John Warrillow has started five companies—and sold four. The England-born, Canada-raised entrepreneur used the insights from those exits, plus his quantitative skills, to create The Value Builder System, a methodology for boosting what a business is worth.
Many business owners gauge the value of their enterprise based on that of their peers. “They think the business is going to be worth whatever the industry-standard multiple is,” says Warrillow, who will be speaking at the PROFIT-sponsored Business Transitions Forum in in Calgary on November 16th and 17th and Vancouver on November 29th and 30th. “They went to an industry trade show and heard that businesses in their industry trade for four times EBIDTA [for example].” But business owners have more control over their eventual sale price than they might realize.
Here are five strategies Warrillow has learned from his four exits, and that you can use to up the value of your own business and attract a buer.
1. Understand your assets
The reliance on an industry-standard multiple causes business owners to ignore assets that might be worth many times EBIDTA in the right hands.
Warrillow uses the analogy of the Rembrandt in the attic: Two homeowners have identical, 2500 sq. ft., three-bedroom houses in the same school district. Each imagines his property to be worth within five percent of the other’s. “But unbeknownst to him, one homeowner has a original Rembrandt in his attic, worth many times what the house is worth,” explains Warrillow. “The same is true of businesses—they have assets that would be incredibly valuable to an acquirer.”
Warrillow cites a couple of high profile examples to illustrate his point. Cara Operations’ recent acquisition of St-Hubert was considered puzzling in some circles, because the company already had a similar offering in Swiss Chalet. But Cara’s in-house rotisserie chicken franchise had little or no presence in Quebec. So it bought an organization that did. Similarly, Microsoft’s $8.5 billion acquisition of Skype in 2011 didn’t make a whole lot of sense based on conventional metrics. “Skype was losing money, so using traditional valuation techniques like discounted cash flow, [it] was essentially worthless,” notes Warrillow. But integrating Skype into its product suite allowed Microsoft to up-sell customers on its other software offerings and increased the value of it’s X-Box platform.
2. Find a source of recurring revenue
In 2008, Warrillow sold his quantitative market research business to publicly-traded The Corporate Executive Board. But before the firm could attract a buyer, he had to rethink it’s revenue streams.
“We used to have a one-and-done business model,” Warrillow explains. Companies would engage the firm on a project, say conducting six focus groups. Once the work was done and the report produced, Warrillow’s agency would invoice the client, and move on.
Research companies, like ad agencies, tend to be sold via management buyout or to a family member in the case of a family business. They’re rarely acquired externally. To beat the odds, Warrillow’s firm moved away from one-and-done. “We sold a subscription to our market research to a group of large FORTUNE 500 companies,” he explains. “That gave us recurring revenue—once people subscribed, they’d subscribe annually and oftentimes for many years.” It also made much for a much more sellable company.
3. Diversify your base
Several years ago, Warrillow owned and sold a business that produced syndicated radio programs. “That was not a particularly good exit,” he admits. The problem: customer concentration. “The business was overly dependent on a single customer, and that became an issue in the acquisition,” explains Warrillow. “It ultimately depressed the value of that business significantly. ”
Warrillow applied that lesson to his market research business. “We had a customer concentration issue, where in one month three or four customers would represent 5060% of our revenue, which was a total non-starter for acquirers,” he explains. Remaking the business on a subscription model broadened the base: by the time the company was acquired, it had more than 100 FORTUNE 500 firms paying it every month.
If a single customer represents more than 15% of your revenue, a potential acquirer is likely to discount their bid to account for the risk.
4. Stay out of the spotlight
A business that’s too heavily dependent on it’s owner makes for a risky acquisition. What if the entrepreneur decides she or he can’t work under the new management, and quits? It’s one reason that advertising agencies, which are typically known for the work of one or a few creative geniuses, aren’t acquired all that often.
Earn-outs and contracts help mitigate this issue, but there are less formal ways for business owners assuage buyers’ concerns. Warrillow dealt with this problem when running a marketing and design agency. “We had to get me out of an equation,” he explains. “So I promoted a president, for example, to get somebody else as the front-person for the company.”
5. Keep the bottom line healthy
Sometimes selling your business is all about the basics. “A lot of times we talk about more sort of esoteric attributes of a business that make it more valuable—recurring revenue [and so on]” admits Warrillow. “But you cannot ignore the fact that profitability has a gross effect on the value of a company.”
He cites the example of another business he successfully exited, an events company. One-sided revenue streams are the norm in this space. Take a residential renovation event like the National Home Show. “You might find that the vast majority of the revenue comes from exhibitors and most of the people that actually attend the event go free,” says Warrillow.
At Warrillow’s events, revenue came from both sides. “We had business-to-business events. So of course we had exhibitors, but we also had attendees who paid quite significant sums to attend,” he explains. “So we were quite profitable.”
John Warrillow is speaking at the Business Transitions Forum, sponsored by PROFIT, in Calgary on November 16th and 17th and in Vancouver on November 29th and 30th. Tickets to the event are available here.
MORE ON SELLING YOUR BUSINESS:
- How to Sell Your Business for Top Dollar »
- 9 Reasons You Can’t Sell Your Business »
- How to Make Your Own Exit Luck »
- Exit Tips from an Entrepreneur Who Sold His Business—Twice »
- What Your Business is REALLY Worth »
Are you thinking of your business? Have you made a successful exit in the past? What other tips and strategies would you add to this list? Let us know by commenting below.