Today’s podcast is about a topic that near and dear to our hearts and one that we’ve actually written a book about in the past.
Longtime listeners know that roughly six years ago we sold our product business, and in the years since we have spent a considerable amount of time processing that decision and examining what happens not only at the core of successful exits but in the aftermath of them as well.
He has also spoken with hundreds of entrepreneurs on his own podcast (including our very own Bossman) about their experiences exiting from their businesses.
John joins us on this episode to discuss what makes a successful exit, how to build a business with the intention of selling, what he has learned from speaking to entrepreneurs about exits over the years, and so much more.
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John: You can chase those goals but if the business is becoming more and more dependent on you, each stride you take towards them, the less valuable your business is going to be to an acquirer.
Dan: Happy Thursday morning. Welcome back to the podcast. Bossman?
Dan: Another busy week in TMBA land, we’ll put the news updates off, maybe talk about some things at the end of the episode. But today, talking about one of our all-time favorite topics, which is building businesses for the sale and designing your eventual exit at the beginning, or along the way, something we talk about all the time, even though we don’t intend to sell, it’s worth thinking about. And on today’s episode, we’ve invited John Warrillow onto the program who’s an expert on these topics, and we’ll talk to him.
And we sort of move up like the meta-levels a little bit more. That’s more or less the category me and you have been in the last 10 years. And there’s this next category which is like more meta, and it’s more chess versus checkers. And it’s kind of like this idea of how much of what you’re building is valuable to others, and in which way, is it valuable to others? In other words thinking about your business’s value, your cash flows’ value, thinking about selling that value, rather than just thinking about picking up the phone and selling the next product to a customer. And that’s really, I think, the category of thinking we’re going to explore in today’s episode.
Ian: You know Dan, I think the Start-up community is really good at this, especially venture-backed companies, they’re really good at seeing this. When we sold our business we were told it was somewhere between two and four times multiple. And it was like a strategic acquisition. It was, ‘This is what it’s worth if you bail out now to someone else’, they’ll have to pay around, I think three is what we sold our business for, three times multiple, our product business.
Dan: So those of you just tuning in, about six years ago, Ian and I sold a multi-million dollar business and we did one of our all-time favourite episodes on that. listeners’ favorite episodes, you can check out tropical mba dot com slash sold. And we’ve basically been processing that exit over the past half a decade. We wrote a book about it called, ‘Before The Exit’. We’ve spoken with lots of people like today’s guest, we’ve seen many of our friends go through this process. And so yeah, this is a constant theme of our strategic conversations. And just thinking about the next things that we’re building.
Ian: And as it relates to, ‘How do we get a bigger multiple?’ too. So what are the things that are required to have a 10 X or 20 X or whatever, a huge exit, if that’s your goal? But I’ll say this, Dan, it’s interesting, since we’ve sold our business, I feel like I’ve tried to talk more people into not selling their businesses. But it’s become more clear to me which businesses are worth selling, which might sound kind of strange, but I wouldn’t even call it intuition. I should probably write down what this is. But essentially, it’s this – if you’re in a position and whatever you’re doing isn’t sustainable. I’m always like, ‘Get out. Man, congratulations, that’s not gonna last, now get out’. So that’s one scenario in which you should sell. But I feel like I talked to more people these days where I’m like, ‘Oh, man, you should hold indefinitely because you’ve got a good cash flow going there’. It’s something that you and I discuss a lot, which is like the value of cash flow on a monthly or yearly basis versus the one time pop. And the one-time pop is what we did when we sold our business. And we had great cash flow before that. But it’s interesting because the one time pop, eventually it runs out.
Dan: One of the interesting things of the dynamic between a cash flow and a cash pile – if you sell your business based on EBITA, which is a technical term, and I have to look up the definition every time, it’s ‘earnings before interest, taxes, and amortization’, it’s essentially net profit. You’re getting your profit forwarded to you by a three-times multiple, say, for example. If you’re selling your business based on that financial framework, you – by definition – can’t afford your business. You don’t have enough cash to buy the asset that you just built.
Ian: Which is why it’s appealing a lot of times to sell Dan, because you think, ‘Wow, when am I ever gonna get this amount of money?’ The truth is, if you wait three years, if it’s a three x multiple, just hold on.
Dan: Honestly, Ian, me and you both, in our own ways, were a little bit underwhelmed by the results of our first exit. And, you know, it’s like, you work really hard for a very long time to build an asset, then you get sick of it, and then you sell it for, you know, what is three times income. A little bit of a lackluster episode, we’ve certainly been trying to build an adjusting for that. One of the takeaways for both of us is that we just don’t want to do that again. So let’s try to improve the next time around. And that’s what today’s episode is all about – considering the ends we’re all building for as we work day in and day out in growing valuable businesses.
So let’s get into today’s guest, who has a much broader experience than us. John has sold four businesses but also interviewed hundreds of founders who’ve done so, he’s the author of a trilogy of books on this topic, including ‘Built to Sell’, ‘The Automatic Customer’ and most recently, ‘The Art of Selling Your Business’. John, why do you do this? You don’t need to, you’ve exited a bunch of businesses you’ve exited four businesses, is that correct?
John: I guess I just get pissed off every time I hear about some other private equity group that has bought a business for kind of pennies on the dollar. And I just think that is a complete crime. And so everything that I do is sort of motivated by: how do you kind of get a fair deal when you go to sell your company?
Dan: Did you get an unfair deal when you sold your businesses?
John: Lots of bad experiences. I had a small marketing agency. And I was exhibiting at a trade show and a guy came up to me really outgoing and started kind of talking to me about how we should partner together. And I was like, ‘What are you talking about? Why do you want to partner with me?’ So finally I said, ‘What do you have in mind?’ Anyways, long story short, I got underneath his quote-unquote offer and it was basically to exchange my shares with his shares so that he would have the majority ownership and I wouldn’t get any cash out of the deal. But he would effectively have control and have all of our customers and it was like the crappiest deal known to man. But I could tell that he’s done this so many times that he was just, he was just a pro at it. There are dozens of other similar stories and some when I didn’t, you know, recognize the gig, so to speak, and, and got taken advantage of so yeah, it is personal on some level.
Dan: I’ve almost equated it to getting married. It’s something that has so much potential to change your life and you don’t get to practice it very often. We had a gentleman who treated us that way. We call him ‘Deals Dimitri’, in retrospect, but this guy had probably done this like 50 times. But, you know, he came in on the last day of the LOI with his accountant. And I’m sure you know how the story ends, like, offered what was still a huge sum of money, but way, way less than was fair. This was a process that was well-honed to rip entrepreneurs off at the point of sale. Is this the kind of thing you see regularly in your podcast?
John: All the time. So you sign a letter of intent, which is nonbinding for either party, you give up negotiating leverage, because you’ve got to sign a ‘no shop’ clause, meaning you can’t continue to shop the company to anybody else. So you’re effectively, to use your analogy, you’re getting engaged and the acquirer knows this. And when you sign that no shock clause, they have all the leverage right? So they protract due diligence, 60 days, 90 days, and at the end, they show up and they’re like, ‘Oh yeah, we found something in diligence. We’re gonna drop by 20%’. And you’re completely at their mercy. I’m reminded of an interview I did recently With a guy named Arik Levy, most famous for selling a company called ‘Luxer One’, a very successful exit. And I said, ‘How did you learn all this stuff?’ and he said ‘The hard way’. He sold another company years earlier, called ‘Laundry Locker’, where he did the classic, he had one acquisition offer, they agreed to a price. At the very end, that guy said, ‘Oh, you know, I can’t really close at that price. How about 20% less?’ By that time Levy had kind of emotionally committed to the sale. And finally, they agreed to a price less than he agreed to originally. And then the acquirer turns around and says, ‘Oh, by the way, we can’t really come up with the money to buy your business. So we need you to lend us some of the money in a vendor financing deal’. Levy learns the next time around to build competitive tension to get multiple offers. The second time he sold, he sold a company called ‘Luxor’ got five offers, played one off the other at the LOI stage, and ended up tripling what he got for his company.
Dan: Some of my best friends in the world are Business Brokers, and they perform a valuable part of this service. But one of the things that was very hard for me to learn, given how I was speaking with my broker all the time, is that he wasn’t actually on my side in the way that this transaction was set up. He was on the side of the deal. Things like competitive tension, I realized or I’m guessing, in my case, wasn’t a good idea for the broker to create because they wanted to create a happy pool of buyers. And that was essentially what the brokers’ value proposition in the marketplace was. Are there brokerages out there that are purely on the entrepreneurial side? Or how do people go about creating that tension? I found brokers are trying to get deals done, so they use LOIs as a tool to get a deal done. But that’s not necessarily in the favour of getting the best price for your business.
John: First of all, I would not sell a company without an intermediary business broker on the lower end, or an m&a professional on the upper end. It’s a huge financial transaction, usually the biggest thing in your life, and I wouldn’t do it on your own. It’s not a DIY event. That being said, I think you’re absolutely right, I think there’s a danger in hiring a broker who specializes in the industry you’re in. When you think about the role of a broker, how does a broker make money? They make money when you transact when you sell your company. And if you’re in a space where there are two or three acquires for your type of business, and that broker makes his or her entire living off selling companies to those two or three acquirers, they can’t fight for you, they can’t put their relationship with those two or three acquirers at risk to get the extra 10% for you, because they need to go to the next guy and sell the next person’s business to the same buyers.
And that’s the danger of using a broker who is an industry guru. If there are dozens of acquirers that’s fine, in fact, you’re probably better served by an industry guru. If you are in a space where there are only two or three buyers, I think you’d actually be better served by an agnostic broker, someone who just sells companies not necessarily sells companies in your industry. The other thing that your question triggers for me, Dan, is – the other side of the counterbalance is going to be an m&a attorney, a mergers and acquisitions lawyer, and that person is – we refer to them as your blind side. Remember the old movie ‘Blind Side?’
Dan: Oh, yeah.
John: So your blind side is there to sort of protecting your, whatever the right-handed quarterback the left tackle is, is there to be your protection. And in an m&a professional is gonna put the brakes on a deal, right? So if your broker is going to kind of gently nudge you to accept it, the m&a professional is going to tap the brakes. And I think deals get done when those two people respect each other and can kind of be countermeasures to one another.
Dan: If we can just talk about four or five crucial points about what to expect or plan for when building a business, or even just at the beginning, I found this stuff is really useful when you think about sort of the end game. That’s a great way to start a business, I think, is thinking about what sort of results or what success might look like. Let’s talk about some things people can do that are listening today, things that they can consider in their own business strategy.
John: The big one is starting to think of your company as a child you want to nurture into a full functioning adult. When most people think about business, they think about, ‘Well, my goal is – I want to reach a million dollars in revenue’, or whatever. And I think those are all valuable aspirations. Yet it can often lead us to make decisions that are kind of like chasing a hamster wheel or running on a treadmill. You can chase those goals but if the business is becoming more and more dependent on you, each stride you take towards them, the less valuable your business is going to be to an acquirer. So you’ve got to structure it so that it can somehow work without you. I’m reminded of a guy, The company’s called ‘Sales Benchmark Index’ or SBI. And the guy’s name is Greg Alexander. He built up this sales benchmarking business basically from his boxer shorts at his kitchen table. He started from nothing. And he structured it over many years to function without him. So his obsession was, ‘I need to get this business to run without me’. So he hired senior people on his team. He didn’t show up for any of the acquisition discussions that he eventually had. He brought in a CEO and he brought in partners to kind of run the business. He sold his $30 million consulting business for $162 million without an earnout. And an earnout, of course, is the entrepreneur’s enemy, right? It’s where you have these goals to reach, the golden handcuffs, years into the future. I’ve never heard anybody get that far out. Most people can get that far out of the operations of their company but to actually sell your company without ever meeting the buyer is astonishing to me.
Dan: What are some other things – I can imagine, like a lot of folks listening to this, they’re running, say, a marketing agency. And they’re such a powerful sales lever in that organization that this idea of, you know, having the business depend less on them is a challenging thought experiment.
John: Done it, been there, bought the T-shirt. So it’s a big challenge, particularly creative business where you can’t make it, you know, the McDonald’s of creativity. And by definition, it’s the opposite. Here’s what I would say – I think what you’ve got to do is, first, really niche down to serving one type of customer. Give you an example. There’s a guy named Darren Root who has an accounting practice. And accounting, very similar to marketing services businesses are, you know, they’re soft, they’re intangible. It’s like services, you’re selling time, right? And Darren Root sold all kinds of different products. He sold, like, everything – accounting, audits, etc. And he was trying to figure out – how does he get his business to thrive effectively without him personally doing the selling? And so he looked at his customers, and he said, ‘What are all my customers?’ And he said – there’s one group of customers, they were doctors offices, and dental practices, any health practitioners, and they have frustration because they have to hire back-office managers to run the back office. But oftentimes, they actually are not a full-time job. So you end up having an employee who’s sort of 70% utilized. And so Root said to these guys, these doctors offices, ‘Look, we’ll manage your back office’, we’ll kind of run the payroll, we’ll do the accounting, the bookkeeping, the bank reconciliation. But when he combined them and productized them into something called ‘The BOS system’, back-office support system, it was a thing, it was a product and he ultimately created a business offering the BOS system and nothing else, right, which was something that could seek seed without him doing the work.
Dan: It’s interesting to see that end game of, you know, I was once working for a production company that was looking to acquire other production services companies. And so we would sit there with these founders that had built these businesses over the course of a decade. And they were looking to retire and get out. And, you know, it was just so hard to imagine acquiring them, because it was essentially an extension of this person’s sales prowess. There’s a bit of a tinge of sadness to it, like, he’s trying to tell the story that this business is going to be okay without him, but we’re not buying it on the other side of the table. And he’s gonna have a hard time making his retirement out of it, he’s gonna have to keep running the company to continue to make the kind of money he’s used to.
John: Yeah, and he’s got effectively a job, which is fine, it’s a well-paid job. It may, in fact, allow you to be location independent, right? That’s great. I think the danger we run into is when we think we’re building a business to sell and we reinvest all of our profits into the business. And then we end up at the end of the line, and there’s really nothing to sell. That’s where I think we’ve run into these sort of tragic stories.
Dan: And to sort of combat this, you focus on a lot of things like, like productizing services, we talk about that all the time here. You also talk about the automatic customer a lot, which is subscriptions and recurring revenue.
John: So ‘The Automatic Customer’ is a book I wrote a while ago about how to create recurring revenue in just about any industry. First of all, it has a huge impact as you allude to in the value of a business, right? So right now security businesses are trading at about 75 cents for every dollar of installation revenue like they come wire up the keypads in your home or your office. They trade in about $2 for every dollar of monitoring revenue. So said another way, the recurring revenues is roughly 3X more valuable than the installation revenue and that trend is not just limited to security companies. It’s virtually every business out there. I’m reminded of the guys who built H.Bloom. So H.Bloom started a company selling flowers and flowers is a crappy business, right? You got to buy the flowers. They start dying, like the moment you cut them, they’re dying. Typical flower store in America throws up more than half of its inventory as a result. It’s also very lumpy – Mother’s Day, Valentine’s Day is when all the flowers are bought. It’s expensive to get recent retail space because you have to walk-in traffic. It’s just I mean, I could go on and on it’s a terrible, terrible business. But these two guys Sonu Panda and Bryan Burkhart said, ‘Okay, we want to sell flowers on subscription’. The thing they did goes back to what we talked about earlier – they didn’t try to create a flower subscription for everybody who buys flowers – the wedding, the funeral, the graduation like they didn’t try to do that. And they realized there’s also a segment of the market, they were high-end wealth management companies, high-end hotels, and restaurants, who buy flowers for their reception table. And so these guys set up this business and said, ‘Why don’t we just sell a subscription to these hotels for flowers?’ Every two weeks, we’ll come in and we’ll get rid of the old flowers, and we’ll bring in the new flowers. When I last talked to Panda and Burkart the average lifetime value of an H.Bloom subscriber was more than $4,000, meaning they make one sale to one hotel, and over the life of that hotel’s business with them they garner more than $4,000 worth of revenue.
Dan: Let me test this idea on you. I wrote down here and I don’t know why, ‘How to escape the EBITA trap’. For so many of us, if you just do the math on how hard it is to grow a business, how much your life gets dedicated to it, like selling your business for three times EBITA after 10 years growing it is kind of a buzzkill. This was really brought home to me by – I was hanging out with a gentleman five years ago, I was telling him about the book I was writing. He’s like, ‘Well, I just sold my business for 50 million bucks’, and what was hilarious to me is – we had all the same emotions, even though he was many multiples more, all the deep emotions that people feel after parting with their business. This is, you know, something Bo Burlingham talks about a lot, and I know you’re familiar with his work. But when he told me his top-line revenue figure, I was shocked, because I was like, ‘Oh, you sell a business for 50 million. That’s like, what, maybe four or five times EBITA, so it probably has this huge revenue figure’, and no, not at all. And the reason was – it was a SaaS product, with subscribing customers that were valuable to the acquirer for other reasons. And also, the acquirer had different motivations than simply tabulating EBITA. So I’m curious if you have thoughts on this idea of what kind of companies do attract buyers who are willing to pay much more than just three times your earnings?
John: What you’re really referring to is a strategic acquirer as opposed to a financial buyer. So financial buyers will usually be buying your future stream of profits. So they project out using what’s called a DCF calculation, Discounted cash flow. And they’ll say, ‘Okay, we’re willing to pay three times and maybe someone else is willing to pay four times earnings for your future profit’. Great, that’s a financial buyer. And to your point, it’s a relatively modest sort of exit. Good, but not the spectacular exit we talked about. The other acquirer is the strategic acquirer, where they are effectively buying your business for what it’s worth in their hands. And so what you’re looking for out there in the marketplace, is a company for whom they would be able to compete more aggressively, or sell more of their products by owning your business. And I’m reminded of Stephanie Breedlove, in this case, a woman I interviewed on ‘Built to Sell Radio’ a while ago now she built a $9 million payroll company, not a big business, $9 million, not an insignificant business, but $9 million in revenue, 10,000 customers. And she looked out there and said, ‘Who would love to buy this business, who would be strategic?’ and she quickly identified ‘Care.com’ because Breedlove’s niche was not just doing payroll, it was doing payroll for parents who had a nanny to pay. In fact, she’s from where you are right now Dan, in Austin. She’s an Austin based company, who decided to do payroll for parents who have a nanny to pay 9 billion bucks in revenue.
And so she looked out there and said, who’s out there? ‘Care.com’ had 7 million subscribers, most of whom are parents who have a nanny to pay or a babysitter to pay. And so she went to ‘Care.com’ and said, you should buy my business. And they looked at it and said, ‘Yeah, this is like an incredible opportunity’. And they offered her $9 million business $40 million. So Breedlove says, ‘Well, you know, that’s a really generous offer. But I think you’re undervaluing what we bring to the table’. And she ran the numbers and she said, ‘Look, you’ve got 7 million subscribers. 1% of them buy my payroll service. That’s 70,000 customers, did I mention, we’re just 10,000 customers today’. In other words, that’s a business seven times her size. And that she said, Well, what if 2% or 5%? Anyways, long story short, she sold her $9 million business for $54 million. But I think it can be done by just about anyone if you think about who’s out there for whom your business would be much more valuable in their hands than it is in your hands.
Dan: It feels like checkers is like building a good product for your customers. And then chess is also realizing that there’s another game going on, which is like building a product as a company as well. There’s this great article by Jason Cohen called ‘Rich or King’, and I used it to formulate one of the thought experiments in my book about selling businesses, and we call it the ‘Lifestyle Ladder’. And it’s this sort of idea that money behaves nonlinearly like money in your personal bank account. So like if you have $0, and you get $20,000, it’s like life-changing. But if you get another $20,000, up to $40,000, it doesn’t really change your life that much. So the idea is that there are these levels that you reach. And I don’t know, like one of the ‘too long, didn’t read’ conclusions of this is, “Don’t sell your company unless it’s ‘done money’”, unless you have a really clear idea of what you need with that money. You’ve put too much time into it. And I wonder if you have a perspective on that. But I first asked us a clear question like, do you see like a number, at least for folks living in North America, that is life-changing money in the sense that financial questions are sort of shelved.
John: I think it makes sense to have pull factors when you sell your company. And so I’m not sure I totally agree with the notion that it has to be ‘done money’. But you definitely should, I think, have something you want to go do. One of my favorite interviews of all time is this guy named Shawn Ashwin, who decided he wanted to live life on a sailboat. He was 39. He said, ‘By my 40th birthday, I want to live on a sailboat’. And so he was living in landlocked Denver, he had an IT services company, which he sold for two to three times profit. Going back to your point earlier, not a spectacular exit kind of a buzzkill for most of us. And I asked him, ‘What was that like? How do you feel about it in retrospect?’ He’s like, ‘I’m happy as a clam. Because I’m living on my sailboat. And that was my aspiration’. So I think if you’ve got a really powerful kind of aspiration, what we refer to as pull factors, I think it can really minimize your obsession over getting the last nickel or the last dime from your company.
I think most of us if we’re honest, when we think about selling your companies, we’re more push, where the push factor is – we’re frustrated by government intervention, or employees or regulation. As much as I want to help you build the value of your company, at the same time, I think it’s gonna be way better if you’ve also got some pull factors, some things you want to go do. We also think about this thing called ‘the freedom point’. And it sort of ties back to your comments around the levels of wealth, so to speak. The freedom point is the point at which the sale of your company would generate enough financial assets that you could live for the rest of your life with the lifestyle that you aspire to have. And so I think what’s interesting is a lot of business owners unconsciously crest the freedom point, and just keep going right on by. And then something like a pandemic happens and their business is compromised hugely. And they wish they freed up some capital.
Dan: This is absolutely critical. We called it the freedom line, I borrowed that from Jason Cohen. This idea that this is like your financial life. This is the engine of it. And if it can deliver you freedom line money, you need to first identify where that is. I know this is speculative. But where do most people put it?
John: What we say, practically, is imagine what the income is that you need to live the life that you want. Let’s imagine that’s 100 grand a year, it doesn’t really matter what the number is, but let’s imagine it is 100 grand a year. Most people have heard the 4% rule. And the 4% rule has been somewhat debated lately about whether it’s enough for etc. But a 4% rule would imply that you take what you need, 100 grand a year, and multiply it by 25. A safer road to go is to multiply by 33, which implies a 3% withdrawal rate. So there’s $3.3 million that you’ve got to accumulate in cash outside of the value of your home because you got to live somewhere.
Dan: And outside of the value of all the fun things you want to do with spending, like a lot of people want to become an angel investor, for example.
John: Right, this is just to live your life, the lifestyle that you aspire to have. So if it’s 100 grand, it’s 3.3 million, if it’s 200 grand it’s 6.6 million, etc. So I think that’s practically how you can calculate it. And I think a lot of it depends on – if you want to live in a beach hut in Thailand, it’s gonna be a whole lot less than if you want to live in a 12,000 square foot apartment in New York City.
Dan: 100%. You mentioned the guy in the sailboat who’s so happy – this phenomenon that Bo first turned me on to and one I’ve experienced. Have you noticed entrepreneurs being sad after they sell their business?
John: Absolutely. Like crushingly sad. In fact, the data point is something in the neighborhood of 74% of business owners say they regret their decision to sell one year after selling. It’s an indictment of the entire industry. So it’s a big, big deal. We did a bunch of research on this and identified four major reasons business owners regret, we’ve already touched on one and that is that they’re all push and no pull. Pain.
Dan: The anxiety of having to worry about it is a big one, too. Like, you’re just bored of being worried about it.
John: Yeah, pull factors are things that you aspire to go do it. It could be writing a book, starting another business, starting a charity, traveling the world, and the more of those that you have, don’t just say I want to travel. That’s like a BS answer, like where do you want to travel with whom?
Dan: And by the way, nine out of 10 of these cool things you can go do right now. So why aren’t you doing it? Why don’t you try it out? One of the other things I mention to founders is like if you want to be away from your business so bad, like try it out. Just go away from it. See what happens.
John: See how it works, yeah. One of the other things around, like why people regret their decision to sell. It comes back to how their employees are treated as part of the process. I’m reminded of a story of a guy named Bobby Martin. Bobby built a great business. It was a $6 million research company. Actually, he and I were kind of peers with our research companies, we showed up at the same events and stuff. Anyways, Bobby built this company and got a beautiful acquisition offer. But the thing about Bobby was he really ran his company like a fraternity house. He hired his buddies. They’d party on Friday nights. And he built this business, a $6 million company, roughly 30 employees when he gets an offer from Dun and Bradstreet for I’m going by memory, it’s about 24 million bucks, big, big, big exit. And Bobby says kind of like, ‘Where do I sign?’ and obviously accepting the deal, only to very quickly end up regretting it because his employees were shocked, many of whom he treated as his family, his friends. They were devastated by this news. And Bobby hadn’t really thought through how he was going to tell them or how they were going to participate in it etc etc. Anyways, he goes into a real state of depression. He shared with me in the podcast that he was estranged from his wife, it got really, really bad. And it was a couple of years later that he was able to reconcile, in his own mind, sort of some of the mistakes he made. He actually wrote a great book. I think it’s called ‘The Hockey Stick Principles’, where he talks about this period in his life. But I’m always reminded of the importance of thinking through how you’re going to deal with your employees. It’s one of the first questions I get if I ever do a speaking engagement or whatever. Almost always one of the first questions is, ‘How do I tell my employees?’
Dan: It’s a huge point of anxiety on both sides of the deal that it’s kind of hard to relate to if you’re not going through the process, but it becomes a huge thing. And I even find buyers that, you know, start to have cold feet, a lot of their anxiety will focus on employees, you know, what’s this person going to do? How are they going to take the news? Are they going to be as productive under you sort of thing?
John: Yeah, absolutely. One of the other ones is not feeling like you were fairly treated. You often get suckered into kind of a proprietary deal, where you’re dealing with one buyer, and you kind of wake up at the end of the process, you’ve closed the sale, and you think, ‘Oh, my gosh, did I leave money on the table’, and it can happen easily because someone says, ‘Hey, we’re gonna pay you a million bucks for your company’, or whatever the number is, doesn’t matter. All of a sudden, you get that sense of validation, and you’re like, ‘Yes, where do I sign? That’s amazing’. And then a year later, you reflect back and think, ‘Man, did I get taken, did I leave money on the table?’ And I think that was the secret to ensuring that that doesn’t happen is you create some competitive tension. You basically create a multiple buyer situation so that, as Ark Levy showed, there are four or five bidders at the table, and that you can feel relatively confident that you’ve got a market rate value for your company.
Dan: Regarding this, the idea of LOI popped into my head – a lot of brokers, they don’t want to do that. So do you just find the next broker, how does the seller have leverage in this situation? I didn’t feel like I had any leverage, like, why couldn’t multiple people have an LOI with me, and we take the money when someone was ready to give us money? You know what I mean?
John: Yeah, there’s a structured process you want to go through, right? It starts with a teaser, where you anonymously reveal a little bit about your information, they sign a nondisclosure agreement, then they get the SIM confidential information management, which is like a deck about your company. And then you’re driving them all towards an acquisition date or window where you’re evaluating letters of intent. And again, most buyers are going to want to disrupt that process. They’re going to want to go on their own timeframe, because they know that if they’re participating in some sort of auction, no matter how many participants there are, they’re going to feel like they’re going to end up having to overpay for a company. So I think the job of a great intermediary is to create that structure and to make it all coalesce around a specific window where you are evaluating letters of intent. Otherwise, you’re into prop deal land where the seller is just dealing with one buyer and, as Arik Levy found out in the ‘Laundry Locker’ case, it’s almost a recipe for accepting less for your company and more punitive deal terms.
Dan: 100%. I just would never do that, again. Just put my foot down right now. I will absolutely partner with a professional who can drive the process in my favor. I can’t believe that I didn’t bother to do it the first time around.
John: I can’t wait to learn more about that when I interview you.
Dan: The final bit of the interview here, John, I want you to know, you already wrote a book that’s one of the automatic go-to reads ‘Built to Sell’. What was the reasoning behind writing ‘The Art of Selling Your Business’? What is the art of selling your business?
John: So ‘Built to Sell’ is about how to build a valuable company. ‘Automatic Customer’ is about how do you accelerate the value through recurring revenue? This is really trying to finish off the trilogy with – how do you harvest the value? And it’s inspired by, I mentioned a couple of times during this interview: this podcast I do called ‘Built to Sell Radio’, where I’ve interviewed some 300 entrepreneurs. And what I’ve come to learn is that most of the people I interview end up having a relatively average exit, not a bad exit, but an average exit. And then there is this other cohort, these folks like Stephanie Breedlove who have these sort of like ridiculously big exits, ones that sort of defy the typical valuation models in their industry. And so I was really just personally fascinated about like, what are these guys and gals know that those other people don’t. And so I tried to kind of distill their key insights and their playbook, if you will, into a field guide for entrepreneurs to follow, if they want to punch above their weight when it comes to selling.
Right now is a great time to sell, the interest rates are at an all-time low. And what that has done is created an entire army of private equity groups. Private equity groups essentially, basically make the economics of their model work through debt. They buy your company, they lever up your business with lots of debt, and then they flip it. And because they used a lot of debt, as long as they’re able to increase the value of your business, when they flip it, they make astronomical amounts of money. Now, there are lots of downsides to selling to a private equity group. But the good news is that there are a lot of them out there right now. And what you can do is use them as A) really solid acquisition offers B), you can often play one off the other. So I think it’s actually a good time, despite COVID and everything else that’s going on.
Dan: I’ve noticed this with the FBA roll-ups, like the private equity, FBA roll-ups that, like their competitive advantages, realizing that the people growing these businesses like they don’t want to go through a sales process. And so they’re able to like, basically, simplify, will often, you know, to sell a multimillion-dollar business it can take, often longer than a year, right? That’s not uncommon at all. And what I think companies like, certain firms have realized like, ‘Hey, we can just offer these folks like, two times EBITDA, and a very clean package and like, get out of here in a month kind of thing’. And that’s really worked. A lot of people, founders, appreciate that to the chagrin of people in the m&a space.
John: I think we just have to look at the last 12 months to know that in a lot of businesses in a lot of cases, businesses have taken this pandemic on the chin, right? They have borne the brunt. It’s not the Facebook employee, you can work from home. A lot of small businesses, in particular, service-based businesses have absolutely been crushed. And so you know, many of them have now started to stabilize their businesses and have gotten back to a point that they were pre-pandemic, and are like, ‘I’m done. I’m out, I lived through 9-11, I lived through the GFC, the great financial crisis, like the Great Recession, whatever you want to call it, you’re gonna give me two times EBITA, here are the keys’. There’s a lot of that going on right now. A lot of people are burnt out.
Dan: Totally. Wow. I mean, this is a topic so near and dear to my heart, I feel like I’m a terrible interviewer for it. Everything is so triggering around every corner. Any parting shots, the audience here, they all want to have a great exit?
John: I think you’ve nailed half the battle already. I mean, if you’re a location, independent company, you’ve probably figured out a lot of what it takes to build a company that can thrive without you. And that’s really the definition of a sellable company, one that can thrive without the owner. And so man, I think you’ve nailed a big chunk of the hard part about building a valuable company. So, more power to you.
Dan: So one of the things I want to say about that is – I’m on my third company now, depending on how you count them, and there’s almost always a way that I could go out and increase revenue faster that’s not repeatable by other people. There’s always a way you can start burning up the phones and generating revenue. The question is, is that a system? Is that a product? Is it repeatable? Can it be sold to somebody else?
John: I couldn’t agree more. I think you’re absolutely right. The more you chase revenue for revenue sake, the bigger and maybe profitable your business gets to some extent. But it’s also not a valuable transferable asset. And I think every business that does that reaches a ceiling pretty quickly. It could be at 500,000 sales or a million in sales, 2 million sales where the founder just runs out of hours in the day, they’re burnt out, they’re stressed out, and they plateau. And so I think the way to punch above that plateau, when you reach it, is to really reconcile your list of products and services and ask yourself, ‘Which ones are more dependent on me and which ones are less dependent on me?’, and getting out of the business lines and services lines where it really depends on you, will give you a huge uptick in lifestyle, but it’ll also start to improve the value of your company.
Dan: Big shout out to John Warrillow. for coming by the show. You can find his trilogy of books and podcasts at ‘Built to Sell dot com’. Bossman, as you know, John really knows his stuff. And he focuses on businesses that are in and around our niche adjacent and so quite informative to get a sense for what our assets mean to the broader market, not just our customers. I think that’s a breakthrough idea, not just our own lifestyle, but the asset value of incumbent companies that are five to 20 times the size of our companies. So yeah, also, if you’re thinking about building a business with the sale of mine, which of course we advocate, check out the show notes of this program, and also a wonderful book by Bo Burlingham, which meant a lot to me, it’s called ‘Finish Big’. And also, we’re going to be returning back to this topic in future episodes, a lot of exits going on out there. A lot of buy-ups, lot of roll-ups, a lot of money, a lot of funny money floating around right now. So certainly something we will revisit and also want to give a shout out to service provider Pro, check them out at SPP dot co. They are lovely, lovely sponsors. Parting shots here Bossman on the concept of selling your business.
Ian: I think I probably talk to more people that regret it, then don’t. Just something to note there. Another thing to note is – if you’re selling your business today, versus when we sold our business, and it wasn’t that long ago, 2015. There are so many more options now, which is nice. There are a lot more brokers out there. There are a lot more marketplaces, there are a lot more buyers. It’s just a rich environment.
Dan: Well even Ian there’s a lot of more traditional m&a, like mergers and acquisitions, infrastructure-type companies or sales companies are focused on our niche two, which is like this trend we’ve been talking about over the years – more and more, quote, ‘real business people’ are looking at our businesses as: we’re the next generation of real businesses, you know?
Ian: Yeah, it’s so funny. Like, this company comes up, ‘Sunbelt Business Brokers’, they’re like some national chain of business brokers, I don’t know what their model is. But this is who I was looking at when we were selling our business. And now it looks completely ridiculous because they’re definitely a brick and mortar type operation that brokers pizza joints and stuff like that. But those were the options that were available back then. And this was just five years ago.
Dan: Like in 2015. One of the big things – there are so many touchpoints about this topic that are unresolved and ongoing, I mean, me and you walk up to each other all the time, just for fun and say, like, ‘What’s your walkaway number right now?’ Just to give ourselves a sense of what our optimistic numbers are, where we think the markets at for different assets within our portfolio. I took that away, I take this idea of the freedom line as more important than ever. The ‘too long, didn’t read’ version of our take on this is ‘know your freedom line’. There’s a lot of different reasons to regret selling a business, but one is like, you got to go over and you got to go do it all over again, right? Because you didn’t get to that point where financial questions are shelved for a lifetime, which is the freedom line. And John picked up on that right away, he’s seen that pattern. I think that’s a fascinating takeaway.
One other thing is really controlling this process, Ian. You know, we’re so used to setting up marketing funnels and creating markets and demand and selling and then you get to the biggest transaction in your life, and you kind of outsource it to somebody. And that’s why I think this concept of getting experienced sellers, advocates, people who can be in your corner, and the bottom line is, I’ll say something here, like a little naive but – my emotion, at least says, ‘I will never sell a business again, that’s not in a competitive sales process that I’m controlling’. I reach out to all the strategic investors, everybody to whom my business is worth more to them than it is to me, letting them all know what the timeframes are when the bids are gonna come in, all the LOIs are coming in. They’re gonna know about each other. It’s going to be a contest to pay the best price for this asset that’s valuable to all these buyers. And I don’t think anybody did anything wrong in our transaction. And I think it went down the way it probably needed to go down. But I don’t want to spend years of my life building the kind of asset that there aren’t going to be at least a few people in the world competing to buy that.
Ian: I hope we had to go through that so other people don’t and hear that message. But it’s so hard Dan, as you know, to start from ground zero and have that kind of vision that you’re going to build some kind of asset that’s going to be strategically acquired for a better multiple than if somebody was just buying your cash flow. It’s really hard to do.
Dan: It’s easier said than done.
Ian: It’s definitely something that we’re aiming for the next time.
Dan: Really cool to have someone with a larger depth and breadth of experience on the topic than us. And yeah, I think it’s given us plenty to talk about, so we’ll be back on this topic, with more coming down the pike. Thanks again for joining us on the pod. We’ll be here next Thursday morning. 8am Eastern Time.