Helped Create over 8000 LOIs - John Warrillow, CEO of ValueBuilder E:57 Top M&A Entrepreneur

Computer. Welcome to the top M&A entrepreneurs. Today, my guest is John Warrilow. John and I actually go back, first of all, uh, I'm gonna read his bio here because you can see it on LinkedIn. John Warlow is the founder of the Value Builder System. He's the host of Built To Sell Radio and author of three best-selling books, Built To Sell, Creating a Business. That can thrive without you, the automatic customer creating a subscription business in any industry, and the art of selling your business, winning strategies and secrets. Now, I have two. I love these books. Uh, uh, I should get them somebody to sign that, I guess. But, uh, we also go back because I was working on an acquisition maybe 4 or 5 years ago, and I was trying to, uh, acquire a company on Udemy, who was a course creator. He sold a million courses, and I required an investor to bring it on, and I found this Irish guy who was fresh off just selling his company for $175 million and putting a check. In his bank for $175 million. And I said, hey, John, or I, I told this guy, you need to get on John's show. Yeah, so there you go. That's kind of our connection. So, uh, welcome to the show and thanks for being here. Yeah, well, thanks, thanks for that connection those years ago and it's good to be back with you. Yeah, so I got a couple questions. I mean, I have a friend in the value builder system, uh, he is a value builder, which, you know, looks for companies to help build in the next at a higher multiple. Uh, how many um people in your network now that have gone through the value builder system that do that. Yeah, yeah, sure. So, so we give you a sense, value builder, we license it to advisors uh who want to build out their, uh, you know, their, their, their profile in, in the exit planning space and we've got Uh, more than 1000 advisors now around the world that do value building and, uh, yeah, they, they, they license our, our tools and, and content and it helps us get our message out to the world. Yeah. Do you have any sense of how many businesses that they've taken under their wing helped create more value in the organization, whether it's organic or whether it's uh an acquisition, and then have ultimately sold to a strategic or financial buyer? Yeah, we don't actually track the consummated deal, but we do track offers received. So we know that about 12% of our users have received a written offer to buy their business in the last year. So if you think about that, we've had 65,000 businesses complete the value builder questionnaire, which is like our intake questionnaire we use so. Probably close to 8 or 10,000 businesses that have received a written offer to buy their business in the last year. And that's up, you know, uh, it's been a very busy season right now in the world of M&A, as you know, that might change with interest rates on, on the way up. Of course, a lot of these deals are financed with a lot of debt and yeah, yeah, and, and debt at that, right? So. We'll, uh, we'll see where that's going in the next year or two, but, uh, and how that's gonna change the, the, the dynamics of, of the market. But, but yeah, right now, it's a very busy time to sell a company. Yeah, I, the, uh, the partner, one of your valuable partners, uh, you know, said invited me in to help him grow his business, and I kind of went through the training and I, I noticed that you said that the Net promoter score is the best predictor of future profits. Is that, I remember that net promoter score for 4 or 5 years ago when you were talking about that. Is that still a valid, uh, statement? Yeah, it's it's one of the ways that acquires evaluates. A business and its potential, right? So, so obviously as part of a due diligence process, most acquires are going to, it's going to try to measure levels of customer satisfaction among the customers of the of the company they're looking to acquire. And if they're looking to acquire a company that's in distress, they would expect those numbers to be low, and if they've got suggestions on how to improve that, then they are obviously bullish on their ability to make that improvement. Where a lot of acquires, in particular private equity companies, uh, use something called Net Promoter Score as a way to make an apples to apples comparison between potential acquisitions. And it's, it's, it's simple as a technique. So for those of your listeners who don't necessarily know that acronym or have never heard that, that term before, it's called Net Promoter score, and basically what it, it does is evaluate uh uh uh an acquisition of company. Satisfaction levels with its customers and it's based on a simple question, which is on a scale of 0 to 10, how likely are you to recommend this to a friend or colleague. It was developed by a guy named Fred Reichel. And what Reichel discovered was that the typical questions we ask on these customer satisfaction surveys are, are really not predictive of the future growth rate of the company. So from an like from an acquirer's perspective, they, they, they can often send wrong messages. Like you can do a traditional customer satisfaction survey with uh potential acquisitions customers. And if you ask questions like how overall satisfied are you and, you know, would you Uh, uh, did you get, you know, are you, you know, again, are you overall satisfied? You may get a positive response to that question, but that doesn't mean that that company is gonna grow. And what Reichel discovered was that this one question, the scale of 0 to 10, how likely are you to recommend this to a friend or colleague. It was actually very predictive of the growth rate of the company in the future. And the reason for that is that it predicts one of two behaviors. Companies or customers who say, I'm a 9 or a 10 on that question, scale of 0 to 10, how likely are to recommend it to a friend or colleague. The people who give you a 9 or 10 of that are likely to either one repurchase from you or to refer you. And so that's what Makes that measurement so predictive is because it's not the net promoter score in and of itself, it's because it predicts those two behaviors. And if you think of any company growing organically at a rate disproportionate to the economy. It almost always comes down to those customers are either stickier, like buying more over time, or they're referring and creating positive word of mouth. And that's why it's predictive and remains predictive. The other stat that we, we talk a lot about, and again, it, it's probably even more important today than it was 5 years ago, is the ENPS score. Have you ever looked at ENPS John? No, yeah, tell me about that. Yeah. OK, so ENPS is employee net promoter score. And simply put, today, finding great people. I mean, I, I don't know if we're recording this on uh whatever it is, Friday, early May, early May, and the new jobs numbers were out from the NFIB today, and it turns out that that unemployment is, is continuing in the United States to be very, very low, tons of jobs, so the current economic turmoil in the stock market has not necessarily trickled down the job market yet. So the job market is thriving and, and so it's hard to find people and that, you know, nobody, you know, no, no entrepreneur would not agree with that statement right now. And so that's totally true. Yeah, yeah. Yeah, ENPS measures the level of engagement your employees have with your company, how effectively loyal they are to your your company. And so the question, and there's there's variations of the ENPS question, but most of them come down to some variation of Uh, would you recommend our company as a place to work, as to a friend or colleague? Would you recommend our company as a place to work to a friend or colleague? And it turns out the answer to that question, uh, relates to the level of engagement the employee has with that place. So, uh, obviously if they're gonna recommend to their friends that to come work at the, they're, they're pretty satisfied employee. And so that can be used in concert with net promoter score, which is a measure of customer satisfaction, uh, to get a nice sort of holistic kind of view of, of a company if you're evaluating one for, for acquisition as, as an example. If I was to start with a company, a smaller company, and they build it to 2 million or 5 million, where it's an attractive to a private equity firm. Uh, and then I started shopping it. Well, you know, I build a relationship while I'm doing it and tell the story all the way through, and then I start shopping it. Would they ask about that, or would that be something that I need to, uh, uh, volunteer? Say, our net promoter score is 9 or 10. And I, I, I, I remember writing this down because it's a 9 or 10, that's a promoters. 7 to 8, that's passive. Anything below that is a detractor, which means, yeah, yeah. Yeah, so promoter score is always expressed as as a percentage, so it'll be like 56 or 32, and it's your percentage of promoters minus your percentage of detractors. Is how you get to a net promoter score, which is again, average is 15%, 15, uh, world class is considered 55%. And so if you are in a luxurious position of having a 50% net promoter score. Uh, I would put it in the teaser. I would put it in the SIM. I would boast about that from the mountain tops because for a lot of private equity group investors, that's going to be a an attractive uh data point, just like your gross margin, your revenue, your profitability. I mean it's a very sexy number. If your net promoter score by contrast is 3. Or minus 12 or you know, then clearly you're not gonna, you're not gonna offer that up. Again, private equity groups um use it because, because, again, it takes the emotion out of the decision to buy a company or not. It's a very objective way to evaluate a company. There's no subjectivity to it whatsoever. Number 12, it allows them to evaluate, uh, you know, acquisition candidate A versus B in, in an apples to apples comparison because it's the same question rendered. Or use. So it, it, it is, uh, it is used quite a bit. So if, so I would, again, if you, if you had a very good net promoter score, I think you want, you want to merchandise that in your teaser and, and again in your SIM, your confidential information memorandum. If it's, if it's, you know, average or below average, I would, I would anticipate that, uh, that as part of their due diligence, your require may do their own. Satisfaction cus, you know, survey with your customers. And if your customers happen to be large enterprise organizations, then they're probably gonna want to do in-depth interviews with them like one on one interviews. If you sell B2C or B2B, like small b, where you've got thousands or tens of thousands of customers, then you'd expect them to want to do some sort of something that they that's done by a third party. uh, because the PE firm goes, well, jeez, anybody could say, you know, I'm 50%, 9 to 10% promoters and so it's a third party kind of deal. Yeah, usually they'll they'll they'll hire a third party to do something just like they would do a quality of earnings, you know, they, they would hire an accounting firm to do a QV kind of evaluation of the, of their books that they'll hire, um, you know, a research firm to do a little net promoter score survey. Yeah, yeah, I, I have to kind of point this out. I don't know if that's true or not. You wrote this automatic customer back in 1995, and it's like, 0 20 2015, yeah, and you were ahead of the I don't, I don't know. I, I could say ahead of, but people look at something evaluation goes, gosh, I love that predictable revenue and that SAS model, and they're starting the multiples just started going up. I don't know if it was your book or just, you know, everybody else at the same time, but you crystallized it to say that's where companies started going after going, I want that predictable revenue. Yeah, yeah, yeah, yeah, I mean, and and and a real arbitrage play right now is taking a business that is is in using it still stuck on a transactional business model and and buying it and flipping it to recurring revenue because you get much more predictable revenue, obviously, but you get a huge jump in valuation. So right now, uh, you know, the car wash industry of all industries is going through a huge consolidation. If they survive COVID, yeah, yeah, well, yeah, hopefully, hopefully they've survived COVID, but uh for those that did, you know, those traditional businesses, you know, the local car wash, they valued their company based on in a lot of ways just the the the the real estate, the car wash sat on. Right, and they think, oh, we've got this great real estate on this corner. So that implies no goodwill in the business. It's just, you know, basically the asset, the hard underlying asset of the real estate is, is the value and so private equity groups picked up on this a while ago and they're like, OK, this is, this is a gold mine. So they're buying these companies for either the the book value, the value of the underlying asset or some paltry, you know, multiple of earnings, 23 times SDE as an example. They're flipping the car wash from one-off, you know, transactions, like get a car wash with a gas purchase to recurring all you can eat, effectively come as much as you want, get your car wash whenever you want to pay a 1 $30 a month subscription. And, and they are a ballooning the lifetime value of a customer, B making their business a lot more predictable. C, you know, on a dollar for dollar revenue you up, um, perspective, you know, they're, they're doubling the multiple, tripling the multiple, you know, like they're, they're now selling these recurring revenue books of business for, you know, you know, double digit multiples of the beda as opposed to what they bought them for, you know, 2 and 3. So I mean that's a, that's a bit of an old playbook that's been around for a couple of years. I'm not sure how much opportunity there is in that space in the car wash space specifically, but there's a lot of industries that are still clinging to a transactional business model. And uh one of my favorite examples of this, it's in the book Automatic Customer uh is H Bloom. They took a flower company. And you know, typical transactional flower stores are terrible that you buy the inventory, it's rotting in the fridge. They throw out like half of their flowers every single month because they, they forget or, or guess wrong. And H Bloom came along and said, well, why don't we sell subscriptions to flowers? And the only people that want to buy flowers on a recurring basis are hotels because they want that very like that bouquets or 5-star image when you check in on the reception table. And so, All they did is sell subscription to flowers to hotels. And I mean, the lifetime value and H Bloom subscriber, last time I talked to these guys was like $4500. So they make one sale. You know, a typical flower story. Yeah, that's amazing, yeah, yeah, typical flower you walk in and buy a bouquet of flowers, you know, maybe $50.60 dollars, whatever, they make one sale and capture over the life of that subscription $4500. And so it's just, it's totally gamechanging for that business model. So, yeah, recurring revenue is a big deal. So that was a trend that's really now moved up to PE. Uh, are you seeing any, I mean, you're in the like midst of all types of information. Are you seeing any other kind of trends that change the multiples of a company? Well, yeah, I mean, the big one is going to be inflation interest, interest rates. It's not inflation, the interest rates reaction to inflation effectively. And so, as you know, private equity groups and individual investors for that matter, you know, they live and die on debt. So the, the, the more of it they can get, the lower the price of it, the, the better the return they can garner provided the company can. Go to underwrite the cost of paying back the debt, right? Um there's enough cash flow to service the debt. And so as interest rates go up, it, it, it's going to become much harder and harder for private equity groups. So we'd expect, you know, evaluations to go down as a result of that. Uh, we'd expect that the less deals will get done, that the returns will be less favorable, um, you know, the spoils will go. To the well-financed private equity groups that have, you know, lots of cash on their, yeah, yeah, yeah, yeah, not having to borrow as much. Yeah, and that could be, you know, Warren Buffett whoever takes over for Warren Buffett types on a larger scale, yeah. Yeah, yeah, and there's a lot of, of, I mean, Warren Buffett's obviously, um, you know, Berkshire Hathaway is probably the the largest of its kind. But there's lots of other sort of imitation funds and imitation businesses that that are trying to be Warren Buffett like and and you know buying small and medium sized businesses. So yeah, there's there's lots of examples of that. But but it's gonna, I think it's gonna be some headwinds in that in that as uh as we see interest rates going up. Yeah. Did you think that it would turn out after 3 books, value bidders is? Value builder system like it did today. I mean, are, are you a different person than you were when you started this? Many years ago, yeah. Yeah, yeah, yeah, um. Or did you have this vision in your mind what it was gonna look like, and it was very uh detailed about what that was gonna look like. No, no, I, I, no, I, I did not have any, um, the reason I brought that up is because I just read something the other day where Elon Musk doesn't have a business plan. He just goes on the, like, yeah, I'm doing this. Yeah, yeah, I, I've been, I've been critical of business plans as well, because I, I think. Uh, you know, they're, they're usually, because I think, let me put it this way, I think young people use them as an excuse not to start something. Uh, so they invest all of their time in writing a business plan because they, they think that's the right thing to do, whereas what in my view, a young person should do with, with very little to risk, you know, no, no mortgage, no kids to feed, etc. is just do it. Just get in the marketplace and try some things and see what sticks. Once you've got some real world data about what you've built or what you could build, then by all means, you can start to put some numbers together and some forecasts. But, but what I see is the inverse. I see a lot of people sort of, you know, Uh, obsessing over every line in their business plan and every, you know, every, every number in their spreadsheet and of course all of them are just fictional until there's actual some real world data. Yeah, yeah. I heard a great story recently, a company called Hush, actually Toronto-based guys, two guys, uh, started this company. And one of them worked at a summer camp for disadvantaged kids and kids that have developmental disabilities. And the, at the camp, they used, um, heavy weighted blankets to allay some of the, uh, the anxiety these kids had. So these weighted blankets are like for sleeping, and they make just make you feel more comfortable because they provide a little bit of weight without suffocating you. Anyway, he looked at the quality of these, these blankets, and they were just kind of poorly made and and shoddy manufacturing, foreign manufacturing and so forth, you know, like we could do these better, make them out of better materials, etc. and so what he did is put together uh uh Little Kickstarter campaign, and he had some friends from camp and so forth. Long story short, he sold 5000 customers, 5000 unique people to buy these blankets in advance. It totaled, they were between $100 and $400 depending on what size and style you wanted. He got 1,05 pre-orders for these blankets before even starting the company, $1.5 million of startup capital from customers. That's demand. Like, like keep in demand in front of your skis, right? That's exactly right. And, and didn't have to give up a stitch of equity in order to build the company and I tell you that story only because you, you know, you talk about business plans, you know. That's, that's an entrepreneur. That's somebody who identifies an opportunity and, and creates something out of nothing. And, and, and, and I think, you know, these folks who spend a lot of time on their business plans and kind of years and years go by, it's, it's just not well, it's not time well spent. What you need is market data. What you need to get out there, uh, tell the world about your product and see if they're interested. Do you take uh participation in any of the deals that come through your kind of the deal flow that comes your way, or you? Occasionally, I, I mean, it's not our business model. Uh, I do some personal investing that that is, uh, Uh, sometimes I'll hear about stuff that is either through my network or friends or whatever. I, I do invest personally in some deals, but, but no, that's not part of the, the kind of value builder model. Uh, that's not, uh, that's not our sort of. What's going through your career, you build 3 books and uh the value builder system, the, the, the podcast, you have created an audience which is You know, what we teach today, create the audience, productize, monetize that audience, and whatever product or that looks like. I mean, what advice would you give somebody today starting this, I kind of wanna do what John Warlow does, like it, but it is a different industry. Uh, interesting. So, I, I just did a, uh, I did this, you, you mentioned the podcast at the beginning of the show it's called Built To Sell Radio. I just did an interview with James Ashford. James is the guy who built GoProposals. So GoProposal is a little software that accountants can use to better create faster proposals, very simple add-on that accountants can buy. Built it up to 1,0005 in British pound turnover, sold it for a healthy 8 figures. So great, great story. James is a prolific entrepreneur. The reason I tell you this, what's that? 8 figures. Yeah, yeah. I think I got that email from you. I'm on your email list. Yeah, do the math on, on that, uh, in terms of multiple. It was a very, very lucrative exit. What I, the reason I, I, I raise it is that James started his company with a personal brand. And he didn't have a lot of money. In fact, he had just come out of a business failure, so effectively no money, but committed to using social media. He said, I'm gonna, you know, I've got an expertise in sales and marketing, so I'm gonna create these videos, and he created a video a day for, you know, years, and that was how he built GoProposal. And, and I, and he also then, you know, use that YouTube channel and parla into a book and of course, and like, you, you know, all the classic sort of assets and extending these things that that one would do if you had an audience. And I I asked James, but, but James, I mean, weren't you creating a lot of owner dependency because all of your sales and marketing came from you personally and so, you know, your business isn't worth very much if if if you leave. And he said, well, actually, it's interesting you say that because I identified that a couple of years ago, and so in 2019, he created this campaign internally called Kill the King. And what killed the king was, was a, an internal campaign for his employees to take over as the social media advocates for his company. So he promoted uh a woman on his team to be their spokesperson for GoProposal, and she then started to do a lot of the webinars, a lot of the posting on social. He took a lot of the content from his book and created assets, social assets that were independent of James Ashford. It was content that they could use whenever they wanted, whether James was working or not. He had this whole strategy about kind of effectively migrating his personal equity, uh, brand equity, personal brand. Uh, that he'd built and, and, and built Go proposal on the backup and migrated it to the company GoProposal. And so when he sold it to Sage, the the big accounting, uh, software providers, they bought it with, uh, not only, uh, you know, the, the, the company, but also the book that James had written, uh, James agreed to stay on for a period of a couple of years after the fact because they wanted him to stay on as a spokesperson. And so it's a nice little story of how do you make, how do you sort of migrate that. So it's a really long-winded way to answer your question, which is it is the perfect answer because it's just the because of the power of social media, whatever you're doing on LinkedIn or TikTok, I mean, I looked there's a uh uh a woman mis Excel. I mean, she just started doing these little TikToks things, put a kajabi or think if it course together. It's a multi-million dollar business now. That's great, yeah, yeah, and again, there's lots of those stories out there that just I I would just caution folks that if the goal is to build a valuable company that you could one day sell, you're gonna wanna migrate that personal brand equity. To your company and be really thoughtful and proactive about that. So you'll notice if you, you sort of follow Value Builder, uh, Value Builder is our uh our company for advisors, we license to advisors as we mentioned in the beginning, so Sam Mendelson is the president of Value Builder. He's got a social profile, he, you know, he Promotes and pushes things out under his personal name. ValueBuilder has a bunch of channels that are out there. And so, while I, you know, do my part to help support it, uh, you know, the, the stuff I do is, is, is hopefully independent and and and intentional, intentionally independent of value builders. So it's a You know, I, I'm hopefully doing my part to You're doing the extricating yourself. You're trying to do that. Uh, I mean, is it cool to have like nothing in your calendar over a 30, 30 day period? Just Sam does a lot of the hard lifting, so I, I, I do have a good, a good, uh, good amount of free time, which I, you know, I value and, and, and obviously that's part of the message you built to sell is, is that once you structure a company that is not dependent on you. You don't have to sell it. You can certainly just continue on as I do as a, as a, you know, an interested shareholder as opposed to, uh, you know, the day to day operator of your company. So that's that's I've heard the, uh, you know, working in the business, and then above the business, yeah, in in. On and above, yeah, that's interesting. I want to work above the business. That's the goal, right? So everything you put into place, systems, whatever it is, it's above. Yeah, I think that's a, that's a really nice analogy that I've never heard of, you know, obviously heard of Michael, you know, he met and the whole concept of in versus on, which is classic, but, uh, but above is a cool twist on that as well. But yeah, I mean, uh, it's, it's one of the reasons that Building to sell, I think is uh is such an important thing to do, uh, because it gives you all of the the leverage um and and and the lifestyle as well that that you, I think most entrepreneurs are aspiring for. So what do you guys do? What's a win for you as far as how do you celebrate a win? Is that somebody getting on your that went through Value Builder and then uh it's on your show and you talk about it or what's a, what does that look like? Yeah, I mean, there's there's lots of different wins. I mean, we'll celebrate, uh, yeah, we'll celebrate first and foremost an entrepreneur who, who punches above their weight and, and, and has a great exit. So oftentimes they'll come on radio and tell us about it, which is awesome, and that's great, you know, our, our goal as an organization is to level the playing field for business owners as they approach their exit. So it's our belief that today, entrepreneurs can bring a knife to a gunfight, as the old expression goes, they, they know everything there is to know about their business, their car wash, their dental practice, their car dealership, whatever, but very little about the process of selling it. And as a result, there is a whole army of folks that, that take advantage of them and I think In large measure, we're trying to change that. We're trying to to to give entrepreneurs the, the knowledge they need to, to, to punch above their weight and make sure they get a fair deal. Because again, without entrepreneurs getting a really good return on their investment, I, I, I just, I really question where we would be as a society, like I, you know, I think. I think about like there's no iPhone, there's there's no, well, there's no vaccine, you know, there's no, no, there's no Tesla, there's no, there's these companies are in in are formed in the minds of entrepreneurs and therefore we have to go out of our way to disproportionately reward that and create an environment where where where entrepreneurs, small and large alike are rewarded for the ideas they bring to the market. Uh, and so I think they, I think that's a healthy, that's a healthy thing for the environment. You know, I live in Canada. I live in Canada, where, where we have a, a very left-leaning prime minister who, you know, flirts with the idea, you know, behind closed doors and I don't have, I'm not privy to any of his thinking, but with the idea of raising uh capital gains tax to the same thing as income tax. And that is wrong. It, it's just fundamentally on every possible dimension, a poor decision. Uh, because you, you have to have incentives for entrepreneurs that are disproportionate to going to work for a company, otherwise you become France, where half of the workforce works on some way, shape, or form for the government. And France, if you don't anything about the country, I mean, you know, intractable unemployment, uh, you know, very slow growth country. There's a lot of problems with that. And so we have to be, uh, I think a world, a society, a country. That promotes and rewards entrepreneurs and part of that is making sure that they, they have great exits and so that's what you were bringing that up. I watched some kind of Apple TV show called The Long Way Down with, uh, uh, you and the Obi Wan Kenobi guy. He took a motorcycle down from the top of Africa all the way down. Oh cool. I've never seen that, it's, it's great, but it's just a Difference between a system, entrepreneurial system and a system stuck 500 years earlier and the life that they live is so difficult, you know, just Yeah, yeah, yeah, you know, I, I, it's not a political show, but we, you know, like, like I think there is a, a limit to, like, I think entrepreneurship without any reins or guardrails is not the right answer either. Like we do need. So that was that happened in the industrial society, taking advantage of workers 20 hours a day. 7 days a week. Yeah, no, no. Yeah, but, but I do think, uh, in particularly in Canada, we, we have the pendulum has shifted unfortunately or swung too far, uh, to, uh, to the point where, where, uh, you know, we, we look, uh, We, we question entrepreneurs where, you know, we, we are critical of people who make money and we have tall poppy syndrome where we, we try to cut down successful people and I just think it's a very unhealthy, uh, we have that here in the United States. Oh, is that right? You didn't build that. We don't have uh full ownership of that. Yeah, so, uh, look, I, I appreciate this time and then, and I, I think this uh very enlightening and I appreciate it. Again, John Warlow from Built To Sell, automaticus, and he's got a third book that I haven't purchased yet, so I'll uh I'll, I'll get to that. So John, thank you so much for the time. Thanks, John. All right. Take care.