The Art of Selling Your Business: A Conversation with John Warrillow

John Warrilow is an expert on the practice of strategically building businesses for the purpose of selling them. After founding and selling four businesses of his own, John turned to the pen to document his entrepreneurial experiences. The Art of Selling Your Business, John’s most recent book, focuses on the mechanics of selling your business as well as common pitfalls to avoid in the process. 

Axial founder and CEO, Peter Lehrman, recently sat down with John for an in-depth discussion on the business sales process from the vantage point of the entrepreneur. From identifying the right intermediary to understanding the incentives of the buyers on the other side of the negotiating table – entering the sales process armed with information is key.

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Audio

Show Notes

Introduction 0:00 – 4:20 

4:21 – Gradually reveal your business’ information

• It’s easy for an entrepreneur to get excited by an inbound request from an interested buyer and respond with all of their business’ information. That’s a mistake. There are three main reasons why entrepreneurs should slowly reveal information to prospective buyers:
  • Buyer Stimulus: Savvy entrepreneurs or those represented by experienced investment bankers understand the stimulating effect that slowly releasing information can have on buyers. Dumping everything in a buyer’s lap can be incredibly overwhelming vs releasing it in a drip cadence, which makes the materials more consumable and can create more connection to the opportunity.
  • Competitive Tension: It’s important to create competitive tension with a few buyers instead of putting all of your eggs in one basket. Slowly releasing information to multiple buyers can help the seller create favorable negotiating dynamics with multiple prospective buyers. 
  • Favorable Outcomes: That competitive tension can help keep a sale process on track in the later stages of a transaction. Buyers are more likely to respect timelines and avoid dragging transactions out if they know there are other suitors waiting close by.

10:25 – The entrepreneur support team

• It’s critical for entrepreneurs to retain an M&A attorney as opposed to a general attorney. 
• An intermediary (investment banker, M&A advisor, business broker) is an equally important resource for an entrepreneur to have to improve the chances of a successful transactional outcome.
• Selling your business is a “who” not “how” process. Having the right representation can result in generating multiple offers for your business, giving you leverage and optionality. 

16:31: How do you know which Intermediary is the “right” Intermediary?

• There are two types of M&A advisors in the world – generalists and specialists. 
• The generalist will tend to dive deeper into your business because they need to learn it themselves. That helps them understand the special sauce that makes your business unique. The specialists already know the ins and outs of the industry that your business operates in. They have all the relationships, they know the comps, and will run a more lubricated process. They also tend to value the relationships with the buyers in their rolodex more because they will likely have to do business with them again in the future.
• It’s important to listen to a prospective intermediary try to explain what makes your business unique. It’s always a red flag when they try to bucket you with other companies in the space. Once you’ve been commoditized, your chances of actualizing the outcomes you’d hoped for have gone down. 
• Intermediaries also have a very finite amount of time with prospective buyers to try to convince them to spend more time assessing the opportunity at hand. If they can’t crisply articulate your value proposition to you, they’re going to have a hard time doing it to a potential acquirer. 

21:45 – What’s the lead time for developing a relationship with an intermediary?

• Cultivating relationships with a handful of intermediaries years in advance is typically a best practice. The relationship with an intermediary is a two way street. You need to court the banker just like they need to court you. Sending an email update once a year and meeting them in person if possible is a great way to nurture the relationship. When the time comes, the entrepreneur will feel more secure in their decision to hire an intermediary that they trust, and the intermediary will be more ramped and ready to go.

26:00 – Know thy buyer…

• The book talks a lot about PE vs strategic acquirers. Neither are good or bad, but it’s important to go into conversations with an understanding of each of their motivations. The PE strategy in its crudest form is to buy low and sell high. They usually pay a little less than strategics, they’ll use debt, and they’ll attempt to sell at a higher multiple a few years later. 
• Higher multiples can be achieved by “professionalizing” an acquired business. That’s typically done by redeveloping company processes and protocols in order to increase profit – usually an incredibly painful thing for an entrepreneur to endure. But, if you know that going in, it can help with the conversation and ultimately the structure of the deal. Bottom line is, ask yourself what’s in it for them.
• Cultivating a relationship with a buyer during the transaction process can really help you get a sense of what to expect post-transaction. If you feel bullish about the future of your company and think the PE group can make a huge difference, you may want to carry a meaningful amount of equity into the new entity – if that makes sense for the entrepreneur and their life circumstances. 
• The entrepreneurial conflict is, if I’m going to put a lot of eggs in one basket, I want to own the basket. It’s important to understand that when you sell your business, even if you roll your equity, you’re selling control in most cases.

42:20 – Managing conflicting incentives between buyers and sellers

• It’s critical to understand the incentives of everyone involved in a transaction – from the accountants to the intermediary to the buyer.
• Example of a business that ran a profit sharing plan with employees since inception. The business was eventually sold to PE. PE would look at the profit sharing plan and only see its negative impact on profit. The entrepreneur on the other hand would argue that the profit sharing plan is a fundamental part of the business. The incentive system is different on both sides of the table, which can lead to opposing perspectives. The risk that PE runs, however, is choosing profit over something like company culture, which can cause way more of a drag on profits in the long term. 
• PE firms have come around to this philosophy of portfolio company management and we’re seeing more and more examples of hands-off management where it makes sense.
• There’s a real opportunity in the private capital markets to create flexible capital solutions that can expand the way owners and capital partners can work together. 
• A lot of entrepreneurs think about selling their business as this one time magical event. More often than not, a sale is a more gradual process. There can be an earnout or other terms that tie you to the business for a significant amount of time beyond the signing of the SPA. It would serve the entrepreneurial community well to start thinking of transactions as gradual and to start selling earlier than what feels comfortable to account for that extra time.

1:00:55 – Covid-19 and the decision to sell 

• Valuation is top of mind for all transactional entrepreneurs today. Finding common ground between the buyer who will want to value a company based on TTM and the seller who will want to value the company based on pre-covid performance will be the name of the game.
• Acquirers will look at a business’ performance during Covid to judge how susceptible the business is to economic cycles. The less susceptible, the more valuable in the eyes of the buyer. 
• A survey of entrepreneurs pre and post-covid found that owners are now much less likely to pass their businesses on to family members. The hypothesis is that running a business has just been too stressful throughout Covid, and owners don’t want their kids to experience that. They want someone else to run it. 
• Recurring revenue is a great way to build resilience for future down turns. Covid is a good forcing function for entrepreneurs to try to find ways to add recurring revenue into the business model. The secret is to segment your customers into super niche, homogeneous cohorts that have similar and specific needs for your services. Once you understand the common denominator of those businesses, you can find ways to create recurring revenue. Example of a flower company that realized hotels constantly need fresh flowers on display at reception. They didn’t try to create recurring revenue for all customers, just the ones where it made sense. Don’t try to create something for everyone. 

1:13:43 – If you were emperor of the world for one day, what’s the one skill or one novel piece of information you’d impart to the entrepreneurs of the world? 

• There’s a real power to curiosity. Being curious is what drives people to figure things out and solve hard problems. Curiosity is the super power of some of the most successful entrepreneurs in our lifetime. The more we can hone those skills the better. 

1:16:30 – Where can people go to learn more about the book?

• Visit https://builttosell.com/selling/ to learn more about all 3 of John’s books, his podcast, and other great resources for entrepreneurs looking to sell their business.