Episode 266 – Profitable Isn’t the Same as Sellable – A Member Case with Frank Williamson

Episode Summary

Most founders treat profit as proof — if the firm is making money, someone will want to buy it. Frank Williamson, Founder & CEO of Oaklyn Consulting, has advised more than 200 transactions and knows this assumption can cost founders everything at the exit table. In this episode, Frank explains why profitable and sellable are two very different things — and what it takes to be both.

Key Takeaways

• Why profitability alone does not make a firm sellable — and what buyers actually look for
• The two tests for sellability: can you have a data-filled planning conversation with a buyer, and have you solved the founder bottleneck?
• Why cash-based accounting and tax-minimized books make your P&L unreadable to buyers
• How to build real deal leverage before entering the room — the autonomous machine and the no-deal option
• The “three buckets” framework — cash at closing, cash over time, and compensation — and why terms beat price in M&A
• Why every firm is sellable at some terms, and how client concentration can turn a sale into an acquihire

About the Guest

Frank Williamson is the Founder & CEO of Oaklyn Consulting, an M&A advisory firm specializing in transactions for professional services firms. With more than 200 deals advised over 10 years, Frank works as a consultant rather than a broker — helping founders navigate exits with clear eyes on what truly makes a firm sellable.

Full Transcript

Jeff Klaumann: Hey everybody, welcome to the ProServe Podcast, brought to you by Collective 54. I’m Jeff Klaumann, president of Collective 54, and I’m your host. Here’s what we’re all about: helping you do three things — make more money, make scaling easier, and make an exit achievable. Everything we record here is built exclusively for boutique professional services firms. If you’re in the expertise business — if you market, sell, and deliver expertise — this show is for you.

Jeff Klaumann: We have a great exit-focused topic today. Many founders who run firms carry the same incorrect assumption: if the firm is profitable, somebody will want to buy it. We often treat profit as the proof, but it isn’t. Profitability and sellable are two very different things. Unfortunately, a lot of founders only find that out at the worst possible moment — when the number comes back from a buyer far below what they had in mind. To help us think through it, I have Frank Williamson on the show. Frank is the founder and CEO of Oaklyn Consulting — ten years running Oaklyn, more than 200 transactions advised, and he does the work as a consultant rather than a broker. He’s a Collective 54 member. So, Frank, welcome back. Why don’t you take a moment to introduce yourself?

Frank Williamson: Well, Jeff, thanks so much for having me on. Being part of this community has done so much for how we run our business — it’s definitely a better one than it would have been otherwise. The ideal around a lot of professional services is you get yourself into a position where you’re as far away from hourly billing as you can, as hooked to your client’s success as you can be, and often that means some kind of value-added revenue unrelated to your underlying costs. In our industry — investment banking or business brokerage, depending on the size of the company we were serving — the norm is that people charge commissions at the end of a successful sale. But when we charge commissions, we’d like to know: will we get it? Can we do it with the expected amount of work, and will it happen on time? Not every sale is predictable in that way, so we help the part of the market where the commission’s too small, too uncertain, or where it might be an unusually large amount of work to navigate the transaction. That puts us in a wonderful place of being a complement rather than a competitor to our peers, because we advise on what they consider bad deals. And we get to see the market more than anyone else, which is really crazy valuable.

Frank Williamson: Can you be profitable, but not saleable? My guess is a decent number of people come to Collective 54 profitable but not saleable. The goal is to be both — and they really aren’t the same thing. Have you really thought about, at the time of exit, what is it you’re selling? And is it something that another company or an investment firm can actually buy? What is the quid pro quo — what are they getting in return for money? Is it only 50 talented people at one time? Or is it that, plus a sales process that runs all the time even as sales reps change, plus long-term contracts that can transfer? Those last things are assets to buy in a service company, and that’s what you get paid for. Just the staff, or just long-term experience with the same clients going from one project to the next, is really squishy.

Jeff Klaumann: You hit on a really important part, Frank — risk and repeatability. The buyer is looking at those two things stronger than anything else. What’s the risk profile of the deal? Can this really be repeated over and over again? This is one of the hard things for a founder to really look at, especially when they look at their P&L and income statement and say, wow, we have a great business. But let’s put some meat on the bones as it relates to the difference between a profitable and a sellable one.

Frank Williamson: A couple of things. What’s actually going on in your P&L? Did you get your gross profit right? If you’re still at a point where you are doing cash-based accounting, then your financial statements probably aren’t telling the story about how you get sales, how you get paid, and how you spend expenses. If you are confused about what’s a direct cost and what’s an overhead cost, you’re going to have a hard time describing to a buyer what their profit might be. And if you are really closely held by a small group, sensibly managing the business to minimize taxes, the costs of management of a future manager by a buyer are very muddy. You’ve either overstated the cost of management because of how the partners agreed to compensate themselves, or understated it because the partners are looking at profit distributions instead of salaries.

Frank Williamson: It is totally appropriate that all of us with closely held firms manage our businesses to minimize taxes and manage our own risks. And at the same time, when it comes to sale time, buyers are going to look at the business through a different lens. How you keep your books matters a lot. Get that so a buyer can see it easily — as early as you can — and you’ll be in better shape for telling the story.

Jeff Klaumann: Well said. That’s really one of those important lenses when you start to move to selling your firm — you have to take your operator hat off and put on an investor hat, and look at your business through a completely different risk profile. Almost every firm in our community starts with a founder with some expertise. They probably don’t want to work for someone anymore, they want to hang their own shingle, they have some relationships, and some great founder’s judgment. That’s the typical origin story. So, how does a founder honestly tell whether the business is still just them versus something that is truly sellable — or something that’s going to be discounted extensively when it comes to exit?

Frank Williamson: I think there are two really good ways to tell. One: can you and another person have a rich, data-filled conversation about the future after a transaction? The granular future — this is what we think revenue will be, these are the additional sales we can achieve together, these are the expenses we’re going to add or cut — at the level of detail. If you’re in a position where you can have that conversation — not a wave-your-arms conversation, but a real planning conversation — then you’ve got a predictable business that another person could help you run, whether you leave immediately or not. If you can see the future along with someone else and you can together feel confident in it, that’s a symptom of good building blocks — good bones underneath the business. Challenge yourself: can you sit down with another person — not an imaginary one — and really have a planning conversation?

Frank Williamson: The second thing is the founder’s bottleneck issue. Make the KPIs of your business the founder’s bottleneck KPIs: how are we progressing on non-founder sales as a percent of the total? How are we progressing on non-founder delivery as a percent of the total? Have we built in a job description and pay for the visionary role and the integrator role? All those components of maturity that are part of the lessons you all highlight are really powerful for determining whether it’s a saleable business. What you’re trying to do is separate the person in the owning role from management. And in order to do that really effectively, those two roles need to have gotten themselves separate before the deal.

Jeff Klaumann: That’s fantastic. For the benefit of listeners who are unfamiliar, the founder bottleneck is a term we use within Collective 54 that describes the early stages of the firm, where the firm runs on founder heroics — the founder wins business, the founder delivers the business, the founder makes most decisions. That’s founder magic. It’s the repeatability that is only present because the founder is there. As Frank was illustrating, you have to remove that dependency. And once those things are removed, the sellability of your asset is going up. What should a founder do well in advance of selling that really helps them have real deal leverage in the future?

Frank Williamson: Yeah, that’s a great question. People meet us at the point of a transaction — sometimes opportunistically, sometimes having decided to declare victory, and sometimes in capitulation. What makes it, from a distance, more saleable? All the things that make it healthy and, for lack of a better term, autonomous. Can the machine keep running when the owner steps away? That’s so important for the sale, because only the ownership is changing, ideally, and the management is not. Those are all the good lessons of Collective 54’s frameworks — how in this community we think about growing, scaling, and exiting.

Frank Williamson: We tell almost all our clients that they’ll be stronger negotiators if they’re very clear about their no-deal option — be prepared to walk away as a way to have backbone in the negotiation, and have thought through what you’re going to do that enables you to walk away. But beyond that, we also have a general belief that every business is saleable at some terms. An owner might not like the terms. So the point of all that pre-work was that you would get terms that you like. If you’re not preparing, you might get terms — they’re just not ones you like.

Frank Williamson: We were working recently with a software development company — all the headwinds in software development these days: big clients, often chunky, AI as a competitive threat, project-based work. These owners did not want an internal sale to their employees when they were ready to exit. They really wanted to uncover every rock to sell the business. The logical buyers are other software development companies who are growth-minded and looking to build scale by acquisition. Can you sell a small business to a large or similar business? Almost certainly yes, because it’s a lot of work to hire 20 people who are all talented and work well together. You’ve got an asset there — people working together, a track record of projects. But what you don’t have, in the case of this business and many dev shops, is a predictable future of where revenue’s going to come from. That was back to this question of, could you, with a specific other person, describe the future? That was their challenge the whole way through. They got there, just about with one buyer, and one of the things they did in describing the future was realize that they share a large client. That large client turned out to be risky — and the client potentially dropping one or both killed that particular version of the deal. These folks had a backup plan — a no-deal option — where they could say, if we’re not going to get a certain amount of cash at closing, we’re okay walking away. They could have completed a deal at some terms — probably something that can be called a sale, but was really an acquihire.

Jeff Klaumann: That’s a great example to really demonstrate the difference. A firm that’s at that size, hey, they’re profitable — but is it really sellable? And then you introduce client concentration, and the risk that comes along with it, and before you know it, the deal’s in jeopardy. You hit on one thing — earlier you were talking about terms, and I saw that recently you wrote an article about how terms beat price. So, why don’t we take a second to talk through that, and then we can wrap up our show today.

Frank Williamson: Well, yeah, let’s begin with that old saying: we’re doing business together, Jeff, and you can choose the price or I choose the terms, and I’ll always take the terms. Because we can make any price appear to be the price. In mergers and acquisitions, the price is very assumption-intensive. Validating those assumptions is a big deal. Lots about the price, even in the cleanest deals, gets a second look at about 90 days after the deal is done, and about 18 months after the deal is done. How the articulation of when and how the price will be paid, and how it can be clawed back — that’s crazy important, and a little bit counterintuitive. Like everybody’s contract details, there are some tricks buried in M&A negotiations. Just be aware they’re there, and have a good guide for the journey.

Frank Williamson: Maybe this helps as a closing thought. For small professional services firms, price is in three buckets — think of it as the little game with three upside-down cups that you’re moving around. Those three buckets are cash at closing, cash over time, and compensation. And value will move among those buckets, however you and the buyer want it to move. The best way to think about price is it’s the sum of what’s in all three buckets. Then you can free yourself from constraints about, did I get the price I want? The next level down question is the one that’ll really tell you how you did on the deal: did I get the price at closing that I needed? Did I get the price over time with the right amount of risk that I needed? And if something had to sub in as compensation in order to get to where we needed to get to — okay, I’ll put it in that bucket.

Jeff Klaumann: That’s a great visual of the three buckets. You’re exactly correct — those are indeed the three buckets and ways to think about it. So, Frank, thank you so much for joining me today. It has been fantastic to have you on the show.

Frank Williamson: It’s a total pleasure. Thanks for having me.

Jeff Klaumann: Absolutely. All right. Well, before we wrap, a couple calls to action. If you’re a member, keep an eye out for the invitation to our private Q&A session with Frank, where you can ask him your questions directly. If you’re not a member, and today’s conversation has you thinking about joining, head over to Collective54.com, fill out an application, and we’ll be in touch. And if you’re not quite ready for either of those, there’s plenty more content on our website at Collective54.com, including past episodes and insights on the industry. So, thanks for listening. Until next time, I wish you the best of luck as you grow, scale, and someday exit your firm.

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