Transcript | Drive the value of your business

Sarah Widmeyer: Welcome to Conversations on Wealth, a podcast dedicated to helping Canadians with your total financial picture. I'm Sarah Widmeyer, Director of Wealth Strategies at Richardson Wealth. And I'm so pleased today to welcome John Warrillow, founder of the Value Builder System, an online tool to help business owners improve the value of their company. John has authored a trilogy of books, which teaches business owners how to build, accelerate and harvest the value of their company. This includes the 2011 bestseller Built to Sell: creating a business that can thrive without you, as well as the Automatic Customer: Creating a Subscription Business in Any Industry released in 2015. And then, most recently, The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top. John is also the host of Built to Sell Radio, rated by Forbes is one of the 10 best podcasts for business owners. John, welcome, and thanks for being here with me today. 

John Warrillow: It's gonna be fun, looking forward to it! 

Sarah Widmeyer: Okay, so before we jump into the key drivers, why don't you tell everyone a little bit about your background as a business owner.

John Warrillow: Well, I've been involved in a few businesses, most of which have been in the service industry. My last one kind of got me into this line of work. I used to run a quantitative market research business. We helped a lot of big Canadian companies - Bell Canada, Rogers, Royal Bank, BMO, understand and market to the SMB space. And I remember we built it up to, I don't know, $5 or $6 million in revenue. And it was a profitable company - it was a service based business, quantitative market research. Every client was different, every project was different. So it was quite profitable. And I think we were 20-30% profit margin, something like that. And I sort of rub my hands together, thinking, Oh, this is gonna be a really valuable company. And I went to see got a Perry Miele. Perry is a mergers and acquisitions professional based in Toronto. And I said, Perry, what do you think it's worth? And he said, Well, you're in the market research business. Let me ask you a question. Who does the research? I'm like, Well, I'm involved in something. I mean, these are huge clients, right? These are massive. He said, Okay, well, who does the selling? And I said, Why? You know, I, if Bell wants, you know, I gotta go see them. Right? He says, Okay, let me get it, you got a research company, you do the research and you do this selling? I said, Sure that's one way to put it. And he said, All right, well, there's nothing here to sell, your business is worthless. And I remember, I remember the day like it was yesterday, it goes back 20 years ago now. But what he was pointing out, was that the business was too dependent on me, and that his bat structure, it wasn't sellable. And so, long story short, we made some major structural changes to that company, we put in a subscription model, etc. And it ultimately was acquired by a publicly traded company. It had a happy ending to the story. But it's sort of kicked off for me a journey in... as business owners, I think we spend so much time in fact, Business School 101 is like, follow your profit and loss statement. I mean, that's the most important document you have. Yet what I learned from Perry is that a P&L is important, but not the most important thing that you need to think about if your goal is to is to build a valuable company, there's actually a bunch of other things. And so I've been on the sort of 20 year journey trying to understand, you mentioned the podcast, I interview entrepreneurs, about their exit. And part of that is just my own personal curiosity about the subject that, just really deeply curious about what drives the value of a company in the eyes of acquirers. That's my a little bit about my background.

Sarah Widmeyer: Wow, what a wake up like, what a shocking. Oh, I can only imagine. So, through this research, and through these conversations you've developed or come to eight key things that can drive the value of a company. Why don't we take some time and walk through that?

John Warrillow: Yeah, for sure. I mean, we probably don't have time for all eight, but we can certainly dig into a few big ones. Yeah, you know, there's a couple that are, you know, obvious, you know, financial performance of your company is important. And I don't want to minimize your revenue and your profitability are absolutely critical elements of the value of your company. But there are others. So one of the biggies is recurring revenue. And again, if you put your acquirer hat on for a moment, and you say, Okay, what would you look for if you were looking to buy a business? Well, you were going to look for businesses going to succeed after the owner is removed, right? Because you got to pay them for the business. And so, recurring revenue gives acquires a high degree of confidence that the business is going to continue. So right now in Canada, for example, security companies, home security companies are being acquired and those businesses have two forms of revenue. They've got installation revenue that they charge you to come and install the keypads and wire up the sensors on the windows and so forth. And then they've got monitoring revenue. And the monitoring revenue is the $29, $39 a month we pay so that if there's a break in that police are called. Well, right now in Canada, for every dollar of installation revenue, you have an acquirer will pay about 75 cents. For every dollar of recurring revenue you have and acquire will pay about $3. set another way, your recurring revenue is worth like three, four times every dollar of one off installation revenue. And when I say that Sarah, a lot of people say yeah, but like, I'm not a software company. I'm not a media company. I don't have an annuity stream, that's just not the business we're in. We're a manufacturer, we're a distribution company, or a retailer. It just wouldn't work that way. And I tell them, in that case, the story of H Bloom. So H Bloom is in a business selling flowers. And if you want to talk about a crappy business to be in, let's talk about selling flowers. Mother's Day and Valentine's Day make up 70% of all flowers purchased. It's incredibly lumpy, right? You're selling inventory that is dying in your refrigerator, right? Within a month most of its dead. A typical flower store throws out more than half of its inventory every single month because it gets wrong, how much stuff to buy. Along comes these two guys Sanju Panda, and Brian Burkhart. And they look at this business of selling flowers. And this is totally broken, right, there's got to be a better way. And they realized that there was one type of buyer that buys flowers on a regular cadence. And that is hotels. Why? Because we all want that sort of, you know, to go to a four or five star hotel, you want to sort of have that very boutique image, right? I daresay there's some Richardson Wealth offices that have fresh cut flowers, right? Because they want to cater to a very established audience. And so these guys said, Why don't we sell flowers on subscription. And they built a subscription for hotels, the average lifetime value of an H Bloom subscriber is more than $4,500, they make one sale. And they get $4,500 worth of value compared to the average transaction in a flower stores around $50. Which business would you rather invest in? Right? It's recurring revenue, that can make your company incredibly powerful and valuable. And again, I think almost any business can create some recurring revenue. And it's the first step. Whether you're a retailer, a distribution company, manufacturing company, is to segment your customers like H Bloom, did. They were trying to create a subscription for everybody who buys flowers? Right? They were saying no, no, this is tiny slice of the market - hotels - that buy them on a regular cadence. And I think that's the step you need to take if you're interested in kind of figuring out your subscription model, regardless of what industry.

Sarah Widmeyer: Okay, so that is one, is it one? Or is it two? I know we're not going to get to a but. 

John Warrillow: [laughing] You're looking at your watch? Like, if that's one, man, we're gonna be here for three hours. 

Sarah Widmeyer: [laughing] So, okay, so give me another one.

John Warrillow: I think this one is one that is really misunderstood and often underestimated. It basically comes back to the idea that if you're looking to get your business acquired, in particular, by a large company, which most small businesses are kind of keen to do in a strategic acquisition, you have asked yourself, like, why would they buy you? Why wouldn't it just compete with you? If they're a company, and there's a thing called the 5 to 20 rule, which suggests the average business is acquired by business 5 to 20 times its size. So if you're a company that's between 5 and 20 times the size of this little business you're thinking of acquiring, why wouldn't you just compete? And the answer to that is that if you've built something in your company that's so unique, so different, that it would take longer or cost more to replicate what you've done, than the acquirer is going to actually just say, why don't I just buy this company, it's gonna be cheaper if I just buy them. And so what that means is that you've got to invest in something that you are really, truly world class at. Something that nobody else does.
And what most small businesses do in contrast, is exactly the opposite. Most small businesses, when they get a few customers, they've heard the idea that it's 10 times cheaper to cross sell your existing customer a new product than it is to go find a new product. So what are the things can we cross sell? Well, the problem with cross selling is every new product you cross sell, you're diluting your value proposition. You're diluting in most cases, your point of differentiation. So you end up with a mile wide product or service list. And maybe one or two are differentiated, but most are not. And when an acquirer looks at you, they look at you and say, Well, why would I bother because all these undifferentiated things I can go acquire, I can go basically compete just lower my price. Whereas if you invested all of your resources in one thing, doing one thing better than anybody else, you ultimately get something that is hard to compete against. You get what Warren Buffett calls the competitive moat, which is when it makes more sense for an acquirer to buy the business rather than compete.
I'll give you an example, Stephanie Breedlove is a woman I had on my podcast a while ago. She built a company in the payroll space. But she had a unique niche. She had a kid, she wanted to have a nanny, but she wanted to pay the nanny legitimately. So they called up ADP, or one of the big payroll companies, and her phone call was sort of transferred a bunch of times because nobody knew what to do with this lady who wanted to pay one person, like they're used to dealing with 1000s of seats, right? And so Breedlove goes home to her husband that night. And it's like, there's got to be a better way here. And they say, why don't we create a payroll company for just parents who have a nanny to pay, because there's all this government red tape and all these rules, you got to jump through. And and she's like, why don't we just do this and do this one thing?
Well, 25 years later, two kids later, she built a really successful business. $9 million in revenue, 10,000 customers. Both kids around the house, she wanted to go on to the next chapter of her life, she thought, you know what, maybe I'll sell it. So she approaches - your kids are older, so you may not know them. But you plug in your postal code, it'll give you baby sitters five star rated in your local market,. Well, the time had 7 million subscribers. 7 million parents who need a nanny, 7 million parents who need to pay their nanny. Breedlove said, why don't you just buy my company, we've developed all this IP, all this methodology ways to interact with the government that gets these payroll systems up and running quickly. You're a giant company. If 1% of your 7 million subscribers by my payroll service, that's a business seven times the size of my company today. Now, imagine 2% of your customers, 5%, 10%. I mean, it boggles the mind.
Anyways long story short, bought Stephanie Breedlove's little $9 million business for $54 million. Six times revenue. It's a number that if you talk to an evaluation consultant, it would like there's no valuation wouldn't make any sense if you're just looking at the dollars and cents. But it doesn't, it sort of fails to really recognize why strategic acquisitions happen. And again, it's because for Care, it was just way cheaper, way faster to buy Breedlove than to try to replicate what she created. And that's why, you know, everybody under the sun, when I talked to Stephanie, she what she said when I when I reached 300 grand in revenue, which is nothing, it was like her and one assistant. She was trying to figure out how to grow and a consultant told her, well you should cross sell those customers you've got on payroll other things. Busy parents need lots of stuff, right? They need home delivery of meals, they need snow removal they need like all this stuff. And Breedlove, like almost went down that road of basically cross selling a bunch of stuff to a few dozen customers. And to her credit, she did not. She decided to take the much harder road, which is to go find more parents who have a nanny to pay doubling down on her unique point of differentiation.
And again, I think it's another area Sarah, where what we talk about is chasing revenue, right? Entrepreneurs puff out their chest and say, Oh, we hit 5 million or 10 million in revenue. And while I think revenue is important, it's not the end of the story. Right? Profitability is important. And it's but it's just one of eight drivers. And I think once we start to understand that it's a more nuanced sort of approach. There are many things that drive the value of your company. And by the way, you can punch well above your weight, if you understand some of these things. Because acquirers, when we evaluate a business, it's much more than just the the profit and revenue of the company.

Sarah Widmeyer:  Wow. Okay. So we're starting to run out of time. But I wanted to ask you one last question. If there is one piece of advice that you could give someone who's listening to this podcast thinking, Okay, yeah, maybe it's time to sell, not sure. One piece of advice you could give them. Obviously, buy the book, get all eight tips and the lessons that you've learned and all the information you're gathering. But is there one piece of advice you could give our listeners?

John Warrillow You know, I think the advice I would offer is to think about why you started your company in the first place. And I think for a lot of entrepreneurs, I mean, sure, there are some entrepreneurs that want to be the next Shopify, they want to be the next Tesla, whatever. And those are great. They fuel our economy. Those are amazing. But I think for most business owners, the answer you would get is I was searching for freedom. I really aspire for independence. I don't want anybody telling me what to do. I just want to call my own shots. I want to control my destiny. I want to control my life, and I want freedom. And the ultimate freedom of course, is financial freedom, which I know you talk a lot about. We talk about this thing called the freedom point, which is the point of time or the sale of your company would create enough liquid wealth that it would allow you to live the life that you aspire to have. If you sold that business, it would create enough liquid wealth that you would essentially be financially free. And I think when you reach that point, I think it's worth asking yourself the question is now the time? Or do I want to double down, like the blackjack player in Vegas, double down and get to the next tranche of revenue. And Warren Buffett has a funny saying, I think I'm going to try to paraphrase. He's like, why would you risk something you value for something you don't. And for most of us, I think financial freedom is very deeply rooted in our desire for independence. And once we reach that, it's only truly crystallized when we sell our company. And God knows the pandemic has been a curveball for a lot of people. But for a lot of businesses, and particularly service companies, they've reached this point where they had this great business, and they were sitting on what they thought was a great retirement plan, only to find out that it wasn't as safe as they thought. And now they're licking their wounds saying, I wish I'd sold. And so I would just encourage people to say, when you get to that point, when the sale of your business would create enough liquid wealth to lead the lifestyle that you aspire to have, am I willing to keep all the chips on the table and put them all back on the next hand? Or is it worth taking some off the table and saying, maybe now's the time for me to do a deal, where I make some of this illiquid wealth liquid? And so that's probably the advice I would share with some of the folks.

Sarah Widmeyer: Awesome. Thank you. This has been so enlightening. 
We hope today's conversation gives you the pieces to help drive the value of your business to where you want it to go. Your Richardson Wealth Advisor can certainly help you along the way. Subscribe to John's podcast, Built to Sell Radio, and find more information about his books and the Value Builder System on John's website, Visit the Richardson Wealth website for more articles and videos for business owners. Remember to follow Richardson Wealth on LinkedIn for the latest in wealth strategies. Conversations on Wealth is available wherever you get your podcasts. Thank you all for listening today. Thank you, John. And please join me again for our next conversation.

The opinions expressed are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Past performance may not be repeated. Richardson Wealth Limited is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.