Episode 166 – How to Go From Idea to Implementation Faster Than a Speeding Bullet – Member Case by Gail Doby

In this session we delve into the fast-paced world of an executive coach in the interior design industry, exploring the methods that she uses when it is time to stop studying and start doing. Our role model shares her expert insights on how to deal with a large volume of ideas, how to prioritize them, how to sequence them, and how she includes her executive team to quicken implementation.

TRANSCRIPT

Greg Alexander [00:00:00] Hey, everybody, this is Greg Alexander, the host of the Pro Serv Podcast, brought to you by Collective 54. Collective 54 is the first community dedicated to the unique needs of the boutique professional services firm and its founder or founders. And on today’s episode, we’re going to talk about going from idea to implementation. In a nanosecond, and doing so in a way that, you know, compresses time to result. And this is something that I talk to numbers about a lot, and I often hear them say, hey, how do I go faster? So I’m on the lookout for people that are going fast. And we have a great guest with us today, a member, Gail Doby. And Gail runs a company called Pearl Collective, and I’ve spent some time with her, and I’ve gained an appreciation for how she goes from idea to implementation super fast. In fact, I should say ideas to implementation. So with that go. Why don’t you introduce yourself to the audience, please? 

Gail Doby [00:01:24] Sure. Well, I’ve been running this company for 16 years, and I just joined, the collective November of 2023 at the beginning. So I was just in time to join your live event, and I walked up to you at the event, introduce myself, and you chatted with me for a few minutes kindly, and said at the, toward the end of that five minutes or so you said, be sure and check with one of the people on the team and get on my calendar. So I did that while I was there in the next few minutes, and Bonnie set me up for our first call. So we’ve had a few calls since then, and that’s kind of how we got connected. And, I did get connected to you through your book, through Amazon, and that’s how I reached out and became a member of the group. So I will tell you in advance. I normally don’t join groups. I’m not a group person, but I have to say your group is different. 

Greg Alexander [00:02:23] Well thank you. I appreciate you saying that. So. So you’ve only been here since November. So at the time of this recording, it’s the end of March of, 2024. So what is that? Five months, I guess. So maybe we’ll go. Maybe we can start off with some examples of this, the ideas and how you implemented them in particular. So I understand you’ve got a few to share with us. 

Gail Doby [00:02:48] I do, I do, I have so many. And I would start with probably one of the bigger ones, because I’m also the person that likes the financial aspects of the business. And I have a finance background. So what happened was I was looking for somebody that could give me benchmarks for what I’m doing. And you gave some benchmarks, fairly early on. And one of those was working toward an 80% gross margin. So immediately that started me thinking about what did I need to do to to change and to have that happen. And then you and I had a conversation and you told me one of the well, actually, you told me several things in that meeting, and, one was that I should really think about just having one product line instead of three, and that I should consider having just one live event a year. If I had a live event and I went back and I did a model for that, did a financial model for it, and immediately took it to my team, and I said, here’s what happens if we do these things. So I told you that I didn’t know how to drop the two products, but I did figure out that I could combine two. And so once I came up with the idea of combining it, I took it back to the team and I said, okay, here’s what happens if we do this. We simplify our business. We streamline things. We cut our cost of operation for that and also our coaching costs. And we can actually cut down to one big event a year, which can between doing those two things, we can cut about 200,000 out of our cost of goods sold. And guess what? That gets us to that 80% gross margin. So that was one of the very first things that I tackled. 

Greg Alexander [00:04:31] That’s the fantastic example and for so many reasons. And I just want to highlight a couple so that those that are listening to this can get the most from this session. So that’s an example of originating an idea by starting with data. And those are usually the best ideas to rush to implementation because there’s a very clear path. Meaning I should say there’s a clear finish line. And then once you see where you want to get to, the path becomes obvious. So in Gail’s case, she wanted to get to 80% gross margins, which is very doable for a services firm. And she so she reverse engineered her way into that and combined some service offerings, simplified service delivery and presto, you know, she’s on her way to hitting that gross margin target. So the big learning there is kind of starting with the end in mind, using data as a way to determine which ideas to implement and what order. So that’s a great example. So how about another one. 

Gail Doby [00:05:34] Oh gosh. Well I what I’d like to do is highlight some of the advantages of being collective. 54 for one is the people that are in the group. And although I’m not usually a group person, what has happened is I have reached out and I’ve asked a question and I’ve gotten answers immediately from people within the group, or just listening to some of your episodes in your podcasts and some of your sessions. I, have taken some of those ideas and reached out to the consultants and already have been in touch to connect and start using their services. So one of those, I was talking to Tom Schwab, and this is after hearing you talk about, recording your Amazon book and then also starting an advertising, campaign for that. So I took that back to the team and I said, gosh, we should really do the same thing. So we’ve already revised my book. We have new calls to action in it, and we will get back in touch with, the person that you had worked with. And we will get some ads started on that. And then also, I just talked to somebody that Tom Schwab mentioned to me just two days ago, and we’re already talking about recording the book, so I’ll get the recording of the book down, which will be great. So that was another one that I just took action on. And I’ve talked to, Michelle friends about writing a little mini book, and I have that plan on the calendar for the, the, for the summer time. So those are a couple of other things. So the link to that, the second connections are just amazing. I she’s like, I’m trying to think of all the things that I’ve done. You’ve of course, connected me with an acquirer, of possible acquirers, which we will chat more about. But, just really nice people and, really good fit. And I think with our company and we’re just starting the process of having a conversation. So that wouldn’t have happened without collective 54. 

Greg Alexander [00:07:31] And again, I appreciate you saying that. And I want to be careful. And Gail, you being so kind of this doesn’t come across as a collective. 54 advertisement. It really isn’t. What I want to focus on is, is going from an idea to implementation in the in the use case. I want to highlight there. And this is the power of a collective. And by the way, I should mention that Gail runs a collective herself now. It’s a collective for interior design firms. Right. And so therefore she’s skilled at making these connections and organizing group activities. And this whole concept of peer to peer learning and one to many, business models, where you go really fast when you have access to the people that you need to have access to. So often we have a business problem and we don’t know who to turn to or where to go. And in the world of boutique professional services firms, they tend to be highly nuanced problems. So, for example, you want to turn your book into an audiobook. Okay, well, there’s a lot of different ways to do that, but isn’t it nice to be able to go to somebody who’s done that before? For somebody who market, sells and delivers expertise for a living? I mean, that’s a very specific thing. You want to run advertisements on Amazon, going to a generic advertising agency that runs advertising in all of its different forms. That’s one thing going to somebody who absolutely specializes in running ads for a book on Amazon, that’s a such a nuance thing. So plugging into peer networks, whether it’s ours or others, gets you access to this network, and it just speeds up finding the people that you need to find in order to get things done. Which is, just a great example. And I really wanted to highlight that. Question for you on when you take these ideas so you get an idea, you go back to your team and you say, let’s implement sometimes. The team says, oh gosh, let me guess. He just went to another collective 54 event and here comes the IC flavor of the week idea. So how do you how do you deal with the volume of ideas, and how do you deal with the kind of change management component and getting your team behind the ideas? 

Gail Doby [00:09:49] Well, that’s so interesting that you asked me that question. I was just having a coaching call with one of my clients about that very same thing. And what I’ve learned is that you go back with the why, why are we doing this? Why is this important? What is it that we want to accomplish? What is the outcome we’re trying to reach, and what are we trying to solve? And if we can solve the problem with making a shift in what we’re doing, and it simplifies how we’re operating our business, then it’s a no brainer for the team to say yes. And by the way, if I add in another thing that I did, pretty quickly after we and I talked, like within two days, I talked to my, leadership team, and I decided to pull the executive team out of that because you said I needed to have a succession plan that was very well laid out. And I said, okay, fine. And I went to them and I said, here’s what we’re going to do. I need for you two to be on my system, my succession plan. We’ve already talked about this. Here’s how we’re going to do this, and here’s how we’re going to roll it out. So we’re going to have an executive team. And we’ll have a leadership team that’s a little bit broader. So that was another thing I did to make sure that I was positioning my company for exit, and I hadn’t formalized it, and so that it took that moment to do it. And so as soon as I did that, then I started bringing them some of these ideas, and they know I’m preparing for exit. So this is just part of me preparing them so that they can lead the company too, because they need to be able to work with me as a team to solve problems. And we’ve got to go fast. We need to get this done. Yeah. 

Greg Alexander [00:11:26] Another great example, right? I mean, you can only go so fast if you’re one person, you can go a lot faster if you’re a team because you can throw some more horsepower at it. You know, I think it was it was a two people that you included in that conversation is, if I remember correctly, right. So now we have three people working on these things instead of one person working on these things. So the takeaway learning there for all of you that are listening is, you know, if you want to speed up the time it takes to implement all these ideas, make sure that you are distributing the ideas to your team intelligently, and that you have an executive team that enthusiastically wants to implement them. So that’s a that’s another great example. You know, maybe slightly off topic, but since I have you and I know our members are listening to this as part of our weekly programing, you were you were running it firm for 16 years. And you weren’t a joiner of groups. And then after 16 years of running the firm, you decided to do something you don’t normally do and join a group, which is uncommon, I mean normally. After doing something for 16 years. I hear sometimes types people, what am I going to learn? I mean, I’ve been doing this for so long, I know my business so well. Like, why join something like this? So what was happening to you in the fall of 2023 that made you open and, you know, receptive to something like peer learning? 

Gail Doby [00:12:49] Well, a couple of things. First of all, I think if you’re going to be a coach and you’re saying that people should join a membership group, that you should consider doing that occasionally. This is not my first time, but I was looking for something very specific. So I was looking for specific answers. And I hit the jackpot when I happened to talk to you at the back of the room, because you’ve been very kind to help me with a few things along the way in the last couple of months, because I was looking for specific answers, and I knew that if I was with a smart enough later that I would get the answers I needed. That was what I was looking for. In. Your content has been really rich and good, and even today I was not expecting to be on the call and to learn anything about time management, and I thought I got a couple nuggets out of that today. So I think just be open when you are considering what it is that you need, but also be very specific about what you’re looking for it because I knew what answers I wanted, I wanted benchmarks, and I saw that that was part of what you had in your program. And I knew if I had benchmarks, I would be able to come to conclusions faster and make decisions and move on. So that was really important to me. 

Greg Alexander [00:14:01] Yeah. Great answer. And I think the reason why you go so fast and I think you have an unfair advantage here because you do this for a living. You know what it means to be a member of an organization. And you probably have your members and you know which ones, the great members that get the most out of the program. And in the end, you’re doing that yourself now, like you’re you’re modeling the positive behavior that you’ve seen over these 16 years, so that the learning to circle on this one for the listeners is, you know, if you want to go faster, maybe study what it means to be a great member in an organization like collective 54, like, like, how do you maximize, you know, all the value that’s available to you and how do you do so at a time in a cost effective way? And for many of our members, this is the first time they’ve ever been a member of a collective, been a member of a membership organization in a business context. And it’s not intuitive. I remember when I my first experience, I was a member of OEO and a member of Ypo, and I was a member of target 21, and I didn’t really know what it was. I didn’t understand the difference between like a training organization or a consulting organization or like going into like an executive education course and like a Harvard or something, you know, versus a membership organization. I really had to learn what that meant. Any advice for our listeners on, you know, how to learn how to operate within a collective? Well. 

Gail Doby [00:15:31] Well, I think first off, if you are good at identifying what your problems are in your company, then that’s number one. If you can get it written down and figure out what your priorities are, focus on your number one priority and then reach out to the leadership of this group or to the person that you’re assigned to that’s there to help you and connect you with the right people and just start asking questions. Because if you ask questions, the quality of your questions determines the quality of your results, as we all know. So if you are if you have some questions that you need to have answered. Figure out what you need help with and if you’re stuck. I’ve heard this before and I love this statement. If you’re stuck for more than three days, you need help. So figure out who you need to go to to ask the question. And then once you get the answer, then makes the right decision based on like you said, data is very important and you’ve got great resources here within the group. So whenever I’ve had a problem or a question, I’ve just reached out and asked a question of somebody and I’ve gotten an answer almost immediately. That’s all that’s been really good. And, I want to give you another, kudo for the summarization of EOS and how to make this apply to our industry. I’ve been on EOS for about six years, and I took that and I summarized it down into 14 pages, and I went back to my leadership team and I said, we need to make these changes. So we’ve already started and we’ve adapted and we have new KPIs, and we have changed our, structure of our meetings so that we’re doing one data meeting a month and we’re doing the rest of those are issues meeting. So we’ve shortened our calls in order to do that. So that’s been a time saver for our leadership team, which has been great. 

Greg Alexander [00:17:24] Is that’s a fantastic example. I mean, for those that aren’t familiar, EOS is the entrepreneur’s operating system, and it’s kind of a management methodology that a lot of our members use. I use myself and I have for a long time, and I love it. The way to make it most effective is to customize it to your own individual situation, which, is what Gail is talking about. We attempted to give you a running start by customizing EOS to our application, which is for the Boutique Pro search firm. And our little firms are very nuanced things. Right. So a generic methodology applies to all types of businesses of all sizes and shapes and, you know, lifecycle stages. It’s a little too high level. So if you can customize it to your situation it can be that much more impactful. Which is which is what you’ve done. Well, listen, I could I could talk to you about this forever. You know, this podcast is meant to be 15 minutes, and it’s a summary of what we’re going to discuss in the one hour member Q&A session. And I know that our members are going to attend with a lot of questions, because this is an area of struggle. Too many ideas. Not having enough time to get them all in, implemented, figuring out which ones to prioritize, how to measure them after they’ve been been implemented, how to take them from kind of a framework state to make them tangible, you know, to your business, you know, next Tuesday, these are all things that you’ve done very well. So on behalf of the members, Gail, thanks for being here and sharing your story with us. 

Gail Doby [00:18:48] My pleasure. Thanks for having me. 

Greg Alexander [00:18:51] All right. Great. All right. A couple calls to action. So if you’re a member and you’re listening to this and you want to learn more from Gail, look out for the meeting invitation that we’ll be sending you for her, Q&A session on the Friday role model, episode. If you’re not a member and you want to become one, go to collective 54.com and fill out an application that will get in contact with you. And if you just want to learn more, I point you to our book, The Boutique How to Start Scale and Sell a professional services Firm, which you can find on Amazon. But until next time, I wish you the best of luck as you try to grow, scale, and maybe someday exit your boutique. Take care everybody.

Episode 165 – Time Management: Strategies for Maximizing Employee Productivity in Boutique Professional Service Firms – Member Case by Benjamin Edwards

In this session, we delve into the science of time management and the art maximizing employee productivity within boutique professional service firms. From strategic time management techniques to fostering a culture of efficiency, we explore actionable strategies to ensure every hour counts. Discover how to optimize resources, streamline processes, and empower employees to thrive, ultimately driving success for both individuals and the organization as a whole.

TRANSCRIPT

Greg Alexander [00:00:15] Hey, everybody, this is Greg Alexander. Welcome to the Pro Search podcast, brought to you by collective 54. On this episode, we’re going to talk about time management and time management in the context of employee productivity inside of a boutique professional services firm. And I got a special guest with us today is a member of collective 54. His name is Ben Edwards, and Ben is with a software company called Cmap that specializes in this very thing. So Ben, welcome to the show. Please introduce yourself to the audience. 

Benjamin Edwards [00:00:48] Hey, thank you very much for having me, Greg. And hello everybody. At C 54. It’s Greg said I’m Ben Edwards, I’m the VP of partnerships here at C Matt and I’ve got a dual role. I get to lead our go to market efforts with boutique consulting in North America and also run all of our partnership opportunities, including being in C 54. 

Greg Alexander [00:01:10] That. But. We hear from members all the time. Is their time starved?  I don’t have enough time to do this? I don’t have enough time to do that. And yet, on the same token, you know, when we look at the benchmarking data, the margins are sometimes where we would want them to be. And then the services business, our inventory is the hour, the billable hour, if you will. So from your perspective, what do you think kind of the basics of time management are in this in the context of what we’re talking about today? 

Benjamin Edwards [00:01:42] Well, you’re absolutely right to address that. But professional services firms people are both the biggest cost and source of revenue. Yet we still find a surprising number of businesses not tracking time. Maybe part of that is down to the fact they use a time tracking point solution, and adoption from the top down and to employee level isn’t particularly strong because there’s a perception that it’s a little bit big Brother Ray. Maybe it’s being used by the execs in the firm to sort of monitor. Performance where it isn’t necessarily the case actually like you address. There’s some benchmarking data in North America and didn’t hear me. I’d suggest those firms that keep a tight hold on time management are more likely to have stronger gross margin, better utilization rates, and be in the growth cohort. 

Greg Alexander [00:02:38] Yeah. So when you’re working with clients of yours to implement time tracking, first off, what is the kind of trigger event that gets them to finally do it. And then when they go to implement it, what are the 2 or 3 things, the obstacles that are standing in the way? What you know, what can we learn from the previous implementations to help our members avoid some common mistakes? 

Benjamin Edwards [00:03:07] Yeah, I think typically they would start to look at time tracking actually, after they’ve used a time tracking point solution on its own and not seeing a huge amount of value from it, unless obviously they do purely chain and work, in which case it directly links to billing. But within C 54 you talk a lot about growth and scale and product ization and being able to repeat business. And presumably that’s fixed fee type engagements. So they come to us because they want to join the time keeping data point alongside financial information, project management information, combinations of pipeline and live engagements. So they feel they’ve realized that actually from a maturity perspective and a sort of growth scale and exit perspective, it’s imperative to connect all of those dots together in terms of some of the challenges that we see with it. The first thing to sort of point out is probably adoption. And actually, this is probably where the most interesting element is quasi 54 members, because you’re a consultancy and part of your skill set is. Delivering value to your clients and how you propose things to people is really important. It’s the same with your employees. How you position it inside your organization is going to be absolutely imperative to the adoption. If I may, I’ll give you a couple of examples. So I guess the starting point is firms who can tie in with KPIs. And that then might lead to a stronger margin, which you can then suggest your employees means that they can have greater growth opportunities inside that firm. They’re going to be part of an organization that’s growing and scaling. And if you want to take that even further, you can even incentivize it to a certain degree, i.e. profit sharing. The other angle from a selling it in perspective to employees that can overcome that adoption hurdle is making it about them. So utilization is a really key metric for any professional services firm. But often employees look at that and think that’s something not going to be judged by, you know, which can be true to a certain extent. But actually if you’re implementing time management, it can be really beneficial to the employee because you can track non billable time, which is how much time have they invested in learning and development. How much time are they doing spending on IP creation or progressing their own career. And you can track that. You can also make sure that people don’t get double booked. People don’t experience, so over being being over resourced onto engagements and then at risk of burnout. So it’s a lot of value that you can give to your employees when you’re actually implementing a solution like this. It really is about how you sell it. The second most important thing to making sure that actually it’s a successful initiative is connecting and with all the other key components of running your operation. So. Analyzing the information to make sure that it’s aligned with your product ization strategy. Tying it into the project financials so that you can make sure there’s no scope creep or delivery and it stays on time, stays on budget. And then you can reinvest that. Hopefully that’s useful. 

Greg Alexander [00:06:31] Yeah. Those are a couple of good, gotchas to watch out for. I particularly like how you sell it, and I think that makes a lot of sense. And showing how it’s to the benefit of the employee to do this. You know, for our listeners, you know, if you think about the challenge, especially with project based consulting firms, the challenge when you have limited forward visibility is matching revenue and expenses. You know, they’re constantly in the situation where they were. They fill the lake, drain the lake, fill the lake, drain the lake, you know, and they’re in there at times. They’ve got, you know, too many people sitting on the beach, so to speak. And then other times you’re running hot at 120% utilization, and they can’t figure out which way is up. And time tracking is a solution to that because you can see where the inventory is going, where all the time is going. And this better allows you to match revenue and expenses and get away from the boom bust cycle associated with project based consulting firms. Now, at what point been in your opinion? Is it appropriate for a firm to kind of move off of a unsophisticated, manual, spreadsheet driven approach to, you know, using a software tool to make this happen? 

Benjamin Edwards [00:07:44] Oh, really? We can split that down into two cohorts. There’s the first time founder an organization which typically adopts it later in the cycle, i.e. somewhere between 20 and 50 employees, depending on usually how much work they’ve got on and whether they can free up a resource to lead that type of project internally. And then there’s the second time founder, who knows absolutely that the operational guardrails that will lead to efficiencies right from the off. And they can embed practices from day one and they will adopt it sooner. 

Greg Alexander [00:08:20] So the person that’s been there and done that tends to adopt it sooner because they’ve seen the error in their ways and they and they know the value of it. Absolutely. You know, you talked about these time tracking systems, connecting with the other systems inside of a firm. So let’s let’s have a conversation around that. So first how does a time tracking tool connect to a CRM. 

Benjamin Edwards [00:08:42] Well, if it’s in a city like ours, an operations platform is part of the tech. So actually, it’s part of the solution that you’re you’re purchasing from a business like Sema. However, quite a few businesses, particularly in the North American market, have already got a CRM, namely Salesforce and HubSpot being the two. And in which case you just have an API based connection between your CRM and your PSC. It’s a two way connection, and that enables you to also do a number of things, so you can actually start resourcing and soft booking people onto pipeline opportunities. But. Okay. And that will help you avoid that boom bust scenario you talked about earlier because you got that forward looking visibility. Let’s talk about the banking finance system. 

Greg Alexander [00:09:33] So how does a time tracking system like yours connect into the financial system? 

Benjamin Edwards [00:09:38] For pure TNM based work, it’s imperative because what people record from a time sheet perspective goes on to the bill and sent to the client, and therefore that connects with your finance system. But I know in C 54 and we wholeheartedly agree moving away from that towards more fixed fee, including performance based, remuneration is still imperative to have that financial connectivity because you want to make sure that as the project is ongoing, you’ve got visibility on where that time that’s been spent by your team tracks against that initial budget, so that actually you’re not going to experience the scope creep that is so common in professional services firms. And often it’s really well-meaning, over delivery. But actually, as an owner founder, if you can instill that sort of clarity and confidence from PMS to address those challenges head on, either with the client or delivery team. That’s that’s margin that you can reinvest in the business for whatever you need. Yeah. 

Greg Alexander [00:10:45] The thing that I always got the most value out of was looking at. The financial information, which time is a component of at the individual product project level. Before the project was over. So a hypothetical example to illustrate my point. You know, let’s say that I’m in a six month project and it’s a fixed fee and the client is agreed to milestone based payments. So maybe they pay a third of the project at project kickoff, a third at the halfway point and the third at the end. It’s very common that we see this in the North American market. Well, in between those milestones, I’m trying to figure out, you know, am I going to turn a profit on this project or not? And that largely comes down to, you know, how accurate was my scoping when I submitted a proposal, and am I tracking to that original scope, or am I off scope quite a bit? And back when I had my boutique, it was very simple. We did a green, yellow, red, green was, you know, we’re on track. Yellow was, you know, we’re starting to see some problems, but it’s not a disaster. And red was, you know, what the heck happened? You know, we have massive scope creep. And if we don’t course correct, you know, early in the project we’re likely to lose money, which would then trigger us to go have a conversation with the client and point out point out the fact that, you know, they’re asking us to do things that weren’t originally scoped. You know, is that was that unique to my situation or it was is that a common use case and a common benefit that you see others realize? 

Benjamin Edwards [00:12:16] Yeah, really come in. And the other one to add to that is having a view in your progress page website, connecting time at a project level against your invoicing so that you know, you can make sure that you’re not. Spending a huge amount of time on a client work that maybe hasn’t been fully invoiced yet, and you need to catch that up. Or the reverse is true where you’ve invoiced a hell of a lot upfront, but actually you haven’t spent a huge amount of delivery time on it, and therefore it’s going to catch you up at some point. So that’s another keenly viewed report in our system, I would say. 

Greg Alexander [00:12:52] Yeah. And for those that aren’t familiar with that, whip is work in progress. So Project Whip is work in progress. That’s some, some industry slang there. I just wanted to clear up, you know, we we then collected $0.54. It’s professional services. Of course, you have the consulting shops and they get the term whip, but others like maybe, marketing agencies and architectural firms and things of that nature may not, may not understand that terminology, but we all should understand that terminology because it’s, it’s relevant across the segments. 

Benjamin Edwards [00:13:21] Yeah, absolutely. So we service businesses across professional services. And what’s always interesting just to know is the differences in the overall strategy, but also the KPIs and the margins and the growth of boutique consultancies versus agencies versus AEC versus life sciences. And there are little intricacies and sort of common stumbling blocks that are pertinent to each of those different industries. 

Greg Alexander [00:13:48] Yeah. We try to keep these podcast short to about 15 minutes, and we’re at the window right here. But then on behalf of the membership, we certainly appreciate you coming on and sharing your wisdom with us. We, we’re looking forward to the associated role model session, which, for those that are not members that are listening to this every week at inside of collective 54, we’ll have a Friday role model session, and Ben will be the featured role model. And one week. And that’s a private one hour Q&A session where members will be given an opportunity to ask their questions to Ben directly as it relates to and improving employee productivity through time tracking. So a couple of calls to action to the audience. So if you remember it, look for the meeting invitation for Ben’s upcoming weekly role model session and attend that so you can ask your questions directly. If you’re not a member and you think you might want to become one to learn from people like Ben, go to collective 54.com and fill out an application and we’ll get in contact with you. And if you’re not ready for either of those two things and just want to learn more, I point you to my book. It’s called The Boutique How to Start, scale and Sell a professional services Firm, and you can find that on Amazon. But Ben, it was good to see you. Look forward to your session on Friday. And thanks for being here. 

Benjamin Edwards [00:14:57] Thanks, Greg. Look forward to it. And to bring you questions, bring you scenarios. We’ll try and. 

Greg Alexander [00:15:03] All right. Sounds great okay. Thanks again everybody. Until next time I wish you the best of luck as you try to grow, scale and exit your firm.

Episode 164 – From Client to Founder: The Journey of Building a Boutique Professional Service Firm – Member Case by Dave Makerewich

In this episode, we delve into the remarkable journey of a founder who transitioned from being a client to establishing a thriving boutique professional service firm. Discover how his firsthand experience as a client shaped his understanding of the industry’s needs and fueled his entrepreneurial spirit. Through insightful anecdotes and lessons learned, uncover the unique challenges and triumphs of building a business from a client’s perspective.

TRANSCRIPT

Greg Alexander [00:00:15] Hey, everybody, this is Greg Alexander, the host of the Pro Serv podcast, brought to you by collective 54. If you’re not familiar, collective 54 is the first. And to my knowledge, the only mastermind community dedicated exclusively to the unique needs of a unique audience and that unique audience are founders and leaders of boutique professional services firms. In fact, the number 54 is the industry code for professional services. So if you’re somebody in consulting or a marketing agency, a law firm, accounting firm, architect, you know, you name it, some of that market sells and delivers expertise for a living and you’re a boutique, which is kind of post startup but pre scale. Then this is the place for you. On today’s episode we’re going to talk about how one leaves industry. And starts a boutique professional services firm by taking advantage of. The previous experience in the industry, and how that can lead to correctly selecting a niche to operate in, and how that can lead to accelerated success in the early days of being a boutique browser firm. And with that, I have a member of collective 54. I’m going to give him a chance to introduce himself. So, Dave, it’s good to see you. Would you please introduce yourself to the audience? 

Dave Makerwich [00:01:41] Yeah, my name’s, Dave Makerwich. I started, Maven about eight years ago, and as Greg mentioned, I’m coming from a different industry. I used to work in a big corporate, sort of setting at, a large pharmaceutical company and worked with a lot of professional service firms in the marketing and advertising space, and kind of just saw a unique opportunity and, decided to jump in. 

Greg Alexander [00:02:10] So, Dave, when you were in industry, you were in a pharmaceutical company. Is that correct? 

Dave Makerwich [00:02:16] Yeah, I was working as a brand manager in the marketing department. 

Greg Alexander [00:02:20] Okay. And then you would hire. Marketing agencies as the client, as I understand it. Is that accurate? 

Dave Makerwich [00:02:28] That is accurate. Usually, you know, the job of a marketer in that is many fold, and one of them is managing all of your advertising materials for your Salesforce, for customers, for, you know, patient materials and all of that. All of that work is generally, you know, given out to a third party agency to help assist with all of that. 

Greg Alexander [00:02:52] So you had a very unique perspective, having been the client. And then you went ahead and decided to start a firm that would serve you or others like you. Do I understand that correctly? 

Dave Makerwich [00:03:05] That’s correct. 

Greg Alexander [00:03:06] Yeah. And this is the thing that I really want to circle and highlight, because I don’t know if you know this day, but you and I share that in common. When I started, my boutique was called SBI, which stood for Sales Benchmark Index. I was you. I was, well, I should say I was similar to you in that I was the client. I was a sales executive in a big tech company, and I hired business to business sales effectiveness consulting companies. And because I was the client, I really understood the client. So when I mustered up the courage to become an entrepreneur, I started a consulting company that would serve people like me. And that gave me an unfair advantage, because all the work that somebody has to do to kind of understand the ideal client profile was really easy because I was the client. So I had to understand myself, which I guess in some cases isn’t easy. But in this case was. So, and I want to highlight that as a great opportunity for, for many, if you were once the client and you now serve the client, you have a huge advantage today. Why don’t you share with me your perspective on what that advantage is and how you leverage it here in the early days of Maven, and how that has led to what’s now an eight year success. 

Dave Makerwich [00:04:31] Yeah. Great question. I mean. I think when I first started working in the area and working with these third parties. It didn’t take long to realize that the con. There was a few things missing. Like, I feel like, you know, pharmaceutical advertising was such a specific thing with with such a detailed regulatory environment, a lot of rules around what you can and cannot do. And at the end of the day, I just I kind of felt as the, the person hiring these agencies, I was never really happy with the level of service or the quality like, I, I felt like for the the amount of money being spent on things and the amount of time it was taking to happen, there was just something I was like, this is something’s got to be wrong here. Like, why? Why is this so inefficient? Or why am I so frustrated all of the time? And so, you know, so yeah. Is that was that just me or was that kind of, you know, was there actually an opportunity? And I think I think when I started to ask around my peers and talk to others, it was just like a similar feeling, like a lot of other, you know, marketers were saying the same thing, like it was just this kind of accepted reality that that this is the way it is and this is how much it costs and this is how long it takes. And yeah, it’s frustrating. You got to kind of do the work yourself. And I think, I don’t know, it just it just led to this idea that I didn’t know anything about how to do the other side of the business, but I knew absolutely, as the client what I wanted and what I needed. And I think that’s all that I really needed to kind of drive me to take that next step and just jump in and try to figure it out. 

Greg Alexander [00:06:16] You know, so you you backed into the right way to do it. And I want to highlight this, which is very often people think about the service first and the problem second. So therefore they run around with a service or a product looking for a problem to solve, and they never really get off the ground. In your case, you had great clarity as to what the problem was, the frustrations that the clients had, which was a huge advantage. And then you could kind of back into, okay, so if if this is what I was looking for and the current providers didn’t offer it, you know, I can engineer that, I can figure out what the service needs to be to make the clients happy. And that is the basis upon which I’ll differentiate myself and I’ll win business. And it’s, it’s a nuance thing, you know, it’s not it’s not so obvious, but it is a huge advantage. And I think that’s why you’ve had the success that you’ve had. Which speaking of which, just for context, for listeners, what types of services do you provide clients? 

Dave Makerwich [00:07:21] Well, again, our clients are very niche and very specific. And so, you know, generally, if they’re marketing managers of pharmaceutical brands and those brand managers are looking for assistance on the entire portfolio of, of marketing and advertising tools that they need to to drive growth of their own brands and their own business. So it’s, you know, it’s kind of like, the services, there’s a series of services that are kind of typical and, you know, bread and butter and there’s sort of an extension of can you be innovative on top of all of that, and can you be a strategic partner with them and make them feel like, you know, you’re a part of their brand team? So it’s both, I guess. I don’t know, it can be very diversified yet. Also sometimes simplistic in in what you’re providing. 

Greg Alexander [00:08:18] Okay. So again, just for context, maybe like one example of a bread and butter service that everybody that might not know pharmaceutics could at least conceptually understand. 

Dave Makerwich [00:08:27] Sure, sure. So. So you’ve got a sales team there going out there speaking to physicians. They need materials when they’re speaking to physicians okay. You’ve got to give them a like a detail that has here’s the information doctor. You need to know about my product. 

Greg Alexander [00:08:41] Okay. Perfect. Yeah. That’s very helpful. So so when you were the brand manager on the other side of the desk, and you were hiring somebody to produce that for you, you were frustrated with how long it took, how much it cost, etc.. And then recapping the words. Tell us a little bit about that frustration. 

Dave Makerwich [00:08:59] Well, I think one of the pieces, you know, my I have, my my educational background, I. My, my, I have, my mother and father were both in healthcare. My father as a physician, I thought for the longest time I wanted to be a physician. I have a strong science background, didn’t go to school for business, didn’t go to school for marketing. Got into, sort of pharmaceuticals. I realized, you know, going down the physician route wasn’t for me. Got exposed to marketing that way. But, you know, you’re became the brand manager for, a very large product in Canada. It’s a very complicated monarch, you know, monoclonal antibody. And you’re in this market where you’re competing against other monoclonal antibodies. It’s very, very nuanced. There’s a lot of specifics of it. And you kind of need to have people on your, I guess, your account team that you’re able to have conversations with that even understand what it is that you’re trying to do. And so one level of that frustration is just, I feel like I’m talking to people that aren’t really getting it. Like, I feel like I’m talking to people that are simply taking what I’m saying and relaying it back to some other group of people. And and at the end of the day, the materials that are coming back to me are not what I asked for. There’s a lot of broken telephone, there’s a lot of rework and fixing and trying to get people back on track. So I think that’s one element. 

Greg Alexander [00:10:31] Yeah, that’s very helpful. What ends up happening in that case is you, the client, you hired somebody to do the job, and you end up doing the job yourself anyways because you’re redoing the provider’s work over and over again. And that could be a very frustrating pain point. And it’s a great example just to highlight what we’re talking about today. And that is, you know, when you were once the client and you are now the service provider, you have a unique advantage over the competition who were not once the client in Dave’s case, you know, he is the son of a physician. He understood that, you know, he thought about being a physician himself, so he wasn’t, you know, this, I guess generic horizontal marketer. You know, he was this highly niched specialist, and it was through that specialization that allowed him to launch his firm and differentiate himself versus the competition. So speaking of the firm, so you’re eight years in. You know, I know that, you have read my book, The Boutique. Thank you for that, by the way. And I know that one of the things that you mentioned to the team was just the appreciation for having vocabulary around these things. So using our vocabulary, you know, you would technically now at eight years, you would be in the scale stage. You had graduated from the growth stage, which is the first stage, those first five years. Now you’re in the scale stage, which is the next five years at least on average anyways. And then at some point, you know, you’ll graduate towards the final five year period, which is the exit period. So you know your experience. Do you do you feel like you’re in that kind of middle scale stage? Do you feel like you’re still in the growth stages, or is it a little bit of both? How far away from the exit stage are you? You know, kind of what are your thoughts? 

Dave Makerwich [00:12:18] Yeah, it’s a great question. And I think I may have even asked, you know, your team, like where am I? Is I definitely, you know, when I started Maven, there was definitely some solopreneurs ship. It was there’s definitely some time of me figuring it out on my own. I think my ambitions, at the beginning, were different than what my ambitions are now. Like. I was just trying to do something different. I was enjoying the work, and the most important thing to me at the time was just figure this problem out and see if I can get a few other people on board and to try to figure out the problem and just try to change the game a little bit. But then, you know, at some point something changed, like we started to get some really great people, some extremely talented employees. We started to build a really great culture. And now, you know, I know that you talk about this, in your books, and I’ve actually read both the boutique and the founder. They’re both great. And you talk about this, that we’re in the business of both, you know, not only serving our clients, but also our people. And at some point, the the internal people piece became. And I wouldn’t say more important, but just as important, making sure I’m retaining the right people, making sure I’m keeping them happy and just their well-being became just as important to me. So. I don’t know. Getting back to your original question, like I think there’s. I think your books have provided a lot of clarity on, you know, what? I think we’ve done well up until now and but but also more clarity on what are the next kind of hurdles that we need to do to get us to the next step. I’m definitely not in my mind thinking about the exit stage like that’s I still think there’s so much opportunity in terms of what we can do and in terms of how we can grow the company and and give our people the opportunities that they deserve. And it’s a big market. So I’m still very much excited about that part and sort of finishing figuring it out. And and I guess opening the doors a little bit because I think we’re, we’re definitely in the stage where we just, we don’t do a lot of business development. We still get a lot of referral work. And it hasn’t been something that we’ve had to do. But again, I know there’s going to be a point where we need to change that and do that. So so I don’t know. I think it’s fair, you know, where we are. 

Greg Alexander [00:14:44] But so in listening to you, I would suggest that you are in the scale stage. And I’ll tell you the reason why I believe that, it’s the expanded ambition. So when I, when I talk to founders and I experienced this myself when I went through it, you know, when you launch your firm as the solopreneur, you know, you’re really just trying to prove to yourself that you can replace the income that you walked away from when you left corporate America. And it’s very much a lifestyle business. And then all of a sudden you have some success and you start hiring some people. You start caring about those people. You start thinking about creating, you know, high paying careers for people. That expanded ambition is the sign that you’ve moved into the scale stage because it’s it’s more than just you, you know, it’s it’s a firm it’s not a practice. There’s a big difference there between those two. I would also suggest, however, that, you know. I like to bring clarity to these situations by suggesting it’s very linear, but it’s not. It’s messier than that. So there’s elements of your business like yourself as a founder, I think you’ve matured to the point you’re in the skill stage. However, if you’re still only generating business from referrals, which is great because that means you’re doing great work and you’re getting referrals. But that would suggest that on the sales and marketing side of things, you’re a little less mature in that part of your business, that function, it might still be in the growth stage. And that’s what happens is parts of your business are in scale, parts of your business are in growth. You know, you might launch a new service and that might even be in the startup stage, parts of your business, for some of our members that are that organization is owned by partners, co-founders. You might have one co-founder who’s in the mid-sixties, and they’re in the exit stage because they want to retire. And you have another co-founder who’s still in their early 40s with kids getting ready to go to college, and they don’t even want to think about retiring. Right? So it’s it’s you always have one foot in one stage and one foot in the other stage. And Dave, I think you’re a great example of that. And I appreciate you coming on the call today. Share a little bit about your story. We’re going to double click on a lot of these things when we have the member Q&A session. I particularly want to talk in greater depth about what it means to start as the client and then become the service provider. That was the reason why I really wanted to speak to you. But I’m also going to talk about, you know, your own expanded ambition and your own journey on the lifecycle. So on behalf of the members, I appreciate you coming on today and sharing sharing part of the story with us. 

Dave Makerwich [00:17:09] Yeah, thanks for having me on board. It’s great. 

Greg Alexander [00:17:12] Okay. All right. A couple calls to action. So, if you’re listening to this and you’re not a member and you think you might want to be because you want to hang around with people like Dave, go to collect a 54.com and fill out an application, and we’ll get in contact with you. If you are a member, and you want to learn more about Dave story because you can probably see yourself in him quite a bit. Look for the meeting invite that will come out, and we’ll have a private one hour Q&A session with him on an upcoming Friday session. And if you’re not ready for either of those two things, you just want to learn more. I would point you towards my book. It’s called The Boutique How to Start Scale and Sell a Professional services Firm, written by yours truly, Greg Alexander. And you can find that on Amazon. But until next time, I wish you the best of luck as you attempt to grow, scale, and exit your firm.

Episode 163 – The Art of Valuation: Unveiling the Secrets Behind Firm Attractiveness and Price Determination – Member Case by Tom Zucker

In this session, we review recent research from over 200 acquirers that suggests the 5 attributes that make a firm an attractive acquisition target, and the 4 attributes that scare acquirers away. The research quantifies how “attractiveness” drives up valuations and how you can increase the worth of your firm.

TRANSCRIPT

Greg Alexander [00:00:10] Hey, everybody, this is Greg Alexander, the host of the Pro Serve podcast, brought to you by Collective 54, the first mastermind community dedicated to the unique needs of a unique group of people. The leaders of boutique professional services firms. And today, we’re continuing on our exit series and we have a wonderful guest with us. He is a member. His name is Tom Zucker, and he is in the investment banking business. And his firm put out a piece of research called The Seller Experience Why Owners Get Premium Values. We’re going to talk about the principles in that. And the origination of this came from we had a member session. Titled how a ten person firm successfully sold itself to a 300 person firm. One of our members bought Mirage was the featured role model. He had an exit recently. This is episode 153 for those that are interested, and Tom attended that session and chimed in and offered some value. And since that time we had a lot of members saying, hey, who was that guy? And can we hear more from him? So we reached out and and Tom was gracious enough to join us today. So, Tom, if you wouldn’t mind, please give us a brief introduction of yourself in the firm. 

Tom Zucker [00:01:33] Right. Thanks for having me. Tom Zucker, president of Hedge Point. We help private owners sell their business for maximum value. With certainty. We’ve been doing this for 25 years, and we’re very fortunate to be part of collective 54. 

Greg Alexander [00:01:49] Excellent. So I read the white paper, The Seller Experience Why Owners Get premium values. And it was compelling. And I found it compelling because you heard directly from buyers. What makes a firm attractive. And it’s that word that really caught me, this word of attractiveness. And in your white paper you quantify, for example, what a some firms get eight times, EBITDA and another firm might get ten times EBITDA. And you summarized five key points that made a firm attractive. I thought maybe we could take them one at a time. And I’d ask you to define what that term is. And then, when we have our private member Q&A session, which is a longer format, we’ll have a full hour. Then we’ll dive into examples for each five and let members ask questions. So if you’re okay with that, why don’t we start with the first one, which, I’ve got the paper pulled up here in front of me, and it looks like the very first attribute that makes a firm get a premium value makes it more attractive as a strong management team. So why does that increase the multiple? 

Tom Zucker [00:02:58] The ability to produce revenues is directly proportional to the talent that sits behind it. So here we are as professional service firms, we are as good as the people that leave the office every single day. Right? And so our goal on a daily basis is to make sure when the buyer takes over the business, they can not only repeat the success that you have, but can grow from that. If you have aged professionals or you have people that are less engaged or just, quite frankly, have reached the top of their peak, there is no more growth that the company can experience. 

Greg Alexander [00:03:30] Very good point. You know, sometimes I see, you know, the founder is brilliant and the buyer meets the founder and says, oh my gosh, I want that person in my firm. They make a they offer a lie, they get into diligence, and they meet the management team. And there’s a major drop from the founder to everybody else. And it kind of spooks them. And they retread the other side. Either don’t do the deal or they trade it down so that I’m not surprised to see that as number one. So let’s go to number two, which is a differentiated service. So why does that increase the multiple. 

Tom Zucker [00:04:07] There’s if you think about a buyer’s perspective, you’re looking at your company. There’s a lot of people that are nice to have, a nice to have trade at reasonable multiples must have, oh my gosh, I need that capability. I need that person that’s differentiated. And so, you know, many of the sessions you’ve been having is on the topic of AI. AI is a unique skill set that many people possess. And as you start having those conversations and show that you’ve developed something that will take years or many, many hours to develop, I got to have that. And when I get I gotta have that, I get a turn to three, five times, expansion of multiples. 

Greg Alexander [00:04:46] Yeah. We got a member right now. Just turned down an offer at 17 times. He’s in the sustainability space, and it’s just hard as heck it’s a must have for a lot of cases. So, I’m not surprised that that was number two. All right. Let’s go to number three. So resilience in recessions or resilience in kind of new tech threats. So tell us what that is and why that leads to an expanded multiple. 

Tom Zucker [00:05:13] Yeah. And remember keep in context these these are things that were generated. We did a 200 person survey private equity family office strategic buyers. Why do they pay premiums. So they came up with the idea is that they’re fearful that something doesn’t continue or go forward. And the indicators they use is let’s take me back to what happened in, you know, the last recession or what happened during Covid. And they’re constantly asking that question. And so if you’re defensive, the answer is we have we continued right through there. No problem. My recurring revenue was there and all of my clients needed me. I was an essential service that was not cut back or passed back during downtimes. Yeah, and that’s when you get a premium, when you when you have that recurring revenue. Banks love it. And switch is a big part of how multiples get made. Right. 

Greg Alexander [00:05:57] Yeah. You know 2023 wasn’t a good year for a lot of people. If you actually had a decent year in 23, you proved to be resilient, resilient when everybody else wasn’t. You know, someday when you go to sell your firm, that’s going to be a wonderful proof, proof point. The next one I want to talk about, which I skipped over by mistake. But let’s come back to it. Strong market position. So what does that mean exactly? And how does that translate to a higher multiple? 

Tom Zucker [00:06:23] Everyone is trying to define what market they’re in. So you mentioned that one of your members getting a 17 times offer for the word sustainability. Right. And every couple of years there’s a new word that hops out that somebody’s got to have. And when you got gotta have that. That tends to make it very attractive building market position, you know. So for example, we’re in the middle market space for investment bankers. Many of my competitors have sold their business. We’re now sitting in a place where we have a very attractive platform that we’re able to. We just brought on a new managing director, that market position as being a platform for capability of providing, you know, independent M&A advisory service that allows us to be differentiated from others. Not. Not that it’s unique or can’t be duplicated, but at a point in time there’s a market position and all of our services fall into that category. And I’m surprised when we begin doing our work. How many people really don’t know the market, that they participate in the adjacent markets, and they certainly don’t know what makes them different from their competition. And that’s an exercise that a good investment banking firm does. They really pull out. Why are you special? Why are unique, why you’re different, and most importantly, not just from your own perspective, but the perspective of your buyers? How will they look at you? 

Greg Alexander [00:07:38] Yeah. You know, and this is why it’s so important to pick the right investment banker. And for our members and listeners, you know, you want somebody that’s in that middle market to lower middle market space because they know that you might not have your market position clearly defined. So therefore they’re skilled at doing that for you. It’s kind of like you go to sell your house and you hire a fantastic real estate agent who’s been selling homes in your neighborhood for 20 years. So when a buyer comes in, you know, they can explain why this is a desirable neighborhood, why it’s in the right school district, why the comps are what they are, etc., etc., etc.. Last thing you want to do is go higher up Goldman Sachs or JP Morgan. You know, you just they expect you to come to the table with a different, set of deliverables. I mean, they expect you to know what your category is, what your market position is. So it’s really important that if you’re thinking about exiting, you pick the right investment banker and you can hear from Tom, you know, somebody like him, knows how to do this and has the patience, you know, to help a first time founder don’t through an exit for the first time, do this. All right. Let’s come back to the white paper. So the last one, number five is scalability of business. I think I know what that is, but why don’t you explain that to the audience and why that translates to a higher multiple. 

Tom Zucker [00:08:55] This is a great book called The Boutique that my friend Greg has written, and it talks about this whole scaling phase, right? And as you talk about scaling, you get a commercial business development engine. You’ve got the ability to take it beyond the founders capabilities. And it is tantamount to much of what you preach and disciple to. But I want to know that I can take, you know, this business for two times revenue, and I want to know the profitability grows incrementally as I scale. Yeah. And I always refer to it no man’s land. That’s between X dollars a revenue and Y that it’s really, really hard to run a scale professional service firm. And once you get past why, likes a whole lot better. And so we all have our own X’s and y’s and whatever that number might be or whatever the scale might be. That’s the part that we always are looking for. And so I want to know that I can do that as a buyer of a business. 

Greg Alexander [00:09:46] Yeah. You know, when I, when I was reading the paper, I really liked it because to me it’s not a puff piece. It’s not just talking about the five things that make your firm attractive. The second half of the document is dedicated to the value detractors. In other words, what makes your baby ugly? So why don’t we? Why don’t we touch on some of those value detractors? So share some of those with the audience and and why they actually reduce the multiple. 

Tom Zucker [00:10:17] Yeah. I mean, so it’s kind of the inverse of attractiveness, right. And so if I’ve got a concentrated position where I have a customer that represents, let’s say it’s north of 40% of revenue, I get a little bit concerned that that particular customer goes away or loses interest in it or changes pricing. That’s a very big detractor. The other part of that is if if it’s dependent on you, the owner of the phone, right to your point, you get really excited. Very attractive owner founder. He’s excited, but unfortunately he’s of an age where he’s not doesn’t want to work for another 5 or 10 years. Yeah. And so I make my investment. What’s private equity is make it for, you know, a 5 to 10 year window. If you’re not going to be the guy that I look to not only run during that time period and more importantly, when I sell it, you’re not standing there. I’ve got a big lift. I’ve got to find somebody to replace the magic that you do as a founder and owner. That’s a really hard thing to do. And so you have to solve that problem for the buyers. The buyers won’t solve it for you. Yeah. 

Greg Alexander [00:11:13] You know, one that jumps out of me that I want to translate for the audience in the value detractor category in the report is this thing called an at risk supplier. And for those that are going to go to Tom’s website and download this report and we’ll show you where to get it in a second, you might say, well, that doesn’t really, apply to me. I don’t have suppliers. I’m not a manufacturer. Well, that’s not true. You do. Your suppliers are your talent. And if somebody is thinking about buying you as a service firm and you were using 1099 contractors, you have at risk suppliers, particularly if you’re using 1099 firms and only one of them. You know, these these firms, especially offshore ones, can run into trouble. They go out of business. And all of a sudden your raw ingredient, you know, your raw material that you use to produce your end product goes away. You’re not going to be able to sell, you know, in the pro serve space. They call that empty calories. In other words, when I buy you one of the assets of buying is your team. And if you have more than, let’s say, 20% of your labor force in 1090 nines. Then you really you don’t have a great team to acquire. So you. I’m either not going to acquire you or I’m going to acquire you at a discount. So, Tom, that was a great walk through of the report. So for those that are listening to want to get a copy of it, where do they find it? 

Tom Zucker [00:12:45] It’s point.com and we have an insight section where you can download this white paper plus others. 

Greg Alexander [00:12:51] Okay. And if somebody reads it and they want to double click and have a conversation with you or someone on your team, how do they get Ahold of you? 

Tom Zucker [00:13:00] (216) 342-5858. Zucker at any point that. Com. 

Greg Alexander [00:13:06] Boy. That’s a salesman at heart right there, who was willing to give his telephone number into the wild, wild world of the internet. God bless you. All right, well, listen, we’re so lucky to have you because our members are your target customers. Your skill set lines up perfectly. You know how to sell businesses like the ones that are in collective 54. You’re always very generous with your time and your knowledge here. Today was a great example of that. So on behalf of the members, thank you for being here. 

Tom Zucker [00:13:32] Thank you Greg. 

Greg Alexander [00:13:35] Okay. And, a couple calls to action for everybody. So if you’re a member, be sure to attend the private Q&A session with Tom and look for the outlook meeting invite to tell you exactly when that is. I hope you get a chance to read that paper beforehand, and you’ll get a chance to ask questions directly to Tom.  You’re not a member. I don’t know what’s wrong with you. You should become one. Go to Collective 54.com. Fill out an application. Some will get in contact with you. If you’re not quite ready for that, you just want to consume some more content. Check out our newsletter. It’s called Collective 54 insights. Again, that’s at the website. Or if you want to read the book, it’s called The Boutique How to Start, Scale and Sell a professional services firm. You can find that on Amazon. But until next time, I wish you the best of luck as we try to grow, scale, and exit your friendship.

Episode 162 – The Task Force: How a Consulting Firm, After 20 Years, Committed to Scaling by Investing in a Dedicated Task Force – Member Case by Andy Thompson

Attend this session to learn how it is never too late to get serious about converting a lifestyle firm into a scalable boutique. This session will discuss the use of a dedicated task force to make up for lost time and how it can restart the boutique lifecycle clock. You will learn the who, what, when, where, why, and how to invest in a dedicated task force inside a small service firm to get back on track.

TRANSCRIPT

Greg Alexander [00:00:10] Hello, everybody. This is Greg Alexander, the host of the ProServ podcast, brought to you by Collective 54, the first mastermind community dedicated to the unique needs of leaders of boutique professional services firms. Today on today’s episode, we’re going to discuss scaling a boutique processor firm. We’re going to talk with a member about a new initiative they’ve launched called the Scaling Task Force, which I can’t wait to hear. We’re going to kick around a few tools that they’re using and discuss how it’s going so far. And the purpose in doing so is to maybe give everybody that’s listening to an idea that, maybe a scaling task force might work for them, or at least pieces of it. And maybe that might help you accelerate the rate of scale and improve the probability of success. So we have two collective 54 people here with us, Andy Thompson and Jeff Weathers. They’re with a company called Notch Partners. And, why don’t I start with you, Andy, and if you wouldn’t mind introducing yourself and the firm, and then Jeff, I’ll ask you to do the same. 

Andrew Thompson [00:01:20] Sure. Greg. Thanks for having us. I co-founded Notch Partners in O2. We work for private equity funds. Our role is to help create transformative relationships between senior executives and our private equity clients. Our mission is to improve their financial returns through better access to deal flow, better analysis of investment opportunities, better value creation planning, and better corporate governance. So you can think of us as a high-end headhunter with a very strong deal focus and private equity focus. 

Greg Alexander [00:01:55] Okay. Sounds great. Jeff, how about you? 

Jeff Weathers [00:01:58] Yeah. So I’ve been with Notch, almost eight years now and have a background in investment banking. I lead our business in financial services team, which is one of the five industry verticals at notch. And I also lead our newly formed skill-building task force. 

Greg Alexander [00:02:16] Okay. Fantastic. All right. I’ll ask a question, and I’d love to get both of your answers on it, but and I’m going to start at, kind of 30,000ft, but maybe to give us some context. So so in Andy, I’ll start with you. So what prompted you to focus on scaling your firm at this stage? You mentioned you founded it in 2002. It’s 2024. Yeah. You’ve put a you put a lot of emphasis around scale right now. How come? 

Andrew Thompson [00:02:41] That’s right. I bought out my co-founder a year ago. It was a long time coming, and it freed me up to do a number of things with the business that I’d been hoping to do. For example, adding equity partners, Jeff being one of them. But I realized as soon as I had the freedom to do what I wanted to do, I realized that the old adage is true. It’s lonely at the top. If I were going to be able to transform the business, I needed some guidance. And I wasn’t ready to constitute a board of directors yet. I started to look into CEO peer groups when I, which I had never invested in. I looked at several of them, collected 54 was recommended. I was the only one that was, entirely focused on professional services companies. So I read your book boutique, and I immediately recognized that we had a host of scaling opportunities to pursue. I bought five more copies of the book. I gave them all to my senior team. I told them we were in the scaling phase. They probably looked at me like, what are you talking about? They didn’t know. Growth scale. Exit. Yeah. They said, you know, they were drinking from a fire hose. I said, we’re in a scaling phase. I want you to read that whole section of this book. And then and then I signed myself up for Collective 54 and got to work for the team. I defined scalability as creating processes that enable and facilitate profitable growth. For a more tangible illustration, I say it this way at the company level. I say if the world were suddenly to hand us a doubling of our business, meaning a doubling of our client base and a doubling of our staff, which of our processes would break and which would hold steady? The ones that would hold are scalable. The rest need work. 

Greg Alexander [00:04:33] I love that definition. That’s a great way to look at it. And and, Jeff, I’ll come to you with the next question, which is since you’ve been there for eight years, I’m sure you’ve been attempting to scale at least, maybe even without knowing that’s what you were doing or calling it that, I should say. What are the biggest challenges, Jeff, and from your perspective in scaling a small services firm? 

Jeff Weathers [00:04:56] Yeah. So one of the, the big ones I think that we need to think about or starting to think about is getting our colleagues really excited about change. Because when you’re scaling a business, you need everybody on board, and there’s a lot of apprehension when you say, hey, we’re going to make some changes to the company. So. What does that mean to for us? What did we need to do? So the first thing was communicate. So we we decided we need to explain what scalability was. To explain what the benefits would be to the firm, and even how it would improve our colleagues day to day work, how their lives are going to change as we put these processes in place. 

Greg Alexander [00:05:38] Yeah, it always does come back down to the individuals and them asking themselves the question like, what does this mean to me? Literally day to day? Like, how is my life going to change? That’s a great way to say it. So I’m pleased that the book is playing a role. And thank you for the kind words and that I put a lot of work into it. It’s rewarding to hear that you got something out of it. And I know that you’ve you’ve recently launched a scaling task force. So I’d love and Jeff, I understand that you’re the leader of that. So I’m going to direct this to you. I’d love for you to kind of tell us what the scaling task force is. Who’s a member of it? You know how it operates. Just kind of riff on this, a forming. 

Jeff Weathers [00:06:15] Sure. So the skill of the task force, simply stated, was designed to look inside the firm, look at all of the ways that we do business with our clients, look at internal processes, anything really, and say, how are we doing this, doing this? And is this scalable to big as the business grows? The skill-building task force, to start with, we’ve really been focused on the service delivery part. And that’s where we felt like we would have the most benefit at the beginning. So what we did is we actually took an employee who had been with us for for several years now, who’s who’s an outstanding worker. And we said, we want you to, to be a part of this and be full time. So I’m spending a lot of my time on the task force. She’s full-time on the task force. And then we took a representative number of employees from across the firm to act as as members, we meet on a weekly basis and evaluate, different processes where we’re trying to change and update and improve. And then we also actually, every week at the at the beginning of the week, talk to the firm about what are we doing, what should you all expect this week? Here are some changes that we, we think are going to come this month or two months from now. Again, trying to make sure that we’re indicating to the firm, so folks are comfortable with what’s happening. 

Greg Alexander [00:07:45] So, Andy, taking a high potential employee and dedicating that person full time, non-bailable, I’m assuming, to leading the task force. Boy, that’s quite a commitment. How did you get there? 

Andrew Thompson [00:08:01] So, Jeff, Jeff is absolutely one of our top and most experienced, players. And he’s about half-time on it. And then we have a very we have a high potential mid-level person full-time. In total we probably have over two FTE is a little over two FTEs out of 30. Look, I wish we had started this stuff years ago. I wish we were not playing doing some cleanup, but I. But it’s time we have some inefficiencies and missed opportunities that could have been capitalized on much sooner in our evolution. There’s no time like the present. We put ourselves, clearly on, in the scaling phase, but we feel like we’re late-stage scaling. There are a lot of things that, unbeknownst to us, it was, you know, covered in your book that we were doing. But when we started doing the math on what the yield impact could be of creating more scalable processes, it’s clear to me that this more than pays for itself in a in a pretty short order. So for me, it was it was not a hard decision. To me. 

Greg Alexander [00:09:14] Interesting. You know, when you express it like that, you know, two FTEs out of 30, it seems like a reasonable investment. But I was on your website and I was looking at some of the bios. I mean, you employ highly skilled people, even at the mid-level. And I’m, I’m guessing in my mind what you’re paying them. So from a dollars perspective, it’s a significant investment. So I just wanted to acknowledge and compliment you for, you know, being willing to make that kind of investment. 

Andrew Thompson [00:09:40] I’ll tell you this. We’re going to be watching closely, and tracking our results as closely as we can. We don’t have all of the gauges and dials that we need to know exactly the impact day to day. If we had all the time in the world, we would have built more dashboards and more insight before we even started. But we’re sort of we’re getting going, and we’re going to do our best to track the results because we’ve got to justify this expense for ourselves. Yeah. 

Greg Alexander [00:10:07] Now, Jeff, you mentioned that you started with service delivery. That’s interesting. You know, when I’ve talked to members attempting to scale and maybe less formally, I don’t know if they’re calling it a scalable task force. They usually start with sales. And the reason for that is because they want to be able to measure it. They want to see revenue coming in. And also the founder is usually trying to replace him or herself as the firm’s primary rainmaker. But you chose to start with service delivery instead of sales. Can you tell us a little bit about what went into that decision? 

Jeff Weathers [00:10:38] So we actually look through all 17 topics in section two of critique. And what we did is we said, okay, what’s the level of impact of each one? And what’s the time frame to achieve? Not surprising business development and pricing. We’re at the top of the list. We actually have been spending a lot of time on business development and pricing over well over a year now. Okay. So to answer your questions, they’re already they were already underway. Makes it makes sense. 

Greg Alexander [00:11:10] Makes a lot of sense. 

Jeff Weathers [00:11:10] Yep. So the next two that we looked at on that list are client experience and yield. And of course client experiences. You know, in looking how you support the individual client. Goal and yield is within the efficiency of how our teams can deliver high-impact service to to their clients. Those two, we decided were, all the other areas we had identified and we knew there were opportunities. We decided, look, these are by far the next two highest priority, probably behind business development and pricing. Got very. 

Andrew Thompson [00:11:43] Well. The reality there, Greg, is that the our our cost structure is built of service delivery. And we are we are the premium provider with premium pricing. With increasing competition, we need to be really conscious of our pricing to manage our gross margin. 

Greg Alexander [00:12:00] Yeah. Yeah. Well, I’m glad that you’re doing that. It’s sometimes people don’t focus on pricing enough, and it’s it’s a lever that we all have to pull, especially if you’re a premium provider. I mean, being intelligent about pricing is so important. So I love the fact and for those that are listening to this that might not have read the book yet. What they’re referring to is section two of the book is called the scale section. And there’s chapters in there. And they they use it as a menu, if you will, to choose the things and to come up with the priority list. And there’s a checklist at the end of every chapter that can help kind of eyeball whether or not this topic is of interest to you. So that’s a really good teaching for all of us, and maybe a way for those that want to start a similar task for us to get started. Jeff, any any, early results so far, is it or is it is it too early? Any even anecdotal stories that would suggest that you guys are off to a good start? 

Jeff Weathers [00:12:50] Yeah, it’s it’s definitely early in the process. So, you know, we’re hoping to see more results to come, but I think one of the first things that I noticed, is actually an openness from our employees, an openness for them to go out and find scalable opportunities because the task force we can identify, we can try to put processes in place, but we’re really going to rely on our employees to look at what they do on a daily basis and say, what can I do to scale the business? So there’s an openness and we’re excited about that. Second, we’re already even within a couple of months. There were some really. Easier. Easy target soon than I thought. They’re already putting processes in place. That are going to help us engage with our clients at a much higher value of service. Yet to be seen how much impact it has that we’re excited to to see those through. And then I would say, lastly, we came up with a whole list of efficiency of efficiencies. And what we have to do is rank that list and say, okay, where do we start and how do we attack it? And so we’re doing that and we’re ticking down and, and I think there’s plenty of opportunities there as well. So I’m excited about that. 

Greg Alexander [00:14:06] Yeah, I’m pleased to hear the employees are open to it. You know, that’s half the battle. Sometimes with any change, initiative is just getting people on board. So congrats on that. I guess guys, my last question is for both of you. And that is, you know, for those that are listening to this, members that are saying, Jesus, maybe it’s something that I should do. What, what words of encouragement would you give them or what would you tell them to stay away from? Like, were there any things that, surprised you, you know, as you designed and launched this new initiative? 

Andrew Thompson [00:14:37] You won’t be surprised. At one of the answers. The communication is so important. Just the word scaling that’s new to most people. Yield is new. We were approaching it with a level of transparency that was new. And so we’ve gone through yield analysis. What does scalability mean? At least two times both of those for the whole company. Pretty slowly and carefully. And it came from the top. So I was I was walking folks through that. We also, I would say while a task force can be incredibly effective and we’re already seeing some early returns, we look forward to keeping you abreast over the next couple of months. As I said to the team, in our in our annual state of the company, the task force is not going to hand you scalability. They may and you tools and and processes to help you scale, but the scalability happens with you. And so the message for the team and this is you’ll love this Greg. The theme for the year is practice scalability every day in every way. And so it is not something that can be isolated with two and a half FTEs and turned into a little project with announcements every week. It’s got to be something that’s a way of life across the company. 

Greg Alexander [00:16:00] Interesting. Jeff, anything that. 

Jeff Weathers [00:16:02] No, I’m just very excited about, you know, you you look at it and you say, look at all the opportunities we have. Look at how much growth we can find. So really excited to see what the results will be, right. 

Greg Alexander [00:16:15] You know, I would like to add something to this comment, and maybe this is a give back to Andy and Jeff for their generous, time today, when I had my firm and I was focused on scaling it, the two measures that we tracked more than any other. Or the cost to acquire a client. Was it going down and going up? And if we were scaling our business development efforts correctly, then we were. We are more efficient in how we acquired clients. That was no one. And then the second was the cost to serve a client. Was that? Was that staying at a minimum flat while revenue was increasing. So therefore we saw margin expansion or was it declining? The cost to serve a client was going down and price was staying the same. So also a margin expansion opportunity because we were more efficient in how we delivered the service. So I don’t know if those are on your scorecards, but I would encourage you both the kind of macro numbers, if you will, and there’s many sub metrics that lead into both of those numbers. But if you think about scalability, what really is it scalability in a services firm is this revenue is growing at a clip faster than headcount. In the end, that’s the essence of it. And if you can get revenue growing at a fast clip, maybe it’s growing at 25%, but head counsel and growing at 5%, then you’re scaling. If you if revenue is growing at 25% and headcount is growing at 25%, you’re really kind of running in place. I mean, you’re you’re not that’s you’re you have higher revenues, but you’re not necessarily earning more, creating more enterprise value for yourself. So just thought I would share that with you guys as a give back. And hopefully that’s helpful. 

Andrew Thompson [00:17:55] All right. Thank you. 

Greg Alexander [00:17:57] All right. Well Andy and Jeff it was great to have you both. We look forward to being a weekly role model with the member Q&A session. So thank you for that. And congratulations on your new initiative for having the courage to launch it. And I wish you the best of luck with it. 

Andrew Thompson [00:18:11] Thanks, Greg. 

Jeff Weathers [00:18:13] I. 

Greg Alexander [00:18:14] All right, everybody, that’s the end of, today’s episode. If you want to learn more, go to Collective54.com. If you want to read about this book that we just discussed, you can find it on Amazon. Again, it’s called The Boutique How to start scale and sell a professional services firm. But until next time, I wish you the best of luck as you try to grow, scale, and exit your firm.

Episode 161 – Behind the Numbers: Decoding the Finances of a Boutique Service Firm – Member Case by William Lieberman

In this session, we simplify the financial jargon surrounding a boutique professional service firm’s Profit and Loss (P&L) statement. Join us as we decode revenue, expenses, EBITDA, and net income, offering insights applicable to any member, regardless of their financial expertise. Whether you’re a consulting firm, marketing agency, systems integrator, or another type of small service firm curious about financial matters, this exploration into the world of P&L statements provides valuable insights into understanding and interpreting financial health.

TRANSCRIPT

Greg Alexander [00:00:15] Hey, everybody, this is Greg Alexander, the host of the Pro Serv podcast, brought to you by Collective 54, the first mastermind community dedicated to serving the unique needs of a unique set of people. Founders and leaders of boutique professional services firms. On today’s episode, we’re going to walk down memory lane and get into some finance one on one. Many of our members are not finance experts, and a reminder of the fundamentals is warranted. And we’re going to talk about how to deconstruct a PNL or profit and loss statement. And we have a long standing, well-liked, well respected member. His name is William Lieberman. This is what he does for a living, and he’s going to help us, guide us through this conversation today. So, William, it’s good to see you. Please introduce yourself. 

William Lieberman [00:01:06] Thanks, Greg. William Lieberman Company is the CEO’s right hand, and we provide outsourced finance and HR services to small and medium businesses throughout the US. 

Greg Alexander [00:01:18] Okay, so let’s talk about the profit and loss statement. So first, what is it? 

William Lieberman [00:01:25] So the PNL profit and loss Damien or income statement represents how your company makes money, spends money and generates profit. So it shows you all the money that’s coming in and the money that’s going out and at the bottom, how much profit you are making at the end of the day over a period of time could be a day, a week, a month, a year. Typically it’s a month or a quarter or a year. 

Greg Alexander [00:01:48] Okay, perfect. And for what it’s worth, listeners, to me, it’s the most important of all the financial documents. It’s the thing that you should be reviewing regularly. It, it is the health checker of the business. Okay. So I’m going to ask you some directed questions. These questions come from members who I’ve talked to that have struggling with this. So the top line of a panel is revenue of course. And I think that’s self-explanatory. However, people are running into an issue of revenue recognition. So for somebody who might not be familiar with that term, what is revenue recognition and how is it relevant to the founder of a services firm? 

William Lieberman [00:02:25] When you earn money. When you generate business, you need to recognize that revenue over the period that that money is earned. So if you deliver a service over a period of three months and you charge a flat rate for that service. One way to recognize is divided equally over that three month period. So that that revenue matches over the time period when you’re delivering that service. 

Greg Alexander [00:02:53] Right. I had a member who sells an annual subscription. For $50,000 and collects all the money at the beginning, and then spends it all and thinks that, you know, everything looks great. And I had to remind him, I’m like, you realize you have a liability here, right? Like that really wasn’t your money that was paid in advance, but you’re on the hook to provide the service for the next 12 months. So that’s an example of where revenue recognition can get, get out of whack. All right. So the next one, which is probably the biggest issue and this is what’s most often called Cogs cost of goods sold. We refer to it as cost to serve, and we define it as the direct labor expense associated with delivering the service. And the way you calculate a gross margin number is revenue minus cost to serve equals gross margin. And I raise this issue, William, because so many people struggle with what goes into cost to serve a Cogs like the contractors go in yes or no, do IT services go into it, yes or no. So help the audience think through what you believe should be in that Cogs number. 

William Lieberman [00:04:02] Sure. So let’s start with some obvious ones. So if you have a consultant who’s providing a service to a client and you’re billing out for that consultants work, that would be in cost of revenue. If that consultant is an FTE full time employee or a contractor, that person stays in that cost of revenue bucket. It gets a little trickier when you have other types of expenses that may or may not be directly attributable to generating revenue, and it gets a little gray. So for example, customer service, customer success. There are a variety of ways that people think about customer success in a professional services business. So for example, there are customer success folks that focus in on upselling, right? They’re account management and they’re trying to generate more revenues through your client base. Well, that’s really sales and marketing. So that’s not cost of revenue. But there are other companies where customer success is more about, doing maybe technical work or delivering subtype of service that is, being billed to the client. And, but they call it customer success because they’re not necessarily hourly billable people, but they’re still responsible for delivering some body of work. And in those cases, those customer success folks belong in Cogs or cost of revenue. 

Greg Alexander [00:05:27] Yeah. Okay. Very good. How about allocating, overhead. So let’s go there so that we’re now we just walk through revenue. Revenue recognition cost of revenue. In Williams terms we call that cost to serve in a product company that because a good sold that gives you a gross margin line. Then what gets subtracted from the gross margin line is a series of things that gets you to an even a number. One of those is overhead, and there’s an awful lot of confusion as to what is considered overhead and how overhead gets allocated, etc. so help the audience think through that. 

William Lieberman [00:06:03] Well, you have a variety of buckets of what’s called operating expenses or, you know, let’s say overhead things like general and administrative expenses. That could be your insurance or bank fees or internet fees and things like that. There’s selling expenses, sales and marketing. So the cost to actually pay a sales person a commission would be, a sales expense. There could be marketing materials or flying to a conference, things like that, all in the sales and marketing bucket. And you could have customer success. Like we mentioned before, customer success is another big bucket that’s under operating expenses. And in some cases, you might even have product development like or service developing. If you’re creating a new service, you need to generate work and spend money to develop that service that would be under operating expenses. So those are the four main ones that you typically see in a professional services business. 

Greg Alexander [00:07:02] And the slang here is that what you would call opex. 

William Lieberman [00:07:06] Opex operating expenses? 

Greg Alexander [00:07:08] Yep. Yes. And opex is different from CapEx. Oh. 

William Lieberman [00:07:12] Yes. So CapEx and capital expenditures are when you’re buying typically a piece of equipment or you’re spending money on a large purchase that’s amortized over years. Maybe you’re buying a company and you’re going to capitalize that company. There’s goodwill and there’s other types of things there. But CapEx typically is referred to in, equipment, hard things that you can kick and touch in, in feel, like a manufacturing business has a big piece of machinery and that’s capital expenditures. In professional services, you don’t really see it too often. Sometimes you have a lot of computer equipment and you might, put that under CapEx, but not often. 

Greg Alexander [00:07:52] Right. And in terms of the owner’s expenses, maybe things that the owner is running through the business like, automobile lease or Plane tickets or what have you. Where would they sit and what advice do you have? People around add backs. 

William Lieberman [00:08:12] So, I’ll tell you how I do it. Okay. So what I do is I have all the owner’s expenses, what I call below the line. So under other expenses. So you have all your operating expenses. And so you have, backing up revenue minus cost of goods sold gives you gross margin. Gross margin minus operating expenses gives you operating income. And then below that, you can have other expenses in there. You’ll have things like interest expense if you borrow money. You’ll have interest expense to the bank or a lender. I also the way I do it is I put any owner’s expenses under there so that I can easily separate out. How much am my is it truly take to operate the business, versus how much am I running through the business for tax benefit only? And that way I can easily say, okay, month by month, here’s how much I’m spending on my plane tickets or, you know, dinner for my wife. 

Greg Alexander [00:09:11] Yep. Very practical way to handle that. I like the other category. I hope all of our members that are listening to us embrace that. So someday when you’re presenting your financials in a potential exit, it’s pretty easy to calculate the add backs. It’s pretty easy to do a Q of equality of earnings. And you know, you have good records. Okay. One thing that I see over and over again. 

William Lieberman [00:09:35] I think I want to I want to just clarify one thing or add one thing on the owner’s expenses. Owner’s compensation is a really important number, and it can be very large and can be very significant piece to what goes under, your PNL. So you want to have in your, income statement, you want to show owner’s compensation, how much it really, you know, you would need to get paid, or you would have to pay somebody to do your job for you. That would be an operating expense under op X. Any additional compensation that you pay yourself would be under other expenses. As you say, Greg, it would be an add back. So it’s really that’s a really important thing because when you get to adjusted EBITDA or EBITDA as a and you’re trying to figure out how much your company’s worth or can sell, that’s the sum number you’re really gonna want to hone in. 

Greg Alexander [00:10:27] Yeah, that’s a good call out because the buyer of your firm is saying, what is the cost to operate this business going forward? So if you’re leaving after the sale, they’re going to have to replace you. And there’s going to be real costs associated with that. So distinguishing between those is really good. All right. So just we try to keep these podcasts short I have one more question for you. And then we’ll save all the rest of this good stuff for the member Q&A. 

William Lieberman [00:10:47] Yep. 

Greg Alexander [00:10:48] The difference between accrual and cash accounting. And when does somebody need to make the switch? 

William Lieberman [00:10:56] So my opinion is that you should always be unapproachable. You should never be on cash base unless you’re operating a small bricks and mortar business. You know, you’re dry cleaner, where you’re paying. Your customers are paying you cash for business, and it’s just widgets that are going in and out the door. Everybody else really should be on accrual basis. And the reason being accrual basis accurately matches the revenues with the expenses on a monthly basis, so that you can easily measure the health of your business if you do it on a cash basis. You’re just measuring when does cash come in. Versus when does it go out? And to your point, earlier when somebody gets a $50,000 check at the beginning of the year for a year subscription, that’s not all recognizable revenue, when you get the money, it’s recognizable over that 12 month period. So if you do it on a cash basis, you would say, oh, I made $50,000 this month, but that’s not true. 

Greg Alexander [00:11:50] So I hear you, but the reality is, is most people start off not knowing that. And they they know cash is king and they’re worried about paying the bills. So they run their books on cash and then something happens. Like, for example, they hire you and you say, hey, you need to switch to accrual. And here’s why. And they have an oh shit moment. Right. So how painful is the conversion from cash to accrual? 

William Lieberman [00:12:14] Well, we’re doing this for a few different clients currently and it can be very painful depending upon how far back you go. And in some cases you have to go back several years. If you receive cash and you still haven’t delivered the service and you’re still, you know, keeping it on the books or it’s still a liability because you owe somebody that service. It can be very painful to switch that over. And so you want to do it as soon as possible because, you know, as you say, when somebody something comes along, you have that oh shit moment like a lender. Let’s say you want to go get funding from a bank. They’re not going to look at you if you have cash based books. 

Greg Alexander [00:12:47] Right. And when you have cash based books and you present them to a lender or a potential acquirer, what you’re saying to them is you’re not very sophisticated. You don’t know what you’re doing. So it’s got to be really careful there. So if you’re not on accrual basis right now, get there. If you need help to go from cash to accrual, call William who can help you do that. And, you know, you probably need to pull it off. All right. So on the private member Q&A, which will be an hour long Q&A session with members, we can talk about a lot of other things. Let me let me tease the audience with a bit of though. So for example, there’s this whole debate between what’s recurring, what’s reoccurring, what’s repeat in terms of revenue. We’re going to have a whole debate around that. We’re going to talk about the balance sheet and how you can calculate what the real worth of your firm is when you talk about the mental model shift, to go from thinking in income terms to thinking about enterprise value, we can talk about the cash flow statement and how that’s different than the PNL, etc.. So lots of things we’re going to talk about. So if you’re interested in that, please, tune in. But William, it’s always wonderful to see you. I know this stuff for you is, you know, very, very fundamental. But for entrepreneurs who are really domain experts in other areas, this is, very valuable. So thanks for being here. 

William Lieberman [00:14:01] Absolutely. Thanks, Greg. 

Greg Alexander [00:14:04] Okay, so with that, that’s the end of the show. If you want to learn more, go to Collective 54.com. If you want to read about this kind of stuff, check out my book, The Boutique How to Start Scale and Sell a Professional Services Firm. You can find that on Amazon. But until next time, I wish you the best of luck as you try to grow, scale, and exit your firm.

Episode 160 – The Rise, Fall, and Recovery of a Consulting Firm – Member Case by Michael Ivie

Attend this session and learn how Phyton Consulting got to $3 million per month in revenue before their third birthday, crashed because of a Black Swan event, and executed a world-class recovery emerging stronger than ever. This session will help members identify risk, in all its forms, and develop a risk mitigation strategy to bulletproof their firms.

TRANSCRIPT

Greg Alexander [00:00:10] Hey, everybody, this is Greg Alexander, your host of the Pro Serv podcast, brought to you by Collective 54. If you’re not familiar with Collective 54, we are the first mastermind community dedicated to serving the very unique needs of a very unique audience, and that is founders and leaders of boutique professional services firms. And on today’s episode, we’re going to talk about an issue that plagues small services firms. And this is called client concentration risk. We’ve got a member with us today. His name is Michael Ivie, and Michael recently went through this issue, and he’s going to share a little bit about his story with us today. So, Michael, with that, would you please introduce yourself to the audience? 

Michael Ivie [00:01:04] Yeah, sure. Excited to be here. Although in the years I’ve been following you and the Collective 54, I never thought the first time I’d be on your on a podcast would be talking about a negative, thing that I survived, but, I was hoping it’d be a home run, a hit or something, but, you know, nonetheless, here we are. But, Michael Ivey, managing partner, founder at, Python Consulting. We’re a boutique professional services firm based out of New York City with, with its staff and locations across North America. We’re most known for the services that we provide around data management and analytics and AI. Mostly for financial services, I think is what we’re we’re, particularly famous for. And, and we, we really differentiate that is with our subject matter led and execution focused approach, which, you know, it’s kind of code word for just not incubating out of universities and letting our clients train our team for us. But, but doing that and blending, across subject matter domains like risk and regulatory change, financial crimes, core banking, digital transformation, blending that with data management and analytics capabilities as well instead of a more siloed, traditional approach. So, anyway, I, you know, excited to be here today. I thought, I’ll follow your lead on things. I think one thing I’d be very interested to hear from you, Greg, is how you actually define concentration. Risk? Because, you know, my my life working as a, you know, very long time ago worked as a credit officer at a bank, and we won billions to large investment banks. And we used to look at various things. When we talk to these institutions about loaning the money, we look at their, their earnings profile, we look at their liquidity, their, asset quality on their books. But there’s always this the hardest part of doing this was looking at sensitivity to market risk. And, and a big component of that was concentration risk. So we’d ask them who your top ten clients, what are the services they consume from you, and how does that contribute to your earnings? And, and that would have a material impact on our, our ability and willingness to want them. So, vastly different when we talk about concentration risk for fatigue. So I’d love to hear your perspective. Is it do you think of concentration? Risk is the top client, the top five clients? The top ten clients? Yeah. 

Greg Alexander [00:03:26] Yeah. Great question. So why don’t we start there? So and and I’ll give you a very precise answer and then I’ll tell you how it came to an answer. So our definition of client concentration risk or high client concentration risk is when 30% of your revenue, 30% or more of your revenue comes from your top five clients. And the reason why we use that as our definition is that we’ve been in business now for a little over four years, and during that time period, we’ve had 28 of our members exit their firms, and we’ve had four times as many of that try to exit their firms who were unable to. And after watching the contrast between the successful exits and the unsuccessful exits, we’ve settled on this definition. More than 30% of your revenue from your top five clients and. The reason why we settled on that is because of deals that didn’t get done. A large reason why they didn’t get done is because of that particular issue. There were other reasons for sure, such as an over dependency on a brilliant founder and a weak management team, etc. etc. but that that’s really the definition. And you know, where it comes up most often is during the exit. But that’s not the only area. For example, in your past, you know, you made lending decisions based on client concentration risk. And we see our boutique browser firms trying to borrow money all the time, and they get asked this question from their bank. And, you know, the answer is different from bank to bank, but that seems to be a good enough working, definition, you know? And the trouble with it, it’s a catch 22, because when you’re a small firm, you know, having an anchor client is a wonderful thing. You can build an entire firm off of the back of an anchor client because there’s a predictable revenue stream, there’s a growing revenue stream, there’s a meaty client with a great project to hire into, etc., etc. but, you know, careful, you wake up one day and you’re really not a firm. You’re a service provider with a single client. And then if that client goes away, you know, all hell breaks loose, so to speak. Which takes me to really what I wanted to get to, which was, you know, you mentioned it was a negative, that you survived this issue. I would tell you it’s a positive because a lot of times what you dealt with puts a firm out of business. And the fact that you, you survived and you’ve restructured and you’re now thriving again after dealing with that is a testament to your resiliency. So why don’t we turn it over to you and just have you tell everybody the story of what happened? I think that would be really instructive. 

Michael Ivie [00:06:02] Yeah. So Greg and I think that’s a great definition to kind of characterize the scenario. But, you know, I worked at one of the largest consulting firms in the world. And, and, you know, I accidentally started consulting from a very long time ago and learned what I didn’t know. So I wanted to go learn how the best firms are run. And and then so when I went back on the journey to work at boutiques again, we had tremendous success, but then unfortunately got acquired by the same firm I just left to, to. So then I had to start over again. Not too long ago, in 2000, at the end of 2018. So I started, you know, that’s when I started finding consulting and I had to start over at Ground Zero website everything. And and. Yeah, so, we, we got going we, you know, and then we continue to grow 300 plus percent per year all the way through 2022. And, and it certainly, you know, as we scale to a point where we were, you know, doing, you know, over 3 million a month in revenue, it was, a lot of it was driven by our top three clients, the vast majority of it, to be honest. And and part of it is it’s a double edged sword that you alluded to because, it seems like insanity to say, sorry, client, we’re doing too much good work with you at, at that competitive margins. And, and we need to diversify. So turning, you know, turning that revenue down, because we recognize there’s concentration risk forming and our revenue doesn’t make a heck of a lot of sense. And I’ll definitely say having 120 million, our client is a lot easier to manage than $21 million clients. So we didn’t have the infrastructure, the resources, the recruiting power to, to to do it across 20 different clients. I think, you know, looking at today, our revenue is not as low as it did drop as, as these clients, you know, the, the clients I’m referring to being, largely banks. So I think concentration in many forms. So we have financial services at the end of 2020 was 95% of our revenue. Then within financial services, banking was over 80% of it. And by banking I mean commercial retail and investment banking. And and then within that bucket, we had 2 or 3 clients that dominated it. So we had concentration on top of concentration, if you look at it from a layered perspective. And and so we were certainly aware and concerned. But you know, our main client, our largest client was 200 plus year old, organization, form banking organization. And we were the number one, you know, managed services provider in North America for them. And, and so, you know, what are the chances they go bust on your watch? But unfortunately, you know, that is, what we had to deal with, in fact, a broader banking crisis, the worst, you know, crisis since the 2008 crisis for banks. And if you’re watching the news this week, you’ll probably see it looks like wave two of that banking crisis might be coming on us right now. But I’ll tell you, as we go through the story, I mean, why we are we feel like we’re in a vastly different position today than we were even a year ago. And and the, the crisis, while it came to a head when Silicon Valley bank went bust in March of last year and that kind of cascaded a bunch of other dominoes, it really started six plus months before that. You know, when everyone was bent down the hatches, a lot of times the first cuts to go are strategy projects or, or consulting, consulting and, contingent workers. So, so we started feeling the pain well before the crisis came to a head, actually in March. That was our revenue actually bottom. So when the crisis actually was peak, so peak media, that was when we at the bottom was already in that process. And we’ve been up every month since then. So, I what is the silver lining, though? Because we were so busy servicing those largest clients, we were actually able to now pivot some of those calories towards supporting, other clients, adding these other client logos in other industries and other verticals within financial services. So looking at those same concentrations today, now financial services down to less than 20% of our total revenue, less than 80%. So more than 20% now as, as other industries, which is a big step forward in two years, I think, then within banking is now only 30% of our financial services revenues. Now we have insurance and asset management and, other fintechs and other, you know, other category, we’ll call it making up the, the rest. So now, as we come into a potentially round two of a banking crisis, we actually look at it like we can actually grow revenue through a crisis as opposed to having 1 or 2 major clients going down. I’ll pause there for a second. Yeah. 

Greg Alexander [00:10:44] I mean, I have great empathy for you. I mean, the big client is 200 year old institution, and they went poof overnight. I mean, the odds of that are so small. So it’s just, I guess a stroke of bad luck that happened. And I don’t want I don’t want the listeners to overreact to that. I mean, that would be the very definition of a black swan event, I guess. But you’ve taken these steps to diversify, which is really the takeaway from today’s call. You know, if you were to look back, you know, with a, the power of retrospection and you could wave a magic wand and you could speak to your former self. You know, when you launched the new firm in 2018 and you were growing 300% a year, and you got it up to $3 million a month in revenue? I mean, things you were rocking and rolling. What would you have told yourself then to do at that moment, to allow yourself to better cope with what did happen? 

Michael Ivie [00:11:46] Well, actually it’s interesting. I don’t know, that would change an awful lot. I think they were important lessons that we needed to learn. And and honestly, as a risk person, I mean, we always have to have our risk hat on. So I kind of we always knew those were risks and unfortunately was kind of a worst case scenario with, you know, our top three clients, all, you know, two of them going to zero and you know, the other one massively cutting back. So. So that that was tough. I think it it presented a challenge that really pushed us to exceed it. And actually I, I it’s an interesting concept of, you know, we often say in the investment world that diversification dealing free lunch. And that’s when you’re talking about long term consistent saving and investing. But Warren Buffett was famously interviewed and they asked him, they kind of said in, in a matter of fact way that, you know, diversification so critical. He said, well, yeah, for the average person, diversification is great. But if you really know what you’re doing and you’re really in there, you should take those specific idiosyncratic risks, because that’s where the most asymmetric upside exists. And I think we would have never if if I were, if I told myself like back off on on these biggest clients and really focused on others, I’m not sure, you know. I’m not sure how much how successful we would have been with a lot of other clients. And like I said, you know, we were at full capacity just supporting that $120 million client. So, you know, would we have been able to do what we did and build the team that we did? I guess my answer to that is always be thinking about risk mitigation. So if we know we have concentration risk, it’s part of the stage of any entrepreneur’s journey. Is is at some point you probably have some level of concentration and and organically over time we’re going to continue to add new logos. Some logos are going to go up and down and and the top five, top ten list, you know, there will be some names that are kind of there are commonplace there and others that are, you know, hopping on and popping off of that list. So I think, you know, I look at it like, what are the risk mitigation? So there’s a strategy saying so using EOS brokers. And they are they hyper focus on incentivizing your organization to, be doing the sales efforts needed to have that pipeline of new logos coming from new clients? The next thing, I guess, you know, diversification is easy to say, but it takes years to build diversification, at least in, you know, for us, when we’re working with really large, complex organizations. And, you know, the our saving grace is a risk mitigate was the fact that we used a lot of contractors and contingent workers, so we didn’t really have to do much cutting in terms of, you know, our full time, you know, what we call our franchise players, really almost none. In fact, we grew headcount throughout this whole crisis. So it it really was an opportunity for us to invest because we had the kind of confluence of things happening in 21 and 22 where the great resignation people were asking for three, four, five, six, $700,000 base salaries, and they were getting it in some cases. And, and so, you know, and if you give in to that, then your existing talent, they, you know, all else equal, why aren’t they getting it as well. So, you know, we we stuck to our guns. We’ll pay market rate for a contractor. What we need to at that point in time. But you know we didn’t over hire when the euphoria was going on. That put us in a position to do strategic hiring coming out of it. So just one of the many I think silver linings. 

Greg Alexander [00:15:20] Yeah. Great advice. You know, I would I would add, you know, when you think about risk mitigation, you know, having a risk mitigation plan, which is what Michael has and what he’s advising to you, I don’t know if enough of our listeners and members have collected 54, have a formal risk mitigation plan. So that might be the take away. And when we have Michael on for his private Q&A session with the members, we’ll we’ll get into details of what a risk mitigation plan looks like. But just to tease the audience a little bit with what we might discuss, then I always ranked when I had my boutique risk high, medium and low, and I ranked it based on how long would it take to recover. So a very high risk was something that if it happened, it would take me a year to recover from. And therefore I prioritize those risks. And I came up with contingency plans to deal with those first. Then I would say moderate risk might take me six months to recover. And then I would say it like risk might take me a quarter to recover. And I’m not suggesting that that’s the way that you all govern your risk mitigation plan. But a risk mitigation plan starts with not all risks are the same. And ranking them high, medium, low might be helpful. You know, to the audience. And the risk that we’re talking about today is not the only risk that you have as an entrepreneur of a services company, but it is a big one and that is client concentration risk. And as Michael shared with us today, you can’t just flip the switch and diversify tomorrow. I mean, there’s it takes a while to build out a portfolio of clients that are diversified and stable. So client concentration risk is in the high category because, you know, it might take you a year or so to recover from that. All right Michael. Well we try to keep these podcasts short about 15 minutes in length. And we’re at that window here. But I do appreciate you coming on and sharing your story. And I know that when we have our Q&A session with the members, we’ll get into more detail about it. And there’ll be lots of questions regarding this. But congratulations on your remarkable story. You know, you had a huge run up. Unfortunately, you had this black swan event that caused some pain, but you’ve recovered from it very nicely. It’s amazing how levelheaded and non-emotional you are about it. So that’s great, and I’m glad to see that things are turning around for you, and I wish you a lot of luck going forward. 

Michael Ivie [00:17:40] Yeah. Thanks a lot, Greg. And always here. If anyone wants to reach out and talk more about the topic. So. 

Greg Alexander [00:17:46] All right. Great. So a couple of calls to action for audience members. So if you’re not a member of Collective 54, you want to be go to Collective 54.com and fill out an application. We’ll get in contact with you. If you’re not quite ready to become a member yet, I encourage you to subscribe to our newsletter. Which is Collective 54 insights. You can find that on the website as well. That’s where this podcast gets posted. And if you want to dive in a little bit more and, spend some time with it, I suggest you read my book. It’s called The Boutique How to Start Scale and sell a professional services Firm. You can find it on Amazon. It takes about a three hour read, and our content is organized and our programing is organized as that book is. So hopefully those are helpful. And until next time, audience, I wish you the best of luck as you try to grow, scale, and sell your firms.

Episode 158 – Playing with Fire: The Perilous Truth About Client Concentration Risk in Boutique Service Firms – Member Case by Jamey Harvey

Attend this session and learn how to address one of the biggest risks for small service firms- client concentration. Items discussed will be benchmarks to measure client concentration, an early warning detection system, the impact on strategy client concentration should have on your firm, how long it takes to fix the issue, the most successful risk mitigation strategies, and how to prevent client concentration from destroying your firm.

TRANSCRIPT

Greg Alexander [00:00:15] Hey, everybody, this is Greg Alexander, the host of the Pro Serve podcast, brought to you by Collective 54, the first mastermind community dedicated to the unique needs of the unique founders of boutique professional services firms. Today’s episode we’re going to talk about client and revenue concentration risk associated with running a small services firm. The very real risk, I hope to raise the awareness of this. I’m going to talk about ways to possibly mitigate it. We have a long-standing, well-respected member with us today. His name is Jamie Harvey. He’s with a company called Agilian. Jamey, if you could introduce your firm and yourself to the audience, please. 

Jamey Harvey [00:01:02] Yeah. Great. Thank you. Greg. So Agilian provides I.T. and strategic advisory services to the health equity ecosystem. Recently, we’ve narrowed our focus to enterprises in the Medicaid ecosystem. So managed care organizations, community health networks, and providers that serve marginalized people. So it’s our vision to dramatically boost the efficacy of the $3.5 billion spend on health care equity through Mcos annually. So, we pivoted to this over the last few years from the government space where I had, started as the chief software architect for the city of Washington, DC. And, I got into government after starting three venture capital-funded companies in the 90s, be the B2C product companies. So, but I ended up, running all of the software and systems integration for the District of Columbia. And so, we developed a methodology there for fixing siloed, overcomplicated, ill-fitting it at, at big enterprises that had interoperate with each other. And it’s a process that we call digital liberation. And it turned out to be even more valuable in the health equity ecosystem than it was in local government. But, when I was starting the firm, most of our clients were with the D.C. government. I have a great network in the DC government. I have a reputation there. It’s a kind of a medium fish and small pond kind of situation. So most of our early customers were in the DC government or around the DC government are funded by the DC government. Which brings us to our story about client concentration risk. 

Greg Alexander [00:02:37] Okay. Very good. So let’s first let’s define client and revenue concentration risk. First I’ll ask you for your definition and then I’ll offer one up. So how would you define it. 

Jamey Harvey [00:02:48] Well, I mean, on some level, I feel like it’s the it’s the situation that the phrase too many eggs in one basket was designed and describe. Right? Like if you lose the basket, you lose all the eggs. And so, so, you know, the advice in a, in collective 54 is not to have so much of your revenue collected in, you know, a few number of clients. And, you know, I think, I think when we did our metrics last, Jillian has always been dead last in that metric for the collective 54%. I looked that you and I have joked about that before. I think I’ve always, always had the worst, compliance and revenue concentration risk of any of your of any of your, members. Yeah. 

Greg Alexander [00:03:34] You know, it’s a double-edged sword. Yeah, yeah it is. It’s a double-edged sword. And all of our members, struggling with this. So let me give you an academic rule of thumb or benchmark. Right. We define it as if it if your top five clients equate to greater than 30% of your revenue, you are by definition concentrated. And the implication of this is that a client or two goes away, which happens especially if you’re project-based. Then the whole PNL falls apart and it’s very damaging. Now. It’s also a plus because a small number of clients that you overserved well tend to grow. They tend to buy more, especially if they’re big. So the more successful you are, the more problematic this risk is. It gets bigger over time, so it’s a tricky one. And I’m certainly not here to suggest that I have all the answers. But the goal of today’s show is to elevate the awareness of it. So, Jenny, I understand in 2023, this reared its ugly head with you and something happened. So just briefly tell us what took place. And then we’re going to get into how to avoid it and fix it once it happens. 

Jamey Harvey [00:04:43] Yeah, I think, I think I when we went through Covid, the funny part was my business accelerated like a lot of people were really struggling, but, you know, we continued to grow. In 2022, we doubled in size. And we for the three years previous to that, we had greater than 70% growth every year, year over year. We were profitable every year we’ve been in business. And in, Q1 2023, last year I had the best quarter ever. And I wrote you a very nice note saying, hey, Greg, my margins are where they’re supposed to be. And, you know, like I’m hitting on every metric except for that darn client concentration thing. Thank you so much. And we did a podcast about how great that was. And, but what I, what I. Didn’t realize what’s going to happen. Was that because I wasn’t in the private sector, because I was doing all this government business? Government had a Covid hangover, basically. And so in Washington DC, the way the Covid hangover looked, well, Washington DC, I know the market pretty well. It’s got about 700,000 residents. And when I used to work there, 2.5 million people would flood into the city every day. So the population of the city during the day was 2.5 million people, and the population that night was 700,000. So people, people from the suburbs come into the city to work and then they go out. And the biggest employer here is federal government. So after Covid, the federal government did not require people to go back to work. All the buildings downtown are vacant. All the restaurants are going out of business. Nobody is spending any money. And the tax base for the city is really based on the, you know, the 1.8 million people that come into the city every day and spend money. So essentially the and takes a. 

Greg Alexander [00:06:27] Sales. 

Jamey Harvey [00:06:27] Tax for that. The sales tax. Yeah. Yeah. You know, normal economic activity. Right. So the city is really runs on that. And they missed their numbers that year, in 2022. And essentially the city went through giant rolling budget cuts everywhere all at once. Which is five out of six of our we only had six customers. So, you know, our client concentration was like 90%, five out of six of our customers, you know, lost all of their funding to do things, and big I.T. projects, even if they’re critical, they get paused, right? They get stopped. And so we went from having, six, six clients to two clients in about six months. And the revenue was about like that kind of drop. It was about, you know, went to a third. 

Greg Alexander [00:07:19] Yeah. Yeah. Well, I hate that you went through that. That part of that story that I hate the most is that there’s there’s nothing you could have done. I mean, Covid happened. The sales tax receipts for your customers went away. They had to cut. They didn’t have a choice. And guess what? Right. So it wasn’t like you screwed up. You know, you gave bad service or something like that. And this, this is the thing that makes it so hard and bites all of us is it’s to a large degree, sometimes outside of our control. So I’m going to ask you an unfair question right now. Yeah, but but I want to see if you can share some wisdom on this. So did you see it coming? Like, were there any early warning signs that with the power of retrospection now Monday morning quarterback this you could have saw coming in. You could have done something to prevent it or there was no way to see this coming. 

Jamey Harvey [00:08:04] Well, let me say this. First of all, every, every company meeting I ever had for the past four years when I would list the risks. Right. You know, I do my Swot analysis, right. The at the top of their list was Glenn concentration DC government client concentration. Too much reliance on our big integrator that we work with. You know taxpayers da da da da da da da. So it was a known risk. It was an accepted risk actually. Really. What we saw was in the fall, you know, there were articles in the paper, you read the Washington Post and you see, the people aren’t coming back. I used to work in the DC government. I I’ve been through these cycles before. I actually knew what it meant. Right. Like, so we were tightening our belt and we. Oh, let me let me say this. We were working our tails off to get away from government. I’m not like you. You heard me talk about the government. The company does. I don’t do government anymore. I’m out of government now. I joined Collective 54 to go build a scalable business. And part of that was, you know, maybe keep one foot in government. But like we were, we’re working on the health equity space, right? So, but we were funding that effort on these five year contracts that we were assuming we’re going to be around. So it was like our venture capitalists essentially like what happened was our series C went away suddenly, right? So, instead of having a, a three-year runway to do the pivot that we were doing, suddenly we had a one-way run, a one-year run rate to do the pivot. And, even though we saw it coming, it was like in slow motion, right? Like we could see it coming. You know, here it comes. But but there was, you know, nothing you could do about it, that we hadn’t already done because we knew that it was risk coming up. 

Greg Alexander [00:09:40] Yeah, yeah. So what I would what I would offer the listeners, and I agree with everything that Jamie just said, is that the only early warning sign, really, to pay attention to is the economic well-being of your end client. Jamie’s case. Right. This was the government and the associated sales tax. And, you know, they were writing about it in the newspaper. Right. But many of the other members that are outside of the government space, they’re not paying enough attention to how well their own client is doing. I’ll give you an example. We had a lot of marketing agencies and Collective 54. It’s one of the areas that we do well in, and a lot of them, during the Go-Go days of Covid, were living off the backs of early-stage VC-funded firms, and these early-stage VC-funded firms were not profitable. They just. But the market was going crazy, so they just kept raising more money. All of a sudden interest rates go up, people slam on the brakes. Fundraising is impossible. These VC little software companies don’t have any capital. What do they do? They cut the marketing budget. Bad client concentration rears its ugly head. So the early warning detection system I’m recommending on today’s podcast is to make sure that you understand the financial well-being, the financial health of your end client, not just your own little world like. And that example, what’s happening to the marketing budget that’s downstream? The bigger, the bigger question is what’s happening to my client’s business? Are they profitable? Are they generated cash flow? Are they growing? How are they doing against the competition? So that’s that’s what I would recommend by Jamey decision making. Let’s talk about that. So this happens you go from six clients. Two clients. The associated revenue hit takes place. What did you do? 

Jamey Harvey [00:11:15] Well. So when the when the first when we got the first calls like, hey, these these client, these are going away and you to get a little bit of warning. Right. We just happened to be walking into our semiannual meeting that we have at Agilian. And, the night before I reworked the, the presentation that I was going to give and basically declared, declared a new state of, all hands on deck. We call it we call it the Wobble because we were hoping it was going to be a wobble. And so we immediately we, we took everybody who was non-bailable or on the admin side of the company, and we tried to get them billable on projects because we still had projects at that point. Right. So like essentially like if we could top people up under, you know, become revenue producing. We were trying to save people. We had a big recruiting team, like, not a big recruiting, but for us, it was a it was a well-established team. It had a really good process. They were really great for creating team. And we didn’t have any more recruiting to do because now we were we were contracting. So we we gave them all job tryouts and other functions like right away. And then I took my I don’t know if you remember this, but I asked my senior team, all of which all of I was doing all the sales at this point, and I basically asked my senior team to to reach in their networks. And we kind of did an all-hands-on-deck sales effort, which we called the seller doer. So these were these were doers, and we asked them to become sellers and And that was that was our initial response was, you know, the in all honesty, none of those things actually ended up working that well, like, they made us feel better. The, the people that were non-billable, that got moved to projects, there were just mixed results. Some of them weren’t able to do it, some of them were able to do it but didn’t last very long, you know. But but like on some level it it wasn’t a panacea for sure. The job trials, really almost none of them worked out right. Like I took people that were a junior and had been trained in a really rigorous process. And I was moving to an area where they had to, like, do stuff on their own, and they weren’t getting much direction and were in a virtual company. And, and it was not a very good environment for them to succeed. And, and then the cellar door thing, you know, it was very educational. We learned a ton, which is important. Right. But, zero revenue. Right. So, what what did work that I, which, which wasn’t a, it wasn’t a austerity technique, but but but I would recommend everybody is we did keep doing the marketing we were doing. We kept on with the pivot. Right. Like so we we kept doubling down on getting away from government, getting into the the health equity ecosystem and the customers. And I, very happy we did that. 

Greg Alexander [00:14:08] Yeah. So let’s let’s kind of summarize, right. So, you know, you went through it, you experienced it. You, congratulations for having the conviction and the courage to continue with the pivot. A lot of times, people at the panic button and they just get into survival mode. And anything that’s futuristic, you know, gets cut instantly. But you didn’t do that. So, you know, peeking out into the future, maybe playing the role of advisor to our members right now, lessons learned. Like what are the 2 or 3 things that you would do going forward to try to mitigate concentration risk as much as possible? 

Jamey Harvey [00:14:41] So. So one, you know, on some level, the. We grew the company as a lifestyle company, kind of on relationships I had. Right. And so and we we had a lot of big deals that were long term. So we were running the business and then they were they were like our venture capital to do the pivot. So on some level, you know, I look at everything that we’ve done and Jillian has done a lot to, to to get to the scale stage and be, a commercially viable company. You know, that is self-generating everything in the Collective 54 program, if you’re doing it right, is going to be moving you towards having less client concentration risk. Honestly, like, the truth matters, like you kind of. But you kind of have to do the whole program, which means it’s going to take a while. Right. Yeah. 

Greg Alexander [00:15:37] Exactly. 

Jamey Harvey [00:15:38] One thing. It’s like start as soon as possible, right. And get going. And as you told me at the very beginning of this thing, started the first chapter of the book and get to work on those. Right. The, we had done a lot of work around our buyer journey model to try and be able people, people and like, if it works out to me, I’m, you know, I’m jealous of your size of deals. You got all these big deals, right? I’ve been trying to do smaller deals and then land and expand and grow them, which I feel I feel like will give me more consistent revenue and will help me with my client concentration risk. So I’ve done a lot of reworking to do that, and it seems to be working. I haven’t been through a full cycle yet to know whether it is working as well as I want it to be, but, the initial the lead indicators are great, right? We we didn’t see any way that we could keep doing the kinds of projects we did for government and not have this project continue to be a problem. So we the our market pivot wasn’t done mainly because of client concentration risk, but it also had the benefit that it was going to help us with that. Right. And You know. But the sad part is, even with like with all the mitigation I’ve done, it took me it took me six years to get from 1 to 6 clients. I was bringing in about one big client a year. Right. And now I’m down to two. So, honestly, like my client, I. I had felt like I was making steady progress towards making my client concentration better. And, you know, it’s, it’s it’s as bad as it’s been since the first year of business. Really now. Right? 

Greg Alexander [00:17:10] Well, however, I would say I think you’re on the right path. Just because your client has concentration rates was sector-based. You were completely dependent upon the government, right? So now now you’re diversified out of a single sector. Yes. You have smaller clients. So by definition you have more concentration. I understand the math, but you have improved in that area. 

Jamey Harvey [00:17:29] I it’s it’s it’s it is it’s different. I mean if, if politically, Congress decides to cancel Medicaid, I will be back to square one. Right. And it’s, you know, that’s not a that’s not an impossible thing in the next 20 years, there’s, there’s different people who are into that. 

Greg Alexander [00:17:47] Yeah. Yeah. True. Yeah. 

Jamey Harvey [00:17:48] No comment. 

Greg Alexander [00:17:53] Anything else? You know, before we wrap up here, any other, ideas that you want to share with the broader audience? Of course. We’ll go into much more of this when we have our member Q&A. But any other thoughts? 

Jamey Harvey [00:18:04] Yeah. So, one thing is, I would say like watch for multiple vectors of concentration, like, we didn’t lose one at a time. We lost to like, it was cascading. Right. So there was we had with the DC government, we had the, we had the risk of several projects in one agency, and then we had several projects under one prime, like subcontractors. And then they were all under the DC government. So when they got hit, we got hit like double sometimes. Right? And it was cascading right. So like that I kind of knew that I had a chart on my wall that was showing that at one point. But, you know, I think if you have that situation you want to be take it more seriously. The, the other thing that we really struggled with was in growing and growing and growing. If my financial projections were a little weak for, you know, the next couple of quarters, if I’m growing 70% year over year and a profitable, really, that’s not a big deal when you’re shrinking and like trying to figure out how much runway you have to keep people employed until you get the next deal. If you’re off by $100,000 a month, that can put you out of business, right? Yeah. And we were in the middle of implementing our our professional services automation system when this happened. And it was like halfway implemented. Right. Like so we we had some we had some weaknesses in our financial management that got exposed when the waterline went down. Right. So I would say if you’ve got this kind of client concentration risk, go ahead and sharpen your pencil and get in there and like make sure that that stuff is really buttoned down now, because when you don’t want to be trying to button that down when the water’s going out. And then I think the other the other thing that I really. Kind of came out of doing this process. Thinking about this conversation is, you know, we’re entrepreneurs. We’re in the business of taking risks, right? People aren’t people don’t have client concentration risk because it’s a bad risk. You know, if if I said to you, Greg, hey, collective 50 or the government is going to give you a contract that is going to give you $10 million a year for forever, but you have to roll the dice each year. And if you roll snake eyes, that’s going to go away. Yeah. You you take you take it. You would take it. Yeah. You take it. Right. 

Greg Alexander [00:20:15] Like that’s that’s the reality of it for sure. 

Jamey Harvey [00:20:18] And eventually you will roll snake eyes. Yeah. Eventually you’re going to roll Snake eyes. And you, you already took the risk. You already have the risk, right? Just know that eventually you’re going to you’re going to roll snake eyes and plan for it as best you can. So. 

Greg Alexander [00:20:33] All right, well, listen, we got to wrap it up here, but this was great, great advice. I really appreciate your maturity level and your ability to say, hey, you know, this is what happened to us. Your generosity of sharing this learning example with others. It’s not easy to come on and say, hey, you know, things didn’t go so well, so I really appreciate you doing that. On behalf of the members, thanks for being here. 

Jamey Harvey [00:20:54] Thank you Greg. 

Greg Alexander [00:20:55] Okay. Right. A couple of calls to action for those that are listening. So if you’re a member and you want to talk to Jamie about this, look for the meeting invite for the Q&A session that will be coming up. If you’re not a member and you think you might want to be, go to Collective 54.com, fill out an application. We’ll get in contact with you. If you just want some more information, I would point you towards our book. It’s called The Boutique How to start, scale and sell a Professional services. Until next time, I wish you the best of luck as you try to grow, scale and exit your trunk.

Episode 157 – Family Ties and Business Lines: The Pros and Cons of Family Members Working Together in a Boutique Professional Service Firm – Member Case by Carajane Moore and Tom Searcy

According to the US Bureau of Census, 90% of small businesses in America are family-owned and operated. Many Collective 54 members work alongside family members daily. Are you? Should you? There is a different set of management best practices used to grow, scale, and exit a service firm owned and operated by a family. Attend this session to learn how mixing family and business can be an effective way to fulfill your dreams- personal and professional.

TRANSCRIPT

Greg Alexander [00:00:10] Hey, everybody, this is Greg Alexander, the host of the Pro Server podcast, brought to you by Collective 54, the first mastermind community dedicated to the unique needs of founders and leaders of boutique professional services firms. On today’s episode, we’re going to talk about the pros and cons, the goods, and the bads of having family members. Inside of a small services firm working in the business and working with each other. Many of our members in our community, our family-run businesses. And, if you listen to the media, you know, that there’s, kind of a generational transfer that’s upon us with the baby boomers handing down their businesses to the next generation. So it’s a topic that I really want to spend some time on. And we have, two of our members who are very well respected, long-tenured members with us, Cara Jane Moore and Tom Searcy, who are our family members. And they run a firm called Hunt Big Sales, and they’re going to come and share their experience with us. So, Carajane and Tom, would you introduce yourselves to the audience, please? 

Carajane Moore [00:01:22] Sure, absolutely. I’m Carajane Moore, I’m president of Hunt Big Sales. And, I’ve been here about almost for since inception, 17 years. So. Yeah. 

Tom Searcy [00:01:33] And I’m Tom Searcy, CMA, CEO, founder of Hunt Big Sales. And we’re from it’s almost 20 years old in the professional services world of helping companies land big sales. The name is not confusing. 

Greg Alexander [00:01:48] Okay, great. So let’s start with a little bit about, about the journey. I mean, how did the idea of working together as family members come about? 

Tom Searcy [00:01:57] It came from, desperation. I, I was I’d started this company. We were starting to work and grow and etc., and I needed somebody that there was that I absolutely knew could do what we needed to have done. Carajane called up and she said, hey, what do you think about me coming on board? And I truly didn’t say a word for about 30s. And she said, or not. And I said, I said, I said I had no way to dream that big. That would be fantastic if you came on board. Because our cultural alignment, our personal value sets the the things we thought about as far as excellence, all that stuff totally lined up and, and we really, really liked each other. Well, I liked her. So. 

Carajane Moore [00:02:47] Now we’re. 

Tom Searcy [00:02:47] In Sydney. 

Greg Alexander [00:02:49] And since you don’t have the last name just for the benefit of the audience, define the family relationship. 

Tom Searcy [00:02:54] But we’re, brother and sister. Carajane is 11 months younger than I am. And, we have, my identical twin brother, passed. So we were Irish triplets, and so now it’s brother and sister running the business. 

Greg Alexander [00:03:10] Got it. Okay. And Carajane in the beginning. Were there any reservations or concerns that you had about going to work with your brother? 

Carajane Moore [00:03:20] No, actually, not like Tom said. You know, we kind of think very similarly. We grew up because we’re so close in age, very close. And so, some of our even teenage years, we were in the same firms working together. So, no reservations. And in fact, that’s why I called. I said, hey, you know, I understand the business is growing. I’m in a position that I, can come. I actually, it’s funny because I’m like, I’m in a position, I can come on board and you don’t have to pay me anything. I’ll just make commission on what I sell and which is also part of that. That’s fantastic. 

Tom Searcy [00:03:53] Yeah. And how do you turn up what you’re thinking here? Yeah. 

Greg Alexander [00:03:58] All right. And then, you know, from your perspective, what do you think some of the key advantages are when you have family members in the firm, maybe in comparison to those who don’t have family members working in the firm? 

Carajane Moore [00:04:11] Yeah. So I’m going to tell you, I think that there’s some really key issues for having family members that shared history, and background or values or consistency of what is excellence look like. We had it that all of that was shared. He didn’t have to say much because I already knew what he was thinking because we shared how that went. I think there’s also, at least in our case, I can’t say for other people, but I would suspect there’s also a shorthand in the language, right. Which saves me an enormous amount of time. He doesn’t have to explain when we first started. Can I have to explain what you just said? Hey, I think we need to go do this. And I already knew what accent looked like. I already knew what it needed to do. And so I could go take it and run with it and bring it back to him. 

Tom Searcy [00:04:53] Right. So if you’ve got that, if you have that institutional, appreciation, I think it we work a lot with multi-generational companies. As far as families that are moving that along, and there are some families which that is baked into their DNA, they understand that this is how we do it as a company and as a family. And there’s others where, there’s a huge divergence. You know, mom and dad took it the wrong direction. I’ve got it now, and I’m going to take it a different direction. And, when you have that, then there’s going to be friction good friction or bad. 

Carajane Moore [00:05:31] Yeah. Well there’s also other some of our other clients and people we’ve seen too, where you’ve got, second generation, our next generation, some of the cousins of where there’s more than just rap in which there’s some entitlement feelings and that type of thing. So some are working really hard and others aren’t working, but have titles and want to be paid. So they’re, you know, we have don’t have those challenges inside of our business at this point. 

Tom Searcy [00:05:53] I throw in one other thing about this, and that is money. Although we can talk about money a little bit later on, sometimes people look at the money as far as I should earn, as far as my compensation, what my level of equity is or what my last name is or whatever, and getting the idea that your role or your job pays you one way, right? And then you, receive dividends or benefits or however the company pays that out separately. And those two things should not be mixed. The money, it always shows up in the conversations. Always. 

Greg Alexander [00:06:28] Yeah. You know the old saying never mix money and friends never mix money and family. You know the money. The money problem can be a real a real a real issue for sure. So so speaking of problems and challenges, you know, what are the problems and challenges both in your own experience as family members running up front and then also with the clients that you serve that are family run businesses? What what are the things that people should look out for? 

Carajane Moore [00:06:53] I. You know, Cass, jump. I was going to say one of the things that I think that Tom and I share as, family members and challenges is we do think a lot alike. And so there isn’t that buffer that says that’s not a good idea. 

Tom Searcy [00:07:06] Right? 

Carajane Moore [00:07:06] I have a great idea. I think that’s a great idea which could do that, where he has a great idea and I go, oh, I think that’s a great idea. We should go do that. And pretty soon, you know, because we are aligned, are going down rabbit holes. We shouldn’t be going because we don’t have somebody going, I’m doing. 

Tom Searcy [00:07:21] Right. Yeah, exactly. So so that’s the heart. That’s the groupthink that comes with a family is without someone to push back that doesn’t have the last name. So many companies have got employees that just complain about their inability to be heard in a constructive way. Next thing is, is, you know, whose lane is what lane? Families oftentimes think that they share lanes. And but Jane and I have very clear lanes. This is her side of the house, my side of the house. We meet regularly, and then we meet once a quarter, as owners for a full day to work through all the business issues that we’ve got right now. And to make certain that I stay in my that we stay in our lanes. Yeah. Sometimes I’ve been accused of overstepping. Yeah. So unfair. So. And when it. 

Greg Alexander [00:08:15] When it comes to decision making, are the decisions joint or is there a boss? 

Carajane Moore [00:08:22] I mean. Well, Tom says I’m the boss. Technically, I’m probably the boss, but I honestly, our culture is more so that we, I’m bigger decisions. We together come to those. But the day to day decisions I make. 

Tom Searcy [00:08:36] There is a piece about those decisions too. We talked about money. It’s important to figure out how to fight. All right. How do you disagree? How do you argue? What what what stays off the table, right. Because in family run businesses, it gets murky. Yeah. You know, so my son was in the business for a period of time. He came in and he was working for a period of time. And then we fired him. And we fired him, you know, gently, you know, at lunch, please take your things home with you. But seriously, he had to go. He wasn’t making the contribution. We laid out what he needed to do. He went into a completely different area in the in the marketplace, and he’s done great. Yeah, he wasn’t a good fit for us. But when he came on board, we had said no blood, no foul. We will fire you or separate. Or you can quit. Yeah. And it’s not going to affect. You can quit is just as easily as we can let you go. And we’re still going to be family. And you got to call it up. Call it out up front. 

Greg Alexander [00:09:42] So that’s interesting. Learn how to fight. And the example of fire in your son. That’s quite a story. I don’t know if a lot of people have the courage to fire the father son, and then the relationship stays intact. So that’s that’s great. Which takes me to my next, I guess, line of questioning, which is how do you set boundaries between the professional relationship and the personal relationship? 

Tom Searcy [00:10:03] If you asked our mom. Her answer would be, I hate having holidays with you too, because all you want to do is go talk about the business and the things that you guys got going on and what just happened. And, you know, we we would never hire her. So and so she she never knows. So it’s you you can talk about how we do that because they would say our parents would say we don’t do it very well. 

Carajane Moore [00:10:26] Yeah, I would say our parents say we don’t do it. Well, I would also say that the people that work with us would say, we don’t do it very well either, and that family issues come into the business conversation just as much as business conversations come into the family, sessions. But we try very, very hard, to regulate that and recognize that. And so when we are at family meetings, we make it a very small conversation off to the side, just the two of us. We might sneak a little bit, but that but then we try to keep. 

Tom Searcy [00:10:55] It bright little notes. I mean, here we are. We’re gonna we’re we’re like, you know, over 50 years of age and we’re still cribbing notes and handing them to each other so Mom and dad won’t be mad. But, you know, there is a piece to this as well. And that is, when it’s a family, crisis or celebration. Right? That kind of a defined set of moments. The business has to go. Second, when Tim was passing, and involved in the business, we looked at each other and said, we’re going to take and the business is going to have to be second to Tim. And Tim took a year to pass and not to bring this up in any. But, every family has moments of crisis and, it’s very hard and probably inappropriate to try and pretend like that’s not happening. 

Greg Alexander [00:11:44] Yeah, you can’t pretend when something like that’s going on. Right? So you might as well just deal with it and be upfront and honest about it. 

Tom Searcy [00:11:50] Yeah. 

Greg Alexander [00:11:51] You know, you talked about your employees. This is an interesting one. You know, in the world that we play in professional services, it’s believed that people have careers, not jobs. You know, they choose to go to work in the professions because of the content of the job. They want to be in the expertise business. And when the when the business is owned and run by family members, employees who are not family members may feel that they don’t have a career path and want to. So how do you deal with that? 

Carajane Moore [00:12:23] I spend a lot of time, because I do more of the day to day management of the business and the team, to really understand what is what is it that they want as the employees? What do they want? Where do they want to go, where their interests, so that we can make sure that we’re keeping them engaged and excited about what they’re doing and developed and growing? And then we’re appropriately saying, okay, that’s great. We’re not going to go that way this year. Are you able to stay here or not? But we do have in our business an enormous number of people who are 1099 as well. And so, it’s a smaller group that’s that we handle the, the what is the career path? And like Tom said before, we have our lanes, we make sure that everybody has their lane so that there is clarity as to where they can go, move or not move. 

Tom Searcy [00:13:17] It is, I would add a little case to any one of our clients. Dear, dear client and friend. They’ve had their company for five generations. Five generations. Wow. So they’ve worked through this generational model very consistently. They have hundreds and hundreds of employees and they work on compensation and bonuses. But there isn’t anybody who thinks at some point, right, that there’s a career inside of their business, but there isn’t a path to ownership. For instance, you know, and the fact is, is that there are family members that are outside who are not interviewed and not brought in. They may receive dividends, but you’ve got to do your job anyway regardless. And that’s, that’s kind of important on the career path side. Some of the members in that family do not have career paths. 

Greg Alexander [00:14:09] Interesting. You know, and the the learning there is, is to separate the ownership piece from the employment piece. 

Tom Searcy [00:14:16] So important. 

Greg Alexander [00:14:17] Yeah. And sometimes I don’t know if we do that as well as we should there to. There are two linked in an, a family business. That needs to be a bright line between those two things for the obvious reasons. You know, particularly when people pass away and there’s a state plans and things are assets on a balance sheet that get transferred from one generation next gen. It can get really complicated, for sure. All right. My last question is this. For those of your peers that are in the community that are thinking about hiring a family member, but they’re hesitating. Would you encourage them or discourage them from doing so and why? 

Carajane Moore [00:15:00] I personally. So I’m going to start with, if you’re hesitating. Right. I think that you need to really do a solid gut check. There there is pressures, maybe personal pressures, family pressures to hire a family member. And if there is a I had cetacean, then I would really check on that. You know, it’s just like if there’s an employee, we come into places and they’re like, well, I’m not sure I’ve got the right people in the bus. Well, if you don’t know, then I can guarantee you you don’t. Right. So my, my, if there’s a hesitation, I would really start to question, is this the right choice? 

Tom Searcy [00:15:35] But I can only echo what Carrie Jane said. You know, what we start to do is, is we know the answer. Then we just figure out ways to lie to ourselves. So, you know, so we say I shouldn’t bring them on. But, you know, I think it’s important to mentor them. And I think it’s important that they generationally learn how to do this. And I think that it and the answer is really okay. So you have their whole lives if it’s children to work with and if they’re, you know, other members of the family, you’ve watched them. Why are we pretending like we don’t know who they are? 

Greg Alexander [00:16:05] Yeah, yeah, yeah. It’s great advice. It really is. Sometimes that hesitation is caused for reasons that aren’t job related. Yeah. Like the family dynamics. And in that, I think it’s it’s a shame, you know, if you have a family member who would be a superstar, who wants to join, but you don’t provide the opportunity because of blowback elsewhere that’s doing that. Family member. Tremendous. Yeah. 

Tom Searcy [00:16:29] That’s true. 

Greg Alexander [00:16:30] Yeah. However, I agree with what you’re saying, that if you have a family member who’s not a superstar just looking for a job and you don’t think they can be successful, then trust your instincts there and run away. So your. 

Tom Searcy [00:16:40] Advice. Yeah, I mean, we get sorry, but I don’t interject. That was the Carajane moment right when she called up. Right. I was like, you know, it was a gift. I had no flippin idea that she might even be interested. So that was one of those things where I had a superstar who called. And then I had my son called, and he’s a superstar just now working for us. Yeah. 

Greg Alexander [00:17:04] Yeah, that’s really interesting, but. All right, well, we’re out of time here. But I do want to thank you all for coming on, and, you guys have been great, members of our community. This podcast is another example of you contributing. For those that are listening, I will tell you that my team is in and, enrolled in their executive language program. There’s so many ways that Carajane and Tom can benefit all those that are listening to this. So I encourage you all to attend our member Q&A with them and look them up on the member portal and reach out and learn more about their story. And especially if you’re thinking about, you know, having family members join you looking for a role model, they’re an exceptional one. So, so Carajane and Tom, thanks so much for being here today. 

Carajane Moore [00:17:40] Thanks to you. It’s great to see a great. 

Greg Alexander [00:17:43] Okay, I just a couple of quick, calls to action for the audience. If you are a member, please attend the Q&A session that will have Kara, Jane and Tom. You’ll see a meeting invite on that. If you’re not a member and you think you might want to be, go to collective 54.com and fill out an application. We’ll get in contact with you. And if you just want some more information, I point you to my book, The Boutique How to Start Scale and Sell a professional services Firm, which you can find on Amazon. But until then, I wish you the best of luck next time as you try to grow and scale and exit your front.

Episode 156 – Sealing the Deal: The Critical Role of Management Meetings in the Successful Sale of Your Firm – Member Case by Matt Rosen

Matt Rosen

In this session, we delve into the pivotal function management meetings serve during the intricate process of selling a firm. We’ll explore how these gatherings can effectively showcase the company’s strengths, address potential concerns, and foster a sense of trust and transparency with prospective buyers. Attendees will learn how to leverage management meetings to not only impress buyers but also to secure a favorable sale outcome.

TRANSCRIPT

Greg Alexander [00:00:15] Hey, everybody. This is Greg Alexander, the host of the Pro Serve podcast. Brought to you by Collective 54, the first community dedicated to founders of small services firms trying to grow, scale and someday sell their firms. On this episode, we’re going to talk about the mechanics of exiting your firm. In particular, this thing called the management meetings, which typically happens during due diligence. And we’ve got a well-respected, long-tenured, well-liked member of Collective 54 with us today. His name is Matt Rosen, and Matt has recently gone through his successful exit and lived through the management meetings and has a lot to share with us. So, Matt, as always, it’s great to see you. Thanks for being here. And would you introduce yourself to the audience? 

Matt Rosen [00:01:08] Yeah, too kind of an introduction, Greg. Thanks for having me on the podcast. So I’m Matt Rosen and I’m founder and CEO of A Leader. A Leader is a consultancy focused on digital excellence that helps our clients with everything from technology, strategy and user experience through custom dev integration data and then supporting the solutions that we build. And so we went through an entire process and an exit to an investor about a year ago. And it’s been a really a great experience, better than I actually thought it could be. And Collective 54 was a great help at every step along the way. 

Greg Alexander [00:01:48] Great. All right. Well, let’s jump into it. So we’re going to talk about management meeting. So let me start with the very basics, Matt. So you went through this exit. Give us a definition of the management meeting or meetings and kind of. When did that happen? And walk us through the basics of this. 

Matt Rosen [00:02:10] Yeah. So we actually started looking at options in 2021 where I’d say we had a few dates where we had an investment banker bring us both a private equity firm and a strategic. And so they came in and spent some time with us. But it was in 2022 we really went through a formal process where we built a SIM, did equality of earnings, sent it out, and then we really had two stages of meetings. We had what they termed as fireside chats. So this would be a one hour conversation with the prospective buyer. And it was only after we had an intent of interest or an IOI that we actually did management meetings which were like a four-hour onsite session. So for the fireside chats, these were more of an introduction. These were mostly held via Zoom teams, virtual meeting with other the we really looked at a couple of different classes of buyers. There were strategics, there was private equity-backed strategics, and then there was private equities that were looking for us to be the platform. We decided early on that the only way we were going to do a transaction was if we were the platform and we were the right size and had the right team to do that. And so as we were evaluating different options, it was myself, my chief operating officer, my chief strategy officer that were involved in the majority of the meetings, both at the fireside chat stage and then the management meeting. 

Greg Alexander [00:03:39] Okay, perfect. So let’s talk about the fireside chats first. So one our Zoom meetings, three people from your team with potential acquirers on the other end of the line. The objective is an introduction. So tell me a little bit about what was covered during those meetings and how you prepared for them. 

Matt Rosen [00:04:00] Yes. So everyone had our SIM and our quality of earnings, so they already had a base understanding of our business. So I think a lot of it was just trying to for them to understand us, who they were talking to and for us to understand them. And I wish I could say we did tons of prep. We really showed up and just shared who we were and what we were looking for. We had rehearsed things like, Hey, what’s the one question we don’t want to get asked? And, you know, we’re places they’re going to take us that we need to have prepared responses. And so we practiced those. But really, once the fireside chats got going, we were doing a couple of day. We probably did. I would say somewhere between 15 and 20 of them. And at this stage, I was really more evaluating the prospective buyers than they were probably evaluating me. And the ones that I really respected were the ones that asked, Why? Why are you all here? Why do you want to do a transaction? What are each one of you looking for? Professionally and personally out of this? And there was only a couple of them that really asked that question. And so it was kind of funny. We actually knew who we were going to. Our top choice was after the fireside chat. Now, obviously, we kept everybody else engaged to keep a competitive process going, but it was pretty apparent early on to who we wanted to partner with. Yeah, but the type of questions they asked was, you know, tell us about the founding of the company. Tell us about what each one of you does. Talk about, you know, top clients talk about how you retain your people. It’s all very, I would say, basic and high-level information that, you know, frankly, is in the same. I think they just want to see how you’re going to answer it. So I found the fireside chats to be, you know, light engagement. And it was interesting. There were some of the big strategics that literally just wanted to tell you their process, asked very few questions. And so we eliminated some of those very, very early on because there were those that were looking to stroke of a true partnership and those who just want to acquire a bunch of people and capabilities and push us to the side. One story I will share that one of the groups that came in to look at us as a platform had the audacity to come into the fireside chat and tell me that they went from founder-led to professionally managed. So the three of us walked out of that meeting and debriefed and were like, Well, all of us can be out of a job in about 18 months if we choose this group. So we kept them around and I won’t name them for confidentiality purposes, but you know, they were really rough to deal with throughout the process and were exactly what I didn’t want a private equity sponsor. So it was good to have that contrast when we actually were serious about, Yeah. 

Greg Alexander [00:06:33] You know, and you were very fortunate and that you’ve built a great firm and it was growing, so you had a ton of interest. So 15 to 20 fireside chats was appropriate, you know, for, for members that might not be in that similar situation, they’re not at the same scale that Matt and his team are at. You might have fewer of those, but, you know, the goal was an introduction and it sounds like, you know, it was a bi-directional introduction and it served its purpose. All right. So let’s move to, you know, the official management meeting, not the fireside chat, but the real one. So tell me a little bit about you mentioned they were 4 hours in length, so quite a bit more intensive. Walk me through that. 

Matt Rosen [00:07:11] Yeah. So we were very fortunate, as Graham mentions, you know, we probably did 15 to 20 fireside chats. We had 11. I was actually a few people tried to preempt the process with letters of intent, but we said we wanted to go through the management team meetings before we signed off on an otherwise. So we invited, I think it was five groups to Dallas. One of the groups is actually based in Dallas. We just went to their offices, but we sat down in an afternoon session in a board room and walked through our SIM in detail. Oftentimes they had prepared a pitch of what a partnership with them would look like. To help us understand how would this relationship work? What would the board look like, what would their responsibilities be? You know, would they have an operating partner not have an operating partner? Then they really asked us a series of intensive questions and they dug pretty deep. I mean, they did their analysis. We did have some concentration risk, so they dug really, really deep into those relationships and really got to know who they were with. What was the nature of the work, How were we building it, what was the structure of the teams? And so they went pretty deep during those those four hour sessions. And after that, we either did a lunch or a dinner, which was, you know, them getting to know us as people and us getting to know them. And so those management team meetings required a bit more prep. We had wanted to representatives from our banker in the room with us, you know, to help with any detailed financial questions. But at this point in time, you know, they’d been exposed. We’re a data room. They pretty much had access to everything we had to share. We had nothing to hide. You know, we were fortunate not having any lawsuits or crazy things that happened. We run a pretty clean set of books for three years since I founded it. And so a lot of the questions we got that were the most challenging were really just around customers, people retention, what were plans to grow. We also shared with them we had a list of acquisition targets that we wanted to go after, and that’s part of the reason we took on an investment is I had never done M&A. I don’t know how to go to the capital markets and get money. And so we were looking for the expertise of a private equity partner that could bring both of those and take on some of the risk and let us take some chips off the table and recapitalize the company. 

Greg Alexander [00:09:27] So who was in the room? So it was it the same three you, your CEO, your chief strategy officer, plus a couple of people from your banker? And then who was in the room from the. Party? 

Matt Rosen [00:09:40] Yes, a good question. So we had two or three strategics and then three private equity platform meetings. And so when we met with the strategics, it would be their president, their head of M&A, and maybe a key person or two that we’re going to be involved in the integration that would be there. And we kept a really tight circle at later on the entire process. Almost nobody outside of the three of us knew other than our controller and our CTO, until the very, very end. We reveal it to them literally a week before we closed. And it was a really positive thing because we I give a lot of my rolled equity to our senior leadership team. It really sent them to stay. And so it was it was a good situation that we were able to explain. So during the strategic meetings, it was three or four people from their end, it was me, my CEO, Phil Leary, my Chief strategy officer, Trish Webb, that were that were in the room. And then literally the banking team head, Greg, who was the lead banker, and he had a team of four that were part of it to the transaction. And so it would be one or two of them that would be there for the meetings. One was the platform meetings. They were bringing the 2 to 3 folks that were going to be on our board. And so we got to see who we were going to be working with day in and day out over the next 3 to 5, seven year old period as we got to know them, because obviously those are the people who are going to be working with very closely. So there’s no bait-and-switch type scenario that we were talking to the folks that were going to be our board and our team until the next transaction. Yep. 

Greg Alexander [00:11:11] You mentioned Greg. That’s Greg Fink from Equity Tech, who’s also a member of Collective 54, and he was Matt Rosen’s banker. I’ve seen Greg execute these meetings. I’m assuming that Greg and his team played the role of facilitator. Is that correct? 

Matt Rosen [00:11:26] They did. They would tee up the meetings, they would organize that, they would get the agenda out ahead of time and they would keep things untracked. They were also really helpful when there was a really deep financial question asked, they were able to jump in, but for the most part it was the my myself and my senior leaders that really led the meeting and of really tried to have them do a lot of the talking. Obviously, they know the aspects of the business at a more detailed level than I did, and I was very fortunate to have Phil interest, you know, in the trenches with me preparing all the information and being there to present it and explain it to our potential suitors. 

Greg Alexander [00:12:01] Yep. And the content of the meeting was the same, correct? 

Matt Rosen [00:12:06] I’m sorry. 

Greg Alexander [00:12:07] The content of the meeting was the same as that, correct? 

Matt Rosen [00:12:11] The content of the meeting was the same, but generally what they were, it was very similar. They wanted to understand what was the founding story. What? How did we go to market? What did our customers look like? What type of work were we doing? What did we incent our people? And we retain our people? What differentiated us? What were our service offerings? And then it turned to, Well, if we become your partner, how are you going to grow? And that was more so in the platform conversations. They really wanted to understand who are we going to acquire, what strategic directions, where are we going to go, how are we going to expand our ability to go to market? When it was the strategics, it was more a conversation of how, how and where were we going to fit into their team? 

Greg Alexander [00:12:54] Yeah. Okay. You know, a point that I would like to add for listeners is that, you know, Matt suggested that he let his executive team do a lot of the talking. And that’s really smart. And that’s something that all of us should pay attention to, because when somebody is in a management meeting, an investor or strategic thinking about making an acquisition, they want to make sure that there’s a real team. You know, there’s not an overdependence on the founder because, you know, God forbid something happens to the founder, you know, does the firm fall apart? So it’s really important to have a solid management team in the management meetings. And I think that’s why these meetings are called management meetings, in part is to assess the quality of the management team. All right, Matt, one last question before we wrap it up here is, you know, was this a high-stress moment for you? And, you know, and looking back on it now, was the stress appropriate or were they easier than you thought they were going to be? Kind of give us a retrospective? 

Matt Rosen [00:13:49] Sure. Yeah. So I’m sitting here. The transaction happened in September of 2022. So we’re know, 13 months in now. And looking back on it, you know, the process itself was not quite as grueling as I had envisioned it to be, at least not the fireside chats and the management team meetings. I mean, I had to get together with people and talk about my business, and that’s what I do all day long. I would say it was by much more stressful for my CFO and Chief strategy officer, as well as our controller, who had to put together a lot of the documents in preparation meeting. I think they had a bit more PTSD around the process than I did. You know, the meetings themselves. We were very fortunate. We didn’t have to sell the business. Not everyone’s in that position. So we went into it and I started almost every meeting saying if I can’t look my people and my clients in the eye and tell them this is good for everyone, not just me and my leaders, we’re not going to do the transaction. So we were in a position of strength from a negotiation standpoint with with all the suitors involved. And we had a lot of suitors at the table. Kotek and Greg ran a great process and had a lot of good options for us. So we were fortunate and the timing was right. And so I would say the hardest part was once we signed and although I went through due diligence, you know, where I got most heavily involved in the negotiation of legal contracts and employment agreements, the non-compete and all all the equity structure, I would say that was the most stressful part was the last couple of weeks leading up to closing. But the process itself of getting people interested in our business and talking about what we do, I actually found that kind of fun. You know, the only downside to it and anyone who goes through the process is you’ve got to have people kind of running the business as you’re selling the business because it’s easy to get distracted. And I think this happens with every firm is, you know, the whole process, you know, either ends with a sale without a sale, but with key leaders not keeping an eye on the ball, the business things do tend to slip. And so I think an important thing to think about if you’re about to go through a process, is make sure you have people that can sell the business, make sure you have people to run the business because it becomes a full-time job being part of a deal team. 

Greg Alexander [00:15:53] Yeah, that’s good advice. It is all time-consuming for sure. Okay, so let’s just put a bow on this thing. So we’re breaking down the mechanics of an exit. And today we spoke about one element of it, which was this mystical thing called the management meetings. And we learned that there’s really two types is the fireside chat. And then there’s a formal management meeting, and we learned a little bit about what their goal is, why they happen, who attends them, how you prepare, what’s covered, etc.. And and we heard from Matt Rosen who recently went through this. So so Matt, on behalf of all the membership, as always, thanks for coming and giving back to the community. Really appreciate it. 

Matt Rosen [00:16:31] But be on. Thanks for having me. 

Greg Alexander [00:16:33] All right. Well, a couple of calls to action for those that are listening. So first, if you’re a member, look for the meeting invitation formats, Q&A session, where you can ask him your questions directly of these management meetings. We’ll go into much more depth and allowed on a podcast. If you’re not a member and you think you might want to become one, go to Collective 54 dot com and fill out an application. We’ll get in contact with you. And if you’re not ready for that, you just want to kick the tires and learn a little bit more. Check out my book called The Boutique How to Start Scale and sell a professional services firm, which you can find on Amazon. Okay. With that, That’s the end of this week’s episode. I wish you all the best as you look to grow, scale and sell your firms.