5 Minutes with…John Warrillow

John Warrillow is a serial entrepreneur who founded four companies, the last of which was Warrillow & Co, a consultancy firm specializing in helping Fortune 500 companies sell to the small business market. In 2008, Warrillow sold that consultancy to The Corporate Executive Board. In addition to public speaking, he is author of Drilling for Gold: How Corporations Can Successfully Market to Small Business, and founding producer of the nationally syndicated radio show Today’s Entrepreneur. Taking what he learned in his own experiences, as well as what he learned from other entrepreneurs, he authored the recently published Built to Sell: Turn Your Business into One You Can Sell. Daria Meoli spoke with Warrillow about creating a scalable business and maximizing your company’s valuation.

Daria Meoli: What inspired you to write Built to Sell?

John Warrillow: Once I sold my company and started taking some time for myself, the idea of making some sort of contribution by sharing some of the lessons that I’ve learned felt like the right thing to do. And coming from a research background with my last business, the statistics really compelled me to write the book—50% of business owners around the country now want to exit their businesses, yet only 1% successfully do so each year.

DM: Why do so many entrepreneurs struggle with creating a sellable company?

JW: It’s primarily because their businesses are centered around them personally. Small business owners generally are the technical expert at what they do. Take, for example, photographers who own photographic studios. Typically, they’re the best photographer in their company. They may have an assistant or an apprentice photographer, but the owners are the ones that customers become reliant on. Generally, that’s why most companies are not sellable; because they’re so heavily dependent on the owner.

DM: How can business owners get started in changing their current model and creating a sellable business?

JW: The first step is to find a product or service that is scalable. To be a scalable product or service, it needs to meet three criteria. First, the creation of the product or the delivery of the service must be teachable to employees or programmable to computers. Second, it must be repeatable. And third, your customers have to value the product or service. Having products that are repeatable and processes that are teachable, but that customers don’t care about, won’t work. To go back to the example of the photographer, there’s a business up in Albany, NY, called the School of Photography Company. All they do is take school photographs. It’s repeatable because kids get their pictures taken every year. It’s teachable because they have a formula for getting kids to smile by using little stuffed animals, and they get the kids in and out in eight minutes, allowing them to get through lots of schools in a short amount of time. You can teach that formula to a junior photographer who wants to get some experience. And the service is valuable, not only to the parents who want pictures of their kids, but to school principals who are happy the photographer can get 30 students through a photographic session in eight minutes.

DM: If a business owner takes steps to create a more scalable business, how can they maximize the valuation?

JW: One of the best ways to maximize your valuation is to get customers to sign long-term agreements so that there’s some longevity to your business beyond you. The second element of getting the maximum valuation is making sure you’ve got your employees locked in. If your employees are not in some form of long-term incentive plan, a buyer’s going to want you personally to stay on for a long earn out and not put much money in the deal at the beginning. So, to have your employees locked into some sort of long-term incentive plans is really important to maximizing valuation. A long-term incentive plan doesn’t necessarily mean sharing equity. You can give a success fee the day the deal closes, and, if they stay with the company a year after the fact, there’s another bonus in it for them. It can be a simple, inelegant stay bonus, or it could be stock options, if that’s the choice you make. Having both employees and customers locked in the business beyond your personal tenure are two of the key elements in valuation