Build your business smart, and you can make a lot of money when you sell it.
In today’s episode of Business Lunch, host Roland Frasier sits down with John Warrillow, founder of ValueBuilder, author of three great books, and all-around good guy, to talk about building and selling businesses.
Each of his books is geared toward a different phase of your business. Built to Sell is for anyone feeling trapped in their business and shows you how to create a business that can thrive without you. The Automated Customer is for anyone looking for a recurring revenue stream. And The Art of Selling Your Business is for anyone on the last chapter of their entrepreneurial journey.
He also has an exclusive offer for Business Lunch listeners who want to apply the lessons from his latest book to their own businesses.
Listen in as Roland and John dig deep into how to build and sell your business well.
Building a Company You’ll Eventually Sell
John has a radio show called Built to Sell where he interviews a different entrepreneur each week about their exit strategy. He says there are a few dozen people out there playing at a higher level, out-maneuvering and outthinking the other side. They were the inspiration behind his most recent book. What tactics can we learn from these people? What mistakes can they help us avoid?
The biggest issue entrepreneurs face when they go to sell their business is: what do you want for it? John says if you put a super-high number out there, you’ll lose people before you even start the process. On the other hand, if your number is too low, you’re cheating yourself. There’s virtually no good answer to this question, but this is a decent one: “Hey, I’m a reasonable person. I’m happy to review any offer you think is reasonable.”
He tells them that he’s willing to look at an IOI (indication of interest) if they want to put that together. An IOI is not the same as an LOI (letter of intent). An LOI gives a specific price and includes a no-shop clause where you agree not to market your business to anyone else. That’s a dangerous document to sign. You’ve lost leverage. You want a process to try to get multiple bids from multiple people at a time.
The Importance of Building Your Own Media
A lot of Business Lunch listeners own ecommerce companies, and right now FBA (Fulfillment By Amazon) roll-ups are all the rage. They’ve raised over $1 billion in funds and hold workshops on how to get the most for your business. They create a deal flow mechanism—How to Sell Your Amazon Business—then go in and buy at low multiples. They’re like the fox in the henhouse. How would John advise someone who gets an offer from one of these groups to proceed?
He asks the question: who owns the customer? If Amazon is seen as the ultimate owner of the customer, and you’re a fulfillment house with a 3rd party product you sourced, you don’t have a direct relationship with the customer. This puts you in a weak negotiating position.
If you own the brand, the customer list, and you have multiple marketing channels, one of which is Amazon, you can do a lot better. You don’t want to be dependent on the traffic from one platform, and you want access to your clients.
John tells a story about Ben Leonard who built a cool workout platform, Beast Gear, selling weight lifting straps and gloves. He started selling on Amazon and, in the package he included a note that says, “Make sure you tag us on IG when you get a PR. I’d love to know about it.” Then he DMs anyone who posts, says something like, “I can’t believe you dead lifted that many pounds!” and builds rapport. On top of that, he gives them a $20 gift card for the Beast Gear website.
This lessens his dependency on Amazon, which is always a good thing.
Selling Your Business to a Private Equity Firm or an Individual Investor
Entrepreneurs thrive on freedom. If they wanted to go work for someone, they’d do that. Most of them are successful and smart. Selling to a private equity firm is usually the worst of both worlds. You’re giving up control (60% to the PE firm) and you’re a minority shareholder in a company they want you to run. People in charge may not know the details of your company, and there’s significant risk.
It comes down to the quality of the buyer and their history in executing this kind of plan. You have to know your stuff to do this. It can work, but it’s tough. The key is to think about building your concerns into the deal. Do your research and know what to ask for.
Private equities in general are a bit like sheep. They all have identical investment criteria. The good news is that, if you attract the attention of one private equity group, others will be attracted too, and you can negotiate and get a better deal.
Individual investors are the most likely buyers for small businesses. That person is either looking for a job or a business that fits together nicely with their own business. They often need to borrow money to buy your company. The more bankable your business it is, the easier it will be to get a loan. You’ll likely have to carry a note, finance at least a little of the sale.
Figure Out Your Freedom Point
Your freedom point is when the sale of your company after taxes will create enough liquid wealth for you to live comfortably for the rest of your life. When you crest that point, ask yourself, is now the right time to get out?
If you stay, and your business is a big part of your net worth, you’re effectively gambling your freedom. Once you crest the freedom point, get out. Take the amount of annual income you need to feel totally free, multiply it by 33, and that’s what you need.
Most entrepreneurs are happiest when they’re creating, building new things. Once you’ve crossed a certain point in your business where the excitement is wearing off, it’s a good time to sell.
Roland’s EPIC Challenge.
You may have heard about Roland’s EPIC challenge, which he moved online when the Pandemic hit. It focuses on Ethical Profits In Times of Crisis and dives into no-money out-of-pocket business acquisition strategies. If you’re interested in finding out more about this strategy, click here.
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