Podcast: 8 Key Drivers to Increased Valuation, an Interview with John Warrillow
Deconstructing The Value Driver System with John Warrillow and what that means for you as a business owner.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
John Warrillow is the founder of The Value Builder System, a company that helps business owners improve the value of their company. As of 2017, The Value Builder System has served 40,000 users.
John is the author of the bestselling book Built to Sell: Creating a Business That Can Thrive Without You, which was recognized by both Fortune and Inc Magazine as one of the best business books of 2011. Built to Sell has been translated into four languages. John's next book, The Automatic Customer: Creating A Subscription Business In Any Industry, was released by Random House in February 2015.
Prior to starting The Value Builder System, John started and exited four companies, including a quantitative market research business that was acquired by The Corporate Executive Board (NYSE: CEB) in 2008. John has been recognized by B2B Marketing as one of the top 10 business-to-business marketers in the United States.
John was born in England and grew up in Canada. He now lives with his family in Toronto.
If you listen, you will learn:
- A recap of my business evaluation series.
- The importance of creating a company that will run without you.
- John’s background in business.
- The beginnings of The Value Builder System company.
- What his company does.
- The Built to Sell podcast.
- The Value Build survey and what it means for your business.
- John’s typical customer.
- Industry standards have nothing to do with company value.
- The 8 key drivers the Value Builder System uses.
- What to fix first based on your value builder score.
- Why earn-outs are an imperfect tool.
- What are vendor take-backs and how do they work?
- The benefits of a high value builder score.
- The cash flow teeter-totter and how it affects a deal.
- How to find recurring value in your business.
- What is monopoly control?
- John’s advice on how to avoid shiny object syndrome.
- John’s parting words for the listeners.
John Warrillow: For your business to be valuable, it needs to run without you and there's a whole bunch of different things, in fact, there are eight unique things you can do to make it so that it's less dependent on you and that gives you lots of control. It gives you a multiple if you ever want to sell, but also gives you a lot more control of your time and business that you're really kind of overseeing as opposed to fighting fires.
Announcer: Welcome to Life After Business, the podcast where your host, Ryan Tansom, brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: Welcome back to the Life After Business podcast. This is episode 116 and today's guest is the one and only John Warrillow. He has been on the show already before. He was like, I think my fifth guest or something like that and I was really excited to have him back on the show, especially in light of this three part series that we've been doing. So if you're just jumping on, we did one episode. It started off, which was with Brandon Hall, all about how a company is valued of understanding of how a certified valuation works and really refining your EBITDA understanding the things that will impact or even to your multiple. And then the next episode that we just got done with was Ryan Turbes and how to calculate net proceeds. So okay, great. So I've got this valuation which is my top line, but how much do I actually take away?
Ryan Tansom: How much do I put in the bank and when? So we really, really dove into that with Ryan. So now it's like, okay great. So I know how much my company's worth. I also understand roughly how much I'm going to make and when I'm going to make it, but what do I do to increase the value of my company so that way I can drive towards a specific outcome that I want. And I thought John was amazing to have back on the show because he's got his book Built to Sell where he has a whole narrative with Alex, this fictitious character that wanted to sell his marketing agency and couldn't get the value that he wanted, and then he has this company called the Value Builder System, which I've mentioned before, and we've got a link in the show notes so that you can go take your score on the eight key drivers that will increase the value of your company so you'll get a score of one out of 100 on each of the eight key drivers in the aggregate score so you have an idea of where you might be falling short or or you might be succeeding these eight key drivers.
Ryan Tansom: But the point of today's show is that we dove into how you can specifically make your company work better without you and how you can make a machine that has transferable cash flow that will be enticing for anybody to want to buy. So it'll increase your exit options and it'll increase your multiple because you've created transferable revenue like we've talked about. So like I've mentioned before in the show notes, we've got a link to the Value Builder Score, so you can go get your eight key drivers, it's like 12 minutes long or something like that. And we also have another round of 10 valuations in Biz Equity. Like I said, it's not a certified valuation, but it gives you a really good benchmark. So if you want to go take that, makes sure that you're jumping all over because we only have another 10 for this episode. So with all that being said, I really hope you enjoy this episode with John. He's got a lot of practical advice. If you've not read the book built to sell, you've got to go do it. Otherwise. Without further ado, here's my second interview with John Warrillow.
Announcer: This episode of Life After Business is sponsored by GEXP Collaborative. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the buyer of your choice at the price you want.
Ryan Tansom: John, how you doing?
John Warrillow: I'm good, man. How are you?
Ryan Tansom: Good. It's been a long time and we were just saying you were like my fifth episode and so hopefully I'm not... I don't sound as ridiculous as I did back then.
John Warrillow: You still sound like the guy from Fargo, though.
Ryan Tansom: I don't know if you've watched that show, but hopefully it's not as ridiculous. There's no dead bodies in my background or my backyard. Right. You got you say about the stupidest thing. So I'm excited to have you back on the show and the listeners who have been caught up over the last couple of episodes, we literally teed you up perfectly to, to plug in all the ridiculous amount of wisdom that you've got on the value drivers in the company you've built. But for anybody that might not be familiar with your story at this point, you know, just kind of give us a little bit of background of what you know, your, your experience on your businesses and then a little bit of like how about your book and why you ended up writing it before we go into the eight key drivers.
John Warrillow: Yeah. I guess I started starting businesses and had four now exited down and have learned lots along the way. Lots of mistakes and maybe a few lessons. I tried to codify some of those as a book I wrote a while ago, called Built to Sell, um, and then out of the value builder, so we now have worked with 40,000 businesses to help them improve the value of their company. It's our view that today when business owners go to sell their company, they're being taken advantage of. I just did a podcast, actually the guy who sold his company, his software company for three and a half times profit and it, it struck me as a low multiple for a software company. Right. But no kidding. [Ryan interjects: Usually you're going to say revenue.] Yeah. Yeah. But you know, the first time through, and admittedly he, he just didn't know really all the ins and outs. And so that's what we try to do valuable. We try to basically work with business owners who are thinking about exiting and get them to think about their business through the eyes of an acquirer so they can jack up a multiple. I mean, people who start with us on average are getting three and a half of the best performers of the people we have on our system that have a value builder score of 90 or more. They're getting offers of seven point one, so more than double the average, so.
Ryan Tansom: That's an awesome. And then we're going to. We're going to peel back all that because we will over the last couple episodes we were talking about EBITDA. What the heck is that? Cash flow, multiples, all this kinds of stuff and just even a little bit of context, John, this is so fun because like I remember and I think you've actually ended up redoing your first podcast because you're like, I think maybe a half a year, a year above me and I remember what I did when I started my show. You and I were sitting when I was getting certified, I'm like, I don't know what the heck I'm going to say. Well, what I wanted, I want it to be different than yours because you get this regiment of interviewing only owners. I've kind of been finding my way, but I remember literally I was listening to your first episode like three years ago or whatever it was two and a half or whatever it was. And I was cleaning and it was your episode like I couldn't believe what happened and like why there's no one really solving this problem while growing value, understanding how to tie it to the next, all this stuff. And I was like, I know what I want to be doing. And then, you know, then I went up and got certified and you talked about this value builder score and then we can kind of dive into the eight key drivers because I think, you know, the big take away we've been talking about the last few episodes. Transferable value, know what I mean? Like how, how easily can you transfer your cash flow and you know, why don't you explain the, the survey and the, how you're actually calculating this because I think we got a lot of technical stuff and you've done a really good job with your book and explaining, you know, what that really means. But then also this survey that is not, you know, three years of financials and you know, diving into this full, you know, cavity search, you did a really good job. So can you explain a little bit about that, the 40,000 people and like what the scores mean and how that ties to the three and the seven that you're talking about.
John Warrillow: Yeah, for sure. So the questionnaire, it takes about 15 minutes to complete by the way it basically walks through the company and asks, asks a bunch of questions that an acquirer would ask. So the theme, the common theme across all 15 minutes worth of questions is really how well would your company operate without you? And if the answer to that is not very well, then your multiple is going to be very low or nonexistent. Other words, you may not have a cell. If your business it would would hum along really nicely without you. In other words, you could take a three month vacation, then you're likely to be paid quite a bit better for your multiple, because I mean if it's, it's basic, right? And so if you think about, you come into business, if you're buying it, you want to know that it's been a thrive without the owner. And so there's these eight factors that acquires, look for. So for example, one of them would be recurring revenue if you, that recurring revenue is something that's going to happen with or without the owner being the rainmaker for the company. And so if you've got recurring revenue that's going to boost your value. Um, if, if, if too much of your customer relationships are in the eyes of the, in the hands of the owner, meaning the owner is the person that customers care about, then that's going to discount your value. And so we've got a whole series of questions. Again, there's these eight factors, but really, if you, if you wanted to know what the common denominator it is, it's, it's, could your business thrive without you personally, uh, running it every day?
Ryan Tansom: Well, and, and what I find interesting is you got so much, I mean 40,000 people that have taken us a lot. You get to the law of large numbers, so that's a lot of data. And so what do you mean when you're saying that you know, the people that, the correlation between the three and the seven and then how do you track that and like, can you kind of explain that for the listeners?
John Warrillow: Yeah, yeah, yeah, yeah, sure. So, so one of the questions we asked on the questionnaire is, well first of all, we ask about your, your profitability. Then we ask about whether or not you've received an offer to buy your business in the last 12 months, a written business offer, and if so, what multiple of your pretax profit was the offer. And we just had done the analysis and looked at all 40,000 of our users and we've discovered that when they go through the questionnaire, the average score, by the way to out of 100 is 59. So the average performer gets a 59. And that average business, when we look statistically at what multiple only been offered, it's three point five times or three times profit. And then when we then when we analyze and we just take this one cohort of business owners who have achieved a very high score. So this will be 90 out of the possible 100. 90 or better, and we look at the multiples they've been offered on average are seven point one times pretax profit. So that's the basically the math behind it.
Ryan Tansom: Got It. Which, which makes it a lot of sensing because then that's any kind of industry and you kind of sector. I mean is there any, any size companies that you're, you're looking at because the range is... you have to get to these averages, right? Because all of these things are different, but are there size companies or any kind of benchmarks that you've got?
John Warrillow: Sure. Yeah. So our typical user would be a business owner, a between one and 20 million in annual revenue and they're, you know, they're, they're owner-operated companies, they're... The owner, knows everything there is to know about making a widget, but they're probably not experts on selling companies. You know, this is for the first time. It's, I think one of the biggest misconceptions. I think one of the biggest areas we rail against a lot is the idea that businesses are valued based on your industry. And you hear this all the time, you hear know I'm an HVAC guy, so I'm going to get four times EBITDA, or you know, I'm a, I'm a SaaS software company and therefore I'm going to get set three times revenue. And what we find is that the reality is we see that companies, while industry is important, it is certainly not a predestined to get whatever valuation, benchmark there is in your industry. I'll give you an example. Ruby receptionists as a cool company. Have you ever interviewed Jill Nelson?
Ryan Tansom: I have not.
John Warrillow: Oh, you should get her on the show. She is a cruel lady. So she, I think she's based in Seattle or Portland, Oregon. She's out of the Pacific North West. It was so chill. She runs this company called Ruby Receptionists and it couldn't be more analog, more 19 eighties. It's an answering service, right? So you all in and you're typewriters. Yeah, exactly. Like her lawyer. And you want someone to answer the phone, your dictionary. So you hire receptionists, legal services. And so she built the business up to $11,000,000 in total revenue. Oh my gosh. We've done. We've looked at industry verticals, I looked at what the multiple would be in the administrative support vertical, which is the vertical she finds herself in, and it would be roughly one point nine times EBITDA, so very low multiple, right? So Jill, she's got $11,000,000 in revenue. She wouldn't tell me what our profitability is, but let's say she's making 10 points. I mean it'd be hard pressed to imagine I'm percent right now, let's just make 10 percent, so a million one profitability. So if she's looking to get two times, one will, that's about $2 million and change right? For Company. She sells her business recently for 38.8 million dollars. For now it's such an outlandish multiple it. It's almost unbelievable. But she did really well on one of the eight key drivers in company values, this thing called monopoly control. So she. She nailed it on one of the drivers and so I tell that story to you just because you know it's not predetermined to get whatever your industry average multiple. I think you do yourself a huge disservice by saying, well, because I'm in XYZ industry I'm going to get X multiple.
Ryan Tansom: First of all, I love it because I always like, I think you and I've talked in the past, but it's like your company's worth what someone's willing to pay for it, right? There's benchmarks and I and I was actually diving into Brandon Hall who the certified valuations or like, and he, he even agreed, I mean he's not 135 of these and the reality is like that's part of the comps and how they get to this valuation and I'm like, well it's all kind of BS until someone buys your company.
John Warrillow: Right. And I love it when valuation guys get really kind of like the leather, a patch on the elbow with the pipe and the and the glasses that purely and they get really serious and scientific about valuation. And, and while I don't mean to discredit valuation, clearly it's a very sophisticated and very important service, but at the same time it is subjective. There is a, an, as you say, the true value of businesses, what someone's willing to pay for it. Now when you're getting into divorce or you've got a partnership dispute, estate planning or whatever, somebody is actually going to put a number on it. Then clearly you need a formal valuation. You need to pay like probably tens of thousands of dollars for that, if you've got a decent-sized company and it's going to get to you pretty close to the number, but you know, you're not both got interviews with people that the number, they'll get two x now get 50 percent of the number.
Ryan Tansom: Well, and I think it also ties to like, this is where I know your methodology and then the exit planning, you tie those two together because it all depends on what, what, what route you're going to transfer your company to, right? I mean whether it's estate planning or family transfer, private. I mean all that depends. Totally depends. And so, John, let's maybe dive into the eight key drivers in the transcript because I think what you, out of the last two and a lot of the people that you and I interview, I think you probably can pinpoint, like you said, that uh, she did really good at monopoly control, but like maybe I don't know if you want to go over all eight of them quick and then we can dive into a couple of your favorite ones because I will get the owners and the listeners to be able to have some takeaways like that before. They're like, okay, great, well I understand this, but what can I do about it?
John Warrillow: So the eight in no particular order are your financial performance, so how much revenue profitability does your company generate? So that's basic blocking and tackling stuff, right? Number two is growth potential. So how much growth are you going to generate from your business in the future? Buyers are looking for the future, they're not buying the past. Customer score is how satisfied your customers are. So overall satisfaction level with your customers is gonna be important. Recurring revenue is a fourth, and again, I think I shared with you the reasons for that. Monopoly control is how well differentiated your product or services is. The reason Jill Nelson, by the way got some outlandish multiple is she had developed as part of her answering service, a routing software so that when a call came in, she dispatched the call to the available attendant. She had a network of these receptionists all across the country and it was through routing software that she built. That gave her a point of differentiation and the reason for that is because every other receptionist company, when when the when the receptionist got busy, the person calling wouldn't get an answering machine and that's exactly what they wanted to avoid with the customer. The routing software. We've got the phone call, the customer's phone call to the right person as well that had flexibility to a variety of different industries which is, which is what made her business unique and what what multiple.
Ryan Tansom: Who bought her, by the way? Was it like private equity or?
John Warrillow: It was a private equity company that saw a way to monetize her software in various other industries. Hub and spoke is another driver of company value. It basically is how dependent the company is on you., the owner. Or the Switzerland structure gets its name from the country of Switzerland. The honors independence, almost a fascinated by are obsessed with independence and so Swiss instructure measures your businesses dependent dependents on anyone, customer, employee or supplier and the valuation teeter totter is how cash flow moves through your business. The more cash your company generates, the more valuable it is to a buyer because if they don't have to inject working capital in your business, so get on going faster, but those are the eight.
Ryan Tansom: Oh no. I'll be on the show notes and then we'll have a link to where they can take the survey and stuff. And you know what I want to know John is like when you look at these different eight key drivers in, you know, I've had customers that have gone through this and then you have all these different owners in different industries, different journeys where they're at in their life stage of the business. How do you prioritize with what you should be doing? Whether it's because you've only got so much time and so much capital, you know, how do you, how do you determine like there's eight different things. Whereas my biggest bang for my buck, you know, whereas you know, how am I mitigating my risk the most? Is there any way that you've seen people, you know, take these and prioritize them?
John Warrillow: Yeah. So you're going to get it. Glad you're gonna. Put the link in the show notes because people can go to the state to share. When you get your results back, you're going to see your score in these eight key drivers out of 100. And I think the answer to start with the ones that you're performing the lowest. I don't mean to distill it down to its basic terms, but when a buyer looks at your business, you know they're looking for hair on the deal. That's what, how buyers talk about when there's a problem. Right? And so if you can avoid any major, any major hair on the deal, any major problems that's at least going to get you through the diligence process and, and get you, I think a fair multiple. If you can get one or two of the drivers to outperform, well that's great. But if I had to pick whether I should accentuate one driver or fix the, the ones that are really underperforming, I'd fix the underperforming. It's like you've heard in job interviews, I like job like personal coach. They say accentuate your strengths, don't worry about your shortcomings and I think that's bs because of the value of your business. You're gonna have all the strength of the world. But if you go sort and shore up those, those, those problem areas, you're not going to get a deal done. And the only deal is going to get done at some crappy earnout shenanigans where you're going to be working for some company for five years. So I think shore up your lowest performing drivers and then certainly accentuate the ones who score highest on. But, but don't disregard if you've got a low score below 50 on any one of the drivers, I would start there.
Ryan Tansom: So perfect way to answer that. And then I want to go back to dive into a couple of days because I got um, a couple of them that I want to expand because I know you've got some serious. I'm experience in the recurring revenue because your automatic customer book and some other ones, but to expand on the earnout and the multiple and the cash and you know, first of all I know you've got, I think, I don't know if it was an article or a podcast, you did it or not burn out or whatever it was. You give my listeners your, your definition of an earnout and then how does that, the money upfront or an earnout, does that correlate with these drivers and the multiple as well?
John Warrillow: Yeah. So first of all definition. So basically an earnout is where is used when an owner, a buyer and seller can't really make a deal. There's, there's too much of a gap in valuation. And so the buyer says, okay, I'll, I'll, you know, I'll buy your business and part of the consideration will be contingent on you hitting certain goals in the future. And so oftentimes it's linked to EBITDA as your company as a division of theirs. You're going to integrate the two companies very quickly, could be revenue with your product line, could be potentially have a single client, et cetera. But there's usually some goals that you've got. The earnout you should know is at risk, meaning it's not guaranteed is far from guaranteed in back because you as the seller become, you know, a middle manager in a big company most likely or division leader, the private equity roll-up. And in that context you may not have control over some of the things you need to hit your, your budget, certain market segments, et cetera. And so it's very much at risk. A lot of entrepreneurs leave before the end of the year, not just because they can't handle working for another company or something like that.
Ryan Tansom: I talked to someone recently where like, yeah, they, they like, I think they like took the average of both companies' profitability because this is totally like a bootstrap deal. And then they said, oh, well, you know, we both do this, well let's just say we can do five percent and then by the way, you're not in charge of your budget anymore. And suddenly they go like, Whoa, who bought dump trucks this quarter? And next thing you know, you don't get your couple hundred grand.
John Warrillow: Yeah, yeah, yeah. It's a big, it's a big deal. And you know, I think it strikes to the heart of why are you, why is a buyer buying this company? Is the buyer buying the company to integrate it into their business? If the answer to that is yes, and more often than not the answer is yes, then the earnout is often going to be at a, at loggerheads hitting your earnout your obviously going to be at loggerheads with the goal of integration. So if your goal is to hit a problem, you probably would run independently, give me all the budget you can and let me run this thing. Hit the road. Now, if the goal is to integrate, you might want to have the buying company's sales people do the selling. So you as the founder of my company, sales people, right? But if your goal is to hit a short-term number, no training their salespeople and how to sell your product, you're going to just go after hitting your number. So again, I think earnouts are an imperfect tool used oftentimes in particular with service businesses, but used to bridge the gap between what a seller wants to sell her company for what a buyer's willing to pay for. It's different than a vendor take back. You've heard vendor take backs, finance, those are usually used when a business and the buyer, oftentimes an individual doesn't have the money to del Oro essentially from. Yeah, a portion of the, of the, uh, of the price, if you will, is paid over time. And the autopsy SBA gets it, gets involved in lending to the buyer and the seller gets their money over time. That's different than earnout. Earnout is at risk and it is contingent on hitting goals in the future most cases.
Ryan Tansom: So you know, what these people that are getting the highest scores on the eight key drivers are you seeing, and I don't know if you track this at all, where they get more of their money upfront.
John Warrillow: Yeah, we, we don't. But we know anecdotally, we don't track it quantitatively, but, but we know anecdotally and through the radio, the podcast that a lot of business owners are getting much better multiples and much better deal terms when you think about value builder score. If you got a high value builder score, you're in control, you're in control of the process, you can decide to sell or not. And if you do decide to sell, you'd gotten much better leverage because your business is not dependent on you. So, uh, you know, they want to do a deal where 70 percent of the value is based on you hitting future EBITDA. It's hard to believe that deals would be that heavily weighted to, to earnouts. But I've seen them get that deal. You just basically say no, there's four other companies that want to buy this business, and I expect 100 percent up front, right? Expect 80 percent of foreign or something to that effect. So it just gives you better deal terms. It gives you better, less on the earn out, more cash up front, less likely to be financed, better terms, better employment terms for you as the owner because don't forget when you sell you'll likely have to be an employee for a while. So yeah, it just gives you more leverage.
Ryan Tansom: So then to move into a couple of the key drivers to give you a little bit of meat behind them. Mom, I want to get into recurring revenue because I think that's one that everybody wants. There's a lot of juice before behind it, but before we get into that one, I really actually like, you know, so financial reporting and the financial performance. Some of these are fairly straightforward, but I think the one that I did, the cash flow teeter totter. Can you explain that one before, you know, the reoccurring revenue because I think if there's some actionable stuff that people can do that they don't really understand how important it is and how asking some hard questions of their clients or their vendors actually could impact that other. So why don't you want you to dive into that one?
John Warrillow: Yeah, sure. So essentially when when you go to sell your company, a buyer's going to look at it and they're essentially gonna ask the question, how much working capital are we going to have to inject in this company in order to operate it the moment we know we take over the business? And working capital is essentially, if you remember back to kind of economics class 12 economics, it's the money your company needs to meet its immediate obligations, right? So basically the money in the bank that you need the day you hand over the keys to the other guys. And a lot of entrepreneurs like, well I've got six or $700,000 in retained earnings that's sitting there ready day fund. That's my money. I earned that money when I sell my business, I'm going to strip that. And a lot of buyers say, no, that's money you've got the company to run the business, to pay your employees to pay for all in your immediate expenses. So that money stays. And it's often an area where a deal breaks down, especially if the owner has been running the business for decades and they take the view that their capital or their retainer rings are theirs to keep. And so one big takeaway from a negotiation standpoint is make sure if you're going to agree with letter of intent with a buyer, that you clear up what the working capital calculation is going to be at closing, what your expectations are, what their expectations are, because it can change the value of the deal by certainly six figures can be seven or more depending what the value of your retainer is. So that's a little bit off topic, but retained earnings and slash or working capital is key. So when a buyer comes in, they're going to look and say, okay, we need x amount of money in the company to run this business going.
John Warrillow: If your business is a cash suck, meaning you have the. You buy a lot of inventory, even though you may be profitable on paper, your accountant says, Oh, you read it a more just 12 percent at the end of year. Well, that's great, but you're constantly having to borrow money, you're constantly having to check money because you buy a lot of inventory or you buy a lot of machinery, you've got a negative cash flow cycle, and when a buyer looks at your business, they're going to say, man, the company looks decent paper, they're making 12 points, but we're going to have to inject a ton of money to buy more equipment, to buy more inventory, etc. So all of that money, if you think about the money they are, they're using, comes from the same place they're using by your business. It's all the same wallet, right? So the more money that they have to inject into working capital, the less money they're willing to buy your business. Likewise, the inverse is also true if they look at your business. So this guy's cash spinner like they're just throwing off tax. They don't need any working capital. We're in fact, we're just going to start generating cash the moment we own the business and they're willing to pay you a higher multiple because they don't have to. Again, for a buyer, for a lot of buyers, private equity, VC, like a lot of professional buyers in particular and corporate buyers for that matter and I guess individuals to some extent for them it's a return on investment, right? I'm going to invest x dollars in five, seven years down the road, I'm going to get three x, five x, 10 x whatever the number is and so investing x dollars is not only bond your business but also injecting working capital into it.
Ryan Tansom: Because yeah, because if it's a million dollar revolving line of credit, that's a million dollars I can't. They can't do with something else. And it comes with a lot of headaches. I mean I'm specifically from our store. I mean we, we used to buy a ton of stuff. I mean like lots and lots of it and then almost. I always joke around in my keynote, like we were the bank for everybody else. It's like, well no one enjoys that and the owners don't enjoy that. So you know, there's things like, you know, we've talked about where, you know, go ask your customers for a credit card upfront, you know, you'd split the fees, do they do these different things instead of, you know, giving a certain amount of terms. I mean there's certain things that you can do to, you know, I don't know if you've got any other ideas off the top of your head or at any of the podcasts you've done to reduce that working capital?
John Warrillow: Yeah, all the things that you, you learned about in business school. So basically cash flow is money coming in, money going out. So I'm thinking about it in that context. so money coming in, how do I increase the speed and proportion of money coming in? So if you're charging for... You're custom jobs group and you're charging 10 percent of the deposit, could you charge 15 or 20 or 25 and not really affect your business? So that's number one, money coming in, deposit taking credit cards. I accelerated the speed with which you charge for your services, etc. Money going out as the other side of the equation. So clearly if you've got great suppliers and you're paying them in 30 and you're a good customer, if you have a conversation like would you mind if we moved to 30 to 45 days, a lot of people wouldn't necessarily that, especially if you're a good customer. I mean there's a great famous, I don't know if you've ever read this right, but the uh, uh, the Dell case study from Kevin Rollins when things HBR case that you talked about how they basically took Dell computer company from a negative cash flow cycle to a positive cash flow cycle. This is going back a decade or two. It's a really interesting case study. But it's these, these things have a cumulative effect. so one tactic like going from a 10 percent deposit to 50 percent isn't necessarily going to break. You're going to make a huge difference, but it's when you start stacking these little changes on themselves, do they collectively have the ability to turn a negative cash flow cycle into a positive one.
Ryan Tansom: Well, any. I think the moral of that story is, you know, it's not a big deal to do these little things. It's worth asking the questions and do and picking up the phone and doing this. A little bit of hard lifting because you might get more money for your company. I mean, that's the reality of it. So it's worth it. There's a significant rate of return on asking your customer for a different situation.
John Warrillow: That's the cool thing about what we do. Uh, and I say we as in you and me is, is helping business owners improve their value. Like it's one thing to help someone improve their profitability and it's a great thing, but if you help someone improve their value, it's, you know, if they're getting a five x multiple for their company, you're, you're having a huge impact on the overall value that they're driving for their life. So a small tweak like we're talking about today. Yeah, it might make you slightly more profitable at the end of the day, certainly help your cash flow. But man, it can have a profound impact on your, basically your, your paycheck at the end of the, at the end of the road.
Ryan Tansom: So then that leads into a perfect lead into. Because I think one of the hardest thing is that out of the, just my random opinion, but out of the all the different eight key drivers, a lot of them are, you know, when you dive into them, they make, they make some serious sense and then you're like, okay, that makes sense and there's kind of some applicable ways to do that, but it reoccurring revenue is something that I always say that everybody wants it. Everybody knows they need it, but they always say, well, not my industry or all of these different excuses, but it's one of those things that I believe is one of the big needle movers, which is why every-- we're in the subscription economy, right, where they obviously there a lot of these companies which are in there for a reason. So can you, you know, you've got the whole book on it on automatic customer, but if you've got a couple different categories of the recurring revenue, but what would you say to someone that had maybe those excuses?
John Warrillow: Yeah. Funny. I was doing a talk last, was it last week or two weeks ago? Down in New Orleans for the, um, the home remodelers, so home remodelers are guys who basically put kitchens on renovations and you want someone to take out your basement, but they basically do additions for residential real estate. There was like 600 guys in the audience and most of them were guys by the way. [Ryan interjects: So it actually works.] Pretty funny thing. And I start getting on my high horse about recurring revenue. this would never work in our industry. So I think you're right. There are some industries where it's much more difficult than others and it may require a fairly strong stomach and a lateral view of your business. So let me give you an example. A carwash as an example. Carwash is one of those businesses that are around for 50, 60 years. They've always been the same. You buy the soap, you buy the land, and then you send cars through it. Five, 10 bucks a pop and you make great money in June, in March if you're in the northeast and April when their self that needs to get off the cars and then you die in November and all at the end of the year, you do at least you do reasonably well. Well, a little while ago, some innovative pioneering carwash said, well, why don't we think about doing this as an all you can eat kind of subscription model. Why don't we say to people, look, we'll charge a 10 or 20 bucks a month and you can come in as many times as you want. It doesn't matter. [Ryan interjects: I've got one of those. I'm a member!] And so what? So everybody in the car, while I like the, the, the old school guys, a car wash industry go, that would never work. It costs us a dollar. Every time someone goes through a carwash, we could never make the economics work. Reality is we've got better things to do than sit in the carwash, right? So most of us, while you might subscribe to an unlimited car wash and go a couple times a month in the beginning, most of us don't go that often, right? We just got better things to do.
Ryan Tansom: I've got the the kids. They get cheerios in my car every day. They lose money. I'm the one guy that's going to cost.
John Warrillow: So this, and this is unlimited. Carwash has become a big thing. So now Mr. Carwash is one of the big rooms, private equity backed roll up guys in the carwash space. I think they've got 150 stores now. They offer unlimited car wash and that's really revolutionizing the carwash business and it's changing their valuation multiples. Now car washes will trade at multiples of revenue as opposed to multiples of EBITDA as a result of the fact that they've got this recurring revenue and so you know, we see it in a variety of different industries. Age bloom is a flower store that sells flowers on subscription. So they target hotels. so one of the things that I would do if you're listening to this, yeah, it'd never worked in my industry, is ask yourself, who is the customer that buys what you sell at a regular cadence? In H Blooms case, the flower guys, it wasn't the guy buys flowers for valentine’s day once a year. It was the hotel and spa owners that wanted fresh cut flowers on the reception table. Those were the the buyers who bought flowers regularly. In the case of the carwash folks into different segment. I can't remember exactly. It depends on the type of part of the country you're in, but ask yourself who is- who buys what you sell and has a need for it on a regular cadence. In the case of the home remodelers, it may not actually be the homeowners themselves. it may be the contractors, the trade. So if you. If you have a roof tiles, there's an example. Let's say you put on new roofs, it may not be the homeowners that need a roof every 25 years. It may be the installers that install roofs that you could put on a subscription basis. So again, think about who is it that buys what you sell on a regular cadence and it may not be 100 percent of your customers, there may be a small segment and that's where you might find a raw material for us.
Ryan Tansom: I've got an interesting funny story. So I've got a client, um, which is in the wedding dress industry. So who regularly buys wedding dresses and an on an ongoing basis?
John Warrillow: Is this a skill testing question?
Ryan Tansom: It's kind of funny because when we were, because they were a client of mine when we were sitting down going over this, we're like, should we give an award for the person that buys the most amount of wedding dresses from you? [John interjects: For frequent buyers club?] Not something... It's going to be more expensive than the, than the perks of the wedding dresses, but you know, and I actually serious, no, they're, they're diversified. I mean because they're really good at fitting in drop-shipping dresses. So I mean, I, I think to your point it's thinking about it in more of the what are your core skill sets and they're launching new products like facial cream and stuff like that. So because there's a lot of stuff that people buy in that one event, but they're expanding and so they can have subscriptions on facial creams, so they've got this triggering event of the wedding, but then there's other things that they can do for that client who's in perpetuity. Right. So I mean it is kind of a joke is we actually laugh, throw out or like this is not the ideal industry to look for that specific market.
John Warrillow: My wife's wedding dress is like on a shelving unit in our garage, right? She's worn it once and it's been there for 20 years and I would love to get it out of our garage. I don't want to sell it. She doesn't want throw it away. So could they store the wedding dresses for like six bucks a month? We'll store your wedding dress. Now you might say like why would you want to, when you're charging like two, three, four grand for a wedding dress. The one secret to a recurring revenue that I think is so overlooked in many cases is that the act of having a subscription makes you infinitely more likely to buy other stuff from that company. So the classic example that will be amazon prime, right? So if you look at what the typical average amazon customer spends a year with amazon and compare it to the average amazon prime subscriber, it's like three x.
John Warrillow: The prime subscriber spends like three times more than the average amazon customer. Part of that is free shipping, but part of it is the fact that you as a prime subscriber had given amazon your credit card, you've given them permission to email you a they have a relationship with you. And so when you think about, oh, maybe I want to buy dog food today, whether or not you have a subscription dog food is kind of out of the point, because you're a prime subscriber, the the first place you go, and we see that in virtually every, every industry and they go back to the carwashes. If you're a carwash subscriber, guess what? You're more likely to buy your windscreen wipers from that car wash because you're in there every day. They've got a relationship with know the guys. They're like, they're part of your routine and so you're much more likely to buy other stuff from the companies that you subscribe to.
Ryan Tansom: Which, which by the way is very interesting because that also opens up to kind of tie it to the eventual exit whenever, how that looks for the owner is now think about those different companies that you can strategically layer on, so maybe an autobody or you could sell to private equity. So there's other people that you could potentially buy, but other companies that you could potentially sell to because of the platform that you built?
John Warrillow: Right. To go back to the wedding dress like it's one thing to have a wedding dress company, right? It's another thing to say, yeah, we make wedding dresses and we have 14,000 women who pay us $4 a month to store their wedding dresses and all of those women need other services. Right? So they're all A) married, so there's. There's a whole list of additional products they probably need to acquirer looking at that business would say, wow, I'd love to get a hold of that list of 14,000 women store their wedding dresses. So again, it has lots of different knock on effect.
Ryan Tansom: We're going to give you credit when we go back to this client. [John interjects: And if it doesn't work, blame this guy.] No, no. This guy, this guy has read all of your stuff. You need. He's always referencing Alex from built the out and you know actually who I'm thinking of is Norm Brodsky and actually storing all this stuff and like getting in the storage business.
John Warrillow: The famous columnist for inc magazine. He's great.
Ryan Tansom: So you know, John and I know we're short on time here, but you know, when we think about, you know, so the listeners who have been following my podcast, you know that we're getting some of the technical stuff more so than, than yours. And we gave all the kinds of all-around advice in the last couple episodes have been about the valuation and diving into EBITDA and add backs and transferable cash flow. What are some of the things to practical ways that you'd say, okay, you know, here's the things that you should focus on. If you get time, you know, because I think that I go back to the, you know, if they've done some of these things where they've sat down with their CPA or a certified valuation that there's a lot of technical stuff. How would you say if you, if you got like a low score on one of these, you know, how do you determine how much time and money you should be spending at these and how to actually get that rating. You know, how are you getting that rate of return or your rate on effort or how are you quantifying what you're actually getting?
John Warrillow: Yeah. I think the first place to start as monopoly control and so monopoly control, again, it's inspired by Warren Buffett said the comments he's made many times, which is invest in companies with a deep and wide competitive moat. And the reason for that is when you have a competitive position that's unique, it gives you pricing authority. Meaning just to some extent, you can control your price. You can charge better margins. When you get better margins, you get more and more. You got more money to invest in marketing and more marketing dollars means you can further differentiate your product or service and then it creates this kind of triggering domino effect and so monopoly control is about having one thing that really makes you unique and that you do better than anybody else in that one thing could be largely should be your product and I think that the biggest disservice done to the business owner community is telling them or that sort of folklore that that it's five times or 10 times easier to cross-sell a second product to an existing customer than it would be to go find a new customer. And while I agree in sales lingo that I'm sure it is better to cross-sell and cheaper and easier to cross-sell. It doesn't make your business more valuable because the services that we typically cross sell or not ones we're differentiated on. It's just a. It's a. It's a. It's a sale of convenience for the buyer and so when an acquire it looks at your company, they're going to look at it and say there's this great company here, but we've also got to buy all these other surfaces on which we already compete on a better product for a. We're not interested in being in that business, et cetera. And you know, I'm reminded of a podcast I did with a guy who created an ice cream store, ice cream brand, and so he always wanted to make his own ice cream. He also was kind of like the idea of having retail stores, so we vertically integrated and created a network of like 60 retail stores where we sold his ice cream.
John Warrillow: He also sold as ice cream and Kruger's and some of the big department stores in the United States and he wouldn't sell the company and nobody wanted to buy it because they all looked at it. Said, I like part of your business. Like I liked the distribution part, but I don't let the retail part I like, but I don't like manufacturing the product. And eventually he ultimately sold his business for relatively low multiple and the moment that require bought the business, they shut down all 60 stores. Oh my gosh. We have no interest in this was like his hugely part of who he was as a person, right? Identifying and so forth. And um, and said, I know we have no interest in being a retail business. We want to do a business because we want to get our product into Kruger's or Kroger's or whatever. And um, and we wanted to use your product as a sort of Trojan horse to get us in there. So, you know, the, the one in the short of it is, I think what you want to do is figure out what one thing you are better than anybody else before that and stick to your knitting. I think it's going to drive a much federal multiple the end of the day. And yes, it's more difficult and it's more difficult to sell your customers and it's more difficult to grow. But man, when you go to buy your business, like it's like we all buy increasingly monopolized by cable television. And you get ESPN, you get whatever, CNN, fox, whatever you're into, get the other 198 channels that you watch and you end up having to buy them and it leaves the buyer with a sense of remorse. And the same thing's true with a company if they, if you have a hodgepodge of services, one of which is really cool and the others are two products. It really is a huge turnoff for buyers.
Ryan Tansom: And now and obviously there, which I think you had some very good points are, but yet you have to have a lens and I don't know how you would maybe articulate this, but would that within the reoccurring revenue lens and these other lenses where you know, you're trying to accomplish some of them all at the same time, right? Where like, it might be a different product or service or maybe just how you're just re-engineering what you're offering. I'm like you, like you said, so storage versus wedding dresses. Right? So I mean obviously you have to put some common sense approach to what you're saying. Right?
John Warrillow: Absolutely. Yeah. There's a practical sense and with monopoly control in particular, like if you, if you have 12 different products and services, let's just say a one or two of them are really highly differentiated and the rest are kind of meets your price. I'm not suggesting that you go out and drop all the other 10 products overnight. I'm saying that you're going to get a material in, in improvement in both quality of life as an entrepreneur as well as ultimately the value your business. If you start with the product and service that is least differentiated and say how can we really be in this business and then work up from there to get rid of one a year. Uh, so don't rip the band-aid off and get rid of all 10. work slowly up the ladder so that over time you're really competing in markets and what you're truly different.
Ryan Tansom: Well, I think what you said is like, I mean coming from my old industry, I mean like we sold copiers, software managed it services talked computer hardware talk. I mean, like you sit down and you go, what the heck are we doing? And I always go back to everybody was like, everybody was always tired with all the next things that you should sell. And then there's this one guy locally who's got this very large company. He only sold copiers and the guy just kills it. He just for prince, prince money. Um, and I think it's challenging because entrepreneurs are, are flashy object individuals. So they're always talking about how. I mean, how would you know any, any word of advice for the entrepreneur who is always chasing the next thing?
John Warrillow: Oh man, it reminds me of Elon Musk. I mean, he's good. He's the Steve Jobs of our generation for sure. Who am I to be criticizing what he's created. He's incredible. But man talk about different, different businesses. You've got Space X and Tesla. I mean, I think taking a page. Yeah, taking a page out of Elon Musk's book, at least he's differentiating the companies. He's not know he's been relatively pure on Space X. He's starting to differentiate or, or, or sort of getting more into other products with Tesla because he's obviously got three or four products that car company. But he's also now gone into solar energy, so I'm not one to criticize Musk certainly for what he's created, but uh, but I think branding businesses differently if, if you were trying to, um, uh, create [cross talk: the divest of them, you know what I mean?] Musk can obviously sell a space x totally separate capital structures that are not related other than having a similar.
Ryan Tansom: I know we gotta run, so I gotta be conscious of your time. So you know, if you were to summarize or highlight one of the things that we've talked about or if we missed something that you always want to leave the business owners with, what would it be?
John Warrillow: It's really where we started the conversation, Ryan, which is for your business to be valuable, it needs to run without you and there's a whole bunch of different things, in fact there are eight unique things you can do to make it so that it's less dependent on you. And that gives you lots of control. it gives you multiple if you ever want to sell, but it also gives you a lot more control and a business that you're really kind of overseeing as opposed to fighting fires, what it's worth doing if you can.
Ryan Tansom: And best way to get in touch with you. If the listeners want to, what would it be?
John Warrillow: Uh, so probably just on twitter at john warrillow w a double r i double l o w. Try saying that a couple times fast.
Ryan Tansom: No, thanks. Hey, I actually had a blast doing this again. I'm glad we coordinated assignment. They get you back on the show.
John Warrillow: Awesome. Me too. Thanks. Right. So you john.
Ryan Tansom: Well, if you didn't expect it, the big takeaway for today is go get your Value Builder report because it's free. It only takes a few minutes and it'll give you some pretty actionable explanations of the eight key drivers and where you stand on them. Because if you've been listening in for the last few episodes, you understand like, I have a benchmark, I know where I want to go. Hopefully there's a dollar amount that you're actually pursuing. If there's a specific exit option that you're pursuing, but now this can be the roadmap to help you really move the needle because instead of getting 2 million, maybe you get 3 million for your company. Instead of getting three or 4 million, you're getting a seven or an $8,000,000 amount because you did things right. When you get these reports, you look and say, oh, maybe I should call that customer and ask them for their money up front.
Or maybe I could call my vendors and ask them to delay my payments a little bit. Or maybe I should take the time to think about how can I implement recurring revenue? Yes, this is hard work other than just getting up and grinding away, but the results and the return on your effort can be astronomical. Because listen to what he said about that Jill Nelson. Instead of getting the two million, she got $38,000,000. So I hope you enjoyed this few episode series. Go take the value builder system report and there also will be a couple Biz Equity. Like I said, there's 10 if you want him to go on there and you want to get a benchmark for where you at, so hopefully out of these few episodes you can walk away saying, I know where I'm at and I know where I need to go, and there's some context of why you're waking up every single day and taking all the crazy risk to run this company. But there's a bunch of perks and there's a bunch of benefits and there's a huge gold pot at the end of the rainbow if you choose to pursue it. So if you enjoyed it, go on to itunes, give me a rating. Otherwise I will see you next week.
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.