Ep. 116 — John Warrillow: The 8 Drivers That Decide Your Multiple

6 min read

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Episode Summary

You’ve been told your industry trades at four times EBITDA, so that’s the number stuck in your head. It’s the wrong number. The HVAC guy down the street gets 2x and the answering service across town sells for $38.8M because she nailed one driver almost nobody talks about. I had John Warrillow back on the show to close out my three-part series on valuation, and after the CPA episode and the certified valuation episode, John brought the operating lens: the eight things buyers actually score your business on before they hand you a check. We got into why the average Value Builder score of 59 gets a 3.5x offer while the 90+ scores get 7.1x, why fixing your lowest-scoring drivers beats accentuating your strengths, how the cash flow teeter-totter quietly costs sellers six figures at the closing table, and why recurring revenue is not an industry problem (it’s a “who buys on what cadence” problem). Real example: Jill Nelson’s Ruby Receptionist, $11M in revenue in a 1.9x industry, sold for $38.8M because she had monopoly control on one piece of routing software.

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## Top 10 Takeaways
  1. Your industry multiple is a lazy benchmark. Your business is worth what one buyer will pay, not the sector average.
  2. The common thread across all eight value drivers is one question: does your business run without you?
  3. The average score is 59 and the average offer is 3.5x. Score 90+ and offers jump to 7.1x.
  4. Fix your lowest-scoring drivers first. Strengths don’t save a deal when buyers find hair on it.
  5. Earnouts are a gap-bridge, not a deal. Most of that money is at risk the moment you lose budget control.
  6. Working capital is not your money to keep. Clarify the closing calculation in the LOI or lose six figures.
  7. A cash-suck business gets a lower multiple because buyers fund the deal and the working capital from the same wallet.
  8. Recurring revenue is not industry-bound. Ask who buys what you sell on a regular cadence, even if it’s a small segment.
  9. A subscription relationship multiplies cross-sell because you already have the credit card and the permission.
  10. Monopoly control comes from one differentiated product. Hodgepodge service lines kill your multiple and trigger buyer’s remorse.

Sound Bites

“Companies, while industry is important, it is certainly not, you know, you’re clearly not predestined to get whatever valuation benchmark there is in your industry.” (@00:07:50) — John Warrillow

“Your company’s worth what someone’s willing to pay for it. It’s all kind of BS until someone buys your company.” (@00:10:00) — Ryan Tansom

“If you’ve got shortcomings in your business, you could have all the strengths of the world, but if you don’t shore up those problem areas, you’re not going to get a deal done. And the only deal you’re going to get done is some crappy earnout shenanigans where you’re going to be working for some company for five years.” (@00:15:36) — John Warrillow

“The act of having a subscription makes you infinitely more likely to buy other stuff from that company.” (@00:34:51) — John Warrillow

“For your business to be valuable, it needs to run without you. There are eight unique things you can do to make it so that it’s less dependent on you. That gives you a better multiple if you ever want to sell, but it also gives you a lot more control of your time.” (@00:44:42) — John Warrillow

About This Episode

John Warrillow is the founder of The Value Builder System, a company that as of 2017 had served over 40,000 business owners. He’s the author of Built to Sell: Creating a Business That Can Thrive Without You (named one of the best business books of 2011 by Fortune and Inc) and The Automatic Customer: Creating a Subscription Business in Any Industry. Before launching Value Builder, John started and exited four companies, including a quantitative market research firm acquired by The Corporate Executive Board in 2008. This is John’s second appearance on the show (he was Ryan’s fifth-ever guest) and closes out a three-part series on business valuation, following episodes with Brandon Hall (certified valuations) and Ryan Turbes (CPA lens on deal payouts).

Resources Mentioned

  • The Value Builder System — Free 15-minute questionnaire that scores your business across the 8 key drivers. — valuebuildersystem.com
  • Built to Sell by John Warrillow — The book that codified the lessons from John’s four exits.
  • The Automatic Customer by John Warrillow — Released by Random House in 2015, on building subscription businesses in any industry.
  • Built to Sell Radio (Podcast) — John’s podcast interviewing business owners about their exits.
  • Ruby Receptionist (Jill Nelson) — The answering service that sold for $38.8M against a 1.9x industry multiple.
  • Mr. Car Wash — Private equity rollup using the unlimited subscription model in the car wash space.
  • H. Bloom — Flower subscription company targeting hotels and spas.
  • Norm Brodsky — Inc Magazine columnist referenced on the storage business model.
  • Dell / Kevin Rollins HBR Case Study — Reference on moving from negative to positive cash flow cycle.

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