John Warrillow, Founder, The Value Builder System

Scaling Up Services - John Warrillow

 John Warrillow, Founder, Value Builder System

John Warrillow is an entrepreneur and author with over 20 years of research experience into the small and medium business (SMB) market. He founded The Value Builder System™ to level the playing field for business owners as they approach their exit. Over 35,000 business owners have taken the Value Builder Questionnaire, and with the support of Certified Value Builders™, such as brokers, M&A professionals, and coaches, they’re using the statistically-proven methodology to improve company value by up to 71%.

John’s best-selling book, Built to Sell: Creating a Business That Can Thrive Without You, was recognized by both Fortune and Inc. Magazine as one of the best business books of 2011. In 2015, John wrote another best-selling book called, The Automatic Customer: Creating A Subscription Business In Any Industry. 

John 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.

Check out John special offer for Scaling Up Services listeners:


[00:00:01] And today I will say is actually quite a special episode. We've got John Warrillow on the line here and we're going to talk a little bit about the work that he's done and my guess is you probably don't need much of an introduction for most of the people that are on here. But for those that haven't run across your word. John Rhodes built a cell. He also wrote the automatic customers he has built the value builder system which I'm quite familiar with through my work with Ito and gazelles and burn Harnish and runs the Built to Sell podcasts. John welcome to the program. Thank you so much for taking some time. I'm really excited for this conversation. Yeah I know my pleasure Bruce. Thanks for having me.

[00:00:38] So what we're focused on here is really talking to the business owners the key executives inside companies that are service based companies. And you know I kind of use it in a somewhat loose term but it's basically companies that at some level are dealing with people providing some kind of service to other people and have to kind of deal with that factor that factor in the business.

[00:01:03] And when we look at scaling those businesses those you know there's complexities come up and you know particularly you know like your story and the work that you've done because you've sort of tackled the space pretty much head on. And I know through hearing your personal story and building your business and selling your business and the whole valuable system is really kind of looking at how do you take kind of those those qualities those complications of service based businesses and structure them frame them systematized them in a way that makes them more scalable more valuable more sort of ultimately sellable. So you know I'd be curious to start with you a little bit about I guess the first sort of giving people here that haven't heard of your storyline. What the background is because the experience that you have in research and you know looking at the small business market is great. And then just talk a little bit about some of the key things you see in the challenges of business owners and I know you've got beat points in the system that's got a few that you think are particularly challenging and what are some of the things that you've seen people succeed around them.

[00:02:03] Sure happy to do all that.

[00:02:06] Well it does give people a summary of the concept that's important for people to know that you're not just you're just not an author who you know came up with this idea but you actually went through a journey of actually building and scaling your own service business.

[00:02:17] Yeah so I've been involved in a few startups where people where the main asset in the company. And I've had a graphic design studio similar to the book built the Sollers that there's a protagonist in that book called Alex Stapleton who runs a graphic design studio so I've own one of those so that was close to home. I bought a quantitative market research business to get a fairly easy people driven business frankly projects and stuff like that. And you know that company as well. So all of them have been one service or another and of course those are very difficult to sell which which I wrote about in the book you know that the challenge of ultimately scaling and ultimately selling a service based business when the assets go up and down the elevator as David Ogilvy said in his book that's the that's the challenge. And so I've done it and and I've lived that difficulty as well. It's you know part of the reason I think a lot of businesses start up a services business is obviously is that there's no capital very low capital or easy to start. Yes. Yeah. You know you don't have to raise a lot of money. You can just kind of put out a shingle and start. And pretty soon you're you're one of the races.

[00:03:25] And the challenge is of course that you're not building any value if it's just deeply dependent on you or on you know on a couple of key staff so. So the challenge is how do you move from the scrappy bootstrap startup days when you're you know doing anything and everything to do something that would be transferable value as they talk about in a Benet's parlance.

[00:03:46] So talk to me I think the you know the valuable the system has to eat and eat factors they eat things we look at when we're looking at how sort of sellable a company is are the things that we can do as owner or as operators of service businesses to make them more attractive or able to sell. I'm curious what you see around what happens for the individual like what do you see that the individual transformations need to be as as they kind of think about the basis think about the business and how to make those transformations because I think that there's kind of a logical side of how do you make these transformations but what are the kind of mental hurdles or mental challenges that you see people trying to implement this whether they need to kind of retrain or rethink about or or change the way they are approaching a situation to be successful in this.

[00:04:32] Yeah I think the biggest mental hurdle is to stop chasing revenue. I think you know it really ever in a day we have thought about revenue being our you know our number one driver right. So you know the magazine covers celebrate revenue at Inc 500 is the 500 fastest growing companies have expanded to now with 5000 fastest growing companies its top line revenue focused and unfortunately revenue often competes with value. There's a relationship between the to and growing companies get better evaluations for sure but there are seven other drivers of value beyond just growth that often compete with growth. So let me give an example. So a service based company that you know the classic would be the owners the is the you know the company's best salesperson. If you wanted to maximize the revenue of that business you put the owner on the road right. You'd make the owner the number one salesperson. You push all of the actual all the other stuff related to running a company off of his or her plate and just get them out in front of customers. And you would you would successfully grow your top line revenue and at the same time you would undermine the value of your company. And so you end up just kind of just running on this treadmill where you're actually not creating anything other than just more work for us. Yeah. So that's it even scaling up even even Verne's book even the work all around growth. Growth is important ingredient in driving value. But if it's at the expense of the other 7 drivers it actually is a fool's errand you know. And so what we need to do is get growth but in an intelligent way in a way that doesn't undermine the other seven values.

[00:06:09] Yeah I agree.

[00:06:10] I think that one of the things that I always kind of tell founders tell entrepreneurs looking to grow faster you want to grow them more you need to focus. So the more you need to not start chasing everything with a dollar sign on it and really decide like what is the core customer what is your core product what are the reporters and how do you zero in on those so you can make those repeatable scalable you know building quality building systems train people. So I like that one. So in terms of the 8 drivers that you see what do you think is the sort of the first one or maybe the first one that was challenging that people kind of run up against from this sector.

[00:06:49] Well it actually goes back to your point where you surround around focus. You know we have this is a driver called the monopoly control and what it comes down to is this idea that when a buyer buys a company you know without you in the room when they're back in their boiler room and head office they're making a simple calculation right. Which is should we buy this company. Or should we compete with it. Should we essentially build what they've created. And if what you've built is very easy to replicate meaning you're a commodity based business. You're selling by the inch by the pound you know by the truckload. There's very little that makes you unique that the barriers to entry are very low. The buyer is going to look at this and say well I could buy this business for ten million bucks or I could lose let's say five hundred grand a year for the next three years and basically take all their market share. Well if they choose to like basically compete by lowering the price and lose a million five there's still way ahead of spending 10 million dollars to buy your business. And that's really the kind of the key. And so what you want to do as an owner I think is find something on which you are truly differentiated that really competing with you on that one product that one service is very tricky or very difficult for someone to replicate. And that's where you've got the monopoly control and that's where when an acquirer makes a decision they're going to look at this business. Yeah we could create what he or she is God but man it's going to take six years and about 50 million bucks to replicate what these guys built. Let's just go buy him for 10. Yeah that's a key. That's a key headspace shift.

[00:08:27] Yeah that's a critical basically you're you're buying because it's cheaper than doing it themselves.

[00:08:33] And I think a lot of entrepreneurs don't realize that you know the value is in the eye of them acquire in the eyes of the person that's getting acquired.

[00:08:41] Yeah yeah and it comes back down to again I want to riff on this idea. Bruce the idea of focus because for a lot of business owners again those chasing revenue as their report card they're sort of top line bogey. Well what we do is oftentimes we'll start off with the vision. Right. So you know we want to create again any case that built to sell the protagonist says he wants to create logos right and he's got a unique unique methodology is developed that what we get tempted by. And there are just sort of all of these temptations all over the place of selling additional services right because clients who buy the one thing that you're really good at will quickly start asking you for other things right. Well I know you do logo's but could you also do our search engine optimization for example or could you build us a landing page. And the more you say yes to that stuff chances are the less differentiated you are on those other products. When you go to sell your company you're going to want a multiple of a dollar or multiple of revenue. The challenge is the buyer is unlikely to want to pay for all the ancillary stuff they might be willing to pay you a multiple. The Baydar revenue if you just all you did is that one thing but if you've got nine other services that you're not really differentiated offering on they're going to discount or in fact choose not want to pay for those nine others.

[00:10:01] Exactly. They're going to take that out of the revenue stream they're going to say look I'm really buying is this one particular service offering you have that is five million out of your 10 million. So I'm only going to take the five and take my multiple on that because that's really on a scale. Yeah. How did you go to look at sort of the strategic choices. How much should the owner look at what sort of internal factors like how what am I good at what can we create significant value around versus external factors and it was aware of them where the market opportunities are where a particular customer might be strategically value in terms of an acquisition scenario. So Heiser have a customer that's actually strategically valuable for my potential acquirers and so therefore it's going to increase my multiple.

[00:10:43] Yeah. On this point you know am I going to zig were I think a lot of people zag the you know lot of people if you are if you pick up a wannabe entrepreneur magazine like you pick up Entrepreneur magazine right which is read by people who don't actually run companies it's run by people who dream about running companies or you watch lions or shark tank or any kind of shows that they're actually real business owners generally don't consume. They will tell you that you should start a business around your passion right. Find something you're passionate about. Go do that. That's going to be the secret to creating your business. And that actually I think that puts you at a disadvantage if you're super passionate about. Block Chain if you're super passionate about outdoor adventure in some ways the worst thing you can do is start a business in that area. Because all of a sudden you're going to be personally very tied to its iteration right. Whereas I think some of the most successful entrepreneurs never fall head over heels in love with what you know whatever product or service they're building and they are instead focused on okay. What does the market need. What is the market saying. It's not to say they don't they don't have any interest in the area but they're not so passionately personally you know wrapped up in that product that it becomes part of who they are you know.

[00:11:56] Yeah I mean it is a bit of a paradox I find because it's one of those if you want to sell the business but if you're emotionally attached to it you'll find all sorts of ways to thwart the sale. I always say that the moment that we start talking about selling a business but not really the first thing we do is start figuring out their next business because we want to create like we want to we want to get them excited about doing something else because we need to create a positive pressure for them to actually disengage from that business and if they don't if they don't have that next thing lined up it is crazy that things they do undermines the actual process either directly or indirectly in the sale process.

[00:12:29] Good point. Yeah I mean having something doesn't have to be the business.

[00:12:33] I don't know it could go start a non-profit go you know decide you're going to climb Everest like you're going to have to create some kind of mission for them that gets them excited so that they start wanting to leave because of the movement that they want and they have something else they are more than willing to make the changes to engage in the activities they need to do to disengage from the business. Yeah.

[00:12:54] It's like a loved one in terms of the factors that you see around services businesses other things that people run into or the challenges that you'd have people pay attention to because people often get wrong.

[00:13:07] Yeah I mean you know in terms of scaling to the business one of the keys is going to be recurring revenue. Right. So you get a lot of service businesses are still based on project or hourly billing and that's a that's a tough business to sell. So what you're really trying to do is rethink the model around some sort of recurring revenue model that's going to be critical. So you know there are nine different recurring revenue models. We look at but virtually every business can create at least some recurring revenue but it does require you I think to think quite laterally about your business a lot of people a lot of you will say well you know just not the way my industry works right like I'm a I'm an accountant I'm a I'm a civil engineer. That's just not the way architecture works. Right. And so you do I think have to think quite laterally. I recall somebody I know quite well who has unfortunately passed away. He he was a divorce lawyer and you know people would say well you can't create recurring revenue from divorce law. Right. Like it's I mean it's by its very nature it doesn't lend itself to recurring revenue. Well he was kind of sick of dealing with all these angry people that you have to deal with through a divorce. And so he developed something called the divorce mediation kit. And so it was a methodology of going through a divorce without actually using a attorney. And he licensed this system to marriage counselors on a recurring basis. And so you know he had to quite laterally about the industry that he was in if he would if he was you know clinging to the definition of what a law firm does bills by the hour then sure it's difficult to create recurring revenue. But if you if you really think more laterally about what is the value exchange or what am I actually doing and you can start to start riffing on ideas if you're willing to think quite laterally about your industry your business.

[00:14:54] Yeah I think that's an excellent point actually strategy and I think that it's a lot on the way to the service businesses.

[00:15:00] So the situation again is there are there in some kind of you know time based costing you know pricing model and getting into more of some kind of a content program process model where they're abstracting themselves out of the actual delivery process.

[00:15:16] You know it is often an effective strategy. So what other kind of recurring revenue schemes because I know that you know everyone talks about recurring revenue but you know you talk about there's there's many different types. Give me some examples of the different types of recurring revenue that we can think about. Yeah sure.

[00:15:29] I mean you know one simple one is the consumables right. So the consumables model is based on the idea that people run out of stuff right. So classic would be so. So they've got Amazon subscribe and save right where if you subscribe to a shipment of toilet paper paper towel and dish soap and you pick the same delivery date for those three products they'll knock 15 percent off and subscribe and save.

[00:15:54] So you basically get it auto ships. That's a consumable So here you're looking for if you're looking at your customer base like what do they run out of. You know in a service business context you might think about you know like you promote in Los Angeles as an example as an SDM A company search engine marketing company. They sell you Google Ad Words being Ord's and various different advertising solutions. So you promote works on a six month recurring contract right. And they say look you know these buying these words is a hassle. You got to bid for them you got to figure out your bidding to optimize your bidding you got to know what's working what's not it always changes. So let us manage it for you on a recurring basis. So you promote has something like 90 percent plus recurring revenue very sellable company as a result of that they're in the service business because they figured out what is that the customer has a need on a regular basis. We call that the simplifier bottom model by the way to Syria where the customer in many cases would would actually prefer to buy from you on subscription.

[00:16:54] What's interesting there is that it's really it's it's not really the cost reduction you know I'm saving 15 percent but it's making it easy.

[00:17:00] You know I think a lot of people don't realize is that I think the real when a lot of those models is that you're actually selling ears to the customer.

[00:17:08] You're taking that burden of having to know every month. Finally you actually sit down and do this when we take that work for you so you don't think about it.

[00:17:17] Yeah absolutely. And so for service companies again that's probably a service contract that simplify our model a classic iteration of service business would be a service contract so it would be you know hey we're probably going to keep doing business stay at the show an accounting firm as an example instead of billing by the hour which many of them used to do. Now most of them are moving to hey look we usually believe about five grand a year to do your tax return to be sort of an advisor to you throughout the year. You know why instead of doing this once and having this big not at the end of the end of a year or having it fluctuate from one month or next. Why don't we just build a flat I don't owe five hundred bucks a month. And and we'll just keep doing that until you tell us to stop and we'll roll all our services into that. Again that's a simplified model and you think well why would it matter where it matters most for cash flow. Because in the old days that you know they would have to do the tax return submit the tax return and then maybe get paid 60 days later instead they're getting paid throughout the year.

[00:18:13] But you're Iranis that'll get around behind schedule. Yeah absolutely.

[00:18:17] And the customers happy right because they don't have to think about it. They just know that they're sort of taking care of my son for example plays guitar. And he's 10. So we have someone come to the house once a week to help him out and teach him a little bit. And this teachers like a great guy but he's got no business acumen whatsoever so. So every week the only occurrence he takes is cash. And every week we've got to find a new time for him to come to the house. So you know like my wife or I talk to each other every every morning and say like you like coming today. Do we have like a chart I want to see charges 30 bucks or something. We have the cash. What time. It's all just a mess right. As opposed to he said look you know I'll believe 30 bucks a week on a credit card. You know I'll be you know will be at same time. You know it's a simple model but it does make huge difference and make it easy to do that time here.

[00:19:09] So I wanted to give you a chance. If people want to find out more about you about your books about the value system what's the best way to get a hold of you. Best place to find out more information. Yeah the value builder dotcom. I'll make sure that stuff isn't in the show notes. People have the links. John it was a pleasure. I know we didn't probably probably another three hours that we could go on. We can do another episode again but this is a great chance to talk with you I really appreciate it.

[00:19:33] Hubers thanks for being here. I should take her care.