Today on the IC-DISC Show, we’re talking with John Warrillow, best selling author of books including Built To Sell and The Art of Selling Your Business, and founder of The Value Builder System™, a simple software for building the value of a company used by thousands of businesses worldwide.
This is a great conversation. I’ve know John for some time and have been looking forward to sharing his thinking and approach to building a business that can thrive without you.
There are a lot of ideas you can take action on in this episode.
Get a Free Copy of the ‘Is an IC-DISC Right for ME’ book Whether or not you have an IC-DISC already, get a free copy of our entrepreneur’s guide to evaluating the IC-DISC and discover the opportunities to maximize your after-tax income – Get your copy here
About John Warrillow
John Warrillow is the founder of The Value Builder System™, a simple software for building the value of a company used by thousands of businesses worldwide. Offered by a global network of independent advisors known as Certified Value Builders, The Value Builder System™ incorporates several diagnostic tools, including the Value Builder Score. Those businesses that achieve a Value Builder Score of 90 or greater are worth double the average-performing business. His best-selling book Built to Sell: Creating a Business That Can Thrive Without You was recognized by both Fortune and Inc. as one of the best business books of 2011 and has been translated into 12 languages. John is the host of Built to Sell Radio, ranked by Forbes as one of the world’s 10 best podcasts for business owners. In 2015, John wrote another best-selling book, The Automatic Customer: Creating a Subscription Business in Any Industry. John completes the trilogy with his latest book, The Art of Selling Your Business: Winning Strategies & Secret Hacks for Exiting on Top. Prior to founding The Value BuilderSystem, he started and exited four companies, including one acquired by a public company. He lives with his family in Toronto. You can follow John’s work at BuiltToSell.com.
IC-DISC Show 019 Transcript
Dave: John, welcome to the show.
John: Thanks, David. Good to be with you.
Dave: Yeah. So I’ve wanted to have you as a guest on the show for a long time, probably going all the way back to when I read your first book probably eight years ago, I Built to Sell. Believe it or not, I’ve probably listened to at least 200 of your 250 podcasts. So it’s-
John: You’re gunning for punishment my friend.
Dave: That I am at that. So you hold a couple firsts. You’re my first Canadian guest, and you might also be my first guest who was born in England. So why don’t we just start with that. Did you move to Canada as a child or an adult?
John: I did. My parents immigrated from England to Canada when I was five. So I really don’t have many memories. I do have some family over there though. Get over there once in a while, but home’s Toronto now.
Dave: Okay. And you attended college in Canada, I take it.
John: I did. Here’s a fact that is astonishing. Elon Musk went to Queens University in Kingston, Ontario one year at the same time I was there. I’d never met the man, but I think it’s great to be able to share that as my alumni. Queens, by the way I took sociology, which is the most ridiculous program you could possibly imagine. So I’m in no way comparing myself to Musk. But I think while I was studying girls at Queens, he was studying engineering, which is pretty impressive.
Dave: That’s awesome. I have a similar kind of touch with greatness. So I was at the University of Texas in Austin at the same time as Michael Dell, Founder of Dell computers. And we were there at the same time in the same dorm. I’m sorry. He was at a different dorm. But we were there at the same time and IBM had a theory, so this was 1983 that if you could get somebody hooked on IBM PCs, they would buy IBM PCs for life. So as a result they had a little storefront on campus where they sold computers at well below wholesale to the students. So while the other 50,000 students ignored it, Michael Dell started buying these IBM’s for blow wholesale and then marketing them between wholesale and retail. And that was how he gets started with Dell computers.
John: Yeah. That’s wild. Did you buy a computer from him?
Dave: I didn’t. Well, I mean, years later. But yeah, not at the time. So I believe he graduated in 1994 from Queens College. Is that right?
John: Yeah, I think that’s right.
Dave: Okay. And did you start your entrepreneurial career right after college, or did you go to the salt mines for a few years before you broke those?
John: Funny you should mention salt mines, because I went to work in a little town called Sudbury, Ontario, which is known as the nickel mining capital of North America. And I’m not a miner, nor did I mine in Sudbury. But I went to work in radio, actually. I was involved in radio and had a kind of idea for a show. This goes back in the early 90s. The show was to interview a different entrepreneur every week and say, “What did you learn? What would you do differently?” And the radio station said, “That’s a crappy idea that’ll never work.” And so in most cases where people get challenged like that as a young person, I decided that I would prove them wrong. And so I left Sudbury and I went back to my hometown of Toronto, and came up with the idea for the show called Today’s Entrepreneur.
Again, this goes back way before podcasts, et cetera, and pitched it to a syndication company in Toronto and ultimately, got the show nationally syndicated in Canada. We were on 22 stations and it was called Today’s Entrepreneur. And we just interviewed a different entrepreneur every day, and asked them, “If you’d known then what you know now, what would you have done differently?” And that’s what got me interested in entrepreneurship and entrepreneurs. It’s just all those stories from different entrepreneurs over the years ago.
Dave: Oh, wow. I did not realize that part of your story. So you’ve been interviewing entrepreneurs a lot longer than the five years ago that you started your podcast, haven’t you.
John: It’s funny because it feels a little bit like deja vu, like Groundhog Day, because yeah, while, I started my career interviewing entrepreneurs, and I’m 25 years later doing it again. But it’s fun. I’ve got a chance to interview 300 or so business owners who have sold their company. And it’s such an emotional experience but it’s been fun for me because I asked these guests about the last chapter of their journey to sell their business. And there’s very little out there. You seem to say that, I mean, I’m sure in your work is a ton of information about, how do you start a business? How do you build a business? How do you market a company? But very little on how to exit one. So that was the niche that I chose to focus on Built to Sell Radio.
Dave: That’s awesome. And then I guess you launched your own business in ’97. Today’s Entrepreneur, was it under that umbrella? All of this your own business?
John: Yeah. As typically the case, these businesses evolved one out of the next, so the syndication company that show was sold and ultimately, I went on to start a research company, and then an event company, and then a marketing company. So all of them evolving out of one, out of the next, really. So yeah.
Dave: Okay. So this is where to me, I’m more familiar with the story starting here. So you sold the company to a public company, I believe in 2009. Does that sound right?
John: Sound about right.
Dave: And then you wrote a book, Built to Sell that was released, I believe in 2011. I guess first off, what did you do after you sold the company? Did you have to hang around a while or did you take some time off or?
John: Yeah. We moved to Europe, actually. We had a young family at the time. We still have a relatively young family. This goes back to 2009. So my wife and I pulled up stakes, we sold our house in Toronto, and we moved to a little village in France and spent three years there. We put our kids into the local French school, and used that town as a bit of a jumping off point, and sort of traveled all around Europe. So that’s what we chose to do with our time after I sold my last company.
Dave: Okay. Did the idea for the book germinate then while you were there in France?
John: The book Built to Sell?
John: No, it was really before we left. And it wasn’t really written with any grand plan, per se. I had sold my last company. I was actually having lunch with a guy named Tom Dean’s, who’s written a great book called Every Family’s Business. If you haven’t read it, it’s about the dangers of doing a family business transition. Anyways, it’s a great book and Tom and I were just chatting over lunch and he said, “You’ve had all these experiences with these four different companies, you should think about writing some stuff down.” And so, I did. I went to the attic of my house and started typing out this parable, this story which was of an entrepreneur who had a marketing agency, which is one of the four companies that I’ve been involved in, was a marketing agency. About how he tries to transform it from a service-based business to sort of more of a productized company. And so, yeah, so that was written in Toronto. And then soon after it was published, we moved over to Europe.
Dave: Oh, okay. So that was the order. You sold it and then wrote the book, and then moved to Europe. So in the book it sounds like received a lot of attention. I understand both Fortune and Inc. recognized it as one of the best business books of 2011. And I also understand it’s been translated into 12 different languages. Were you surprised by how successful the book was?
John: In a way, yeah. I mean, it’s an easy topic. The first edition of Built to Sell was self-published. I didn’t have a publisher, I didn’t know anything about writing a book, really. So I self-published it and I was good enough, or I was fortunate to meet a guy named Bo Burlingham.
Dave: Sure. Small Giants, right?
John: Yeah, that’s right. Bo and I wrote for Inc. at the time, Inc. Magazine. I said, “Oh, I’ve written this book. Could you take a look at it?” And Bo was like, “Man, you should really get an agent and do this seriously, because the book’s got some likes.” And so he was the one who introduced me to my agent or his agent, I should say. I didn’t have an agent at the time. And he introduced me to his agent and she said, “Send me the book.” And she actually was the agent that Michael Gerber used to publish his first book. The E-Myth.
Dave: Oh, wow.
John: Yeah. So she took it to Random House, which is the ultimate publisher of the book and said, “Would you want to publish this?” And they were a bit skeptical for two reasons. Number one, the book had already been out there for three or four months. And so they don’t usually like picking up self-published books because obviously, the initial demand for the book has been fulfilled already.
Dave: Mm-hmm (affirmative).
John: The other reason was that they were like, “Nobody sells a company. Relative to the number who start a company, actually very few people sell a company.” And so they were the ones who really pushed the subtitle of the book and said, “We really need to have a subtitle that brings more people into the fold, and widens the target market for the book.”
So the original book was called Built to Sell, but when Random House put it out, they added the subtitle, Creating a Business That Can Thrive Without You. And I have to credit them for that because for every one business owner who wants to sell, there’s probably another 100 that want a business they could sell.
John: And I just emphasized the word true-r, in italics, it doesn’t mean you have to want to sell it, but knowing that you’re building an asset. And I think that was a great course correction, and maybe, played some small role in the success of the book, is that it has been more widely adopted because its audiences is more broad speaking.
Dave: Okay. So then that’s when the French sabbatical, I guess, started.
John: That’s right.
Dave: Yeah, you must have been really well rested because you came back with a burst of energy in 2015. As near as I can tell you had three separate business initiatives in 2015. I believe you had your second book, the launch of the podcast, and the launch of The Value Builder System. Is my timing correct? Was that all in the same year?
John: Yeah. The Automatic Customer, which was the follow up book to Built to Sell was launched in 2015. You’re absolutely right. And I also launched Built to Sell Radio, which the idea behind that was, I was getting a chance to speak to audiences on the back of the Built to Sell, I do EO events, or tab events, and get asked to speak to entrepreneurs. And what I found was the questions interestingly, pertain the last two, the theory of building to sell, which was covered in the book, but the questions were more the mechanics of how to sell a company. And so that was a bit of almost a contradiction to the original reason that the publisher widen the audience or added the subtitle, to widen the targets of the book. But entrepreneurs, I think, really wanted the nitty-gritty, the details, right?
What proportion of your deal was on earn-out? Did you have to finance the buyer? What was the percentage of interest you charge… That kind of detail. And so that’s what triggered me to want to launch Built to Sell Radio, which was to get into the nitty gritty, the mechanics of selling a company.
And so to your point was 2015. And then we also licensed our very first certified value builder in 2015. So The Value Builder System is where we help entrepreneurs improve the value of their business leading up to an exit. As you know, we launched and we licensed our first certified value builder, which are independent advisors like yourself to do value building as an offering for their clients. So that was our first ever group of certified value builders was in 2015. So yeah, it was a busy time for sure.
Dave: Sure. I can imagine. So why don’t we go through these one at a time. So on the Built to Sell Radio yeah, one of the reasons I’m just drawn to this is because speaking about something you said earlier, there’s not a lot of data and information on when businesses sell, and correct me if I’m wrong, but it seems like what happens is the acquirer is usually a larger company and they do not want the terms made public. And so thus a lot of people know is just XYZ bought ABC business for undisclosed terms. And that’s all you hear. Is that your experience as…
John: Yeah, most of the time you see in a press release when big company A buy small company B. You don’t say, “Terms not disclosed.” Which basically means that the acquisition for the acquire, if it’s a public company, it was not material, meaning it had no material impact on the shareholders. They didn’t need to disclose the mechanics of the sale, and what they paid, and what the valuation was, et cetera. If a public company buys a company which is material it needs to disclose that and to its shareholders.
And so big company exits, typically all disclosed, like for example, one of the people I interviewed for the show was a guy named James Murphy. He sold a company called Viviscal, which had a treatment for women’s hair loss to C&D, which is a big consumer packaged goods company that competes with Procter & Gamble, and others. Anyway, C&D had to disclose what they paid for the revenue and profits, and all the details associated which is great because it allows the owner, the founder who sold to tell me more of the details, because it’s public information. That’s somewhat of a rarity.
So usually on the show, we have to dance around some of those mechanics. The guest before I hit record will say, “Well, I can’t tell you the price.” To which I’ll then say, “Well, could you tell me what multiple of earnings it was?” And usually we find some way communicate to the audience some of the more important details without getting into any of the secrets that the acquirer forces the owner to remain to keep as as private.
Dave: Yeah. One of the things I love about listening to the podcast is… So I’m an accountant by training. So I’m always trying to do the math in my head as you’re going. And it’s fun because… Sometimes you’ll be taught because you ask the questions cleverly. So for example, for anyone who hasn’t listened to the podcast, I’d highly recommend it, because is you might say, “Okay, I know you can’t discuss all the terms but what did it sell for as a multiple of EBITDA?” And they’ll maybe tell you, or they’ll maybe say, “Well, I can’t really say that. And then you’ll ask, “Well, what would a typical business in your industry trade for as an EBITDA multiple?” And they’ll say, “Okay, I can answer that. It’s a five to eight.” And you’ll be, “Okay. So did you guys sell in that range?” “Sure, sure. But I can’t tell you anything more.” But you’ve extracted what we really wanted to hear, which was really just a sense.
And then sometimes they’ll not say the sales price, but then later, you’ll get into their margins. And so maybe by the end of the podcast, you realize that a typical company in the industry sells for five to eight times EBITDA. They were within that range. They had 20% net margins and their sales were in the 10 to $15 million range. Well, now all of a sudden using mathematics, you can kind of figure out a range of what it sold for. So-
John: You’re giving away all my secrets man.
Dave: Oh, that’s right. What are your future guests going to do? Well, they probably won’t listen to this. No, that’s good. But it’s so useful because like you said, it’s hard to get this information and-
John: Yeah. One of the other questions I really like, and it’s not intended to be like a got you question by any stretch of imagination, but it is, I think, an interesting question, which is, as you were growing the company, what did you think it was going to be worth? Not, what was it worth and what did you sell for? But what was your assumption. I’m reminded of the interview this week, actually. It was built by a guy name Greg Carpenter who sold SBI sales, benchmark index. He was under the impression that his company would trade at around one to 1.2 times revenue. And so, he went through the process of bringing in partners into the company, a couple of guys-
Dave: At that price?
Dave: I’ve listened to it. Yeah.
John: Yeah, yeah. It was around 1.2 times revenue. And so he gave them a slice up that company, or sold. I can’t remember which at that valuation. Well, long story short, he sold SBI a $30 million revenue business for $162 million. So while that’s spectacular exited, amazing achievement, if you’re doing the math, you realize he sold for five or six times revenue. He’s selling shares at one times revenue. And so the guys who he sold shares to, “We’ve got a pretty good deal.”
Dave: Yeah, he referred to that as his $80 million mistake.
John: That’s exactly right. Yeah, yeah.
Dave: Yeah. Okay. So that’s the podcast. I don’t want to spend too much time just on the podcast. But I’d like to turn to The Value Builder System, because I’ve got to tell you, John, there were two people who have added more value to my business than anyone else on earth. So one is a guy named Ron Baker who wrote a book on pricing professional services. And I read that book about 10 years ago and I’ve recommended to hundreds of people. And I can honestly say that, that book has made me millions of dollars-
Dave: Over the years with what I’ve learned from pricing professional services. But the other one is you have probably added, untold hundreds of thousands of dollars to maybe, seven figures to the value of my business based on the same principles. So let me just go ahead and thank you for that. If you’re ever in Houston, I think I owe you dinner.
John: I like steak, man.
Dave: Well, we have a few steakhouses here.
John: I would imagine.
Dave: So talk to me about The Value Builder System. The background and what made you want to start it. What’s the story?
John: Yeah. If you want the actual backstory, it was born out of the book Built to Sell. So when I wrote the book Built to Sell, I thought, “How am I going to get people to buy this thing? How can we market it?” And I came up with the idea of a little questionnaire, kind of like a Men’s Health, when you fill it there’s, how fit are you? And they ask you to answer 10 questions that will tell you-
John: Whatever. And I came up with this thing called the sellability score, which was 10 questions. How much recurring revenue do you have? How fast are you growing? Et cetera. And it would give you a score.
And I was in Europe at the time, and I started getting calls from brokers in particular and some accountants, but mostly brokers saying, “Hey, that’s a little questionnaire. Can we put this on our website?” “No, but that was kind of intriguing.” And again, I was away and not really thinking too much about business, but I was starting to get the itch to do something else. And I started thinking, “Well, these brokers want this little questionnaire that I made up on a back of a napkin. There’s got to be an appetite for advisors who want a system to talk to their clients about the value of their business.” And so that’s the inspiration for everything we do is that little questionnaire.
So we launched a much more robust research-based questionnaire called The Value Builder Questionnaire. And that then became the underpinnings of the entire system, that system’s got 12 unique steps, you’d take owners through and it adds value to their business. But it all goes back to that little goofy questionnaire in Build to Sell.
Dave: Oh, that is awesome. I love hearing more of the backstory there. I love the research-based to this because my understanding is you’ve now had, is it over 60,000 businesses complete the questionnaire?
John: We have. And you know what’s interesting? The companies that come to us from the beginning, their average score is 59. And most hard charging entrepreneurs they’re used to doing well and lots of things. So when we tell them they got a score of 59 out of a possible 100, I think sometimes it’s disappointing. But those businesses are trading at around 3.5 times, pre-tax profit. And you compare that to the folks who go through the system score better on each of the drivers, if they can get their score up to 90, out of a possible 100, those businesses on average are trading at 7.1 times, pre-tax profits. So more than double. So there’s a real story embedded in the data that if you focus on these factors that drive the value of your company, it can really improve your outcomes from the sale of your business.
Dave: And I think even if they only have more moderate success, they increase the score to it, say an 80, that still has a significant statistical increase in the business value. Doesn’t it?
John: Yeah, 71% higher than the average performer. So getting up to 80 has real, real benefits. And it’s not just the exit, I think a business, if you try to distill all of the things that we do at value builder down to a central idea, it’s really this concept of building a company that can thrive without you going back to your original title before. It’s having a business that has transferable value because it’s not dependent necessarily on the owner. And so if you think about that, while it makes the business more valuable, 71% more valuable in the case of someone who scores an 80, it also gives the owner options. They don’t have to sell. They could bring in a manager. They could bring in a private equity group and sell them a percentage of the business. They could they could sell it out, right? They’ve got options at that point. And that puts them in a much more powerful position than feeling like they have to sell or want to sell, et cetera.
Dave: Yeah. That makes sense. And to me, the biggest insight about your whole system there is that, the conventional wisdom is, people that have some familiarity with accounting, finance business valuation, they understand the concept of EBITDA and EBITDA multiples. And it seems that the solution that if somebody goes to an accountant or a business broker and says, “Hey, we want to sell our business, what’s it worth?” And they ask, “Well, we want to double the value. What do we need to do?” It seems like the answer is always double your EBITDA, right?
John: Mm-hmm (affirmative).
Dave: But what you discovered and correct me if I’m wrong, is that these other drivers actually end up having a bigger impact on the value, or said another way, that in some ways it’s easier to increase the multiple than it is to increase the EBITDA. Can you talk a bit more about that and what you’ve discovered?
John: Yeah, for sure. So you’re absolutely right. I think a lot of businesses have the view that there’s a multiple in my industry and I’m preordained to kind of get that. And we’ve seen examples where owners will punch two or three times above their weight class in terms of getting better multiples for their company. And then we’ve also seen examples where you don’t get the industry multiple. And so really it comes down to, beyond just the revenue that you have, what is underneath the covers of the business? How are you performing on these eight factors? One of the eight factors is an example, is recurring revenue. And it’s a huge driver of the value of your business. So if you look at, for example, security companies these days, they trade at different multiples based on the kind of revenue you have. Security businesses, but guys who secure your home or your office have installation revenue where they install the keypads.
Dave: Mm-hmm (affirmative).
John: You get about 75 cents for every dollar of that kind of revenue, because it’s one-off, it doesn’t have a tail to it.
John: And then those folks who have recurring revenue in the security space, that’s called monitoring revenue. Those businesses are getting about $2 for every dollar of monitoring revenue. In other words, the recurring revenue is worth three X to the installation revenue.
John: But it happens in virtually all industries. It’s one example of how not all revenue is counts the same in the eyes of an acquirer. And so I think, it does owners a disservice to just myopically focused on while my industry multiple is whatever five X and that’s what I’m going to get, you could get much better from buybacks if you focus on these drivers. Equally, you could get much worse if you don’t. And so, I’m a big believer in kind of getting under the covers and seeing what the performance on these eight factors.
Dave: Yeah, no, I’ve found that to be very helpful. Now, these eight drivers, I believe one of them has the title, The Switzerland Structure. Now, did this come from your time in France, where you visited Switzerland and you had this idea? So what’s The Switzerland Structure all about?
John: Yeah, yeah. No, I don’t know that it actually came from… I mean, we did visit when we were there, but no, The Switzerland Structure, it basically measures your company’s dependence on any one customer, employee, or supplier. And so the backstory is, we gave it the name The Switzerland Structure because of course, Switzerland is obsessed with independence, right? They didn’t join the World Wars. They didn’t send troops to Iraq. They don’t even use the Euro currency, because they don’t want to be seen as cozying up to any one geopolitical faction, right? And they’ve come under tremendous scrutiny for that. But we gave the name, The Switzerland Structure because it reminds people of the value of independence. Not being overly reliant on any one customer, employee, or supplier.
Dave: No, that’s great. I love that. I love that name. What’s the problem with having that reliance? Could you maybe give me an example of a situation you’ve seen where somebody did not have that independence and it really hurt them?
John: Yeah, for sure. So supplier dependence is one that is overly oftentimes misunderstood or overlooked. And so most people get the fact that you can’t have all your revenue coming from just a handful of customers, or that you’re overly dependent on one superstar salesperson. I think most owners sort of get that conceptually. Where I think an often misunderstood area of dependence can often creep in as around suppliers. And so if you’re getting all of your supply from just one vendor, it can cause a problem. What if that vendor were to go out of business or change their business strategy, et cetera. I’m reminded of one guy, he built a $26 million business in the area of value added reseller. He essentially installed phone systems in the businesses and it was a $26 million business.
They used Avaya technology, as well as Cisco technology. They were effectively a reseller. But over time, Avaya gave them better and better discounts, longer payment terms, and just treated them better. And over time, Avaya really started to sop up most of the business in this company. In fact, at the time of the sale, $26 million worth of revenue, 90% of it was supplying Avaya gear.
Well, when this individual went to sell his company, acquires looked at this business and says, “Yeah, but you’re too dependent on Avaya. What if Avaya changes strategy and goes direct. Hires a bunch of salespeople and eliminates its channel? You’re out of business.” And the long story short, he got, going by memory, I think 3.2 times EBITDA for his $26 million company, which on the surface is not a great multiple for a $26 million business. But again, the reason we had to sacrifice or accept a lower offer was that he had a Switzerland Structure problem. Too much dependence on one supplier.
Dave: Yeah, no, that’s a great example. That also made me think of another episode that you had, where the entrepreneur did some type of technology consulting, and they focused purely on AWS, Amazon Web Services. At least I’m pretty sure it was one of your podcasts. And they intentionally decided not to do a Microsoft product or anyone else because they wanted that laser-focus. Does that sound familiar or am I confusing it with-
John: Yeah, I think the company you’re referring to is Stelligent and you’re absolutely right. They play in the WebOps space. So if you own a website, you need to basically have someone host it and you can host it through AWS or Microsoft. I think it’s called Azure or Google Cloud. These are all kind of direct competitors. And there are IT consultant companies that basically configure your website to work on one of these platforms. And so what Stelligent decided to do early was focus exclusively on AWS.
In the early days they were using and helping people configure for all. The problem was that they had to have lots of employees trained in lots of different platforms. And actually, just consolidated on AWS. Now, in the case of Stelligent, it worked because they tied their horse to the wagon, to AWS, which was growing like a weed. And they ultimately got acquired because the company they acquired them was looking for more AWS chops. But it could have worked the other way and that they were too dependent. So I think there’s a quid pro quo on one end, you become a specialist in the case of Stelligent focusing on AWS. That works provided that you’re required or looking to make more into that space, but it does leave you susceptible to the structural problem I referred to earlier.
Dave: Yeah, no, that makes sense. And one of the other drivers that I love the name of is that the teeter-totter. The evaluation teeter-totter. So what’s that all about?
John: Yeah. Teeter-totter refers to, you think of the kid’s teeter-totter or a playground, whether it’s the big kid that’s on a little kid chunk goes up on the teeter-totter.
John: It’s the same concept, but in specific terms around cash flows. So the more cash your company generates, the less the acquirer needs to invest in working capital. And therefore the more they can pay you for your company. The opposite is also true. If an acquirer comes along and says, “Okay, this business looks attractive, but if we buy it, we’re going to have to inject a truckload of money and working capital.” Which is what you need to do when you’ve got a negative cash flow cycle. In other words, you get paid after you pay your suppliers.
If you have a big working capital problem, the acquirer is going to say, “Well, we’re going to buy this business, but we have to jack a ton of money working capital.” Which means, their appetite to buy and spend on your company goes down. Because both the working capital, I mean. So the more they have to inject in working capital, the less they’re going to pay for you. And so it works a little… Again, more, you’ve got to invest in working capital the less the value of the-
Dave: Right, right. Well, thank you for that. Well, let’s now turn to the third book in the trilogy. What prompted you to write the third book?
John: Man, you could have been my coauthor, right. I noticed that a lot of the people I’ve interviewed for Built to Sell Radio, and again, these are all owners of companies, generally selling businesses valued in a two to $50 million range, although we have some exceptions outside of that, generally in that space. So these are life-changing events for the owners, absolutely life-changing. But they don’t show up on any news feed or a media release. They’re relatively below the radar. And so what I kind of come to know is that for a lot of these owners, they exit at relatively subdued multiples, relatively average multiples.
And then there’s this other cohort of owners. I would put James Murphy, the company I referenced earlier, Viviscal sold to C&D into a second camp, which are people who seem to punch well above their weight, get valuations much, much higher than the average. Again, Greg Carpenter from CBI, I said he’s getting 1.2 times revenue, at least getting five or six times revenue. And so I wanted to understand, what are these guys doing? What are their negotiation tactics? What are their tips and tricks for punching above their weight? And that’s what I wanted to do with this new book is try to put together a bit of a field guide for entrepreneurs to follow.
Dave: Okay. So it released about three or four weeks ago?
John: It came out on January the 12th.
Dave: Okay. And how’s it done so far?
John: Pretty well, yeah. I’ve actually got visibility into the sales numbers and it’s tracking out where we’re Built to Sell was at the same time. So pretty happy with that. Just given the trajectory that Built to Sell has had over the years.
Dave: Well, hopefully, it will be translated into 12 languages as well.
John: Won’t that be great? Yeah.
Dave: And then where can people buy this book? The usual places, or would you rather, they go to builttosell.com to buy it?
John: Anywhere you like buying books is fine. If you happen to go to builttosell.com. We put together a special page which is, builttosell.com/selling, where folks can get some extra gifts if they order from that page. So that’s just builttosell.com/selling.
Dave: Okay. So that’s good. That’s where they get the book. Based on feedback you’ve received, has there been anything that was particularly interesting or surprising on the feedback you’ve received that may be one of the stories resonated more than you might’ve expected or what’s been the reaction?
John: Yeah. I mean, look, I think one of the stories that really pop to mind for me, because he had the worst of times and the best of times is a guy named Arik Levy. Arik is in a locker business. So if you’ve ever been to a Whole Foods and you see those Amazon lockers, that’s the space that Arik is in. His first company was called Laundry Locker, where they put your dry cleaning laundry into a locker for people who needed to pick it up after hours, business was a success, but he decided he wanted to sell. And he got an offer and agreed to negotiate with one acquirer, which is one of the mistakes we talked about in the book. He got an offer, the acquirer did the due diligence, but 60 days later, they started to retrade, retrading in the industry lingo for basically a bait and switch.
They tried to lower the price that they’d agreed to pay in the LOI. And Arik with no other offers on the table, agreed to the lower price. And then once they sort of nickel and dime to dabble in a lower price. They then turned around, said, “Oh, we don’t have the money to buy your company. We couldn’t borrow the bank. So we need to borrow from you. And so Arik had to finance part of the sale of his business. They essentially financed the acquirers to buy his business. So it was a bad exit along, not a horrible exit, but there were some things that didn’t go as well as he’d hoped. And so when he went to sell his second business, a company called Luxer One, also in the locker business, but in this case lockers in Manhattan apartments for people who buy online, he learned everything there was. He kind of applied all the things he learned the first time around to the sale of Luxer.
So went out, ran up a process, got five offers for his company. And once he’d received those five offers, he started to play one off the other, trying to get them to raise their price in a success of series of negotiation. Well, he played them quite well because by the end, he was able to triple the original offers for his company and he ultimately, agreed to sell it. And it’s just a good example of some of the tactics in particular, the importance of having multiple offers to essentially give you more leverage in the sale of your company. So that’s one of many stories in the book.
Dave: Yeah, I remember that that episode specifically, because he was talking about this disconnect between people like to drop off their dry cleaning at the hours that the dry cleaners are not open, basically. They like to drop off their dry cleaning on the way to work, or on the way home from work. And if they work long hours and the dry cleaner’s not open then… And I believe that’s what his laundry locker was trying to address, right?
John: That’s right. I mean, you think about people who wear a dress shirt that needs to be pressed. Typically, they get in before nine and leave after five, certainly. And those are the hours a lot of dry cleaners are open. So it’s kind of a disconnect. You didn’t want to pick up your laundry before work or after work, in the case of Arik Levy, you found that they were always closed. So that-
Dave: Right. And then his second business was the lockers for the apartment complexes, right?
John: That’s right.
Dave: To receive packages and stuff, because it’s been a while since I lived in an apartment, but I can only imagine what it’s like now with Amazon Prime in that these poor apartment leasing offices must just be without this service. I can just imagine they’ve just got boxes stacked to the ceiling, and it’s the same problem, right? The leasing office closes at five o’clock and the person doesn’t get off work in time to go by the leasing office.
John: And these days in a pandemic around the holiday season, must have been just atrocious, right? Because all these boxes end up on the floor behind the desk. And the apartment owner has to come out and sift through dozens of boxes. It’s a terrible experience. So in the case of Luxer One, the business that Arik sold, the five offers, he was able to basically solve that problem for apartment dwellers because he installed the lockers.
Dave: Yeah. I remember that story. That’s awesome. So as we wrap up here, my final question is one that I stole from Tim Ferriss. You know who Tim Ferriss is?
John: I do.
Dave: Yeah. And you’re the first guest I’ve ever asked this. So if you had a metaphorical billboard that millions of entrepreneurs would see what words or phrase would you put on it? You’re going to distill all your wisdom that about selling your business to distill it to a sentence or two, what might you say?
John: Great question. I don’t have any name kind of pithy and that would sit on a billboard, but it would be something along the lines of revenue is vanity, value is sanity. Maybe something to that effect-
Dave: Oh, I like that.
John: Yeah. Okay. Maybe he’s a little pithier than I thought it was going to be. Okay. So revenue is vanity, value is sanity. So it’s a play on the old revenue is vanity, profit is sanity, adage that accountants talk about a lot. And of course, as entrepreneurs, I think we’re often susceptible to shiny ball syndrome trying to reach new top line sales thresholds because they make us feel good, or they make us proud. And we love boasting about how many people we employ or how many locations we have, et cetera. And I first-hand seen many, many examples where the owner of those businesses chasing revenue has given up a lot of equity, a lot of control, a lot of lifestyle benefits to chase the next zero on their top line revenue. Yet it doesn’t always translate into value.
I’m reminded, I did two episodes almost back to back. One was a guy who built a $15 million business. So pretty good size business over the years, but kind of chasing revenue, very seasonal in nature and sold it for 25% of one year’s revenue.
About a day later, I interviewed another guy named Rob Walling who built a company called Drip, which was an email marketing platform. He sold to Leadpages. He built it up to just $2 million of annual revenue, a dozen employees, small, small company in the grand scheme of things. And was entertaining offers between nine and 12 times revenue.
John: So the math is astonishing. Here’s a business owner in the first case that has been running on a hamster wheel for years, sacrificing sleep for cashflow worries and hours from his family and so forth just to try to hit the next top line everybody go. And then Rob Walling, quiet, toiling in relative obscurity with a little 12 person company sells for a multiple many, many, many times more than the guy chasing revenue. So it’s not always the top line revenue that’s the thing to chase. I don’t believe in owning a business.
Dave: That is great. And that’s what I wrote down. I’ve never heard that quote, but I’m going to remember that. Revenue is vanity, value is sanity. That’s great.
John: There you go.
Dave: Well, I really appreciate you taking time out to be on the show. Were there any questions that I didn’t ask you that you wish I had?
John: No, I think we covered a lot of ground. And I really appreciate the opportunity to chat with you and your listeners. So I think we did a lot of real estate today, so thank you for the opportunity.
Dave: That is great. So if people want to reach out to you or say, hi, what’s the best way to do so?
John: Really, all roads lead to builttosell.com.
John: So builtosell.com, get the latest episodes, my social links, you can opt in to get an episode every week. That’s probably the best place to go. So just go to sell.com.
Dave: That is great. Well, I think that will do it. Well, thank you again for being on the podcast. I think our listeners are really going to enjoy your insight and your experience, and really appreciate it.
John: Well, thank you, Dave.
Dave: There we have it, another great episode. Thanks for listening in. If you want to continue the conversation, go to ic-discshow.com. That’s I-C-D-I-S-C-S-H-O-W.com. And we have additional information on the podcast, archived episodes, as well as a button to be a guest. So if you’d like to be a guest, go select that and fill out the information, and we’d love to have you on the show. So that’s it. We’ll be back next time with another episode of the IC-Disc Show.