171: How to Create an Interior Design Business to Sell

Michele  00:00

Hello, my name is Michele, and you're listening to Profit is a Choice. John Warrillow is the founder of The Value Builder System, a simple software for building the value of a company used by 1000s of businesses worldwide. He's the author of Built to Sell: Creating a Business That Can Thrive Without You, The Automatic Customer: Creating a Subscription Business in any Industry, and The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top. John also hosts the popular podcast Built to Sell Radio. Today we're going to talk about how to create a business to sell, the difference between a job and the business, and who needs to be on your team. 

Michele  00:47

Every day, empowered entrepreneurs are taking ownership of their company financial health, and enjoying the rewards of reduce stress and more creativity. With my background, as a financial software developer, owner of multiple businesses in the interior design, industry, educator, and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is a Choice. 

Michele  01:20

Hi, John, welcome to the podcast.

John Warrillow  01:22

Yeah, it's good to be with you, Michele.

Michele  01:23

Great, I am so excited to talk to you today. When the opportunity came up for us to have this conversation, I was super excited because I already had your book Built to Sell. And then I had seen that you had a new book out that is The Art of Selling Your Business. So I immediately ran out and I've told them on the podcast, Amazon's like my friend when they drop ship a book a day to my house, but I was able to get that one as well. And so just they are just chock full of information. And so I'm excited to just dig in a little bit with you, and talk about the art of selling a business what it means to sell a business, right. 

John Warrillow  02:00

Sure. 

Michele  02:00

And our listeners are interior designers and work rooms and fabricators and so sometimes it's about it's very service oriented. And I think at least from my experience, John that sometimes it's hard to put a price on I know, I've been teaching a signature program for 11 years now called Pricing Without Emotion. So how we priced service based work, take the emotion out of it, what is it? What does it mean? What does it cost? What are the inputs? How do we price it, not how we feel about it. And so really, we're talking about buying and selling without some emotion here. And but it's just so hard to do, when these are businesses that we started, many of us, you know, we're starting a business is very creative. So it's very much a piece and a part of the owner that got it started is they are building up these ideas of, of what could come to life with fabric and paint and elements. And so to put a price tag not just on their work, but then to have to price out an entire business is quite the challenge. And can you just start off by talking to us a little bit maybe about what are some things to even just right off the bat think about with selling a service bait? I mean, I'm assuming we can sell a service based business, right?

John Warrillow  03:16

Yeah, if it's structured the right way, for sure. I mean, I've owned a few service businesses, none of the interior design space, but I've owned a graphic design studio. So I feel like I have some creative. You know synergies are paired with that with some of your listeners. I also want a quantitative market research business, which was a service company, that last one I went to try to sell. And at the time, we worked with very large organizations, big banks, phone companies, and I was involved in doing some of the selling and I went to see an M & A person in Toronto, guy's name is Perry Miceli. And I said, What did you think it's worth, and at the time, we were, you know, I thought a pretty good sized business, we had five or 6 million in revenue, you know, 20 to 30% profit margin. So like, good service based business profit margins, and I was sort of walking around thinking that it would be worth a multiple of my profit. And my client list would be what everybody wanted to like Microsoft that you're America. And Perry kind of looked at me across the room and peered over, you know, his nose through his door to show glasses and said, like, John, it's not worth anything. And like, What do you mean, it's not worth anything? And he's like, it's, all you I mean, you're doing the selling, you're doing the delivery? I'm like, No, no, I've got 20-30 employees, and he's like, No, no, if you're doing the selling and you're still supervising the work, it's worthless. I can't sell your company. And I remember that conversation like it was yesterday. It's probably 20 years ago now. But it was like the wind being taken out of my sails, right. I had thought my company would be worth something because I had a great client list, and I good profits. And what Perry taught me was that none of that really matters. If the Business is still dependent on you. And so I think that's the secret, or that's the challenging part of selling a service based business is to structure it so that it's not dependent on you anymore.

Michele  05:12

Oh, yeah, that's so good. So now let me ask this. If so if it's not dependent on you, where do you fit in? In those years prior to sell?

John Warrillow  05:22

Yeah, well, I mean, I think it's, it's, first of all, there's a philosophical change that we need to make, I think, as owners, and that is that right now, in service based businesses, I think we, we inject all of our creativity, all of our intelligence, our grit and our desire into making a client project come to fruition, right. And, and, in fact, what we actually want to do is, is invest that same energy into building a valuable company, as opposed to serving an individual client. And I can remember when I learned this, I was I got the chance of, probably, again, 15-20 years ago, I was invited to a thing called the Birthing of Giants, which is a pretentious name, but it's about 60 entrepreneurs that gather once a year for three consecutive years on the MIT executive education campus. And I was selected for this program, I was very flattered, it was amazing. And we heard from some amazing speakers over the years, Pat Lencioni, talked about, you know, how to build a team, Jack Stack, the guy who wrote a Stake in the Outcome about how to, you know, do employee ownership stuff. And then this guy came in who had sold a business recently, and I almost didn't go to the session, because I was sort of tired of the kind of rags to riches story. And I, you know, I just didn't want to hear it. And I'm glad I did, because he came in, he said, Okay, how many of you are involved in selling your service or product, and like, all of us, 60 hands went up in the air, right? And we were almost proud of that, that we were involved in doing the selling, instead, okay, put your hands down. You all, every single one of you, he said, to have the right skills, you're selling the wrong product, you need to hire sales people to sell your service or your product, you need to be investing those skills and marketing and selling and influencing and delivering in building more valuable company. And so like, that's a, you know, that's a philosophical head scratcher for a lot of owners. You know, I bet you a lot of the people that listen to your show are parents, I'd imagine. And I and I imagine also, that as parents, they've gone through that psychological journey where in the beginning, you're caring for your child, you're you do everything right for them, you feed them your buttered, burp them, like cetera. And then as they grow older, your role as a parent sort of shifts a little bit, right, and you're all of a sudden, you know, trying to give them guard roles and their teenage years. So you know, like, they kind of get a little freedom, but and by the time they're adults, you kind of want them off in the world, right? making their own decisions, happy, independent. And then you can kind of check the box as a parent that you've done your job. I think, in a funny way, the philosophical change we need to make is instead of thinking of ourselves, as the CEO of our interior design business, or the founder of an interior design business, or a partner and an interior designer, stop thinking that way and start thinking my, my role here is the parent, the mother, or the father of this company. And my job is not to when a new client, put on a great creative project, it's actually to get this firm, to a point where it can live without me, that's the highest order job, I think, if any founder and I think that's just philosophical headspace change is an important one to make.

Michele  08:47

I think that's a really great analogy. I have always said, I have two sons. I'm not raising big boys. I'm raising adult men, though just right. And there's a, it's a difference. I even remember when it got to the point, my sons are grown, and one is married. And I can remember when it got to the point where you're going through those years, John, where you're teaching, and you're teaching, you're guiding all those things that you talked about. And somebody made the comment. I don't remember where I read it. And it hit me like a ton of bricks. And it was like, okay, so your adult kids are at your house and they start loading the dishwasher. Do you say something to them? Like, we don't put the plates in that way, we turn them this way, return them that way? Or do you shut up and assume that they're like a best friend at your house loading dishwasher, you would never tell your best friend, we don't load the dishwasher, you would just be quiet, say thank you and move on. And so it's that separation from parenting and telling him how to standing back and going there might be more than one way to load that dishwasher and you're an adult and I'm going to trust and I'm going to let go and I'm not going to make I'm not going to guide you that way. And even now, we tell Our boys, we're not going to call and tell you what to do or how to do it. If you have a question, call us, we'll give you some insight if you ask us to. Otherwise, we're just going to listen, and we're just going to shake your head. And we may go off and pray about it and worry about it on our own. But we're not going to say anything unless you've asked us to. And I think that's really, really hard when we are the owner. So it's hard enough for parenting. But it's super hard to, if we have created this business through our own thoughts and processes, and hard work, and then the team that we built, to make that turn to realize, and this is first, I think, a personal realization that the company is not me, it's separate from we are separate beings.

John Warrillow  10:42

Yeah. And I also think it's particularly hard for creative people, where their sense of purpose, even their sense of pride, and their sense of self worth, even in some cases, is tied to their last job. Like being able to talk about that home that beautiful, 5000 square foot home you designed. Like it gives you a sense of pride. That that is that it's your work, and that people are enjoying that work. And, and that is a very tempting, but also very destructive. thing about running a creative business, if you're getting your sense of self worth from your last project, you're always only as good as your last project, right? If you can get that same sense of creative inspiration, the same sense of pride from your company, and what your company does, and how you position your company and market and train your people, etc, then I think you are you're building something of value. And here's the thing, where we get slipped up, it looked for, for us to build a company that can thrive without us clearly, you have to get other people doing the work, right, you can't be the one doing the interior design, that's easier said than done. The challenge, I think where we fall down is we're too wide. We listen to clients and try to understand their needs and provide a custom solution for every client, right. And so that means one day you're doing a luxury home of 5000 square feet, another day, you're doing a condominium of 800 square feet. And it's very difficult to try to instill your expertise that allows you to do that breadth of job. Overnight, you know, it said nine women can't have a baby in one month. That's an old expression, right? But some things they just take time to learn, right? And you've had the benefit of a multi year career as an interior designer. Your can't hire young people out of school and suddenly inject everything you've learned. And so what the challenge, I think is, is to narrow what you do decide where you're going to dominate, is that going to be ultra luxurious homes of $12 million? Or more? Or is it going to be student apartments on a budget? Is it going to be family homes in the country or modern homes in the city? Once you decide that you can start to develop your own methodologies, your own process, your own point of view, which you can instill in other younger designers. And because you've narrowed from a really wide breadth of offerings into a very narrow solution, if you will, you can start training people, you can also become much more referral, right? When I think about interior design, like the only thing I'm going to recommend an interior designer is on their personal relationship. I like that individual therefore I'm going to refer you and therefore if you think about it, that that juicy, wonderful jet fuel for your company known as word of mouth will always be contingent on you personally, because people are just referring you whereas if you become the world's expert at doing interior design for $12 million homes, or the country's most specialized person and doing you know eco friendly condominiums, that makes you referral. Right It makes it easier to spread word of mouth about you that's independent of your personality and more about your specialty. And so again, I'm you know, there's lots that goes into building kind of a sellable company, but I think one of the most important things is the discipline to pick one thing and dominate that one type of service and people are listening to me as I say that I'm sorry, Michele, for getting on my grandstand. But people are listening to me and they're saying, Oh my god, I couldn't imagine anything worse. I couldn't imagine the McDonald's ification of my interior design business. It's a pejorative to think about, you know, Ray Kroc, and the fact that he developed systems and processes and I don't that's an anathema, for who I am as a creative will be that as it made that may be Your head is at and know that you have a job, not a business. If you take that same desire to be creative, and you inject it into building a company, as opposed to serving a client, you can get the same sets, I would argue even greater sense of satisfaction. But you're building an asset as opposed to serving a client. Does that make any sense?

Michele  15:22

Absolutely. It's using your creativity with a different focus.

John Warrillow  15:27

Yeah, like, what is the product? What is your website look like? What are the emails that come out? When people request a consultation? What does that experience like when you go for a discovery meeting? How have you mapped that out, those are all really creative projects that you can really get behind. But the beauty of is you do them once, and they become your funnel for life, as opposed to having to recreate yourself and kind of spin all the plates all at once every new job you get. So I just I would just encourage people to not stop being creative, but just inject those skills in and sort of aim them at a different project.

Michele  16:09

I'm curious of Let me think of how and what is the difference in your estimation between having a job and a business? Because you mentioned that a minute ago? How would we, and the reason why am I here where I'm going to go with that next? Because then I'm curious if we were to look at businesses, not just jobs, right? Well, I'm just creating something for me to do for the next few years until I'm done to make a little side cast, but truly a business that outlives me, what percentage of those are created, and are viable for sale versus created and not viable for sale? But I want to kind of differentiate job and business before we go there.

John Warrillow  16:49

Yeah. Great, great question. And I, you know, I'll try to do my best. I don't know if I have statistics for you on that front. But we can. Yeah, that's Yeah, yeah, I think I mean, again, it's somewhat subjective. But I would say the difference between a job and a business is a job stops when you stop working, right. So no matter how much you charge by the hour, you can charge $1,000 an hour, but is, if you stop working, the work stops effectively. And that is what I would call a job, even though the IRS would call you a business if you're sending a business grade invoice, etc. It's really a job, right? Whereas if your company generates money, independent of your personal involvement, the time you spend in the company, that is what I would refer to as a business, and certainly a transferable business, if it can truly succeed without you. And again, if we look at the statistics, and I'll try to put some framework around this, there are 30 million small businesses in the United States, 6 million of which have at least one employee set another 20. set another way 24 million, have no employees, they are effectively jobs, right. So even though the Small Business Administration likes to talk about, there are 30 million small businesses in United States 24 million of them are really not what I would refer to as a transferable business. It's more of a job or freelance side hustle. So we got 6 million out of the 6 million businesses. It's roughly, let me get the math, right, it's roughly 4%. But 1.2 million ever get to seven figures in revenue. So seven figures in revenue would be a million dollars of annual revenue, which in a service based business really equates to roughly 10 employees more often than not, right? So just 4% of companies ever a crest, kind of 10 employees. So it's a very challenging thing to go from a job to a business. It's these, you know, it's the biggest roadblock I think, for many, many owners in particular service based businesses.

Michele  18:58

Yeah, I think a lot of service based businesses created a job yeah, which is fine. And then they get to the point where they think, and I've talked to many, many like this in our industry, oh my goodness, I want to sell but then they don't really have what they need to sell it to your point of transferable business. What they have is perhaps some assets in the company, machinery books, you know, items that somebody else in that same industry could purchase, but they don't have, you know, a leadership turn, they don't have anybody else who can stand into that position. They don't have documented processes and procedures so that anybody else could even step in and replicate what they had without them there. And so at that point, their choice honestly is either turn off the lights and do a yard sale, or sell the assets and then turn off the lights when they're down to that last wire, right? I mean, there's really not much else you can do. It is not very easy, in my estimation to sit down on the day that you decide you want to sell and sell if you haven't prepared in advance to be able to do that.

John Warrillow  20:12

Yeah, no, absolutely. I mean, I think the only exception of what you describe, essentially just selling your assets, your hard assets would be, if you were to effectively merge in with a larger interior design organization and accept what's called an earn out. An earn out is where you maybe get a little bit of money upfront, but then over time, you get paid for your business based on the performance of your company as a division of an acquiring company. And it sounds like reasonable in theory, in practice, it's challenging, because you're now a minority owner, if even just an employee, in a company, you don't necessarily control anymore, the acquiring organization can change the rules, there's lots of leeway, they can make it very difficult for you to hit your earn out. I reminded of a woman I interviewed on Built to Sell radio named Jody Cook, I'm not sure if you heard that episode was maybe a couple months ago, now she built a service based business, they were in social media, marketing, digital marketing, if you want to build Instagram ads, and so forth, she started off and it was just her and she decided she wanted to build a business beyond her. So she kind of focused on one thing, and she got a whole system productized her service what felt like a tangible thing. But she's a very independent woman and had no interest in an earn out, right. Like she knew from the beginning, when she decided she wanted to sell I think they had about 10 or 12 employees, she knew she did not want an earn out. And so what she did was build out standard operating procedures, right, which are basically instructions you want your employees to follow. So you do SOP for you know, how you want your emails responded to and how you want to quote jobs and how you want to all the things get created and these kind of standard operating procedures. And I remember I said to Jody, man for you know, for creative, obviously very independent person that must have felt like, just like a jail sentence to spend three months doing all that work to create those standard operating procedures. And she responded back saying, Yeah, John, but if you had to go to jail, would you rather go to prison for three months or three years? That's exactly right. And her point was, you know, I could do it now for three months and get it all written. And then I can get out of my business without an earn out, or I can keep it all in my head and have to suffer through an earn out. And so she did three months. And she got out. She sold her business on the high end of what the multiple ranges in their industry. And she left two weeks after. No earn out.

Michele  22:50

Yeah, that's awesome.

John Warrillow  22:53

And amazing story. And again, in a service based business, we're obviously creativities at a premium this, you know, you usually don't exit a marketing services business or virtually any service business without some sort of earnout. But the big lesson she learned was the importance of these standard operating procedures to really help kind of make the business transferable, if that makes sense.

Michele  23:17

Yeah. So if somebody let's say, in her situation, in our situation, somebody is created, based on the definitions that we set up a few minutes ago, a job and they want to turn it into something that is sellable. So transferable type business, what are some of the things that they need to do outside of our planning stages? And what type of timeframe should they allow for that? Before we even get to the finding a broker or talking to anybody, what do they need to do to get themselves ready? What do they need to be able to show to make that sellable?

John Warrillow  23:53

Yeah, yeah, yeah, it's a great question. Let me answer the steps first, and then we can talk about timeline, I think it's probably in a service based business is two steps that you need to take the from kind of transitioning from a, a service or job, if you will, to a transferable company we've already talked about the first one being you picking one thing, deciding if you're going to do the 800 square foot condo or the $12 million mansion, and really figuring out what it is you were put on this planet to really do in a way of a specialization. The second step, I think, is productizing. And productizing is where you turn what sounds like a service. Like I'll bill you $100 an hour for my time, and we'll spend lots of time looking at things and you can pick to productizing developing a solution which is effectively like marketed like a thing, so you'd name it. So the five step interior design system for $12 million mansions as an example. You'd name each of the steps that you take in order to deliver that offering and the way I've used usually described as imagine you pull a bottle of tide off the shelf at Costco, right? You know, the, the logo always appears the exact same way, the name always appears the same way, if you turn it around the value proposition is always described in the same way, the steps that you take to use the product are always itemized. Even the cautions, right, I don't drink this stuff is listed on the back. And so what you want to do is make that service instead of I charge $100 an hour for my design time to we offer the $12 million dollar mansion escape plan or design concept or whatever. And it's got these six steps that we take everybody through. What that does is it makes your service look like a thing, independent of you in the absence of productizing. People are vetting you, they want to hear your referrals, they want to talk to your previous customers. And it gets to be this kludgy process where they're buying you and as long as you're there, they're happy. But if you want to walk away, they're not. And so you need to stop selling you and your time and your experience and your portfolio and move to a thing a productized offering. That's step two, step three, if you can, finding some form of recurring revenue, and recurring revenue is like a tail to what you do. Again, interior design is difficult because you only need oftentimes designed done once or once every 10 years you buy a new home and you want to get, what you've got to start thinking through is how do I create some form of a tail to what I do, right? Here's the secret. Most people when they try to transform a transactional business into a recurring one, they tried to kind of figure out what all their customers would value. And that's almost always a recipe for diluting your offering and kind of coming up with this sort of half baked, diluted sort of offering. What I think you want to do in contrast, is to first segment all of your customers. So the $800,000 condo where he had a square foot condo, and the ranch and the family home and imagine, you want to look at all the reasons people buy from you and segment your customers in that way. And then ask yourself at a segment level, what recurring revenue model would these people value. I'll give you an example. That is, again, outside of the interior design space, but I think it'll serve to, to illustrate, there's a company called H Bloom, and they wanted to get in the business of selling flowers. Flowers is a crappy you think interior design stuff, try selling flowers, you have to buy flowers, the moment the farmer cuts them from the stem, they start to die, right? Typical flower store in America throws out more than half of its flowers, because they're rotting in the bottom of the refrigerator. Right? So you've got perishable inventory, you have to do Mother's Day and Valentine's Days when people buy flowers, right? It's like 30 40% of all the flowers bought around those two days. So your left 363 days of the year trying to like stimulate demand. And you do that by getting some space, a retail space that costs twice as much as office space, right? So it's, it's a really tough way to make a living. And these two guys Brian Burkhart and Sanju Sanda came around and said, we're going to get in the business of selling flowers. We're going to do it on a recurring basis. Now, instead of what most people would do and say, well, like, how are we going to come up with a subscription model for flowers? Right? Well, there's, you know, Mother's Day and Valentine's Day and graduate. They didn't do that. They said, Who buys flowers, and they discovered that hotels buy flowers on a recurring basis, because they want to, if you go to the Ritz Carlton in downtown Buckhead, they want to present that really high end image, right, so there's a fresh cut bouquet of flowers. So they didn't create a subscription for all buyers of flowers. They just did it for hotels who want to create a four and five star image, while they built a wonderful company, the average lifetime value of an H bloom subscriber is more than $4,500 compared to the average transaction, and the flower store is around $50. So it totally changes the economics. If you think about it, if you knew that you were going to get $4,500 worth of revenue from a single client, like how does that change? How you market how you sell? Who does the marketing, who does the sell how much you're willing to invest in those things, if you knew that you were going to get that kind of revenue from one customer. And so again, I would be looking from an interior design perspective and saying, like, who buys interior design services? Sure, there are the wealthy people that have a $12 million mansion, but there's also probably contractors who need to bring in, you know, designers on a regular basis. There's probably developers who buy a plot of land and do 200 homes of the same type, who probably need on a recurring basis that need the help of an interior designer. So just think I'm not going to solve it right here on with you now, Michele, but I think it's That's the question that that you need answers is of all the people that buy my services who needs it on some sort of recurring cadence.

Michele  30:06

I love that. And it made me think about I was in my chiropractor's office, and I made a comment to them a couple of weeks ago. I'm like, those flowers are gorgeous, where, where did you get the flowers. And they said that there is a local company, they pay a subscription every month, they don't know what they're going to get. Because they do it seasonally based on the flowers that are available, that they promise, some type of a bouquet that looks You know, this tall, and that why that fits in this space. And they come out every month, and they open the back of the van and they pull out the rent, or every couple of weeks, I think is every two weeks, they come in with a whole new bouquet, they switch it out, they take care of everything, they don't touch it. And then I've seen office complexes that did the same thing with like plants where they would come in and water the plants and take care of the living plants. And you didn't have to do it. So they placed the plant and then they come and take care of it. So just eat you're right even thinking through that as a subscription recurring. I even think of things like on the on the eating the drapery workroom side, things like for X amount of money, we could twice a year send you updated pillows, right, or pillow covers to change out so that you have a different look in that space. And we said there's all kinds of just little things that you can do. It doesn't all have to be, I think an informational subscription model or recurring model. And oh, yeah, not at all. Yeah. And I think a lot in the interior design space think that the recurring model needs to be something informational, not necessarily a product, but it could absolutely be some type of a recurring product for something that they already buy, sell and do and that they've monetized, right? Yeah. And that leads into that whole lifetime value of the client. What are they going to pay you after the main event of the design? And then how long do they usually stay with you to do that type of, you know, refresh in their home before it's time to come in and do it again. So I love that way of thinking. Alright, so then how long do you think it would take if we were looking back at it? Because here's the other things I think we do also, and we haven't even hit on that this is on the product side, for sure. But we have to show that there's profitability, we need to be able to show that people are being paid and that we're able to make payroll like, and I know that sounds kind of silly, and maybe it's a given in some industries. But in super creative industries, they have a high tolerance for low pay, in some cases. Yeah, yeah. And you know, I'm not going to go buy a business from somebody, if the owner of that company wasn't getting paid, they may pay their employees awesome. But if that owner is not making any money, and there's not any additional profit in that company, that's not going to be one unless I'm going to retool it and change it out, or they've got something else that I want technology wise, or some secret sauce recipe, I'm not going to go in and buy that.

John Warrillow  33:00

Yeah, no, for sure. And I think it's also that is a symptom of a larger problem that you know, giving away your time for less than your worth is a symptom of this larger problem, which is, which is wanting to be appreciated, right, wanting to be loved and needed and, and acknowledged for what you do, makes people squeamish about charging for what they do, right? It's this, it's this way, like, love me, because I'm creative doesn't necessarily work when you're trying to build a company. And again, I don't say that lightly or an A meaning to be offensive. I just mean that I think we, as creative people try to derive too much of our self worth, from how much our clients like us name shadows, and the accolades that we get from the accolades and attaboys a lot of girls kind of that that fill us up, right? Whereas, whereas, you know, if you can get that same sense of self worth from watching your company, like you would, as a parent, watching your child start to succeed without you, I can tell you, it feels 10 times better when someone else is doing it and you know that that's going to perpetuate without your work for years into the future. So anyway, to go back to your question, which I think was around how long I would, I would I would draw it into sort of two or three little points I would make one, when you go to sell your business as you know this, Michele, you've helped lots of people do this, they're going to usually look at three years worth of past financial statements they're going to wait those so that your most recent year is the most heavily weighted, but they're also going to look to three years back so a three year run rate of making money is usually you know, like a starting point. Right? Right. it you know, the old How long does it take to build a valuable businesses like how long does it take to grow a tree, right, like, forever, you know, like, it's the kind of thing that never stops but you have to decide when you're ready to you know, it's grown to a point where you feel like you want to pass it on and again, you want to make sure there's probably Three years worth of healthy profits, ideally growing profits year over year. And then I think the process of selling once you kind of put your company on the market, so to speak, it's probably a year, you know, and it could be done shorter. In many cases it can be. But when you think about the actual marketing of your business, talking to potential buyers, there's usually a 60 or 90 day kind of due diligence process where people kind of vet the books and so forth. So I would budget, you know, a year and again, if you haven't productize created recurring revenue, you're probably on the back end, once you consummate a deal, you probably got a three year urn out after that. So long story short, you really should be thinking about this years in advance of actually wanting to be on the beach, right? Because you're right, you know, you're going to have to make some of these fairly kind of structural changes to make it less about you and more about a company, then you're going to have to see those changes come to fruition in a ways of profits, and be able to demonstrate that they are growing over time, and then sell and again, depending on how well you've done creating recurring revenue, you may not have to have a long earn out. But those are some of the things that some kind of timing benchmarks that I began about.

Michele  36:14

Yeah, and that kind of fits in with what I've been working with my clients, John, explain exactly what earnout is. So for some people, that might be a term that's brand new to them, they don't know what that means, or how that works, if you could just give some context around that,

John Warrillow  36:29

So, essentially, it's where you sell your business and usually get some money up front. But then there's a second payment or third, in the future, which is contingent on you hitting certain goals as a division of the acquiring company. So let's say interior company, a interior design company a is bought by interior design, Company B, they're going to say great, we'd like your work at your company, don't leave, just stay, continue to run your company. And if you grow your revenue from x to y, we'll give you another tranche of money for your company. If you fail to do that, however, there's no extra money. And so it's often used in a service business. Because, you know, as David Ogilvy said that, you know, the assets go up and down the elevator every night, right? Like, you want to retain the founders, the principals of the interior design firm, and therefore, you don't give them a huge check at closing day and they're going to run off in the sunset, you give them a little bit of money. And then you give them the bulk of their proceeds contingent on them hitting certain goals. And, and so for most owner selling, it's the worst possible outcome, right? Because you want to get I mean, first of all, if you started your own business, you're probably independent minded. You don't like having a boss, you certainly don't like having your destiny controlled by someone else. 

Michele  37:53

And don't want to boss from the company that you just created. 

John Warrillow  37:56

Yeah. And you know, I've heard it described is going to open heart surgery without the anesthetic like you, you get you sell your company, and the only reason someone's going to buy your company is if they think they can make it better. Well, how do they make it better? Well, they make changes, right? And they're going to basically really suffer through that. Yeah, they're going to rip up the policies, the procedures, the way you deal with clients, the way you price your jobs, to make it more profitable. And that's going to feel like you're having an appendectomy without anesthetic. 

Michele  38:28

So I sold a company a few years ago, and when we were going through the different process, and we were talking to different buyers that had come in to, they were they were pretty much coming in saying we're either going to compete against you, or we're going to buy you that was kind of the way that the conversation started. But all of the owners, we were all ready to sell. We had a partnership, we were ready to go. It was interesting, though, when we got down to the two main offers one was a cash payout. Because they just wanted it their way. And they were willing to pay or to keep a couple of us employed to be able to have a transition. But it was mostly like six months. I mean, it was like seriously a transition handoff, right? The other was nothing at closing, three year earn out. And this is what you'll get. Well, we were already, like tapped out at that point, like the thought of getting nothing at closing with the promise of three years if we went above what we were already doing, when we were already like at the end. We were like, no, so we definitely took the cash option. Yeah, even though we wish we could. It could have been a little bit smaller in the long run. But it allowed everybody to go off and now start their next thing and do their next game. And that's how I started my whole, you know, coaching business was because I had sold a company. I was no longer working there. So now I had the ability to go create and build something new. And I couldn't have done it. I would have been three years still trying to earn My way out of the company that I'd sold and there was just no way.

John Warrillow  40:04

Yeah, no, it's Yeah.

Michele  40:06

I mean, and it's not something that is a bad thing, right? So my husband works in software and he has worked for companies that have been bought out over and over and over. And they constantly have a two to three year earnings. So you're sitting there for two to three years to build to get paid for the final sale. And it's hard It is really hard because it's like you said it's almost like watching somebody come in and totally retool everything that you've done that you thought worked so well that got you to where you are and then you have to sit and support it and rah, rah, ree, and cheer right behind it. When every fiber of you is wanting to go get on that beach.

John Warrillow  40:44

Yeah, I'm reminded I did a an interview on Built to Sell radio now with a woman named Sherry Deutschmann. She sold a company called Letter Logic, which she started when she took an old door in her home and took it off the hinges and put it across to sawhorses to make a desk, she had no money, right and she started selling to hospitals to offer to do outsource their billing when you sending invoices as a hospital. And that's the kind of grassroots that she started up literally old door on sawhorses, she started, she built this company up and in a couple of years in she'd hired a couple of employees, junior level employees. And she decided she wanted to pay them a little bonus every month based on the profitability of her company, right profit sharing. And in the early days, it was like $12. And like $26, like it was very, very small potatoes, but it was thought the counts. And every month she bring her employees together. And it grew and grew. And she would give them the spiel about how much they were growing. And they she handed out these checks. And it became this like really important part of our culture. And she built this company up to 40 or so employees $7 million if I remember correctly in revenue, when she decided to sell and she decided to sell to a private equity group who asked her to stay on and keep some of her equity in the business similar to an earn out. It's a different legal structure, but there's some similarities to it. And couple weeks after they bought the company, they were looking over her financials, and they were looking down on line, you know, like 76, on the profit and loss statement and said, What is this employee variable compensation plan? And then Sherry kind of described it, you know, proudly, well, this is the profit sharing plan. And you know, that by this time, their checks were in some of these, like, kind of hourly workers, they were making, like $300 or $400 a month, like it was a big part of their compensation. And they said, well, we got to get rid of that. And she's like, no, no, you can't get rid of that. I mean, that's what makes our culture our culture and the way we you know, no, no, it's too rich for a company of your size, based on the metrics that we looked at in the benchmarks in Wall Street says, and they scrapped it. And Sherry left soon after, I interviewed her again, they were about 40 employees when she sold I think she said there were seven employees still remaining in the company. And she had no recourse right, because she'd sold a company and she was still sort of the asked to be there and watch as they dismantled it, using what I'm sure Wall Street analysts think is a really brilliant strategy about lowering costs, but without any of this sort of cultural context of what made her company special, you know, and right, and I think that's that same sort of thing happens in an earn out where some of the weird idiosyncrasies you have in your company that make you who you are, don't look don't look very smart on the outside, but if they knew you and knew why you do them, they would probably make all the sense in the world. Right? So again, earnouts are can be challenging for sure for founders so,

Michele  43:44

You know, we could probably do a whole podcast on on finding the right buyer and doing that matchup, I'm sure. And certainly everybody go listen to your podcast where you talk about that people can hear a lot on built a cell radio, but that example john really makes me think about, I know in a couple of the different cells that we've been through. I'm just personally with my husband and I looking to make sure that the culture of the company that we're selling to we like I pounded in my clients had to know your why know your mission, know your vision, know your values. We use that as kind of the litmus test the framework for decision making on which clients we work with which work we take on which employees we hire. But I think those also, it's not just for most, for most people that have built a business out of heart and soul that they love that truly love the work of the business, not just the raking in the cash. And you know, we're kind of separated from that. If they were to sell, they want to make certain that who they sell to has an understanding of the heart and the soul of the company and the people and the culture. I know that a couple of times in some of the buyout situations we've been involved in the selling company Took the deal that they took because of the way that their employees and their management were going to be compensated and cared for on the other side, but they couldn't be there to protect them. And you can see those situations they show up, which is the opposite of what you just described, you know, from the way that it was structured. And so there's a lot more that goes into the sell of a company, I believe, than just how much money are you willing to pay? Because that's one of the questions everybody says, What is my company worth? Yeah, it's what I, what is my company worth? And let's assume that it's truly a transferable business is really just worth what somebody is willing to pay, but you've got to look past the dollar to see what is it what's going to happen on the other side of that sale?

John Warrillow  45:47

Yeah, yeah. Again, know that in an urn out, you don't really have control of your own destiny, to an urn out is where you stick on for as you know, for a period of time. And while you may verbally have a commitment, you know, you know, I've had books or radio people who say, Yeah, I had I had a, I had an our iron clad agreement, I looked in the whites, the eyes of the buyer, and I knew that we had a deal on certain material facts like, are you going to move our location when my employees still get their bonus, all those things, only to have that executive fired, or the company that bought their company itself acquired and a new management team brought in that made none of the commandments, and had none of the kind of moral suasion. And so again, lots can happen. And in the sale of a company, and any kind of handshake deal, I think it can be eradicated fairly quickly, in for a lot of reasons beyond the control the people that make the initial agreement. So I would just make sure that you try to do some of the things we've talked about today, productizing, recurring revenue, making sure it's not dependent on you, so that you can get as much of your money upfront as you can, and therefore, and then they can earn out pieces a bit more like gravy, right? Like if you hit a great, but if you don't, you're okay, you feel satisfied with the deal. And I think that's only possible when you've, you've made some of these shifts from making kind of about you and a job effectively to more of a transferable company.

Michele  47:23

Okay, so, couple of last questions I want to ask you, when we are looking at buying and selling a business, and let's say that we are looking to sell a business that has revenues between let's say, one and $5 million, okay? Because that's what I get a fair amount of from the interior designers, I'm trying to sell this business service based one and 5 million, let's say it's transferable. Is that the type of business that absolutely needs to have a broker? Or needs to go through some type of a more legal or? Or is it a, here's another designer, or here's somebody that wants to buy what I have, like, you know, what is the structure of and I'm not talking about the final structure of legally how we do it, but who are the players that they need to involve so that they can make the best buy and sell agreement and decision so that everybody feels whole when it's done?

John Warrillow  48:23

Yeah, yeah. So look, there's a few people you want on your deal team, I think the quarterback is some sort of m&a professional or business broker. 

Michele  48:33

I mean, m&a is meant mergers and acquisitions,

John Warrillow  48:37

or a business broker, they effectively do the same thing they sell your company. I'm a big believer in using these people. I don't think most people would sell a home without a real estate agent, likely. And selling a business is like 100 times more complex. So I just would not do it without representation. It's not what I do for a living. So I don't say that in a self serving way. But I but I, but I do believe in what they do. I think they can act like a foil for you because it's very emotional process. And there can be times where you want to slam your fist on the table and say No way. They can be the one who absorbs that energy. Equally. They know how to negotiate, they know how to avoid, use lots of tactics, they just earned their keep. Look, there's two kinds. We've talked about Business Brokers and m&a professionals. It actually hides the third kind and I think a lot of your listeners would be better served by the third kind. And that is the person who sits in between those two individuals. So Business Brokers generally sell companies for less than a million dollars of sales, usually a million dollars of price. So think of your coffee shops and so forth. m&a professionals, mergers acquisition professional usually have a minimum cutoff of around $10 million of value. The space in between the business is generally one to 5 million in revenue is best served by what's called a quality Mainstreet business broker, and that is a sort of a quote unquote higher end business broker who's Slightly more sophisticated than the average broker understands that the kind of concept of a strategic acquire and can really represent what you've created in a unique way. So you think you're looking for somebody who has done deals that are sort of similar in size to your company, as opposed to just selling coffee shops or just selling like high tech companies, for hundreds of millions of dollars, you want someone what we refer to as a quality mainstream business broker, I think that's probably the best person to look for.

Michele  50:26

Okay, great. And this also, I think, is a good time to just remind everybody, it's always great to have a good relationship with your own attorney to have a good relationship with your own accountant to make sure that your bookkeeping is up to date to to have a look at your other board of directors, if you will, those other people that are supporting your firm, because they're all going to be called in at some point to provide something and you want to make sure that you are up to date things have been taken care of, and that you have those relationships built because I think it's a lot harder at that moment to run out and go find somebody to go look at everything versus the accountant who's been with you these last three years, and we've been building who knows and can pull the information quickly, and knows how it's structured and can explain how your finances are structured.

John Warrillow  51:13

Yeah, let me give a plug for your work. Because I think even before, like all the work leading up to an actual transaction, I think you play an incredibly important role as a business coach, because here's the thing, as a CEO, as a founder, as an owner, operator of a business, you don't have a boss. And that's a great thing. And it also can make you accountable to nobody. And I think all this stuff we're talking about is building value is what Stephen Covey talked about being the non urgent yet strategically important, right? And what we all are susceptible to doing is focusing on the shiny ball, right, the thing that's like the client who's angry, and then the project that needs a quote, and all the new stuff, right? And the stuff that sort of goes to the backburner? Are there really strategic projects that are never urgent, and trust me, building a valuable company will never be urgent, but it will be important. And I think having someone like you to hold people accountable to say, hold on a second, we met last month and you said you were going to use these three things. Why haven't you done it? Where are they important? Let's revisit the why etc. I think you'd like someone like you as an independent foil to hold people accountable is really important. Once you get into the transaction itself, like the actual selling process that I think you need a business broker, the other person you referenced, which I think is critical, is an attorney. But there's a there's a special kind of lawyer that you want. And that is a corporate finance attorney, someone who sells companies, it probably is not the same lawyer who incorporated your company. And that's a big a big trap is a lot of owners go back to the same kind of family lawyer who did the original incorporation, and said, Can you help me sell this company and they can do it? But it's like having a GP Do you know, brain surgery? That's not their specialization, you want somebody who specializes in corporate finance. And that's a different kind of lawyer.

Michele  53:06

Yes, it is. I've worked with another client of mine, and she's going through that process. And we had worked, we've worked together for a couple of years getting the business ready, so that she could step into that right for the things that we knew needed to be done. And I'm telling you that this is some smart people, like I mean, the numbers and the way that they're watching and structuring and asking and looking for scenarios that in the day to day, if we've never gone through that process, we wouldn't have thought about it. We wouldn't have thought about it with that business type or the structure of the sale and who's staying and who's going and what are they doing and can the business afford to pay for multiple people and you know, just all of it and then you got the whole financing piece of it in some cases and there's just so much to dig into but I have really just loved this conversation I could keep you on for six more hours and pick your brain about it. But I do want to remind everybody do you have it? Are these the two books do you have? Do you have any more books that I don't have that I need to know about? And I need to go get an Amazon?

John Warrillow  54:15

Yeah, it's a trilogy actually, you're missing one so Built to Sell was the first sellable business. The second one was called the Automatic Customer which is about recurring revenue. And how do you create recurring revenue? 

Michele  54:26

Yeah, you just hit my you just hit my Amazon. Oh, that's funny list now.

John Warrillow  54:30

Yeah. And the third one, the Art of Selling your Business is the latest. So together we try that we other it's a trilogy, if you will. Absolutely. I've probably sold quite as many as JK Rowling but we're doing our best. 

Michele  54:41

All right, that's good. And then tell everybody about a little bit about your podcast and kind of what you cover and talk about on there because it's really fascinating to listen to. 

John Warrillow  54:50

Yeah, Built to Sell radio. We interview a different entrepreneur every week and ask them about their exit and the idea is to help you punch above your weight class when you go to negotiate the sale of your company so we get into the tips and tricks and hacks and mistakes to avoid when selling your company.

Michele  55:04

Awesome. And, John, if our listeners want to know more about you and your company, what is the website? Where does it go? Check it out? Yeah,

John Warrillow  55:11

I would, I would, we've actually put together a page for your listeners. It's called Built to Sell.com/profit. And if you go there, there is a worksheet on the nine subscription models, you can think about how your interior design company might convert itself into subscription model. We've got the eight key drivers, a company value video series, and there's actually a part of selling your business workbook that is an accompaniment to the actual physical book, but the digital assets are all free. So it's just BuilttoSell.com/profit.

Michele  55:41

Awesome. Well, thank you so much for your time today and your insight, and I'd have to have you come back. I've got to go get the second book. We'll have to come back and talk about that now.

John Warrillow  55:51

It sounds great. I'd love to do it. 

Michele  55:52

Thank you so much. 

John Warrillow  55:53

Thanks for sure. 

Michele  55:54

I really love this conversation with John, and I have totally enjoyed his books. Make sure to tune into his podcast if the idea of selling your business is interesting at all. One of my greatest joys is to work with my clients to pair them to have a business to sell, if that's what they want, from identifying what's most important, making a strategic plan to implement and then putting themselves in a great position to take that next step. If you're interested in learning more about my Aim With Intent program, check out the masterclass on my website at ScarletThreadConsulting.com and look under the Resources tab. Choose to build a profitable business because it doesn't happen by accident. Profit is a Choice is proud to be part of the designnetwork.org where you can discover more design media reaching creative listeners. Thanks for listening, and stay creative and business minded.