E155 | Strategic Advice from Appletree Answers Founder & Scaling Up Coaches CEO, John Ratliff
Today’s guest knows all about scaling up. Not only is John Ratliff CEO of Scaling Up Coaches, he’s also a seasoned entrepreneur himself.
Having started Appletree Answers, a telephone answering service from his apartment in 1995, John grew the company to 24 US-based locations and more than 600 employees, taking nearly 10 years to get to $1million in revenue, and then six years to get to $30 million, before a fantastic exit well over market value, selling the company to a strategic buyer in 2012.
This experience gave John a unique perspective into the importance of culture, employee engagement, and the guidance and tools entrepreneurs need to have a successful exit.
Today John spends the majority of his time defending entrepreneurs against private equity buyers – he says if you’re considering selling your company, you’d be mad not to get representation.
In this episode, John shares some fantastic tips for owners thinking of selling, the time he turned a potentially $400,000 loss into $7 million of value, and how he really understood employee happiness by changing one NPS question.
This episode is a little longer than normal, but it’s jam-packed full of useful insights and guidance. We hope you enjoy it as much as we did.
On today’s podcast:
- Business selling advice for founders
- Why you shouldn’t start from scratch
- Building and selling Appletree Answers
- John’s M&A playbook
- The importance of happy employees
- LinkedIn – John Ratliff
- Website – stscapital.com, align5.com
Strategic Advice for Entrepreneurs with John Ratliff
John Ratliff is on a mission to help entrepreneurs at the critical moment of selling their business, not get themselves into a bad spot.
As a lifelong entrepreneur, he’s started and sold several companies, including a 650 person call centre company that he exited in 2012 having started the company from scratch, in 1995, from his apartment.
Today John owns and runs a coaches organisation for scaling up, which has about 200 coaches around the world teaching the scaling up methodology based on the book by Vern Harnish, Scaling Up.
He also does a lot of M&A consulting, middle market exit strategy, specifically geared towards entrepreneurs, because with M&A and private equity having become so prolific over the last 20-25 years, he sees entrepreneurs on a daily basis, being taken advantage of at the table.
“You spend 20 years of incredibly hard work to build something from scratch or to grow an asset, and then you get to the most important event. And it’s a complete mismatch. You’ve got really sophisticated buyers and very unsophisticated sellers who may sell one or two companies in a lifetime, and it’s gotten very one-sided.”
While John doesn’t advocate that every entrepreneur needs to hire an advisor when selling their business, they have to go into each transaction knowing they’re outmatched by the buyer. You have to have your eyes open, to have good representation, a good attorney and good accountants.
“The fundamental strength of most private equity firms is buying companies for less than they’re actually worth. And that’s at the expense of the entrepreneur.”
Advice for sellers
John’s advice for sellers is this: make sure you have multiple bidders for your business. If you only have one, they will have the upper hand. And remember, due diligence is for confirmation, not renegotiation.
“As soon as the negotiating starts in due diligence, we’re out the door, unless you find something that was materially wrong, but the number you put on the line is the number you’re going to bring to the closing table.”
Don’t start from scratch
Having built up Appletree Answers from scratch, working 24 hours a day, seven days a week, 365 days a year, it took John 6 years to get to $1million in revenue. He then began to do acquisitions and grew 30x in the next 6 years.
His advice for any entrepreneur today? Don’t start from scratch.
It would have been far easier to buy a little call center with some existing customers with momentum already, than to start completely from scratch.
“It’s a lesson for anyone coming out of college or grad school now that wants to start a company, just buy one that’s underperforming, you can often just get them by acquiring their debt.”
When you’re starting from scratch, you’re saying yes to everyone, it’s hard to cross the divide and start finding your niche customers, and really focus on what you’re best at.
“All the customers that got you from zero to $1 million are the exact opposite of what’s going to get you from $1 million to $10 million, and from $10 million to $100 million. So then you have to start saying no to everybody, and it just really creates a lot of chaos.”
“So we were about 2.25x revenue, which equated to about 14.5x EBITDA. We had bought 23 companies and we were on average, paying about 3-3.5x EBITDA. We would buy mom and pop smaller companies in a given market. And then through operational efficiency and core knowledge about how to run them a little bit better, we typically were able to improve their site level profitability by about 2x.”
John’s team had a formula, and they followed their formula to the tee – they wouldn’t buy companies that were losing money, they wouldn’t buy turnarounds, they wanted a company doing between 10 and 20% profitability, typically 20 plus years old. And they would come in, offer a fair price, and they built a reputation for being incredibly fair.
It was this attitude that saw them take what could have been a $400,000 over payment and turn into a 17x return.
Spend money on your employees
John’s advice for creating a successful company is simple: invest in your employees. Don’t invest in your branding. Spend money on your employees and get them to love your brand, because if your employees don’t love your brand, your customers will never love your brand.
Spend money making the experience of your people better, especially if what you do is as unsexy as being a call centre person.
When John’s team buys a new business, the playbook is the same every time: nobody gets fired, everyone starts over with a clean sheet, never cut an existing benefit, and keep the old brand facing externally for at least 6 months, but introduce the Appletree brand internally from day one.
“We would raise prices under the old brand that we had bought. So we do damage if there’s damage to be done to that brand. Knowing that we’re going to change it out for ours in six months to a year.”
Net Promoter Score
At Appletree, John used to run a customer NPS and an employee NPS quarterly. On the customer side, it allowed them to track how customers viewed them – in particular, what customers loved about their service, so they could replicate it.
On the employee NPS side, they were measuring data that every call centre measures, but they realised they weren’t getting the results they expected. They weren’t measuring the stats that correlated to winning. They weren’t asking the right questions. They weren’t measuring employee happiness.
“We started out asking the Net Promoter question, which is, based on your experience in the last 90 days, how likely would you be to refer someone to work at Appletree, and the first round of scores came back and I was surprised that they weren’t as high as I thought they would be.”
John asked one of his cheerleaders to explain why they had said they wouldn’t refer a friend to work at the company, despite the cheerleader being incredibly happy there, and they replied that the work was hard, and they didn’t think any of their friends could cope.
John realised he was asking the wrong question.
“So we changed the question to, based on the last 90 days, how happy are you at Appletree? And that subtle distinction was massively important.”
- Scaling Up – Verne Harnish
- E Myth – Michael Gerber
- The Goal – Eli Goldratt
- Five Dysfunctions Of A Team
- The Art Of The Impossible – Steven Kotler
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