Built to Sell

A summary of John Warrillow’s ‘novel’ about creating a business that can thrive without you

A sound business built with a sale in mind — even if that option is never used — has much more value, carries significantly lower risk, and can be much more personally enjoyable to run, according to John Warrillow.

The author uses two different approaches in Built to Sell to make this point. The first is the fictional story of Alex Stapleton, design agency owner, his serial entrepreneur mentor Ted Gordon, and their quest to sell Alex’s business. The second section replays the principles underlying Alex’s story and Ted’s advice, spliced with Warrillow’s personal experience from exiting four companies of his own.

I don’t have time to read it — what are the main characteristics of a business that’s Built to Sell?

1. It has a deep, focused specialism: A team of experts — rather than generalists — can be assembled around this chosen focus area. As the business learns to excel in its field, it stands out from the competition, and can command prices that are based on the value it provides rather than its delivery costs. Once customers have clarity about what the offering is — and isn’t (saying ‘no’ to work outside the specialism is crucial) — they are likely to generate referrals. This specialism must be ‘teachable’, ‘valuable’ and ‘repeatable’. Costs related to aspects of the business not within the new specialist focus can be cut.

---

2. It has a standardised approach: A clear and simple process for articulating how the company delivers value in a repeatable, consistent way has multiple advantages. It gives confidence and clarity to customers, allows employees to understand how their work contributes to the bigger picture, allows new team members to be trained effectively, and allows ongoing improvements to be made.

---

3. Its business model is built around recurring, advance revenues from a large number of customers: The deep specialism, and the standardised approach, are combined together into a recurring product offering that customers will need on a regular basis. These have a significantly lower ‘cost of sale’; retaining clients is less resource intensive than acquiring new ones. Products can also be (partly or fully) charged for in advance, creating a positive cash-flow cycle. Finally, no one customer should make up more than 10–15% of revenue, to avoid risky dependence on them.

---

4. It has a highly tuned sales engine: A sales process which measures its prospect close rate can extrapolate how many pipeline prospects will result in sales, allowing predictability of revenue, as well as enabling the estimation of the size of market opportunity. Having more than one rep drives competition, and demonstrates that the model is scalable, rather than reliant on one good sales person. These reps should be people who are good at selling products, with the ability to fit the business’ product to a customer’s need, rather than a tendency to agree to tailor the offering to what clients want.

---

5. It has a strong, empowered, top team: A management team which runs the business is needed, rather than relying on the owner. These people are rewarded for their personal performance and loyalty via a long term incentive plan, rather than stock options (which add complexity, and have limited value unless there is a market for the shares). A ‘stay bonus’ can be paid into this plan to retain the management in the event of the business being sold. Instead of selling or delivering the product, the owner should ‘selling the company’ or working toward it by building relationships with potential future strategic buyers (e.g. partners, suppliers, competitors in other markets).

---

6. It uses the right advisors: If and when the business is to be sold, the right advisor will have the ability and incentive to introduce the right level of competitive tension into any deal. As such, as well as looking for evidence of a deep understanding of the relevant industries, Warrillow recommends using an advisor for whom the business is neither its largest or smallest client. This adviser should be armed with a ‘3 year plan’ which takes into consideration the growth potential of the business if acquired — and invested in — by a strategic buyer. Under the pressure of due diligence and negotiations, it’s important to ensure BAU performance doesn’t drop, undermining the projections the deal price is based on.

---

What kind of business models work best with this concept? There’s a list of the various types of recurring revenue models at the start of the ‘Implementation guide’:

1. Consumables e.g. toothpaste — being able to measure repurchase rate is key here in order to prove loyalty;

2. Sunk money consumables e.g. razor blades — where a customer has ‘invested’ in your platform, and buys the consumables to match;

3. Renewable subscriptions e.g. magazines — these lock down the repurchase revenue for a period into the future (where renewal can be automated, and customers must ‘opt-out’, the model increases in value);

4. Sunk money renewal subscriptions e.g. Bloomberg terminals — these combine the ‘investment’ in a platform that makes the customer ‘sticky’, with the longer term revenue stream of a subscription; and

5. Contracts e.g. mobile phones — where the platform is ‘given away’ in return for signing up to a contractually obliged revenue payment over a number of years.

What other interesting points does the author make?

• Warrillow is NOT keen on ‘earnouts’, describing them as ‘giving acquirers most of the reward, and making the acquired owner take on most of the risks, while losing control and endangering significant amounts of value;’

• Partly because of this, a lot of emphasis is placed on becoming a product business, rather than a professional services firm (where the IP is largely in the heads of the employees, and ‘walks out the door each evening’). An example is his suggestion of talking about ‘customers’ rather than ‘clients’, and ‘contracts’ rather than ‘engagements’;

• The value that could be realised from a sale should be put in the context of personal life goals, rather than extracting the maximising the pure financial returns. Alex, the main character of the ‘novel’, gets to the point where he is weighing the risks and advantages of holding the business longer. He realises that although waiting might extract a more lucrative financial reward, he doesn’t need that cash for what he really wants in life, and doesn’t want to take the risk of a market crash or performance downturn in the meantime;

• Creating a ‘competitive moat’ can increase the value of the business, protecting it against employee defection, by — for example — owning the annual ranking study, awards program, industry event or benchmark relevant for your category;

• In terms of accounting, Built to Sell recommends having two years’ statements reflecting a standardised offering model before attempting to sell a business, and to ignore the P&L statement in a year where a switch to a standardised offering model has been made (provided your cash-flow is strong);

Worth a read? The ‘novel’ that makes up the first half of Built to Sell is hardly a gripping thriller, but don’t be put off. There are some unrealistic details that date it ($10,000 for a logo anyone?), and the myth it perpetuates — via the perfect life Ted leads as the result of his wealth — is also a bit grating. However, these gripes really shouldn’t don’t matter — Built to Sell is short and practical; it’s well worth the small investment of your time, particularly if these concepts are new to you.