Summary

In this conversation, Jon Stoddard interviews John Warrillow, founder of the Value Builder System, discussing the importance of building a business that can thrive without its owner, the significance of net promoter scores in evaluating business potential, and the shift towards recurring revenue models. They explore current trends in mergers and acquisitions, the role of personal branding, and the necessity of supporting entrepreneurs to ensure they receive fair returns on their investments. Warrillow emphasizes the need for entrepreneurs to focus on market data rather than traditional business plans, and the conversation concludes with insights on celebrating entrepreneurial successes and the importance of fostering a supportive environment for business owners.

Takeaways

The Value Builder System has over a thousand advisors worldwide.
12% of Value Builder users received written offers to buy their business last year.
Net Promoter Score (NPS) is crucial for evaluating customer satisfaction and future growth.
Employee Net Promoter Score (ENPS) measures employee engagement and loyalty.
Recurring revenue models significantly increase business valuation.
Private equity groups are increasingly interested in businesses with predictable revenue streams.
Entrepreneurs should focus on market data rather than detailed business plans.
Building a personal brand can enhance business value and marketability.
Celebrating entrepreneurial wins is essential for motivation and growth.
Support for entrepreneurs is vital for innovation and economic growth.

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Transcript

Jon Stoddard (00:00.61)
Welcome to the top &A entrepreneurs today. My guest is John Warlow. John and I actually go back, first of all, 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 bestselling 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.

I have two, I love these books. I should get somebody to sign that I guess, but we also go back because I was working on an acquisition maybe four or five years ago and I was trying to 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 this company for $175 million and putting a check in his bank for $175 million. And I said, hey, John, or I told this guy, you need to get on John's show. So that's kind of our connection. So welcome to the show and thanks for being here. Thanks for that connection those years ago. And it's good to be back with you. Yeah. So I got a couple of questions. I mean, I have a friend in the value builder system. He is a value builder, which

you know, looks for companies to help build and then they accept and empire multiple. How many people in your network now that have gone through the value builder system that do that? Yeah, yeah, sure. So we give you a sense value builder, we licensed it to advisors who want to build out their, you know, their profile in the exit planning space. And we've got

fatly more than a thousand advisors now around the world that do value building. And, 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 an acquisition and then have ultimately sold to a strategic.

Jon Stoddard (02:27.126)
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 it's probably close to eight or 10,000 businesses that have received a written offer to buy.

their business in the last year. And that's up, you know, it's been a very busy season right now in the world of &A as you know, that might change with interest rates on the way up. Of course, a lot of these deals are financed with a lot of debt and- debt right now, yeah. Yeah, and cheap debt at that, right? So we'll see where that's going in the next year or two, but, and how that's gonna change the dynamics of the market.

But yeah, right now it's a very busy time to sell a company. Yeah, the partner, one of your valued partners, you know, said, invited me in to help him grow his business. And I kind of went through the training and I noticed that you said that the net promoter score is the best predictor of future profits. that, I remember that net promoter score for four or five years ago when you were talking about that, is that still a valid statement?

Yeah, it's one of the ways that acquirers evaluate a business and its potential, right? So obviously as part of a due diligence process, most acquirers are going to, it's going to try to measure levels of customer satisfaction among the customers 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.

where a lot of acquirers, in particular private equity companies use something called net promoter score as a way to make an apples to apples comparison between potential acquisitions. And it's simple as a technique. So for those of your listeners who don't necessarily know that acronym or have never heard that term before, it's called net promoter score. And basically what it does is evaluate a...

Jon Stoddard (04:53.934)
an acquisition, company's satisfaction levels with its customers. And it's based on a simple question, which is on a scale of zero 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 really not predictive of the future growth rate of the company. So from an acquirer's perspective, they can often...

send wrong messages. Like you can do a traditional customer satisfaction survey with a potential acquisitions customers. And if you ask questions like how overall satisfied are you? would you, did you get, are you, 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 Rykel discovered was that this one question, scalers of year 10, how likely are you to recommend this to a friend or colleague?

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. or customers who say, I'm a nine or a 10 on that question, scalers that are 10, how likely are you to recommend this to friend or colleague? The people who give you a nine or 10 of that are likely to either one, repurchase from you or two, refer you. And so that's what makes that.

measurements so predictive is because it's not the net promoter scoring 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 talk a lot about, and again,

it's probably even more important today than it was five years ago is the ENPS score. Have you ever looked at ENPS, No, yeah, tell me about that. Okay, so ENPS is Employee Net Promoter Score. And simply put today, finding great people. mean, I don't know if we're recording this on whatever it is, early May, and the new jobs numbers were out from the NFIB today. And it turns out that

Jon Stoddard (07:16.6)
that unemployment 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 triggered down to the job market yet. So the job market is thriving. And so it's hard to find people and that, you nobody, know, no entrepreneur would not agree with that statement right now. I understand that's totally true. ENPS measures the level of engagement

your employees have with your company, how effectively loyal they are to your And so the question, and there's variations of the ENPS question, but most of them come down to some variation of, 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 relates to the level of engagement the employee has with that place.

Obviously if they're gonna recommend to their friends that to come work at that, they're pretty satisfied employee. And so that can be used in concert with net promoter score, which is a measure of the customer satisfaction to get a nice sort of holistic kind of view of a company if you're evaluating one for acquisition as an example. Yeah, if I was to start with a company, a smaller company and I build it to 2 million EBIT 5 million, where it's an attractive to a private equity firm,

And then I started shopping it. Well, you I build a relationship while I'm going to 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 volunteer? Say our net promoter score is nine or 10. I remember writing this down because it said nine or 10, that's a promoters. Seven to eight, that's passive.

anything below that is a detractor, means, yeah. Yeah. your net promoter score is always expressed 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%, one five. World class is considered 50, five zero percent. And so if you

Jon Stoddard (09:39.438)
are in the luxurious position of having a 50 % net promoter score, I would put it in the teaser. I would put it in the sim. I would boast about that from the mountaintops because for a lot of private equity group investors, that's going to be an attractive data point, just like your gross margin, your revenue, your profitability. I it's a very sexy number. If your net promoter score by contrast is three or minus 12, or, know, then clearly you're not gonna offer that up.

Again, private equity groups use it because A, 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 one. Number two, it allows them to evaluate acquisition candidate A versus B in an apples to apples comparison because it's the same question rendered or used. it is used quite a bit.

So I would, again, if you had a very good net promoter score, I think you wanna merchandise that in your teaser and again, in your SIM, your confidential information minimum, random. If it's average or below average, I would anticipate that as part of their due diligence, your acquirer may do their own satisfaction survey with your customers.

And if your customers happen to be large enterprise organizations, then they're probably gonna wanna 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 wanna do some sort Is that something that's done by a third party? Because the P firm goes, well, geez, anybody could say, you know, I'm 50%, nine to 10 promoters. And so it's a third party kind of deal. Yeah, usually they'll hire a third

party to do something, just like they would do a quality of earnings. You know, they would hire an accounting firm to do a QV kind of evaluation of their books that they'll hire, you know, a research firm to do a little net promoter score survey. Yeah, I have to kind of point this out. I don't know if this is true or not. You wrote this automatic customer back in 1995, and it's like, no, 2000, 2015. were ahead of the, I don't know,

Jon Stoddard (12:02.31)
I can say a head up, but people look at something evaluation goes, gosh, I love that predictable revenue and that SaaS model. 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 a real arbitrage play right now is taking a business that is in using it, still stuck on a transactional business model 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, 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 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 real estate the car wash sat on, right. And they think, 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 the value. so private equity

groups picked up on this a while ago and they're like, okay, this is a gold mine. So they're buying these companies for either the book value, the value of the underlying asset or some poultry multiple of earnings, two, three times SDE as an example. They're flipping the car wash from one-off 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 wanna pay a $130 a month subscription. they are A, ballooning the lifetime value of a customer, B, making their business a lot more predictable, C, on a dollar for dollar revenue, you would adopt perspective, they're doubling the multiple, tripling the multiple, they're now selling these

Jon Stoddard (14:20.014)
recurring revenue books of business for, you know, double digit multiples of the bidda as opposed to what they bought them for, you know, two and three. So, I mean, that's a bit of an old playbook that's been around for a couple of years. So 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 one of my favorite examples of this, it's in the book, Automatic Customer, is H. Bloom. They took a flower company,

Yes. know, transactional flower stores are terrible. You buy the inventory, it's rotting in the fridge. They throw out like half of their flowers every single month because they forget 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 bouquet sort of five-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, a lifetime value in each Bloom subscriber. Last time I talked to this guy's was like $4,500. So they make one sale, you know, a typical flower store. it's a lifetime value is 4,000. Yeah, that's amazing. Yeah. Yeah. Yeah. Typical flower story. You walk in and buy a bouquet of flowers, maybe 50 bucks, 60 bucks, whatever they make one sale and capture over the life of that subscription, $4,500. And so it's just, it's totally game-changing 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. 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 rates. It's not inflation, the interest rates, the reaction to inflation effectively. And so as you know, private equity groups,

And individual investors for that matter, they live and die on debt. the more of it they can get, the lower the price of it, the better the return they can garner provided the company can underwrite the cost of paying back the debt, There's enough cash flow to service the debt. And so as interest rates go up, it's going to become much harder and harder for private equity groups. So we'd expect valuations to go down as a result of that.

Jon Stoddard (16:47.693)
we'd expect that the less deals will get done, that the returns will be less favorable. The spoils will go to the well-financed private equity groups that have lots lot of cash on their balance sheets. Yeah. Yeah. Interesting. They're not having to borrow as much. Yeah. And that could be Warren Buffett, whoever takes over for Warren Buffett types, or on a larger scale. Yeah. Yeah. Yeah. And there's a lot of, I mean, Warren Buffett's obviously, you know.

Berkshire Hathaway is probably the largest of its kind, but there's lots of other sort of imitation funds and imitation businesses that are trying to be Warren Buffett light and buying small medium sized businesses. yeah, there's lots of examples of that, but I think there's gonna be some headwinds in that as we see interest rates going up. Yeah, did you think that it would turn out after three books value builders value builder system?

like it did today? I mean, are you a different person than you were when you started this many years ago? Yeah. Yeah. Yeah. Yeah.

Or did you have this vision in your mind what it was gonna look like and it was very detailed about what that was gonna look like?

I did not have any... 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... I'm doing this. Yeah. Yeah. I've been critical of business plans as well because I think they're usually... Because I think, let me put it this way, think young people use them as an excuse not to start something.

Jon Stoddard (18:34.549)
So they invest all of their time in writing a business plan because they think that's the right thing to do. what, in my view, young person should do with very little to risk, know, no mortgage, no kids to feed, et cetera, 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 what I see is the inverse. I see a lot of people sort of obsessing over every line in their business plan and every number in their spreadsheet. And of course all of them are just fictional until there's actual some real world data. Real world, actionable, yeah. I heard a great story recently, a company called Hush, actually Toronto based guys, two guys started this company.

And one of them worked at a summer camp for disadvantaged kids and kids that have developmental disabilities. And at the camp, they used heavy weighted blankets to allay some of the anxiety these kids had. So these weighted blankets are like for sleeping and they 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 shoddy manufacturing, foreign manufacturing and so forth. Like we could do these better, make them out of better materials, et cetera. And so what he did is put together a little Kickstarter campaign and he had some friends from camp and so forth. Long story short, he sold 5,000 customers, 5,000 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 a million five pre-orders for these blankets before even starting the company. $1.5 million of startup capital from customers. That's demand. Like, keep in demand in front of your skis, right? That's exactly right. 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 talk about business plans, you know, that's an entrepreneur.

Jon Stoddard (20:57.357)
That's somebody who identifies an opportunity and creates something out of nothing. And I think these folks who spend a lot of time on their business plans and kind of years and years go by, it's just not well-spent. What you need is market data. What you need is get out there, tell the world about your product and see if they're interested. Do you take participation in any of the deals that come through your

Kind of the deal flow that comes your way or are you? Occasionally, I mean, it's not our business model. I do some personal investing that is, sometimes I'll hear about stuff that is either through my network or friends or whatever. And I do invest personally in some deals, but no, that's not part of the kind of value builder model. That's not our sort of, it's more-

going through your career, you build three books and the value builder system, 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. mean, what advice would you give somebody today starting just, I kind of want to do what John Warlow does like it, but it in a different industry. Interesting. So I just did a,

I do this, you mentioned the podcast, the beginning of the shows, it's called Built to Sell Radio. just did an interview with James Ashford. James is the guy who built Go Proposal. So Go Proposal 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 a million five in British pound turnover, sold it for a healthy eight figure. So great story. James is a prolific entrepreneur.

The reason I tell you this, what's that? Eight figures. Yeah. Yeah. I think I got that email from you. I'm on your email list. Yeah. Do the math on that in terms of multiple. was a very, very lucrative exit. The reason 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. he effectively no money.

Jon Stoddard (23:21.323)
committed to using social media. said, I'm gonna, you I've got an expertise in sales and marketing, so I'm gonna create these videos. And he created a video a day for years. And that was how he built Go Proposal. And he also then, you know, used that YouTube channel and parlayed into a book and a course and like, you know, all the classic sort of assets and extending it as things that one would do if you had an audience. And I asked James, but James, mean, weren't you creating a lot of owner deposition

because all of your sales and marketing came from you personally. And so, you your business isn't worth very much 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 Kill the King was, was an internal campaign for his employees to take over.

as the social media advocates for his company. So he promoted 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, brand equity, personal brand that he'd built and built Go Proposal on the backup and migrated it to the company Go Proposal. And so when he sold it to Sage, the big accounting software providers, they bought it with not only the company, but also the book that James had written. 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. It is the perfect answer because it's just because of the power of social media, whatever you're doing on LinkedIn or TikTok. mean, I look, there's a, a woman, Miss Excel. I mean, she just started doing these little TikTok things, put a Kajabi or Thinkific course together. It's a multimillion dollar.

Jon Stoddard (25:49.761)
Business now. That's great. Yeah. Yeah. And again, there's lots of those stories out there that just, I would just caution folks that if the goal is to build a valuable company that you could one day sell, you're going to want to 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, value builder is our

our company for advisors. We licensed two advisors as we mentioned in the beginning. So Sam Mendelson is the president of Value Builder. He's got a social profile. He promotes and pushes things out under his personal name. Value Builder has a bunch of channels that are out there. so while I do my part to help support it, the stuff I do is hopefully independent and intentionally independent of Value Builder. So it's a...

you know, I'm hopefully doing my part to You're doing the extracade yourself. You're trying to do that. I mean, is it cool to have like nothing in your calendar over 30 day period? come. Sam does a lot of the hard lifting. I do have a good amount of free time, which I value. And obviously that's part of the message of Built to Sell 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 as a, you know, an interested shareholder, as opposed to, you know, the day to day operator of your company. That's, that's working above. I've heard the, know, working in the business. Yeah, above the business. Yeah, in, in, on and above. Yeah.

That's interesting. You 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 really nice analogy that I've never heard of. You know, obviously heard of Michael Red E-Meth years ago and the cool concept of in versus on, which is classic. But above is a cool twist on that as well. But yeah, I mean, it's one of the reasons that building to sell, I think is such an important.

Jon Stoddard (28:11.101)
a thing to do because it gives you all of the lab work and the lifestyle as well that you, 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 it's on your show and you talk about it or what's a, what does that look like? Yeah, I mean, there's lots of different wins. mean, we'll celebrate.

Yeah, we'll celebrate first and foremost, an entrepreneur who punches above their weight and has a great exit. So oftentimes they'll come on Build, Sell, Radio and tell us about it, which is awesome. And that's great. Our goal as an organization is to level a playing field for business owners as they approach their exit. So it's our belief that today,

entrepreneurs kind of bring a knife to a gunfight, as the old expression goes, 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 take advantage of them. And I think in large measure, we're trying to change that. We're trying to give entrepreneurs the knowledge they need 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 really question where we would be as a society. I think about like, there's no iPhone, there's no vaccine, there's no Tesla, these companies 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 we're entrepreneurs, small and large alike are rewarded for the ideas they bring to the market. And so I think that's a healthy thing for the environment. I live in Canada where we have a...

Jon Stoddard (30:25.805)
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 capital gains tax to the same thing as income tax. And that is wrong. It's just fundamentally on every possible dimension, a poor decision.

because 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, or form for the government. And France, if you know anything about the country, mean, know, it's intractable unemployment, you know, very slow growth country. There's a lot of problems with that. And so we have to be, I think a world, a society, a country.

that promotes and rewards entrepreneurs. And part of that is making sure they have great exits. And so that's what we're You were bringing that up. I watched some kind of Apple TV show called The Long Way Down with Ewan, the Obi-Wan Kenobi guy. took a motorcycle down from the top of Africa all the way down. cool. I've never seen that. It sounds great. It's great, but it's just the difference between a system, entrepreneurial system, and a system stock.

500 years earlier. And the life that they live is so difficult, just existent. Yeah. It's not a political show, I think there is a limit to, I think.

entrepreneurship without any reins or guardrails is not the right answer either. Like we do need. that was, that happened in the industrial society, taking advantage of workers. Right. 20 hours a day, seven days a week. Yeah. No, no. Yeah. But I do think, in particular in Canada, we have the pendulum has shifted, unfortunately, or swung too far to the point where

Jon Stoddard (32:35.917)
you know, we look, we question entrepreneurs where, you know, we are critical of people who make money and we have tall poppy syndrome where we try to cut down successful people. And I just think it's a very unhealthy. Yeah. Well, we have that here too in United States. is that right? You didn't build that type of We don't have full ownership of that. Yeah. So look, I appreciate this time. I think this

very enlightening and I appreciate it. Again, John Warlow from Built to Sell, automatic customer. And he's got a third book that I haven't purchased yet, so I'll get to that. So John, thank you so much for the time. Thanks, John. All right. Take care.