Episode 47

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John Warrillow is the author of books “Built to Sell” and “The Automatic Customer” and founder of The Value Builder System™ where advisors help company owners increase the value of their business. Previously, he founded Warrillow & Co., a subscription-based research business dedicated to helping Fortune 500 companies market to small business owners. A sought-after speaker and popular Inc.com columnist, John lives in Toronto.

 

 

What you’ll learn about in this episode:

  • John’s book “Built to Sell”
  • The very easy path for agencies to follow that make it extremely hard to sell
  • What services look like that make an agency sellable
  • Why you can’t confuse the doing with owning a business
  • When is it time to say no to business?
  • What to do after you sell your agency
  • Things to avoid when exiting your agency
  • Services agencies can offer on a subscription model
  • Standardizing a process and giving that process or product a specific name
  • Why you shouldn’t surround yourself with journeymen agency employees
  • How to assess how sellable your agency is and what can be done to make your agency more sellable

 

The Golden Nugget:

“Name it. Claim it. That’s when you get that point of differentiation.” – @JohnWarrillow Click To Tweet

 

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Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits too. Welcome to Build a Better Agency, where we show you how to build an agency that can scale and grow with better clients, invested employees and best of all, more money to the bottom line. Bringing his 25 plus years of expertise as both an agency owner and agency consultant to you, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody Drew McLellan here with another episode of Build a Better Agency. All of you as I talk to agency owners all over the land, one of the things that we are always talking about is how to create an agency that has intrinsic value so that you have choices in terms of keeping it, passing it on to your kids, selling it to your employees, selling it to an outside buyer. But a lot of times we spend time talking about how does an agency get evaluated and what makes it a valuable proposition for someone else if they’re looking to buy. And that’s why I’m super excited. Many of you have heard me recommend the book Built to Sell by John Warrillow. And John also has a great new book out called The Automatic Customer: Creating a Subscription based Business in Any Industry. But John has lived our world. He has started and exited four companies, including a market research business. And the book, if you’ve read it is a business-parable book and the business that in John’s book that his character is building to sell is an agency.

So he certainly knows our world. So I’m excited to talk to him about how business owners think differently about their business, so that they have options down to the tail end of the business cycle for them. So John, welcome to the podcast. Thanks for joining us.

John Warrillow:

Thanks for having me Drew.

Drew McLellan:

So what prompted you to write the book Built to Sell?

John Warrillow:

So I had, as you said, exited a couple of businesses and figured I’ve made every mistake in the book. And I had some time on my hands and thought I should get some of these ideas down on paper. And so I took a few weeks, started banging out the story and you’re right, it’s a parable about an agency owner who is tired of the hamster wheel of always chasing the next client, always chasing the next project and figures there’s got to be you better way.

Drew McLellan:

One of the things I love about the book is that it talks about something that I preach to agency owners all the time, which is if you’re a generalist, you diminish the value of your company, it really is about being different and differentiating and narrowing your focus. Can you talk a little bit about that?

John Warrillow:

Yeah, it happens pretty easily. And that is because is a lot of agency owners are really personable, they’re the rainmaker for their company and they build great relationships with the other side of the table, being the client. Well, the client will hire you and say, we love the fact that you do great websites, let’s say. And then they say, you’re doing such a great job managing our website, have you ever thought about doing SEO, search engine optimization? And you scratch your head and say, well, I don’t really know much about Google, but I probably could figure it out, this client who I really love working with has asked me to do SEO, so I’ll do SEO. And then they start to work together on the SEO front. And the client says, you’re doing such a great job on SEO, have you ever done search engine marketing? Will you actually buy the Google keywords, would you ever consider doing that on our behalf? And then you go, well, I don’t know the first thing about that, but I’ll figure it out.

And sooner or later, you’ve gone from being a specialist in building websites to being a generalist marketing agency where you basically offer all services to a few customers. And that’s the definition of an unsellable business where you’ve got a general suite of services, a handful of clients that you personally take care of. It can be by the way, Drew, a very profitable agency, but no one would want to buy it.

Drew McLellan:

Right. Well, and one of the things that I have conversations with agency owners all the time is you may very well choose not to sell your agency. The idea though, is to build a company of value so that that’s an option for you if you want it, right?

John Warrillow:

Yeah. And a lot of agencies will transfer from one ownership group to the next, like a law firm, the senior partner will say, hey, it’s time to retire, let’s let some of the new guys come up and buy in over time. And that’s a pretty typical way an agency owner will exit.

Drew McLellan:

Yeah, absolutely. So when you think about building a business that is ready to sell, what’s the biggest mistake business owners make around that?

John Warrillow:

Great question. Probably thinking it’s an overnight transaction is probably the biggest mistake. And it sounds like an overused trite sort of example, but a lot of agency owners think that selling a company is like a 400 meter relay, you sprint as hard as can and you just dive into the arms with the next guy who’s going to run it for you, and you hand the baton and you ride off into the sunset or more actively you collapse onto the tarmac. The reality is most agencies are not transitioned that way.

So you decide you want to sell, it takes you a couple years to get the business ready to sell, it takes you a year to negotiate the sale, and then it takes you three or five or even seven years on an earnout to capture any value out. So if you’re 40 and you’re listening to podcasters saying, yeah, yeah, I think I want to be on the beach by the time I’m 60, my advice would be to start proactively selling your agency by the time you’re 50. Because it’s going to take you 10 years to capture any value out of it. It literally takes that long.

Drew McLellan:

Well, and I think to your analogy when you’re 40, that’s when you start building the business with purpose around creating value so that it is sellable when you’re 50, and then you start the marketing and the process that you described.

John Warrillow:

Exactly, yeah.

Drew McLellan:

What are some other stumbling blocks that agency owners need to be mindful of as they, let’s assume that they are 40 years old and they’re saying, okay, yep, I think I do want to be on the beach by the time I’m 60, I’d like to have part of my exit strategy be that someone buys the agency for whatever reason they are motivated to do that besides money because I think it’s not always just about the money, so I’m 40 years old, what do I need to do? What’s the recipe for building a sellable business?

John Warrillow:

Yeah. So the first thing you identified earlier, which is to find one thing in your agency that meets the trifecta of scale. So for me, that means it’s a service typically, in an advertising context, it’s a service that is teachable to employees, valuable to customers and repeatable. So the way to remember that is TVR, teachable valuable and repeatable. And so the first step is really thinking about all the services you provide.

So let’s say you do direct mail, copywriting, graphic design, brochures, event marketing, whatever, we put all the whole suite of services you offer on a whiteboard and then score them on a scale of zero to 10, to what degree you can teach [inaudible 00:07:14] to deliver it, or on the inverse it relies on you, to what degree it’s valuable to customers or on the inverse into commodity, get it from any agency in the market. And the third is it to what degree it’s repeatable, meaning to what degree do clients have to purchase that service on a regular cadence? And then you’re really looking to start to specialize in this service and [inaudible 00:07:40] that rank the highest against the teachable valuable repeatable criteria. That’s strong cheese for a lot of people to consume.

A lot of agency owners will look at that and say, yeah, but the most profitable stuff we do or the most scalable stuff we do is the smallest portion of our revenue or only three of our customers want that, or our biggest client wants us to do 50 other things, we could never just specialize in one thing. To which unfortunately, I think the response would be well, that’s the price of building a scalable agency. In my view, you’ve really got to start eliminating the services, eliminating offering the services that you cannot teach other employees to deliver, that clients will choose you for rather than view as a commodity and are repeatable, meaning they’re not just a one-off product launch process where you never need to buy it again. So I think that’s the first step. We touched on that when we talked about generalization versus specialization.

Drew McLellan:

One of the things in that equation, I think one of the reasons why people get into the agency business and why some people rise to the ranks of the owner is because they do like serving clients and they do like being a trusted resource or a trusted counselor, and they do like being at the C-suite table and offering good marketing advice. And part of what you’re saying is you have to be able to park all that at the door and be able to, especially as the owner, not really be that guy or that woman, but that you need to teach your people how to do this repeatable sort of check, check, check, check, item list that delivers value to the client, right?

John Warrillow:

You bet. I remember I was doing a speech awhile ago for a group of graphic designers and I was blutterring on same spiel basically saying, you can’t think of yourself as the chief creative officer, you got to find things that you could replicate, you can’t be your client server. And the audience was going [inaudible 00:09:51]. They were like, this is terrible, this is like the antithesis of what I got in the business to do. And my message to them, it’s the same to you, is that, hey, if you want to be [inaudible 00:10:00] designer, be a graphic designer, don’t run an agency that does graphic design, because that’s terrible. Actually just be a freelancer because if you want to do the doing and you want to be a graphic designer, then be graphic designer.

If you want to be a marketing strategist, hold your shingle up and say, look, you can hire me for $500 an hour and I’ll build you a marketing strategy. It’s not a company, it’s a job. And that’s fine, and that’s perfectly acceptable way to have a career. Many people add tremendous value, but don’t confuse the doing with actually owning a business. Because even if you’ve got employees, if you are the person the client wants to see to build the strategy, to design the design, to write the copy, you’re not an owner of a business, you are a glorified employee. And that’s a tough, tough message to hear. But again, if you get all sorts of ego gratification from being the guy the client goes to for advice, by all means, be that guy, but don’t expect to sell your company, don’t expect your company to be worth anything.

Drew McLellan:

Yeah. It’s funny when I look across all the agency owners I work with, the ones who transition best to what you’re describing are the ones who didn’t grow up in agencies and whose identity and ego isn’t tied to the skillset they had when they were an agency employee.

John Warrillow:

Totally, totally, totally. Yeah, and I get that. It’s the same by the way, in HVAC companies, in plumbing companies. In all those companies, if the owner thinks that, hey, I’m the guy they want to go to to fix their furnace. Well, guess what? There’s nothing to sell. You can just be a furnace fixer. That’s great, and if that’s what you’re into, then be the best furnace fixer you can be, be the best copywriter you can be. What I get upset about is when entrepreneurs say, I’m a great copywriter, I’m going to start a copywriting business and I’m going to hold myself out for $500 an hour and write great copy for clients. And they invest all the proceeds of their hard work into building their agency, fancy furniture, office space, marketing, [inaudible 00:12:07]. And then at the end of the day, turn to someone and say, why isn’t my company worth anything?

Well, it’s not worth anything because you didn’t set it up to be sold. So again, if you’re going to hold yourself out and be a freelancer and charge $500 an hour to write an amazing copy, then great, do that. But by all means, do it from your basement where you don’t have any costs and you can keep all the money you bill, as opposed to pretending you’re running an agency where all the money you’re making, it’s just going to fund your overhead, which is basically workless.

Drew McLellan:

In the book, I think one of the big turning points for the character in your book, the agency owner in the book, is when he has to turn down business that is not his core competency. He’s decided that he’s going to be a logo shop and all they’re going to do are great logos. And he’s got this great logo process. And then somebody asks him, I don’t remember what it is now, but somebody asks him to do something different and it’s a big pot of money. And that’s a crossroads for him. Talk to us a little bit about that crossroad and how people can decide or figure out when is the right time to start saying no to things that are not where they’re pointing the company towards.

John Warrillow:

Yeah. You characterize [inaudible 00:13:21] crossroads and in the book, it is a crossroads. But I would argue that, especially when you are making this transition, you have to look these decisions in the eye and make the right decision again and again and again. In the book, for those who haven’t read the book, the main character goes through this process of specialization, he decides to do logos. And this one client, his dream client, he’s always wanted this client on his resume, comes to him and says, look, we want you to be our agency of record. And it’s like 750 grand worth of fees a year. And it’s like his dream in the old world. And so he’s got to decide, do I take the money and fulfill the dream I’ve always had, which is to be the agency of record of this big advertiser or do I stick to my [inaudible 00:14:09] and continue to crank out building this business to sell. And so I think that, and maybe less traumatic form happens to business owners who make this transition all the time.

So couple of thoughts, one, you’ve got to rest assured that if your goal is building a sellable company, there will be these moments where you have to sacrifice short-term money, ego gratification for long-term value. So it should feel wrong, but hopefully in your gut, you know it’s the right call to make, to specialize. Number two, charge up front. So if you decide on your agency, you are going to become the world’s greatest designer of PowerPoint presentations. And that’s going to be your unique little corner of the universe. When someone comes to you, when Apple or [Al Gore 00:15:01] or some other company comes to you and says, look, we want you to create a PowerPoint presentation, then charge up front, charge a large [inaudible 00:15:11], if you truly are the world’s greatest, fill in the blank, you should be able to determine the pricing term.

So at least while you may not have the glory of the big client over years, you’re not worried about cash flow by turning down projects. And so again, I think if you become the world’s greatest, fill in the blank, copywriter, whatever, you can start to determine your pricing terms. When you’ve got cash in the bank and you’re not scrambling for your next project, that can give you the intestinal fortitude to say no when something looks very tempting.

Drew McLellan:

Yeah. I think when you have X number of employees and you know that all of them are counting on paying their mortgage that month, the pressure to have money coming in the door can sometimes force you into a decision or make you feel like you’re forced into a decision that is taking you off of the path. So I think you’re right. I think figuring out how to manage the cash flow is one of the ways to take that pressure off.

John Warrillow:

You bet.

Drew McLellan:

So in terms of building a business to sell, where do you, and this was not something really you dealt with in the book, but I know that you deal with it in terms of the work you do outside of the story in the book, where does the importance of an owner’s emotional state… So I’ve walked a lot of owners through the process of selling their business and yes, there’s the financial part of, it is or isn’t worth what they thought it was worth and all of that. But I also think that part of the ability to build a business to sell and then actually be able to pull the trigger and sell it, is tied to sort of where they are emotionally and what they’re going to after the sale. Do you have some thoughts about that?

John Warrillow:

Yeah. I think you want a big goal, a big box to check outside of work, to go do once you exit. Most of us as entrepreneurs who haven’t worked for a boss for years, if not decades, every day we’re waking up on the hunt, you’re waking up for the next hunting, the next client, making sure you’ve got enough money in the bank just to fund the things that you need and so forth. And so you’ve got that excitement in your life, and so the moment you exit you lose that, that purpose to use an overused expression. Great book on this, by the way, by a guy named Bo Burlingham, wrote a book called Finish Big.

If you haven’t read it, I’d strongly recommend reading it. It talks about the emotional impact of selling a company and things to think about before and after. But one of the kind of core ideas of Bo’s book is the idea that you’ve really got to think about and have a purpose. That for some people is going to be philanthropic, they want go start a foundation, they might want go start another business, they might want to travel, they might want to master some sports, get in shape. In our case, my last company, I sold back in 2008, and my wife and we had two young kids. We wanted to move to another country. And so our goal was to move to Europe. And so for us, that was very galvanizing and it gave me something to focus on, right?

So when you’re trying to learn a new language, and you’re trying to figure out like how the driving laws work in another country, you’ve got something else to think about other than, oh, I miss my company or I miss the people, or I miss that adrenaline rush. So for that, that worked for us. That’s not going to be right for everybody obviously. But having something to go to, it’s cliche and to even say it, but there’s only so much golf you can play, it will get boring very quickly. So having something that energizes you, I think is a good, best practice.

Drew McLellan:

Yeah. I think entrepreneurs by their human nature are, whether or type A’s are not, they’re driven. They like to be super busy, they like to add value. And so I’ve seen some agency owners really stumble out of their agency without something big, like you said, and they’re sort of miserable for a while as they sort of reinvent who they are.

John Warrillow:

Yeah, yeah, yeah. And many, [inaudible 00:19:27] get back into running an agency because that’s what they know and that is what gave in the ego gratification. And so a lot of them do, which is why, by the way, if you ever do sell your company, the non-compete is not an inconsequential discussion. So any buyer’s going to come in and want to buy your company, they’re going to want you to sign a non-compete. And you’re going to look at that at non-compete, and if you’re like anything like me, you’re going to look at it and go, there’s no way in the world I’m ever going to get into this business again, it could be a lifetime non-compete and all of marketing services can be covered. Because I don’t want to touch this business for the next 50 years, I’ll never in my life.

Drew McLellan:

Right.

John Warrillow:

But time has a funny way of healing all wounds and never is a long time. And so I would just encourage you to sign a non-compete slowly and know that, hey, five years, that’s a long time to sit on the bench, and even though you may not feel like running an agency now, you may in five years. And so I would just encourage you to think about what scope, and the scope usually is the length of the non-compete number one. And then the industry, what scope of services like, is it, I will never start another marketing services business or is it more specifically, I will never get into the business of doing search engine optimization, if that’s your specialty as an example. So just be careful what you saw and when it comes to an non-compete.

Drew McLellan:

Well, and in fact, what I’ve seen is that some agency owners cut the deal for the sale. Part of the deal is that they have to stay for a certain amount of time and then they don’t get out when they’re supposed to. And it really mucks up the deal for the new person, because it’s hard to run a company when the old guy or the old boss, male or female, is still in the shop.

John Warrillow:

And it’s one of the reasons I can’t stand earnouts is because you’re immediately in competition with the buyer. So if you don’t know what an earnout is, basically an earnout is when you sign up to a… Like the way typically the big [inaudible 00:21:34] agency holding companies, business buy agencies right now and so they’ll come to you and say, we loved your agency, we’re going to pay you 10 times earnings for your company. And you like, your eyes go wide, and you’re like 10 times earnings, that sounds great. The fine for an all takes all most of that away [inaudible 00:21:48]. And they say, look, we’re going to pay you three times earnings up front and then another seven times earnings, you have the potential to earn if you meet all these future goals five years from now or three years from now. And so you’re actually selling your agency for three times you put up, but they don’t open the conversation with that.

They give you the 10 times if it does the headline number. And so your goal over that three, five or seven year earnout is to try to hit a bunch of goals. Through that period of time, there are going to be all kinds of times where hitting your earnout is going to be competing with the overall goal of the buying company. And so you’re going to butt heads with the agency holding company, your boss, essentially, because for you to hit your earnout undermine their ability to do something they want to do in the company. So let’s say for example, at the agency holding company, they want rationalize…

Well, a good example would be, they want to give General Motors agency of record relationship. And you’ve got the Ford account, right? And they’re going to come to you and say, hey, listen, I know you got a couple 100 grand worth of revenue from Ford, but you got to get rid of it because as a parent company, we’re going take the GM account. And so you said, yeah, but that’s part of my earnout. And they say, yeah, but you’re part of the company now. And so that’s just one stupid little example, but you run into almost daily conflicts with the buyer where your goals to hit your earnout are in direct conflict with their goals to integrate you as part of their business.

Drew McLellan:

Well, and sometimes the way they want to run the business may simply be that they want to spend more money than you would’ve spent. And that in fact, AGI or other things that ultimately affect the net profit and so your payout, right?

John Warrillow:

Right. Yeah, it’s like, you use [canvas 00:23:47] 100 entrepreneurs and particular agency owners who’ve gone through an earnout, you’ll get 90, 95 of them who will kind of roll their eyes and say, God, that was the worst three years of my life, and they’ll recount stories like the one you just shared. So the trick by the way to avoiding that is to getting as much recurring revenue as you can in your agency, because when you’ve got recurring revenue and you can demonstrate to a buyer you’ve got this annuity stream of revenue coming in, and that is not personally dependent on you, that’s when you start to get away from the huge portion of the deal on the earnout and a bigger fatter payment up front. And so if you’re doing search engine optimization, as an exa