Podcast: How to Build a Sellable Business - An Interview With John Warrillow
John Warrillow, author of the best sellling book "Built to Sell", provides his expert advice on how owners can build a valuable and sellable business.
In this podcast, John Warrillow, Founder of The Sellability Score talks about:
- The epiphany of realizing his own business was not saleable;
- How a working capital calculation can make a huge difference in the offers received in a business sale;
- The biggest opportunity for owners to increase the value of their business;
- Business models that create sellability; and
- The mission of The Sellability Score to help a million people create sellable companies by 2050.
About the GuestJohn Warrillow is the founder of The Value Builder System. Throughout his career, John has started and exited four companies and is a sought-after speaker and angel investor. He also contributes regularly to Inc.com and The Globe and Mail. John is also the author of Built To Sell: Turn Your Business Into One You Can Sell.
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Read the Full Transcript Here:Noah Rosenfarb: Hello everyone. This is Noah Rosenfarb here with another great guest, John Warrillow. John is the founder of the Sellability Score, which helps owners assess the sellability of their company. It’s licensed to a network of over 1700 accountants and advisors around the world who use it as a succession planning conversation starter with their clients, and I’m proud to be a subscriber to that software as well. Perhaps equally important, John is the author of the bestselling book Built to Sell: Creating a Business that Can Thrive Without You, which was one of the best business books for 2011 for both Fortune and Inc Magazine.
The other thing that I think our audience will find really interesting is that before John wrote his book, before he created this software, he started and exited four companies. We’re going to talk about all these things today with John. John, thanks so much for coming on.
John Warrillow: Thanks for having me.
Noah Rosenfarb: Take me back in time and tell me about your experience as an entrepreneur early on. How did you get started?
John Warrillow: I got started up actually interviewing entrepreneurs for a national syndicated radio show that I produced over a period of two years and got to interview a number of different fantastic entrepreneurs that inspired me to build a few companies. My last one was a market research business and like a lot of, I guess, professional services businesses it was highly custom, highly dependent on a couple of top clients. I can remember thinking that I wanted to sell the business but realizing that there wasn’t really much to sell the way we structured. We needed some pretty profound changes in the way we ran that business ultimately.
Noah Rosenfarb: You said you wanted to sell it but you knew it didn’t really have the value the way it was structured. What gave you the impetus to think, you know, "I’d like to sell this." Did you want to do something else?
John Warrillow: You know, I was on a taxi ride across the United States, a funny story. AMEX called - we were in Toronto, AMEX was in New York - they called and said, "Hey, we’d like to have you come down and present." It was a Tuesday night. I show up at the airport on Tuesday night. There’s huge thunderstorms up and down the Northeastern seaboard and we can’t get into New York. I tried Baltimore, DC, all the different Northeastern seaboard cities and I couldn’t fly in. I ended up taking a taxi all the way to New York to get to this meeting and I got to the steps of the meeting half an hour before the meeting was supposed to start and I had one of those epiphanies and realized that, "This is crazy. I can’t keep going like this for 20 years, taking a taxi all night to see a client." I decided that I wanted to sell this business.
I went back to Toronto after the meeting and I met with an M&A professional, a guy who sells companies. The guy’s name is Perry Miele with Beringer Capital. I said, "Perry, what’s it worth?" At this point, we built it up, fairly good-sized company, big blue chip clients - American Express, Microsoft and others - and I said, "What do you think it’s worth?" He said, "Before I answer that question, let me ask you a couple," and I said, "Sure." He said, "Who does the research?" I said, "Well, it’s my research guys," and he said, "Okay. You don't approve it?" I said, "Well, I still approve major studies." He said, "Okay, question number two. Who does the selling?" I said, "It’s my sales guys," and he said, "Really? So what’s with you taking a taxi to New York to go visit AMEX? What did your sales guys do?" He called me on my fibs basically and showed me that in fact I was still very dependent, the business was still very dependent on me. I was still involved in some of the selling.
That’s when Perry said, "Look, there’s nothing here for me to sell. You’re the business," and I responded by saying, "Look, you’ve got millions of revenue and great blue chip clients. Sure, there’s something to sell." He said, "No. If you’re in charge of sales and you’re still approving the research, there’s nothing to sell." That’s what triggered a five-year odyssey where we scrapped our business model, changed what we were doing, built a subscription model, scaled the business up ultimately and sold it to a public company in 2008.
Noah Rosenfarb: That five-year odyssey, as you described, who was along with you for the journey on the outside, advisory side?
John Warrillow: We had an advisory board and a number of different advisors help us. The final six to twelve months of that journey, I engaged two particular advisors who had gone through the process a few times and in particular were steep in certain knowledge about how to sell to a strategic, so I had some outside advisors helping me with that as well.
Noah Rosenfarb: When did the banker come back into the picture?
John Warrillow: The banker came back probably six months before.
Noah Rosenfarb: Okay. What was the biggest lesson you learned through that auction process?
John Warrillow: Great question. So many. I’d liken the active selling business to a little bit like landing a 737 on the Hudson River. You remember Sully, the guy who landed the - I think it was the US Airways flight - on the Hudson River. He was a 30-year veteran, done everything there is to do on an airplane, was training other pilots how to fly and deal with disaster situation, yet he’d never ever in his career, led a plane full of people on the Hudson River. In many ways I think selling the business is a lot like trying to fly and land a 737 on the Hudson River. You don’t get to practice. Business owners, we get to practice so much of the stuff that we do - marketing plans, hiring people, firing people - we’ve done it all so many times that we don’t need to rehearse, but when it comes to selling I think it is not something you get to rehearse. It’s tricky.
Back to your question, Noah, one of the big ones I recall is how to go through the working capital calculations. On an offer to purchase a business, there’s two numbers. One is the sale price that they’re offering you, two is the working capital calculation, and it’s tempting as a business owner to ignore the latter and focus on the former but in reality - you’re a CPA so you know this - that the working capital calculation, which is the amount of money you leave in the bank the day you hand over the keys, can have a profound impact on the amount of money that you take away from a transaction. The different offers that we got from the business had different ways of calculating working capital and my accountant pointed that out to me saying, "Spend some time looking at this working capital calculation because it does make a huge difference in these offers."
Noah Rosenfarb: Yeah, a great point. So you sell the company, did you have a plan for what you were going to do next?
John Warrillow: Not really. With the sale of the business, obviously there’s a transition period so we went through that. My wife and I decided that we wanted to have sort of a life experience so we moved to France, actually. We’ve got two young kids that we moved to a village called Aix-en-Provence. We lived there for three years and that was a great experience. We had a chance to really give the kids an exposure to a different culture, different food, different language, different lifestyle, and have a great time doing that. That was a big life change but I talked to a lot of entrepreneurs, it is a big deal selling your business and so really trying to reinvent yourself doing something really outside of what is normal I think, certainly for me it helps get things focused on a different direction. That was a good experience for us.
Noah Rosenfarb: While you were there, did you create the book Built to Sell?
John Warrillow: The book was written while I was still in Toronto but some of the marketing, some of the promotion, I think the actual publishing date we were in France for the day it was published, so some of that work was done from France but a lot of the promotions was done from there as well.
Noah Rosenfarb: What gave you the idea to write a book?
John Warrillow: I got to it a few times, Noah, and there wasn’t a grand theme. I’d love to be able to say, "Well, it was going to be the calling card for my new business, the book would help us license Sellability Score." There was no grand agenda. It was one of those, I would say, visceral gut after having gone through it a few times to get some ideas on paper and to the extent they could perhaps help some folks that would be great. There wasn’t really a grand theme. I just started writing. I had some time, obviously, and it kind of came up pretty quickly. Again, I had the benefit of an advisory board.
The book is a fictional story. Alex Stapleton is a fictional character. The advisor, played by Ted Gordon is a fictional character. However, the advisor is kind of an amalgam of lessons I learned from both my advisory board and then some of my specific advisors over a 20-year period. That’s the thought.
Noah Rosenfarb: Yeah. What was the message that you wanted to get out there? What was it that drove you to write the book?
John Warrillow: It’s funny, you know. I just cam back from the Inc. 500. Here we are, a couple of years after writing the book. I came back to Inc. 500 and I was sitting on a panel about exit, and one guy just put his hand up in the air and said, "You know, my business is a $15 million business. We’re putting $3 million on the bottom line, me and my two partners," you know, asking me some questions about whether it was sellable. I said, "Well, who does the selling?" He said, "That’s me and my partners." I said, "No, it’s really not sellable. The only way you’re going to get out of that business is if you agree to an earn-out. If you and your partners agree to stay on and leave much of the value into the hands of an earn-out."
I think that’s pretty common among a lot of entrepreneurs. We confuse growth with value, especially younger entrepreneurs, those that are sort of aspiring too grow they’ll have a top lying number that they want to hit, and certainly everyone Inc. 500, they certainly had that, but that’s not the same as having a valuable company. That’s really what I wanted to try to communicate in the book, is there’s a huge difference between building a business and building a valuable business. If you’re kind of not taking any money off the table, not taking any chips off the table and think, "Well, one day I’ll sell this thing," make sure you’re building something sellable. If you don’t think that it’s ever going to be sellable like you’re building a law firm or something that’s got like most of its assets go up and down the elevator, then know that day one and start paying yourself well, drawing dividends from the business every year because there is no pay day at the end of the year.
I think so many entrepreneurs just assume that one day the thing is going to be sellable and wake up and find out, as I did, that my baby was ugly. In other words, I didn’t have a company that was sellable before I made some of those gut-wrenching changes. That’s the kind of key message I wanted to get out.
Noah Rosenfarb: You’re now collecting a tremendous volume of data around owners and ownership and exiting. What do you say that the data is telling you about how prepared or how sellable owners companies are?
John Warrillow: To give you a sense, at sellabilityscore.com, we’re on a mission to create a million sellable businesses between now and 2050 so we have 25 years to help a million business owners get their business ready to sell. Our definition of a business that is ready to sell is someone scores on the sellability score at least 80 and above. To give you a sense of what proportion of our users do that, it’s about 5% so the other 95% are scoring less than 80. Probably the biggest opportunity business owners have to improve their score is to create some recurring revenue. That probably has the most profound impact on the attractiveness of a company is having some annuity-based revenue. Subscription model companies are the real darlings of the economy so clearly guys like salesforce.com and others have subscription revenue.
But there are other ways to create subscription revenue. Apple has got their one to one service that they sell. Amazon is now offering various subscription services for groceries even. The more I think business owners can think through what’s the subscription model, what is the reoccurring engine that gives a buyer enough confidence that the business is going to continue after the owner steps away.
Noah Rosenfarb: How about some of the other important data that you’ve been collecting, what would you share with either the owners or advisors on the call about what you see is the trend line over the last few years, ten years, collecting the metrics and serving owners?
John Warrillow: We do something called the Sellability Tracker. It’s a quarterly research study developed in a power point presentation that tracks the people who use the tools. We now have thousands and thousands of users who have gone through and so we do have some of the data that you’re referencing. Some of the proportion of people who are getting an offer is pretty flat, pretty constituent, but that’s 12% of the business owners who have used sell-building score are getting an offer in the last two years. Roughly, one in ten of the business owners out there have received an offer in the last two years. Those valuations are in the three to four times EBITDA range, so assuming normalized EBITDA, adjusted EBITDA, you’re looking at your pre-tax profit essentially for business including a market rate salary for the owner, those businesses are getting around three to four times EBITDA.
If you look up-market for businesses with an excessive ten million in revenue, for example, that number is getting closer to five, and if you go up again from there and look at a company with fifty million in revenue, you might see multiples past six or six and a half. Certainly, the size of the business does have a fairly significant impact on the EBITDA multiple that they are being offered at exit. The smaller the business, obviously the more the owner is dependent on the business and therefore the lower the multiple.
Noah Rosenfarb: Yeah. For any of our listeners that haven’t seen the quarterly summary, it’s amazing data. John, thanks for putting it together and sharing it with the community because it’s really awesome stuff to take a look at and there’s always something new that I could take when I get that report, so thank you.
John Warrillow: Great, glad it's helpful.
Noah Rosenfarb: Another question that you alluded to in the past discussion was not every business is sellable, only 12% of people got an offer in the last two years, and some of the other guests that we’ve had on that M&A business saying 80% of the people that approached them aren’t even qualified to take on, to help them exit their company. Tell me more about the mission that you have to help these million owners. What is it that you think is going to be the key to fostering their business, to going from something that’s not sellable where when you’re gone the business is gone to creating lasting value?
John Warrillow: One of the biggest changes is to move from being a hub and spoke manager to being an apple picker. These names, hub and spoke and apple picker come from a focused group I moderated years ago now where I asked entrepreneurs in the room to visually describe their role in the company, and one guy drew a wheel and in the middle he drew a hub, like a bicycle wheel with a hub in the middle. He said, "For me, my business, I’m the hub and all my employees and customers are spokes. All the information and all the communications, come into the hub and then I dispatch answers. Of course, I’m listening to this guy speak and there’s obviously a very rigid limit to how big he can grow his business because as soon as there’s no more time the day he can’t build his business anymore.
We call folks who have that mentality that can fully need to have all communications go in and out of their depth is a hub and spoke manager. It’s really the definition of a worthless business. Whereas the apple picker was another guy, I had draw this diagram and he said, "For me, I visualize myself on the second floor of an orchard and I’m watching as the workers pick the apples off the apple tree and the trucks come along and the apples are going into the back of the truck, and then I can see the truck go down the dusty road on the way of the market, and I’m watching. Of course, that’s an attitude or mentality of a business that’s built to sell, someone who can watch, and as Michael Gruber said in his book, work on, not in the business, that’s a business that’s built to sell. You really encourage owners listening to think about becoming an apple picker rather than a hub and spoke manager because if you are to distill down sellability into its raw component, raw material, it really comes down to can the business thrive without the owner.
Noah Rosenfarb: I’ll just share with the owners on the call that one of the first exercises I do with new clients is I have them keep a journal by their desk, and on it they write down all the things they do throughout the course of two weeks. What we do is we take all that information about what they actually do with their time and we organize it into high value and low value, and whether it’s high priority or low priority. Typically, through that exercise owners can find a pattern of things that they do that they probably could delegate, and they could delegate it now because it has low impact - it’s a low priority - and they can delegate that now, and then over the course of time hopefully they are able to delegate things that have a medium impact in their company and eventually that have a high impact. The more that they can take the things that they do and distribute it to others and just keep the most important and the most impactful things on their list, the more value they’ll create. Do you give advice, John, to owners either through the Sellability Score or through your book on how to do some of these things?
John Warrillow: No, but I love what you’re doing, though. I think that’s excellent work. It makes sense just to jot down the things that they’re doing and bucket them into very low value, medium value, and high value obviously to start to get rid of the very low value. With virtual assistance and the variety of ways that we can enable ourselves technologically, it really does make sense to start getting invested in some of the higher value stuff. Again, I’ve encouraged people to remember this, though. When people do that exercise, oftentimes the temptation is to say, "Okay, now that I freed up all this administrative time, I can get involved to doing more of the selling because that’s where I add the most value."
That’s a very common reaction for a lot of business owners. We feel like we’re pretty good sales people therefore we get rid of all the nasty stuff, the messes, and then you go sell. If you were then the number one sales person for your company there’s nothing that you can sell unless you want to take a long and arduous earn-out.
Peter Drucker, the famous management theorist, said that a CEO of any company that’s successful focuses most of his or her time on two functions: one is product development, two is sales marketing. Drucker said that any CEO needs to spend the majority of their time on those two assets, on those two items. I would actually challenge you that if you want to build a sellable company, you actually have to get those two things into the hands of other people, because again as long as you’re the one taking care of the key strategic things in the company, there’s only one way that you can sell your company is if you go work as an employee for another business.
The temptation I think is, to spend our time as the sales people for the company, the challenge with that knee jerk reaction is that it doesn’t do anything for your sellability. What makes your company more sellable is coaching those employees on how to be better sales people, coaching people on your service development group to really understand what the customer experience that you are aiming for looks like, but actually doing the work doesn’t get you any further ahead in terms of sellability. It may make you more profitable but it doesn’t make you any more sellable.
Noah Rosenfarb: Yeah. I think that’s a distinction that - you also discussed this a little bit earlier on the interview - is the distinction between growth, profits and value and that they’re not all synonymous, and certainly they’re not mutually exclusive either but oftentimes owners look to create more profit in their company and maybe that’s through failing to reinvest in technology so they don’t have to buy a $50 thousand software package or computer system, or upgrade their telephone system but all those things end up diminishing value in the end as well. I think it’s important to pick the path that you’re on and if you want to transfer value for your interest in your company, you should focus on value because typically if you focus on value you’re going to get a multiple back for each of these changes that you make rather than on the profit side or cash flow side where you’re just getting it once every year. John, what have you found to be the biggest reaction or benefit to people that have used the sellability score? What’s the feedback you’re getting?
John Warrillow: The feedback we get is that it’s giving me a lot of freedom, freedom that, you know, freedom to sell it if we want, but oftentimes people are still a few years away from wanting to sell but they like the idea that they could scale it but they can be sort of work as a chairman figure, making strategic decisions but not involved in the day to day, and also like the idea that if they’re wanting to pass the business down to friend or family, say family or I should say management team, that the business is more sellable, more valuable as an asset. There’s that sense that they’re being freed up a little bit from their business and we call that the owner’s trap, when either the business is too dependent on the owner they’re really trapped inside their business and so there’s a sense of liberation I think when you make some of these changes.
I had an email from a guy yesterday. His name is Mac. Mac is actually down from Florida, great guy. He emailed me and said, "You know, one thing is that my company’s way more fun to run now and I’ve sort of tried selling it on the back corner while it’s so much fun to run." That’s a great accolade. That’s a great endorsement. Obviously, if you want to sell that’s an option but if you have to sell the business you hold out the cards.
Noah Rosenfarb: Yeah, that is great, and I think that’s a tremendous advantage to owners that plan in advance is they may fall in love with their business again. They may want to stick with it. How does that relate to your experience when you had sold your market research company? Was it more fun for you when it was sellable?
John Warrillow: Sure, yeah. The biggest benefit, of course, to making some of these changes, if you are able to create some recurring revenue is that you go into the month knowing you’ve got money on the books. With the subscription business model or some sort of a new recurring revenue model you got that. You know next month within plus or minus 5% - what next month can look at. If you’ve ever not have that, if you’ve ever had to scramble and recreate yourself every month to try to cover your nut, it is a very fundamentally disturbing feeling knowing that you just kind of recreate yourself in a sell-do sort of environment, whereas obviously if you go in you have a recurring revenue, you know pretty much how the money’s going to shape up, and at that point you just have the mental and chronological time to think about your business more. That’s one of the great side benefits of making some of these changes.
Noah Rosenfarb: So what’s next in the world of Built to Sell and the sellability score? How do you see having that impact on a million businesses?
John Warrillow: So on The Sellability Score, we want to help a million people hit a score of 80 or above in the 25 years, and so that’s going to involve a lot of reach-out and a lot of folks, a lot of advisors who use the tool who are obviously always looking to work with advisors who share our vision and passion for helping business owners create sellable companies so we do license the tool. That’s really our mission, is just to execute against this goal along with our advisor partners who are aligned and share our vision.
Noah Rosenfarb: What else do you think would be helpful to share with our listeners today? I mentioned we’ve got owners and the advisors that help them both on the call. Tell them more.
John Warrillow: My ask would be that if any of you - whether you’re a business owner or advisor - please visit sellabilityscore.com. If you’re a business owner please get your score. We have a great group of phenomenal advisors who will get you your report and share with you some of their hard-one lessons on how to make your business sellable. It’s free. There is no cost for taking your score.
If you’re an advisor and you’d like a demo of the tool and you’re interested in joining this mission, please go to sellabilityscore.com and on the top right-hand corner there’s a button that has 'advisor’ and you just select that and choose a time for a demo, which we’d love to offer you. So if I can ask you to go to sellabilityscore.com that would be a great favor. Thank you.
Noah Rosenfarb: Terrific. I’d like to thank you, John, for coming on the show and sharing your experience and sharing the vision that you have of helping a million owners get an 80 or above. I’d love it if the baby boomers that are now in their spot in their lives where they’re thinking about how they’re going to leave their companies, if they’re able to create value and transfer that value to the next generation, we’ll have what, I think it’s Richard Jackim calls this ten-trillion dollar opportunity, a wave of value creation that baby boomers can pass on to the next generation. Unfortunately, if they don’t heed the message and they don’t stay focused on getting themselves out of the day-to-day business, that value could be eroded and it would really be a shame
I applaud you for what you’re looking to do and support you as well, and hopefully our listeners will take heed of your advice and start creating value in their companies. This is Noah Rosenfarb. I appreciate you joining us today and we hope to have you back with us on another Divestopedia Exit Strategy podcast.