Recurring revenue is one of the two most important things you can do to create a valuable business that someone besides you would want to own. (The other thing is to make yourself operationally irrelevant in your business.)
Join John Warrillow the best selling author of Built to Sell and The Automatic Customer as he helps us think about what creating a business with recurring revenue is all about. In this podcast you’ll learn:
- What a recurring revenue revenue business is.
- What the value builder system is and how it can help your business.
- What the simplest form of recurring revenue is.
- Why you need to become operationally irrelevant in your business.
- Why you need to know what your business is worth.
Narrator: Welcome to the Sustainable Business Radio Show on podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.
Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.
Josh: Good afternoon. Today’s podcast features John Warrillow. John first came to my attention with his first book Built to Sell which covers what a business would do if it truly wanted to make itself saleable. From Built to Sell, John developed the Value Builder System, a 12-step method for improving the value of a company by 71%, a big number. Recently, John’s newest book is the Automatic Customer. This book talks about the importance of recurring revenue to creating lasting value in your business. Let’s get right to it and talk with John about what an automatic customer is.
Hey, John. How are you today?
John: I’m good, thanks. Josh, how are you?
Josh: I’m great. Life is wonderful. It’s a beautiful day here in Vermont and I assume it is up where you are.
John: Yeah. For sure, it’s about 75 degrees and sunny, so we can’t complain.
Josh: That’s a good thing. Let’s start talking about your new book. What caused you to write it?
John: Well, it’s all about recurring revenue. As you mentioned in the outset, my day job is running something called the Value Builder System where we have everybody go through this 12-step process for improving the value of their company. The first step in that process is getting an evaluation of your business.
One of the things that became pretty clear when we first launched the tool back in 2012 is people didn’t have enough recurring revenue. A lot of people were chasing PO’s. Lots of customer concentration but just not a lot of recurring revenue and it was dragging down the value of businesses. And so, I started to dig into this whole idea of recurring revenue. The subscription business model was something that was really popularized, I guess, by the software businesses after it was kind of co-opted for the media companies. But it’s really something that can be applied to virtually any industry. And the more recurring revenue you have, the more valuable your business is going to be.
Josh: So, we all know what recurring revenue as if a subscription recurring revenue. What other types of recurring revenue might there be in the world?
John: Yeah. In the book, we talk about nine different forms actually. I’ll give you a sense of the breadth of that. The simplest one, for most people to think about, would be what we call the simplifier subscription model where essentially you’re taking a service that your customers are purchasing from you already and you’re creating a service contract so that the customer’s forward purchase is implied. So, for example, if you were a swimming pool installation company and you wanted some recurring revenue and people only ever install swimming pools once, you could create a service plan where you go in, you open the swimming pool up in the spring, you check the chemicals every two weeks through the summer and then you close it up in the fall. That’s taking what you already do for a lot of customers and creating it as a subscription. That’s the simplifier model. There’s another eight in the book.
Josh: Oh, cool. So, what would the 12 steps be because I assume that’s the other sort of advice you would talk to them about besides recurring revenue?
John: Well, that’s right. Recurring revenue is one of the 12 steps in the system. The first step, as I mentioned, we always have people go through and do a full assessment. That’s really knowing where you’re at. The second step is the scalability finder where we’re looking at “How do you create a growth platform?” A lot of companies, they start out and they sell too many things to a few customers. And so, they become heavily dependent on a few customers, lots of customer concentration and very hard to scale a business like that. So we have a process by which we go through called the scalability finder which identifies the products and services that the business sells which are the most scalable and have them really start to focus in on that.
We probably don’t have time to go through all through 12 but essentially each of the exercises or modules relates to a different part of the value-improving process. There’s exercises on growth and there are exercises on recurring revenue. There’s exercises around sales and marketing. Exercises on reducing reliance on the owner of the business which we call Hub and Spoke.
Josh: My favorite topic.
John: It’s a biggie, for sure, because obviously for a business to have value to anybody outside the owner, it’s got to be able to run without the owner so I know that’s something that you focus up a lot on. And certainly a major part of driving value, for sure.
Josh: How much time does it take a business owner to go through this process?
John: It’s an annual process. A business will go through each of the 12 modules through a year. We do one module per month so think of it as a calendar year. But a lot of businesses will prepare their business for sale over a period of years. They will work through this system, working through this 12-month approach. So, in month one, they do an assessment. Then when they go back in month 13 and do the same assessment and track their progress. And then month 25, they go back and do it again. It is a process they go through over a period of years but there is one exercise per month.
Josh: How long would it take per month to do the exercise? I’m assuming it would vary from month to month.
John: Yeah. It does really, Josh. I mean, usually it’s about a two-hour meeting with their advisor to go through an exercise. It’s a couple of hours and maybe a little bit of homework before the meeting but it’s usually about two hours a month.
Josh: So, this is an advisor that processes and not something the business owner would do by themselves?
John: Typically, an advisor. In fact, 100% of our engagements in the Value Builder System are led by advisors. We don’t sell directly to business owners. So, yeah, 100% of our engagements, if you will, are executed through advisors.
Josh: What type of advisors would typically be leading this?
John: Typically, it would be business coaches, consultants, accountants with an advisory services practice, M&A professionals, premium main street business brokers from occasionally financial services wealth management companies all provide this service.
Josh: If a listener wanted to find somebody to work with them, how would they go about doing that?
John: They would just simply go to valuebuildersystem.com and there’s a form that they can complete and we’ll get them in touch with an advisor.
Josh: Oh, that’s very cool. That’s pretty easy to do. Let’s take a step back again. When you talk to a business owner today, what sort of advice would you give them?
John: Well, I think globally, at 30,000 feet, the main idea of driving value in your company can be distilled with this notion as “How would your business perform if you were not able to run it?” because, again, that’s the definition of a sellable business. It’s one that would kind of thrive without the owner in situ.
So, thinking about that, one of the common mistakes that I think we see is confusing a profit and loss statement with a valuation statement or thinking of your profit and loss statement as your business’ report card at the end of the year. And while I think of P&L is important, it doesn’t tell the whole story because there are many situations where the value of your company is in direct competition with how much profit you make. So, for example, if you wanted to be a very profitable company you would probably have the owner do all the selling. You would probably have the owner cultivate deep, long-lasting relationships with two or three customers so you don’t need to hire sales people. You probably don’t need a very effective web presence or marketing presence. All those things would create a very fat margin company where the owner could just generate lots and lots of cash but it would be a basically worthless company. No one would ever buy that business.
And so, I think, one of the most important things that business owners need to think about and what we spend a lot of time talking about is this idea that the profit and loss statement is something that’s a good statement but it’s not necessarily the whole story. You should also be layering in “What’s the company worth?” because that’s the ultimate acid test of how you’re doing as an entrepreneur.
Josh: You mentioned though, the first step is you want them to have a statement of value or evaluation done. Do you do a formal valuation with a valuation expert or do you have a different methodology?
John: We use what we call an estimate of value and it’s part of the whole Value Builder Assessment. So, within the Value Builder Assessment, we’d provide an estimate of value of the business, but we also look at their score on the eight key drivers of value. We give them both a quantitative estimate of value. So, a number – like a dollar range, what we think your business is worth. But also, we’re looking at their performance on the eight key drivers of value. So, we’re looking at it kind of both qualitative and quantitatively.
Josh: A lot of times, when someone tells me they’re interested in selling their business, I recommend they do a mock due diligence exam which is we’re pretending it’s going through due diligence. Can you use your Value Builder System for that?
John: You know, a pre-diligence process tends to be quite technical in nature. I mean, if you hire Ernst and Young to do a pre-diligence effort, they’re going to get really nitty-gritty into things like “What’s your lease look like? What lease provisions do you have for change of ownership? Let’s look at your accounts receivable. Let’s look historically at what percentage get written off.” I mean, quite some technical things. And I think that’s a good process to go through if you’re planning to sell your company or if you’re interested in the value of it. But really, what we’re looking at, with the Value Builder System, is a more forward-looking approach to improving the value of the company. So, a little bit less technical and a little bit more strategic would be how I characterize the difference.
Josh: Nice difference and thank you. When you’re training advisors on how to work with their business owner clients using your Value Builder System or just by having a conversation, what would you like to see them focus on first, second and third?
John: Well, with advisor it is almost always focused in on how they grow their practice. So, you know, advisors tend to be technically very strong whether it’s an accountant or a consultant, financial service provider, they tend to be very strong subject matter experts in their field and they’re very comfortable in that zone. Where they feel oftentimes less comfortable is in the sales and marketing arena. So, how do you develop new leads for your practice? How do you convert leads into sales? Those are areas that generally, in professional services, they’re not as comfortable. And so, we spend a good amount of time talking about how do you market your practice? And how do you convert awareness into engagements?
Josh: So, that’s part of the value proposition with the Value Builder?
John: It is. I mean, it’s all part of productizing a service business. And so, we all know selling time is a brutal guinea pig on a hamster wheel kind of a way to approach your business. So it leads you to the discussion about/ or in search of, I think for many advisors, a better business model – one with more scale, one with more leverage.
And, really, a lot of that is productizing what you do because if you don’t productize you’re left really just buying a human being. And the only way you can sort of buy that person is usually by the hour or by the day. And again, there’s no scale in that. So, that’s why we’re big proponents of kind of productizing your service. And what I mean by that is making it look and feel like a product.
So, name it. Don’t say, “we offer advisory services” – the generic advisory services. Say, “You offer the six-step approach to wealth planning or the nine-step approach to strategic planning” kind of, naming it, developing a methodology, trade marking if you can or you want to, developing the sales and marketing brochure. Like, once you publish a brochure and put a price on it, on whatever it is the thing that you are offering, all of the sudden, it becomes real and permanent. People will much less likely to haggle over price because they’re permanent in ink. It’s in a brochure, of course that’s a price. You don’t go into Costco and start to haggle with that person at the cashier’s desk about your box of Tide. If it says it’s $10.99, that’s the price you’ve got to pay for. And so, I think, productizing your service is a key component of scaling a service business.
Josh: That makes perfectly good sense to me, one I’ve actually tried to do. So, if you were going to start a new business today, what are the two or three things that you would want to focus on?
John: Interesting. I mean, getting really clear about your avatar I think is important. And what I mean by avatar is your ideal customer, the person for whom you are creating this for. When I say getting clear on that, most people say, “Well, my service is for professional men,” for example or soccer moms. Where I think you want to get to is right down to an individual where you’re actually describing a person. Like, my avatar or the ideal customer–I’ll give you what our avatar is for the Value Builder System. It’s a business owner, running a three million-dollar company in the service industry. They’re in a graphic design studio. They work in an urban environment. They’re generating $150,000 of profits that they are able to take out of the business each year. They want to sell their business in the next three years.
So, just getting really clear on that. And that doest meant that’s the only person that you need to create your company for but it does mean that when you start to make decisions about your company you’re looking at them through the lens of how would our avatar react to that product, or service, or marketing, or website design or whatever. I think, a lot of people talk about market segments but I recommend you go to the next level of specificity and actually develop an avatar/a person that you’re really trying to resonate with.
Josh: Great answer. You recently went through a re-branding exercise. Your old name was Sellabilty Score. And now, you have the Value Builder Score. Why the re‑branding?
John: When we talk to business owners, we think that they kind of fall into two buckets. We’ve experienced them falling into two buckets. There’s a group of business owners that we speak to that want to sell their company, who have that as an objective. And for them, the Sellability Score made sense. It was a name that kind of resonated with them and it felt right.
There’s another bucket of folks, however, that were allergic to the word sellability. They found it to be crass, something that you wouldn’t talk about in public, something that you certainly wouldn’t want anybody to know you were thinking about, certainly not your employees or your suppliers or your competition, for example. And so, that became problematic at times because we were turning off some of our customers. Those business owners who didn’t want to sell but did want to create a valuable company.
And so, creating value is one of those much more inclusive words or terms, if you will, because there we can capture both sets of users, those that want to sell but also those that want to just improve the value of their business. And so, that’s why we started teeing] on this idea of kind of value building. And then from there, we just built out the kind of nomenclature using value builder as a consistent theme. So, you’ve got the Value Builder System as the overarching brand. And then within that, you’ve got the Value Builder Score or you’ve got the Value Builder Assessment, and you’ve got the Value Builder Engagement. And then we’ve trademarked all that in the major markets in which we operate in the United States and in the UK in particular. And so, just, I kind of worked for us in that way.
Josh: So, here is my last question for you, then we’ll thank you for your time, which has been very generous. How often do your licenses find the business owners are more interested in talking about building value than selling their business, kind of a follow up to your answer?
John: I don’t know that we would be able to put a number on it, Josh. Certainly, there is a group of business owners out there that just don’t necessarily want to talk about selling. It’s just not something much to I think their detriment. They think that that’s something they’ll do in the future.
A lot of people think of selling as this idea of, you know, if you think of analogy of the 100-m relay, when you’re sprinting just to be able to hand the baton out to someone else. There’s just this moment in time where you’re both touching the baton and then you drop the baton and they take it. The time that you both are holding the baton is instantaneous. It’s less than a second.
The reality is that the transition of the business is usually over many years. There’s a year or two getting the business kind of prepared to go to market. There’s a year where you’re marketing the business to potential buyers. And then once you get the buyer to sign on the dotted line and you sell your business, there’s usually another two, three, four as much as five years’ worth of transition where you’re on an earn out or some form of compensation that ties you to the business.
It’s seven years for a lot of business owners. Yet, they think it’s something they’re going to do when they hit 65 and by 66 they’re going to be on the beach. And so, that’s just a huge message that we’ve got to change. But it’s a long process. I can’t remember your question now, but it got me off on that tangent.
Josh: Well actually it was a good answer to my question. It was essentially, “What’s the percent of people who want to sell versus who want to talk about building value?” But I think your answer was really good on that. So, we’re just about out of time. And before we leave for the day, how would people find more information about Value Builder and how to buy your books?
John: The best place to go is valuebuildersystem.com.
Josh: Can they get your books there also?
John: There’s a link there to Amazon. And if you want to dig directly into the automatic customer and see some of the background on that, you can just go to automaticcustomer.com.
Josh: Great. Well, John, thank you sir very much today. I really appreciate it. And just for the listeners to know, John’s had about 18,000 businesses go through one or both of these products, so the database he’s got is an incredibly robust one based on real world experience with lots of people, so I highly encourage you to visit valuebuilder.com and take a look around.
John: Just to be clear, Josh, it’s valuebuildersystem.com. They need the word system on that.
Josh: Oh, thank you. Sorry about that.
John: No, not at all. I just wanted to make sure you got that.
Josh: Again, thank you very much for your time today, John.
John: Thanks, Josh, my pleasure.
Josh: You’ve been listening to the Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802‑846‑1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at email@example.com.
This is Josh Patrick and thanks for listening. I hope to see you soon for another edition of The Sustainable Business.