Many times, a business owner starts up his company with an eye to selling it one day, rather than holding onto it forever. There are many reasons for this, as I found out when I spoke to John Warrillow, author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of a company called The Sellability Score.
Here is a transcript of our interview. To listen to the actual interview, visit GoldsteinOnGelt.com.
Douglas Goldstein: What were you hoping the average business owner would get from reading your book?
John Warrillow: I think the average business owner wants to believe that they are building an asset that they could exit from one day. When I talk to business owners, they say, "Yeah, I want to sell my company 5 or 10 years from now," but most of them will say that they want to believe that they are actually building something at value, like a stock market account that is growing in value over time. So what I really want to try to achieve with the book is to say that when you want to sell it a year from now, or 20 years from now, your business should be growing in value.
Douglas Goldstein: How do you compare those to a person building stocks and a person building his business?
John Warrillow: For a person building a business, obviously they have total control over the value of the company. They make all the decisions. If it goes up or down, they sell them so they have a 100% control. Most business owners have most of their wealth tied up in their business. Businesses tend to be a great wealth accumulation vehicle. The challenge is making that wealth liquid. The stock market generally is a well-diversified portfolio of stocks and bonds, etc., and over 20-30 years generally can uphold together a 5, 6, 7, 8% return, whereas a very concentrated position in a single business, i.e. your own company, should deliver a higher return if you focus on it in a savvy way. The challenge, of course, is making that wealth liquid, and that is really about pulling yourself personally out of the company so that when a buyer comes to buy that asset, just like when they go to buy a stock or bond, they can see how that asset is going to improve in value when you, the owner leaves, rides off into the sunset.
Douglas Goldstein: Is there a parallel number or a parallel average you've seen in smaller business, so you could say that businesses over 20 years have an average return of X?
John Warrillow: What we do at www.sellabilityscore.com is track the value of companies, and I can tell you that the average multiple of earnings that a typical business will be offered when they go to sell their company is 3.3 times pretax profit. Now that is a global piece of research that spans users of our tool from all over the world. The 3.3 times pretax profit may sound quite low for some of your listeners hoping to achieve a better multiple or better valuation. That is across the entire user base. If we isolate those companies that have revenue of at least 3 million and no more than 50 million in overall revenue total sales, that multiple goes to 4.6 times pretax profit. And if we isolate those companies that achieve a sellability score of at least 80 out of a possible 100, that multiple goes to 6.1 times pretax profit. So I can't give you a historical number, but what I can tell you is that there are some drivers that will drive up the typical valuation of a small business.
Douglas Goldstein: Some high-tech companies were bought out for many times more than what they earned. Here I think you're talking more about non-high tech companies, or is this across the board?
John Warrillow: This is across the board, when we look at all companies from all industries. But I would agree there are some exceptions, some businesses that are in a very unique position that are acquired for what is called typically a strategic acquisition. This is where, instead of just buying the future stream of profits, which is the way typically businesses are bought and sold, the company comes in and buys the business, not for its future stream of profits, but what that business is worth in the hands of a new owner. Skype, for example, was a company that was losing money on paper yet Microsoft paid $8.5 billion to buy Skype. So they weren't buying the future stream of profit. What they were buying when they bought Skype was the ability, with hundreds and millions of users, as well as the ability to integrate the Skype application into various Microsoft products and hopefully sell more Microsoft stuff.
One of the things that I think a lot of business owners make a mistake with is when they say, "Company A is going to buy my business because we're going to be able to sell more of our stuff, because they're an acquirer. They have more customers that will buy our stuff." Actually, if you want to get bought by a strategic, you need to flip that thinking on its head and say, "If a strategic comes and buys our business, how much more of their stuff can they sell by adding our stuff?" So if they bolt your company onto their company, how much more of their stuff can they sell? So in Skype's case, it was how much more Microsoft stuff - Office, X-Box, etc., can they sell by integrating Skype, not how much more Skype can Microsoft sell? It's a very subtle but huge kind of sea change thinking when you want to be bought by a strategic.
Douglas Goldstein: If you were to describe the theme of your book, what would you say it's all about?
John Warrillow: It's pulling the owner out of the day-to-day operations of the company. A lot of owners are the go-to guy or gal for their business. Your customer has a problem, so they call the owner. A supplier needs an approval on the quote, so they call the owner. An employee wants to take a vacation, so they call the owner for permission. Everything falls to the owner. It's like if you can imagine a wheel with a hub in the middle, the communications are the spokes, and everything comes out of the hub.
What that does is create a very efficient communication style for the business owner. The business owner is just constantly triaging issues like an ER doctor would triage patients coming in, but it makes an incredibly unsellable business, because obviously when a buyer comes along and says, "What am I buying here?" if the owner falls away or rides off into the sunset, there's nothing left to sell. So to be a sellable company, you've got to really pull yourself as the owner out of the day-to-day operations, so that it can run without you, and that's when running and owning a business becomes a lot more fun. You could take vacations without taking your mobile phone. You have free time, and you can enjoy time to your family without feeling like your business is suffering. That's really the theme.
Douglas Goldstein: It sounds very similar to a book that I've read, and I know you've read it as well, and I had the author of the book, called The E-Myth, on the show - Michael Gerber. He spoke to us about how important it was to just focus on the one thing that you do and leave everything else to your team.
John Warrillow: Michael Gerber is an amazing writer, and he has obviously written the quintessential bible for the small business market. He does talk about the core theme of working on, not in, the business and I agree wholeheartedly. One of the things that I might extend the idea to would be to talk about recurring revenue because again, a lot of business owners are the expert in their field, and as a result, the customers come to them and say, "I want you personally to work on this project or sell me this product because I know you personally know whatever it is they are selling," and that can obviously make it very hard for the owner to step away.
What I'd encourage owners to think about is how to move from what would be a kind of a sell-do business model, where you're constantly reinventing yourself, to more of a subscription-based or recurring revenue model, where customers sign up for a recurring building relationship with you as a company that you can then predict out the future of your business and you and the customer are aware of what the relationship is.
I will give you a quick example. Mosquito Squad is a company in the United States that sprays your backyard if you've got mosquito problems, if you've got mosquitoes that affect your outdoor living space. You can't have a nice barbecue with your family because you're constantly getting bitten by mosquitoes. They come and spray your backyard to make sure there aren't mosquitoes. Typically, these businesses work on a kind of a one-off basis. So you have mosquitoes, you call a mosquito company in to have it sprayed. What Mosquito Squad has done is create a recurring revenue stream, where the customers sign up for an annual bug protection program, and Mosquito Squad goes in once a month to spray. You then have that auto-renewal relationship with your customer and can build up your recurring revenue. You're not trying to stimulate demand every time that the customer has an issue. Recurring revenue could be a key way to do that.
Douglas Goldstein: Do you think that is as good for the customer as it is for the business?
John Warrillow: I do. Customers don't want to be worried about whether they're going to be having a barbecue with friends over and they are getting bitten by mosquitoes. One of the 10 subscription models I've written about in my new book is called the "simplifier model," and it really relates to the idea that we've got too much stuff going on. There are just too many things fighting for our attention, whether it's all the social media applications we're part of, whether it's all the commitments we make personally for our kids and so forth. There are too many programs, just too much. So the more we can simplify the lives of customers by saying, "You know what? Don't worry about it. If you have a swimming pool and you need the chemicals rebalanced every two weeks, and you need to open it in the spring and close it in the fall, don't worry about it. Sign up for our annual pool maintenance program, and we will worry about it for you." There's a huge premium to be won, I think, by companies that take a load off their customers, that take a to-do off a to-do list of their customer, and people are willing to pay to simplify their lives.
I occasionally would do a talk to support the book, and I was at a talk recently, and someone told me about something called the Yesable Proposal. Basically, he is a business owner that was hub-and-spoke business owner that was getting every kind of question coming to him, and all of his employees typically were dumping the problems of the business on to the owner, asking for what to do, what should I do about X and what should I do about Y. He instituted what he calls the Yesable Proposal, which basically means that in order to go to the owner of the business, now the employee has to frame the issue in a question that can be answered with a yes or no. So that forces the employee to really think through and explain, "This is the issue, and these are the three alternatives I've thought through. This is a little bit of research that I've done. Are you okay if I do X?" Guess what? Ninety-nine percent of the time, the employee has done the work. They figured out what the right answer is, and the business owner simply needs to send an email back saying "yes." I can't take ownership of that intellectual property, but I've adopted it in my own company.
Douglas Goldstein: How can people get your book and find more out about what you're doing?
John Warrillow: The best thing to do is get your sellability score. If you're curious to know if you could build a sellable company, or if you have a sellable company, just go to www.sellabilityscore.com.