Built to Sell: Intel

August 7, 2020 |  

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The format for Built to Sell Radio typically features our host, John Warrillow, interviewing an owner who has recently sold their business.

This week, we’re going to try something different.

Today’s episode features John’s analysis of four of the exits we’ve featured on the show. John will break down his key takeaways and transferable lessons. You’ll get 9 unique insights for building to sell including:

  • How to identify the most strategic acquirer for your business (the one who will pay the most)
  • The rule of 40 and how it can impact your valuation
  • The surprising role your location can play in the value of your company.
  • How to package your service like a product

This episode is taken from a monthly webinar we host called Built to Sell Intel. This webinar gives you a chance to get John’s take on the exits we chronicle on the podcast and ask your own questions. Sign up for the next edition of Built to Sell Intel.

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Transcript

John Warrillow:

Usually in Built To Sell Radio, I get to sit back and let someone else drive. I ask the odd question, but for the most part, my guests are just oozing with insight. And so I had the opportunity to just take it all in and absorb it like a sponge. In this episode of Built To Sell Radio, we’re going to actually turn the tables a little bit. And I’m going to talk about the key insights I derived, or I concluded from four recent episodes of Built To Sell Radio. It’s taken from an original Built To Sell Intel webinar that we hosted about a month ago. So it’s a recording from that session and it breaks down again four Built To Sell Radio episodes. And I’ve tried to tease out what I think are the most transferable lessons from you, for you, regardless of whatever industry you happen to be in. Here are four unique stories and my interpretation of the key insights. I hope you enjoy.

John Warrillow:

The idea behind Built To Sell Intel is for us to look at the most recent episodes of Built to Sell Radio, where I interview a different entrepreneur every week and ask them about their exit. My goal is to really uncover some of the tips and tricks that you all can use and when I say you all, I mean owners, as well as advisors can use to maximize the value of your company.

John Warrillow:

About four weeks ago, I interviewed on the left, Ganesh Ramakrishna. I hope I’m pronouncing that correctly. Ganesh I’m pretty confident in, and on the right Mike Watson who built Opex Analytics. They built it up to 140 employees before they were acquired by private equity, backed LLamasoft, they’re episode 234. When I interviewed them, I was really struggling to try to get a sense of what it is they do, because I understand at a core level, the idea of supply chain, which is what they were involved in, but I had to get Ganesh to dumb it down for me, and here’s what he said.

John Warrillow:

He said, so imagine there’s an orange juice manufacturer. The guy must figure out where they should make their products, which warehouses they should use. That’s what LLamasoft traditionally does. They’re in supply chain logistics trying to map out where you need manufacturing plants, where you need trucks to go, et cetera, but Ganesh said, “What Opex does is they come in and help them predict which truckers aren’t going to show up that day or what the price you’re going to pay for a truck is tomorrow.”

John Warrillow:

As Ganesh pointed out, they were playing in the white space that they weren’t… Opex was playing in sort of an adjacent field, not exactly the same as LLamasoft, but certainly complimentary to LLamasoft. LLamasoft made sure you knew where to put your manufacturing plants. Both companies interestingly shared a similar client base, Fortune 500 companies largely, that had physical products to ship. Of course, that’s just even been amplified tenfold in the scope of the coronavirus and COVID-19 where all of the supply chain logistics are being interrupted. That took me about 15 minutes to get when I went through the interview and tried to really get a sense of how what they did was different than what LLamasoft did.

John Warrillow:

One of the key learnings I think you can take away from this as an advisor and an owner of a business is that your natural acquirer is often adjacent to you. It’s often a company that you know. It’s often a company that you’re already quite friendly with. You may even have as Ganesh had with LLamasoft, a form of partnership. It’s romantic to assume that the natural acquirer is this kind of unknown giant that you know nobody heard who comes in and kind of swoops in out of the night to acquire your company, but in reality, what we see more often is that the most likely acquirer is going to be a company that is adjacent to you, not necessarily a direct competitor, but someone who is in your ecosystem already.

John Warrillow:

Opex wasn’t a direct competitor of LLamasoft, but they were in the same ecosystem. There’s a couple of big insights that for me were important out of the LLamasoft acquisition of Opex, but I think one of the biggest transferable lessons, and it’s one we talk about a lot in a module within the Value Builder System called the short list builder, and that is that the most natural acquire for your company is going to be someone who sees your product or service as being germane or advantageous to selling their product or service. Ironically, most of us as entrepreneurs think about it in exactly the opposite way.

John Warrillow:

Here’s the way a lot of us as entrepreneurs think. We think, okay. This big Fortune 500 company has got lots of salespeople. They’ve got lots of distribution channels, they’ve got retail, they’ve got partners, et cetera. If they acquired my business, they would be able to sell much more of my product than I can because they have lots of distribution. That’s a very myopic view. It’s a very insular view, and entrepreneurs are absolutely excused for having that view. Many of them have been growing their business over decades thinking about how do I sell my product? How do I sell my product?

John Warrillow:

When they see a Fortune 500 company or a large enterprise organization that they would like to be acquired by, they think, wow, the first thing that comes to mind is, “Wow, they could sell a truckload of my product or service.” The secret to getting an enterprise organization excited about your company may actually be doing exactly the opposite, asking yourself and if you’re doing this on behalf of your client, asking your client, “Hold on a second, how could acquiring your business help that large enterprise Fortune 500 company sell more of their product?” When Ganesh and Mike approached Llamasoft, they didn’t say, “Look, you could sell lots more AI to your existing LLamasoft subscribers.” The people these Fortune 500 companies who already use LLamasoft software. They did exactly the opposite.

John Warrillow:

They said to LLamasoft, “Look, we can help you sell more of your software by using Opex Analytics. We help you differentiate your software from your direct competitors.” And guess what? LLamasoft was enamored by that idea because they spend all day thinking about how they can beat their competitors and so Opex was an opportunity for them to both own an analytics group onto LLamasoft and make LLamasoft that much more attractive to companies they were not already doing business with. Again, that may sound simple, but it’s actually a fundamental difference in the way often new entrepreneurs approach exiting with the way more established experienced entrepreneurs like Mike who’s had a few exit under his belt approach it.

John Warrillow:

Kind of two key lessons here. Number one, the most natural acquirer is often going to be someone who’s already in your ecosystem, not necessarily a direct competitor, but someone who knows of you and who perhaps you already have a partnership with to. Number two, focus on helping them sell their product, not on helping you sell your product. That’s the first sort of package, if you will, of what I wanted to share with you, the Mike and Ganesh story.

John Warrillow:

Let’s talk about Gaby. Gaby was one of my favorite episodes of the last few months. She just hit it out of the park on so many dimensions of what we talk about at Value Builder. First of all, she’s a wonderful lady and a really good interview. If you haven’t had a chance to listen to it, it’s certainly worth a listen. She built a company called Bellefield Systems, boring name, but a very exciting company on many, many levels. She got up to 45 employees in offering a timekeeping solution for lawyers. If you know anything about lawyers, they charge by the hour. In fact, they charge by the minute and oftentimes six minute increments.

John Warrillow:

One of the challenges that lawyers face is in particular, in an increasingly diversified world where they’re spending a lot of time at home, in the car, on the road, where they don’t necessarily have access to their desktop, the question then becomes how do they track their time when they’re not sitting in their office? Of course, that’s a huge opportunity for a lot of law firms where they make all their money off billable hours. What Gaby built was a time tracking software that allows lawyers to track simultaneously synchronicity with synchronous updating their billable hours on any device.

John Warrillow:

With Gaby’s invention, they were able to bill on their desktop. Obviously when they’re sitting at their desk, that’s a no brainer. There were lots of competitors that already did that, but her innovation was to use that same technology and make it available on an iPhone, an iPad, Samsung enabled phone, any device with access to the internet, a lawyer can now track their time. It was a SaaS based billing platform, meaning she sold law firms and she billed them on a regular recurring basis. Because she was a software company growing quite quickly that had a SaaS platform, she knew her company was a very valuable asset.

John Warrillow:

In fact, when she went into negotiation to sell her company, she thought it might be worth as much as between five and seven times top-line revenue. top-line revenue, five to seven times. I mean, we usually in the valuation world, we talk about multiples of SDE, seller’s discretionary earnings. In other words net profit with add backs or EBITDA, earnings before interest, taxes, depreciation and amortization, but in Gaby’s case, she’s talking top-line revenues, the nature of the beast in the software as service space so very, very highly sought after companies, highly acquirable companies. In fact, she got six or seven offers, which she was able to gin up by 40% from the time she originally got the first offer to the final consummated deal she made with a Roper, a New York Stock Exchange listed company. She was able to get the final price up by 40% by definitely playing one off the other.

John Warrillow:

It’s definitely worth a listen. There were a couple of key insights that I took away from Gaby’s episode. I think these are largely transferable lessons for you. Number one is the importance of your financial performance, right? We can often be lulled into this sort of sense that good old profitability doesn’t matter. Profitability, even for a SaaS company is a very attractive asset. It’s so attractive that it means that some owners often stop growing in order to create more profitability. One of the questions we get a lot is which is going to be more important, your top-line revenue to an acquirer or your bottom line profit. I don’t mean to sound facetious in saying this, but the answer is going to be both. The most attractive companies are able to grow at the same time as remaining profitable.

John Warrillow:

In the technology space, there’s something called the rule of 40. The rule of 40 is simply the most attractive, most valuable companies can combine their growth rate with their profit margin to a number of at least 40. That would be 40% growth with 0% profit margins or 30% profit margins and 10% growth. In the technology space that would equate to one of the most valuable companies. I think the juggle that you need to make as an entrepreneur, and for those of you who are advising entrepreneurs is to somehow do both. If you’re all profit and no growth, that’s going to be a discount and equally, if you’re all growth and no prospect for profit, that can be a discount as well but if you’re able to get to the rule of 40, in other words, profitability plus revenue… excuse me, revenue growth rate plus profitability percentage you’re in very rarefied air and among the most attractive companies and in the technology space, it could lead to a valuation that would exceed a multiple of your top-line revenue which would be again, an amazing achievement I think.

John Warrillow:

When it comes to key transferable lessons from Gaby, one of the other big ones that she talked about was, obviously recurring revenue as a general theme was critical. It’s critical in any SaaS based company. Software as a service based company where you’re billing on a monthly or an annual basis. Gaby did a really good job of describing the difference between logo, customer, or revenue churn. Each is important, and each may be prioritized for different reasons by an acquirer.

John Warrillow:

What’s meant by logo churn is companies that continue to be a subscriber to Bellefield. If you think about a law firm, if a law firm with say 10 licensees, if nine of them cancel but one remain a licensee of Bellefield, that would be considered 100% logo retention. Even though on a customer level, in other words, a user level, Gaby in this hypothetical example would have experienced 90% user churn if 10… she started the month with 10 users, lost nine and kept one. Her user churn would have been 90% or her user retention, said the opposite way, would have been only 10% but her logo churn would have been in this case 0%. In other words, she would have retained all her logos because she kept at least one customer.

John Warrillow:

Both are important to acquirers. The logo churn is going to be important to an acquirer who wants to get into new accounts, who sees you, your company as a way to access lots of new accounts. In the case of Roper, what Gaby did really well is really nurtured the mid market. She knew that going after the largest New York based or Washington based law firms would be really slow and time consuming. Equally, the very small self-employed lawyers were probably not going to generate enough revenue. What Gaby did really well is focus on the mid market, the segment in the middle. When Roper Technologies came in and looked at this, they saw… one of the reasons they saw Gaby’s company is so attractive was that by making one acquisition, it would allow them to reach out to many, many thousands of law firms in Gaby’s database.

John Warrillow:

They were keen to see her logo churn to be very, very low. They were a little bit less worried about customer churn, because again, they were confident they would be able to sell into all of those logos. The third kind of churn is revenue churn and again, revenue churn would be a close cousin to user churn, but in essence you are measuring the loss of revenue from one month over to the next. All three types of churn are different and all three can be important to potential acquirers. What revenue churn allows you to do is measure your LTV to CAC ratio. LTV stands for lifetime value of a customer compared to the CAC. CAC stands for customer acquisition costs.

John Warrillow:

What acquirers are looking for is an LTV to CAC of at least three to one, meaning you’re garnering at least three times more lifetime value from that customer than it costs you to acquire that customer. The secret to calculating your LTV or the raw material, I should say to calculating your LTV to CAC ratio is going to be your revenue churn rate, your net revenue churn rate. That’s why revenue churn is going to be equally important to customer churn and logo churn.

John Warrillow:

If you are advising a business owner, or if you indeed you’re a business that’s thriving or striving to have some sort of recurring revenue, you’re going to want to look at all three of those factors. The third and final key insight that I will share with you from Bellefield in particular, Gaby story is monopoly control. Monopoly control is what we talk about at Value Builder, which is one of the eight key drivers of company value. One of the eight key things that acquires look for. They want to buy businesses that do something unique, because when you do something unique, it gives you pricing authority, pricing authority leads you to better margins, better margins means you’ve got more money to invest in sales and marketing. What Gaby did, which so few owners do is she resisted the temptation to go to a broader set of professionals.

John Warrillow:

Lots of people track time for a living, right? Architects track their time, graphic designers track their time. There’s a lot of professional service providers that track time, but Gaby resisted the urge to dilute her offering to go after other verticals. She decided to go all in for lawyers, and in so doing that allowed her to build 32 different practice management integrations. She went to the different practical practice management softwares, the software that lawyers use to run their business behind the scenes and said, “Look, your lawyers have to track their time. We’ve got the very best time tracking application and we can integrate it directly into your practice management software, making your software stickier.” And giving Gaby the opportunity to distinguish her product from all of the other me too products out there.

John Warrillow:

This is one of the hardest lessons I think so many entrepreneurs fail to learn, and that is that by diluting themselves, by going after lots of different market segments and diluting their value proposition, they’re becoming a me too product. When Roper looked at buying Bellefield, they were fascinated by the fact that Bellefield had such dominant market share with lawyers. Had Bellefield made the mistake of just selling time management software to anyone who could fog a mirror, I believe Roper would have been less interested because all of a sudden they would have not seen such a clean opportunity to integrate Bellefield into their firm.

John Warrillow:

I think building a monopoly control, building a competitive moat gives you pricing authority. It gives you a differentiated advantage, but it also makes you so much more attractive to acquirers. Remember acquires only acquire a company if it would cost more or take more time to compete with you. Right? Roper had all the money in the world to compete with Gaby, but they reasoned that by buying Gaby’s company, they would more be quicker to market and it would cost them less in the way of time and money to simply just buy her a company than would to create what Gaby had created and that was because she had in large measure, focused on lawyers and created these 32 different practice management integrations. That was Gaby Isturiz.

John Warrillow:

Michael Spinosa was a fun interview. Smaller company, so $6 million in annual revenue, a company called Unleashed Technologies. Michael also had great operating metrics. 20% growth, 20% margin and 90% customer retention. He was definitely focused on the key metrics of financial performance, but to be sure. He was also interestingly acquired by a private equity backed organization called LINC Partners. What Michael kind of assumed was his business was going to be worth around what a typical small service based company deeply dependent on its owners would be. He thought it would be around two and a half to three times his SDE or seller’s discretionary earnings. Again, think of it, it’s not exactly apples to apples, but think of it as a little bit like pretax profit. Two and a half to three times pretax profit.

John Warrillow:

What Michael actually got for his company is around double that. How did he do that? Well, here’s the analysis. What Michael did at Unleashed Technologies was created essentially freelance technology people, web designers, user experience people and instead of just building on a time and material basis, what he did was productize his service. He created what he calls growth packages. Growth packages that are essentially plans that look like products, essentially service plans that look like products. They come with dosages and he intentionally used the word dosages. Now, what is a dosage? Dosage is something that you use when you’re consuming medication, right? What dosage level is something a doctor would ask them, but he specifically used the word dosages as a way to communicate that what he was doing was not selling time, which you would buy by the hour. He was selling growth packages which you would buy in dosages.

John Warrillow:

It’s just two examples of how far he went to productize his service to make it look like a thing. I think this is the secret for virtually any service business to get ultimately a more valuable company and certainly a more scalable company, is to productize whatever service that you have. Packaging it like a service. Why is that important? Well, if you have a service company and all you do is say, I’m a graphic designer. I’m a lawn care specialist. I’m a translator as an example, you’re inviting competition. You’re inviting comparison because you’re using the generic term that is within your industry, translator, graphic designer, lawn care professional, and allowing people to compare you on an apples to apples basis with other lawn care providers and translators and so forth.

John Warrillow:

As a result, you get priced down. People say, “Well, I could find another translator for $20 an hour and you’re charging $30 an hour. Why would I go with you.” Essentially you’re inviting that comparison. Whereas if you follow Michael’s footprint and you create products out of your services. In other words, you productize your service. You essentially create more of a differentiated value proposition. Suddenly Michael’s the only guy that has these special growth packages that you could buy by the dose. Suddenly he’s differentiated himself from every other generic web design shop that charges by the hour, and that’s one of the reasons because he was able to create these growth plans and distinguish them from a time and materials hourly based company. He was able to create the operating metrics that he did. Again, a 20% profit, 20% growth and 90% customer retention.

John Warrillow:

I think I believe and he believes in listening to the interview that a major part of his success and the reason he was able to do that was because he productized his service. In fact, during the interview very early on, he admitted. He said like, John, in the beginning our company was very average. He used the words, very average. He said, you know what? We’re just kind of average. There’s nothing really special about what we did, and for the first two years, he lived on that hamster wheel that so many service company providers live, which is the sort of hand to mouth project to invoice kind of work. It wasn’t until he made this switch to these growth packages, which he built by the way annually upfront, so he had a positive cashflow cycle that he was able to create the sort of growth that he was yearning and again, the net result was an acquisition about two times what he thought a classic service business would garner.

John Warrillow:

The other kind of big lesson, I think out of Michael’s work and Unleashed was the importance of recurring revenue. The growth packages were not a one off package. You didn’t buy it and use it up and wait until you ran out. He billed them on an annual basis and they were purchased in installments. He did not let clients transfer hours from one month or one year to the next. He said, “Look, part of our value proposition is we are always available to you but the quid pro quo is that you’ve got to have projects for us.” He did not let people… and that’s one of the age old questions of lawyers. Do you let the retainer get transferred from one month to the next? And Michael made the decision that, no, he was not going to let that happen.

John Warrillow:

It created a recurring revenue for him so much so that when COVID-19, the coronavirus happened he hardly missed a beat in the sense that he had these locked in contracts and he continued to serve his customers through the worst of the economic recession and continues to do so to this day. He’s in an earn-out right now and is benefiting from the fact that he has those customers on those long-term contracts. Hopefully that gives you a sense of what Michael was doing and the reason that he was able to get such a great multiple first company.

John Warrillow:

Last case study, if you will, and then we’re going to turn to some questions and answer whatever questions that you have about your own business. This last example comes courtesy of a gentleman named Anson Sowby. He runs a company called Battery, an advertising agency. These guys were pretty sort of hip and trendy in the advertising world. They were based in Los Angeles and cut their teeth doing advertising for video games. Video games as you know if you’ve looked at this industry is now larger, if you can believe it, than the motion picture industry. Meaning more money is spent marketing and selling video games than the entire movie business, which is shocking to me.

John Warrillow:

Anson was in the absolute cradle of the entertainment business being located in Los Angeles. He took his learning from marketing and selling video games to the likes of Lego and ultimately Netflix and carved out an amazing reputation as a advertising agency that specializes in working in the entertainment field. Built it up to 50 employees when they were acquired by Havas, which is one of the big advertising agency, holding companies based in Paris, France. A couple of key lessons from Anson’s story. The first is the importance of building with the end in mind.

John Warrillow:

I often, when I do interviews, I can remember I did an interview a while back and I got on the interview and usually these interviews are kind of… they’re puff pieces. They’re not hard. The interviewer kind of lobs these softballs at you, and this guy came on and his first question was okay, Warrillow. Yeah, you’re the guy… you’re the douchebag who wrote, Built To Sell and he went on from that opening to chastise me for writing a book that advocated people build to flip their companies. I don’t know how well I rebutted his comments. I tried, but I don’t think I did a great job on the spot, but since then I’ve reflected on what is this sort of, if you will cancer running through the entrepreneurial community, I believe, which is that for a lot of people, this notion of building to sell is a negative.

John Warrillow:

It’s somehow only done by the money grubbing, greedy entrepreneur. I couldn’t disagree more, surprise, surprise, with that notion. I think the best companies like Anson’s are built to sell from the beginning. Anson actually said from the beginning, he was working in the video game industry and he decided to start an advertising agency, and he said from day one, I was building to sell. I try to draw the distinction between building to flip versus building to sell. I think building a flip is a very short-term focused way of thinking, right? You build a company and you’re hoping to flip it in a matter of months, maybe you acquire a company hoping to clean it up and sell it in a matter of months. That’s not what we do at Value Builder.

John Warrillow:

We are helping owners build to sell, and that’s a very different mentality. It’s a much more long-term mentality. It’s taking a much more strategic field of view. I would just draw the distinction and I think Anson did a great job on this episode of drawing the distinction between building to flip versus building to sell and of course, what we advocate for is building to sell. The second thing that I think Anson did really, really well was he started buying lunch for mergers and acquisitions professionals. He did this almost from the get go. Like in the first year of his company, he was starting to kind of romance and pick and glean lessons from mergers and acquisitions professionals.

John Warrillow:

He was pretty wide in terms of lunches. He would buy lunch with anyone who had experience selling advertising agencies. He did that very intentionally, because he wanted to understand from the M&A professionals, the people who sell companies what people liked in advertising agencies, what they value, what they found to be discounted. I think it’s the cheapest meal that you’ll ever buy, is to take a mergers and acquisitions professional for lunch and it reminds me just the critical rule, I think, and I’m so glad to see so many of you, 62% of you are advisors. I’m so glad to see that so many of you have joined because I think you play a critical, critical role.

John Warrillow:

I was reminded of this yesterday. I did an interview. It’ll come out in two or three weeks. It’ll be broadcast in two or three weeks. I did an interview with a woman in Oregon who built a salad bar. You’ve probably seen these restaurants. I think one’s called Chopped. There’s a few sort of chains that are springing up in across the United States. I’m sure around the world where they do fresh salads. She built this one salad bar in Portland, Oregon. They didn’t have any kind of cool salad bars and so she built it in Portland. It was a success, great success. She decided that she wanted to scale this business and grow it and she decided that… she wrote a business plan for 10 locations. She didn’t have enough money to finance this. She was a divorced single mom with a couple of kids.

John Warrillow:

She decided to raise money and she made the mistake of using an advisor who was also in the round of investment that she was raising. I’m using the word advisor in air quotes, now. Convinced her to sign a deal, which called for… they were using convertible notes as a financing mechanism, which called for a two and a half times liquidity preference, meaning that in the event of the sale of her company, she would pay two and a half times their original investment without any cliff or any vesting period or any state period. She would pay immediately two and a half times the original investment. Well, guess what? A few months later, she signs the deal. A few months later, one of the fastest growing salad bars in Seattle comes and makes an acquisition offer. At the time she had nine locations, she was on her way to a 10th.

John Warrillow:

When she accepted this acquisition offer, she thought she’d hit the lottery, won the lottery only to find out from her lawyer a couple of days before closing that she’d agreed to pay all of these investors two and a half times their money a few months after they had made this investment. Her lawyer told her that by signing that term sheet, she had effectively washed out all of her equity. She made the decision to sell the business even though she stood to gain nothing from the sale of her nine location restaurant. She made the decision to sell because she wanted to pay back all of her investors. She agreed to take any of her proceeds in the form of an earn-out.

John Warrillow:

Well, she signed that earn-out in November 2019. In February 2020, three months later, Oregon state shut down all restaurants, making it impossible for her to hit her earn-out. She was left from the sale of her nine store chain with absolutely nothing, and it’s because she didn’t have good advice. She didn’t have an advisor like you looking out for her. She had an investor looking out for himself, writing a prospectus which gave him and his fellow investors a two and a half times X on their investment months after they invested. She didn’t have great advice and that’s something that Anson Sowby did the opposite way.

John Warrillow:

He, from the very beginning started to cultivate relationships with outside investors. Started to buy lunches and started to start listen to the advice of outsiders whose job and profession it is to sell companies. Key learning there, hire a certified value builder. We’ve got a few of them on the call today. I know John, [Ropper 00:45:53] is on the call. We’ve got Andres as a certified value builder. I won’t name all of you, but there’s lots of certified value builders on the phone today, but I think you do an incredible work.

John Warrillow:

The third thing that Anson did really, really well is think deeply about what he wanted in selling his company. As you can see from his headshot. I mean, he’s a relatively young guy, right? He thought about what his potential exit options were and he considered three different exit options. The first was a minority recapitalization, meaning he would sell a minority of his shares in return for an injection of capital. He also considered a majority recapitalization and there were a couple of offers he considered from private equity groups who were saying, “Hey, listen, we’ll buy 60% of your agency, but we want you to continue to hold 40%. We want you to continue to grow it for five, six, seven years.” That’s called a majority recapitalization, and then he also looked at the option of a 100% sale with a backend earn-out.

John Warrillow:

He ultimately chose the latter, but he considered all three, which I think is a really key lesson for anyone who is building to sell and is an aspiring value builder, is the more open you are to multiple exit scenarios, minority, majority, or 100% outright sale, I think that’s going to drive the most interest in your company. If you are standoffish and say, ‘No, I don’t want any of that structuring stuff. All I want is 100% sale.” The problem is you’re going to turn off a lot of acquirers. For acquirers, in order to drive the best deal terms, you want multiple bidders. Ironically that the way you get the best deal terms, the most cash up front, the best outcome for you is to be as open as humanly possible to all the potential scenarios that you can conceive of.

John Warrillow:

Anson had offers from minority recap to majority recap, to a 100% outright, and it gave him more leverage to deal with Havas. That’s my kind of key takeaway for you is, to really stay open to all of your exit scenarios, is one of the drivers of a happy and lucrative exit that we measure using the PREScore tool within the Value Builder System. The final kind of key insight from Anson that I wanted to share was the importance of your physical location to some acquirers. I mentioned earlier, Havas is based in Paris.

John Warrillow:

Anson started Battery in the heart of the entertainment industry in Los Angeles. For some acquirers, and it’s one of the questions on the short list builder tool. For some acquirers, your location is going to make you irresistible, because it’s going to give them a chance to create a beachhead in a market that they want to be in and so don’t discount your location as just where you happen to be. You may find that that physical proximity is important to potential acquires. It certainly was to Havas. Okay, let’s do this. Those are the four episodes I wanted to sort of try to draw out some transferable lessons. I hope that you are taking away a couple of key lessons from that.

John Warrillow:

I wanted to now give you a chance to ask any questions that you have. These can be of your situation, of your client’s situation to the extent that you want to ask on behalf of a client of yours. Happy to sort of dig into your questions now. If you have a question, please just drop it into the GoToWebinar control panel. I’ll answer them in the order in which they arrive. We’re going to put a hard stop on question and answer at one o’clock Eastern Time. If you do have a question, we’ll take the questions up until one o’clock Eastern Time, so for the next 15 minutes.

John Warrillow:

Vikram asks, how do you productize a service and avoid more customization to our SaaS based software web app? Well, okay, great question. How do you productize a service and avoid more customization? Yeah. The thing that I would highly recommend you do Vikram is go through a segmentation exercise and really think hard about who the customers are that you work with and who your ideal customer is. You can look at it from demographics, so the age of customers, the income level, to psychographics, their motivation, to firmographics which is a… it’s a B2B software that you have Vikram. Could be your industry, et cetera. One of the things that leads to customization and dilutes the whole value proposition of a SaaS company is when you’re selling to too many segments. Too many segments leads to too much customization. You’re trying to make the product, the software work for too many different types of buying needs.

John Warrillow:

What Gaby did was create one software for lawyers and she didn’t offer customization. She offered basic integration, which I would argue is different than customization. Integration means, if you’ve got an existing practice management software we’ll integrate it with your practice management software. That’s different than changing the code in the software based on each of your customer types. I would just draw distinction Vikram between integration and customization. If you’re running into customization issues where each customer wants you to make it look different for them, I think it’s time to start niching down, is what I would recommend.

John Warrillow:

Addie asks, oh, very simply. I had to jump off the webinar, can I get a recording? Yes, Addie. By the way, for those of you who want a recording, because you attended live you will get an email two or three hours after the session with a recording to the session so you’re welcome to grab that. Don asked the question, how could logo churn ever be anything other than 100%? Logo churn, again, is when a company stops doing business with you. Let’s imagine that a company… Let’s imagine you have a Tesla as a customer and let’s imagine that you sell Tesla some software. Let’s just imagine. Let’s imagine you have 10 employees at Tesla that use your software.

John Warrillow:

Tesla’s a logo that you have and the 10 employees are all users of your software. Well, you could do something that angers all of those customers and nine of them would cancel their subscription with you, but if one remained as a subscriber at Tesla, you would be able to consider Tesla a retained logo. In other words, your logo retention or your ability to retain that would be 100%, that logo. As long as you are keeping at least one customer from that company, you can consider that a 100% logo retention. Hopefully that draws the distinction for you, Don.

John Warrillow:

Michael says, I particularly like the museum example called Museum Hacks. This guy named Nick Gray. I can’t remember what episode number, but it’s like in the last 20 episodes. He was great, by the way. He was a fantastic interview. Michael, I’m glad you brought him up, take away from building employee, family, friends is good idea. You can not hold them accountable price and so true. Yeah. That’s just more of a comment from Michael than a question, but yeah, I agree. That was a great episode, Michael.

John Warrillow:

Martin asks any thoughts on EBITDAC, i.e. earnings before interest, the taxes, depreciation, amortization, and now coronavirus. New valuation technique being discussed. Yeah look, I think it’s horseshit, to be honest with you. I think it’s completely just nonsense. EBITDAC as it’s been explained to me is essentially recasting your earnings now that the coronavirus has negatively impacted your earnings, which is what an acquirer does anyways. Irregardless of coronavirus, they are going to look at your most recent profitability. If it’s down from last year, they’re going to discount your valuation. They may apply the same multiple, but they’re going to discount your evaluation because your earnings are down.

John Warrillow:

They don’t take into consideration the fact that it’s a coronavirus event versus another negative event. That’s essentially not giving any credit to the business owner for building a great business that had a black swan to it. What I think is a more intelligent way to value a company is saying the coronavirus is an extraordinary event. It is a one off event. It doesn’t happen every day. Just because they… and so recasting the earnings stripping away the effective coronavirus, I think is a reasonable thing to do. Clearly savvy acquires are going to use this to take advantage of vulnerable entrepreneurs. I think coronavirus is a black swan. It’s a one-time expense and I think trying to suggest that their earnings… you should apply the same multiple to drastically lower earnings, I just think it’s wrong. Hopefully that helps.

John Warrillow:

Bill says, we are in the wisdom business. Crisis communications and reputation management thrives off… we thrive off referrals. We’re working to create products, but initial market feedback is that they most value the customer solutions and the insight of the CEO lead consultant. Can you share a case study that bridge that gap? Yeah. I mean, it’s really the same, Bill, as any situation where you are selling your intelligence to your professional services. I mean, you could look at architectural firms where you don’t want off the shelf architectural solution. You want the partner from the architectural firm to come in and design your building just for you, same for a law firm, et cetera.

John Warrillow:

What I would encourage you to do Bill is try to go through the process that is described in the book, Built To Sell, which is really about identifying if there’s a process you go through in serving… in doing crisis communication that allows you to build a consistent process. That there are some methodology to what you do. It’s not completely custom every time, and that will allow other people to sell on your behalf, which is a big step forward. Right now Bill, my guess is that you do all the selling or your partners do all the selling because you’re the one with the most industry credibility, et cetera.

John Warrillow:

If you productize that service, even though you may still be delivering it, you will enable people to sell it because in the absence of a product by service, the only thing people have to go on is evaluating the person in front of them. Whereas if you productize the service like the guys from Unleashed, you’re making it easier for people to sell what you do. The other thing that you might think about is if there is a product solution embedded somewhere in your business. Jason Fried comes to mind. Jason was much like you. He was in the web development business, but was highly sought after. Had tremendous depth and wisdom about building great websites. He was hired by the major, major companies, Ford and Wrigley, and these giant companies to build them websites, which he charged them 60, 80, a $100,000 to do.

John Warrillow:

You might see some of the parallels between what Jason found himself doing, and he hated feeling so beholden to these large clients. Interestingly, he built a little piece of software that allowed him kind of behind underneath the hood that allowed him to manage the projects that he was managing, these big web design projects. That software was something that intrigued a lot of these big companies, many of whom were forced to use Microsoft Project and hated how clumsy that product was. Well, Microsoft Project is a very clumsy product. What Jason had built was this very simple project management software. He started selling the project management software very inexpensively to these clients and realized that, “Oh my gosh, this is my secret for getting out of these big custom jobs.”

John Warrillow:

He started selling user licenses to a product he called Basecamp. Basecamp today has hundreds of thousands of users. When his revenue from Basecamp eclipsed what he was getting from doing custom websites, he shut down the custom website business and has never looked back. Does not do custom websites. In fact, his biggest customers pay him hundreds of dollars a month, not tens of thousands of dollars a month. There may be a product lurking in what you do in crisis management, Bill, that could benefit hundreds of thousands of businesses, small and medium sized businesses that if you could codify and productize it, you would be able to get out of the kind of hamster wheel of having the business so dependent on you. I hope that helps Bill.

John Warrillow:

12:54, so we’ve got time for maybe one or two more questions. This question goes beyond I think that… it’s talking about convertible notes. Comes from James and he’s just describing four different types of convertible notes. It’s just going to go beyond my pay grade and too complicated for our conversation today. I appreciate you sharing James but I don’t think I can address it right now. Jim asked the question, in each of these acquisitions, did the individual brand intangible asset values add the final sale price?

John Warrillow:

Yeah. Look, I think intangibles like… when you value and sell a company, there’s the asset value of the business and then there is goodwill. Goodwill by definition in an accounting parlance is the difference between the actual market value of the business and the asset value of the underlying assets of the company. The job of the entrepreneur is to create goodwill, right? Because any idiot could sell their assets, right? You just hire an auctioneer and say, “Here, sell my truck, sell my furniture.” And basically you’re liquidating your assets.

John Warrillow:

The job of the owner of a company in my view is to build value and that is really building the intangible value, the value beyond just the assets of the hard assets in the company and one of those of course is the brand, but what I’ve experienced is the brand is less important in and of itself but what the brand represents. The brand represents a willingness for owners… excuse me, customers, to purchase from that company and repurchase from that company and more importantly, pay a premium to repurchase from that company. If you think about a class example, like if you look at Nike, for example. Nike shorts, running shorts, right? Virtually identical to the generic running shorts you can buy at any number of other stores, yet people pay a premium. Why?

John Warrillow:

Well, it’s not the fabric, it’s not the place they manufacture them, because most of them are manufactured in the same place. It’s the brand. It’s the willingness to repurchase from that brand that makes Nike so valuable as a company. The logo Nike was commissioned for… it was a famous story, is commissioned for less than a hundred dollars. There’s nothing inherently valuable in the logo. The swoosh picture. What’s valuable is what it represents and that is the willingness for customers to repurchase at a premium when it is emblazoned on something. That’s what’s valuable, not just the graphic design of the logo. All right. Last question here.

John Warrillow:

It comes from Gregory. His question is how to get, save value from a company that is in a turnaround or crisis. Any business cases, how to sell the future when you cannot fix the present. Yeah. I mean, it’s unfortunately going to be the story of a lot of companies right now. Right? A lot of businesses in particular service businesses are just being crushed by the coronavirus, right? And so there’s… and many of them there they’re going out of businesses. Many are in desperate straits. I don’t mean to be glib in making this advice, but clearly selling six months ago would have been a whole lot better and I know that’s terrible advice because you can’t do anything with it.

John Warrillow:

One of the things that I experienced around Christmas time this year is two dear friends of mine who have always sort of tapped me informally for advice on selling their company. I’m just talking informally as a friend. I had met up with them around Christmas time, both of them individually at different times and said, “Hey, like where are you at? Are you still thinking of maybe exiting?” Both of them said, “We’re coming off our best year, 2019. I think we’re going to put it off for other five years.” I can tell you with no uncertain terms, both of them are devastated by what has happened to their companies over the last five months since the pandemic really took hold of virtually all companies, in particular service based companies and they wished they’d had a do over, right? Of selling when they were thriving. That’s again, not something that you can do anything with, Gregory, but what I would say is once you get your business back into fighting form and you become successful again, please do not wait.

John Warrillow:

Black swan events happen. They happen to great companies and the time to sell is exactly the time where you feel like nothing could go wrong. That’s the perfect time to sell. Practically speaking what I think you’re going to run into Gregory. Forget, I’m calling you Gregory, but I think actually your name is pronounced Grégoire. Forgive me for mispronouncing your first name. My advice would probably be to look for some form of earn-out or recapitalization where you partner with a company and you structure a deal where much of your sort of proceeds are garnered from the future. Again, that’s not guaranteed as we saw in the beginning or in the discussion about Anson Sowby.

John Warrillow:

My guest who is from Portland, Oregon had an earn-out and she was unable to monetize that. It’s not guaranteed. If you’re going to do an earn-out I think that the key is to try to structure it so that it’s tied to top-line revenue as opposed to profitability or margin because you’re in much better control of your top-line revenue. You’re in less control of your margin, especially when you’re a division of a large enterprise organization. Listen, I hope that’s helpful.

John Warrillow:

If you’re interested in learning a little bit more about what we do at Value Builder, we help people discover their monopoly control, create recurring revenue, all the stuff we talked about. Please head over to valuebuilder.com. There’s a questionnaire that you can take there and we will put you in touch with a certified value builder who can walk you through the process of building your company. If you are kind of contemplating a sale and you’re just not sure if you’re personally ready yet and you want to really think about your options for exiting like Anson did, and thinking about the three options that were available to him, please go ahead and get your PREScore.

John Warrillow:

Again, PREScore is PREScore.com. It’ll allow you to evaluate your personal readiness to exit. I hope you found this helpful. I enjoy doing it. We’re going to do this once a month, and so look out for the next invitation in your inbox in about three weeks time. Thank you for doing this everybody. Have a great afternoon.

 

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