getting a hodgepodge mess of stuff that they have to do. Of all the various value levers that somebody like a business owner can typically put in place when they're trying to increase their valuation and make themselves more attractive, what do you think are maybe two or three of the most effective ones that are universally applicable that business owners should ask themselves, “Do I have this? Is this something I can add in order to help me out?” 

    We talk about eight key drivers of company value. When you get your value a score, we get to rate you on these eight factors. One of the eight factors that is heavily weighted in our algorithm because it's correlated to getting offered a premium is what we call them monopoly control. Essentially what it means is how welldifferentiated is your product and service. If you have something truly unique that you have a virtual monopoly on, you would score very high on the monopoly control. If by contrast, you're selling a commodity, you're responding to RFPs, you're selling your product based on time or by the yard, by the ounce, by the pound, that's the opposite of monopoly control.  

    That's when you're going to get the least value for your business. What you're trying to do is find something and create something where it's truly unique. The reason has nothing to do with marketing. The reason that acquirers are looking for businesses that have a high degree of differentiation is because when an acquirer looks at your company, before they even express any interest, before you even know they're looking at you, they're looking at you externally. They’re saying, “Should we compete with these guys or is it going to be cheaper for us to buy them?” 

    That's one of the things I'm looking if I’m looking at something to say, “If I spent that money or a lot less, could I compete with them by entering the market myself?” There are no barriers to entry. There's no moat, no monopoly around them. For a majority of business owners, one of the harder ones if you don't have any demonstrable monopolistic moat that protects yourself from that. This is a loaded question because I know it all depends on the type of business and the industry, etc. Are there any anecdotal stories that you can think of off the top of your head on the spot of a company that didn't have one and was able to create one in relatively short order? 

    Get a manufacturer one. When you think about monopoly control, there are two ways you can create monopoly control. Number one, you can build a better mousetrap, and a lot of business owners, to your point, don't have the luxury of a better mousetrap. Their product is a parody product. It is not a better product. Essentially it is the same product as their competitors. I'm an SEO guy, there are 10,000 other SEO guys on Upwork. You're not differentiating. You can create monopoly control and do something better. Most people don't have that luxury. If you don't that luxury, you've got to manufacture the appearance of monopoly control through better marketing. This comes down to how well have you given the appearance of differentiation, whether you're different or not. 

    I ride mountain bikes, road bikes or whatever. There are dozens of different brands of bikes out there and they all got loyalists, loyal customers. They're all manufactured in two factories in China. Nike shirts as an example, I would challenge you to pick up a Nike dri-FIT shirt and compare it to another no name brand athletic knit shirt. Arguably, it would be difficult to tell the difference, but one's got the Nike logo, the other doesn't. It comes down to how do you create a brand. If you have a product, you sell a beer, you're a manufacturer of a new guacamole, you've got something people can touch, get it and you can brand it.  

    If you have a service, which you've got to do is productize your service. Service companies are renowned for genericizing their service. They say, “I'm an accountant.” That's great. There are another 500,000 accountants in America. How am I going to differentiate you from the other guys? Instead, you do what again named Darren Root has done, who is also an accountant. He set up something called Rootworks and it provides a unique accounting service, a backup. Rootworks is an organization. The brand that he offers is something called BOSS, Back Office Support System. The BOSS System is a bookkeeping offering. It's essentially accounting services, but he's branded it better. If you're the world's greatest SEO guy, don't hold your shingle out there and say, “I do SEO,” because then you're being encouraging, inviting people to compete with you on price. Say, “I've got the sevenstep proprietary process to maximize your position on Google.” 

    The more you personally do the selling, the less valuable your business will be. Click To Tweet

    This is what I know. One of the things I help my clients do is come up with that big idea that differentiates yourself and makes them go, “That's what you do.” Even if it's exactly the same as somebody else, the appearance that it's different can make a big difference in people's minds. 

    Getting good at branding and productizing would also include trademarking the name, coming up with the delivery steps underneath that. If you've got the fivestep SEO system, you have each of the five steps consistently merchandise every time. When you go, don't respond to requests for proposal and say, “I can do an SEO.” You politely decline and say, “We offer the fivestep and no one else does that. If you're interested in that, let me know but I'm not corresponding to your RFP.” 

    I want to flip the script and go back to something we were talking about before. This makes me think of one of my favorite little mental thinking strategies I took from Charlie Munger, Warren Buffett's partner called inversion, which is if there's something you want, invert what you want. Look at the opposite side, what you don't want and always look at it from two different angles. I want to explore this, partly for selfish reasons, but partly as a learning opportunity for people. What do you think are some of the biggest opportunities for buyers based on what you're seeing with sellers?  

    I don't mean how you take advantage of them, but what I mean is if you were to step away from saying, “I'm going to help sellers get the highest and most for them,” for the other side, the people who are trying to buy them, do you see any good opportunities for them? I'll give you one example. This ties in with your whole automatic customer thing, which is when I'm looking for businesses to buy, I'm looking to see do they maybe not have a recurring revenue thing in place? If they don't, is there something I can do to put that in place? Are there any opportunities there the buyers should look at because you've got a unique perspective? You see what's going on with the sellers. 

    It's funny you should mention recurring revenue because that's where the majority of the opportunities are right now. They are traditional transactional industries, businesses and transactional industries that are ripe to be converted into subscription offerings. Before I give you an example, to give you a sense of the delta, the difference between a transactional model and a subscription model in terms of valuation. If you look at security companies right now, these are the guys like home and office security companies. They have two forms of revenue. They have installation revenue, which you would consider transactional, one-off versus recurring, which they call monitoring revenue. Right now an acquirer will pay about $0.75 for every dollar of installation revenue and $2 for every dollar of recurring revenue. 

    On a dollar for dollar basis, the recurring revenue is worth almost three times that of the transaction revenue. If you buy a transactional business and you convert it into a recurring revenue business, you're making huge strides in making that company more valuable. You're doubling and tripling the value of the business as a result. That's what's at stake here. I'll give you an example, car washes. Right now car washes in the United States are generally transactional businesses. You go in, you pay, you buy your gas and you say that you want a car wash and they say, “Sure.” You buy a car wash. Increasingly, car washes have realized that there is a much better business model in creating a subscription business for unlimited car washes. Some of the savvy private equity groups and many of the big carwash organizations, I'm not talking about individuals, I'm talking about organizations are going around buying up crappy car washes for very low multiples, converting them into recurring revenue businessesThey are making out like bandits as a result. Constellation Software is another example.  

    I was going to mention them. I discovered them. An investment banker was telling me to look at them and said, “Look at their model.” 

    Constellation Software is great example. They have a reputation for buying onprem. Essentially, on-prem is technology jargon for software that is purchased on a one-time transactional model.  

    It's not Software as a Service. 

    Think about the way we used to buy Office from Microsoft. You go to Staples, you buy the CD's, you load them up. There are still software companies that are out there that operate on that business model. Constellation buys those companies, convert them into SaaS businesses and in so doing, ads turns and turns to their multiple. A turn is if you're trading at four times EBITDA and you increase your value to five times, that's one turn. Constellation is a publicly-traded company.  

    There are really small companies too. Sometimes they're buying big companies, but they're going after small ones as well. These industry stalwarts that are boring as all get out and they're using the cashflow from there. They're funding the development as a SaaS and turn it into recurring. I thought that was absolutely brilliant. 

    BWB John | Building Business To Sell

    Building Business To Sell: A monopoly control pertains to how well differentiated your products and services are.

     

    I'm not a huge fan because what we're trying to do is help the software company that is using the old transaction model. We’re trying to say, “Before you go sell to one of these sharks, make these changes.” 

    Do this yourself and make ten times what you're going to get prior to. That's why hear the other angle of it because you have that unique perspective with working with all of the sellers. You see the things they're doing right. You see the things that they're doing wrong. There are a lot of business owners who are baby boomers. The baby boomer is this aging population. They're starting to retire in mass if they can with this economy. Are you starting to see a lot more business sellers come on the scene now versus five or ten years ago? Are you seeing any particular trends? 

    The Exit Planning Institute, which is a partner of ours, says that 76% of business owners plan to exit their business in the next ten years. That's a big nut. That's as big as they've ever tracked in terms of the market. There is a coming wave. One financial advisor called it the $10 trillion opportunity. It is a big transfer of wealth. Most people believe it's the largest transfer private wealth that's going to take place in the next ten years. It's a big trend. 

    Just to interject there, I would think if you are thinking about it that if you know that there is going to be a potential glut of supply of people selling their businesses over the next ten years and you're not making hay right now. You’re getting your stuff together, following your advice and saying, “If a lot of people are going to start selling this stuff in the next decade and increasingly so, I better get my stuff right because I'm going to have to compete with a lot of other businesses that are going to be on the market.” 

    I was talking to somebody and they were saying the average accounting firm in America is run by a partner with an average age of 58. What's going to happen when all those guys turned 65? There are going to be a lot of accounting firms on the market and to your point, they're going to get cheaper and cheaper because there simply won't be enough buyers to meet the demand zones. That's definitely a concern for business owners. The flip side is there are a lot of folks out there similar to what you're doing, which is increasingly there are a lot of people realizing that the risks associated with starting a business are significant, but buying something established and making it run better is something that's a lot less risky. We’re seeing a lot of people, more and more people than I was aware of that are looking at buying a business as their career choice. 

    More people are looking at buying businesses as their career choice. Click To Tweet

    It made a lot of sense to me. I've started businesses. I've had businesses succeed. I've had businesses fail. I don't know if I have the energy anymore to start from scratch unless I'm so completely interested in it. A friend of mine who does buy businesses and hold them on whether in his portfolio, sometimes he resells them, he said, “As consumers, when we want shelter from the elements, we don't usually go to Home Depot and buy boards, hammers and nails and go out and build a house ourselves.  

    We usually find somebody who's built a house. Ideally it's a house that we want to live in. We arrange financing and we purchase that house and we move in.” He gave a couple of other examples, but he's like, “As entrepreneurs, as business owners, ultimately we get into business to make an impact, to make money, to make a living and create cashflow so that we can live our lives. Why do we think we have to build it from scratch? Somebody out there has probably done a pretty good job of it if you can find a business that fits all of your criteria.”  

    Most businesses fail after five years then find a business that's been around for five years as a validated product, a list of customers, and then reverse engineer the math to say, “This is how much I need to make. This is the financing I need. Let's go find somebody who's already built it. Let's move into their house and then decorate it the way we want.” That makes a lot of sense. The more people that start to adopt that idea as well, they'll be able to match up with the opportunity of a lot of these people who are retiring and wanting to sell their business. 

    It's true. The word of caution I would have though is oftentimes, it's not immediately clear how dependent the company is on its owner. To go back to your Charlie Munger, what's the opposite of what buyers look for. From a seller's perspective, what you want to ensure is that your business is not dependent on you personally. That can be very difficult to measure, but it's easy if you're the rainmaker for the company. That's easy to pick up and you should be able to figure that out and do due diligence. If the owner is deeply involved and coming up with product ideas for example, that's oftentimes less obvious to a potential acquirer. 

    It was Peter Drucker, he’s now since passed away, but the old management theorist, he said that as a CEO of a business, you should be focusing 80% of your time on one of two things, sales and marketing or product development. While I agree with Drucker, if the goal is to be the CEO for life, then yeah, you should be spending the majority of your time on those two things. If however your goal is to sell your company, you have to get those two things into other people's hands, but that can be hard for a lot of entrepreneurs. They've been told and they know that it feels right and that it feels like they're in the zone when they're doing the sales and marketing. They're doing the product development. That feels like they're adding value to their company. 

    The more they do that, they can see quick, shortterm results. The problem is that the more dependent it's becoming on them. You do almost the opposite of what you would want to do to build a shortterm successful company. That's why building a valuable company is so hard. For those that do it, they get paid so very handsomely. I do a podcast. I interviewed a guy and he said, “I always wanted to make enough money so that my kids would never worry.” I was asking him what did he sell for. He wouldn't tell me that number. He said, “John, I'm not going to tell you the number, but I'm going to tell you that not only that my kids never have to worry, but my kids’ kids.” The reason guys get paid so handsomely for businesses that are built well because they're so rare. They’re truly built so that they're not dependent on the owner.  

    BWB John | Building Business To Sell

    Building Business To Sell: A lot of people think that “get rich quick”doesn't exist when they just confuse it with it’s evil cousin, “get rich easy.”

    I was having a conversation with another mentor of mine. One of the things he said was a different perspective of looking at Built To Sell. He goes, “I totally agree with that, but I want to challenge you to change your words. If you build a company to sell in mind, you’ve got one foot out of the door already. Build a company that you would want to buy.” I was like, “That makes sense.” The two of them are the exact same thing, which is if you are going to buy that company, what are the things you would want to buy? I'd want to buy one that's well run. It doesn't depend on me to work on at a hundred hours a week. It has systems. It has a unique monopoly. That’s a great point, build a business you would want to buy. If you build that business, then the ability to sell it becomes infinitely more capable. Another thing that you reminded me of was there was a book I read years ago. It’s an amazing book with a terrible title because it sounds like a cheesy get rich quick scheme, but it's called The Millionaire Fastlane by M.J. DeMarco. Have you ever heard of that book? 

    I've seen it in bookshelves and I was repulsed by the title. I never picked it up as a result. 

    I'm going to recommend you read it. A lot of people think that get rich quick doesn't exist, but you're confusing it with its evil cousin, get rich easy. I'm going to show you how to get rich quick does exist. Let's say you build or buy business, but let's say you build a business and you spend the next five years working your butt off, hustling and you make a valuable business. You sell that business after five years, $5 million to $10 million, which is rich by anybody's standards. I don't care who you are. Did you get rich quick? Don't confuse it with get rich overnight, but most people work 40, 50 years of their life saving for retirement. You can put five years into it and you had an exit that allowed you to now live the rest of your life carefree. He goes, “The only way you do that is with an exit-based event.” You’ve got to shift your perspective of what quick is. 

    I'll have to pick it up. I haven't read it, but that's a good analogy. I wrote a blog post and this goes back a couple of years, but it was called Happy, Rich or Famous? Pick One! Happy was being happy, doing your craft. If you're an SEO guy, doing your SEO and nailing it for clients and getting the attaboys and the backslaps from your clients. You're never going to sell back the company, but you'll be very well appreciated and so happy. Famous was the venture back startup. You want to compete against Instagram. You want to create the next Google. You're going to need a truckload of money. It's going to be venture-backed and in many cases, more often than not, the VC wipes out the owner and the owner is left with nothing.  

    There are celebrated examples where that has not happened, but there are a lot more examples where CEOs walk away with nothing. You could be famous but not necessarily rich. The rich are generally the people who build companies in tiny little sleepy corners of the economy that nobody cares much about. They build up a $3 million or $4 million business that's generating 20% profit margins. They're netting $500,000 a year and they sell it for $4 million or $5 million because it's got great monopoly control. That's the recipe for getting rich. 

    For my audience out there who are business owners and are like, “I do need to have an exit in mind someday and I want to find out what some of the things I need to be doing and resources for,” I know you've got a tremendous Value Builder System. 

    Go to ValueBuilder.com and get your score. We're going to give you a score out of 100 and the average business owner who takes that questionnaire scores that 59 out of a possible 100. Those average companies are getting offers when they go to sell their business of 3.5 times pretax profit. If you over time build up your value builder score, we can show you how to do that. There are eight drivers and some tools we've got. If you build your valuable to score up to 90 out of a possible 100, those businesses that are trading at 7.1 times pretax profit. The first step is to get your score. Figure out where you are and what you need to change to drive up the value of your company so you can get it at ValueBuilder.com. 

    For my audience who are consultants as well, you license some of the tools and intellectual property around the Value Builder System so that if they're out there working with companies who may be interested in learning how to do this as well, you have opportunities for consultants too, right? 

    We work with entrepreneurs to help them for their value. Our business model as a company, the way we make money is we license our platform to what we call certified value builders. We've got 900 or so certified value builders around the world who are independent advisors. They're typically consultants, business coaches, M&A professionals. If you're interested in learning more about that, the page on our website is ValueBuilderSystem.com/Advisor. 

    Are there any nuts you're trying to crack? Is there anything that myself, my readers can help you out? Whether it's a person you're trying to meet, a skill you're trying to learn, money you're trying to raise, anything? 

    I appreciate the offer. I go back to where we started. We've got this mission to level the playing field for business owners. You're doing enough by helping us spread the word and I appreciate it. 

    If you’d like to be on any other podcasts, I've got a couple of friends with great business podcasts and tremendous reach, so I'm happy to make some intros. I just hope that all those business owners out there with the average of 59, they better get to you before I get to them. At the same time, I'm sure I can take a whole bunch of this stuff that you're doing and teaching to increase the valuation. I know one or two of the businesses that I've got that I'm going to be selling here before hopefully too long. I am playing both sides of it, but I cannot tell you how much I appreciate this, John. It's been a real honor to speak to you and hear from the horse's mouth about the way that this stuff is done. I look forward to getting all the feedback from my audience. If you loved this show, do us a favor and share it on social media. Tag both John and myself. If you ever have a question you want to ask me, send that email to AskBrad@BaconWrappedBusiness.com. John, once more, thank you very much for being on the show.  

    Thanks, Brad. 

    Tune into the next epi-sizzle and I'll talk to you soon. 

    Important Links:

    About John Warrillow

    BWB John | Building Business To Sell

    John Warrillow is an entrepreneur and author with over 20 years of research experience in the small and medium business (SMB) market. He founded The Value Builder System™ to level the playing field for business owners as they approach their exit. Over 35,000 business owners have taken the Value Builder Questionnaire™, and with the support of Certified Value Builders™ such as brokers, M&A professionals, and coaches, they’re using the statistically-proven methodology to improve company value by up to 71%.

    John’s best-selling book, Built to Sell: Creating a Business That Can Thrive Without You, was recognized by both Fortune and Inc. Magazine as one of the best business books of 2011 and has been translated into four languages. In 2015, John wrote another best-selling book that was released by Random House called The Automatic Customer: Creating A Subscription Business In Any Industry.

    Love the show? Subscribe, rate, review, and share!
    Join the Bacon Wrapped Business Community today:

    Got A Question Or Comment For Brad?