Aug 16th, 2021
John Warrillow is an entrepreneur, author, podcast host as well as being the CEO and Founder of the Value Builder System. In this super conversation you can learn:
- Why he coaches entrepreneurs to consider selling from the outset
- Making yourself dispensable - your ultimate poker hand - so what is that?
- Why we should focus on value above all else
- “Parenting” your team and business can deliver great value
Join our Tribe at https://leadership-hacker.com
Music: " Upbeat Party " by Scott Holmes courtesy of the Free Music Archive FMA
Transcript: Thanks to Jermaine Pinto at JRP Transcribing for being our Partner. Contact Jermaine via LinkedIn or via his site JRP Transcribing Services
Find out more about John below:
John on LinkedIn: https://www.linkedin.com/in/johnwarrillow/
Value Builder System Website: https://valuebuilder.com
John on Twitter: https://twitter.com/JohnWarrillow
Full Transcript Below
Steve Rush: Some call me Steve, dad, husband or friend. Others might call me boss, coach or mentor. Today you can call me The Leadership Hacker.
Thanks for listening in. I really appreciate it. My job as the leadership hacker is to hack into the minds, experiences, habits and learning of great leaders, C-Suite executives, authors and development experts so that I can assist you developing your understanding and awareness of leadership. I am Steve Rush and I am your host today. I am the author of Leadership Cake. I am a transformation consultant and leadership coach. I cannot wait to start sharing all things leadership with you
Our special guest on today's show is John Warrillow. He's the founder of The Value Builder System, a practice management software for business advisors. His best-selling book, Built to Sell has been internationally recognized as one of the best business books. He's also the host of the Built to Sell Radio. But before we get a chance to meet with John, it's The Leadership Hacker News.
The Leadership Hacker News
So, as we head towards the end of the summer holidays, business leaders and team leaders are going to start thinking about how to get ready for 2022. Although we can't predict a future, we can say that next year will not be returned to business as usual. The pandemic, social unrest, cultural divisions, new remote, or hybrid working, schooling possibilities, all but guarantee that leading teams of businesses in the coming year will be anything but business as usual. The technological trends in which workers will need to learn new skill sets outside of their roles, combined with new ways of working. Remote, in person, or hybrid of the two, would require leaders to be nimble, empathetic, and inclusive as well as strategically focused.
So how do we get ready for 2022 and beyond? Use technology in human ways and for human reasons, when it comes to even the near future, the ability to adapt to new technology is always going to be a priority. And the question often in its minds of its workforce, is this tool a force of good or the enemy? Professor Roshni Raveendran research explores the integration of novel technologies into the workplace and where those technologies intersect with the psychology of human behavior. With studies include an examination of monitoring technology and the use of virtual and augmented reality. Raveendran keeps focus on the use of new systems to augment human life and how to use those new technologies responsibly. For example, the use of avatars may relieve a sense of social threat through psychological distance or an organization's behavior tracking application may be used for better.
If it's for the information for its employees to self-analyze, rather than making them feel monitored constantly, as companies start thinking about making remote work a long-term reality, one key challenge pertains to the missing social connection, the feeling of being part of the same group, said Raveendran. So, there'll be a lot more demand for immersive technologies like virtual reality. That's why it's important for us to understand the psychology that drives people to adopt some of those technologies. Let's look at maintaining and improving company culture. If a company does maintain remote work as a status quo, how can leaders nurture a sense of teamwork and company culture across a distance and the difference that might exist? Well, Darden Professor Laura Morgan Roberts is an expert in human potential, diversity and leadership development. She knows compassionate, responsive leadership is what every organization needs, whether it's face-to-face or screen to screen, because learning needs to happen so rapidly.
The fastest route is often peer to peer through nonlinear ways of thinking. Even after a crisis, there will be a normal, normality and leaders need to map out old values and behaviors and norms, even especially the unspoken ones. And then contrast them with what we now know to be the normal as it is today, or as we'd like it to be. As companies compete and grow, the successful ones will emphasize with a culture of inclusivity, authentic ways of developing and retaining their talent. And the last thing I want to call out for how organizations and teams can get set up for 2022 is advance your diversity efforts and intelligent inclusion as we move forward next year or any year for that matter. Successful leaders will forge beyond diversity efforts and developing minority talent, pushing their organizations to embrace the importance of intelligent inclusion, ultimately the impact of diversity, equity and inclusion efforts.
However well-meaning will depend on how they're viewed. Professor Martin Davidson, who also serves as Darden's senior associate Dean and global chief diversity officer, said, create an inclusion climate is inherently ambiguous task, how organizations and to take inclusion matters is key. Decades of research in social psychology and organizational behavior show us that when individuals questioned the value of group identity, the social identity threats they register are massively damaging, not just to the individual, but to the individual's relationship with the organization they work in. Davidson and explores how those organizations can design and Institute programs and policies that work to eliminate racial inequality by reducing that psychological reactivity that arises in response to any racial friction. While Davidson's research was focused on racial equality. For me, intelligent inclusion is about any minority. Age, race, religion, sexuality, cultures. The more we can recognize that we're all in the same boat, heading in the same direction, the better we can serve each other. That's been The Leadership Hacker News. If you have any news, insights or any information that you'd like us to showcase on the show? Please get in touch.
Start of Podcast
Steve Rush: Our special guest on today's show is John Warrillow. He's an entrepreneur, a writer, he's a podcast host, and he's also the founder and CEO of The Value Builder System. John, welcome to The Leadership Hacker Podcast.
John Warrillow: Hey, good to be with you Steve.
Steve Rush: So, delighted to have a fellow podcaster and an entrepreneur on the show today. But for the folks that listening for the first time that may not have heard a little bit about your backstory, let's just give us a little flavor of how you ended up creating The Value Builder System and doing what you're doing now?
John Warrillow: Oh man, it goes back 25 years ago. I had a market research business where we did quantitative market research for big companies. We had a decent sized company. I think we were five or six million in revenue, 20, 30% profit margin. So, it was a good business. I thought I was sitting on a gold mine and I went to see an M&A professional guy named Harry Mielly in Toronto. And I said, you know, what do you think it's worth? And I was kind of rubbing my hands together, waiting for his number. And he said, well, it kind of depends on the answer to a couple of questions and I said, shoot. He said, all right. So, like, you do research? And I’m like yep. He said who does the research. And at the time we worked with these massive companies, Bank of America, Apple and JP Morgan Chase.
And so, I was involved. So, I said, well, I'm involved in the research. He said, all right, who does the selling? And I'm like, we're working with these giant companies. Of course, I'm doing some of the selling, right? He says, okay, well John, there is nothing here I could sell, your company is worthless.
Steve Rush: Wow.
John Warrillow: And man, that was tough to hear for me, especially going into that meeting, thinking, I was sort of sitting on this goldmine, kind of counting my shekels, so to speak. And leaving, realizing that I had built this business that was effectively unsellable. And I spent the better part of, I guess, three years, really trying to listen to what Perry had to say and others frankly, and transform that business, made much change we create. It’s a subscription model I got out of doing the selling out doing research. Long story short, it was acquired by a New York stock exchange listed company in 2009.
So, it had a happy ending, I think kicked off for me to sort of lifelong journey that I'm on to this day, which is to really discover what drives the value of a business. And hopefully, you know, you talking about purpose-driven leadership, hopefully helping other entrepreneurs you know, not have to experience what I felt and maybe save them some years off their lives by building a business from the start that's valuable. So, I've written a few books on that topic and of course, Value Builder is a software platform that advisors use to help their clients sort of understand some of these principles. So that's me in a kind of nut shell.
Steve Rush: Was that kind of an epiphany for you at the time where you had a perception there was valuing the business because of its turnover, yet when it comes down to its underlying asset value, there was a real mismatch. Was that the kind of defining moment to set you on this path I guess?
John Warrillow: Yeah, I walked around thinking my business is going to be valuable because it's profitable. And because we have great clients and people would say to me, they would say, wow, you work with Bank of America, you work with IBM, you know, fill in the blank, large enterprise organization. You're going to be, you know, this business is going to be valuable. And, I was under the impression that an acquirer would buy us for our client list. So, my focus for many years was to really win clients that were prestigious clients, right. We worked with British Telecom, biggest Telecom company in Europe at the time. And that was an aspiration for us. Not because they were necessarily great clients or the biggest revenue, but because we could put that logo on our PowerPoint slide deck to say, hey, we worked with British Telecom, and I was chasing the wrong stuff. What I came to learn was that clients are great and having kind of blue-chip clients can help the value of your company, but they're not going to make the value of your company. They're instiller tertiary to the overall value. So, it was a real learning experience for me.
Steve Rush: What's your experience then John, in helping other entrepreneurs on this path, when they start to think and realize that value isn't derived from turnover?
John Warrillow: Yeah, it can be a bit difficult, right? Because again, we have these yardsticks, I think as entrepreneurs. As a society, we celebrate top-line turnover, right? Like that's all the newspaper articles and the magazine articles are like this company's growing this quickly. And their top line revenue is this amount of money, yet it's generally not necessarily the most important driver for value. You mentioned Built to Sell radio in the intro of podcasts, where I interviewed different entrepreneurs. I did two interviews kind of back-to-back a few months ago. And one guy distributed a product and distribution companies by their nature, terrible businesses to sell, they're really difficult to sell. And he distributed product, built it up to $15 million in revenue turnover, and ultimately sold it for 25% of one year's revenue.
Well, literally the next day I did an interview with a guy named Rob Walling who built a company called drip, which was a SAS product software and service product. And he focused exclusively on this one product, focused a hundred percent on recurring revenue and built it to just two million dollars of turnover. So, the day before I'd talked to the guy who had a business with fifteen million turn over, sold for twenty five percent of one year revenue. The next day I learned from Rob Walling that he sold his two-million-dollar turnover business for somewhere between nine- and thirteen-times top line revenue. He didn’t show the exact number, it was a multiple of revenue, not a multiple of profits. And it was a large, high multiple of revenue. And it was just such a black and white contrast for me, of here's two companies.
One is a fraction of the size of another. Yet the tiny company is trading at a much, much higher value than the large company. And so, I think we boast about and kind put out our chest and say, yeah, we get a million in turnover a week. You know, we got ten employees or we're at five million or whatever the boast is, but oftentimes it's kind of revenue sort of vanity, I think for a lot of entrepreneurs. And yet the real value oftentimes is not in the revenue, in the other elements of your business.
Steve Rush: So, what are they John? What are the other elements that you would really drive conversations to focus on value?
John Warrillow: Probably the biggest one, I think is finding something, an area where you can absolutely dominate. One feature, one product, one offering where you can be the dominant provider. Because again, when you look at an acquire, if you put your acquire hat on for a second, they've got generally tons of money. They've got tons of resources. If you're just selling a commoditized product, if you are offering something where you're competing on price, you're responding to RFP’S, you're selling by ounce or pound or whatever. That large enterprise organization is just going to basically come to the conclusion that it's a lot cheaper to compete with you than it would be to buy you. So, this is going to lower the price in the market for that service or product.
Steve Rush: Right.
John Warrillow: Get in a bidding war with you, and basically pick up your business. Whereas if you do something really unique, they're going to draw the conclusion that it would take years to replicate what they have bill. You know, if you go back to Rob Walling and Drip, he had a really beautiful, elegant email marketing software, which lead pages, which was ultimately his acquire didn't have. And he had some features that would have taken years to build out. And he had a two- or three-year head start, could lead pages with enough developers have replicated Drip, of course, but for lead pages where time was money, they thought, you know what, this is too unique. We can just acquire this. And I think, again, going back to distribution companies and why that fifteen-million-dollar distribution company was so difficult to sell and ultimately got such a huge discount is they're not selling anything unique. They're basically taking someone else's product and selling it. And again, if you're a fortune 500 or a large enterprise organization, you can simply do that without buying the company.
Steve Rush: Right? Yeah. It's a pretty interesting perspective, isn't it? And also, there's been some recent articles around the human capital element that plays into that value stream. So that's the people on your balance sheet versus the assets on your balance sheet. How do you frame that in?
John Warrillow: Yeah, look, the people on your team, again, a lot of acquirers will look at that and say, could we recruit all these people with some unique skillset? Yes, of course is yes. With enough money and time could, in many cases acquire will look at that and say, you know what, it's just going to be a lot cheaper rather than spent two years and many hundreds of thousands or millions of pounds on a recruiter. Why don't I just buy this company? Now, those valuations are referred to as acquihires in the industry, those generally are much lower than you would expect from a acquire who is placing value on other elements of what you do. So, I don't think you're going to get the highest valuation for your business if you're just looking at an acquihires, okay, effectively, you're selling your team. But you will get some value for that in particular, if they have some unique skill set that that is, you know, obviously if you have a bunch of people who are doing AI right now, or even people who have a real skillset in the area of digital marketing, those are very hard to come by. And so, someone might value that team of yours, but generally that's not going to be an astronomical multiple relative to having some sort of unique product that is more valuable.
Steve Rush: Sure, is there anything in the value set that you look at that should be avoided by potential entrepreneurs?
John Warrillow: Interesting, yeah. I mean, I think cross selling is probably one of the biggest mistake’s entrepreneurs make and they come by it, honestly, because if you listen and talk to virtually any sales and marketing guru that gets the stage or writes a book, they'll tell you that cross selling an existing customer is like eight or nine times cheaper than going and winning a new customer. And so most entrepreneurs here that, they're focused on scale and growing and top line revenue and they say great, we've got a few customers, let's cross them. And by doing that, they're ultimately diluting their value proposition and ultimately making the business less sellable, certainly less valuable than it would be if they stuck to their knitting. I'll give you an example. There's a woman I interviewed on Built to Sell Radio named Stephanie Breedlove. She built up a payroll company and they had a special niche where they did payroll for parents who had a nanny, an HomePay to pay.
And her niche was very small. And she reached a point at three hundred thousand dollars in revenue where it started to become harder for her to get new parents who had a nanny to pay. She was based in Texas. She was focused mostly locally. She reached three hundred thousand dollars in revenue, so tiny business, was just her and one employee. And she had this kind of fork in the road. She could go, and although it would be hard, find new parents who had a nanny to pay, or she could do what everybody else was telling her to do, which was to cross sell other services to her existing customers, right? So, what else did busy parents have a nanny need? They need, you know, lawn care services and meal deliveries, and you could go on and kind of brainstorm what busy parents need? And Breedlove was being told at the time that that's how you grow your business.
Yet to her credit, she did not do that. She instead took the much harder road. She went and said, I'm going to double down and go find more parents who have a nanny to pay. Twenty-five years later, she built her business up to nine million dollars in revenue, ten thousand parents who have nannies to pay. Nine million in revenue over twenty-five years. It's not liked the next Tesla, right? Like it's not a super-fast growth company. It's a kind of twenty-five-year overnight success, it's a slow burn.
Steve Rush: Yeah.
John Warrillow: And she goes to sell it. She sells it to care.com, care.com, I'm not sure if they have it in the UK, but basically if you plug in your postal code and it will render babysitters and Au Pairs in your local market, that all be five stars rated. Have you seen that, Steve?
Steve Rush: Yeah, yeah. Right.
John Warrillow: Yeah. Yeah. Okay. So, she finds care.com and care.com at the time of the acquisition had seven million subscribers. So, she made the case, look, with just one percent of your seven million subscribers by my payroll service. That's seventy thousand customers. We're a nine-million-dollar company on the back of ten thousand customers. Long story short, Stephanie sold her nine million business for fifty-four million dollars.
Steve Rush: Wow.
John Warrillow: That's like six times revenue. That's like unbelief. It doesn't make any sense on any valuation table you could possibly conceive of. And it would never have happened, had she done what ninety five percent of gurus would have told her to do at a time, which was to go cross sell her existing customers because care.com wanted a very elegant solution to provide payroll to their seven million subscribers. They didn't want meal delivery services or lawn care services, right? Like they had a very specific need. And that's really were understanding what a strategic acquires looking for and sticking to your knitting. Doing one thing is where I think so much value can be added, but also undermined and lost if you sort of follow the mantra of growth is good. Top line revenue is our number one goal. I think you can, many cases hurt you more than it can help you.
Steve Rush: That's super fascinating. Almost contradictory to what certainly I've heard. And most people have muted along the way because you build up a client base to cross sell more revenue. So, but I get the whole focus on the whole be great at your niche or your niche. And most importantly, be super, super good at that. And therefore, it just grows and develops and its strength and capability, right?
John Warrillow: Yeah, and again, put your acquirer hat on for a second. And when you're looking at company, they closed the boardroom door, you're not invited to the meeting. And the head of corporate development sits down with the CEO and says, why are we buying this company again? And why don't we just compete with them? Are they doing something that unique, that's special that we need to acquire them because it'll be a lot cheaper and a lot less disruptive if we just get in a price war with them and for six months drop our price, ten percent below them, we can sustain that way better than they can? Why don't we just do it and get in a price war? And then the corporate development head as to fight back to the CEO and say, no, but you don't get it. They got something really unique that would take us years to build, you know, many millions of dollars to replicate. And that's the conversation that happens when you're not in the room.
Steve Rush: Yeah.
John Warrillow: And so, if you're just selling a bunch of, I mean, like, I don't know what it's like in the UK, but in North America, the cable providers had a monopoly and they would package up their television programming so that if you wanted like one or two channels, you couldn't buy the one or two channels, you'd have to buy like two hundred channels. And it was the most frustrating thing on earth, right. Because all you wanted was a couple of channels and you're paying for something you really don't need.
Steve Rush: Yeah.
John Warrillow: And then along comes Netflix and now Disney and all these discreet channels where you don't need cable anymore. And they're obviously losing customers in droves because people are like, all I want is ESPN, Disney and Netflix, and I'm good. And I don't two hundred channels.
Steve Rush: It's exactly the same in Europe.
John Warrillow: The Acquiror of a business makes the same.
Steve Rush: Exactly the same. You have written the book Built to Sell. And it comes from that mindset of how you encourage entrepreneurs to consider building their business with the intention to sell at some point in the future. Tell us a little bit about what that mindset is and how we might need to reframe some of that thinking along the way.
John Warrillow: Yeah, I mean, the essence of building to sell is you're creating a company that can thrive without you, the entrepreneur, founder, doing all the work. And when you've created a business that can succeed without you personally doing the work, you've got all of the options, like think of the poker player who gets like a royal flush. I mean, you can't lose basically. So, you can run your business without having to do the hard lifting, right? The hard yards, as they say. You can just simply be the CEO and letting your teams sort of run the business and take lots of time away from the company. You could bring in a manager and literally leave and have the manager run the business. While you kind of think of it as a passive asset, as it works, you could bring in a private equity group and sell sixty percent of the company, put some cash in your jeans and then continue to run and get a sort of second traunche of equity.
When the private equity group sells, you can sell to a strategic. I mean, you've got every option available to you. If it can succeed without you personally doing the work and the inversus is not true. If the business is deeply dependent on you showing up for work, you've got very few options. You've got effectively a job, not to put too fine point on it, where you can't really get out of it. And then you're in this weird position where you got into business for the freedom, right. Freedom to do what you want, when you want, financial freedom, et cetera. Those were all, and for many of the entrepreneurs I speak with the aspirations. And yet, if the business is dependent on you, you actually have less freedom than most employed people.
Steve Rush: That's very true.
John Warrillow: Like if you go to work for Proctor & Gamble and you put in your fifty hours a week, and you're a good corporate citizen, you can have your weekends, you can have your evenings to do the things that you want to do with your family, et cetera. If you run a company that's dependent on you, your life sucks. You're not only putting in your fifty hours, but you're working all the hours in the evening, the weekends, you're on call for your customers, you’re thinking about it constantly in your back of your mind, worried that this is going to happen, that's going to happen. So, you have none of the freedom and none of the benefits. So, for me, I think if you're going to create a business, really the aspiration should be, if freedom is your goal, to get it to survive without you. And that gives you the ultimate program.
Steve Rush: Yeah, so you hold all the next play, don't you? And of course, if you are part of the play, so your part of that key human capital, then actually you could be at risk financially and probably the value of the business will be less, I guess.
John Warrillow: Absolutely.
Steve Rush: Yeah.
John Warrillow: The other piece of this is, that you can get out more cleanly if and when you decided, just did an interview with a woman based in the UK, your name's Jodie Cook, she started a social media company and the beginning, it was her. It was actually JC Social Media or something. It was her initials in the name of the company. So, it was totally dependent on her. And over time she realized that really what she wanted to build was something that didn't actually depend on her. And she ultimately came a decision that she wanted to sell the business and what she did not want to do, which is what most, every entrepreneur in the marketing services industry has to do, was to sign up for an earn-out. An earn-out is when you have a portion of the proceeds of the sale of your company at risk in the future.
And you've got to reach some certain goals that the acquire puts in place, and Jodie is an independent woman, and she just had no interest in that, right. Of kind of working for a company for three, five years and have some goals out there that she had. So, she said, I'm going to create a business, that's not dependent on me. And she focused on building out her standard operating procedures. These are like the processes that people need to follow to do the work. And she spent months building out these SOPs. I said but Jodie. I mean, for a young entrepreneur, like you, that must have been torture to spend all that time kind of systematizing your business and thinking about all the processes and so forth, Yeah, John think about this way, if you're going to go to jail, would you rather go to jail for four months or four years?
Steve Rush: It’s an Interesting philosophy, isn’t it?
John Warrillow: And her point was, I could sell the company, but then I'm going to have to be in a four, five year earn-out, while I’m working for some middle manager who reports to some senior manager, who reports to some division for some giant conglomerate and have no control over my destiny. Whereas if I do this work in creating standard operating procedures now, yeah It sucks for a few months, but man I'm much better off. And so, she sold her company, She left two weeks later and that's almost unheard of in marketing services, almost all marketing services deals have some sort of burnout, but good for her for doing the work.
Steve Rush: Totally, right. Yeah. So, what's the reason you think then John, that entrepreneurs fall into this trap?
John Warrillow: You know, I think there's an element of ego to it, if I'm honest, I was just, you know, the same as I think many entrepreneurs. It feels good to be wanted, right? It feels good to be the Knight in shining armor, you know, that swoops in and saves the day and fixes the customer problem. And this, you know, this happens in virtually every industry where you, as the owner gets brought in to some really technical challenge or some difficult customer relationship, and you solve the issue. And for a few months or years, or a few weeks, probably. It feels good to be there and be the Rainmaker for your company. I got a chance; this goes back twenty years. So, bear with me, Steven. It was a while ago, but I got a chance to go to something called the birthing of giants.
It's simply, it's been renamed, something different these days, but it was a group of sixty entrepreneurs who were invited to MIT's executive education center for a three-year program of entrepreneurship, it’s called the birthing of giants. And we got to hear from these amazing speakers, like Patrick Lencioni who wrote The Five Dysfunctions of a Team and lots of other books in the area of leadership. He came in and spoke, and there's lots of speakers that came in. One day, this guy came in towards the end who just sold his company. And he started off the conversation with a ploy. Okay, raise your hand if you're involved in selling your product or service. And like every one of our hands went up. This is like sixty eager young entrepreneurs, we were all kind of, you know, the fourth grader got with the answer to the question when the teacher asks, like, we were all sort of like proud of that.
And he said, all right, put your hands down. He says, here's the deal. You've all got the right skills. You're selling the wrong product, hire salespeople to sell your product. Your job is to use those same skills to sell your company. And it was like, for me, it was an epiphany. Like I felt like an amateur who had just seen a professional game for the first time. Like I actually saw that my job was not to do the work. It was actually to sell the company and I don't mean sell it transactionally. I mean, to promote it, to be having conversations with strategic investors, people who might one day want to buy the company, that's the job of the CEO. I'll never forget that meeting again. It goes back twenty or so years now, but it was a real light bulb for me.
Steve Rush: Yeah, it's interesting that a lot of the principles that you've created within your writing and your books are all around that kind of take stock and be thoughtful about your role as the business owner, the CEO, rather than being the practitioner inside the business, right?
John Warrillow: Absolutely. I think one of the things that helps people get their head around that, or start the journey down the road of getting it to not be so dependent on them is this concept of recurring revenue, because for a lot of businesses, there are some transactional business models, right? So, you kind of run around bidding on jobs, finding clients, responding to RFP’s to win the project, and then it takes it two or three months to delivery. And then you kind of wake up, you delivery the project and then you've got nothing on top to follow and you're on this kind of hamster wheel that gets really frustrating over time. Because you kind of have the sense, I think, at least I did at the time when I was in a kind of a business transaction model where you just not making any progress. Every month, you kind of dread the beginning of the month. Because you know, you have to go create the magic again next month, right. And, you know, sell everybody. And so, I think one of the things in addition to finding one thing that you're really good at, Stephanie Breedlove did, I think the other thing is, is to create some recurrent revenue, put your company as much as possible on an annuity stream where customers have to opt out versus opting in.
Steve Rush: Yeah.
John Warrillow: And I don't mean that in a nefarious way, but I do mean, like if you're a carpet cleaning company, you know, don't wait for your customer to call you to come in and clean their carpets. Most customers frankly have better things to do, then think about how clean their carpets are. And most people only remember to clean their carpets well past the date where they should've had them cleaned, right. Whereas if you say, look, once a month, we'll come in on the third Tuesday of every month and clean your carpet, let us know, if you ever don’t want us to, but we'll be here on the third Tuesday of every month. And all of a sudden, first of all, taken something off your clients or customers to-do list to remember, to have the carpet clean and come in every period of time. And number two, you've got recurring revenue. Now you can decide how many people you need? How many trucks you need on the road? et cetera. It creates this sort of domino effect where it makes a much more predictable business and ultimately a whole lot more valuable. So, I'm a big believer in this notion of recurring revenue as an important element to building a valuable company.
Steve Rush: Of course, if it's recurring revenue, it's also bottom-line value on the balance sheets as well.
John Warrillow: Absolutely. I mean, I just looked at this recently, the security companies, you know, the folks we use to secure our homes and offices, you come in and they put together the sensors on the windows and they call the fire brigade if there's a fire. Those companies have two forms of revenue. They've got their installation revenue where they come in and do the initial setup for the system. And then they had their monitoring revenue. And you have the kind of thirty, forty, fifty-dollar revenue a month, they charge us to come on the system. Those companies, when they go to sell a typical acquire will pay about 75 cents for every dollar of installation revenue, because it's kind of one and done transactional, not very valuable. They'll pay between two and three dollars for every single dollar of monitoring revenue. Another way your recurring revenue is worth like kind of three, four dollars for every dollar of installation revenue you have.
Steve Rush: That’s really fascinating, yeah.
John Warrillow: We see it in virtually every industry. Carpet cleaning, you can look at HVAC, you know, heating and air condition, any industry. Your recurring revenue is going to be what acquirers place the highest value on.
Steve Rush: You know, it's just struck me actually, there are a number of different businesses taking the same approach. I have the same now with coffee beans. So, I have a coffee machine. It knows broadly that every two months, I need another three kilograms of coffee beans. And every three months I get a box of coffee beans. So same principle, right?
John Warrillow: Absolutely. Think about? For that coffee company, how much more valuable you are then sitting around, waiting for the phone to ring or buying Google ad words, trying to get you to stimulate your purchase because that's what most people do. They effectively manufactured demand through advertising. Whereas you're locking in, actively demand by subscribing. It makes it easy for you. You don't have to worry about that, you know, the morning you wake up and there's no coffee beans, it's like the dreaded morning of my life.
Steve Rush: Absolutely right.
John Warrillow: And so, knowing that you're going to get that order every two months or whatever preemptively allows you to just kind of sit back and relax and know what's coming. So, it's good for the customer. It's not something nefarious thing. It's good for the customer. Not only that, it makes it way, way easier for the coffee company, because they're probably not, you know, they're probably not growing their own coffee beans. They're probably buying them from a supplier. And when you're at the mercy of a transaction business module, you never know how many coffee beans to buy. I reminded of a company I wrote about in the automatic customer called H. Bloom, and they do flowers on subscription. They focus on hotels that want to have like a fresh cut bouquet of flowers on their reception table. Typical flower store, at least in North America. I'm sure it's the same in the UK or similar. Typical flower store in north America, will throw out sixty percent of its inventory every single month. Why? Because it's dead, rotting in your refrigerator, right? Like you guess wrong, you guess how many people are going to come in and want gerbera daisies, verses roses, verses daisies or whatever. And so, you've got a bunch of inventories you can't sell and you throw it out. 60% of the inventory, a typical flower store is thrown out. H. Bloom comes along and says, we're not going to sell flowers in some retail shop. We're going to sell flowers on subscription, were going to focus on hotels, four- or five-star hotels that just want that bouquet of flowers fresh cut every two weeks on the reception table. There spoilage rate, in other words, the percentage of their flowers they throw out every month is less than 2%.
Steve Rush: Wow, that's amazing.
John Warrillow: I mean, if you think about, which company would you rather own? Which company would you rather invest in? I mean, it's not even an argument. A company have a predictable revenue where you only buy the number of flowers you need to fulfill the subscribers you have is a much different model than worrying about guessing how much you need every month. And again, for your example, same thing. They're probably buying their beans from a third-party provider and beans have a shelf life. And if they guess wrong, they've got a bunch of beans that can't sell. Whereas if they get guys like Steve to subscribe, they only buy the coffee beans they have for subscribers, they need to fulfill. And it just changes the business entire.
Steve Rush: Yeah, it really does, yeah. So, when it comes to that moment where I'm now going to sell my business, walk away and leave it, is there ever a perfect time to sell it out?
John Warrillow: Well, you might make the case that right now is pretty good. I mean, I think, you know, interest rates are very low and of course, acquirers, in many cases in particular, private equity groups are one of those common acquires for SMEs right now. They make their business model work on debt. Like it doesn't work without debt. So, they take on a bunch of debt to buy a business and they try to sell it later on for higher multiple. And they put a little bit of equity in, but they give a lot of debt and that allows them to choose their return on investment for their investors. Private equity is fuel on interest rates. And right now, we're at a point in the history of our world where interest rates are still very, very low. And so that's creating an enormous sort of volume of sort of acquisitions.
I think on the flip side of that. I think we're also in a point where a lot of SME owners have come through the worst of the pandemic, I realized as we record this, the pandemic is not over, but there is a lot of entrepreneurs that have kind of come through the worst of it and said, enough is enough. I can't do this anymore. And they're willing to leave their company for less than they might have prior to the pandemic. And, I see that again, I do this Built to Sell Radio episode or Podcast. And in the last few weeks I've had that sediment two or three times where people said, yeah, you know, I was just at my wit's end. I wanted out and, you know, almost at any price. And so, I think those two things are off setting one on the right now. On one hand, you've got a lot of demands. On the other hand, you've got a lot of really burnt-out owners who are effectively willing to sell for lower prices. So, I think they're balancing right now, but you might make the case, at least economically that right now is a pretty good time.
Steve Rush: So, as we start to transition into me hacking into your leadership brain, the last time you and I met, we had a really fascinating conversation around Fortnite and how kids were getting dragged into Fortnite and consumed by video games. And that you had a great parallel to this, which is this whole concept of leadership being a bit like a parent. There's tell our listeners a little bit about that.
John Warrillow: Well, I think a lot of SME owners, small business owners, think of their role as being the leader of their company, the CEO, oftentimes they're involved in doing some of the selling, the rainmaker, the driver of their company, right. And that's all fine. I think a lot of us would be better served thinking of ourselves, not as the CEO of our company, but as the parent of our company. And again, I'm sure a lot of your listeners are parents. And if you think about your job as a parent, it's, you know, some people want their kids to go to Oxford or Harvard or some fancy school, but for most of us, we would be happy if our kids got out of the basement. They went into the world as adults and they were happy functioning, independent adults and like box check that as a parent, if you're able to succeed and do that.
And so, you know, despite the fact that many parents are sitting there with their, you know, kids play a lot of Fortnite and wondering, will they ever sort of get out of the house? I think that's the job as a parent is to kind of nudge them and cajole them and teach them to be independent functioning adults. And if we're successful in that, then we've done our job. And again, I think if we go back to our job as the owner of a company, I think if you can get your business to thrive without you, to be independent of you, it is the most rewarding thing in the world psychologically, but it also gives you all the cards when it comes to the value of your company. So, I think we'd be better served in a lot of ways, not thinking of ourselves as a rainmaker, as the CEO, but more as the parent of our business. And our main goal is to get it to become an independent thriving adult.
Steve Rush: Yeah, it’s a really great reframe. I love it. So, we're going to now start to tap into your leadership brain, having led and run businesses and coached other businesses for over twenty years, I want to hack into that leadership brain of yours. So, if you had to distill your top three leadership hacks or tips, what would they be John?
John Warrillow: I'm a big believer in journaling and really reflecting on what's working and what's not. And whether you do that in a sort of formalized program or just a white paper or white board every week or so. So, I'm a big believer in journaling and having the people you're leading also journal, I think is big win. So, I think it helps you, one for yourself personally. And two, for the people you're leading. I guess, you know, to take that hack to another level. I think there are some really good journaling tools out there. I know I'm a user of the high-performance planner, I this its Brendon Burchard product. I mean, there's nothing magical about it per se, but it's a good journal. And I think having some sort of system around that can be super helpful. So, I'm a big journaling guy.
Steve Rush: Me too. So, the next part of the show we call it Hack to Attack. So, this is typically where something has gone wrong and as a result of it going wrong or not working out well, you've now used the experience as a driver and a positive force in your life and work. What would be your Hack to Attack?
John Warrillow: You know, I would actually go back to the very beginning of our conversation. And I think my hack was when I really got punched in the nose by a Perry figuratively. And he told me in no uncertain terms, that what I built was not a successful, not a valuable company. And so, I take that, although it was really strong cheese for me to hear at the time and very, you know, difficult, frankly for me to hear, I have now taken that. And also, you know, it's really informed everything that we do professionally, out the books and so forth. So, I think that's been super helpful and I'm also maybe inspired a little bit by that fairly straightforward with business owners, probably it's sometimes offensive at times where, you know, I make the case hopefully gently that a business isn't as valuable as they perceive it to be because it's too dependent on them personally. So, I think I've tried to sort of to honor that as time has gone on.
Steve Rush: Awesome. Last thing we want to do, give you some time travel. So, if you could go and meet John at twenty-one and give them some words of wisdom, what would your advice to him at twenty be?
John Warrillow: Stop chasing other people's approval. At twenty-one, I had graduated, I'd left university early because I hated university and I was trying to get a job. And I was in this funny zone where, you know, my father had worked for company all his life and I thought, okay, that's what I should do. I should go get a job and climb the corporate ladder. And so, I also knew at the time that I wanted to do my own thing, be an entrepreneur. And I was in this kind of really conflicted zone where I wasn't sure which path to take. And I spent a couple of years working for a company and probably three years actually. And I wish I had, if I can rewind the tape basically just started as an entrepreneur at twenty-one. I think I would have learned more.
And I think I would have, you know, in retrospect gotten as much, if not more experience just doing it. So, if I was twenty-one again, I would say, look, this one time in your life where you don't have dependents. You don't have stresses; you can live on a couch. That's the time to start something and really go all in.
Steve Rush: Yeah, isn’t it?
John Warrillow: Some people have the opinion, oh, you should work for a company for 10 years, get experience, understand the corporate world and then start a business. Well, good luck doing that when you've got, you know, a spouse, a mortgage, kids on the way, the whole idea just seems so much less attractive. But at twenty-one, I think that's a great time to start something.
Steve Rush: That’s great words of wisdom. Thank you for sharing that, John. So, we're very fortunate, in the fact that in order to keep our conversation going and keep our listeners connected with your work, you’re going to create a URL for us. So, we can get some free resources to share with us a little bit about how our listeners can get hold of some of that stuff.
John Warrillow: Yeah, just builttosell.com/hacker. We put together a landing page where you can get free video series on the eight key drivers of value in a company. We've also put the nine Subscription Models at the whole recurring revenue theme was sort of resonated with you. We've got a checklist that you could identify, which of the nine models might work for you. And then the art of selling your business workbook, which again is a digital workbook. You can work through to help you think about what you need to do to get prepared to sell your company. So, it's all free and it's builttosell.com/hacker.
Steve Rush: Thank you for doing that, John. And that's some great resources and we'll make sure that, they in our show next too, and of course, outside of the corporate arena, you blog, you're regularly quoted in lots of different articles. So, we'll make sure that your social media links are in our show notes as well.
John Warrillow: Thanks Steve. It was fun being with you.
Steve Rush: Love chatting, John. Good luck with the new book. Good luck with The Valuable Builder System continuous growth and thanks for being on the community.
John Warrillow: It's my pleasure.
Steve Rush: Thanks John.
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