Building A Business To Sell With John Warrillow

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Now here's your host, Brad Costanzo.

Welcome back to Bacon Wrap Business. This is Brad and I am very excited to have today's guest on the show. It is going to fit into a theme that you guys, at least my loyal listeners have heard me talking a lot about lately, which has to do with buying, selling businesses, increasing valuations and looking at this in a completely different perspective than what, you know, you might typically be hearing about, which is, you know, start a business, grow a business, make more sales, et cetera. And one of the reasons I'm really excited today is because I have been a fan of this author and this expert's work for years now. When I first read his book, his name is John Warlow. I first read his book Built to Sell, I don't even remember when. I know it was a few years ago and it was such a refreshing read and the way it was written and some of the key takeaways in it were these really forehead slapping epiphany moments that like, yeah, this, this is a completely different way to look at running a business. And it was all about.

In essence, a parable of telling the story of a person who ran a business. In this case, I believe it was a marketing agency and how they were doing a little bit of everything and completely owned by their business and realized that there was really no escape unless they kind of got their stuff right and created the business in a way that they could exit it if they wanted to. Buying and selling businesses is something I've done to a degree in my own business. As if you're a listener to the show, you'll hear me talking about it. I've sold businesses, I've purchased them, I'm looking to purchase more. And there are a lot of different aspects that make this a, a really amazing way to do business. But it's also fraught with complexities that a lot of people aren't shedding the light on today. John Werlow is here with us to shed the light on some of this. He's also the author of an amazing book that I recommend everybody get called the Automatic Customer, which is really about how to build continuity as subscription based recurring revenue into your business. Which is really a key driver for increasing the valuation. I don't know exactly where today's conversation is going to go, but I am thrilled to have John on the show and let you eavesdrop on a conversation that I've wanted to have for a long time. So without any hesitation, John, welcome to bacon Wrap Business.

Hey, thanks, Brad. Good to be here.

Yeah, absolutely. As I said, it's kind of cool because I've read a lot of your stuff and I think that what you've done for business owners is really give them a new perspective on kind of how to look at their business. But where do I want to start on this? So.

Tell me a little bit or tell the listeners. I guess I should say you've got a couple of books, you've got your value builder system, you help entrepreneurs or business owners sell their business. But how would you describe the core of your primary business and how you're serving business owners right now?

Yeah, I mean, our vision as a company is to level the playing field for business owners as they approach their exit. So the idea is right now, a lot of business owners start their business, they grow, and they get to the end of the line and decide to sell it. And on the other side of the negotiation table, they're faced with a really tough negotiator. It's either a corporate buyer, oftentimes it's a private equity guy. These are guys that went to Stanford and Harvard and Wharton.

And know every trick in the book. And they use that manipulation, financial engineering, underhanded, frankly, tactics to take advantage of business owners as they sell their life work. And I, you know, we all at Value Builders think that's wrong. We just think that, you know, if you build something that's making an impact on the world, you should be paid for it. And so that's what we're trying to fix. We're trying to make sure that entrepreneurs get a fair price when they go to sell their company.

I love that. And as I said, I've been on both sides of this and I've been on the side with the very first business I sold. I was actually, I gotta admit, I was kind of running it into the ground. And I was a distressed seller and I didn't know how I was going to turn it around. I had, my focus was fixed elsewhere and there was a whole bunch of stuff that I really didn't even know that I didn't know. And I had a relatively sophisticated investor coming by. He wasn't just somebody who wanted to buy my business. He was looking for people in my situation. And I got a really. I know I sold it for less than I could have and had I known some other things, but I got a. I got a. I guess a hard one. Lesson in kind of the do's and don'ts. And I made a lot of notes like, man, the next business I do, I'm gonna have these things in place before I ever go take this shopping to a broker. Which is exactly what I did. I just had my business. I was like, I don't know what I'm gonna do. I'm just gonna take this to a business broker and see what they can do with it. So do you find that that's one of the most common paths that business owners who kind of reach that point of going, I think I just, I need to escape this, I need to get out of this or I want to sell it. Do you think their very first thought is go to a business broker?

Yeah, look, I mean, we do a lot of work with M and A professionals and business brokers because we license our system to them. On the flip side of the coin, their biggest frustration is entrepreneurs doing exactly what you did. It's coming to them when they're exhausted and they're kind of done and they just want out. And they're like, here are the keys. Sell this thing. Give me the check by Friday, because I'm done. And that, of course, is really tough for a broker or an intermediary, an M and a professional to deal with.

It takes a long time to sell a company. If you think about it, it's way more sophisticated than a house. There's a lot of work you generally do before you put a house on the market. You fix all the leaking roof and the leaking faucets and you make it look pretty. There's a lot of work that you need to do to put a business into shape to get it to sell. And then there's the process of marketing the business. It's one of those very inefficient Google AdWords is a very efficient market, right? You bid and it's in real time and you can get. Words are bid on to exactly what the market is willing to pay for them. Businesses are not the same way. It's a very opaque marketplace. There is no true marketplace for businesses. And so as a result, it takes a long time for a broker and a professional to find the right buyers, to socialize the idea with them, to show them the kind of idea, the book. It's just a very KLUDGY very opaque market. The worst thing, one recipe for making sure you get really screwed when you sell your company is to not do any of the kind of pre work and then just sort of hand the keys over to a broker at the end and say, get me the most you can for it now. Because it's really tough at that point.

Right.

Well.

And as somebody who has looked at businesses and purchased businesses to buy the, you know, the side, everybody's trying to do what's in their best interest. So if I smell somebody who just doesn't have their stuff together and who hasn't, you know, doesn't have systems, documented SOPs, doesn't have their, you know, it just, it's really disorganized. I'm taking a lot of money off the table for the valuation of that and I'm docking them, you know, for a lot of things. So I'm looking at it on both sides and as anybody would. And I'm not even a sophisticated M and A guy, right. I know just enough to kind of do some negotiation points. And that's what I learned the hard way when I went through with my sale is that. And also how they. As you know, you're very familiar with this, but the way that the initial conversation starts off is almost never the way it ends when it's at the closing table because people are looking for all those little points to just get you down, down, down based upon all the stuff you probably haven't done.

Absolutely. So yeah, it's absolutely right. So you want to go into it. I mean, I think there's a huge opportunity. Not that I would ever advocate for it, but there's a huge opportunity for people to buy businesses at deep discounts for exactly the same reasons that you share. Right. There are business owners doing this. That's not what we do. We work the other side of the equation. It's just to help business owners make sure they maximize the value of their company.

But yeah, you're right. One of the classic things, one of the classic ways that we see deals go tilt back in the direction of in favor of the buyer is the buyer will sort of say they'll throw out a number like, I want to buy your business for, let's say, $2 million, right. And the business owner will say, wow, that's amazing. Two fantastic, right? And then of course, the devil's always in the details. One of the classic things you got to look for is what's the downstroke? The downstroke is sort of M and A parlance for what's the minimum amount of money that you as the owner is going to get out of this deal when all is said and done. So your downstroke, if the M and a guy says or if the buyer says we're going to pay you $2 million for the business, the downstroke is the guaranteed portion and that might be 500,000, it might be 800,000, it might be a million two depending on again how well you structured your business. But you can guarantee it's not 2 million because the other piece is usually an earn out or some form of sort of payment in the future based on what's possible. In a small business. It's often what they call a vendor take back which is essentially you as the seller of the company is partially financing the buyer to buy your business. So they write you a check for part of your business but then basically they're borrowing and paying the rest of it over time. And usually you get a small coupon for that.

Well that's, and that's, it sounds like one that I, I almost purchased this business, it was an E commerce business last year to where they're, you know, they're doing about between three and four million dollars. And it was distressed. Right. He wanted out. And I was, you know, my offer to him was I'll buy, well the initial I'll buy 80% of your business because I kind of want you around to still operate a lot of the piece. But I'll give you some liquidity and I'll give you some certainty. But I said it started off I'll give me 100% owner financing. So I'll do a, let's just call it a million dollars to make it easy over the next three years. And I'm just going to take that out of your cash flow and just make sure I'm guaranteeing it to you with no risk to me. For a while there he said yes and I was pretty happy about that. We went up to like 10% down 90% owner financing with where I was going to be pulling, you know, sending him checks from his revenue primarily in order to cover the note payments. And it was 100% because there was, he was distressed. He didn't have an exact plan or things in place that helped to add value to it. Right. Like I knew if I took over this thing there was going to be a hell of a lot of work that I was going to have to do because he didn't really do the necessary pre work to build up his Valuation.

You got it. We're all about trying to intercept business owners, which is why I wanted to do your show, by the way. Intercept business owners well before they get distressed, when they're still running their companies, happily, in many cases running, maybe they've got an inkling that, yeah, maybe in the next five or ten years I might sell. That's the perfect time to start thinking about how do you structure your business so that it will be attractive to an acquirer. Because a lot of us, a lot of us as entrepreneurs, we use the profit and loss statement as our report card at the end of the year. Right. How'd I do this year's top line, bottom line, and that's fine. But I think using another document is equally, if not more important, which is the valuation statement of the beer. Have you grown the value of your company? Because if all you're thinking about is profitability, you as the owner would probably do all the selling. Because you don't have to hire a salesperson because you're probably more passionate, you probably get better margins. You can do more selling. You do that. At the same time, the more you personally do the selling, the less valuable your business will be to a buyer.

Dependent upon you.

Yeah, exactly. So sometimes the irony is what makes you more valuable may make you less profitable in the short term. Right. And so by using both, Both numbers oftentimes compete with each other and they sort of offset one another. They. They provide some tension, which is good, you know, so if all you're looking at is how much profit did we make? How much profit did we make? It's not the whole story. And you may get to a point where, where you built a business that's so centrally dependent on you that you, you could never sell it. And most of us as entrepreneurs.

Well, I shouldn't say most, many entrepreneurs.

Would like to think they're building value, that all their sort of hard work.

Is going to get sort of compensated down the road at some point.

Right. Well, the value is in the eyes of the beholder. Right. So your value to somebody who wants to buy you purely from a financial perspective, because you're a cash cow and they just want to buy it and.

Just get a good return on their cash is totally different than a strategic buyer who's going to come in because the things that you've done will be very valuable to kind of their current existing businesses.

Yeah.

Realizing where, you know, should I sell it to a financial buyer, should I sell it to a strategic buyer? Is a big decision.

Yeah. And you're absolutely right. The motivations are very different. I think you've done a great job of articulating the financial buyer. They basically say, okay, I could, you know, I put my money in the bank and get nothing. I could put my money in a you, you know, diversified stock portfolio. Over the long run, maybe I'll get seven or eight points. Or I could buy this business and hope to get, you know, 12, 15, 20% return if, you know, over time. That's a financial buyer. And they're looking at the predictability of your future profits. They're trying to understand how reliable is this company going to predictably generate cash into the future. So the more you can de risk it for them, the higher the multiple they're going to pay for your business. You're absolutely right. The strategic is actually doing some very different math. They're trying to say, okay, what's this thing worth in our hands? I'll give you an example. So do you know Stephanie Breedlove?

No.

Okay, so she, she's a great entrepreneur. She's written a book recently. I can't remember the name of the book, but it's probably worth picking up. Stephanie Breedlove.

She was an Anderson consultant. So you know, the precursor to Accenture. She has a kid, she's an accountant. She says, okay, I'm gonna hire a nanny, but we wanna do it above board. We don't wanna pay them cash, so we're gonna go get a payroll company to do the payroll. So she calls up ADP and they give her like a terrible experience to give her the run around. They transfer her calls like five different people. And Breedlove, after like the fifth transfer call, she kind of dawns on her that they don't want her business. Cause all she's doing is trying to pay a nanny, right? Cause ADP thrives on doing payroll for General Motors and Walgreens or whatever. So she goes, well, what if I started a company that just does payroll for parents who want to pay a nanny? So that's what she does. She starts this company called Breedlove and Associates. She has another kid, they build the business 25 years later. So it's not a hyper growth company. 25 years later her business is generating, if my memory serves, $9 million in top line revenue. So good business, but not knocking this, you know, lights up, right? She sells it for $54 million. $54 million. Six times top line revenue. Like it's, it's such a laughable number that it's almost unfathomable. Right. Like, like six times profit. Yeah, yeah. Six times profit would be a great outcome, right, for any entrepreneur. She's selling it for six times top line. How does she do that? Well, she sold it to a strategic. Here's what she did. She goes to A company called Care.com is a venture backed website similar to Angie's List. You know Angie's List where you can find a plumber or whatever. Care.com is the Angie's list of caregivers. So if you're in Toledo, Ohio and you need a child babysitter for your kid, you can go in, enter your zip code and it will give you a list of rated childcare providers in Toledo, Ohio. Well, at the time of the Breedlove and Associates, which is the name of Stephanie's company acquisition, Breedlove had 10,000 customers. Care.com had 70. Excuse me, 7 million subscribers. 7 million subscribers. So they reasoned, and Stephanie argued that if they just sold 1% of the 7 million or 70,000 customers, her payroll service.

That would increase the size of the BreedLove revenue by 700% overnight because they've got 7 million subscribers. So if they can just literally cross sell the Breedlove payroll service to 1% of those customers, that business is worth 7 times more overnight. If they sold 2%, it's 14 times bigger. If they sold 10%, you get the math right. And so care.com saying, yeah, it's a big multiple. We got to pay for Breedlove's company. But it still works out for us in the end if we're successful cross selling our service. So that's a strategic acquisition. Very different than how predictable is this business going to generate profits for the next 10 years.

What are you seeing when you're, when you're looking at, you know, I mean, you advise a lot of companies and talk to a lot of business owners who do this. Are you seeing kind of like more people selling to strategic buyers or more, more of them selling to financial buyers? Or I guess, I guess the third one. And there may be more than. I haven't really thought deeply about this. There's the strategic buyer who's already got something that this plays really well into. The financial buyer who just kind of wants a cash cow. And I guess the, the other one is somebody who just wants, in essence, they want to do something. They want to get out of their job, they want to stop being a doctor, they want to go start a new business or whatever.

Yeah.

What do you see?

Kind of mostly, yeah, they want to, you know, they want a job or they want to own a business. Yeah, absolutely right. So it's very dependent on the size of the company. So for a business that's say less than a million dollars in annual sales, it's almost always the latter. Right. It's almost always the individual who wants a job. Essentially they've left the corporate world. They don't totally comfortable starting a business for themselves, but they've got a little cash and so they want to buy a business that's very small. Companies generally sub 1 million in the 1 to 10 million space. In terms of 1 to 10 million in terms of revenue.

You do see some individuals, but that's starting to get a little rich for an individual. So you start to see more financial buyers. The threshold that most private equity companies will use and a private equity company would be the.

The quintessential sort of financial buyer a private equity company will usually use. I mean they all range but a million dollars in EBITDA is a pretty good cutoff rate to attract private equity. So if you've got a million dollars in EBITDA pre tax profit, to use a lay term, you're likely to be able to achieve or attract a lot of private equity at that point, private equity or financial buyers. So if you're a $5 million business with 20% margins, you're going to be able to attract private equity. If you're a $10 million business with 10, etc. You can track private equity once the business is up. More like.

North of 10 million certainly, but even north of 20 or 30 million. That's when strategics start to play a little bit more. Most strategics really don't buy a lot of very small companies sub 10 million, they're much more likely to be looking at larger businesses. Private equity companies, their game is they buy a company for a low multiple, they might jam a couple of companies together that are similar, that there's some synergies between and they'll try to go off and sell off the combined entities for a better multiple to a strategic down the road. That's basically the game they play.

Yeah, that makes a ton of sense.

I'm looking at a handful of the questions that I've got here.

So.

When you are prepping to sell, and I think I've read about or since you talk about some of these points, but.

What do you do to get the most amount of viable offers? Like what can you do besides just taking it to a broker, Besides just going out there and cold calling yourself? What can a business Owner do? Let's say that they've gone.

They'Ve paused in their business, they've done the work, they've started to deploy some of the value building levers that you show them what to do. And let's just say that after that homework's done, it's time to take this to market. What can they do to increase the number of offers they get?

Go to the industry trade show. Okay, you know that's probably, you know that's probably the very best thing to do.

Walk the halls or set up?

No, don't set up. I mean look, be it be an active member of your industry. If that means exhibiting, fine exhibit. But if it means getting the award for the most exciting new company or the lifetime achievement award in that industry, regardless, you want to walk, you want to make connections and aggressively network at the industry because most of the big industry players will be going to the industry event with a view of what are the companies we should acquire. So that's one of the hats they wear. So that's going to be a chance to connect with many of the players in the space. You don't have to be as desperately painful about it as would you like to acquire our business? Obviously you'd have a good open ended conversation. Hey, we should find a way to work together. I'd love to sit down and talk about if there's some way we could partner together. And those are all industry code words for acquisition. But you don't have to say you want to be acquired. You can say hey, we should look at a way to do something, partner together, see if there's some synergies between the two companies, blah blah, blah.

Right. And that sounds like a pretty good way to start to attract strategic buyers and obviously talk to the people who are already in your industry. Are there any other ways that you recommend people attract the strategic buyers or high net worth investors?

Yeah, in particular strategic buyers. Look at your current partners. And that's what Breedlove did by the way. Stephanie Breedlove, they had a relatively junior relationship@care.com Stephanie Breedlove, the CEO of Breedlove and founder was working with a marketing manager@care.com on a joint sort of content place. Like in other words, Breedlove was supplying some content, some articles to care.com but I mean it was a very, you wouldn't have thought of it as a strategic relationship. It was a very tactical sort of relationship. But that was enough for Breedlove to basically go to the CEO of Care.com and say look, you know, we've got this junior partnership. You know, we're supplying, but there's a got to be more we can do together.

Yep.

So get the foot in the door.

Get that relationship, ability to talk beforehand, add value to each other, and then see what can be done there.

And even if it's at a relatively junior level, that's fine. It'll allow the CEO to go to the junior person and say, hey, tell me about what we're doing with these guys. Tell me more about him. What's she like? Is she legit? Is she, you know, is she credible? You know, and then that's all you need is to start a conversation. So I would look down my list of partners. Who else do we partner with? And, and, and see if kind of go upstream, because probably your partnership is with someone not the CEO, but for a strategic sort of acquisition, it's likely to be initiated first and foremost by either the CEO or a division president, if it's a large company or a corporate development executive. So Google, as an example, has a head of corporate development. A division of Google would certainly have a president that would be on the lookout for acquisitions. And of course, the CEO of Google would be looking for massive acquisitions, but not the kind of stuff we're talking about.

Right. There's a lot of value levers, I guess you call it, that people can do in order to. During that time period when they decide, I might want to sell this and I want to increase my valuation of the business. Maybe you've identified kind of a finite number. I know there's a million things that people can do, such as making sure. Or maybe one of the driest but most important things is make sure you've got standard operating procedures and documentation of all the things you do. So when somebody comes to buy it, they know they're not getting a hodgepodge mess of stuff that they have to do. But of all the various value levers that a business owner can typically put in place when they're trying to increase their valuation and make themselves more attractive, what do you think are maybe like two or three of the most effective ones that are universally applicable that business owners should really kind of ask myself, do I have this and. Or is this something I can add in order to help me out?

Yeah. So we talk about eight key drivers of company value. When you get your value better score, we basically rate you on these eight factors. So one of the eight factors that is heavily weighted in our algorithm because it's correlated to getting offered a premium is what we call the monopoly control, and essentially what it means is how well differentiated is your product and service.

If you have something truly unique that you have a virtual monopoly on, you would score very high on the monopoly control. If, by contrast, you're selling a commodity, you're responding to RFPs, you're selling your product based on time or by the yard, by the ounce, by the pound, that's the opposite of monopoly control. That's when you're going to get the least price for the least value for your business. What you're trying to do is find something and create something where it's really, truly unique. And the reason that it has nothing to do with marketing, by the way, the reason it has an element to marketing, but the reason that acquirers are looking for businesses that have a high degree of differentiation is because when an acquirer looks at your company before they even express any interest, before you even know they're looking at you, they're looking at you externally and saying, can. Should we compete with these guys or should we. Is it just gonna be cheaper for us to buy them?

Absolutely. That's one of the things I think about if I'm looking at something to say, well, if I spent that money or a lot less, could I, could I compete with them just by entering the market myself? Because there's no barriers to entry, there's no moat, there's no monopoly around them. Okay, but now that also sounds like, for a majority of business owners, maybe one of the harder ones to like, if you don't have any demonstrable monopolistic moat that protects yourself from that.

How can somebody develop. And this is a really loaded question because I know it all depends on the type of business and the industry, etc. But have there. Are there any kind of anecdotal stories that you can think of off the top of your head, put on the spot of a company that kind of didn't have one and was able to.

To create one in relatively short order kind of manufacture? One. Yeah. When you think about monopoly control, there are two ways you can create monopoly control. Number one, you can build a better mousetrap. And a lot of business owners, to your point, don't have the luxury of a better mousetrap. Their product is a parody product. It is not a better product. Essentially, it is the same product as their competitors.

So, number one, a service, Right? Yeah, you do.

I'm a window cleaner. Yeah, exactly. Yeah, yeah, yeah, yeah, Exactly. I'm an SEO guy. Well, so there's 10,000 other SEO guys on Upwork, like, like you're not differentiated. So, so number one, you can create a monopoly control, do something better. Most people don't have that luxury. What if you don't have that luxury? You've got to manufacture the appearance of monopoly control through better marketing. And so really this comes down to how well have you given the appearance of differentiation whether you're different or not. I mean, if you go, if you look at, I mean, I ride bicycles, like mountain bikes, road bikes, whatever. There's dozens of different brands of bikes out there and they've all got loyalists, loyal customers, et cetera. They're all manufactured in two factories in China.

Nike shirts as an example. You know, I would challenge you to pick up a Nike Dry Fit shirt and compare it to.

Another no name brand shirt, you know, athletic knit shirt. Arguably it would be difficult to tell the difference, but one's got the Nike logo, the other doesn't. So yeah, it really comes down to how do you create a brand. Now if you, obviously, if you have a product, you sell beer.

You'Re a manufacturer of guacamole, you've got something people touch, get it, you can brand it. If you have a service, what you've got to do is productize your service. Service companies are renowned for genericizing their service. So they say, I'm an accountant. Well, that's great. There's another 500,000 accountants in America. How am I going to differentiate you from the other guys? Instead you do what a guy named Darren Root has done, who's also an accountant. He set up something called Root Works and.

It provides a unique accounting service, a back office. Rootworks is an organization. The brand that he offers is something called Boss Back Office Support System. And so the Boss System is a bookkeeping offering. It's essentially accounting services, but he's branded it better. So if you're the world's greatest SEO guy, don't hold your shingle out there and say, I do SEO. Because then you're just being basically encouraging, inviting people to compete with you on price. Say, you know, I've got the seven step proprietary process to maximize your position on Google. Or I've got the.

Exactly. This is what I help. One of the things I help my clients do is kind of come up with that big idea that makes, that makes people, that differentiates yourself and makes them go, oh, like, oh, okay, that's what you do. And even if it's exactly the same as somebody else, kind of the appearance that it's different can make a big, big, big Difference in people's minds.

You bet. You bet. And I mean.

Getting really good at branding productizing would also include trademarking the name, coming up with the delivery steps underneath it. So if you've got the five step SEO system, have each of the five steps consistently merchandise every time. When you go, don't respond to requests for proposal and say, yeah, I can do an SEO. You politely decline and say, well, know, we offer the five step, you know, and no one else does that. So if you're interested in that, let me know, but I'm not responding to your rfp. I love that, that kind of stuff.

Super powerful. What do you think? Look.

I want to flip the script and kind of go back to something we were talking about before. This makes me think of like one of my favorite little mental thinking strategies I took from Charlie Munger, Warren Buffett's partner, called Inversion, which is like, if there's something you want, like invert what you want into kind of what you like, look at the opposite side of, you know, what you don't want, and always look at it from two different angles. So I actually want to explore this partly for selfish reasons, but partly as a learning opportunity for people, which is, what do you think are some of the biggest opportunities for buyers based on what you're seeing.

With, you know, with sellers? And I don't mean like, how do you take advantage of them? But what I mean is where do you, when you see, you know, if you were to, if you were to step away from just saying, I'm going to help sellers really get.

You know, get the highest and most for them, for the other side, the people who are trying to buy them, do you see any really good opportunities for them? Such. And I'll give you one example. And this kind of ties in with your whole automatic customer thing, which is when I'm looking for businesses to buy, I'm looking to see do they maybe not have a recurring revenue thing in place? And if they don't, is there something I can do to put that in place? And are there any opportunities there that buyers should look at? Because you've got a really unique perspective. You see what's going on with the sellers.

Yeah, I think you're absolutely right. And it's funny you should mention recurring revenue because I think that's where the majority of the opportunities are right now. They are traditional transactional industries. Businesses and transactional industries that are ripe to be converted into subscription offerings. Just to give you a sense, before I give you an example, just to give you A sense of the delta, the difference between a transactional model and a subscription model in terms of valuation. So if you look at security companies, right. So these are the guy like home and office security companies, they have two forms of revenue, right? They have installation revenue, which would consider transactional, like one off versus recurring, which they call monitoring revenue. Right now an acquirer will pay about 75 cents for every dollar of installation revenue and $2 for every dollar of recurring revenue. Wow. So on a dollar for dollar basis, the recurring revenue is worth almost three times that of the transaction revenue. So if you buy the business, you know, if you buy a transactional business and you convert it into a recurring revenue business, you're making huge strides in making that company more valuable. Like you're doubling and tripling the value of your, of the business as a result. So that's just what's at stake here. I'll give you an example. Car washes. So right now car washes in the United States are generally transactional business. So you go in, you pay your, you buy your gas and you say you want a car wash today? And you say sure, and you buy a car wash. Well, increasingly car washes have realized that there is a much better business model in creating a subscription business for unlimited car washes. So today some of the savvy private equity groups and many of the big car wash organizations, I'm not talking about individuals, I'm talking about organizations, are going around buying up crappy car washes for very low multiples, converting them into recurring revenue businesses.

And making out like bandits as a result. Constellation Software is another example.

Oh my God, I was just going to mention them. By the way, I just discovered them recently. An investment banker was telling me to look at them and say look at their model but keep going.

Yeah, yeah. Constellation Software is a great example. So they have a reputation for buying on prem. Essentially what on prem is, is technology jargon for software that is purchased on a one time transactional model. Yeah.

And like installed on your software as a service.

Yeah. Think about the way we used to buy Office from Microsoft. You go to Staples, you buy the CDs, you load them up. That's basically so there are still software companies, if you can believe it, that are out there that operate on that business model. So Constellation buys those companies, converts them into SaaS business in so doing adds turns and turns and turns and turns to their multiple. A turn by the way, is like if you're trading at four times EBITDA and you increase your value to five times ebitda, that's one turn.

So Constellation is a publicly traded company. You look them up on the really small companies too.

I mean, they're buying one to five. I mean, sometimes they're buying big companies, but they're going after small ones as well. These industry stalwarts that are boring as all get out and they are. Yeah, they're using the cash flow from there and they're funding the development as a SaaS and turn it into recurring. I thought that was absolutely brilliant.

Yeah, yeah. Again, I'm not a huge fan because again, what we're trying to do is help the software company that is using the old transaction model and trying to say, before you go sell to one of these sharks, let, you know, make.

These changes, do this yourself and get. Yeah, you know, 10 times what you're gonna get prior to. Yeah, but that's why, as I said, I wanted to kind of hear the other angle of it because you have that really unique perspective, is working with all of the, you know, all of the sellers. So you kind of see the things they're doing right. You see the things they're doing, you know, that they're doing wrong. Are you noticing that because of demographics, you know, the baby, you know, there's a lot of business owners who are baby boomers and the baby boomer is that this aging population that is, you know, they're starting to retire in mass if they can, you know, with this economy. But the. Are you starting to see a lot more business sellers come on the scene like now versus maybe, I don't know, five or ten years ago or. Are you seeing any particular trends?

Yeah, so the Exit Planning Institute, which is a partner of ours, says that 76% of business owners plan to exit their business in the next 10 years. So that's a big nut. That's as big as they've ever tracked in terms of the market. There is a coming wave. One financial advisor called it the $10 trillion opportunity. It is a big transfer of wealth. Most people believe it's the largest transfer of private wealth that's going to take place in the next 10 years. It's a big trend.

Just to interject there, it's also, I would think, if you are thinking about it, that if you know that there is going to be a potential glut of supply of people selling their businesses over the next 10 years and you're not making hay right now and getting your stuff together, like following your advice and saying, listen, if a lot of people are going to start selling this stuff in the. In the next decade and increasingly. So I better get my stuff right, because I'm going to have to compete with a lot of other businesses that are going to be on the market.

You bet. You bet. Like I heard today, I was talking to somebody and they were saying the average accounting firm in America is run by a partner with an average age of 58.

So, like, what's going to happen when all those guys turn 65? There's going to be a lot of accounting firms on the market. And to your point, they're going to get cheaper and cheaper and cheaper because there just simply won't be enough buyers to meet the demand that they sell. Yeah, yeah. Grade 10 economics.

So, yeah, I think that's definitely concern for business owners today. Flip side is, I think there's a lot of folks out there similar to what you're doing, which is basically, increasingly, there are a lot of people realizing that the risks associated with starting a business are significant, but buying something established and making it run better is something that's a lot less risky. And so I think we're seeing a lot of people, more and more people than a. That I sort of was aware of, that are looking at buying a business as their sort of career choice.

You know, it made a lot of sense to me. I've started businesses.

I've had businesses succeed. I've had businesses fail. And I do know that I don't know if I have the energy anymore to start something from scratch unless I'm so completely interested in it. A friend of mine who does buy businesses and, you know, holds them on whether in his portfolio, sometimes he resells them. But he said, you know, we.

As consumers, when we want shelter, you know, from, you know, from the elements, we don't usually go to Home Depot and buy boards and hammers and nails and go out and build a house ourselves. We usually find somebody who's built a house. Ideally, it's a house we want to live in. We arrange financing and we purchase that house and we move in. And he gave a couple other examples, but he's like, why is it as. As entrepreneurs, as business owners, you know, ultimately we get into business, I mean, you can say to make an impact, whatever, but we get into business to make money and to make a living and to create cash flow so that we can live our lives. He's like, why do we think we have to build it from scratch? Somebody out there has probably done a pretty good job of it. And if you can find a business that fits all of your criteria, such as if you know that a business, most businesses fail after five years, then find a business that's been around for five years, has a validated product, a list of customers, customers, et cetera, and then just reverse engineer the math to say this is how much I need to make, this is the financing I need. Let's go find somebody who's already built it, let's move into their house and then decorate it the way we want. Yeah, that actually makes a lot of sense. And I think that the more people that start to adopt that idea as well, they'll be able to match up with the opportunity of a lot of these people who are retiring and wanting to sell their business.

Yeah, I think that's true. The word of caution I would have though is oftentimes a business, it's not immediately clear how dependent the company is on its owner. And to go back to your Charlie Munger, like, what's the inversion of or the opposite of what buyers look for? From a seller's perspective, what you want to do ensure is that your business.

Is not dependent on you personally. And that can be very difficult to measure.

But oftentimes it's easy if you're the rainmaker for the company. So that's easy to pick up and you should be able to figure that out and due diligence. But if the owner is deeply involved in coming up with the product ideas, for example, that's oftentimes less obvious to a potential acquirer. And so that's an area that I think it was Peter Drucker, the old kind of now since passed away, but the old management theorist, he said that as a CEO of a business, you should be focusing 80% of your time on one of two things, sales and marketing or product development. And while I agree with Drucker, if the goal is to be the CEO for life, then yeah, you should be spending the majority of your time on those two things. If, however, your goal is to sell your company, you actually have to get those two things into other people's hands.

And team building, right?

Yeah, but that can be really hard for a lot of entrepreneurs because they've been told and they know that it feels right and that it feels like they're in the kind of zone when they're doing the sales and marketing and they're doing the product development, that feels like they're adding value to their company. And the more they do that.

They can see quick short term results. The problem is that the more dependent it's becoming on them and so it's almost, you do almost the opposite of what you would want to do to build.

A short term successful company.

That's why I think building a valuable company is really so hard. And for those that do it, they get paid so very handsome. You know, like, I talked to, I do a podcast, I interviewed a guy yesterday. He said like, I made enough money for, in selling my company so that. He said I always wanted to make enough money so that my kids would never worry in the sale of my business. Because I was asking him, like, what did he sell for? He wouldn't tell me the number. He said, john, I'm not going to tell you the number, but I'm going to tell you that not only did my kids never have to worry, but my kids, kids, that's great. And it was like the reason guys get paid so handsomely for businesses that are built well is because they're so rare, really truly built, so that they're not dependent on the owner.

Yeah, you're 100% right on that. You know, I was having a conversation with another kind of mentor of mine and one of the things though that he said it was kind of just a different perspective of looking at the kind of set of built to sell. And he goes, I totally agree with that. But he goes, I want to, I want to challenge you to change your words. He goes, because if you build a company with it to sell in mind, you're kind of got one foot out the door already. He goes, build a company that you would want to buy. Right? And I was like, that actually kind of makes sense because. But by the way, the two of them are the exact same thing, which is if you were going to buy that company, what are the things you would want to buy? Well, I'd want to buy one that's well run, that doesn't depend on me to work on it 100 hours a week that has systems that, that has unique, like a monopoly. And I was like, ah, that's actually a really good, you know, really good point. Like build this business you would want to buy because if you build that business, then the ability to sell it becomes infinitely more.

You know, capable. And I love that. Another thing that you just reminded me of, there was a book I read years ago, an amazing book, terrible title because it sounds like a cheesy get rich quick scheme, but it's called Millionaire Fast Lane by MJ DeMarco. Have you ever heard of that book?

I've seen it. And you know what? I've seen it like in bookshelves. And I thought, oh man, I was repulsed by the title. I never picked it up.

As a result, I'm going to recommend you read it. One of the cool things like he talks about, he talks about one of the best.

First of all, the big paradigm shifting thing is he said, now a lot of you people think that Get Rich Quick doesn't exist, but you're confusing it with, with its evil cousin, Get Rich Easy. But I'm going to show you how Get Rich Quick does exist. Let's say you build or buy a business. But let's say you build a business and you spend the next five years working your butt off, hustling, et cetera, and you make a valuable business and you sell that business after five years, five, $10 million, which is rich by anybody's standards. I don't care who you are, right?

Did you get Rich quick? And he goes, don't confuse it with get rich overnight, but Most people work 40, 50 years of their life life saving for retirement. You put five years into it and you had an exit that allowed you to now live the rest of your life carefree. He goes, the only way you do that is with an event, like an exit based event. So understand Get Rich Quick actually does. You just got to shift your perspective of what Quick is.

No, that's cool. I'll have to pick it up. I haven't, you know, I haven't read it, but I think that's a really good analogy. The other thing that I think, folks, you know, I wrote a blog post, this goes back a couple years.

But I think it was called Famous or Rich Pick one. Yeah, no, it was Happy Famous or Rich Pick one.

And happy was being happy doing your craft. If you're an SEO guy doing your SEO and really kind of nailing it for clients and getting the atta boys and the back slaps from your clients, you're never going to sell that company, but you'll be very well. Appreciate it. So Happy.

Famous was the venture backed startup, right? So you want to compete against Instagram, you want to create, you know, the next whatever Google, you're going to need a truckload of money. It's going to be venture backed. And in many cases, more often than not, the VC wipes out the owner and the owner is left with nothing. Now, of course, there are celebrated examples where that has not happened.

If they get rid of dumping TechCrunch and then that makes them happy.

Yeah, but there are a lot more examples where CEOs walk away from nothing. With a VC. So you could be famous but not necessarily rich. And the rich are generally the people who build companies in tiny little sleepy corners of the economy that nobody cares much about. They build a 3 or $4 million business that's generating 20% profit margins so they're netting 500 grand a year and they sell it for whatever 4 or $5 million because it's got great monopoly control. That's the recipe for getting rich.

I love that. Now I'm going to honestly John, I could talk to you for hours about this topic but I know that you've got a hard stop here in just a couple minutes. So I want to ask what are so for my, for my listeners out there who are a business owners and are like yeah, I do need to have an exit in mind someday and I want to find out what some of the things I need to be doing and resources for. I know you've got a tremendous. Is it a scorecard or a value builder system?

Yeah, yeah. So go to valuebuilder.com and get your score. We're going to give you a score out of 100 and the average business owner who takes that questionnaire scores a 59 out of a possible 100. Now those average companies are getting offers when they go to to sell their business of 3.5 times pre tax profit. If you over time build up your value builder score and we can show you how to do that. There are eight drivers and some tools we've got. If you build your value builder score up to 90 out of a possible 100, those businesses are trading at 7.1 times pre tax profit.

Yeah, it's only double.

Yeah, yeah. So the first step is to get your score, figure out kind of where you are, what you need to change to drive up the value of your company so you can get it@valuebuilder.com perfect.

And then for my listeners who are consultants as well, you do license, correct me if I get this incorrect but you license some of the tools and intellectual property around the value builder system so that if they're out there working with companies who may be interested in learning how to do this as well, you, you have opportunities for consultants too, right?

Yeah, for sure. So we work with entrepreneurs to help them improve their value. Our business model as a company, the way we make money. We license our platform to what we call certified value builders. We Certify we've got 900 or so certified value builders around the world who are independent advisors. They're typically consultants, business coaches, M and A professionals. And yeah, if you're interested in learning more about that, I think the page on our website is value build. Buildersystem.com advisor.

Got it. I love it. Well, are there any nuts you're trying to crack? Is there anything that myself, my listeners, can help you out, whether it's a person you're trying to meet, skill you're trying to learn, money you're trying to raise, anything?

Yeah, no, I appreciate the offer. Again, I go back to where we started. We've got this sort of mission to level the playing field for business owners, so. So.

You'Re doing enough by helping us spread the word.

I'd like to be on any other podcast. I've got a couple of friends with great business podcasts and tremendous reach, so I'm happy to make some intros.

Cool. Okay.

I just hope that all those business owners out there with the average of 59, they better get to you before I get to them. Let's just say that right.

At the same time, I. I'm sure I can take a whole bunch of the stuff that you're doing and teaching to increase the valuation of. I know one or two of the businesses that I've got that I'm going to be selling here before hopefully too long. So I am actually playing both sides of it. But I cannot tell you how much I appreciate this. John, it's been a real honor to speak to you and hear from the horse's mouth about the way that this stuff is really done. And I look forward to to getting all the feedback from my listeners. Guys, if you loved this show, do us a favor, share it on social media. Tag both John and myself. There'll be links in the show notes. And if you ever have a question you want to ask me, send that email to askbradaconrappbusiness.com John, once more, thank you very much for being on the show.

Thanks, Brad.

It's good to be with you. Okay, guys, tune into the next episizzle and I'll talk to you soon.