How to Punch Above Your Weight in a Negotiation to Sell Your Business with John Warrillow: An EOFire Classic from 2021

0:01Boom! Shake the room, Fire Nation! JLD here and welcome to Entrepreneurs on Fire! Brought to you by the HubSpot podcast network, the audio destination for business professionals with great shows like Business Made Simple. Today, we're pulling a timeless EO Fire episode from the archives, so the giveaway may not be active, and we'll be breaking down how to punch above your weight in a negotiation to sell your business. To drop these value bombs, I brought John Warlow into EO Fire Studios. John is the founder of the Value Builder System, a simple software for building the value of a company used by thousands of businesses worldwide.

0:38And today at Fire Nation, we'll talk about why it's okay to sell. You're not a bad person for wanting to sell the company. For finding the right buyer or acquirer, the word partnership means something different. And the right time to sell is when somebody's ready to buy. When you get an offer, you're in a unique position, you're being offered a large amount of money. Negotiate. And Fire Nation, there's so much more. And a big thank you for sponsoring today's episode goes to John and our sponsors. Business Made Simple, hosted by Donald Miller, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals.

1:11Business Made Simple takes the mystery out of growing your business. Join my friend, Donald Miller, each week as he shares value bombs on topics like the secret to making better marketing decisions. Listen to Business Made Simple wherever you get your podcasts. Belay has spent over a decade helping thousands of leaders increase efficiency and productivity by leveraging flexible staffing solutions. Download Belay's delegation guide and learn six specific things that busy leaders must start delegating today. Text FIRE, that's F-I-R-E, to 55123 to download the guide and get started. John, say what's up to FIRE Nation and what is something that you believe about becoming successful that most people disagree with?

1:57What's up, JLD? I get a lot of pushback on the name Built to Sell, the book I wrote. And I think a lot of people think about Building to Last, which is Jim Collins' book, which is a fantastic book. I just think as entrepreneurs, we get way past our sell-by date. And for a lot of people, they feel like there is this requirement that they build to last, that they build some sort of legacy for themselves, that they build a multi-generational business, that they pass it on to their kids. And for me, that's just an athema. That's not what I think makes a lot of sense. I think we get in, we add some value, and then we should move on and let someone else take a turn running a company.

2:39Well, as we talked about in the pre-interview and as I was kind of teasing with you, Fire Nation, during the introduction, we're gonna be talking about a lot of really cool stuff today that John's an expert on, like knowing the right time to sell, knowing the biggest mistake that people make and owners make when it's time to sell, what reeking of desperation will do, if you're trying to sell and so much more. But I want to start off by saying this. I mean, let's just call a spade a spade. You know, it's 2021 and a lot of businesses were hit hard during COVID. So what specific selling trends do you predict going forward in our new world?

3:12Two things. Number one, more people are selling sooner. They are moving up their sell by date as a result of the pandemic. We do this thing called value builder where we have people come in and do an assessment. We've looked at the data now. Prior to the announcement of COVID, there were about 4 ,000 people that completed the questionnaire prior to the eight months prior, and then the eight months during COVID. Two things really popped. The first, again, is that people have moved up their sale by date by 20%. The other one that I think is kind of cool is that the appetite to pass their business down to their kids has dropped through the floor.

3:50And now we are seeing a much bigger influx of people who want to sell to a third party. And what's really interesting, I think right now, is that private equity is being absolutely boosted by low interest rates. One of the things this pandemic has done is lower interest rates, right? We're at emergency level interest rates. Private equity groups who are the buyers of a lot of entrepreneurial businesses, they use debt in order to make their transactions, make their financing happen. And so that's just like accelerant onto this entire M &A marketplace. I just think it's going to be a very, very interesting 2021.

4:28Now, what about SPACs? I'm hearing a lot about SPACs, you know, otherwise known as SPACs just kind of coming up. It's just like this big ball of money that everybody, you know, not everybody, but you know, billionaires are dumping money into, and they're going around just scooping up businesses for this and businesses for that. How is that having an impact? Again, there's a ton of money that is chasing a lot of small deals right now. Interest rates are one. You're also got a lot of people that are a little worried about the stock market, right? So we're seeing massive valuations for a lot of companies.

4:59Tesla's gone crazy. You know, there's a huge amount of wealth in the public markets that is getting nervous, right? And that's got to go somewhere. And so private businesses are a place that a lot of people go to pick up value. And again, you've got a lot of business owners who are distressed right now. And I mean, I'm not in any way suggesting that you, and this is a good time to be a vulture. Our whole business is predicated on the idea that we help companies improve their value, not get taken advantage of. But I think we are, unless we can make sure we kind of know the secrets of buyers and how they try to kind of pull the wool over our eyes, I think we are susceptible to that unless we can sort of have a bit of a guidebook on how to go about punching back when these acquirers try to prey on what is right now, for a lot of people, sort of a weakened business, in particular service-based companies.

5:58Let's talk specifically about selling your business. And not yours, John, but I'm talking about you, Fire Nation, who are listening, like selling your business. How do business owners know when it's the right time to sell? I mean, the short answer, and I don't mean to be glib about this, but the short answer is when someone's buying, right? So when you get an offer, you've got a unique position. You're now in the catbird seat, right? You've been offered an amount of money for your business. And at that point, you're not groveling going hand, you know, hat in hand to a potential acquirer. You've been approached.

6:35And so that's an opportunity to take very seriously, I think. And there's a way that you can approach that that doesn't overplay your hand. I had a chance on my podcast to interview a guy named Rand Fishkin. Have you had Rand on the show, John? Multiple times. I followed that guy's journey. He's actually one of my first guests back in the day. And man, that book that he released not too long ago was a fascinating look. Yeah, Lost and Founder. That was such a cool title too, yeah. Such a good book. Yeah, I'd recommend anyone pick it up. Rand is a great guy. he told me the story of selling SEO Moz or more accurately not selling SEO Moz.

7:11So he built it up to$5 million of ARR, annual recurring revenue, growing like stink, doubling every year, gets an offer from Brian Halligan, the guy who started HubSpot. And Rand in his mind was like, you know, we're growing like crazy. We're thinking maybe we can get to 10 next year. I've heard that, you know, companies like a SaaS business like mine should sell it like four times top line revenue. So I think it's worth 40. And Halligan says, I'll give you 25 of cash and HubSpot stock for a$5 million business. So that's a pretty good outcome. And Rand says, yeah, hums and haws a little bit and says no.

7:50Takes venture capital money instead, goes and invests in a lot of different products. Unfortunately, it doesn't work out. The business starts to spiral, sucks up cash, the VCs come in and remove Rand. He kind of spirals into a, you know, a sense of depression. And, and ultimately the VCs use pref shares, preferred shares to buy into Moz, which they are guaranteed a return on before Rand will get anything. And as a result, I asked Rand, I said, like, what's, what do you think, you know, your share in Moz is worth these days? And he says, it's probably worth nothing. And I said, well, like, what's your net worth?

8:29He said, I've got 800 grand, most of which I'm going to share or spend on my grandparents for elder care. And I said, what would that offer of Halligan's be worth now, given the appreciation in HubSpot stock? And he said it would be worth close to$200 million. I mean, be still my heart. So anyway, long story short, when a guy like Brian Halligan comes up to you and says, look, I want to buy your business. Take them seriously. You're in a unique position to negotiate, yet you don't want to overplay your hand or kind of ride it over the top, as they say in an M &A parlance. Yeah. And I remember when I actually interviewed Rand about Lost and Founder, which wasn't too long ago.

9:11So Fire Nation, go back and just search in the EOfire.com search bar, Rand Fishkin, even just R-A-N-D, Rand Work. And one thing that he said that really just kind of like broke my heart too was like everybody thought like his friends, his family, everybody thought that he was a super rich guy. So they kept going to him like, oh my God, like, can you hit me up with this? Hit me up with that. He's just like, I, I literally am like the poorest person that I know by like a long shot. And it was like, you know, it's so brutal because he, you know, working so hard, built this from the ground up and doing all these things.

9:43And man, so you talked about a huge mistake that Rand made. I mean, passing on that 25 million that now would be worth over$200 million. Of course, a lot of you would have held onto the stock that long. Maybe you would have had to actually, because it might have been a holding period or whatever. So you might have been forced to ride that puppy all the way to$200 million, which would have been amazing. But what's the biggest, the number one biggest mistake, John, that you see owners make when it comes time to actually sell? This is such a great question. I mean, so many. I think one that comes to mind is answering the question, what's your number?

10:16A lot of buyers are going to want to pull out that out of you. It's said that he who says his number first or she loses, right? And so a lot of buyers, acquirers will say, they'll put their arm around you figuratively and say, JLD, what do you want for your company? What do you think is fair? And it sounds so innocuous to answer, right? And you feel like being a transparent person. I have a number. You do? Yeah. Well, you said we should all have a number, right? So I have a number. I don't think it's a realistic number, but it's a number and I have it and it's my number. And it's what it would take.

10:51And this is maybe a wrong way to look at it, John, but this is what it would take for me to walk away from the autonomy that I have with Entrepreneurs on Fire, you know, from, you know, the multiple millions of dollars that this business produces, you know, in a very lifestyle freedom type of way. So I do have a number. I don't think it's realistic. Well, I don't think, I just, I'm just like, I'm not saying it's realistic, but it's$50 million. Like that's my number. Nice. Take or leave it, buddy. What do you say? I think it's great. I think it's great. I wouldn't counsel you to share that with too many people, especially if somebody comes up and say, okay, I want to buy your company.

11:27Oh, you would say$100 million? No, I'm just, I'm saying that. Okay, my new number is$100 million. Okay, good, good. I'll give you an example. So, okay, there's a guy named, have you ever had Chris Jones on the show? Ah, no. Started Pepper Jam? No, no. I interviewed him for the book. he tells me the story of when he gets approached by Michael Rubin. Michael Rubin, of course, being the founder of GSI, sold it to PayPal. Chris Jones is the founder of this little company. They do affiliate marketing called Pepper Jam. So Michael Rubin calls him up and says, hey, why don't you come down and meet with me?

12:00I'm kind of interested in what you're doing at Pepper Jam. Chris Jones says, this is awesome. I'm going to meet with this luminary in the tech world. So Chris Jones walks in. Michael Rubin kind of rocks up. And instead of being on his own, Ruben is flanked by his chief counsel and his CFO. And without even like exchanging pleasantries with Chris, Ruben says to Chris, all right, what do you want for Pepper Jam? And Chris kind of was on his back foot. He's like, I was expecting kind of like a nice little conversation. And here you are asking my number. And Ruben repeated. He's like, what do you want for Pepper Jam?

12:34And Chris blurted out his number. and Ruben, without acknowledging Chris, looked at his chief counsel and his CFO and said, all right, I think we can get a deal done. And what he was communicating to his lieutenants was, don't pay a penny more than the number Jones just uttered. And in fact, make it your job to get it for less. And that's the problem with answering that question. It's such an innocuous question. It sounds reasonable to answer, but by asking it, answering it, excuse me, you're putting a ceiling onto which you will never sell your business beyond and you don't know what they're willing to pay.

13:11So look, I just think it's one of those questions that often is a trap that we fall into. And it's best to just let the other side come up with the value in their own mind. So your kind of advice and sage advice to me would be if somebody ever approached me and said, hey, what's your number? We're acquiring. For instance, podcasting is on fire right now. I mean, Amazon just bought this podcast production company, Wondery, who by the way is not making any money. They bought him for$300 million. Um, you know, Gimlet, uh, was bought by Spotify a couple of years ago for$233 million. Joe Rogan was, uh, you know, went exclusive with Spotify and they gave him nine figures.

13:46This is one podcast. They gave him nine figures plus. I mean, they're like, Oh, does that mean a hundred million? You know? And they're like, he's like, no, like it's more than that. So I mean, like we're talking, you know, real deep money into that and it's insane. So like, what is kind of like your like advice for something like that? Is it just make them say the number first? They have to come to you with something before you even put a number out there? Yeah, you're just going to respond by saying, hey, I'm a reasonable guy. I built a great business that I'm super proud of and super excited to continue running forever.

14:17But I'm a reasonable person and I'll look at any reasonable offer put in front of me. And that's it. And there's two documents that you can ask for. One is an IOI and the other is an LOI. An LOI is a much more formal document. You're not going to get that with an informal conversation. It's going to be after many months of negotiation, you're going to get a letter of intent, which is a two-page, three-page document that spells out in great detail what their proposal is for buying your business. It'll go into the number, the working capital, due diligence, et cetera. Lots of detail. There's another document, though, IOI, Indication of Interest.

14:55It's a less formal document. It's usually a couple of pages and it often will use a multiple range instead of an absolute number. They'll say, look, yeah, we're thinking somewhere in the four to six times EBITDA range. So it'll be a range. And you can ask them for an IOI. You can say, look, I'm a reasonable guy. I built a great business. It's awesome, but I'm reasonable. And so let me know what you have in mind. If you want to throw together an IOI, I'd be happy to review it. and that's a way for them to sort of put a stake in the ground and say, we're thinking two times top line or three times EBITDA or whatever they're thinking.

15:31And you can then react to that. A lot of lessons here, Fire Nation, a lot of interesting things on how to just, you know, take that first interaction, which can be a critical interaction, which we're going to talk about later. One of the last things we're going to talk about is like looking desperate. So you want to stay tuned for that and so much more when we get back from thanking our sponsors. Are you ready to close 2023 out strong by surpassing your revenue targets? Q4 is the time to make it happen. But in order to do that, you need the right tools to help you fill your pipeline, nurture prospects, and close deals.

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18:55So John, we're back and I want to talk right now about gaining leverage. I mean, leverage is something obviously you would want to have. So what is the absolute best way to gain leverage when you're negotiating with an industry giant? And like I said, I mean, I'm just, I would love to have been in that room and like, Wondery was talking about getting acquired by Amazon and Gimlet by Spotify and Joe Rogan having the back and forth. I mean, they must have gained leverage because I mean, they got big, big dollars and who knows, but what's the best way? The best way is to have multiple bidders at the table before you sign an LOI.

19:25So we talked about LOI before the break. This is the letter of intent which gives and spells out the acquirer's proposition to buy your business. The letter of intent includes something called a no-shop clause, which means that you have to give up negotiating with all of the other people that are interested in buying your company and basically get engaged to one acquirer. And that's the point at which leverage that you have as a seller goes heavily away from you and goes heavily into the hands of the buyer. and they then will have lots more leverage. So what you want to do is make sure you retain all your leverage leading up to that point by getting multiple bidders to the table.

20:07You want as many people kind of competing over your business simultaneously, which gives you two things. Number one, it makes sure you ratchet up the value of your company, but it also ensures that that acquirer is going to close, basically commit on their and deliver on their commitments they make in their LOI. because there's a dirty little secret in the world of entrepreneurship, which is something called retrading, where the acquirer makes an LOI, a letter of intent. They say they're going to pay X for your business. And then later you find out that they're only willing to pay X minus 20 % because they've manufactured reasons that your business is less valuable than they thought it was.

20:50That only happens when you're the only bit where you've only got one bidder, but when you've got multiple bidders and you've demonstrated that to an acquirer, they're much less likely to retrade. So that's a really important subtlety is to make sure you've got multiple bidders and that the other side knows that. I've talked about desperation a few times so far in this interview, mostly as a tease, because if you look desperate, you've already lost to a certain degree. So how can owners let potential buyers know that they're interested in selling? They're like, hey, like, I'd be interested in talking about this, but without looking and seeming desperate.

21:26Yeah, because if you rock up to an acquirer and say, Please buy me. Hey, would you like to buy me? It's like the grade eight kid who goes up to the prettiest girl to dance and says, Hey, would you like to dance? It's just pathetic. And it feels really defensive and you're unlikely to get the result that you're looking for. So look, one of the words I love is partnership. because I think for the right buyer and the right acquirer, the word partnership means something different. If you say, I'd love to explore some sort of strategic partnership together, that's going to telegraph to the other side that there's probably more to this than just a simple partnership.

22:08There's probably the opportunity to talk about acquisition, but it also at the same time gives you deniability, right? Plausible deniability. Hey, I just was suggesting a partnership and you guys are coming to me with this acquisition conversation. It reminds me, I interviewed a woman named Stephanie Breedlove. Man, she's so fantastic. She built a business, payroll business, doing payroll for parents who have nannies. She built it up to$9 million in revenue, 10 ,000 customers. And she found Care.com out there in the marketplace, and she thought these guys would be perfect acquirers. Why? Because Care.com is like the Angie's list of care providers, right?

22:45Like babysitter, plug it in, you get a five-star rating, you feel confident. they've got 7 million parents who are subscribers to care.com most of which need to pay a nanny and so breed love sitting there saying holy crap man if i can just get them to pay attention to me they've got 7 million subscribers if 1 of them buy my payroll service that's like 70 000 customers that's like a business seven times my size so what she does is forms a marketing partnership at a very low level at care, like a marketing manager level. But just that existing of the marketing partnerships where Breedlove is just supplying a little bit of content to care.com, it opened the door.

23:28The marketing manager loved what Stephanie was providing. She used that relationship and equity to get an introduction to the CEO of care.com. One thing leads to another. Care.com acquires Breedlove's business for a cool$54 million. John, this is a$9 million company. $9 million revenue business for$54 million. It starts with the word P, partnership. P is for partnership, Fire Nation. Wow, I love that story. So let's talk about just an overall concept that you want Fire Nation to really walk away with from what we talked about. I mean, we talked about a lot of awesome things. The biggest mistake, leverage, desperation, the right time to sell.

24:09What's the big takeaway you want Fire Nation to get from all this conversation. It's okay to sell. You're not a douchebag for wanting to sell your company. I got on a podcast a few years ago, and this is just promoting my book, Built to Sell. And the guy gets on his first line, no word of a lie. His first line is, oh, Warlow, yeah, you're the douche bag who wrote Built to Sell. And I'm like, what are you doing? That's your opening line? What are you talking about? And he went on to say, yeah, aren't we all supposed to build to last? You're talking about flipping businesses and, and, and I was on my defensive, I was on my back foot and I thought, man, I did a crappy job rebutting his criticism.