Knowing When to Leave: The Founder’s Role in a Professional Service Firm

Knowing When to Leave: The Founder’s Role in a Professional Service Firm

The early launch days of a professional service firm are often characterized by the visionary leadership of its founder. The founder’s dedication, expertise, and passion are instrumental in establishing the firm and shaping its culture. However, there comes a time when the founder must evaluate whether it is appropriate to continue in their current role or hand over management responsibility to a CEO. This decision can be challenging, as it involves considering what is lost when a founder leaves versus what is gained from new leadership.

During the early days, the founder plays a pivotal role in setting the direction, building relationships, and establishing the firm’s reputation. They possess deep industry knowledge and are often the driving force behind the firm’s initial success. The founder’s commitment and personal touch are instrumental in attracting clients, fostering a cohesive team, and navigating the challenges of starting a business.

However, as the firm grows, the demands and complexities increase exponentially. Scaling a professional service firm requires a different set of skills, including operational expertise, strategic vision, and leadership acumen. Recognizing these evolving needs is crucial in determining the right time for the founder to transition to a different role or bring in a CEO.

Several indicators can help assess if the founder should consider a change. One common sign is the adoption of “flavor of the week” strategies that cause employee whiplash. If the firm frequently changes its direction without a clear long-term vision, it can lead to confusion, disengagement, and reduced productivity among employees. Similarly, high turnover in the C-suite, growth stagnation at a certain size, excessive internal politics, and the founder becoming a bottleneck for decision-making are all signs that a founder may have overstayed their role.

When a founder leaves, there are various impacts on the firm. One of the immediate consequences is the morale issues that loyal employees may experience. The founder’s departure can create a sense of uncertainty and loss, especially if they were deeply involved in day-to-day operations. It becomes crucial for the new CEO or leadership team to step in and provide reassurance, transparency, and stability during this transition period.

The departure of a founder also necessitates a period of shakeout in the management team. With new leadership, there may be adjustments in roles and responsibilities, potentially resulting in some executives leaving or being replaced. This phase requires careful communication, clear expectations, and support for the team members who remain.

Maintaining positive relationships with clients is another vital aspect following a founder’s departure. Clients often develop strong ties with the founder, and it is crucial to reassure them that the firm’s values, quality, and commitment to excellence will continue under new leadership. Open and honest communication is key to retaining clients and ensuring a smooth transition.

In some cases, it may be possible for the founder to remain within the firm but in a different role. This arrangement allows the founder to continue contributing their expertise and industry knowledge while relieving them of operational and management responsibilities. However, the likelihood of a founder agreeing to such a new structure depends on individual circumstances, personal aspirations, and the founder’s ability to adapt to a different role within the organization.

Research studies have shed light on the percentage of founders who successfully make it to the exit. According to a reputable source, a study conducted by Harvard Business School found that only around 25% of founders are still at the helm when a professional service firm reaches the exit point. This statistic highlights the common occurrence of founders transitioning out of their leadership roles as firms evolve and grow.

Here is a specific tool designed exclusively for founders of professional service firms to assess if they have stayed at their firm too long. It is a SWOT analysis, which stands for Strengths, Weaknesses, Opportunities, and Threats. It has been adapted to help founders evaluate their position within the firm. Here’s how you can apply it:

    1. Strengths: Assess your personal strengths and skills as a founder. Are your core competencies aligned with the current needs and strategic direction of the firm? Evaluate if your expertise and leadership style are still relevant and effective in the evolving business landscape.
    2. Weaknesses: Reflect on your limitations and areas where you may have become a bottleneck or hindered the firm’s growth. Consider if there are aspects of the business that would benefit from new perspectives or different skill sets. Assess whether your weaknesses are impeding the firm’s progress and if they can be addressed through training, delegation, or restructuring.
    3. Opportunities: Identify opportunities for growth, innovation, and expansion that may require new leadership or different expertise. Consider emerging trends, market shifts, and evolving client needs. Assess if promoting someone to CEO or transitioning to a different role would enable the firm to seize these opportunities more effectively.
    4. Threats: Evaluate potential threats and challenges that could impact the firm’s long-term success. Assess if your continued involvement as the founder poses any risks, such as limited scalability, difficulty in attracting and retaining top talent, or being resistant to change. Consider whether new leadership would mitigate these threats and position the firm for sustained growth.

Additionally, seeking feedback from peers from a mastermind community, such as Collective 54, can provide valuable insights into your role and impact within the firm. Their perspectives can help you gain a more objective understanding of whether you have overstayed your position and if it’s time for a transition.

Remember, self-assessment tools are meant to guide your reflection and decision-making process, but ultimately the choice to stay or leave rests on your personal circumstances, aspirations, and the best interests of the firm.

Episode  129 – How to Improve Margins by Understanding the Difference Between a Client’s Ability to Pay and Their Willingness to Pay – Member Case by Ken Yager

In this session, member Ken Yager shares how he discovered that his traditional client was not going to get his firm to reach its full potential. Ken shares how he changed his ideal client profile, and as a result, has significantly improved his margins. Attend this session and learn how to adjust your target client profile as your firm progresses along its lifecycle. 

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serv Podcast, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community focused entirely on the unique needs of boutique pro serv firms. My name is Greg Alexander. I’m the founder and I’ll be your host. And in this episode, we’re going to talk about changing your ideal client profile. Why to do it, when to do it, what the risks are, what might happen, the benefits, etc. And we’ve got a great role model with us today. It’s a long standing Collective 54 member, well-respected, well-liked member. His name is Ken Yeager. Ken, it’s good to see you again. Thanks for being here. And for those that don’t know you, which is in the minority these days. Explain or I should say introduce yourself to the audience.

Ken Yager [00:01:06] All right. Well, thank you, Greg. It is a pleasure to be here. I am the founder of Newpoint Advisors Corporation. We are a turnaround management firm that exclusively focuses on small companies. And that’ll be a part of our conversation today. But we try to help companies kind of in that 5 to $50 million range who otherwise couldn’t afford the services that are typically rendered in our industry, which tend to be a little more expensive. And therefore that’s our mission.

Greg Alexander [00:01:32] Right. So when we spoke several months back, you were experiencing fee pressure as many of our members were, as things changed in the economy a bit. And your approach to that was to change your ideal client profile. So I don’t want to steal too much of the thunder of the story. So tell us tell us what happened and what you did.

Ken Yager [00:01:55] Yes. All right. So ten years, almost ten years into our journey and feeling like we weren’t growing the way we should, and certainly we’re being profitable the way we should and if you will I blame part of that on you because I came to Collective 54 with an idea about what profitability meant. And then in the in my readings and in our meetings, you clearly pointed out that there was a much higher bar that one had to be focused on. Well, I got a taste for that, when to go for that, and was finding myself not being able to move away from or getting stuck with the mission and the design focus of the clients and how that was intersecting with that of you say, profitability or that profile of financial success. And so we needed to make a change. And that changed the focus of the clients I’ll start there and then we can you can lead me through the rest of this. But that we are we started the mission of focusing on just the smallest of small cut. You know, really, we would even take companies less than $1,000,000 in revenue, but we would state clearly on our website and on our emails 1 to 50 million in revenue, average client was 8 million in revenue. Medium client was 4 million in revenue. And we’re very proud of that, that, you know, that we were getting to those smaller companies, but they were too small. And even with our fee structure what we found and that’s the one before we make the modifications, we were even a little too expensive for some of the ones that the smaller into that. And so we were sort of friction on friction trying to make something work that wasn’t working, but sticking your heads in the in the lion’s teeth every day trying to figure it out. But it wasn’t.

Greg Alexander [00:03:35] Yeah. So then you made a switch to what?

Ken Yager [00:03:38] So then the most subtle of switches, but definitely was intention instead of 1 to 50 million in revenue. And we had a hard cap on that 50 million top. We said we’re going to start at 5 million in revenue. We’re going to let the cap come off the 50 advertised with 50. But if you come to us with a 60 or $70 million company, we’re going to say, yes, we can help you. And what that does is as we look at the notes or the kind of information our business, our average client was going to start shifting from that $8 million range to about a $15 million range overnight. And that’s pretty much what started to happen.

Greg Alexander [00:04:14] And a $15 million revenue client is a better client for you than the previous $8 million client. Why?

Ken Yager [00:04:23] Well, there are layers in that the let’s say, in the entrepreneurial journey. And I think some of the people in Collective 54 recognize this. What you feel like as a business when you were at 1 million revenue, 5 million, 10 million and then above and then we’ll go into the $20 million range, all change and they all deal with those things that you’re talking about, which is that, you know, the scale of the scaling group, how to get there and how to get through those those elements. It’s when you’re not talking to a $4 million company that’s trying to figure out how to put an org chart together versus trying to put talk to a a $15 million company that has actually got one but isn’t getting it right. The issues at hand. The resources at hand. And their ability to pay to have someone help them and their willingness to pay someone to help them, it changes dramatically. Mm hmm. That’s what we found.

Greg Alexander [00:05:13] Yeah. And let’s pick on that a little bit. The the affordability factor so they can pay you. Versus the willingness factor. They will pay you. I think that’s often overlooked. And it’s so important because although not always the case. More often than not, smaller revenue firms, although they may be willing I’m sorry, they may be able to pay you. They can afford your services. They’re not willing to because whatever you may charge them as a bigger percentage of the available profit pool. I mean, let’s say a $5 million company with 20% margin has got a million bucks of discretionary income. You know, if you hit them with $100,000 gig, that’s 10% of total profitability. Yes, they can swing it. But do they want to do it or not? Whereas if you had a $15 million company, 20% is 3 million. Get them with $100,000 gig and, you know, 100 grand versus 3 million, Maybe they’re willing to pay for it at that point in time. That’s the general idea. Now, Ken, you had courage to do this because I’m often advising members in office hours to change their ideal client profile, and that usually means sell to bigger clients, but they don’t have the guts to walk away from those small guys. You know, especially with businesses type, you know, the old phrase bad breath is better than no breath.

Ken Yager [00:06:34] Right.

Greg Alexander [00:06:34] So how did you have the courage to walk away from yesterday’s business?

Ken Yager [00:06:40] You know, one of the most important things I think, for someone to do is to have a North Star, if you will. Where am I headed? Because it does feel like like you say, to walk away. Oh, my gosh, what am I doing? But when you’re walking towards something, I think it helps a lot. And for us with the conversation we had with you was it was about looking at that financial result of for our result from doing the same hour of work or if you will, the same delivering the same product at the end of the day. And that became that became a big the drumbeat got louder and louder about what are we doing here? We’re grinding ourselves to death, trying to work with these small companies, and you just can’t make the fees work. And when we have these conversations internally where we would look at the cost of doing something and I have, you know, my number two on my team, Tim Stone, he and I would go at it and he’s like, the costs have got to go up. We’ve got to raise the prices. You know, this is not delivering correctly. And so here we are recognizing that we are not being able to work with small companies and yet keep going back every day to do it. You know, it’s the definition of saving.

Greg Alexander [00:07:47] Yeah. Now, sometimes boutique founders are afraid to go up market because they don’t think they can attract bigger companies. So you took the cap off the lid. You know, you removed the $50 Million number and you said, hey, if someone calls us at 70 million we’ll serve them. Were you able to get pit larger companies to pay attention to you?

Ken Yager [00:08:08] Yes. Almost immediately. We’ve. I’ll put it to you this way, because I was thinking about, I’ll do it this way. I was. We. Immediately change. We really the pivot was rather quickly. We kind of had a sense for where the model was going. And so we made those changes rather quickly and started bidding on new projects. We are many, many months through that process. We have lost one client to pricing and we’re pretty sure that we did it because it was a sloppy estimate on the price. And that has nothing, nothing reflective of our model. So within our constraints of what we said, we should be pricing it. We were we had no issue getting people to take the price. And also and which also it’s your more to your point, nor were our credentials questioned. If anything, you know, we had you know, we were able to show that, look, we’ve been here for a minute. We know what we’re talking about and this will work for you. And that has been accepted universally.

Greg Alexander [00:09:12] Yeah, which is great. I mean, it’s just that’s inspiring because some of our members don’t believe they’re worthy of larger clients. And they are. I mean, those larger clients sometimes don’t necessarily think about your business the way you do. They might not make distinctions the way that you would. And yes, your expertise is your expertise, and it applies the same for a larger client or a different ideal client profile than it does the smaller ones. Internally sometimes that can be a struggle.

Ken Yager [00:09:44] Yes. Well, let me say this. I’ve met Collective 54 members now. You know, I’ve been at this for minute, and they do have the capabilities they do have. I suffer from the same thing, I’m like, I don’t know if our thing is really good, all that great. And then I talk to the people who have seen what we do and they go, no, this is the thing. And I think all the Collective 54 members have that where they spent a minute trying to make something out of their what they’re doing, they have the power, more pricing power than they give themselves credit for.

Greg Alexander [00:10:14] Yeah, well, that’s great to hear you say that, because I agree. But, you know, sometimes people get tired of listening to me. So hearing that reinforcement to others is a wonderful thing. So my next question would be, how big is too big? So where are you going to take this?

Ken Yager [00:10:30] At this moment in time, we would hit the goals that we needed to that financial North Star that we were talking about, just saying, and we’ll call it the 5 to $50 million range, $500 million range could be you know that coming came to me and we’re 150 million. We said look, there are a whole bunch of people out there who could do really good work for you and you can afford it. We’re designed a certain way. So this revenue thing you’ve got to be careful about, I don’t want to go up. I don’t have to chase Fortune 500 companies to go after that. I don’t know. That was a part of our conversation with you. But we can be in very lucrative, very warm waters financially without having to go much higher. The trouble was with where we were sticking ourselves at the bottom of that of that curve, you know, the bad news. So average client could get up to $25 million and we would be or will make it. We’ll make our numbers. And for us, that means something along the lines of of a $50 million 50% EBITDA. Yeah. You know, strong where we were, we were struggling to see a ten a 10% EBITDA. I mean, that was like way up there. Wow, look at that. We’re going to get there one day. You know, story that’s done. We’re already running in the direction of that 50.

Greg Alexander [00:11:45] Feels good, doesn’t it?

Ken Yager [00:11:46] It feels so much better and for such a small number, it is a monster that the people who you know who are you know, they’re working at the two small companies. Fine. Don’t hook a big fish, but stop chasing the little fish. Yeah. When something the middle work your way up, work your confidence up, I suppose. 

Greg Alexander [00:12:08] Yeah. Is it the same exact service or did you have to tweak it as you went up market.

Ken Yager [00:12:13] Not a single sell. Had to change in our DNA to this. And what I would say is again, you know mindset that we needed to grind away at those smaller companies. We turned around with bigger companies with, you know, we’d had companies like 40 and $50 million who would drift into our universe, and we said we would service them, but just not as many as we are chasing today. And then in a lot of it comes down to the price point. We were giving it away to those larger companies and that set and we raised our prices significantly. But up in it now, like to X, you have to do that. But it’s now where these projects have a super high contribution margin. Yep.

Greg Alexander [00:12:51] And as you’ve gone up marketing, you’re running into different types of competitors or is it the same competitive landscape?

Ken Yager [00:12:58] Same people. Yeah, there could be a couple of the drift down, but I really wouldn’t expect that. So for our market, it’s really the same folks that we were you know, giving it away in front of. Now we’re pricing right in front of them. Yeah.

Greg Alexander [00:13:11] Okay. So let’s summarize this. I mean, listeners, you know, we often talk about the ideal client profile and sometimes people say, Hey, I get it. You know, I’ve got my ideal client profile nailed. And if that is true, congratulations. But you’re in the minority. And the point I’m making here is it changes. The ideal client profile or profiles is not static. It’s dynamic. And sometimes it changes because the market forces it to change. So, for example, in Ken’s case, you know, he had some fee pressure, He had a low-margin business. He wasn’t happy with that. So he changed the ideal client profile because his North Star changed. So dust off that ideal client profile and make sure that you say these are my goals as an entrepreneur. This is what I hope to accomplish. You know, what type of client do I need to target and serve in order to reach those goals? If that’s off, if those two things are not in alignment, meaning what you want to do in the type of client that’s required to execute against that, that’s off. It’s just too hard. So constantly be refreshing that ideal client profile, constantly be linking it back to your North Star, to use Ken’s words, you know, and look to examples like Ken that it’s not a fairy, it’s real. I mean, we see this time and time again. It’s so important to know who that ideal client is, because if that’s not done correctly, everything else that comes after that, they could have the greatest service in the world, a fantastic marketing approach, blah, blah, blah. It doesn’t matter because you just you can’t make the money that you want to be. Ken’s on his way going from 10% margin to 50% margin, just think about that 5x if he gets there 5x margin improvement, even if he falls short a little bit, gets to 30 or 40%, 3 to 4 times improvement in margin and then Ken owns his firm. So that goes in his pocket just by changing the ICP. I mean, if that doesn’t motivate you, I don’t know what does. So Ken, we’re out of our time here, but I really wanted to thank you for coming back on the show. Ken is a wonderful contributor and it’s so great to hear you doing these things and I’m so glad it’s working out for you and I wish you much continued success.

Ken Yager [00:15:23] Thank you so much. I’m glad I can help you spread the word.

Greg Alexander [00:15:26] Okay, great. Okay. So a few calls to action. So first, if you’re a member, be sure to attend the private Q&A session. You’ll get with Ken and dive into the details on how to do this. If you’re not a member, you should consider joining. Go to Collective 54.com and fill out a contact us for us form and a rep will get in contact with you. And if you want to subscribe to our content, the podcast, the video, the blog, the charts, etc. consider subscribing to Collective 54 Insights. It’s a weekly newsletter. You get those four things and you can find that at the website. And then lastly, if you want to really dive into this material, check out our book, The Boutique: How to Start, Scale, and Sell A Pro Serv Firm. Thanks for listening today and until next time, I wish you great success as you try to grow, scale, and exit your boutique pro serv firm.