The Exit Podcast - Finding Premium Exit Valuations with John Warrillow of Built To Sell
By Steve McGarry
What Is The Value Builder System?
John describes Value Builder as a way to think about your company through the lens of an acquirer. The system is designed to improve the value of a business. When using the system, entrepreneurs first fill out an intake questionnaire using eight dimensions that acquirers look at to get a score. The average score at intake is 59/100, and those businesses are trending at a 3.5x pre-tax profit. Over time, going through the process, the aim is to improve your value builder score. For those that are able to raise their score to 90/100, they’re trending at a 7.1x pre-tax profit.
Getting A Premium Valuation
One of the biggest drivers of a premium valuation is recurring revenue. Lack of recurring revenue is the single most reason that companies fail to get a premium valuation. It’s vital to have recurring revenue streams such as a subscription service. Take H.Bloom for example. As a flower company, they go through seasons of sales, Mother’s Day, Valentines Day, etc. They also have a product that dies if it doesn’t sell within a certain time. One of the smartest moves H.Bloom made was to start a subscription service for hotels and the like. This brought in recurring revenue and was a saving grace for the company.
Painting A Picture
Another thing that drives up value and gives the seller more leverage is being able to do the math for a potential acquirer. If you can paint a picture of what the business can be worth in the right hands, you put yourself in the driver’s seat. Take Breedlove, a provider of comprehensive household payroll, as an example. Breedlove was doing about $9 million in revenue when they decided to sell. They asked who this company would be most valuable for, and the answer was the quickly growing care.com, a company that screens and matches people with household employees. Care.com had 7 million subscribers at the time, and Breedlove was able to make the point that even if only 1% of those subscribers used this service, that would still be 70,000 customers. Breedlove was making $9million off of 10,000 customers. By showing Care.com the economic value that Breedlove could have for them, they were able to sell for $54 million.
Knowing When To Sell
A big question among business owners is how do you know when to sell? Most entrepreneurs will try to time the sale of a company, wanting to reach a certain milestone, maximizing their value, and then selling. This sounds reasonable, but the challenge is there’s usually some sort of earn-out involved where you want to still be on a growth trajectory. If you’re already at the top, the new owner has nowhere to take the company. An example of this would be the software company Moz. The owner of Moz, Rand Fishkin had built up his company to $5 million in revenue with a trajectory of doubling that within the next year. At that time, Hubspot came along and wanted to buy Moz for $25 million in cash plus shares in the company, but Rand thought he could get his valuation up to $40 million before selling, so he passed. Eventually, the business started to spiral and was hemorrhaging money, to a point where the venture capitalists removed him from the board. When asked if he would have sold when an offer was made what the shares would be worth now, the answer was $200 million. So, sometimes the best time to sell is when an offer is being made. When you’re being courted you’re in the driver’s seat, and you have the leverage. The biggest mistake you can make is trying to ride it over the top.
The Pandemic’s Impact
John says that the pandemic in 2020 absolutely crushed service businesses, any business with human to human contact. With ½ of the economy being service-based companies, many entrepreneurs were hit hard. Value Builder decided to pull data from 9 months leading up to the pandemic and nine months during the pandemic to compare. They found two interesting trends. One was that the sell-by date had moved up by 20%. The appetite to sell during the pandemic was now much sooner. The other finding was that the proportion of people that planned to do a family transition had dropped dramatically with selling to a third party going up. Family businesses were less eager to hand down their businesses to their children, instead wanting to take what they could get and move on.
Knowing What You Know Now, What Would You Tell Yourself Ten Years Ago?
He says after selling a company at the age of 38, he and his wife decided to move to Europe with their two young children. While they were there for three years, John got an itch just nine months in to start something new. If he had it to do again, he says he would have taken more time just to be there and take that time to decompress before diving into the next thing.
Where To Learn More
To learn more, go to builttosell.com, and if you opt-in with an email, they will send you a new episode each week where they interview someone that has sold a company and discuss tips and tricks.