In this episode we are joined by Richard Perry, an ActionCoach. Make sure to tune in if you want to hear the 8 key principles of business, and how to turn a business into an asset that works without you to generate predictable income.
Every good business must be capable of being sold and in this episode, we look at 8 key factors in helping you achieve that. So whether you plan to pass your business on to your kids, or whether you pass it on to your employees, you still need good principles in place. This episode will show you how to turn your business into an asset that works without you to generate predictable, recurring income.
Featured Guest: Richard Perry [ActionCoach]
> Take the Test! Find out what your Value Builder score is here: https://wealthbuilders.co.uk/valuebuilder
RESOURCES MENTIONED IN THIS EPISODE:
> The Automatic Customer: Creating a Subscription Business in Any Industry - John Warrillow [Book]
> Built to Sell: Turn Your Business Into One You Can Sell - John Warrillow [Book]
The E-Myth: Why most small businesses don’t work and what to do about it - Michael Gerber [Book]
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The purpose of wealth talk is to educate, inform and hopefully entertain you on the subject of building your wealth. Wealth builders recommends you should always take independent financial tax or legal advice before making any decisions around your finances.
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You're welcome to Episode 38 of wealth taught my question Rodwell membership director for wealth builders, and I'm joined by the founder, Mr. Kevin Whelan. Hi, Kevin. Hello, Chris. Good evening to you. I think we've got a shout out this evening. And we Yes, yes. We had a wonderful message through the wealth builders website this week from Rob ryles. So, thank you so much, Rob. We really appreciate you listening all the way over in Bangladesh. It's great to hear that the message is spreading across the world, Kevin? Well, these football coaches knew so I think he's British through and through. But good to know, though, that more and more people are reaching out in fact, Southeast Asia, somebody very famous in Southeast Asia.
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reached out this week, didn't they and want to be featured on our podcasts and more of that one in due course. Yeah, it's really wonderful. So we appreciate all of the reviews the time that you are taking to let us know that you're enjoying listening to self taught, we really, really do appreciate it. And if you haven't yet left a review and you'd like to do so, then please feel free to head on over to wealth builders.co.uk forward slash wealth talk or pop a quick message and say hello, in iTunes. Okay, so Kevin, we are continuing the theme of business this week. And we of course, spoke to john warrillow. Last week that was very enjoyable. Indeed, john is just a great guy, as I mentioned to you, and thing to mention about john is even though you can tell by the accent that he's while he's Canadian, which is different to American accent, for those who can pick it up. But the ideas and everything he explores in his books on the subject of business are universal principles. And that's what we want to make
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Make sure that nobody thinks it's not applicable to the UK. It's absolutely applicable to the UK. It is now john fold one of his businesses. And off the back of that he wrote the book Built to Sell that was around 2012. And that then led to the creation of the value builder system, which john briefly touched on in last week's interview. But what is the value builder system? Exactly, Kevin? Well, you know, john has a view that most businesses, especially coming from the fact that when he was thinking about selling his stems from the fact that you know, most people sell one business in the lifetime, but those who are acquiring those businesses are very, very seasoned in that acquisition. And consequently, he feels and I think he's true, that the odds, for the most part are stacked up against those who want to sell their business. So john wanted to level the playing field a little and say, well look, instead of just kind of turning up and saying, I want to sell my
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business, here's a set of metrics, here's a foundational set of principles that you could use to help increase the value of your business. And understand then what's in the mind of the acquirer or potential acquirer. Now that turns the tables, but doesn't it because it allows you to think, well, who is likely to be interested in buying my business. Now, it doesn't mean you need to sell a business because he makes the point that every good business must be capable of being sold. So whether you pass it on to your kids, whether you pass it on to your employees, you still need good principles in place for a good business to be there. The thing I would say though, is only selling a business get you a premium price. Because an acquirer if you understand exactly how to position the sale of your business will pay the premium, whereas your family and your employees simply never will. So just an interesting point.
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So he comes from a viewpoint. And he created a eight value builder drivers, which if you isolate them all, I'm not going to go into all of them. I think we've got Richard, who's going to talk a little bit more about that in a few minutes, right? Yes, that's right. So Richard Perry is an action coach in the UK, and action coach in the UK, or a, probably the largest supplier of coaching expertise to businesses. And they often will use the value builder metrics, and many of them are trained in the metrics, essentially, they say a number of things, you know, there are eight of them. And rather than go into eight, there's a couple, which really focus on finances, you'd expect because we know all businesses need to be valued at this some point in terms of you know, what's the finances not a stable and solid and is the business actually growing? Those are kind of really quite important things, generally speaking, and you may recall that I mentioned that most businesses have value
Unknown Speaker 5:00
In a previous podcast on something called EBIT da, which is earnings before insurance, tax and motorisation, basically profit, so you take your profit, and most businesses will get a multiple of that profit, whether it's two times profit, five times profit, and so on. Now, John's view is that those people who spend time working on all the metrics, not just the finance, but some of the others, which I'll touch on, have a strong chance of doubling the value of that multiple. Now, if you can double the value of anything, and you have a successful business, and instead of selling it for 2 million you sell it for formally, and that's gonna be life changing numbers, and you don't have to do life changing work. You just need to focus on some of those key things. Now, some of them would be the importance of having a business that works without the owner in the business. And that's really critical that comes across in a couple of the metrics. Another one is measuring that customer satisfied
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So not just accepting the referrals you get, but having something in your business that measures that. So it gives a score on that customer satisfaction and the likelihood then of people willing to repeat and refer, and that can can hold instead, you know, a good valuation thought to another big one is what we call the monopoly effect, which is essentially not the board game CRISPR. I was asked a question of any business owner that I meet, and which is this is the number one prevalent in your business. And they all look at me quizzically. So what what? What do you mean, Kevin? The number one, right, okay. Are you relying too much on one? customer? Are you relying too much on one supplier? Is there one employee that's critical to the business that if that employee wasn't there, like you would seriously affect the impact of the business. You see what I mean by that monopoly issue?
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The other big one, and it's the big one that I'll keep on going on about Chris's recurring income. Because the degree to which you can create recurring income in a business creates that double edged sword that cuts both ways for you positively on one side and positively on the other side, which is, if you've got great recurring income, then the income will carry on without you. That's great for an acquirer, right. And the other thing is you've got predictability, you've got the income stream, which is coming in, and you can predict how you grow your business, how you start your business, how you systemize the business because you've got income coming in all the time, which means if you sell it, you've got more value, and if you keep it, you've got a systemized business. So you can spend the time doing as much in the business as you wish. But if you don't want to be you don't need to be because it will automatically run without you. So I think it'd be great to hear what these metrics are. And those people who focus on them even if it's
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Little bit every month dislike, I suppose we say never let a month go by without doing something to create your wealth. Well, you could do that in your business, couldn't you really, you could say never let a month go by without working on something that's improving one of the metrics. So I hope Richard will do a great job in explaining what those metrics are. And maybe we could to debrief that when it's done. Let's do that. Okay, let's head on over to our guest, Richard Perry.
Unknown Speaker 8:28
Welcome to wealth talk. Richard, how are you today? I'm fine. Christian. Thank you very much. Yeah. Great to have you, Richard. And of course, following on from our conversation with john warrillow. Last week, it felt right to explore value builder in more detail. So Richard, what's your association with value builder if you don't mind sharing? Absolutely no problem. So value builder is a is a way of looking at how to value a company obviously, and obviously, as the name suggests, how to build it and I'm a business coach. So I'm working a lot with business owners and they're clearly looking at growing their profits.
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It's but also they're looking at, I'm getting them to think about their business as an asset. It's something that is obviously separate from them. It's a legal entity, but also, they may be thinking about selling it. So how do we create the value as well as the profit, and we're looking at the multiple, obviously, people always talk about if you're going to sell the business, we will look at the multiple of profit. So we've got a really smart tool here developed by john, which really tunes in on, you know, these factors that help people improve that value. Okay, so Richard, you're gonna take us through the eight key value builder drivers now? Sure. So first one we're gonna look at is financial performance. And that's really looking at the history of producing revenue, and profit. And also one of the other factors is quite interesting is that is looking at the professionalism of your bookkeeping and your record keeping. So what is the system you have for tracking the numbers? And that's really looking at the obvious things around it. What was the growth of the business? What's the current revenue, profit, gross margin, net margins, but more recently, what's it like to be in the next 12 months or what do you think?
Unknown Speaker 10:00
Revenue turnover profit is going to be based on the percentage growth, did you make a loss? Did you make a profit? Those are typical things you'd expect to look at in valuing a company. Second one is the growth potential. And obviously, that's as it says, it's the likelihood you're going to grow your business in the future, and also what rate of growth, you're gonna have that you might want to dig a bit deeper into certain sectors or certain areas and segments. But again, just give me the overall picture of looking at your industry. are you growing above the average? And where's the growth going to come from? Okay, so you are turning to the third one, which is the Switzerland structure. As the name suggests, this is about the dependency or independency. So how dependent is your business on any one of the following that could be the employee, the customer, the supplier, and interestingly enough, also had dependent is that business on you. So are you the job owner? Are you the business owner, and that's something we're looking at as obviously as a business coach with an action coach is saying how do you make the business less dependent on you and also those other factors because any potential buyer will see those
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There's a risk and therefore, they'll downplay the value. So that's the Switzerland structure. Next one we're going to look at is what we call the valuation seesaw, to capture that one in the headline that's really looking at the cash flows and saying, is it the business generating cash? Is it sucking the cash out? Or what are the typical gross margins net margins as the cash flow? So we're looking at the balance between can you get the cash flow? Is it predictable, is it certain occurrences tight ties in with a recurring predictability of the revenue, if a business is generating a lot of cash, it's going to need to borrow less and therefore potential buyer is going to be looking at that cash generation and going to give it a much better valuation. So that's the seesaw now fifth one is called what we call it the hierarchy of recurring revenue. And And really, that's the proportion and the quality of the automatic or the recurring revenue you collect each month. And that could be through say, subscription models. Actually, john John's got another book on the automatic customer, which is
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goes through, I think nine different models. Let's talk about that. So that's the route. So again, we're looking at what percentage of your sales revenues recurring. And that could be defined as subscriptions, maintenance contracts of annuity streams. And really the work the way to look at that is the customer would need to opt out of spending the money so you sign them up and really they need to make the effort to to opt out. So it's not something you've got to chase. It's just really, it's gonna come in, regardless of pretty much how much you service them or what you do. You don't need to spend as much on marketing. Yeah, I actually just reached out I was listening to a different marketing podcast just last week and they were saying you know, not to get confused with a payment plan spread over 12 months, it is not the same that is not recurring revenue. It's just delayed payment. So as you've rightly said, this is something that the customer needs to opt out of something like a Netflix subscription or something along those lines. Yeah, exactly. I think once you get the definition these words right, but it just makes sense. It's like how much money you getting how often are protected
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And that leads us on to the sixth drive, which is monopoly control. So really, when we think of monopoly, we tend to think of, you know, monopoly investigations that something, something perhaps negative but really, in this context invaluable that we're talking about how differentiated your business is from the competitors in your industry. And obviously, differentiation is the key element of marketing. And Efrain Warren Buffett will talk about building businesses with a moat around them to protect that. So once you got into that business, you've got the revenue, how can you protect yourself? What are the barriers to entry and get some sort of Monopoly control? But obviously, this is this is talking about it in a good competitive marketing sense of the word. And again, there's your things you can do to improve that. How exclusive is your product to the to the market, how do you differentiate what's the niche? Again, I'd call that the marketing driver. The seventh driver is a customer score, and really, that's the likelihood that your customer is going to repurchase or refrain
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You, this brings us into something called NPS, which is the net promoter score. And you'll see this this was invented by guys at Bain and co the consulting company, basically, clients are more likely to buy from you. And they're more likely to refer you. Again, that's multiplying up the revenue as multiplying up deductibility and multiplying the whole the whole occurring revenue. And you'll find that companies with a high net promoter score normally it's between minus 101 hundred anything about 50 is seen as as world class. And I have to put, I have to put a plug in for action coach because we've got a score of 77. So what that means is people like what we do like to reuse us continuously, and they'd like to refer others and that can apply to any business at all. So anybody who wants to really look in the valley, go and look up how to work out your net promoter score, you need to get it done independently, but it's it's a really key one. And then the other factor number eight, put the hub and spokes it's really saying like how would your business perform if you were unexpectedly unable to work?
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Let's a period of three months. So suffice it to Christine, like taking you out of the business. Give me a phone, closing it down, I'm sending you off for a month, two months, three months, what would you come back to tell me again how the pendant is the business on you and said, We don't get how much of that business is personally done by you how often the customers asked for you by name. And so I want to speak to to the boss, as we might like to think maybe ego suggests that's a good thing. But really what it's signaling is that you've got the job, people want you really what you've got to do is build the system and the team that can function without you. So that covers the eight factors. I've got a couple of little case studies really of companies, which if I gave you the numbers, you you'd be surprised at what they're actually sold for. Yeah, let's go through those quickly. So what we've got is let's start with the first one. So a lady called Jill Nelson over in the States. She had a company which was called Ruby receptionists and basically an answering service that was doing turnover about 11
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million dollars with a profit of around just over a million. And you think well in that industry, it comes under the category of admin and wastage for some reason. But typically the multiples are gonna be just under two. So we're profit of one, you'd be expecting the value of that sale to be around 2 million. So again, 2,000,011 million turnover, 1 million profit, she sold that business for $38 million. Wow. That's great. So you know, it. Again, it wasn't just the history, it wasn't just the current situation it was. There's something about the future, that business is something about how that business fitted in with the buyer that made it much more valuable. And again, by using the value builder score as a benchmark as a scorecard, but enabling her to say, Well, I know why my business is valuable. So if I may just jump in there and ask if a client comes to you and takes the value builder assessment here. And obviously, you analyze the report together, you know, how would you approach making
Unknown Speaker 17:00
Progress, you know, as quickly as possible. Do you look at the lowest scoring areas? Or do you just have a holistic approach? You know, overall look at the business and just see where it makes sense to focus on first. I think with any sort of reviews or coaching or consultancy, I think, yeah, if there's some quick fixes that need to be done, I would look at those. But I think the most important thing is it's about the mindset of the owner. Firstly, say, Well, how can I build this business? So it's not dependent on me? How can I build the revenue? How can I get the niche in differentiation that I can create predictability, senior, we do want to have a long term approach, but we still want them to obviously improve their profit initially enough, let's say we increase the profit by 10,000 on a multiple of three, and obviously, that's going to be worth 30,000, if you were selling, but if you can, if you can increase, increase the profit by 10,000, but also increase the multiple to seven, that 10,000 becomes worth 70,000, not 30,000. So that's the power of it really. So then you've got to get the balance.
Unknown Speaker 18:00
But I would say, yeah, we need to look at all eight of them. If there's any quick fixes, obviously, we're going to get it got to get in there. That could be price rises or cost reductions and all the all the typical things you'd imagine from coaching, but it's just a good framework, really. And you had another case study as well, Richard. Yeah. So it's a great little company, again, in the states here, effectively, a payroll companies, a lady who was looking for a company that could help her set up the payroll for her nanny and American she really couldn't get much interest from the these large companies. So she decided her husband decided to set it up themselves. So they built up built up the revenue to $9 million turnover. And again, this is this is setting up the payroll for the nanny, and they sold that business to care.com. So they had a 9 billion pound business, 10,000 customers and long term care.com with 7 million subscribers and says, hang on a minute, we need a payroll company, if we could just sell that to 1% of our customers that 70,000 that's going to be worth us having. So again,
Unknown Speaker 19:00
Businesses 9 million turnover that was sold to care.com for $54 million. And that was as a result of using the value builder system. They've gone through the value of the system. Yes, they've obviously got their average score, and they've worked through the whole, that whole thing using the eight factors. And really, again, that's a good example of them selling you how does that business fit into a potential acquirer? And what is it they really value? It wasn't just the turnover it was, what can that do for them in the future? It just solved the problem for them pretty much straight away with it 7 million subscribers. So Richard, if someone would like to take the value builder assessment here, what's the best way of them going about that? Takes about 15 minutes you simply answer the questions based on all the things we've covered earlier, plug in the numbers. And what it'll do is it will just give you the score for each of the eight factors. If you want, they'll give you a valuation based on your industry, and then it will tell you a few things about what you can do
Unknown Speaker 20:00
To get more valuable, so I'm happy to share my link, I will certainly put that in the show notes. So Richard, thanks so much for sharing the eight key value builder drivers there. That was fascinating. And
Unknown Speaker 20:16
Kevin, so Richard talked us for the eight drivers there and showing not just how to increase the value but the profitability and the predictability of your business. Yeah, I mean, you could see that if you could work on any of those, you're going to do something better for your business. And why wouldn't anybody really do that? It's just putting it in your field of vision, so that you can work on those as opposed to just doing what most people do in jobs and in business, they just turn the wheel you know, but not the wheel as in focus on wheels as we know and wealth building but just the hamster wheel, you know, they chase the profit, they chase the job, they chase the income. So having something to work on in addition to the traditional just, you know, make sense.
Unknown Speaker 21:00
and generate profit is a really good thing to, to dive deeper into if you can. So, you know, take the value builder score, if you've got a business go online, I think you could put a link to that in the show notes. And it's really important you can get that score, you know, I did my score, I'm not going to tell you what it was, but it was reasonably high because of the recurring income. But that's a really important thing and it was very helpful for me to do that. One of the things that I'm not sure we dive too much into Chris which is you know, the process of how to sell you know, and and also why to sell beginning with the end in mind always comes to mind when thinking about business owners. It is indeed you know, we will often sharing with our foundation members that you always start with the end in mind, you know, defining what is that monthly target that you want in terms of asset income, and then working back from there understanding which pillar which strategy, and then the turning of the wheel process, which is the only way really to generate that recurring income.
Unknown Speaker 22:00
Yeah, and then, you know, you could apply the same principle inside a business, you just turning the valuable the wheels inside your own business. And I think one of the points that I know from speaking with john, that he does cover in, in other talks, is, you know, how ready are business owners for sale? Because you know, there's a big point isn't there, that if you get to the point and I've met many business owners, Chris who get to the point when they are literally hanging on and their health is gone, you know, other things in their life are stressed and struggling, and they need to sell the business, because unless they get something or some stress relieved from having to do all of this work, it's just really important to begin with that end in mind and almost work out what does the business need to be worth in order for me to sell it that when I take the capital sum from the sale, it would give me the income that I want to live financially free forever.
Unknown Speaker 23:00
Because I think what happens in business, not like property, I suppose, because there's lots of comparables in property. You know, people get a bit caught up dump day in their home, I'm not selling my home for anything less than whatever it is. And I think people get even more entrenched when it comes to their business. You know, they think that their business is worth so much more because they put more money into it, and more time into it and more of their whole life into it. But that's not what value is a business, what value is a business? What's it worth to the acquirer and the acquirer wants different things, they don't value what you've done, they value where it's going. So you have to think about where you're going. And then if you need the business to sell for 5 million because you know, that if you then invest that 5 million, you can get, you know, even if it's simple stock market stuff at 4%, you know, 200,000 pounds worth of net income after you paid your tax gives you the income you want, then you don't need to sell your business for six months.
Unknown Speaker 24:00
You know, or take any number and multiply in any which way you like. So there's always a reason to think about are you ready as a person as a business owner, to understand the psychology of selling the business and don't get caught up in trying to value things in a different way to an acquire. So I think that's a really good thing. And there's many, many people I know, Chris are experts in the field of the process of selling business, how to bring competitive bids, if you like. So you don't get to a situation where you meet one person you sell to one person and you could, you know, well not have a sense of the comparables and the more you put in competition, the more you drive, the potential for a higher increase because, you know, somebody's bidding with somebody else. So there are brokers and specialists who do this the same as there are in any aspect of business life. And what I'm thinking about Chris is having one of those people come on and do a podcast with us and tell
Unknown Speaker 25:00
It's a little bit more about the business selling process. How about that? That'd be interesting. I really would. And one thing we haven't mentioned really important word, that's actually step four, in the seven steps to wealth process that we're teaching is leverage. And there's just so much opportunity isn't there within every one of the pillars, but certainly in business to really leverage what you already have and get much, much greater return. I think there's no bigger return on your investment as an ROI with leverage than business because it breaks all the molds you know, you can impact so many people by systemising a business with incredible value. And as a result of that, you can get multiples on your business in a way you can't get multiples on value property, or multiples on value of the stock market because things are constrained by markets to a certain degree. Yes, you can add value in property but you can add much more value in business.
Unknown Speaker 26:00
Which is why, as I've said before, Chris, it's my very, very favorite wealth building pillar. And why I continue to be an owner of multiple businesses all focused on recurring income. And maybe at some point, Chris might be useful during an interview me, indeed. So I'm really enjoying the business pillar at the moment. And I think next week, we can perhaps dive into some of the other metrics that we've not yet touched on. Yeah, I think I mean, I like the people that action coach, they've got great set of values. And we've heard from Richard today who's, you know, one of the coaches in there, and we've got a number who love the whole wealth building philosophy and the business building philosophy wrapped up. So I think next week, Chris, if we can, we'll interview another fellow and friendly code, someone who's worked with wealth builders for for a while and invested in being coached by myself to you know, to help him grow his own wealth outside of his business. And that's an important thing as well. Definitely something to pick up on next time, Chris. So
Unknown Speaker 27:00
If you can create recurring income, multiple streams of recurring income, both inside and outside of your business now that would make a world of difference to your wealth, wouldn't it? Well, that sets up next week pretty nicely. I'm looking forward to that one. Kevin, thank you for your time today. Thank you everyone for listening. And we'll see you next week. Looking forward to Christmas. See ya.
Unknown Speaker 27:24
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