Growing a business takes a lot of effort and time investment. So when the time comes to exit, it wouldbe a waste not to harvest the value you’ve created. So how do you get the ultimate reward for selling your business? Today, host Robbie Kellman Baxter sits down with John Warrillow, the founder of The Value Builder System™. John and Robbie first met when John published The Automatic Customer around the same time as Robbie released her bestseller, The Membership Economy. They bonded over a shared belief in the value of businesses that were optimized around recurring revenue and long-term relationships with customers. John is launching a new book, The Art of Selling Your Business. In it, he connects the dots about why subscription businesses are so valuable, how to optimize business processes and dashboards to create more value, and how to determine what your own business is actually worth. Tune into this episode to learn how to maximize the value of your own subscription business.

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The Value of Subscription Businesses and How to Sell Them for More With John Warrillow, Author of The Art of Selling Your Business

Our guest is John Warrillow. He is the founder of the Value Builder System, a simple software for building the value of a company used by thousands of businesses worldwide, a startup veteran himself who started and exited four companies. These days, John helps business owners build valuable businesses through his network of independent advisors, known as Certified Value Builders. John and I first met when he published The Automatic Customer. Around the same time, I released The Membership Economy. We bonded over a shared belief in the value of businesses that were optimized around recurring revenue and long-term relationships with customers. He’s launching a new book, The Art of Selling Your Business. I invited him to Subscription Stories to connect the dots for us about why subscription businesses are so valuable, how to optimize business processes and dashboards to create more value, and how to determine what your own business is worth.

Welcome to the show, John. Thanks, Robbie. It’s good to be with you. It’s great to have you. You and I met a few years ago when you publish The Automatic Customer. You focused on the power of recurring revenue and the impact subscriptions can have on the valuation of a company. What have you learned about subscription businesses since you wrote that book? One of the things that a lot of businesses have trouble with who are going from the transaction economy to the subscription economy is we try to boil the ocean, meaning we try to come up with a subscription model that will serve all customers. I’ve learned that there’s a mini pre-step that you need to take in order to create a subscription offering. That is to bucket your customers, niche down effectively into homogeneous buying groups. Put your customers together in segments where they have a common reason to buy. It’s only after you take that extra first step do you realize the subscription offering start to bubble up to the surface. I’m sure in your work, Robbie, you’ve seen lots of very diluted, crappy subscription models where people are like, “This subscription thing is a great idea, recurring revenue, reliable revenue, etc.” They put together a crappy model which is essentially dividing their revenue up across twelve payments. That’s not what we mean by a forever transaction. The key to getting it is first niching down, trying to come up with something your customers have in common, a need for a regular basis, and then building it out from there. Why subscription businesses are so valuable, how to optimize business processes and dashboards for sale, and how to know what your own business is actually worth. All in this episode of Subscription Stories w/ @johnwarrillow. #podcast… Click To Tweet It’s this one simple step that comes down to knowing your business and providing value to your customers. I love how you made it a clear step to niche down, get focused, know what you’re doing, and who you’re doing it for. Also, that admonition to make sure that you’re doing this for more than getting subscription revenue but rather because it makes sense for your customers to pay on a subscription basis. I’ll give you an example. For people reading who may be like, “I don’t still get what he’s talking about.” Take a look at H.Bloom. H.Bloom does flowers on subscription and you think about every flower store sells all their flowers for Mother’s Day, Valentine’s Day, big days, weddings and so forth. H.Bloom says, “We want to sell flowers on subscription.” Instead of trying to sell a subscription of flowers for everybody who buys flowers, they said, “Let’s segment our customers.” They realized that there were hotels that buy flowers regularly. They want to put that bouquet of flowers on their reception table. They put together a subscription for hotels that want flowers on subscription. It wasn’t all flower buyers. It was hotels that happen to have this weird idiosyncratic need for flowers on a regular cadence. That’s what I mean by niching down. It’s a great example because I would imagine that a lot of florists are like, “If we cut down, if we niche down, we would lose all the weddings, birthdays, big Valentine’s rush, and we wouldn’t be ready. It’s distracting.” If you focus on that, first of all, you get the subscription revenue and the subscription operations that people love, which is all about predictability. You lose all of those spiky moments that are hard for businesses to manage. It’s counter-intuitive that by niching down, it gives you the ability to grow faster and more predictable. It also makes you so much more referable. It’s a generic flower shop that does the same thing as everybody else does. Why would you buy it from that retailer from another location? As soon as you undermine your location or you’re not the closest retailer, there’s no reason to buy. Whereas if you say, “We’re the world’s greatest flower company. We’re supplying hotels on a regular basis,” that’s something you can get around referring people to. It’s memorable too. If I say it’s a flower shop, there’s one store, and they’re good at weddings, birthdays, hotels, and office buildings, and pretty much anything you could possibly imagine because they’re geniuses with flowers, that’s very forgettable. It sounds like everybody. If you say, “They’re funny. They only do hotels.” Ninety percent of people are like, “I’m not a hotel.” The 10% that are buying on behalf of a hospitality business, they’re like, “They’re going to understand all of my unique, quirky questions and problems.” It’s great for both referenceability and credibility. How has what you’ve learned come into play in this new book, The Art of Selling Your Business? What made you decide to take pen to paper again, metaphorically speaking, and go back into the dark tunnel of book writing? I do a podcast called Built To Sell Radio, where I interview entrepreneurs who have sold a company. I’ve done something 300 episodes now. One of the things that I find fascinating is there is a subgroup of business owners, and when they go to sell, they punch above their weight class. They seem to be seeing to a different hymnbook. They’ve got some playbook that they’re following that allows them to get better deal terms and way more for their business. Frankly, the vast majority of business owners often get unfortunately taken advantage of when they go to sell their company. I wanted to try to codify what the best entrepreneurs do when they go to sell their company. My mission is to try to pick the winning hacks, the best little ideas from entrepreneurs who seem to somehow punch well above their weight when it comes to selling. Anything specific for subscription businesses that you’ve noticed. You’ve helped entrepreneurs sell a lot of businesses, not to mention your own businesses. What is different, better, worse and harder for subscription businesses?

They’re much easier to sell. They’re much more desirable companies because of what you mentioned right about all the time, this predictability. If any acquirers want anything, they want to make a business very predictable. That’s their juice, that’s what gets them going, especially with a low churn rate, you have tremendous predictability. That’s what they’re after. I did an interview with a guy named Rob Walling. Drip was his company. He sold it to Leadpages. If you saw him, you’d be like, “He’s a young guy.” It’s $2 million of annual revenue, not a huge company per se but a successful one, and one growing quite quickly with very low churn. He figures the company’s worth between 9 and 14 times ARR, Annual Recurring Revenue. For a non-subscription based entrepreneur, to hear 9 to 14 times, they’d be thinking a multiple of earnings. Even then, they’d be like, “That’s incredible. They get 9 to 14 times.” Walling is getting 9 to 14 times revenue. It blows the mind to think about that. His business was very unique. There were some unique circumstances that made it so valuable but still, one of the key differences between a subscription company and a transactional company is the valuation. Subscription companies traded oftentimes multiples of revenue as opposed to multiples of EBITDA. I know you know this but that’s an incredible insight to take away. I’m glad you’re saying it because there are a lot of businesses that are very aware of it that get into subscription models, change their episodic pricing into subscription pricing without changing anything else because they’re like, “We want to get that big valuation. We want to be valued on our ARR without even having the business to support that.” On the other hand, there are lots of organizations for whom this is still new news. They’re like, “I didn’t know. I’ve been busy running my business. I didn’t realize that recurring revenue is so much more valuable.” If part of your business is subscription-based and part of it is not, many investors will value the two parts of the business differently and then take some of the parts valuations to decide what the company is worth. I want to make sure we get this. You’re saying that what you see with your generally smaller, closely-held businesses using subscription pricing that have subscription revenue are getting valuations based on the revenue that is much higher than their episodic counterparts’ valuations. You bring up an interesting point, Robbie, and that is this notion of having two different forms of revenue, your episodic, as you described, transactional revenue, and then you’ve got your subscription revenue. You’re right, they will be valued by an acquirer at very different rates. For example, oftentimes a software company will have SaaS or subscription-based revenue and then they’ll have on the side installation, one-off revenue, services revenue, training revenue, and all these sorts of things. The savvy buyer will very much tease apart your profit and loss statement and will say, “We’re going to give you X multiple of ARR and then we’re going to deeply discount your training revenue, one-off installation revenue, etc.” For folks who are on the fence, half-pregnant a little bit with this subscription model, it’s worth considering why to keep the episodic revenue. I speak very much firsthand. I used to own a market research company. We used to have an episodic business model. This goes back years or so. I tried to create a subscription model. I heard about Thomson Reuters and all these subscription-based research companies. I thought, “That sounds great.” For very similar reasons you describe is you’re not rethinking the entire business but wanting to move. We were half-pregnant, we kept the episodic market research business, and we tried to create a subscription. Every time we went to a customer, they would say, “That’s interesting that you’ve got that subscription over there, but what we want is a customized offering for us.” We couldn’t get the subscription off the ground because we left the flank of having a transactional business model open. It wasn’t until we turned off the episodic business that the subscription business started to grow. For me, that was a big lesson in the power of being all-in on subscriptions. I think about GNC. They’ve declared bankruptcy I can’t remember when. They built a subscription company. It was their protein supplements for workout buff dudes who want to get big and protein powder, but my guess is it wasn’t translated all the way through the company. When you go into a store, the retail store manager is still incentivized to sell the product in the store as opposed to getting you to buy the subscription to protein powder. Though they notionally had a subscription offering, it wasn’t hardwired into their entire business model. You had the subscription model competing with the store manager who wanted to sell same-store sales increases. Of course, it failed. It’s got to be always through the company. It gets messy for many reasons. We’re trying our best reasons, which is it’s complicated to track all the individual products and understand how to sell the subscription offering. There’s the more cynical one, which is different people have different goals. If I’m getting comped on my same-store sales for this quarter, I’m going to push different products than if I’m compensated for signing up subscribers who come, engage, stay and tell their friends over time. That’s an issue frankly with a lot of businesses that transitioned to subscriptions without changing their operations, culture and metrics, that there are people who are still being rewarded for short-term returns. It’s hard to build long-term value in your business if you’re optimizing for short-term returns. One of the questions I had for you as I was curious about is how sophisticated you think investors are these days about subscription businesses? We’ve seen some ugly mistakes, certainly in the public markets of investors getting excited because they see that dollar sign in the subscription, and then they learn after the onion is peeled back for them, usually after they’ve made the investment, that the company is spending all kinds of money on acquisition, acquiring customers who aren’t staying very long, and where the customer lifetime value is negative or the customer lifetime value isn’t there at all. The more recurring revenue you have, the more valuable your business will be. Click To Tweet One public example of that is Blue Apron. Effectively, I’m going to oversimplify for the illustration, but it was taking seven months for them to pay back that meal kit early trial period where people were getting free meal kits. It took seven months for that customer to become valuable, but the customers stayed for about six months. They’re losing a month of revenue on every new customer. I oversimplified it a little bit, but the investors didn’t see it because they saw big acquisition money going in, they saw lots of customers joining, and they saw short-term revenue exploding. Let me ask you, are investors getting more savvy about digging into the numbers? Absolutely. LTV to CAC is still the best single metric to look at. LTV to CAC is the customer’s lifetime value over the costs to acquire her as a subscriber. What most professional investors are looking for is at least a 3:1 LTV to CAC ratio. You’re getting three times more lifetime value than it costs to acquire customers. In your Blue Apron example, it’s negative. A lot of acquirers are starting to get educated about this. You can’t have a very fast go subscription company, basically acquiring customers and have them follow it, and the leaky bucket at the bottom. You can get away with lots of churns very early in a subscription moment because it’s easy to acquire customers, and you can make up for it. As your subscription company matures, it’s much more difficult to maintain any churn. We’re seeing a lot of that. It’s happening in virtually every industry. One of the ones that I love is the business of car washes. Think about the most old school, greasy business you could possibly imagine. It’s the business of washing cars. If you had a good location in the old days, if you were on a busy street corner, that was a valuable business because you could sell the land. That was how these things were bought and sold. Of course, that’s totally changed. As private equity has moved into the carwash market, they have glommed onto the idea of subscription offerings. Now, virtually all car washes offer an unlimited membership where you can get your car washed as much as you want. It’s having a profound impact on your subscribers’ lifetime value because if you live where I live in Toronto, it’s nice to think about getting your carwash, but for as much as it snows and rains here, it’s not worth it. You get a busy day in April when the sun is shining. Everybody’s got the salt and crap on their car. There’s a lineup down the road of people who want to get the carwash. The carwash gets these big blips of revenue in a certain month. Whereas when a subscription, they get predictable revenue every single month. The carwash business has been transformed by the injection of sophisticated private equity groups trying to transition these businesses into subscription companies. Carwashes are one of my favorite examples as well. I spoke at the International Carwash Association a couple of years ago. I was talking about that the forever promise of a carwash is that your car is always clean. That’s what you want in Toronto. We don’t want to go to the carwash, wait in a line around the block, have our car look terrible for the days leading up to the moment when we have the time, and drive to get there. We want our cars to be clean all the time. I brought that up and I said, “You guys are talking about taking your car wash time from 10 minutes to 9.5 minutes with a special new brush. Nobody cares, customer doesn’t care.” What the customer wants is, “I want my car to be clean.” In fact, if the carwash fairies came to my home in the middle of the night and spot cleaned it even when there was the smallest fleck of dirt on it, it was removed, I would pay more for that. I suggested ideas like taking that carwash one step further. What if your location, instead of being in that expensive, busy area, which by the way puts you in the category of real estate investor more than carwash operator, but that’s a different story. What if you had your carwash in a low traffic, industrial area because you were valet washing the cars? You were picking up people’s cars at their homes or their offices and zipping them over to your car wash and then bringing them back, whether that’s in the dead of night or while people are at work. They said, “No because we have the sunk cost.” One of the biggest challenges I’ve found in organizations committing to subscription is the sunk cost. We already have this professional services team, printing presses and car washes. We don’t want to be nimble and evolve to solve the customer’s problem in a better and ongoing way because we have all this baggage. It’s great that investors are focusing on what’s going to add value and drive the numbers. This brings me to what I think of as the meat of this conversation and what everybody is here for which is tell us how to build value into the business before we sell it. You can start by talking about the Value Builder System and how you developed it. The Value Builder System will evaluate your company’s value now and show you prescribe a way to improve it leading up to an exit. It’s based on these eight drivers. We identified through quantitative market research with business owners. We’ve had 55,000 businesses go through it. It’s all based on these eight factors that are attractive to acquire. Recurring revenue is one of the eight. That’s a huge driver of the value of your business. The more recurring revenue you have and the higher quality recurring revenue you have, and going back to some of these LTV to CAC ratio, some of the important ratios to acquires, that’s going to drive the value of your business. There’s an underlying theme through all eight of the factors, and that is for business to be valuable, it has to be successful without the founder.

SSP 1 | Subscription Businesses

“There’s a mini pre-step that you need to take in order to create a subscription offering. That is to bucket your customers, niche down effectively into homogeneous buying groups.” – John Warrillow

I know you work with a lot of big companies, Robbie, but for smaller companies and startup businesses, that’s a tough thing to do because the owner is oftentimes very much involved in the operations of the business. What we try to show them is across these eight dimensions that they’ve got to pull themselves out of the operations of the business. In many episodic transactional business models, the owner is the rainmaker in the company, whereas moving to a subscription allows that recurring or automatic revenue to replace the owner as the chief salesperson for the company. That would be one of the common themes if you wanted to distill what’s all this value building about. It’s how you create this business so that it’s not dependent on the founder anymore or less dependent on the founder. It’s often counter-intuitive for that founder to say, “You’ve built this baby. You’ve built this thing that is so important to you and that works so well. Now, you need to figure out how to make it work without you.” Subscription can be a great way to move the business in that direction. How do you use that to calculate what the business is worth or whether its value is increasing? The value of the business is ultimately determined by what someone is willing to pay for it, but by estimating what someone might be willing to pay for it. It’s hard for organizations to know because so much of it depends on the buyers themselves and the moment of sale. The beauty is in the eye of the beholder. The way to get a precise value on your company is to take it to market and figure it out. Having said that, there are some benchmarks especially in the SaaS world, Software as a Service world, that can help. For a very small company, a non-software company operating on a recurring revenue model, usually the recurring revenue on dollar-for-dollar basis is worth at least twice that of the transactional revenue. I’ll give you an example. Do you know the guys who do security in your home where you put a little pad? They have two forms of revenue. They’ve got your installation revenue where they charge to wire all the sensors up in your windows, and then they’ve got installation revenue. I’m sure they have the monitoring revenue where you pay them $39 a month to call the cops if somebody breaks in. The transactional revenue, the installation revenue, typical private equity group nowadays buying security companies will pay about 75% for every dollar of transactional revenue. Whereas the recurring revenue, they’ll pay about $2 for every dollar. In that case, set another way, every dollar of recurring revenues were 2 or 3 times that of the transactional revenue. That’s a subscription company. If you walk over to the world of software where you’re looking at the incremental growth rates are so much easier to get because it’s software, it doesn’t require people, trucks and all that stuff. It’s even more pronounced. You can have examples where a company growing very quickly and with very low net churn rates can get into the high single-digit ARR multiples. If we go back to Rob Walling, he was thinking 9 to 14 times ARR but those are reserved for the fastest growing, lowest churn subscription companies that are software-based. It’s so insightful and helpful. When you were talking about Rob Walling, you were talking about some of the other metrics. You had alluded earlier that he said 9 to 14 times which is higher than your average subscription business because he had some other factors. You mentioned some that relevant to the low churn and fast growth. I’m wondering if you could talk about the systems you need, the metrics you should focus on as you’re growing your business, and even as you’re getting ready to sell it. The ultimate metric, especially in the software world, is the Rule of 40. That is that your growth rate and your profit rate percentage add up to at least 40. If you had 25% profitability EBITDA margins and 20% growth rate, you add up to 45%. Twenty-five percent plus 20% is 45%. Therefore, you exceed the Rule of 40 and that’s what Gaby Isturiz was focused on. Gaby is a woman that I write about a lot. She built a company called Bellefield Systems, which did timekeeping for lawyers. It’s a plumbing kind of company. It was based on a subscription offering that lawyers loved as a way to monitor and measure their time. She built law firms for this stuff every month, very sticky, very low churn rates because once lawyers figured out a system, they don’t want to revamp it or pull it out. She was able to get to Rule 40 when she started to realize that that company would be on the higher end of the valuation metrics. Her estimates were she was going to get between 5 and 7 times her ARR. She ended up getting on the top end of that range because she got multiple bidders and made some great choices. She got to the Rule of 40 most importantly. That’s the panacea. Not all subscription companies are going to get to the Rule of 40, especially if you focus exclusively on the growth and beginning of your model, but that’s the panacea. It can also be flat profitability and 40% growth, that gets you to the Rule of 40 or Fat Profit Margins, 35% profit margins of 5% growth. Also, the Rule of 40 but that’s the idea. Beauty is in the eye of the beholder. The way to actually get a precise value on your company is to take it to market and figure it out. Click To Tweet To get there, that’s in many ways a forward-looking indicator of your ability to get there would be things like net churn rates. I’m preaching to the choir and even mentioning this to you, but gross churn less your upgrade revenue gets you to net churn. That’s going to be a key metric to look for. Obviously, even more of a leading indicator would be the usage of your subscription. The more people use it, the less they’re going to churn. If you’re wondering what’s the forward indicator of all those steps, build a great offering that people love to use. It’s interesting how you’re talking about the systems you need and the tracking of not just those top-level metrics that are the ones that the investors care about, but those leading underlying metrics that can help you manage the business as it’s growing. You talk about engagement metrics and usage metrics. I think of those as the leading indicator for an organization of how well it’s doing. If people are using your product regularly and well, and I think about recency frequency, depth and breadth of usage, they’re not that likely to leave. If they’re getting value, if you’re part of their habits, they’re likely to stay. If they’re likely to stay, they’re likely to keep paying, which results in valuable revenue. I like how you’re talking about the metrics. Do the metrics change as you’re readying the business for sale or is this a system that you should put into place on day one of running your business, you can set it and forget it, and then when it’s time to sell, you have a valuable thing? I would do it from the beginning as much as possible because what investors crave again is de-risking. That’s what they pay a huge premium. The major multiples of revenue for is if they can be very confident that this business is going to continue to grow. It’s the longevity of the reporting that is going to be very attractive. If you rock up and say, “We did an LTV to CAC. We’re 4.6 to 1.” That’s helpful, but what’s even more helpful is to know that you’ve been tracking your LTV to CAC for five years and it’s gone from 2.6 all the way up to 4.6. That’s way more valuable for an acquire equally. You talk about usage, depth, breadth, frequency, recency. If you can show great positive trends in all those areas, that’s what acquires crave. It’s the length of time you’ve been tracking this stuff. Even if I was five years away from selling, I would want to be tracking that stuff now so you can demonstrate the improvement over time. That’s what investors are going to crave. What if you didn’t do it from the beginning? Is it too late when you’re already thinking about selling the business to start creating the systems and the metrics, as people say, prettying it up for sale? Is that something that people do? Is that ethical? Is that effective? What’s your take on prettying things up for sale? Part of selling well is positioning your company in the most positive, favorable light possible. People invest a lifetime in creating a company and they should do everything they can to pretty it up for sale, to make it look as attractive as possible. There’s all that expression, “When’s the best to plant a tree? Sixty years ago. What’s the second-best time? Now.” Grab your metrics and it will have an impact for sure on the ability to position your company for sale. If you’re just starting to track your metrics, you might get an earn-out deal. An earn-out deal is where you get paid a little bit of money upfront or some portion of your proceeds that value of your company upfront, but then there’s this 2nd payment or 3rd payment down the road if you achieve certain milestones as a division of their company. That happens when, number one, the buyer and the seller can’t agree to a price. Number two, the buyer isn’t that confident in what you built yet. I’m reminded of a guy, Rod Drury. Rod founded Xero, the accounting package, which is in this big battle right now with QuickBooks. Prior to Xero, he started a company called AfterMail. That’s what created the money to build Xero, it was selling AfterMail. They basically helped you archive email. This was around the time of Sarbanes-Oxley and all these big Fortune 500 companies having to do a lot better job of tracking their email and so forth. Rod builds this little product called AfterMail, which allows them to archive their email among other things. It’s two of the Fortune 500 companies to buy it for $1 million each, so he get $2 million in revenue. Most people at that point would say, “I’m going to go find the other 498.” He doesn’t. He sells the company to a systems integrator who was working with all the other Fortune 500 companies and he sells it for $35 million. Here’s the thing, it’s a $2 million company combined.

That’s a 17x ARR. Here’s the trick. He was so young, he didn’t have his metrics to go back to what we were talking about earlier, the longevity and all that stuff. He only got $15 million only. He got $15 million of this $35 million upfront and the rest tied to his ability to hit future payments. As with most entrepreneurs, if you put them inside a corporate environment, he lasted about six months before he bailed and walked away from his entire earn-out. That’s the downside of an earn-out deal where you get paid a little bit of money upfront but you have lots in the future. Most entrepreneurs are not wired to work for someone. Earn-outs can be challenging for them. This is such an important point. If you’re a business owner and you want liquidity, meaning that you want some cash. In that case, you have this valuable business that you’re running, it’s throwing off a little bit of cash, but you know that as an asset, it’s worth so much more. If you want that liquidity event, but you don’t want to leave the business, how can you have that conversation? What kinds of terms can you write into the agreement so that you keep part of the business or you continue to work with the organization in some way, or have some leverage over this beautiful thing that you’ve spent your blood, sweat, and tears on building? How do you manage that if you do or don’t want to leave the business when you sell? That’s becoming a very common way these days that businesses are transaction, especially in the space that I spent a lot of time thinking about, which is the value of roughly $1 million to $30 million company. That company is oftentimes not that attractive to a strategic investor. It’s “too small” for a very large enterprise organization to buy a company of that size. Increasingly, you’re getting private equity groups filling the gap. They are buying these small and mid-sized companies and rolling them up together, stitching them together, and creating a larger company down the road. To go back to your question, private equity companies generally don’t like buying 100% of the businesses they acquire because they don’t have managers in place. They don’t know what they’re doing frankly. They’re financial engineers. What they love to do is buy 60% or 70% of your company. If that’s a transaction that’s attractive to you, in other words, selling the majority but not all of your company and continuing to work in your business for a period of years into the future, a private equity transaction may be ideal for you. You get to put some money in your jeans, and at the same time, you don’t lose your job because they’ll ask you to roll your remaining equity into a new entity that you will run, effectively reporting to the private equity group on your board. This can be a good exit option if you want to sell some, but not all of your company. The downside or the danger is you still got to make sure that the private equity company knows what they’re doing. When you roll equity into that business, effectively they’re going to leverage up your business and they’re going to need your business to be able to pay off that debt. I’m reminded of a guy I interviewed for the podcast I do. He sold 60% of his company, so he lost the operating control. It rolled 40% into a new entity, the private equity group funded. It wasn’t long before they brought in new managers, they didn’t know what they were doing. Private equity group started to lose traction. The company no longer was able to afford to pay the bank back its payments. Long story short, that new entity went bankrupt and that entrepreneur lost everything in that transaction. The 40% he had put at risk was gone. You want to make sure if you’re going to do that deal, you have a high degree of confidence that the private equity group you’re working with knows what they’re doing. You’ve got a sense of from operationally what they intend to do, and that they’re not levering up that debt so high that the payments are on a table for you to make while you run the business as a new entity. That’s a lot of complicated math but hopefully, that makes some sense. Part of selling well is positioning your company in the most positive, favorable light possible. Click To Tweet I think I mentioned to you that I also have interviewed Steve Cakebread, the author of The IPO Playbook, who’s doing similar work but taking much larger companies public into the public markets. It’s funny because a lot of the themes are the same, but it’s not just about taking the money. It’s about whose money you’re taking, and it’s about what your vision is for the long-term health of the business. At its best, you can bring in partners that have deep pockets and can take you to if you want to stay with your business to the next level in terms of reach, credibility, staying power and sophistication. If you don’t go with the right partners, you risk damaging your business that you’ve invested so much in. You need to know, “Am I doing this to get out?” No judgment there or, “Am I doing this because I truly want to take my business to the next level and have a little breathing room to do the next part of the marathon?” You think about why private equity groups buy businesses. They’re in the buy low, sell high business. Private equity companies are simply financial structures, oftentimes, funded by investors who are investing in a company. They’re trying to buy it for as little as possible and then go around and flip it for as much as possible. How do they create value? They create value in many cases by trying to “professionalize” your company. You’ll think, “That sounds interesting. That sounds great. I’d love some Harvard MBA, Stanford MBA type thinking on my company.” However, until you realize that as the author of all the policies you’ve created, how you treat customers, how you treat employees, all those get ripped up and “professionalized.” For a lot of entrepreneurs, it’s like open-heart surgery without the anesthetic. Everything you’ve built, the culture you’ve created is being “professionalized.” It could be a very traumatic experience. It’s delicate alchemy running a company. You should give people their birthday off but that doesn’t make any financial sense to give people a holiday on their birthday. If that’s part of your culture and you’ve been doing it for twenty years, that could be an important policy. It may not make financial sense but it does make strategic sense. You don’t want to lose the baby in the bathwater, as they say. It’s a horrible metaphor. We’re going to do a speed round. First, what’s your one piece of advice for a business owner who’s thinking about getting out and looking to put their business on sale? If you treat your company as a child and adolescent, you’re trying to create it into an adult who is a thriving, successful human being. That’s your job is to get your business to a point where it can succeed without you. The best piece of advice you recently received? It wasn’t recent but it was good. That is, “Don’t get too high on the highs and low on the low.” Greig Clark, the guy who founded the company called College Pro Painters, told me that. He said, “Entrepreneurship is personal. It’s deeply personal. You’re going to get way too excited and happy when it goes well and way to depress when it goes badly. The reality is it’s never as good as it feels when it’s other good days. It’s never as bad as it feels on the bad days.”

SSP 1 | Subscription Businesses

“People invest a lifetime in creating a company. They should do everything they can to pretty it up for sale.” ” – John Warrillow

What’s the first subscription you ever remember getting? Sports Illustrated. It was a magazine. My parents bought it for me to try to encourage me to read. That was my worst thing in the world. They must be so proud that their kid who didn’t like to read is now an accomplished author. I want to thank you so much, John, for being a guest on Subscription Stories. I wish you all the best with your book. I’m excited to get it into the hands of my clients, The Art of Selling Your Business. Thanks, Robbie.

That was John Warrillow, founder of the Value Builder System. You can find out more about John and his book, The Art of Selling Your Business at BuiltToSell.com. For more about Subscription Stories, go to RobbieKellmanBaxter.com/podcast. Also, if you like what you read, please take a moment to write a review and give us a star rating. Reviews matters so much in helping others find us. Thanks for your support. Thanks for reading.

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About John Warrillow

SSP 1 | Subscription BusinessesSmall businesses have always revolved around their owner, but in 2011, John Warrillow kicked off a revolution with the release of his bestselling book, Built to Sell: Creating a Business That Can Thrive Without You. Built to Sell passionately advocates owners reframe how they approach their company from thinking of it as a job to building a transferable—and valuable —asset. The book was recognized by both Fortune and Inc. magazine as one of the best business books of 2011 and subsequently translated into 12 languages. Since then, an entire tribe of owners has flocked to Warrillow’s new way of thinking, making Built to Sell essential reading for any aspiring entrepreneur. The book spawned a company that has helped more than 50,000 businesses build more valuable companies. It’s called The Value Builder System™, where Warrillow now serves as CEO. Warrillow is also the host of Built to Sell Radio, ranked by Forbes magazine as one of the world’s 10 best podcasts for business owners. In 2015, Warrillow wrote another best-selling book called The Automatic Customer: Creating a Subscription Business in Any Industry which illustrates how owners can accelerate the value of their business through creating recurring revenue streams. Before founding The Value Builder System, John started and exited four companies, including one acquired by a public company. He lives with his family in Toronto. To learn more about John, please visit www.BuiltToSell.com.

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