The Difference Between Revenue and Business Value
with John Warrillow
Starting with the end in mind, entrepreneurs and business people aim to create profitable companies and services while continuing to grow. That means even after they reach their goals of success, they’ve got a plan to keep their business sustainable. This can mean selling the company, passing the job on, or simply evolving.
John Warrillow, the creator of the Value Builder System and best-selling author, joins us on this episode of Making Bank to discuss the importance of making sure that you have a valuable business. Value doesn’t just depend on your brand, your numbers, or how big of a company you have. There are layers to a business that make them successful in the long run, including making sure that they are sellable and have recurring revenue.
Determining Company Worth
John first got into entrepreneurship not exactly by partaking in it, but rather he was interviewing entrepreneurs for a radio show in Canada. During this time, he was interviewing professionals about their businesses. Eventually, he started his couple of businesses and helping other companies out with his connection through the radio show.
While he was first working in business, he built up a company that referenced researching and marketing tactics that allowed clients to market towards newer audiences. Big-name companies, like Microsoft, Wells Fargo, etc., were on the client list. Because he had brands that everyone knew, John assumed that the value of his company was worth a lot of money. When he met with someone to talk about the actual worth and how much his company would sell for, John was surprised.
John learned that his company was essentially worthless. “I was just devastated, because I walked into that room, that meeting, thinking I had this goldmine and what he told was, you know, I had nothing. There was nothing to sell.” John realized that to create a successful business, you have to hire other people, start selling, and creating recurring revenue. Looking at his business, he realized that he didn’t have anything sustainable for people to buy; he had a service that relied heavily on the work that he did himself.
Working with his advisors, John attempted to bring value to his company so that it could be sold in the future. One of the best pieces of advice he was given while trying to make his business profitable was to never forget what an acquirer’s buying. They aren’t buying a brand, they’re not buying a location, they’re not buying a name, and they’re not buying a client list. They are buying the rights to your future stream of profit.
“So, for [the acquirers], if your business needs you when you leave there, clearly there’s not a future stream of profits and therefore no value,” John says, reflecting on how he learned that guaranteeing future profits and recurring revenue is the best way to build company value. He learned quickly that successful businesses run on a structure that allows them to be self-sufficient without the person who is running the business being hands-on in everything.
The Value Of Revenue
So…how can you determine the value of your business? John says there is a disservice when referring to revenue as vanity – as how much money they make. People boast about their salary, or how much they get paid, or how much they sell in a year. Sometimes, it might even be the number of employees. Either way, those things are great. But focusing on them can be detrimental.
“I think the challenge when talking about top-line revenue is that it often undermines the value of a company,” John says that sometimes, 2 million dollar companies are worth more than the 15 million dollar business when it comes to recurring revenue and ensuring that they are a sustainable business with a future.
Growth rates are a huge component of how much your business is going to be worth. Is the current way that you’re making a profit going to be sustainable in the future? Future profit is going to factor into how much your company is worth at the moment. This means that the estimates you expect to make need to be accurate and precise, and you need to have a strategy to follow through with your goals.
Another driving factor towards business value is how well you’ve pulled yourself out of the operations of your company. “Acquirers are going to pay more for a business where the owner is not doing much,” John says that people look for businesses that aren’t dependent on the main guy running it. Businesses need to be self-sufficient and have a sort of process implemented before being sold so that the transition from management, or people, runs as smooth as possible.