Not every entrepreneur goes into the process of putting their business on sale. But when the time comes that selling your business is necessary, whatever your purpose may be, you will have nothing to lose on your end if you prepare well. Demystifying the intricacies of business selling and acquisition with Bob Roark is John Warrillow, the CEO of Built To Sell. John discusses how to know the right time to sell a business, present it to potential buyers, and start a healthy bidding war. He also goes deep into the most critical responsibilities business owners must take on when delving into such a transaction, from breaking the news to your employees to treading carefully when signing a no-shop clause.
Every business owner will exit their business at some point. If you want to learn how to create value, understand what makes your business attractive to a buyer, and then how to negotiate the sale of your businesses, where John says, “Punch above your weight with that buyer.” You're going to improve your skill stack on this episode with John Warrillow. He's the best-selling author of Built to Sell, top ten Forbes ranked podcast host on Built to Sell Radio, and CEO of The Value Builder System. He has started an excellent four companies. You would agree it's safe to say a couple of things at a minimum. John is a subject matter expert and an advocate for business owners on creating value in their business, maximizing the return on their legacy. He's one busy guy. John, welcome to the show.
It's good to be here, Bob.
Thank you for taking the time. John, I've read your previous books and I bought additional copies to share with business owners. I’ve got it dog-eared and worn out. One of your books, The Art of Selling Your Business, is an important book. It's a must-have investment for every business owner. I have to ask, being as busy as you are, why this book and why now?
It's funny you mentioned the podcast I do. I've done something like 300 episodes and what I've come to learn is that there are cadres, a small cohort of entrepreneurs, who seem to get much better offers when they go to sell their business than the prevailing industry benchmark. It got me curious about, “What is it that the small group is doing? What do they know that others don't? What are the secrets?” Independent of what industry you're in or what the mechanics of your business is. It seems like there was something they were thinking and doing differently. I tried to distill that down into some lessons and some secrets, and that's what inspired me to write the book.
You're doing field research. You're talking to business owners every week on Built to Sell Radio. If you don't have your finger on the pulse of the business owner, no one else does. On the selling trends for business owners that were hit in a difficult patch during the COVID pandemic, what do you see the trends doing here during this period of time and post-pandemic?
There are two big things that we've seen. We've done some research where we looked at people that complete the Value Builder questionnaire, which is our intake questionnaire for people who use the system prior to the announcement of the pandemic in March of 2020 and the next eight months during the pandemic. Two big things popped. One is that the pandemic is causing business owners to want to sell sooner. They moved up their sales by 20%.
Number two is their appetite to do a family transition. Passing their business down to their kids has dropped through the floor. In lieu, they are now planning to sell their business to a third party. We could riff on why that is. My guess is it's probably the stress of the pandemic that has left owners wounded and not wanting to pass that stress on to their kids. They're like, “I want out and I want to sell it to somebody other than my kids.”
[caption id="attachment_5737" align="aligncenter" width="600"] Selling Your Business: During the pandemic, more business owners sold sooner and refused to pass it down to their children.[/caption]
It's funny. I've had a number of those conversations as well, particularly the business owners that made it through ‘08 and ‘09 and recovered and back. They go, “Really? I'm getting another once in a lifetime of it in ten years. How many of these can I survive?” For that business owner, how do they know when it's the right time to sell?
There's a qualitative way to answer that question, which is probably the opposite of when you think it's the right time to sell. The right time to sell is when you're on the way up, not the way down. I did a podcast before this. It was with an entrepreneur who built a company. He was on the way up and had an offer from News Corp, Owned and founded by Rupert Murdoch, and shunned it. He said, “No, we're going to go grow and build.” Ultimately, he rode over the top and raised $10 million. He didn't build the company that he thought he was going to build and sold it in a fire sale for $1 million.
He and the shareholders got virtually nothing from the deal. It's a very common instance when we ride it over the top. That's a qualitative way of thinking about it. Probably the best time to sell is when you least feel like it's a good time. There's also an objective way to answer this question, and that is when you hit the freedom point. The freedom point is when the sale of your company after tax and after paying commissions and so forth would garner enough money for you to live happily, successfully for the rest of your life.
People say, “How do I calculate that?” Take how much income you want and multiply it by 33. That implies a 3% withdrawal rate. Once your business reaches that amount of money, the question you need that answer is, “Am I prepared to give up financial freedom in return for the next tranche of growth?” The next zero on your top-line revenue line isn't necessarily going to change your lifestyle at all fundamentally. When you reach that point, it's worth saying, “Am I willing to gamble that?” It's like the blackjack player puts all the chips on the table.
As a business owner, if you own a concentrated position in your company and it's a big part of your net worth, you're effectively gambling that freedom every time you wake up in the morning. I know there are lots of reasons to build a business. It can be to create something that is much larger than yourself. That's an admirable goal. It's worth asking yourself the question once you crest the freedom point, “Am I willing to make that trade-off again?”
The answer for more owners is, “No, I've had enough.” For that business owner who’s negotiating, like Rupert Murdoch, how do you gain leverage as a smaller business owner when you're working with an industry giant?
You want multiple offers. You want competitive tension and multiple people buying your business. What I found is that a lot of people get enamored with or fall in love with the idea of selling to a strategic like a News Corp of Rupert Murdoch if you're a media company. The challenge we’ve fallen head over heels in love with the idea of selling to one type of buyer is that you limit the universe of potential acquirers. It's the opposite of what you want. You want a lot of potential acquirers because that's going to guarantee or at least maximize the odds that you can get multiple offers, and multiple offers is what allows you to punch above your weight.
[bctt tweet="The right time to sell is when you're on the way up, not down." username=""]
There are three types of buyers and I would in the shoes of an entrepreneur, be open to all three. There's an individual investor who comes in and wants to buy a job effectively. There's a private equity group. It’s common these days for small and mid-sized businesses to be bought by private equity groups, and then there are the strategic acquirers. If you can remain open to all three, in a funny way, it gives you more leverage to sell to the person you want to sell to because you've got competitive offers. If you only got one offer, it's hard to punch above your weight.
If you did a comparison matrix, if you had three offers from the three types of buyers, you could compare and contrast. If you have one, that does disallow the ability to compare and contrast. For the owners that are interested in selling without looking desperate, how do they let potential buyers know that they're coming to market?
There's the magic in the word partnership. You can approach a potential acquirer about a partnership. Most acquirers will see through that language as, “This might be an interesting strategic partnership or potentially an acquisition,” but it gives you plausible deniability. It gives you the ability to say, “That's not what I meant. I genuinely meant a partnership.” If you look at all of the stories that I've done for Built to Sell Radio, a lot of them starts with the relationship and begin with a partnership.
One that comes to mind immediately is Stephanie Breedlove. She built a wonderful little payroll company with $9 million in revenue when she did a marketing partnership with Care.com, which is like Angie's List of care providers. She does marketing and sharing content, and ultimately, that transcends into a strategic conversation. The fact that they had a pre-existing relationship allowed Stephanie to know a little bit more about Care.com.
Care.com had 7 million subscribers and Stephanie had just 10,000 customers. She made the case that, “If 1% of your 7 million subscribers buy my payroll service, that's 70,000 customers. It's a business seven times the size of mine.” Long story short, Stephanie sold her $9 million payroll company for $54 million. It's an unbelievable exit. It's so outlandish. The valuation is out of this world, but it started with the partnership conversation.
You get a free look or a de-risk look at how they behave when we're working together as a partner. That's a great idea.
We often think of acquisitions happening from these events where people don't know each other. When in actual fact, in most cases, the acquirer knows the person that they're acquiring.
[caption id="attachment_5738" align="aligncenter" width="600"] Selling Your Business: Strategically, owners must wait until the deal is signed before breaking the news about selling to their people.[/caption]
Take some of the mystery out of that mess for sure. For the business owner thinking about selling, how do they break that news to their employees?
That is a tough one. It's one of the instances where what is morally right is strategically wrong. What is morally right and feels natural for most business owners is to tell their employees they're thinking of putting their business on the market and tell them they've got an offer. The problem with that is the moment you tell employees what they are going to do, they're going to brush up their LinkedIn profile or resume and they're going to start sending it off to people in the industry. Quickly, the word is going to travel that you're for sale and that can undermine the value of your company and your negotiating leverage.
It's the right thing to do morally and it's the wrong thing to do strategically. Strategically, you want to wait until the deal is signed. There are a couple of people on your team you'll probably need to consummate a deal. A senior management team, for example. If you have one, they're going to need to know. You're going to want to put an incentive in place for them to help you get it over the line and as well keep it confidential, but this can be very emotional.
I talked about in the book. There's a woman who built a nice business with 60 employees. When she went down to tell her employees she had sold, she broke down in tears and sobbed uncontrollably in front of her entire team. Partly because of the stress of selling her company, but partly because of the guilt that she felt in having the secret from the people that she owed so much to. One of those uncomfortable truths about selling a company is you've got to keep it confidential and it feels terrible.
The unsaid commentary is if you're getting older in life, your late 60s or late 70s, the employees know. Unless you're going to live as old as Moses, they know you're going to sell at some point. Going back to that one comment where you were talking about a bidding war. The business owner’s reading goes, “I want to do a bidding war. How do I create a bidding war for my company?” Any thoughts?
This is a who, not a how question. Dan Sullivan wrote a book called Who Not How. It's a great book. You should pick it up. It says that most of us as entrepreneurs think problems are how problems. Meaning, how do I find multiple bidders for my company? How do I go about doing that? In fact, it's a who problem. You need to find an intermediary, an M&A professional to take your company to market to create competitive tension.
In many cases, they have a Rolodex of private equity groups that they can reach out to. They know the strategics in your place if they're an industry expert, and that's their job. That's why they make as much money as they do is to create competitive tension. Instead of trying to do it yourself, it's a bit of a fool's errand. I interviewed a guy on the show and put him in the book. Arik Levy was his name. He built a company called Luxer One. It's an amazing business. They put lockers into Manhattan apartments where people buy online and can get their stuff delivered.
[bctt tweet="The next zero on your top-line revenue isn't necessarily going to change your lifestyle fundamentally." username=""]
Levy goes to raise money thinking it's a DIY job. He's thinking, “How do I raise money? How do I sell part of my business?” He goes down to Sand Hill Road in Silicon Valley. After dozens of meetings, he can't get to any of the partners at the VC firms. He's meeting with junior associates and people right out of MBA school. He leaves Silicon Valley, puts his tail between his legs, and he's got nothing to show for his attempt to sell his business.
A few months later, he gets an email from a guy in one of the buildings that he's put his lockers in named Trip Wolfe and he says, “I love what you've done. I believe in your company. If you ever want to sell or raise money, let me know.” Trip is an M&A professional. Arik calls him up and says, “I want to raise money.” Trip goes out and gets seven offers and five of which are acquisition offers. Levy sells his company to a public business. There's a science to selling a company and there's an art to it. The science is done and known by the M&A professional, so just hire one. They're worth their weight.
It's funny, for many of the entrepreneurs, they're so steeped in, “I did it. I built it. I grew it. I understand it. Therefore, I can translate all those skills to selling it.” The emotional investment in that process and the lack of expertise, maybe the first and only time they sell their company. The money spent on a professional is a good investment, in my opinion. It’s interesting. One of the specific things talking with the client, what does that client or owner do when you have a potential buyer who wants them to sign a no-shop clause? What do you do?
A no-shop clause is almost always part of a letter of intent. A letter of intent is like an engagement letter or an engagement proposal. You're not married. Most LOIs or Letters of Intent are not binding, but they are a strong indication that you're engaged. Part of that engagement like an engagement in life is you agree not to see other people. On a no-shop clause, you agree not to negotiate with anybody else. When you sign a no-shop clause, your negotiating leverage swings heavily away from you in favor of the buyer. Once that LOI is signed, the buyer has leverage over you. Oftentimes, they'll use that leverage to reach trade and try to eke out better terms because they know you're a bit compromised.
The key before you sign a no-shop clause is to ensure all of the material deal points that you believe are important are negotiated upfront rather than waiting until the end of the line. The story in the book about a guy who signed a letter of intent with some nebulous terms around what his employment would be and what the reps and warranties were going to be, the things that are material to the deal. The acquire said, “We'll figure those out downstream. We'll work those out and do due diligence.” Of course, the deal fell apart because those things were not agreed to upfront. The moral of the story is to get everything that's material or important to you done and agreed to at the letter of intent stage because once you sign that no-shop clause, you lose a lot of leverage.
That plays into the earnout issues that many people have. For a number of the business owners I've talked to where they're in an earnout situation, if you've given up control or it's not specific, the earnout is a risk issue for them.
[caption id="attachment_5739" align="aligncenter" width="600"] Selling Your Business: When you sign a no-shop clause, your negotiating leverage swings heavily away from you and in favor of the buyer.[/caption]
The number of stories I've written about and heard of a disaster earnout, one that comes to mind is a guy named Rod Drury. He started Xero, the competitor to QuickBooks. It's a big cloud-based software, counting platform, and billion-dollar company unicorn. Rod got the money to start Xero by building a company called AfterMail. AfterMail was around the time of Sarbanes–Oxley when all these big Fortune 500 companies had to archive their email and be able to access paper trails and...