In this episode, our host Michael Bereslavsky speaks with author John Warrillow. Together they delve into John’s experience as a business owner, selling and developing businesses. He also shares summaries of his books and interviews with his podcast guests.
HOST BIO:
John Warrillow is the founder of The Value Builder System™, host of Built To Sell Radio, and author of the bestselling books, Built to Sell: Creating a Business That Can Thrive Without You, The Automatic Customer: Creating a Subscription Business in Any Industry, and The Art of Selling Your Business: Winning Strategies & Secret Hacks for Exiting on Top.
SKIP TO THE GOOD PARTS:
- 01:52 – Summary on Built to Sell
- 07:26 – Freedom Point
- 45: 21 – Summary on Automated Customer
- 48:22 – Summary on The Art of Selling your Business
SHOW TRANSCRIPT:
Michael 00:10 Welcome podcast listeners and viewers. Today, on this episode, we have John Warrillow author of Built to Sell and the founder of The Value Builder System. Hi, John.
John 00:24 Hey, Michael, how are you?
Michael 00:25 Good, good. So, it’s good to have you here. I’ve read, built to sell quite a few years ago, but I remember it made quite an impression on me in understanding like higher level on how to really grow a business. How to, how do we improve it? So, I’m curious how many people do you reckon have read, built to sell so far?
John 00:50 I have no idea. It’s been translated into like 13 languages and it’s been a great run and I have no idea how many people have read it. I can tell you that of the three books a week. We’ve written a kind of a trilogy built. The sell was the first out amount of customer about recurring revenue. The second. And now the new book ‘The Art of Selling your business’ was the third.
I can tell you to that Built to Sell’ was the most well-read it’s the one that I get sort of approached about for the most part. And yeah, it’s really about how do you create a business that’s not dependent on you, which of course is a transferable business. So, yeah that’s the book ‘Built to Sell’.
Michael 01:27 And do you know how many people bought it, would it be like a hundred thousand, a million or more.
John 01:37 Yeah, no we’d be into the hundreds of thousands.
Michael 01:41 Sounds good. Yes. So, you summarize briefly, but can you give us a little bit more of an intro for those who haven’t read the book and don’t know much about it? If you can explain it like a few minutes.
John 01:52 Yeah, the core idea is that for business to really have transferable value. It needs to be able to run without the owner. And so many small businesses are, are too dependent on the owner. They’re not transferable because the owner needs to come with it.
And so that the of core idea in Built the Sell is how do you structure things so that everything is not dependent on you and that gives you the ultimate poker hand. Like if you can create a business that’s not dependent on you, you could sell it, but you don’t have to, you could also scale it. You could bring in a management team, you could sell half of it to a private equity group.
Like you can do lots of things, you’ve got lots of options. But if it’s a business that’s dependent on the owner you’re really stuck, you kind of have a job and that’s not great. So, for most entrepreneurs I interact with they’re not trying to become the next Elon Musk. They’re trying to build something that gives them freedom that allows them to decide where they want to work, how much they can earn, they don’t want to be held down. And so, the kind of idea is creating a business that doesn’t require you. And you’ve got sort of all the options.
Michael 03:04 And who would be the target business here? What’s the minimum size or like in terms of employees or things like that?
John 03:14 Yeah, we have startups that read it, but really when I was writing it, it was really for an entrepreneur generating revenue of somewhere between 500,000 top line and 5 million top line like that was the space that I was thinking about. The book is based on a story Alex Stapleton is the protagonist in the story, the hero of the story, so to speak, and his revenue is something like a million, five.
He’s got like a half dozen employees and he’s running around with his head cut off like a chicken it’s the classic story where you grow the business. You know when you’re really small… like when you’re self-employed I think it’s… like running a business is not that hard. You’re really just selling your time and you’re effectively… you you’ve got a job, it’s just a self-employed job.
Whereas when you grow to say five employees or 10 employees, all of a sudden thing get real, you’ve got mouths to feed. You’ve got revenue, you’ve got to generate and all of a sudden thing get really serious really quickly. And that’s the stage that I think ‘Built to Sell’ helps for is where you’re trying to like get out of the fog of war. You’re trying to try to build something that’s not so dependent on you.
Michael 04:38 And, that’s interesting, I’ve seen a 10 million business for about 15 years now. I’ve seen on my own experience and other people that there is some kind of threshold that, that seems to exist in that range that you mentioned like 500 hundred thousand or 5 million. That very few people are able to cross it, very few businesses seem to make it further.
John 05:03 In the US it’s 4%, 4% ever crest a million dollars in annual revenue. [crosstalk] because the revenue is tied to the owner and so when the owner runs out of hours in the day, they can’t sell any more and therefore the business plateaus. So, in a professional services business it might hit very early. I know that most of your listeners are not professional services business, but it might be as low as say two or $300,000 in revenue where you reach that point.
And in a, SAS business or e-commerce business, it may be higher, but that’s where we see this sort of fork in the road, frankly, where a lot of business owners step off and they say, okay, I’ve reached whatever, $500,000 in revenue. It’s a great business, it’s a lifestyle for me, it gives me tremendous independence. I can pull out lots of money I can run out all my expenses through it. I’m good. I’m going to just run it like a lifestyle business.
And so, we see examples of that, you know, Tim Ferriss for example, had Brain Quicken. It was a supplements business and when I asked him about why he sold it, he said it was a great business. I was only down to like four or five hours a week running it, which is obviously the book he wrote Four Hour work week.
But he said it was still like my brain was running antivirus software. Always sort of churning through the business and I could never really feel like I’d leave it at night. It was always there with me and so that’s why he chose to sell his business. For some entrepreneurs] they don’t feel the same burden, they reached that point of $500,000 in revenue and they decide, well, I’m just going to leave it as a lifestyle business. But for others and put myself in the latter camp It’s hard to switch it off. And so that’s why I think a lot of smaller businesses decide to sell or decide to do, make some transformational, changes in their business because they don’t want to run a lifestyle business. And that’s were Built to Sell can help and others.
Michael 07:12 Yeah, that’s certainly something we see as well with businesses we acquire or broker for clients that sometimes we just don’t spend much time on it. And we as buyers or our clients often ask why would you sell it, if it only takes you a couple hours a week to run and it’s quite stable, why would you sell it?
And this is something that many people don’t understand is that it might only take you a couple hours but what you are kind constantly thinking about it. It’s always occupying some space in your mind so it’s difficult to fully disengage.
John 07:26 Yeah. We also talk thing called the freedom point, which is the point at which selling your business will generate enough liquid cash to live comfortably for the rest of your life. And when you reach that point, I think Michael, it makes sense to pull up and say, well, why would I keep it going? Like Warren Buffett’s got a famous saying, I’ll see if I can paraphrase it. He says, why would you risk something you care about for something you don’t care about?
And what he was trying to say is like, once you’ve got the nest egg that you’ve created, why risk it for that next little bit of alpha on whatever investment you’re trying to create. And so, for a lot of entrepreneurs, I think it’s worth calculating the freedom point. Again, it’s when you, the sale of your company, after you pay your broker and after you pay tax, what’s left over, is enough money for you to fund the lifestyle you aspire to have for the rest of your life. It’s worth asking yourself why not sell because selling will create that wealth, make it liquid, not selling means you’re the gambler at the poker table.
Who has just won five consecutive hands and you know, the dealer saying, put all your chips on the table again, because you’re risking everything? You never know when the next black Swan event I just did an interview with a guy named is I think his first name was Adam.
He built a great company where they created template-based apps for the iTunes store. So, if you are a restaurant right, or a gym, and you wanted to create a mobile app for your restaurant, it might cost you $50 or $60,000 to go out and hire a developer created like a really slick iPhone app. Well,.
So, like most restaurants don’t have $50 grand to spend on an iPhone app. So, he built an iPhone app tool, like a wizard that would enable you to create your own iPhone app. Well, this business took off very quickly, and I think if I’m going to go back, I interviewed him for Built to Sell radio recently.
I think he was generating call it eight or $9 million of revenue, when all of a sudden Tim Cook decided that overnight, they were no longer going to accept template-based apps in the iTunes store. And overnight phones started to ring off the hook from customers who were building these apps and were no longer able to use them in the iTunes store.
So, the number one dominant most obviously player and cause business went from $9 million, very profitable growing like a weed to literally nothing overnight. With one decision from Apple that’s really what can happen for a lot of businesses. A lot of businesses went into 2020 on the back of their best year ever.
And then out of nowhere, we have a global pandemic and the business in some sectors in particular service businesses gets crushed. So, we don’t know what’s going to happen and you crest the freedom point where the sale of your business would create enough liquid wealth. It’s worth asking yourself. Well, why not sell?
Why not make that wealth liquid and then go do the next thing that you’re excited about because, by the way I should finish that story. He called email Tim Cook and said, this is crazy, our apps are helping people. He actually… right after one of the, his apps, a template-based app was featured on the Megan Kelly show.
When Megan was describing how one of these apps helped a teenager avoid suicide, it was a suicide prevention app. Megan Kelly interviewed this woman. And then cause sent that video of Megan Kelly interviewing the woman to Tim Cook and saying, is this really what you want to pull out of your iTunes store?
Long story short. got his apps back in the iTunes store. The business went on to be a tremendous success. He sold it for more than $20 million, but there was a moment in time where it gets was almost out of business and that’s just worth remembering. I think when we reached the freedom point.
Michael 12:08 Yeah that’s a good story. It’s certainly interesting to see how the platform risks can be a major risk. And we see that a lot with Amazon businesses, for example, that focus completely on Amazon. And then at some point, Amazon just decides to change something and basically closes an account.
And we’ve seen something similar with the Facebook and Google as well for businesses that rely on their API or their specific features. So that could be a major risk.
John 12:42 Yeah, in Value Builder we call it the Switzerland structure where you want to make sure. None of your business is not dependent on any customer, employee, or supplier.
And Michael, what you’re referring to is a supplier risk platform risk where you have, as had risk that iTunes would change its business model. Another example, I just did an interview for Built to Sell radio with a guy named Ben Leonard, Ben built a wonderful business he built beast gear.
Interesting story. Ben at a very young age, had a heart problem, which he was very fit guy. I was working out and he went one day and had a, an issue with his heart at like the age of 25, very young. And so, the doctors basically put him on bed rest and he couldn’t work out. And so, he’s like, like unpacking his gym bag, basically putting it all away.
And he looks at his gear like skipping ropes and these are straps and they’re all kind of frayed and torn apart. And he’s like, God, I got to build like better gear. This one was premium stuff, expensive stuff, and it was all falling apart. So, he decided that in his time off, he would create better workout gear, better straps and accessories for people who work out. Long story short, he creates this company called Beast Gear and he creates an Amazon store.
He buys like 250 ropes from China and get some branded with Beast Gear and then sells them on a little, basically crude Amazon store. Anyways, long story, longer, over time he builds this up I think it was 4 million pounds in annual turnover. Tremendous success did a lot to build business off amazon created a whole Instagram following got people to opt in to mitigate for his platform risk.
So, he created a customer list off Amazon, et cetera. But when he went to sell the business to your point, Michael, that the PE group that bought it said We love what you’ve done to build the kind of off Amazon stuff. And at the same time, we do realize that you do have some platform risks because at the time I think 95% of his revenue, not his customer relationships, but as revenue is still coming off of Amazon.
And so, I think he traded it three times top line revenue in and around three times top line revenue. Excuse me, not top-line revenue three times EBITDA three times bottom line profit before interest tax depreciation, et cetera, which is a relatively low multiple for a business of that size. But it was because of the platform risk that That he got a little bit of a haircut there, but again, he would never have sold his business.
Had he not created an off-Amazon presence. So, he did a great job of doing that, but you know, any business with 95% of its revenue from Amazon is going to take a bit of a haircut.
Michael 15:34 Absolutely. So, going back to the idea of Built to Sell the idea of removing yourself from operations so that the business is not dependent on the owner first of all can businesses pass that threshold dimension without doing that? Do you see businesses that still stay the same structure, but managed to grow beyond that beyond 5 million, 10 million, maybe like have 20 people, 30 people or more, or do you think that’s just not possible to move forward without doing all the necessary steps.
John 16:13 Yeah, no for sure I think you can grow. And I’ve seen examples of growing businesses that much larger than $5 million that have lots of different things they do. Usually, one of two or three things has happened; number one is they’ve sold a bunch of equity so they’ve raised a bunch of rounds of outside capital, friends, and family investors, et cetera.
And so, they’ve got lots of money to kind of wipe out or wipe over any inefficiencies in their model. And so, they can grow beyond just the owner very quickly without having to narrow down what they do. I just did an interview with a guy named Jason Flack who built an app for TV companies to use and yeah, he quickly scaled to something like 50 million in revenue, but he only owned like at the end, a very small slice. So, I think you have to give up a lot of equity to raise a bunch of money to grow like that. The other in a professional services context is easy to take on partners, right?
You reach a point of 300,500,000, dollars of turnover revenue when you can’t grow any more. And the only way to attract the kind of talent and could sell customers cause that’s the one currency in professional services, concepts that is hard to replicate is you have to give up equity. So, you see law firms, accounting firms you know, they talk about revenue per partner because once the firm reaches, again, three, $500,000 in revenue, you’ve got to get partners.
So yes, we do. I see examples of that, but very rarely does the owner maintain a hundred percent. Equity and it, again, it goes back to the age-old question. Would you rather own a hundred percent of a relatively small business, or would you rather own a tiny slice of a company you don’t control? I’m interviewed a guy named Rob walling on built to sell radio who built drip. Have you ever had drip? Have you ever had Rob on the show, Michael?
Michael 18:11 No, but I think I haven’t talked to him before. Yeah.
John 18:15 Yeah, he’s he runs a podcast called startups, the rest of us. Anyways, I interviewed Rob and talked to him about the sale of drip. Drip was a, an automatic email marketing software with some bells and whistles and he built it up.
But did it. Very independently didn’t raise money. Didn’t like, get, take a VC round, even though he was in a very acquisitive space. He calmer. Yeah. Or, email marketing. Okay. In any event, he built it up to $2 million of annual recurring revenue. So still a very small business. It was like him and like a few employee’s kind of thing.
But he wanted to remain independent. Didn’t want to go down the classic software route of giving up all his rounds and rounds, rounds of equity. Hey, it was long story short walling. Started to receive offers for drip. And he was in the head space of nine to 13 times top-line revenue.
Those are the kinds of offers and the kinds of conversations he was having. And he had a hundred percent of the company. And in many cases, I see examples of people who do exactly the opposite. They give up lots of equity, one, one employee’s guy interviewed and built this already as a guy named Rand Fishkin built a great little company called Moz.
Do you know MAs Michael Chung? Yeah. So Moz SEO software builds it up to $5 million in revenue. So still a relatively small company when he gets approached by kind of Brian Halligan, co-founder HubSpot. HubSpot is a massive company on the way to becoming a unicorn Mazda is a $5 billion business Halligan offers.
Rand Fishkin, the founder of Moz $25 million of cash and HubSpot stock for his $5 million business. And ran says, well, no, he thinks he’s going to 10 million. And he thinks his business should be worth four times top line revenue on the future. So, the future looking and go counter offers at 40.
Halligan says, no, there’s no way we’re paying $40 million for $5 million company. And they part ways or ran raises VC money. VC money gets him a bunch of cash quickly. He goes and invest in a whole different other set of products. Some of which are successful. Others are not. The company starts to bleed cash because of how diversified it has become how many products and services it’s offering.
And eventually the VC’s actually removed Rand from the CEO spot and they continue to run the business without him. I interviewed ran and I said, well, what was that like? And he said, it was terrible, like watching your baby that you created, be run by someone else. And I said, okay, but clearly your shares and Mazda must be worth the truckload now.
And he’s actually probably not. I don’t think they’re worth anything. And I was like, what do you mean anything? He’s like, well, the way VCs invest that usually have preferred shares where over time they get a preferred return. And so, if they hold for long enough as a founder, it washes out. It has washed out in his view.
Most of it, if not all of his equity, because again, they’re guaranteed a preferred return for each year. They hold the investment. And I said to ran, what would that offer from HubSpot be worth these days? And he said, well, based on the appreciation of HubSpot stock, it would probably be worth close to $200 million versus.
Right now, what his stock is worth is perhaps nothing. And the reason I tell you that story Michael is I think it’s indicative of this idea that when we take on shareholders and we no longer control the company, we founded bad things can happen. And Rob walling decided to say, I’m going to keep a hundred percent.
Even though it’s a small business and will never be a big business, but I’m going to control it versus ran who took the VC money and ultimately lost control and, and a lot of value along the way. So, I’m a big proponent of small piece, a big piece of a small pie. And because I just think it’s a much better way for most entrepreneurs to go.
Michael 22:30 Yep. Good points. So definitely think twice before taking the seed money. So, so going back to the main premise of built to sell off of how you prepare your business to run this out here, would you give me like a Greek. A quick overview of the stamps that are universal in that sense that would apply to all types of businesses.
John 22:54 Yeah. Again, there’s a lot there. I mean, we can’t go through the entire books premise, but if the overarching sort of theme, if you will, like the arc of the idea is to create a business that can thrive without you. And so, for an e-commerce business or SAS business, that’s really in a lot of ways, it’s about documenting the way you want things done.
Into a set of processes and procedures. So again, most founders know what, the way they want to see it done and struggled to get employees to do it the way they would want it to have done. So, creating processes, procedures. Systems for your company so that it can effectively run without you. I mean, the only thing better than a system that somebody can follow is technology automation.
So obviously you’re going to want to automate as much as possible. But if you can’t automate it, at least create a system. I mean, if we go back to Ben Leonard, the guy who built. Beast gear. One of the things he did was had people publish pictures of them, achieving their workout goals and push them up to republish them on his Instagram page.
Well, when they did that, Ben send a DM direct message to the athletes saying, congratulations on it, hitting your So, PR using beast gear, et cetera. Here’s a 10% coupon to buy your next set of skipping ropes or whatever on beast gear.com. That process became quite cumbersome for him to do personally, especially as he grew the business.
So, he hired some virtual assistants to do that job to email, to first of all, scan Instagram, to then direct message each person. That was him doing it his way manually at the beginning. But then over time he scaled that by hiring people to do it, but he needed to give them the formula. He needed to give them the system, the script, the process to follow.
And I think that’s the kind of thing that an e-commerce company or SAS company needs to do is create. Effectively entrepreneur like behaviors being delivered by non-entrepreneurs. Yeah, absolutely. So,
Michael 25:06 so, John what would it be like for a company that is very dependent on the owner? If the owner has a public profile.
Like, let’s say, if you wanted to exit the value builder system, how would you prepare it to, to run these out here? Is that, is it possible for like in general for companies that have a public profile of the owner or is it generally possible to exit?
John 25:31 Do you think that the operations. Yeah. I mean, you want to separate the personal brand from the company’s brand.
So, the value builder system has its own brand. It has its own president, a guy named Sam Mendelson. It’s a company with 800 advisors around the world that implement the system. So, it’s very independent of me. An author of the book built to sell. So, I think one of the things you need to think about is the branding architecture.
So, for example, if you have a personal brand or any sort of personal profile, you want to make sure that’s distinct and unique from your company brand and profile, right? So, for example, if you can avoid putting your name in the company name, that’s going to be a good idea. You know, making sure your brand at the company has a distinct profile and as a unique marketing engine, like acquires care about recurring sustainable business.
And so, if, if the business. Needs you as the personal brand to generate leads will then it’s not going to be valuable without you, but if you’ve got a system, a formula to recreating leads, let’s say you have great organic search or you’re you know, you’ve got a whole outbound sales team that brings in deals for you.
It’s got a system for generating revenue without you as the founder. And that’s the kind of system that an acquirer is going to want to see. Yeah, absolutely.
Michael 27:03 What about something complex like other structures that might not fit well, for example, a private equity company, have you seen private equity companies being automated like that and being able to run though the owner.
John 27:20 No private equity companies are usually just a collection of individuals. They have no value in and of themselves other than the assets they own. They’re not valuable ongoing businesses. It’s like when we think about the value of a company, you’ve got the asset value of a business and then you’ve got effectively.
The market value of business, the asset value is like, you basically just roll up some auctioneers and a truck and get rid of your stuff. You sell off your completers, your desks. That’s the asset value of a company and private equity groups are, are the only value they’ve got is that the assets, the underlying assets they own for a business.
If you’ve got a SAS company, for example, that’s a bad example, an e-commerce business, and you sell for your assets. It’s like literally your inventory. And the desks, it’s the worst possible outcome there. It means that there is no value being ascribed to your ongoing operations. Whereas when you sell at a market value, you’ve created, what’s called Goodwill, which is the difference between the market value of your company and the assets of your company.
Like if we take salesforce.com, what are they trading at? Like. A hundred billion dollars right now, I think is the value of the company. Well, what do you think the value of the [email protected] are? And the computers like maybe 10 million, maybe a hundred billion dollars, but the. Difference between the market value of salesforce.com a hundred billion dollars and its assets is $99.9 billion.
That’s because they’ve got a great business has created incredible Goodwill. No, I don’t think any private equity companies are worthless entities. They are just a bunch of partners that are investing some money. It’s like not in a pejorative way. They just don’t have any value. Other than the assets that they’ve invested.
I mean, there’s no value in them other than again, unless they’ve invested in great assets, in which case they have tremendous value, you could look at black rock or any of the great, incredible private equity groups in and of themselves. A bunch of guys in a suit on wall street that doesn’t have any value. What it has value is the businesses they invest in.
Michael 29:20 Well, I disagree with the values and systems that they create. They create systems. Plus, the good ones, create systems on how to devalue different businesses. They create their own proprietary deal flow. They have their own due diligence systems. They have great people who analyze deals and understand them. They have people who managed those companies and operate those businesses.
John: [00:29:44] So has vendors. I think that’s true if they’ve done all those things, Michael you’re right. If you’ve got a, again, I don’t mean to be dogmatic, but if you’ve just got one or two people who are investing in stuff and it’s all in their heads, but clearly, they don’t have the private equity group itself does not value.
But if they’ve done the things that you’re describing, which is really what the built to sell. Process advocates right. Is to create systems and processes that are dependent. So replicatable processes. So, for example, how are we going to evaluate deal flow? What do we do to, to evaluate what our investment criteria can we do that objectively?
How do we have a brand that we have a way to generate deal flow at a proprietary basis as you point out if we’ve got that and we’ve got a system around that yet, then yeah. You’re building more value than the underlying assets. Most of the private equity groups that I’ve seen, especially small don’t have many of those things.
They are a few partners in an office trying to get some deals and that’s a different, that’s a totally different model, but I would agree with you that if you’ve done that you can create some value, but again, systems. Only are so valuable in, in, in that they still require human beings to execute.
If you can create things that are automated, then I think you create more value over time, but don’t require humans to kind of run them.
Michael 31:11 What would you say are the biggest challenges for facing business owners who are. Going towards the built to sell powerful structuring the systems and setting up SLPs and everything for each process.
John 31:29 What would you say is, yeah, I think for a lot of founders it’s the, it’s the dopamine drip that we become addicted to when we focus on the short-term success. We have a tool called the rainmakers dilemma, which is basically the, for a lot of entrepreneurs. They’re good at selling. They’re good at writing marketing copy.
They’re good at selling customers are good at influencing people and. They spend a lot of their time on those things. And they’ve done that by and large good measure because if you look at, the current books now discover your strengths finder. There’s a lot of holes. There’s a whole kind of prevailing wisdom that says that entrepreneurs should a find out what they’re good at.
Be, do that more often. And for most founders that means selling and marketing. And that’s the Rainmaker’s dilemma because as you reach a point. Again, it happens at 500,000 a million or a million, five revenue. Whereas if you are the primary sales engine for your company, your business will reach a plateau beyond which it can’t grow without you.
And so, I think, the biggest challenge is stopping to sell your product and starting to sell your company. It goes back to and I was, lucky enough to be part of a. An event called the birthing of giants. I know it’s a pretentious name, but it’s now since been rebranded entrepreneurial master’s program, but it’s a, it’s an event that takes place at Endicott house, which is the sort of executive education center at MIT.
And just outside Boston. And I was interviewed or I, excuse me, I was invited to go attend this thing. It was a three-year thing. And we got great speeches from, we had like Jack stack came and talked about like employee ownership. We had pat Lynn Shoney, the guy wrote the five dysfunctions of a team, common and talk about leadership.
So, it was amazing. One guy came in, I think his name is Watkins and he’s one of the last speakers I almost didn’t go Because I was burnt out and tired at that point, but I went and he starts to speech off by saying, okay, great. How many of you, there were 60 of us in the room, this amphitheater style seating.
He said, how many of you raised your hand if you’re involved in the selling and marketing of your product and service? And like every one of our hands went in the air and he said, all right, put your hands down. You’ve all got the right skills. You’re selling the wrong products. You need to hire salespeople to sell your products and services, but you should be taking those skills of influencing and marketing and selling and investing them in selling your company. You make millions when you sell your company and thousands.
When you sell your product, you’ve got all the right skills. You’re selling the wrong product. Again, this goes back for this was. 2022 years ago, that I was involved in hearing that speech. But I’ve always remembered that speech because I think for many of us as entrepreneurs, we focus on the short-term win of winning that new customer, sending that new email, coming up with a new launch plan for XYZ product, which is all great.
But if that’s how you spend the majority of your time, you’re running on a hamster wheel, you’ve got to take those skills. And effectively systematize or build a framework so that other people can do the selling training people on how to do the work creating the sales processes and Southern, so others can do the work.
That’s what we call the Rainmaker’s dilemma. And I think it’s probably the biggest challenge that. Entrepreneurs have its sort inside their own head, if you will. That the desire for that validation and that when that comes from making a sale, as opposed to building a business that can sell on its own.
Michael 35:23 Yeah. So, the eternal struggle of an entrepreneurial business owner prioritizing the allergens all over the place,
John 35:32 well said.
Michael 35:34 So let’s talk about different types of businesses. Have you found that some businesses are maybe easier to sell, easier to just do it to structure and organize and others let’s say commerce software, businesses.
And what, what types of businesses do you see people or service has been as people work on the most when it comes to using your systems?
John 36:00 Yeah. So, at value builder, we help entrepreneurs improve the value of their company. Leading up to an exit we’ve done 60, we’ve worked with 60,000 business owners now across the world.
So, it’s a big system. What we see is that virtually every industry right now, it has, is being rolled up. So, when I say rolled up, I mean, they’re private equity companies that are trying to buy businesses in just about every category. And usually, they’ll pick an industry and create some synergy. So, I know of a private equity group, for example, that’s rolling up dental practices, one that’s rolling up pharmacies one.
That’s rolling up advertising agencies. I mean, it goes. Across the spectrum. E-commerce is obviously a perennial winner. There’s a ton of e-commerce businesses that are being bought and sold right now. And in the private equity companies, rolling them up. In the case of Ben Leonard, the guy who sold the skier, it was a private equity company doing a roll up of sports accessory company.
So, it’s a very common. Is this model right now. And of course, private equity companies are fueled by cheap debt. So as long as debt is basically free, private equity companies will exist and they are buying and investing in more and more companies. I think that’s one way to look at that.
The kinds of industries that are rolling up is where is the private equity money being of focused clearly anywhere where you have a service business. It’s a challenge. Not only is the pandemic Retallick over all service businesses. But it is also a challenge because they’re deeply dependent on the owners typically to run.
So, you’re likely have what’s called an earn-out where as you know, Michael, the you know, the proceeds of the business sale are paid over time, contingent on hitting certain goals in the future. So, service businesses are in that space, but I would say, any of the, I think your listeners are in greats in a great spot, because many of them are SAS companies or e-commerce companies, technology companies.
I mean, those are perennial winners and there’s always a marketplace for those companies. And
Michael 38:08 so for people who go through your system and they organize their business to the point that it can be sold, do you see that many of them regret that and decide to continue running it? Because now it’s suddenly much easier to run or do most of them still decide to sell it?
John 38:26 Yeah. Uh, it’s a great question. I think there, there is a cohort of people who, start in there and they’re just frustrated, right? They’re all what we call push factors where they’re just, they’re, they’re frustrated with red tape and bureaucracy and employees and.
And it goes through the process. And at the end, they’ve got a business that can sort of throw without them. And they’re like, Hey, this is a great, this is a great business. Why would I kind of sell it again? I don’t think that’s the majority. I think that’s the minority. We try to talk to business owners when they come out.
The other side and the sale of their business would be enough to create enough liquid wealth to live for the rest of your life. I think we do try to have the conversation with them and saying, it’s this, do you really want to risk what you’ve created for or something again that you may not necessarily want?
So, I, I think the majority go on to then execute a sale. At some point once they’ve sort of built a business that can thrive without them. But you’re right. There are some that I’m trying to think of one off the top of my head. I can’t right now, but there are some that say, you know what? This is great. I’m going to hold.
Michael 39:40 How long does this process usually take to get an average business and get it to a point where it can fly without the owner
John 39:50 It’s like, how long is a piece of string? I don’t mean to dodge your question, but it depends on the, the kind of intestinal fortitude of the owner and, and how willing they are to rip off the band aid. I mean, I’ll give you an example and this goes back again, 20 years ago. Similar time when I was at that Endicott thing. I used to run a quantitative market research business.
And we did custom projects for big banks, foam companies, technology company. I mean, we had great client bank of America, Google, apple, they’re all clients. And, but each job was custom. And I got looking at the world and I looked at Bloomberg and looked at Forrester Gartner, all these companies, these research companies that I considered sort of peers.
They would be moving to syndicated market research, right. And an effort to juice their multiples. So, they do one piece of research and sell it to all of their subscribers. And so, I thought, wow, this is an amazing business model. And I created a, or we created at my company a subscription to our research, and we went out to all of our customers, banks, and technology companies.
And we said, look, we’ve created this subscription. Would you like to buy it? And they were like, no pleasantly interested in what we had to offer. And they kind of asked some perfunctory questions, but basically fairly superficially interested. And they would say great, now that we understand your subscription company offering let us think about that.
But while you’re here, we have this project that we’d like you to do. And they’d go on to tell us about some other custom project they wanted us to do. And so. We went along, going, talking to all of our customers about this subscription offering. And we could only get roughly like a half a dozen of them to buy.
Like it was a failure. We couldn’t get it to work because we didn’t look serious. We looked half pregnant. Right. We look like we wanted our cake and eat it too. We were willing to take the custom stuff, but we also want the syndicated, scalable stuff. Anyways, long story short, when we were running these kinds of business models together, it was clearly not working.
Cash was being sucked out of one side of business, going to the other. And so, we decided to turn off the subscription offering, go back. To just doing custom work tail between our legs, et cetera. And it always haunted me the fact that we couldn’t get it to. Work. And so, two or three years later, I decided to take another crack at it.
This time I made one fundamental change and that was, I gave our customers. We gave our customers and ultimatum. We said we are no longer doing custom work. We’re turning off that side of our business. And so, the only way we can continue to have a relationship is if you invest in our subscription and we went on to describe the benefits of that subscription, why we thought that would be better served by the subscription and the posture of our customers changed instantly.
All of a sudden, they went from being kind of superficially interested, pleasantly listening to all of a sudden leaning in to the conversation saying, okay, if you’re going to risk our relationship for this. I need to know more. How many subscribers, how much how’s the research done? How’s it priced?
What’s the guarantee like all of these like very buying related questions and it was long story. We got most of our old customers, our legacy customers to move to the subscription model. We then use that as a platform to scale up the subscription model. The company was acquired by a New York stock exchange listed company that became Gartner group today, but it never would have happened.
Had we not given our customers that ultimatum. So, so I think, I can’t even remember your question, Michael, but deplete that, that’s what I would say for people who you know, really want to dive. I remember what your question was. It was how long is this I’ll take, I think it’s about, are you willing to dive both feet in it, strong cheese, but if you are, it can be done much faster.
If you want to pack that way at it over a year, then clearly you can make this in a more evolutionary process than a revolutionary process. If you’re serious about moving quickly, you may have to rip off the band-aid.
Michael 44:07 So would the average be like, like a year, two years based on all the companies?
John 44:13 I don’t know the actual number off the top of my head. I think we looked at it about a year ago and did a cohort and looked at how quickly people could move their value builder score. And the average was 19% over a year. The value builder score to give you a sense, when people start with us, we have them complete the value builder questionnaire.
We give them the score of 100, the average score is 59. Those businesses on average are trading at three and a half times profit. When you go through and improve your value builder score up to 90. Those businesses are trading at 7.1 times pre-tax profit or more than double the business. When they started that changed from going from a 59 to a 90 is the journey.
And again, average business improves their value builder score by about 19% across a year. So, you can do the math on how many years it would take to go from a 59 to a 90.
Michael 45:12 So you mentioned subscriptions and a kind of automated customers. Is that what the book, the Automatic Customer is about
John 45:21 Creating subscription in revenue, in any industry. That’s right. Yeah. What we found was that Built a Sell, provided a great framework for people to think about how to build a valuable company, but the real sort of accelerant, I call it jet fuel on the value of your business is going to be recurring revenue. That’s where a company goes from trading at a multiple of EBITDA to a trading at a multiple of revenue.
And so, for a lot of business owners, I mean, SAS companies, clearly moved recurring revenue 15 years ago, so it’s not for SAS companies per se. But it is for e-commerce companies and other businesses that are still selling in a transactional business model where they’re selling one-off. I mean, I’ll give you an example.
We talked about Ben Leonard that was a transactional business that, that the traded around three times EBITDA again I don’t want to take away anything from Ben. He built a great business and did a lot of great things. But it traded at a relatively low multiple, again, part of that was the Amazon dependency.
But part of that, it was a transactional business model; and transactional businesses do trade at much lower multiples. Compare that with a guy named James Murphy, James Murphy built Viviscal, which is like a hair loss treatment for women. He built it up to $50 million in revenue, but a third of his revenue get this.
A third of his revenue was people buying women effectively buying Viviscal on subscription. A third of his revenue. Why? Because it’s a topical treatment you put on your head and you need auto ship. It’s not something you do once. And it’s not one and done you’ve got to use it over a period of months and years.
Third of his revenue was coming from subscriptions when he sold Viviscal he sold it for 165 million euros, a 50 million Euro business sold it, for 165 million euros. So not a multiple of EBITDA, but in his case, a multiple of revenue, same e-commerce business, similar eco… not same similar e-commerce business, many of the similar attributes, but in his case, he had a third of his revenue coming from subscription, sold it for three times revenue, not three times profit.
Again, there we could argue all day about the differences between Viviscal and Beast Gear. But one of them, for me that stands out is recurring revenue.
Michael 47:45 Yeah, it’s a good point, the customer kind of dependent on the product in a way that they keep buying. So, there is a free subscription and that’s also why we see SaaS businesses typically trade for higher multiples in our industry compared to eCommerce and content and other businesses. The recurring revenue is different, a big change. So just briefly about your latest book, The Art of Selling your Business. Can you summarize it just in a minute?
John 48:22 Yeah, sure thing. So, I’ve mentioned a couple of times people like Rob Walling and Ben Leonard, I’ve interviewed them on my podcast, Built to Sell Radio.
Michael 48:29 So I interview a different entrepreneur every day, every week, excuse me, done it for five years. We have something like 300 episodes. And what I’ve seen over time is that most entrepreneurs trade at an industry average multiple. So, if your industry is rolling up at four times, EBITDA, most of the people I interview trade in and around the prevailing multiple.
There is however, this group of entrepreneurs, people like Rob Walling, people like James Murphy, the founder of Viviscal who trade at multiples of revenue; trading multiples that are so far outside of the industry average that it got me curious. I was trying to figure out what do they do differently?
And so, I tried to codify their approach for punching above their weight or your weight in this book, The Art of Selling Your Business. And the name comes from this notion that for most people, they think of the value of their business as being predetermined. It’s just based on my industry yet again, there are these entrepreneurs that seem to punch well above their weight.
And for them, the process of selling a business is more of an art form than it is a science. There’s a marketing and a messaging component to it. And so that’s what I I’ve codified into a sort of a recipe to follow in The Art of Selling your Business.
All right. Well, thank you, John. That was a pleasure to talk to you. How can people reach you online or how can they find out more information about Built to Sell.
John 49:58 Yeah, the best thing to do is go to builttosell.com. and if you click on there’s a button at the top right corner called free gifts. If you click on that, you’ll get a video series on the eight key drivers of company value.
We’ve also put The Art of Selling Your Business workbook together, which is sort of a sister book that is designed to be used with the book, The Art of Selling Your Business. You’ll get that for free along with, the nine-subscription model checklist. So yeah, it’s all available [email protected]
Michael 50:31 Thank you, John, have a good day
Enjoying our podcast? Support us by leaving us a review on iTunes or on your favorite podcast app.
Leave a Reply