Building a Company to Sell with John Warrillow

Here's a little bit from today's episode on Business Lunch.

Do you want to run a process where you are trying to get multiple bidders interested in your company at the same time? That's going to ferret out from them what their offer is if you're forcing them effectively to make an offer along with other potential acquirers, if it makes sense. And it's also where you can start to gin up the value of your company.

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You're listening to Business Lunch with Roland Fraser. This is your seat at the table.

Hey, everybody, Roland Frazier here with Business Lunch. And I'm very excited, excited to have the founder of Value Builder, author of three really, really great books that I highly recommend that you read all three of and all around good guy, John Warlow. John, welcome to the show.

Hey Matt, good to be with you.

So tell us a little bit about. You've got three books that are out there. The first one I think was built to sell, then you went into the automated customer and now the new one, the art of selling. What are the audiences for those three books and what are the differences? Who should be reading those?

Yeah, sure. So built to sell really is how do you take an owner operated business and make it into a valuable asset? So anyone who feels kind of trapped by their business that it's not giving them what they wanted to out of business, it's not giving them the freedom they aspired for, is really a great person to rebuild to sell automatic customers, really. But how do you create a recurring revenue stream? So if you're in an industry where it just doesn't lend itself to recurring revenue, you're not a SaaS company. Maybe you've got a car wash or you're a dentist and you're trying to figure out like how do I create recurring revenue? Perfect book to read there. And then the art of selling your business is really for folks who are in the last chapter of their entrepreneurial journey and they're trying to figure out how to punch above their weight when it comes to selling. And that's really the ideal reader for that book.

Okay. And then you also have a radio show that you recently started, is that correct?

Yeah, it's actually five years old, so that's. Yeah, no, I feel old saying that, but yeah, built a cell came out. And what I learned from doing speeches is that a lot of times entrepreneurs in particular kind of eo ypo folks, they really crave the kind of inside baseball and the sale of a company. Like how did you deal with an earn out or what's the escrow? And all the stuff that isn't sort of stuff that people would care about unless you happen to run a seven or eight figure business, in which case it's really, really important. And so I tried to nail that by putting together this podcast where I interview a different entrepreneur once a week and ask them about their exit. What went well, what would you do over again if you had a mulligan? What was the deal terms? How did you structure your holdback and stuff? And that's really been a lot of fun for me and I'm trying to just unpack and help other folks avoid some of the classic mistakes that we make as entrepreneurs when we Go to sell.

And is that really kind of what drove the art of selling your business is kind of taking the most common questions that came up or issues again and again and kind of diving more deeply into those?

Yeah, I've done something like 300 episodes. And for most part, people trade at industry average multiples. Right. Like, if it's an H Vac company, it's trading at 5 or 6 times EBITDA. If it's a dental practice, they trade at pretty common industry multiples. And what I found, though, is that after I've done 300 or so, there's like a few dozen that seem to be playing by a completely different template. They seem to be playing at a higher level. They're trading at multiples of revenue, not ebitda. They're outmaneuvering and out thinking the other side. And I just really got fascinated about what they do differently. And so that was my goal with the art of selling your business is to say, what's the template that these folks who seem to punch well above their weight class, they're using? And what can others learn from these tactics? Because, again, we only get. I don't know if you remember this one, Roland, but do you remember, I don't know, it was maybe 10 years ago when Sully, the guy who they made the movie about, landed the plane on the Hudson river in New York.

Yep.

Yeah. Like, he was the most decorated pilot I think they'd ever had at us. Like, he was taught young pilots, was trained to fly lots of different gear, and yet he's never had the chance to land a jet plane on a river. Never had. Never had that option. And I think for a lot of entrepreneurs, that's the same when it comes to selling their business. They could talk to you all day long about marketing funnels, about hiring employees, about commercial lease and all the stuff they do every day, but they'd only get one shot to sell. And we make all sorts of unforced errors just out of naivete, never having done it before. And so I tried to kind of describe some of those unforced errors and mistakes we make and hopefully help people along the way.

So for our folks that are listening and watching, what would you say some of those are? I know they're very, very well described in the book in a lot of detail, but to give us a taste, and a lot of people do ask that, I think, when they're talking about selling your business, what do I need to watch out for? What would you say?

What are the gotchas Yeah, I mean, yeah, like, I hope, but a whole, like a section of the book is dedicated to the gotchas. So, I mean, one comes to mind. Classic issue that almost every entrepreneur will deal with when they go to sell their business is the age old question, what do you want for it? And most people hear that and say, oh, I'm not going to put a ceiling onto which I'm going to sell my business for. So I'm going to put some crazy number out there, like I want 12 times top line revenue, right? And they do that because they're like, I don't want to put a ceiling on what. And the problem with answering that way is that oftentimes a lot of acquirers will just walk away and they'll go, okay, that guy has no clue. And his demands are so outlandish that it's not even worth us betting in. And so you lose them before you start the process, right? You lose them before you have a chance to romance them about what you've created. Equally, if you give them a more realistic number, a low number, clearly you're putting a ceiling onto which you'll ever sell your business for. I remember one of the guys I interviewed way back in built to sell radio first year is a guy named Chris Jones. Built a great little company called Pepper Jam. It was early affiliate marketing software. And I talked to Chris about the sale of his company and he said, yeah, I got a call one day from Mark Rubin. Mark Rubin, I think his name is Mark Rubin. Rubin, yeah. In any event, Rubin is a kind of tech luminary, billionaire, et cetera. I sold his company to PayPal for truckload. And he thought this guy, Chris Jones thought that he was walking into kind of a meeting of the minds with Ruben, a discussion about technology and the way the world was working. Instead, he walked in and he wasn't alone. Rubin was flanked by his chief financial officer and his head legal counsel. And before they really got into any discussions about the business, before they even exchanged much in the way of pleasantries, Rubin's first question was, all right, what do you want for Pepper, Jim? And Jones was like on his back heels. He's like, we haven't even broken bread here. We haven't even poured the coffee. What are you asking me about my. And he said, no, what do you want for your company? And Jones kind of spit out a number. And Ruben looked at his CFO and said, all right, I think we can get a deal done. And that was code for don't pay a penny more. Than that number. Sure enough, they closed the deal at that number, which begged the question what was left on the table? And I asked Chris after the fact that if you had a do over a mulligan, what would you do differently? He's like, I wouldn't answer the question because I probably put some sort of ceiling. He had a successful exit, has gone on to do lots of great things. But the key insight I think is that there is virtually no good way to answer that question without sort of snookering yourself into a corner.

So how would you answer it if somebody asks you that right now?

Hey, I'm a reasonable person, happy to review any offer you think is reasonable. If you have an indication of interest that you want to put together, people need to know that there's a difference between an IOI and an loi. An indication of interest is when an acquirer looks at a business and wants to throw a shot over the bow and gives you a couple of page document that says for companies in your industry with these sort of basic metrics, we're usually paying between X and Y multiple. So we pay generally between 4 and 6 times EBITDA. We pay 80% of it in cash, 20% in earn out and that's kind of what we. And if that has sort of any interest for you, let's have a conversation that's like an indication of interest and that's different than an LOI or letter of intent. And again, I know Roland, you know this stuff like the back of your hand, so hopefully it's helpful for others. But an LOI is where it's a more formal document and it gives rather than a range, usually a specific price where you're going to sell your company for they're offering to acquire. There's usually a diligence schedule, some things that you'll need to give them to close out the deal, how the currency with which the deal will be closing. And most importantly, again, for a lot of your listeners, it will usually include a no shop clause where you agree not to market your business to anybody else. And that is a dangerous document to sign because the moment you sign it, the balance of power in the negotiations goes heavily in favor of the acquirer because you've lost negotiating leverage. So how did I get onto that diatribe, the difference between IOI and LOI and some of the things to think.

About it was really just talking about that somebody is going, I ask you, how would you answer if somebody says I'd like to buy your company? Yeah, one thing that's really interesting that I found and a lot more lately over the last couple years is that we generally don't want to get into conversations with people who aren't in the ballpark of where we would want to be. We also don't want to mention that number. And so it's really interesting because there's I'd say probably 50, 50 division between when we're selling to private equity or family office or a strategic buyer that's sophisticated that they'll either say, well, we typically pay between X and Y multiple of EBITDA or they'll say, well, it just totally depends. And for the it just totally depends people, it's very frustrating because, because, and my response is always, look, we're open to anything, but for us to go forward with any kind of non disclosure agreement into looking at some high level numbers, we have to know, does it make sense? Because if not, I don't want to waste your time. And you know, and we've got plenty to do too. And some of them are just doggedly determined not to give you any information versus the others that are just very clear. Yeah, okay. This is what we typically do. And by the way, the experience, you know, my experience with those guys is that we've had, I think our, our best deal was literally twice what they typically pay. And so whatever they say to me is like that's not, that's not constraining what I think we'll be able to get for the company. And I would encourage anybody that's watching or listening to think this way. It is kind of, I look at it as the bottom of, you know, at least you're in the ballpark of is it close to your number? Do you find that, that you hear people saying there are these kind of two different approaches to how the valuation goes up front?

Yeah, absolutely. And again, from their side, they don't want to answer the question either. And that's really why I think you want to run a process where you are trying to get multiple bidders interested in your company at the same time that's going to ferret out from them what their offer is if you're forcing them effectively to make an offer along with other potential acquirers, if it makes sense. And it's also where you can start to gin up the value of your company. I remember I interviewed a guy named Arik Levy. Have you ever had Arik on the show?

I haven't.

Sacramento EO guy, great guy. He started two companies in the locker business, you know, like these Amazon Lockers in Whole Foods, similar business. But in his case, his first one was laundry locker and Laundromats. And he kind of got bored of it, decided to sell it, and he didn't want to hire an M and a person. And so he just went to the first person who made him an offer and did a deal, signed a letter of intent. 60 days go by, they retrade it. So they lowered the price, said, oh, we saw some things in diligence. So that's one of the common things that happens when you don't have multiple offers, is you get retraded on. So we got retraded on. And then later, when they actually went to close at the closing table, they basically said, you know what? We weren't able to get the financing we were hoping for, so we need you to finance this. So ARIC ended up not only taking less, but ultimately financing the acquirer, getting paid over time, and carrying the note. So speak. So it was like kind of a crappy exit for him. And so he was determined his next time around to get it right. And next time around he built a company called Luxor1. It's a similar model, but in this case he was putting lockers in apartment buildings in New York and other cities. And this time he hires an M and a guy, guy named Tripp Wolf in New York. And Tripp goes and runs a process, gets eight offers, three of which are investment offers, five of which are acquisition offers. What's interesting is that the acquisition offers were ballpark plus or minus 10% of each other, five of them. And that's when Tripp Wolf, the M and A guy, went to work and started playing one offer off the other. Ultimately, Aric traded, sold that business for three times what the original offers were. So 300% increase over just by ginning one off the other, right? Playing one off the other.

Yeah, I think that's really important right now. So a lot of the folks that are in our audience own software as a service, SaaS companies or e commerce companies. And right now, FBA, the fulfillment by Amazon rollups are all the rage. They've raised over a billion dollars in funds like Therassio and Perch and several others to acquire them. And these, it's really kind of evilly smart. These funds are holding workshops on how to get the most for your business. And you know, when you talk about letting the fox in the henhouse, that it's like, so. So they're creating this deal flow mechanism to say how to sell your Amazon business. Then they're Going in and buying at low multiples 2, 3, 4, 5, and instantly receiving the arbitrage benefit in their fund, which is trading significantly higher. How would you advise somebody that gets either an offer from one of these groups, because there's, there's a lot of folks in our audience I know that are getting these right now to proceed? Would you say negotiate with that company? Because those companies typically say, and you know, you don't need to shop with other people or we don't want you to shop or sign this no shop agreement and then move forward in the process. And a lot of those do lead to acquisitions. But I'm curious to get your perspective on how you would advise folks that are kind of in that situation.

Yeah, I've interviewed a few folks selling to Thrasio on Built Sell Radio over the last little while. I think it comes down to who owns the customer. So if Amazon is seen as the ultimate owner of the customer and you are literally a fulfillment, you're offering something, some third party product that you sourced that you don't really have a brand, that you don't have a direct relationship with the customer, you're in a really weak negotiating position. And if someone like Thrasio comes and says, yeah, we'll give you two times or three times ebitda, that's probably a decent outcome at this point. If you own the brand and you own the customer list and you have multiple channels to market, one of which is Amazon, I think you can do a lot better. I think you can do a lot better because you're in a much better negotiating position. And that is, I think we refer to it as the Switzerland structure at Value Builder. But basically what it means is that if you're too dependent on a single supplier, you're going to get a haircut. It's just inevitable because the acquirer is going to say, yeah, but if that supplier changes the rules, delists you, whatever, you're out of business. And that's real. If your entire go to market strategy is being an Amazon reseller and I.

Think your number is 15% right in there.

Yeah, certainly in customer concentration, 15% would be a problem.

Or anything north in supplier concentration too.

Yeah, around that. I don't know that there's any hard and fast number. Obviously the more of your supply that comes from one vendor, the worse. I interviewed a guy named Adi Pinar out of South Africa who sold a SaaS product. It was, you know, like a cart abandonment. Are you familiar with that technology at all?

Our audience would definitely know that yeah, yeah.

So you're shopping online. Anyways, Adi built a great little app and decided to offer it through the Shopify App Store. Right. And so Shopify as you know, went through this incredible growth period and Adi sort of like the old adage rising tide lifts all boats, went up in lockstep and grew from sort of bootstrapped up to a couple million in arrival and sold. When he sold, he had a great exit, but it was somewhat muted by the fact that his entire sort of go to market strategy was to be a Shopify store again. I think when you run into that problem, another one is Andrew Gazdecki. He sold business apps, I think it was called. They did mobile apps. Think of them like a webex or a template based web apps. Mobile apps for small businesses. And they were growing like stink. They built it up to something like 7 or 8 million dollars in revenue. When Apple overnight decided that they were going to delist any apps that were based on templates. Literally overnight he went from having hundreds of customers to zero because he was dependent on the App Store and it was almost the death of his business. Ultimately he cold email Tim Cook and they found a deal and were able to overcome this and got his apps listed back in the App Store. But it was one of those moments where he realized just how dependent he was on a single supplier, in this case Apple for the App Store.

What are your thoughts on that as far as if you're currently in that situation? Let's say that somebody has developed an app and it's doing really, really well and there's a market for selling those but, but you're only there. What would your advice to them be as to the move to make to reduce that risk and hopefully get a higher valuation?

Yeah, it's a tricky one and I don't know the right answer. I mean you could sell the private equity and roll 40% of the equity into a new entity and continue to sort of ride the rising tide, if you will. If you believe that platform is going to continue to go on and, and have astronomical growth, you're not going to get a huge multiple likely from the PE group, but you might get the second tranche based on that. I think that's one play. Obviously if you can build a diversified supplier pool, other sources of channels, that's going to be important, especially if you want to sell to a strategic being not beholden to one supplier because a lot of these strategic of course are competitors with these platforms. If you're getting 100% of your, your Customers from Shopify, any Shopify competitor is going to see that obviously as a problem. And so, yeah, it's not an easy corner to back yourself out of. I don't know if I have a great solution. What would you recommend?

Yeah, it would be to me, if you're on the iOS store, then how do you get on Android? I guess if you were constrained like that. So how do I increase my channels of distribution? Is there. Does it make sense to have a desktop app? Are there other markets or things like that that I can do? And then I would start thinking about how can I get my own media? Because the issue for the app people is really, I guess the delisting of an entire category of apps is something that, that is real. TikTok just said no crypto. Right. You know that. So. And that's not an app. But anytime I agree that you're dependent on that channel, it's the only thing I can think of is you got to figure out how can I build my own media so that I'm not dependent on that traffic? So I, I would. Look, I'm a big acquisition fan. I would say, how do you either do strategic relationships or go acquire media that's got your icp, your ideal customer profile. If you can't do that, you're just kind of constrained. And, and as we know, all buyers are concerned about risk. So that, that means a lower. A lower multiple for you.

Yeah, no, for sure. Going back to this idea of sort of supplier dependence and not having a direct channel to your customer, I interviewed a guy named Ben Leonard who built a cool workout platform like exercise equipment company called Beast Gear. Like the straps that you need to lift heavy weights and the gloves and all the accessories. Anyways, he starts selling on Amazon, but what he does is he includes in the package a little note saying, hey, make sure you tag Instagram when you hit a pbr. A personal best or personal record pr and I'd love to know about it. And so they went on to base two years Instagram site and sort of uploaded a picture of them hitting a pr. Then what Ben did on the back end is he direct messaged everyone who posted and said, fantastic, I can't believe you deadlifted 300 pounds or whatever the achievement was and built a little rapport with that individual. He then after two or three DMs back and forth said, hey listen, here's a $20 gift card to buy anything you want on our Beast Gear website. And oh, by the way, if you wouldn't mind Giving us a review on Amazon, it'd be amazing. But by that time he had enough relationship capital to draw down on. So two things happened. Number one, he gets tons of five star reviews on Amazon. Number two, he, he start to build a direct relationship with the customer, gets their email address, gets them buying direct from his website. And it was a nice example of how he tried to sort of lessen his dependency on Amazon.

I think that's really smart. Yeah, get those customers onto your list.

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You mentioned carried interest as far as kind of. So when a lot of groups come in and buy, they like to have the owner continue to have some skin in the game and hopefully they'll grow together and then the owner will get, will keep, they'll sell, the owner will sell less than 100% of the business, keep a portion of it, stay in and then hopefully get an additional pop that might even be more than they sold the business for in the first place. That's the pitch generally. What are your thoughts on that and how do you advise people to think about that?

Look, man, I'm a bit of a skeptic to be honest. Entrepreneurs thrive on freedom, right? That's why they do what they do. I think if they wanted to go to work for somebody, they would do that. Most of them are very successful, smart people. They could go get a job at Procter and Gamble if they wanted one. And I think that the selling to a private equity firm, there are some exceptions, but in many cases it's the worst of both worlds. Because you're giving up control, usually 60% to the PE firm, they're buying at a relatively low multiple, usually because in Order for their economics to make sense, they've got to flip it for higher multiple. It's got to be creative. So you're getting 60% sold. 60%. So now you're a minority shareholder in a company they want you to run because they don't have management. So now you're running this company, and you're being influenced by people that may or may not know your industry, the intimate details of your company. And so you're in this sort of weird middle ground where you don't have total control. You're being told what to do to some extent, and yet you don't enjoy the full benefit of the upside, and there's significant risk. I interviewed Ryan Moran. Have you ever had Ryan on the show?

Yeah, Ryan, absolutely.

Okay. So Ryan talked. I know Ryan Dice is a good friend of yours, but I'm. This is the other Ryan. But Ryan sold a great company. I think they had $18 million in top line revenue when they sold to a PE firm. I interviewed him on the show, and I think he owned half of it. And the deal was that they were going to sell 60% and roll 40% of equity into a new entity. And so he said, okay, great, I'll roll the dice. But he was done running the company. So he said, you got to bring in a CEO. So they bring in a CEO, and the CEO doesn't know his business, doesn't know his industry. And again, a lot of entrepreneurs run companies almost by intuition, right? Like, we all create standard operating procedures, but there's still this overlay of, like, intuition. And this new CEO obviously didn't have that intuition and real nuances of the business and started to struggle. Started to struggle. So much so that the PE company was struggling to pay down the debt that they'd taken on to buy Ryan's company. Long story short, the debt started to go into default, the equity went to zero, and Ryan got nothing for his other 40%. So he'd lost control. He wasn't the CEO, he wasn't the primary shareholder, yet he took a 40% haircut on the sale of his company. So he was a really, really illuminating episode for me. And just this story. Has he shared that story with you?

Yeah, and what's. To me, it's. I see it happen frequently. It's tough, though. I mean, I think it really comes down to what's the quality of the buyer and what's their history in executing this plan that they're selling you. Right. Because in that case, you're bringing somebody in without the Industry experience. To me that's crazy. I think you can build in to your agreement, you can build in super majority clauses so that you say when we're talking about who we're going to bring in to run the company, even though I have 40%, it's a unanimous vote is required or my vote counts yours. Right. And that's part of the negotiation. I think the challenge is that a lot of attorneys that are the M and A attorneys on these deals haven't lived through post closing integration and operation and selling of the carried interests. They hop out like they're into the deal and they've got their checklist and playbook that they run but they're not thinking about what is going to impact the wealth of the entrepreneur as they go on to the next thing. And so you've got to have some governance provisions that, that control what is going to happen with your carried interest. We had a guy who you ought to have on the show, Cole Humphus, who created a thing called Cole's Classroom and he basically built it up from nothing into this great business sold to private equity, had a percentage carried interest and a significant amount of cash also but, but a very significant amount invested in the carried interest and he was going to run, continue to run this business. And as you said, they brought in an MBA inexperienced, low level person who was his boss to, to supervise him and help him and all the stuff that he had done before that built up this great business that they bought so that they would have lead flow for their SaaS. He had an educational business so they were buying media effectively because he can feed their SaaS. And ultimately this, this person wouldn't run any of the game plan. The people didn't understand how he had done things before. They're very traditional, he's very scrappy and so those cultures clashed and ultimately he's still got his interest in the company. I'm sure they'll do great. But. But he basically opted out. And so he lost the ability to control what happened with his significant ownership interest. And that's something that happens over and over and over. So I think the key there is, is to think about building in your concerns, right? The things that like listen to the episodes on your show, listen to the episodes on our show that talk about this kind of stuff and then what are those things that create challenges there and how can I get my attorneys a little bit up to speed to thinking about how do, how does this affect me as I go into the future so that you can build some of that stuff in.

Yeah. And the other thing about private equity in particular is they are a bit like sheep. They generally have the identical investment criteria. You could go down a row of private equity groups and they're all looking for a protected niche management that's willing to stay on high profit margins, good growth rate. It's identical, the investment criteria they have. And so if you attract the attention of one private equity group, chances are you will be attracted to multiple. And that's again where you get negotiating leverage and the terms that you want. So if you don't want 40% carried interest, then maybe it's only 10% you want to carry. And the way you get that deal, I think, is having multiple bidders at the table. Again, if you've somehow attracted the attention of one PE firm, trust me, there's another dozen that will be just as attracted to that company.

And how do you respond when they say, but you just have to deal with us, we approached you first. And so we need an exclusive negotiating period.

Yeah, I mean, I think the answer.

To the Nancy Reagan philosophy, just say no.

Yeah, exactly, just say no. I mean, it's. You're not, I'm not beholden to you. You know, I'm running a company here. I mean, unless you make some sort of commitments to them that I would never, you know, never recommend. But I think you're, you're fine. I really appreciate your interest and glad you think what we're doing is interesting. But, you know, like, we're busy. We get these conversations going all the time and we'll keep having those conversations.

One tip that I'll give everybody, that we sold a company to a Blackstone company. And this is something that we do pretty frequently with our, with, with those carried interests when we kind of want to be in, because we see that we're going. Basically, if we're selling a platform company, meaning the company they're going to use to do lots of other acquisitions, then it might go well. It might not go well. So rather than putting 100% of our bet on the future with no thought as to what's going to happen, we'll typically do a reciprocal put call agreement so that we have the. They'll have the ability to buy us out after, say, five years at an agreed upon formula, not to be below a certain amount, which is important because if they ran it like Moran's business, right. If they run it into the ground, that multiple, you know, you might have a good multiple that you've agreed on, even the original multiple, but it's not really worth anything anymore. So we'll have a reciprocal put call that gives them the ability to buy us out at a predetermined formula with minimums and gives us the ability to force them to buy us out at a price that will at least equal what we would have got had we taken 100% cash. So that's a cool thing that you can build in to help reduce that risk but get the benefit of the potential upside at the same time.

Fantastic.

One thing too, a lot of folks.

Sell smaller businesses to other businesses that aren't private equity and those are a little bit different kind of deal. Do you talk to many people that are or have any thoughts on if you're a smaller business, maybe you only are making 100,000 or a few hundred thousand a year. You're not in that private equity interest range where you'll get them interested in you. How do you look at that? Do you say just don't sell yet or maybe they're burnt out with the business and want to sell. What are your thoughts on that?

Yeah, no, absolutely. I think individual investors are the most likely buyers for small businesses that are say sub 500,000 in EBITDA. It's most likely that you would have an individual investor and that person is either looking for a job to buy a job or to buy a business that might fit together nicely with their business. Oftentimes they're not as well financed, don't have their own debt facilities as a private equity company would or a strategic buyer would. And so they're going to need to borrow money to buy your company. Now the more bankable your business is, the easier it is for them to borrow money to buy it. So the more you can focus on recurring revenue, reliable profits, not having these really big lumpy years where things are great one year and terrible the next year. If you can show sort of steady growth and some of the other things that banks look for when they're lending, that's going to help facilitate the transaction. Because again, individual investors aren't usually plunking down a bunch of cash to buy your business. They're usually borrowing most of it. And that helps. The other thing to think about as a smaller business is that you're likely have to carry a note, which effectively means that you're likely have to finance a little bit of the sale. So let's say they're going to buy your company for $100. Maybe they put in $10 of their own money. Maybe they borrow $60 from a bank and they ask you to finance the remaining 30%, and that does two things. Number one, it helps them get the deal done. It helps them get the financing in place. Number two, it ensures that you stick around to help them to transition the business. Right. Because you want your pain, you're almost always as a seller behind the bank. So the bank has to get paid off before you get your money. And therefore you're motivated to make sure the transition goes smoothly. So that's a pretty common way those smaller deals are done. And I think the more you can make your business reliable so that banks would lend to it, the easier it is to get those deals done.

So would you say, is it worth them trying to stick with the business and tough it out, even if they're kind of tired of it and ready to go, or should they just, do you think, go on and sell? Have you?

No, look, yeah, look, I'm not. Okay, so two things. One, I'm a big believer in understanding your freedom point. The freedom point is when the sale of your company would, after tax would create enough liquid wealth for you to live comfortably for the rest of your life. And I think when you crest that point, it happens a lot lower than a lot of people think. When you crest that point, I think it's worth asking yourself, is now the right time to get out? Because if you stay and your business is a big part of your net worth, you're effectively gambling freedom, which is probably something you aspire to have in the beginning for the next million dollars of revenue or the next location or the next tranche of growth where it actually might not make you any happier or feel more any satisfied. So I think once you crest the freedom point doesn't mean there are other reasons that you might want to continue to grow your business for impact, legacy, etc. But once you crest it, I think it's worth at least pulling up, cracking a great bottle of wine and asking yourself, do I want to risk what I've created financial freedom for myself for the next trials? And that happens again. Very easy to figure out what your freedom point is. You just basically take the amount of income you need to feel totally free and multiply it by 33, and that would imply a 3% withdrawal rate. So if you need 100 grand a year to feel totally free, then multiply it by 33 and it's $3.3 million. And when you crest that point, it's worth pulling up. That's number one. The other thing I would say, Roland, is related to the question at hand as to whether to tough it out or sell. I'm reminded of an interview I did years ago with a guy who had an IT services company in Denver, Colorado. It was not a big company, it was a couple million dollars in revenue. And he reached his 39th birthday and he decided that he wanted to live on a sailboat. So there's no water around Denver. So this is kind of a big deal for this guy who's 39. Sean Oshman is his name. I knew it would come to me. So 39 decides he's going to live on a sailboat, goes to hire a broker, goes away, gets an offer of 2.6 times SDE or seller's discretionary earnings. It's an expression of profit. 2.6 times SDE for his company and he takes the check and he buys a sailboat. And I asked him a year later, like, how are you feeling about the deal? Like 2.6 times. It's not a huge multiple, right? Like it's not like life changing amount of money. It's not, you know, right after the sunset, et cetera. And he said, yeah, but John, I don't think you get it. And I'm like, what's that? And he's like, I'm living life on a sailboat. And that was his way of saying, like, yeah, he got what he wanted. Which was. We talk about push and pull factors when it comes to selling your business. The happiest entrepreneurs after selling are ones that are more pull versus push. Push factors are like the frustrations in your company, like employees and red tape and bureaucracy. Those are all push factors and we all have them. We all kind of frustrated at times. Pull factors is like what you want to go do next. In Sean Ochman's case, it was like live life on a sailboat for you. It might be run a marathon, write a book, travel to India, whatever it is, make sure your list of pull factors are way longer than your list of push factors. And that way regardless of what you end up getting for your company, whatever multiple you get, I think you'll end up being generally satisfied with the outcome.

I love that one thing that. And I'll probably make this the last thing until I before I ask you what things we didn't cover that you think we should, you talk about in Built to Sell. I think the, when you're taught, when you're trying to figure out what your number is, you the person that you were advising there, you gave them a strategy for determining that does that. I imagine you remember it but does that jog your memory enough? Because I'd love for you to tell that story. It's. To me, it was absolutely brilliant and a really good way to get people to be happier with what they're getting in terms of their offer.

Well, yeah, look, the story in the book, basically, early in the business owner's life, when things are just in the crapper and nothing's going right, he meets a mentor. And the mentor says, okay, what's your number? And the entrepreneur kind of puts a number that is so totally out of left field. Completely unrealistic based on the way the business is running at the time. I think at the time, the guy's business is turning over a million five in revenue, a couple hundred grand in profit. And it's a marketing services business, and so generally trade at pretty low multiples. And I think he wrote $5 million down, so nowhere near what it was worth. And he said, okay, write that down. Put it in an envelope and seal the envelope and never look at it again. I'll let you know when to open it. He goes about his business, grows his business over multiple years, and gets an offer. And the offer, lo and behold, is slightly more than the number in. In the envelope. And the mentor character says, okay, open up the envelope. Because the funny thing happens when we grow our business, we move the yardsticks, right? We do this in lots of areas of our lives, right, where we think this is going to make us happy. And then as we get approaching to that goal, all of a sudden the yardsticks move. And the reason he had it written on the index card sealed was it avoided moving the yardsticks. It's like you started this years ago with this outlandish goal to sell your business for $5 million. Now that's happening. Don't change the yardsticks, right? You've built a great business. I think most entrepreneurs are happiest when they're building, when they're creating, when they're doing new things. I think once your business crests a certain point where the newness is kind of wearing off for a lot of us, I think it's a good time to sell. Like, you put that win in your pocket. I have a friend who's. I'm always bugging him to sell his business because it's a great business. It could be worth a lot. And I think sometimes he's inert, right? He doesn't love it, but he doesn't hate it. It's just kind of going along, making good money. Why would I sell and I kind of try to make this game. I haven't been successful yet. Maybe one day.

So in closing and. Well, actually, first let me ask, would you change that advice? Now, that book was written quite a while ago and you've had hundreds of interviews and conversations with folks. Any modifications to that? That put the number down and throw it in your desk, seal it and then look at it when somebody comes and offers you.

No, I think it holds up. I love it.

I just didn't know if you had any. Any. I mean, to me, it's perfect.

Oh, that's good. I'm glad you said. Yeah. No, I mean, I think. I think informing the number by your freedom point, maybe the only other thing that I would say, throwing out a number like I want to sell my business for whatever and there's. It's not based on anything other than just a number, is I think, maybe less. Less helpful. I think if you do really do some thinking around, like, what does freedom look like and what are all the things I want to do in my life and how much would that cost to finance? And again, for most entrepreneurs. Look, here's the thing. I think once you reach your freedom point, if you sell your business, very few entrepreneurs are just going to ride off in the sunset, sit on the beach, go to the golf course. I don't think that's what they're going to do. However, if they pocket the money, they. Unless they go spend it on crypto or do something stupid with it, they put one foot on the ladder of Maslow's hierarchy of needs. That security ladder piece will always be your bottom ladder. And I think there's tremendous value in that. You can go on and do another business, enjoy your life knowing that no matter what, you're not going to worry about where rent's going to come from, et cetera. And I think, again, this is obviously assuming you're not going to risk it as something crazy. I think there's tremendous value in that for folks. So it doesn't mean that you're not going to do anything. It does mean, however, that you lock in a point on Maslow's hierarchy of needs that you can't step below. And I think that has value for folks.

That's awesome. I love that. So anything that I didn't ask or that we didn't talk about that you think would be really, really helpful to folks that are listening and watching.

Look, I think we've covered a lot of ground. I think if folks are interested in this stuff, we put Together a downloadable form called the Art of Selling youg Business Workbook, which is basically a little book that you can apply the lessons in the book to your own business. And it's just@builttocell.com lunch and you can grab that. It's free. It's also got some videos on the eight drivers of value so folks can get that. I think that's probably where I would tell people to go.

And then the books you've got, the Built to Sell, the automatic Customer, the Art of selling your Business, those are all great. You guys should all definitely check those out. And then the radio show, again, the name is It's Built to Sell Radio. Built to Sell Radio. And that's a podcast, right? Not. Not a. Like a syndicated radio show or. It's both.

Yeah, no, it's a podcast.

Okay, fantastic. So, and that's everywhere that you guys listen to podcasts. And since you're listening to mine, you should definitely listen to John's. Okay, so that's it. John, thank you so much for taking the time and hanging out with us today. I really, really appreciate it and look forward to hopefully getting to talk more as the years go by.

Let's do it. It was fun.

You've been listening to Business Lunch with Roland Fraser. If you're enjoying the show, let us know by subscribing and leaving a review. And for more information, go to businesslunchpodcast.com thank you for listening.

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