In this episode of the Creative Dealmaker podcast, host Carl Allen interviews John Warrillow, author and entrepreneur, who shares his journey of understanding the true value of a business. Warrillow recounts a pivotal moment when a merger and acquisition (M&A) advisor told him his company was essentially worthless because it was too dependent on him. This experience sparked a two-decade quest for Warrillow to learn what drives business value, leading to the creation of the Value Builder system, which helps owners prepare their companies for sale in a way that maximizes their worth.

The discussion highlights the common emotional challenges faced by business owners contemplating an exit, particularly the feeling of loss when stepping away from a business they’ve nurtured. Warrillow emphasizes that many owners often focus solely on financial metrics without considering the personal implications of selling. He points out that successful exits often depend on having a clear vision of what to do next, a concept he refers to as “pull factors,” which contrasts with the “push factors” that compel owners to sell out of frustration.

Allen and Warrillow explore the different motivations and types of sellers in the market, categorizing them into three buckets: those seeking maximum value, those looking for a supportive partner, and those who prioritize legacy and employee welfare. They agree that sellers who cultivate a business that can thrive independently of them have more leverage in negotiations and can achieve more favorable terms.

The conversation shifts to the importance of storytelling in understanding the emotional complexities of buying and selling businesses. Warrillow expresses his intention to write a novel, “The Creative Deal Maker,” aimed at capturing the drama and psychology involved in these transactions, particularly in the micro-cap market. He believes that parables and narratives can provide valuable insights that technical books often overlook.

Finally, they discuss the urgency many sellers face, especially when personal circumstances force them to act quickly. Warrillow emphasizes the importance of readiness and strategy in achieving successful exits, advocating for business owners to adopt a value creation mindset rather than a solely income-focused approach. By preparing their businesses for eventual sale, owners can enhance their options and outcomes, ensuring that they are in the driver’s seat when the time comes to exit.

Full Transcript:

And he said, “John, there’s nothing I can sell here. This is a worthless company.” I really struggled to hear that. It was a seven-figure business. We probably made more than a million dollars in profit a year. So I thought going into that meeting it was a very valuable asset. He was telling me effectively all I had was a job.

That kicked off what has been a twenty-year odyssey for me to learn about what drives the value of a company. Nobody really talks about the transfer of value. I think it was seventy-four percent of business owners who exit within one year are depressed or sad about their outcome.

A very warm welcome to the Creative Dealmaker podcast. I’m Carl Allen, your host, and I’m going to be interviewing expert guests sharing investor strategies that will completely and utterly disrupt the market when it comes to buying and selling businesses all over the world.

Hey, guys. It’s Carl Allen. Welcome to the Creative Dealmaker podcast. I’ve got a very special guest on my show today: none other than John Warrillow. I’ll let John talk about his background in a minute, but you guys know how much I love this book. This book is going to teach you everything about how to get a business ready for sale so that someone is going to really appreciate it and pay what’s hopefully going to be a premium valuation for it.

So, John, welcome to the show. Thank you for coming on.

Thanks for having me, Carl. So, obviously, you know, you’re an author. You’ve built and exited four businesses. You have the incredible Value Builder system. But just for my listeners and viewers who probably don’t know as well as I do, just give them a few minutes on your backstory. Where did you come from? What have you done? And what’s your focus here on in?

Yeah. I built and sold four companies, most recently a business that I thought was very valuable. I went to see an M&A guy and asked him, “What do you think it’s worth?” He said, “Well, it depends on the answer to a couple of questions.” I said, “Shoot.” He asked, “Who does the work in your company? Who actually oversees the production of the service that we were offering?” I said, “Well, I’m involved in overseeing that.” He said, “Alright. Well, number two, who does the selling?” I was the chief salesperson for the company. We sold to very large enterprise companies: Microsoft, Bank of America, etc.

He said, “John, there’s nothing I can sell here. This is a worthless company.” I really struggled to hear that. It was a seven-figure business, making more than a million dollars in profit a year. I thought going into that meeting it was a very valuable asset, and he was telling me effectively all I had was a job. That kicked off what has been a twenty-year odyssey for me to learn about what drives the value of a company.

Ultimately, we changed that business. We moved it to a subscription model. We brought in a sales team, and ultimately, it was acquired by a New York Stock Exchange listed company. It sort of had a happy ending in the end, but it was a very tumultuous time. With Value Builder, we help business owners understand and ultimately realize the value of their company. And so that’s me in a nutshell.

Yeah, that’s interesting. I think this is the single biggest problem that we have today in the United States for the tens of thousands of baby boomers every week that are looking to exit their businesses and transition on to something else. A lot of them work more in their business tactically rather than on their business strategically. People only look at valuation in terms of numbers.

They say, “Hey. What’s my recasted EBITDA? What’s the market multiple? What are my add-backs? Do I need to top up my working capital?” All that’s important, but nobody really talks about the transfer of value. We all know that a business has an enterprise value, a multiple of EBITDA plus or minus, and it has a liquidation value. It has the value if the business owner turns off the lights and walks away. The difference, the goodwill, if you will, is built up of those different pillars: the human capital in the business, whether it’s owner dependent, the quality of the systems and processes, the culture, the brand, and the recognition in the marketplace.

I applaud you for building the business that you’ve built to not only educate sellers and other deal intermediaries through that journey but ultimately help them drive the value that they need to see so they can retire, transition, and have the quality of life they want.

You use the word retire. Interestingly, I think some owners go through this process because they want to retire. I think many more actually don’t want to retire. They want to get on with the next chapter of their life, which could mean for many of them another business, a philanthropic project, or even going to work for a company to alleviate the stress of running a business.

We go out of our way to talk about this issue; it’s not about retiring, and it’s not about selling and sitting on the beach. You can want to exit and go do something else. That’s okay. I did a podcast interview with a guy named Joey Redner who built a great business, Cigar City Brewing in Tampa Bay. They did craft beer, and it was a very capital-intensive business. Over time, he built up a tremendous amount of debt to his father, to the SBA, to another bank. Even though it was an incredibly successful company, Joey just kind of pulled up and said, “This is crazy. I’m out.”

He sold his business to Oscar Blues, went private equity-backed, had a great outcome, had a great exit. He’d be in his late thirties at the time when he had that exit. He’s not going to retire. But he wanted to, number one, go do something else, and number two, derisk. That’s an important thing for a lot of owners to think about because so much of their wealth is tied up in their company.

It’s not uncommon for us to see a business situation where someone’s business represents sixty, seventy, or eighty percent of their net worth. They would never do that in a stock portfolio. You wouldn’t have eighty percent of your stock in Google or Tesla. Nobody does that. But we do that every day when we run a company.

There are some important things to think about regarding diversifying. But it’s not about retiring per se; it’s more about thinking about what your next chapter is going to look like.

There are three interesting points I want to touch on. The first one is that I love the data that a non-business owner has fifty percent of their net worth in bonds, fifty percent in stocks, real estate, and others. A business owner, I think the Exit Planning Institute has the same data: seventy to eighty percent is tied up in the value of their business, and the rest is whatever.

What’s really interesting is that people always talk about that value gap. There are three gaps in a business owner’s life: a profit gap, a value gap, which is a higher level of profit based on being best in class multiplied by the best in class multiple for that sector, and then you’ve got that wealth gap. You’ve got the gap between, for example, if you need four hundred thousand dollars a year to comfortably retire, that’s four percent yield on a ten million dollar net worth. Sometimes, they don’t have the value in their business yet, and it’s what do they have to do to get to that point in time?

Another interesting point is what I don’t see enough of. I talk to probably twenty sellers a week. I’m doing a big roll-up in the ecom space, a big roll-up in the engineering space, and a big roll-up in the coaching and services space. I’m talking to business owners all the time. Some of them are off-market deals, and some of them are on-market deals.

What I find really interesting is that business owners don’t have a mindset of value creation. They’ll only think about value when they sell. They don’t run their businesses around value creation. A lot of the business owners I talk to say, “Hey, Carl. You know, I’m looking to sell.” The first question they always ask me is, “Why are you selling?” And the response is often, “I hate this thing.”

That’s terrible for a negotiator to hear because I’m thinking, okay, so if you hate this thing, you know, you’re spending too much time in this business, you don’t like your employees, and you’re kind of done. But they haven’t orchestrated a business model that can drive incredible value. When you get to that point, they might not want to sell. If you get to a point where you’re working on your business, you’re an owner, you’re an owner-investor, not an owner-operator, and you’ve got a management team running it, all the systems, processes, and KPIs are dialed in, then if you’re making seven figures a year and spending four hours a week working on your business—not in your business—why would you sell it?

Knowing that you can just add more fuel to the engine and compound that value, I’m not seeing that. I think there’s a mindset shift that needs to happen in the micro and small-cap business community to adopt this culture of value creation, whether they want to sell the business or not. If you drive value creation, you’re going to have higher margins in your business. You’re going to be worth a higher multiple. Your revenues are going to grow. You’re going to have a more differentiated product or service. You’re going to be able to capture more market share.

I know that; you know that. You’re the expert. Why are people doing that? It drives me crazy.

Interesting. That’s quite a tirade.

I talk to a lot of business owners, and I’m like, “Dude, come on.” I don’t know if I agree, to be honest. I think there is a cohort of owners that are income-focused. They are using their business as a piggy bank. For them, their ultimate report card is their profit at the end of the year, and that’s a way to function a business. There are a lot of businesses that do that. I’m increasingly seeing the other side, though, which is a business owner who is building to sell.

I wrote a book on it, and you referenced it at the beginning. It’s done pretty well; it’s sold a lot of copies. I think it’s in part because it struck a nerve, this idea that I want to build an asset. I don’t necessarily want to go out boots first and sell when I effectively die. That’s not what I want to do.

I think there might be a generational thing too. Baby boomers tend to have fewer jobs; they started with a company and will often retire with that company. Young people see that as a pipe dream. No young person today thinks they’re going to retire with the company that they started with. I think there’s some of that sentiment among entrepreneurs. If you talk to entrepreneurs in their thirties and forties, you’re more likely to hear this sentiment of building to sell, that they want to create something and then move to the next thing.

There’s a much more transient ethos about it. It’s much less paternalistic. Business owners in my experience tend to be more income-focused, like the “father knows best” kind of entrepreneurs, who build a business; their employees are their family. When they’re ready to retire, they’ll pass the business on to their kids or their management team or do an ESOP. That’s a thing, but it tends to be an older business owner. I don’t see it as much among a younger generation.

I think you’re right. One of the things that intrigues me, and I’m not seeing any data on this, and I’d love your insight because you’re at the cutting edge of this: for someone that goes through the Value Builder system and generates a premium valuation and exits with great terms, a lot of cash at close—do you find that many of those people decide to become angel investors and deploy a bit of their capital that they’ve now got plus that experience and skill set to help other people go on the same journey, but then they get a piece of that upside, buying in at probably a lower valuation?

Some of our most successful advisors at Value Builder are former business owners. Glenn Grant comes to mind; he built a great company. I interviewed him; he had thirty or forty employees, a software business, sold it at a great multiple. Now he’s a business coach. It’s not necessarily because he needs the money, but because he wants to give back and teach people what he learned and realizes that it’s not super common out there.

The thing about selling a company, and we’ve talked about this before, is that there is no playbook. There’s no simulator. I often equate it to Sully landing that plane on the Hudson River. He had done everything there was to do in an airplane, yet he had to land on the Hudson River. That was something he had to do once; he had to grease the landing, and everything was at stake. He had a hundred and nineteen lives at stake.

I think the same is true for most business owners. We get to write marketing plans, sell customers, and deal with customer satisfaction. We do those things repetitiously, so we get good at them. Selling a company is only something you ever do once. Once you have that experience, you feel almost obliged to give it back, to pass it on. Some people choose to do it as a hobby, others as a coach, others as an investor, or as an angel investor.

I think I’ve seen all of those. I think it’s one of the secrets to a satisfying exit. You referenced the Exit Planning Institute; they did a piece of research a while back. I think it was seventy-four percent of business owners who exit within one year are depressed or sad about their outcome. When we unpack that data, we discovered that one of the reasons they’re unhappy is that they were all push and no pull.

What do I mean by push versus pull? Push is the things you referenced: I’m frustrated with employees, regulations, and the government of the day. Those are all push factors, and we all have them when we think about our business. Those are things that often cause people to want to sell. Pull factors are the things you’re excited to go do next, like being an angel investor or starting an incubator, for example.

I interviewed Kieran Merchant on the pod. He was a lifelong closet filmmaker. He grew up in India, came to the United States, and got involved in aviation consulting, helping airports design new terminals. It was a boring job, to lack a better word, but he always had this closet interest in filmmaking. By the age of fifty-five, he built a great little twelve-person consulting firm that helped these airports create new terminals, and he decided to sell it.

Why did he sell it? It was a great business throwing off a lot of cash. He sold it because he was excited to go be a full-time filmmaker. The sale of the company gave him enough money to do that. It’s really good best practice to get really clear about what your next chapter looks like. Once you do that, I think that’s the raw material for a happier exit, regardless of what financial outcome you get.

That’s a really interesting point. I’m in my early fifties now, and I keep getting asked by my family, “When are you going to retire and stop doing this?” I can’t because I love being a coach and educator. I love buying businesses. What’s really interesting is, as you mentioned, landing the plane on the Hudson River—obviously, you’re working on the sell side. I’m primarily working on the buy side of deals.

I coach my business-buying students about how, often if it’s their first time, they have the same emotions. They don’t know what they don’t know. My analogy is like having children. I’ve got two boys, fifteen and twenty-seven, with a bit of a gap. I remember when my twenty-seven-year-old was born—the anxiety, the nerves, the worry about how I’m going to be a good dad, if the birth is going to go well, and how it’s going to work.

When the second guy came along, it was like, “Yeah, that’s fine.” Out he came; I went out for a beer. No problem at all because I’d been through it once. I feel for a lot of business owners who, as you’ve probably heard me talk about before, I’m not a massive fan of the business broker community. I personally don’t like dealing with brokers; I’d rather originate deals off-market.

I’ve developed some tactics to get in front of them and build relationships with them. I don’t feel brokers do enough of a job preparing a seller for that sale. I’m not just talking about the business’s financial and strategic readiness; I think it’s that personal readiness as well. They need to have all their ducks in a row and have they thought about that afterlife—what they actually want to do next.

Until they have that future pacing—this is what I’m going to do with the rest of my life—I think that can hold a lot of business owners back from pulling the trigger. I’ve lost count of the number of deals I’ve got to the closing table, and the sellers just said, “You know what? I can’t do this. This will leave such a void in my life. I’m actually scared of what tomorrow’s going to look like. I’m walking away from this deal.”

There’s no amount of bribery or sweetening of deal terms that can change that. What I do now is actually sit down with a seller before I even give them the LOI. I want to understand, do they have an afterlife, as I call it? What are they going to do next?

It’s funny you should mention that. We have an assessment tool called Prescore. We’re best known for the assessment called Value Builder, but one of our most hidden gems is this thing called Prescore. It stands for personal readiness to exit. It’s an assessment survey that business owners take. It asks them about their push factors, their pull factors, and the type of deals they’d be open to.

We have an advisor in the Value Builder community who insists that business owners do their Prescore. He will not engage with them unless they complete their Prescore because of exactly what you say. He’s had too many bad examples where business owners get to the end of the line on signing day and say, “You know what? I can’t do it because I don’t have a pull factor.”

I don’t have the equivalent of going to be a filmmaker. I think it’s a really interesting insight.

One thing I want to talk about is the market mix. I look at sellers and typically put them into three buckets. Bucket one is the seller who wants maximum value, most of the cash at close, and is prepared to deal with a trade buyer. They’re prepared for the brain-damaging due diligence, the extended process, and the acknowledgment that a trade buyer is potentially going to upset the apple cart.

About a third of sellers I meet are fine with that; they just want the money, typically younger, more tech, SaaS, and e-commerce type deals. Bucket two is the seller who just wants a partner, wants support. They’re looking at financial buyers or a private equity firm or a family office that will come in.

They’ll give them a cash-out on day one and provide additional capital for acquisitions or to organically scale. They want a second bite of the cherry. The third camp, where I focus a lot and so do my students, is the seller who wants what I call the safe, trusty pair of hands. They care about their legacy, their customer base, their employees, and the culture they’ve built. They’re prepared to take a slightly more creative deal or a lower valuation deal in general to get the best buyer, not necessarily the most expensive buyer.

Do you see a lot of that with the interactions you have? I guess you’re more in camp number one and a bit of camp number two, because I think with you taking them through the Value Builder system, you’re removing a lot of that distressed seller psychology. Whenever I’m vetting a business, I always give the seller something I call a mud score. How motivated are they to do a deal? What’s their level of urgency? What’s their distress level?

And I think all those things are possible, whereas you start to narrow down your options if you don’t build it so that it can thrive without you. So if the business is deeply dependent on you personally as the owner, and I know I’m preaching to the choir, who would you call? Your listeners may benefit from this. If it’s dependent on you personally, there’s sort of two scenarios that usually come about. One is that much of the valuation is put on an earn-out, which is at risk, where future payment is at risk if you’ve got to hit a certain set of goals as an employee of the company. The other is, as you suggest, the second by the cherry. It’s this rolling equity, which on the surface may sound perfectly reasonable, and oftentimes, it is. It can be a great way to build wealth if the acquiring private equity group has the second sort of act. If they don’t, however, you can end up being a minority shareholder in a business you don’t control, and that can leave you penniless or at least the second tranche without any value.

I did an interview with a guy named Ryan Moran who rolled about forty-five percent of his equity. I like Ryan. He’s a very good friend of mine. Well, he shared his story on the show and talked a lot about how he rolled a bunch of equity. Ultimately, that went to zero because the private equity group brought in a CEO who didn’t know his business, and the rest is history. So the moral of the story is the more options you have at your disposal, the more offers, the more you’re in the driver’s seat, and the more you can determine and dictate your terms.

Some people, for example, are very loyal to their employees. They feel deeply that the employees are the ones who brought them to the dance, who took a risk on them, and they want to make sure those employees get taken care of. In many cases, they’ll take a worse deal financially if they feel comfortable that those employees are going to be taken care of. Once you’ve got a business that can thrive without you, you’re not doing all the work or owning all the client relations. You’ve got the ultimate poker hand in the game of life.

I’ve got direct experience of both of those things. I saw one of my companies in 2019, just before COVID, sold to a billion-dollar corporation on a primarily earn-out structure. They just didn’t culturally fit. A billion-dollar company buying a five-million-dollar company is destined to fail. They decided that they didn’t want it anymore, and I got it back for a crazy low discount on creative terms.

The first deal I ever did was to that point of legacy and employee protection. When I left the corporate M&A world after some time on Wall Street, I worked in private equity and then for Hewlett Packard. I was buying technology businesses, and when I became a father for the second time, I decided to leave that world and become a business broker. I found this transportation company to buy, and I found a great buyer, big exit. The day before closing, the seller pulled out because he realized the buyer was going to wreck the company—get rid of all the employees and trash the legacy that they built. I said, well, I’ll buy the company.

I decided to involve employee ownership, giving senior managers significant percentage ownership, but it was going to be a leveraged buyout. I didn’t really want to put any capital into this but would finance it. In England, if you sell the stock of a business rather than the assets, you only pay ten percent tax versus thirty-eight. So, when businesses are about to sell, they stockpile cash. If they take it out as a distribution, they’ll pay thirty-two point five percent, but if they leave it in the business and sell it as an add-on to the deal price, they’re only going to pay ten on it.

I was able to use some of that financing and cash to structure the deal. That was my entree into being a micro private equity guy doing leveraged buy-ins because I found a seller who was less interested in the deal terms and more concerned about the safety of the buyer and the protection of the company they built. I see that a lot, mostly in traditional industries like engineering, manufacturing, and construction, less so in tech or e-commerce.

Many of these businesses haven’t adopted a value approach; they’ve only adopted an income approach. That may serve them well in the short term, but once they start to think of their business as an asset, it changes how they think about the company, the decisions they make, and ultimately the outcome. If you know how the movie ends—what acquirers look for—you can start making decisions very early in your life cycle to maximize the value of that business. Too many times, business owners don’t know how the movie ends. They keep their heads down, running their business, making their widget, and then pull up ten years down the road and say, okay, now I want to sell, but they’ve made decisions years ago that hamper the value of the company.

It’s better to know how the movie ends, regardless of whether you want to sell or not. I want to know what the endgame looks like.

I want to talk about the book I’m writing right now. I’m about halfway through, getting up at five AM to do my fifteen hundred words a day. The inspiration for my book actually came from “Built to Sell.” What I love about “Built to Sell” is it’s a fable about a business owner named Alex who’s frustrated working in his business, not on it. He doesn’t have a predictable revenue model and gets coached to create a business that’s got real value that someone can monetize.

I’ve read that book probably ten times. It’s mandatory reading for everyone in my coaching program. The book I’m writing is called “The Creative Deal Maker.” I took a class on how to write a novel because I’ve written technical books, but they don’t capture the emotion and drama of doing a deal. Everyone can write a book on buying a business, but technical books don’t capture the drama, emotion, and psychology of what buyers and sellers go through.

My book is about a buyer and seller meeting through their various processes and consummating a transaction, capturing the drama and emotion of the process—like when sellers have cold feet or when the bank says no. It addresses those different aspects.

I think a lot of these businesses haven’t adopted a value approach to their business and only have an income approach. I believe that parables are essential in business. The emotional psychology behind buying and selling businesses is vital, especially in the micro-cap market, where deals in the one to five million dollar range are more about emotional psychology than math.

In my past experiences with larger deals on Wall Street, it was all about financial engineering. But down on Main Street, you’ve got a business owner who’s spent more time in that business than with their own family. They often aren’t advised well by the marketplace. They don’t know what they don’t know, and it can be a lonely place as a seller, especially if they’re a sole proprietor.

Understanding the drama and emotion of going through this process is crucial. Parables help with that. For example, in the book “Traction,” the implementation of the system is brought to life through real-life scenarios that you can’t pick up in a technical book.

I’m passionate about writing these stories about business. After “The Creative Deal Maker,” the next book will probably be about roll-ups because I’m involved in many of those right now. I want to write a book that captures the essence of that challenge while highlighting the emotional aspects involved.

I love the idea of writing stories that delve into the complexities of business, and I can see myself writing more as I move into the next stage of my career. It’s been a pleasure to discuss all of this, and I hope to continue sharing these insights with others in the future.

Urgency is really important. If somebody is like, “Hey, I’m sick. I can’t be in this business much longer. My team really needs a new leader. We need extra capital to take it forward.” They need to come out of this deal super quickly. Most buyers aren’t sitting on tens of millions of dollars of cash to do those deals.

So how do you see that market mixing up with all of the things you do?

I think those three buckets exist in the marketplace for sure. The secret, and what we really try to preach, is that once you have a business that can thrive without you, you’ve got the ultimate poker hand. You can really maximize the things that are important to you. You can entertain an offer from a strategic acquirer, look at a private equity group, and drive the terms that are most interesting to you. You can also talk to someone who is suggesting a more creative deal that protects your employees, the process, and your legacy.

Thank you, John Warrillow. It’s been an absolute pleasure to chat with you today. I’d love to come back on your show anytime to continue this conversation.

For anyone looking to learn more or get in touch, you can visit Built to Sell dot com. All roads lead there, and you’ll find links to our social media. We’re into episode four hundred and fifty of Built to Sell Radio, so there’s tons of content available.

Thank you for your time, and I hope to connect again soon. Bye, John!