Chris: Welcome to Process Makes Perfect. I'm Chris Ronzio, founder of Trainual and today I'm here with John Warrillow, the author of one of my favorite books Built To Sell. So in addition to being a bestselling author of Built To Sell and his next book, The Automatic Customer, John has started and exited four companies. So he is one of the foremost experts on B2B marketing for small businesses and we are thrilled to have him here. John, thanks for being here.
John: Thanks for having me.
Chris: So I first read your, your first book Built To Sell five or six years ago. It was being passed through the circle of my friends and everyone wanting to exit their companies. And I actually read it again cover to cover last week. And my wife was interested and because of the format that you wrote the book in – if you haven't read the book, it's written in a fictional style where it's a story of this guy, Alex, and his agency as he tries to position his company for sale. So it was so intriguing that my wife took the book from me and she read it cover to cover. And so I think that says something. What made you decide to write the story in that format?
John: Yeah, a good question. I think because I wanted to write, I'd done four exits for building four companies in each of them, I'm under confidentiality agreement. I can't talk about specifically what happened in any one of the exits. So by creating a fictional story, it allows me to just make it all up. And so in within all of that story, there are little sprinkled lessons from both my own personal experience along with the stuff that I've heard. But as soon as you make it public and say, this is what happened to me, you have to dilute it down so much that it becomes boring to read. So it's a compilation of lessons I learned through my own exits along with, I ran a company where we interviewed 10,000 entrepreneurs a year. We did quantitative market research. And so I've spent a lot of time talking to and interviewing and listening to the stories of entrepreneurs. So it's kind of an amalgam of all that. And I thought the story was a good way to do it.
Chris: Yeah, the format was so interesting and there was this one situation early in the book where the entrepreneur was out to lunch with a customer. And I remember reading this paragraph where he was afraid to pay for the bill because he thought that it might be over the limit, but he was excited about the credit card points and I just laughed and thought you'd nailed so perfectly the small business mindset. Obviously you have some experience.
John: Yeah, I've been the guy with the Amex going, “Oh, do you think the, the gods back at compliance are going to let this card pass one more time?”
Chris: Yeah. So at the end of the book you have an implementation guide, which I also found really interesting and it's kind of a step by step sequence. So after you go through the story, here's the roadmap, here's how to do it. So in your four exits, in four experiences building those companies, did the recipe change a bit over time? Or how did you, how did you put that formula together and writing the book?
John: Yeah, again, it's kind of an amalgam of, of experiences. I don't know that it changed. It probably got more refined. I'll tell you what did, we did get much more pronounced as the importance of recurring revenue. I sort of understood recurring revenue at a high level and yeah, of course, recurring revenue is important to an acquirer. But I really had no idea how important it was. And so, you know, we'd done a bunch of research, a valuable that are in shows that are these eight key drivers of company value, what acquirers look for and recurring revenue is arguably the most important. And it's one that you know, a lot of entrepreneurs when they hear recurring revenue, they think SAS companies, right? They think, oh yeah, well that's great for SAS Company, but you know, I run a food truck or I run a flower store or whatever, it wouldn't apply to me. And I think that's a mistake because, you know I think virtually any industry can create some recurring revenue. And of course it just makes your business so much more valuable to acquirers.
Chris: So as you're developing a recurring revenue stream, how important is specialization in terms of that recurring revenue model? Is it that you are specialized in a few products and services and that you charge in a recurring revenue format or is it a few different revenue streams?
John: So specialization I don't think has a lot to do with recurring revenue. I think the reason as an entrepreneur you want to specialize is because you're putting finite resources, very finite resources against one idea. And as soon as you dilute that by going after two or three different target market segments or with two or three different product ideas, they'll all fail because you're just taking a very small amount of money or resources and diluting it and dissecting in two, three, four ways. So, from my experience, I would pick one target segment and at least until you're a million or two in revenue before you start worrying about what the next target market could be or what the next product could be when it comes to recurring revenue that's really, I think, a slightly different idea. Like you could look at you know, something like a Netflix where there's obviously it's an entire business model based on recurring revenue. There's all kinds of different customers at Netflix. Most are consumers, but there's all kinds of different customers. So they've got tremendous variety among their customer pool. But it's really selling the same solution, if that makes sense.
Chris: Sure. So when you set out to build a business with the intention of selling, or maybe not, do you pick the, the thing that you're specializing in out of the gates or do you think it's important to try a lot of things and like your character in the book, then look and understand what you've done really well and what's worked the best?
John: Look, I think if you can niche down to begin with, you're gonna cut your an accelerate your speed to scale much faster. And I got this wrong in virtually every business that, that, that I've run. I'm not really a planner, a much more iterative. And so I've done, you know, my typical model is it kind of put a bunch of stuff against the wall and see what sticks and that's burned me a few times. And so if I were, if I had the rigor or to do it over again, I think kind of trying to think through a little bit more. What is the offering a, I think shortcuts you a lot. So in lean terminology, it's kind of popular these days to talk about, you know, your basic product that you could market and sell. I'm a big fan of that. But I wouldn't, I wouldn't try to create three basic products. I try to create kind of one concept and say, you know, we'll, you know, does this AV likes, can I get somebody bought?
Chris: So the more specialized you can be out of the gates, the more time you can cut down as you're trying to build a sellable company.
John: Absolutely. Yeah. If you're not specialized out of the gate, you run the risk of running out of money. You run the risk of creating a bunch of businesses that need different staffing models. You need different people with different expertise and then you've got a round peg in a square hole. How do I get rid of this person who I've hired to do x where I realized that I actually need y? Like it just creates a bunch of mess, which I've lived through many times. So I would, if you could specialize early, figure out kind of one product, one service, one target segment and try to get that off the ground before you start to go too wide with with what you're offering.
Chris: So for businesses that already exist, like the Stapleton agency did in the example in your book looking back at all of the different products and services that they offer, are there certain things that you recommend they evaluate those those, those offerings based on, to see what they should really decide to, to go all in on?
John: Yeah. Valuability we use this model called TVR. It stands for teachable, valuable, repeatable. So basically what you would do is you get a whiteboard and you write down all the services and products that you sell, and then you would score them on three, three dimensions, how teachable they are to employees, how valuable they are to customers and how repeatable they are. Many how, what kind of recurring revenue stream you can get out of that, out of that product. And then really what you're looking for is the service or product that scores highest in an aggregate across those three dimensions. And that's your TVR. And that's really where I would start.
Chris: Got It. Okay. So if you decide that you've picked the one thing that you're going to focus on and you're going to say no to everything else, it's almost definitely going to impact your revenue. And as most entrepreneurs try to build their business, they think the more revenue I've got, the more attractive to an acquirer or how do you think about the difference between revenue and the actual value of a business, even if revenue shrinks as you're pursuing this?
John: Yeah. So, you know, when an acquirer looks at buying a company, they're making a build or buy decision, they may not tell you that, but essentially they're looking at your company and saying, did they have something that that's really truly unique that would take us a lot of money or a lot of time to replicate? Or is it something that we could just go replicate without acquiring the company? If the latter is true, then they won't buy your business. They'll simply try to compete with you. Right. And so the latter is true when what you've created as a commodity or something that's not really differentiated. And so if you're responding to RFPs, for example, to just get to the next level of revenue, it may feel good. But it actually doesn't get you very far because at acquire, we'll look at that revenue you gain through winning an RFP.
John: And in many cases they'll look at it and discount it drastically because they'll say, you know, that's, that's, it's really just being acquired through better pricing. And the same rules that made them go to the RFP in the first place means that they're gonna have to RFP the business in a year or two anyways, and we'll go through the same song and dance. So if you’re bidding on price or selling on price, for example, in an effort just to build the top line of your revenue, it's a bit of a fool's errand in the sense that you're really not adding any value to your company and you're creating a lot of complexity. Where acquirers look at a business and they say, “Wow, I want what they've created.” You know, like when Microsoft bought Linkedin as an example, they looked at that and said, man linkedin is the professional social network.
John: They've carved out some unique territory against Facebook and the others at the time. You know, would take us years and billions to create that, let's go by that because that's a strategic asset for us. You know, if it were a generic me too Facebook at the time, they wouldn't have bought it because there was no point in differentiation but they looked at it as a professional network. They want to move more office three 65 subscriptions. It felt like a good purchase. So, you know, maybe beyond a recurring revenue, how differentiated your offering is in the marketplace, how unique is going to be one of those kind of key drivers of company value? We call it the monopoly control of valuable words. It's our little name we use.
Chris: So you naming things, I noticed in your system you've got a, a lot of names for things. And even in the book they called it the five step logo design process. You know, a lot of companies won't apply that type of unique branding to what they do to distinguish themselves. So is that something that you always recommend when you're trying to increase value?
John: Yeah, for sure. Yeah. I mean take ownership over the nomenclature, right? Create your own blue ocean, your own category of one. As soon as you define yourself as a generic category, like I'm an accountant or I'm a massage therapist, it invites for the customer the ability to compare you with everybody else. So you're an accountant. Great. Well there's three other accountants down the street and they charge $200 an hour. Why do you charge $300 an hour? You're all of a sudden commoditizing yourself. Whereas if you've got the 12 step financial management system or you know, fill in the blank, you've got something that makes you unique and special when you've got something different. You have pricing authority to some extent when you have pricing authority, better margins, and it creates a domino effect. So, really you want to own the nomenclature around your company, the naming, the branding because it gives you a point of differentiation. Yeah, you could call yourself a generic bike shop or generic massage therapist, whatever. But really what you want to create is something unique, that you're a blue ocean or a category of one
Chris: Great advice. So as you're building a company and you know whether you want to sell it or not, actually that's a great point you made at the beginning of the book is when you're building something to sell, it's really building with the option to sell, right? That if you build a stable company that is valuable in the eyes of an acquirer, you can decide to keep it. And that's a perfectly fine option. So of all the steps on the way on that path, where do you see most small businesses struggle to create value in a business that could sell?
John: Yeah, I mean and it's why I think what you do is so good and so important for business owners. It's really structuring a business so that it can thrive without the owner. You know, that's the one, if you could draw a common theme or thread across all of the eight drivers we measure, it's really can this business thrive without the owner? And if the answer is no, you really don't have a sellable company. But if the answer's yes, you've got something you might have something, in many cases you will have something that will be attractive to an acquirer. And so thinking through everything through that lens, including how you're systematizing the business, right? Like how you're training employees to be able to deliver on what you offer when you are not there, what are the training systems that you've got in place so that you can, your business can actually succeed without you, the owner. That's really the big theme, if you will, across everything that we do.
Chris: I love that. So we talk at Trainual a lot about, you learn to do something and then you have to document it and then you can delegate it. And that three step process of figuring out how to do something consistently, how to document it and how to delegate it really creates value in the business. So in the book, you talk about an instruction manual and creating a step by step instruction manual. A lot of the companies that we talk to say, you know, that sounds good, that's a project I'd like to get around to, but it's never urgent. So how would it, what do you say to that when people
John: You've hit on something that is so important. It is the quintessential problem in, in what we do. And that is that building value is never a burning platform, right? Unless you're six weeks away from selling, in which case it's way too late. It's always a Stephen Covey talked about the four quadrants. It's always the highly important but never time-sensitive. Like you can get through another day without documenting the process for, you know, turning on the lights in the office in the morning. Right. You can get through one more day. You can show up early and make sure the lights are on it's never going to be the, you know, critical burning bridges. So I think somehow you have to manufacture that. Whether you hire a business coach or you use a Google doc with tasks, whether you, you kind of name and claim some sort of a promise to the world, like, you're going to get this done by this date, you're going to document this system and there'll be penalties.
John: If you don't, you have to somehow manufacture that urgency because your business won't do it for you. Your business will always be thirsty for another sale, another employee that needs his vacation approved or whatever. There always be a burning, you know, fire that you're asked to deal with. It's never going to be documenting that important system. And so it's one of the main reasons that so many businesses failed to sell this. You know, that only one out of every 10 businesses listed by a business broker actually ever transact, ever sell. So these are guys who have built businesses for 10, 20, 30 years, right? Gone into the process of hiring and you know, and just to mediary still, only one out of 10 of them actually sell. And so, you know, the other nine are left empty handed. So this stuff's important, but it, it does take someone with tremendous discipline to, to put the big rocks in as Stephen Covey says so eloquently. So I don't know the answer to that one. Let me know if you ever figure it out.
Chris: I will for sure. So another question that we get asked is, is there an inappropriate company size or a level of maturity that you begin to document? When should you start to standardize your processes in the business.
John: I mean, the obvious answer is when you've got employees and so much is changing in a very young, early-stage company that you can spend. I think a lot of cycles documenting processes have changed dramatically. So I think you're probably a better expert to ask on that, but in the very early days you know, if your business is pivoting and changing, you, you may end up spending too much time documenting process and not enough time figuring out what's gonna stick. But as you start to zero in on what they call a product, you know, product market fit. So when you start to see, okay, this product seems to work with this kind of customer, maybe you've hired your first employee or two. You know, I think that's when you start to document when it's not going to frankly be wasted effort.
Chris: Now, how long before you want to sell the business should you really start getting serious about making this plan and whether it's a transition plan or a plan to document, or how in your experience and in the four companies you've built and sold, what's that timeline like?
John: Yeah, so I would say early, as early as you can possibly do it. It's funny, the more you can start making decisions about your business through the lens of how would an acquirer think about this? I’ll tell you a story. I do this podcast and I interview different entrepreneur every week and say like, tell me about your exit is all about companies who sold. And I interviewed this guy who had a frozen yogurt company and he said I said, you know, I was describing the business and he said, yeah, I went to market and I always wanted retail stores. Like I wanted people to recognize me in the community. So I wanted retail stores, my frozen yogurt. But he also made the frozen yogurt and he sold it to Kroger's and other big grocery stores. And this is like a pretty big company, 60 or $70 million.
John: I can't remember the exact amount, but you know, substantial company. And so he goes to market with this hybrid business, right? Like it's got some retail stores and they also manufacturer this frozen yogurt. And he says when he went to market, he got crickets. People either they kind of knew what to do with a retail company and they knew what to do with the distribution food brand. But this kind of hybrid of a food brand that also had its own retail stores was just kind of an anomaly that they didn't know what to do with. And so he got virtually no, in fact he got no offers for the company. He went in a fire sale basically and sold off the business for just the distribution business, i.e. the brand and the distribution in the stores like Kroger. And literally the day after he made that sale, the acquirer shut down the retail stores.
John: So all of the, the millions of dollars and the hours and years of headaches managing that retail sort of footprint was for not, it was a complete red herring. Something that he could've put, you know, grown a business much more carefully and successfully. You have to just focused on what an acquirer would value. And so I've always stuck with that story in my head is if he had been thinking early, what would an acquirer value, what acquirers value is the brand, the distribution into the retail, big box food stores, they don't value a bunch of minimum wage employees on street funds selling ice cream. It's just, that's just not what acquirers care about. And so had he known that going in, I, you know, even though he might've been 10 years away from selling, he would've made different decisions in his business.
John: And so I'm a big believer in to your earlier point, whether you want to sell now or in 10 years, if you can start to think through the lens of how would an acquire think about this. I think it makes a ton of sense. You almost have to put your investor hat on and look at your business as an outsider and wonder how much you would buy it for. Yeah, exactly. And ask yourself would I buy this thing for what I think it's worth, right? If not, why not? Right. Is it because it's too dependent on you personally? Do you have too much customer concentration as one, you know, client generating most of your revenue? You know, have you done a crappy job documenting what you do? Do you have a crappy brand? Are you buying revenue? Like there's all kinds of reasons why an acquirer would look at your business and say, I'm not interested.
John: But the common theme is would your business succeed without you personally running it every day?
Chris: Right. And going back to your book, I mean, it started off with an example of someone wanting to sell their business because he didn't want to be in it anymore. And he was faced with the reality that, well, a business that you don't want to be in anymore isn't very attractive to an acquirer.
John: It's the horrible truth about what we do is that, is that the moment you want to sell is like the moment your business is least valuable, right? And the opposite is true, right? Like when your business is the most valuable, you'll never want to sell it. And so it's the irony of what we do is that you know that when, when people get burnt out and they get tired of their business, it's exactly the wrong time to sell it.
Chris: So it's just one of those ironic things. So if you're following your playbook and going through your implementation guide and building a business that does have value, a lot of entrepreneurs wonder, what is my company worth and are there back of the Napkin calculations or, or what resources would you recommend for someone to try to understand the dollar value they could put on their company today or maybe what they're shooting for in the future?
John: Yeah, go to valuebuilder.com and you'll actually get that. We have a questionnaire, you can take about 15 minutes to complete it and we'll give you a score out of 100. We'll also get you connected to one of our certified value builders who can give you an estimate of value based on the questionnaire you complete. We found the average business that starts the value builder questionnaire achieves a score of 59 out of a possible 100 and those businesses are trading at about 3.5 times or pre tax profit for our graduates that get all their value builder score all the way up to 90 or greater out of a possible 100.
John: Those businesses are trading at 7.1 times pretax profit or more than double. So the first step is figuring out what your score and figure out how to excel, how to grow your score from there.
Chris: Excellent. So valuebuilder.com. Anyone out there that is wondering what the value of your business is, check it out, valuebuilder.com and take the assessment. I'm sure you won't be disappointed so thank you for that. Great. As we move into the end of this I guess the last question I would ask you is if someone wants to create a more process focused company, Is there a simple first step? You know what, when someone says to you that, you know, like in the book when, when the guy went to his mentor, his Ted, if I have a Ted, what is the first step in, in trying to create a sellable asset?
John: Yeah. I mean, what Ted did with Alex in the book is, is he just sort of tried to get Alex to think about what's, what, what are the projects or what are the products that you sell where you really are, feel like you're adding value. You're, you kind of athletes talk about being in the zone, right? We've all, as entrepreneurs I think sold things or like I did not add a lot of value there. It wasn't, you know, it wasn't highly differentiated. It wasn't something that we really specialize in. But then on the other hand, hopefully their products and services, when you do sell them, you're like, yeah, like we should be doing more of this. This feels right. This feels really differentiated. And when you identify that, it's really trying to peel back the layers and figure out what's your unique process.
John: And it's hard to do on your own. It's great to get somebody to interview you. And if you can find a journalist – journalists by training are really good interviewers, right? Like they're, they're really good at peeling back the layers to try to, you know, they, they ask why five times during an interview. And I think a unique opportunity to find a journalist or someone who's really good at asking questions and just to get them to interview you. Because if you've been doing it for years, the chances of you being able to sort of articulate it or identify it are pretty low. But if somebody really tries to say, why are you really unique at doing this and what's your unique process for doing this? And tell me more about that and how does that work? You start to distill down to what is the sort of essence of what you do.
Chris: Great. So closing the loop full circle back to creating that product, that service that is teachable, that is valuable, that is repeatable, and then developing recurring revenue to continue to build value in your business and be attractive to an investor. So I love it. Thank you so much for the guide that you put together through that book and for all of the lessons you continue to give through your articles online and your videos. Where can people find you today if they'd like to, to follow you?
John: Yeah. valuebuilder.com all road leads to all roads lead to Value Builder and you'll find me there.
Chris: Okay, perfect. So check John out valuebuilder.com. He is, as we said at the beginning, not only a bestselling author, serial entrepreneur, but the foremost expert building and selling businesses. And if you haven't read Built To Sell, like I said, one of my favorite books, so please do check it out. John, thank you so much for taking the time to chat today. Really appreciate it.