Episode 9: The Boutique: A Little Known Secret: How Employee Loyalty Drives Up Valuation

You compete in two markets. The market for clients. And the market for employees. As much effort needs to be put into employees as into clients. Owners of boutiques work for the employees, not the other way around. Would you want to work for you?

The Boutique with Capital 54-Episode 9.mp3
Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build
conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in
on the next chapter of your life.
Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners
of professional services firms. My goal with this show is to help you grow scale and sell
your firm at the right time for the right price and on the right terms. I’m Sean Magennis,
CEO of Capital 54 and your host. On this episode, I will make the case there is a direct
correlation between your employee loyalty and your firm’s valuation. I’ll try to prove this
theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has
developed a proprietary approach to measure the employee loyalty of a professional
services firm. Greg, to begin, can you help the audience connect employee loyalty to firm
valuation?
Greg Alexander [00:01:12] Sure. So traditionally, investors have shied away from
investing in pro serve firms. When asked why, they are fond of saying, quote, all the
assets of a pro serve firm walk out the door each night, end quote. And this is meant to
illustrate that assets of a firm are its employees. And if the employees or assets can walk
out the door, the business has no value. Therefore, if you can demonstrate that the assets
your employees stick around, the business does have real value in the best way to prove
the assets do stick around, it’s demonstrating outstanding employee loyalty. High loyalty
equates to high valuation.
Sean Magennis [00:01:52] I see. Excellent employee loyalty can then de-risk an
acquisition for an investor. So how can an owner of a firm prove excellent employee
loyalty?
Greg Alexander [00:02:04] There are several ways. Let me share just a few that the
listeners can try immediately.
Greg Alexander [00:02:11] So the obvious one is employee turnover rate and that’s an
excellent metric to prove employee loyalty. The average turnover rate across all pro serve
firms is approximately 30 percent. Best in class is about 15 percent. If an owner has a low
turnover rate and he can prove high employee loyalty. So that’s a easy one to go after.
The next one would be tenure. And employee tenure is another excellent proof point. The
listeners should challenge themselves to have average employee tenure of, let’s say,
greater than five years. This would prove to investor that the employees do indeed stick
around. And one of my favorite ways to de-risk an investment, and prove employee loyalty
is to show how many positions get filled internally. You see, boutiques are growth
businesses and growth creates lots of promotion opportunities for employees. If these
promotions are filled internally, this suggests outstanding employee loyalty. In fact, a well-
run firm should fill all of its promotions with homegrown talent.
Sean Magennis [00:03:16] So 15 percent employee turnover, five years or more of
employee tenure and to the extent possible, 100 percent of promotions filled internally.
These are three excellent goals to shoot for. Are there any other ways a listener could
prove to an investor that his or her firm is worth more due to his outstanding employee
loyalty?

Greg Alexander [00:03:41] There are a few more. Here are a few others to think about.
One of my favorites is Discretionary Effort. So what is discretionary effort? Discretionary
effort are the hours an employee puts in above and beyond the job requirements. So, for
example, let’s say the job calls for 40 hours per week on the submitted time sheet and
most employees log 44 hours not because they are asked to, but because they want to.
This is a 10 percent discretionary effort. Some like to say, quote, My people give it 100,
110 percent effort, end quote. And this is what they mean when they say this. An investor
who sees this when reviewing the timesheets during diligence will determine you have
high employee loyalty and will likely pay more for your firm. And here’s one more to just
get the juices flowing. What are former employee is going to say about your firm when they
are contacted? If they say they loved working at the firm and for the owner, investors will
be very pleased. If, however, former employees say they hated working for the firm and
even worse, hated working for you, the owner, the investor will run away. That’s a major
red flag. You know, it cracks me up. But boutique owners think that they can hide their
skeletons when you try to sell your firm. Investors are going to find all the skeletons. That’s
their job. If the former employees do not have nice things to say, the valuation of your firm
is going down.
Sean Magennis [00:05:06] So discretionary effort and the former employee reference
checks are key. This makes sense, Greg. And when added to employee turnover, tenure
and promotion fill rate. This makes for an excellent list for our readers.
Sean Magennis [00:05:23] And now a word from our sponsor. Collective 54, Collective 54
is a membership organization for owners of professional services firms. Members join to
work with their industry peers to grow scale and someday sell their firms at the right time
for the right price and on the right terms. Let us meet one of the collective 54 members.
Irit Elzips [00:05:50] Hello, my name is Irit Elzips I own CSM Practice, a customer
success strategy consulting firm. We serve technology and services organizations from
around the world. These clients turn to us to accelerate their profitable growth rate by
improving their customer retention, increasing their up sell and cross-sell revenues, and
creating a strong differentiation in their market through a better customer experience and
maximizing values for their clients. We achieve these kind of results by designing an
optimal customer success strategy. We then develop processes, protocols and policies to
ensure that our strategy recommendations are adopted and we implement those in a
scalable manner using both training and technologies. If you need help with accelerating
your profitable growth and increasing revenues from your existing customer, install base or
reach out to me at csmpractice.com.
Sean Magennis [00:07:00] If you are trying to grow scale or sell your firm and feel you
would benefit from being a part of a community of peers, visit Collective54.com.
Sean Magennis [00:07:16] So this takes us to the end of this episode and as is
customary, we end with a ten question, yes, no checklist. We do this to reward you, our
listeners with some immediate take home value. Ask yourself these 10 questions. If you
answer yes to eight or more of these questions, you can prove you have loyal employees.
If you answer no too many times, you have an employee loyalty problem and this is going
to hurt you when you try to sell your firm.
Sean Magennis [00:07:45] Question number one. Is your turnover rate fifteen percent or
lower? Number two, is the average tenure of your employees greater than five years?
Number three, do most of your promotions get filled internally? Number four, do you get

rewarded by your employees with lots of discretionary effort? Number five, will your former
employees sing your praises when contacted? Number six, does your firm have a purpose
that the employees believe in? Number seven, does your boutique have a vision of the
future that employees want to be a part of? Number eight, does your firm have a set of
values and are they actually lived by? Number nine, are you paying your employees what
they are worth? And number 10, do you have an in-house recruiting engine that provides
you with a stream of quality people?
Greg Alexander [00:09:04] Just one quick thing on number nine, are you paying your
employees what they’re worth? You know, sometimes small business owners, owners of
boutique professional services firms, because labor is their biggest expense, they try to
underpay because they’re trying to contain costs. That’s an example of being, as they say,
penny wise and pound foolish, because if you’re underpaying and as a result of that, your
turnover is, let’s say, 30 percent instead of 50 percent, you’re actually hurting yourself
there. Just pay a little bit more. Keep the turnover rate down and you’ll benefit not only in
the short term, but someday when you go to sell your firm, it’ll be easier to do so.
Sean Magennis [00:09:39] It’s a great example, Greg. So in summary, remember, you
compete in two markets, the market for clients and the market for employees. As much
effort needs to be put into employees as into clients. Owners of boutiques work for their
employees, not the other way round. Consider this question. Would you want to work for
you?
Greg Alexander [00:10:04] That’s a tough one to answer.
Sean Magennis [00:10:07] If you enjoyed the show and want to learn more, pick up a
copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a
Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Why Revenue Growth Flatlines in Professional Services Firms

Episode 8: The Boutique: The Real Reason Revenue Growth Flatlines inside of Professional Services Firms

Transitioning away from a partner-led sales model to a commercial sales engine is  key to creating wealth for owners of professional services firms. In this episode, Sean Magennis and Greg Alexander discuss why boutiques find themselves in this position and how they can overcome this inflection point. 

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in on the next chapter of your life.

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners

of professional services firms. My goal with this show is to help you grow, scale and sell

your firm at the right time, for the right price, and on the right terms. 

 

I’m Sean Magennis,CEO of Capital 54 and your host. In this episode, I will make the case that transitioning

away from a partner-led sales model to a scalable commercial sales engine is key to

creating wealth for professional services firm owners. I’ll try to prove this theory byinterviewing Greg Alexander, Capital 54’s chief investment officer. Greg is truly one of the

world’s leading experts in sales effectiveness. Greg, a pleasure to have you again today.

Why is this transition point a key milestone for professional services firms?

Why is Transitioning Away From a Partner-Led Model a Milestone?

Greg Alexander [00:01:14] It is a key milestone. You know, kind of the natural

progression of a professional services firm is a startup that becomes a growth firm then becomes a scalable firm and eventually sells. 

This transition point usually happens in between that growth and scale stage, and let me kind of walk the audience through this, and I point out that kind of evolutionary track, if you will, to really highlight the word here milestone. So this is something to shoot for, and it’s something that has to happen if you truly want to create an investable asset. 

Startups become boutiques by having the partners generate referrals, and boutiquesbecome market leaders by building a commercial sales engine. That’s the difference.

Sean Magennis [00:02:00] Yes.

Greg Alexander [00:02:01] You know, when you’re kind of a lifestyle boutique, you’ve got

some partners. They have great personal networks, and they’re able through positive word

of mouth, to generate business. So what’s different between them and a high-growth professional services firm that can become a market leader? It is somebody who builds the commercial sales engine.

And investors like Capital 54 and others want to see a maturing commercial capability before they make a buying decision and the sales and marketing process has to be proven capable of scaling. Otherwise, you’ll be a natural kind of limitation on the size of the market. 

So there’s an inflection point that all professional services firms run into head-on and this is when sales generation happens by employees and not by the partners. These kind of young pre-scale firms did not invest in building a professional commercial sales engine. They don’t have to. 

The partners are experts. They have very large personal networks, and these networks expand as they gain exposure to their niche. Then partners harvest these networks with businesses, and successful projects lead to more happy clients, and happy clients lead to positive word of mouth. 

And on and on it goes… You know, and the partner can really, with a group of partners, can really kind of carry the firm. I’d say for good five years, and then all of a sudden, it flatlines.

Why Does Revenue Flatline For Professional Services Firm Owners?

Sean Magennis [00:03:35] So why does it flatline, Greg?

Greg Alexander [00:03:38] So there are 52 weeks in a year, and each of those weeks has five business days and a hardworking partner is going to put in roughly a twelve hour day. Folks in professional services, particularly the partner level, work their tails off.

Sean Magennis [00:03:53] Yep.

Greg Alexander [00:03:54] This means that each partner has about three thousand one hundred and twenty hours to produce. If you subtract some holidays, a few sick days, a vacation or two, it’s more like, let’s say, twenty five hundred hours. And these twenty five hundred hours are not spent entirely on sales activity. After all, the partners are running the boutique, and as the firm scales, partners have only about half their time available for business development. So, therefore, once each partner is tapped out, sales flatline.

Sean Magennis [00:04:30] The obvious question is: Why not just add more partners?

Greg Alexander [00:04:34] Well, most professional services boutiques are very reluctant to do this, as I was, and I don’t blame those that are reluctant to do this. This is a for-profit business. We’re here to make money. 

So the profit pool is distributed to the partners. Dividing the pie by, let’s say, three partners are better than dividing the pie between ten partners. So if the sales engine requires adding more partners, it doesn’t scale. The current owners and partners end up making less, and even worse, their equity gets diluted. That’s why it doesn’t happen. That’s why they don’t just add more partners.

Sean Magennis [00:05:14] Yes, I can see how this is an inflection point, Greg. So follow-up question, what options are then available to the owners?

How Can Professional Services Firm Improve Revenue Growth Decline?

Greg Alexander [00:05:23] Yep, so the owners have to ask themselves. They’ve got to

choose between really two approaches to sales. Let’s call them option A and option B.

Option A is a partner-led model, and this means more sales but less wealth for the owners. It requires more partners to scale, as I previously discussed. 

Option B, which is my recommendation, is a professional sales model. This means more sales and more wealth for the owners. It does require investment, but it does not eat into the equity, and that is the most important piece.

Sean Magennis [00:05:58] Critical piece.

Greg Alexander [00:05:59] Yep. The partners/owners invest budget dollars in hiring a professional sales force. The partners no longer sell; the sales team does the selling. Now, investors typically want to buy boutiques that have made it through this inflection point. It indicates to them that this boutique actually has the sales capability to scale.

It’s important for the listeners to keep in mind that acquirers are buying the future growth of the boutique. They’re not buying the past – they are buying the future. So the more likely a boutique is to grow, the more they will want to buy it. Boutiques that can generate sales without the owner’s involvement are simply more likely to grow, and boutiques that take this approach can grow sales cost-effectively. A commercial sales team is less expensive than adding partners.

Greg Alexander [00:06:58] When I look at firms, and I see them either just completing this transition or in the process of this transition, I get very excited, and it makes me want to invest in the firm. 

Why is this? Number one, they become aware of the need, which is not obvious to many. Number two, they had the guts to pursue it, which is the type of people that I’d like to invest in.

Sean Magennis [00:07:22] Me too, Greg.

Greg Alexander [00:07:23] Now, I should point out that building a commercial sales team inside a boutique is not easy to do, and this is one reason why so few owners become market leaders and fail to pivot away from the partner-led sales model results in many lifestyle businesses. And as a result of that, potential acquirers are not interested in these lifestyle businesses. And I might add just one more thing if I can. 

You know, I’m making a comment that it’s not easy to do, and here’s why. When a client meets with a partner and the partner is selling the work, they say to the partner that “you’re going to be involved in the project.” And when the partner says, “yes, I’m going to be involved in the project, he or she says that because they’re trying to close the deal. 

Now, that’s the worst thing you could do because now you’re stuck. You can’t tell the client you got to be involved in the project and then be MIA for every key meeting. But partners are very reluctant to say “no, I’m not going to be involved in the project, and that’s a mistake.” 

And what I recommend, they say, is, “Mr. Client, no, I’m not going to be involved in the project and oh, by the way, that’s a good thing for you. My ability is not in delivering client work. I’m the worst project manager in the firm. My knowledge is in creating the methodology, hiring the staff, training the staff, and running the firm. I’m going to introduce you to my team who are about ten times better than delivering this work than I am.” 

And then you bring the delivery team into the sales call and then the client gets to experience your exceptional engagement manager and your analyst, et cetera, and they say, “yeah, I agree, you don’t have to be involved” and then the client, the partner, can move away. So that’s the key thing that stands in the way. Most owners of boutiques feel they have to remain committed to the project after selling it.

Sean Magennis [00:09:13] Outstanding advice. This is a big milestone, and I can also see why so few make it through this transition. That’s a challenge for businesses and for partners that are so hands-on.

Greg Alexander [00:09:24] Yes.

Sean Magennis [00:09:25] But to scale, it makes total sense, and I can see why why those professional services firm owners that are successful at doing that really become wealthy.

Greg Alexander [00:09:33] Yep.

Sean Magennis [00:09:37] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field. 

Collective 54 is the only national peer-to-peer advisory network for owners of professional services firms who have focused exclusively on growing, scaling, and maximizing business valuation. Today, we have the pleasure of introducing you to Jon Jones, president, CEO, and co-founder at Anthroware, an On-Demand Innovation Force creating high impact digital solutions firm.

Jon Jones [00:10:20] I’m Jon Jones, CEO of Anthroware.Anthroware makes beautiful digital products. We do this by studying people, your customers. We put them in the center of our process to make tools that they both need and love to use. 

Our work ranges from MBP apps for funded startups to big HIPAA compliant platforms for large established companies. We’re smart, a little rebellious, and we love working on hard problems.

Sean Magennis [00:10:49] Please get to know Jon and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success.

Questions to Ask When Transitioning Away From the Partner-Led Sales Model

Sean Magennis [00:11:09] So, in an effort to provide immediate take-home value for you, I prepared a ten-question, yes or no checklist. Ask yourself these ten questions. If you answer yes to eight or more of these questions, you’ve made it through this inflection point. 

Number one: Are the owners removed from the sales process?

Greg Alexander [00:11:31] So let’s talk about that. So with diligence, when I pull the sales report.

Sean Magennis [00:11:36] Yes.

Greg Alexander [00:11:38] Typically, from a CRM system, every opportunity of business has a name associated with it. If that name associated with that client record is one of the owners, I’m not in. I become less interested in making an investment in that business because that tells me the owners are driving the business. 

If their name is nowhere near any of those records and there’s somebody else in the firm who doesn’t have an equity stake in the firm who’s the person that owns that client, has sold the work, and is delivering new work – that’s a real positive. Now, if you lined up ten owners of professional services firms right now and you asked them what their forecast was for the next 90 days, they could recite it. 

And if I told them all that they could not go in the next sales call, the next five sales calls, the close of business, what would they tell you? We’ll lose the business as a result. So they have to have the courage to step away.

Sean Magennis [00:12:33] Absolutely.

Greg Alexander [00:12:34] And trust your employees that they can get the deal done.

Sean Magennis [00:12:37] Brilliantly, said Greg. So question number two: Are there are employees generating all the sales? Number three: Is business being generated from scalable sources in addition to referrals? Number four: Have sales increased consistently without adding partners or new owners? Number five: Are your financials able to handle the expense of a commercial sales team?

Greg Alexander [00:13:12] Yes. So let’s talk about that. This is another obstacle. The cost of building a commercial sales team goes into the overhead bucket. Those aren’t billable resources. So partners have to be willing to make the investment, and very often boutiques come to us at that moment in time because they don’t have enough free cash flow to do this. So they need an outside investor to help them.

Sean Magennis [00:13:33] Excellent. And that’s where we provide the growth capital, the stimulus. And by the way, your extraordinary experience in building these commercial sales teams.

Greg Alexander [00:13:42] Correct.

Sean Magennis [00:13:43] Question number six: Have the sales results from the commercial sales team been consistent over time? Number seven: Have the win rates with the commercial sales team been on par, and I’m going to throw in or exceed the partners?

Greg Alexander [00:14:00] Yep. So some advice to the owners out there. The first time you do this, the win rates will drop substantially. Just hang in there.

Sean Magennis [00:14:09] Hang in.

Greg Alexander [00:14:09] You got to go through that period. You got to give the employees a chance to improve. Eventually, their win rates will be as good as yours, but there’ll be a difficult transition there. So just buckle up for that transition.

Sean Magennis [00:14:21] Well said, Greg. Number eight: Have the deal sizes with the commercial sales team been on par with the partners?

Greg Alexander [00:14:28] Same thing. Originally, the non-partners are going to sell smaller deals, or they may cave under price objections, et cetera. You just got to hang in there and get through that period.

Sean Magennis [00:14:39] Great. And number nine:Have the sales cycle links with the commercial sales team been on a par with the partners again?

Greg Alexander [00:14:46] Correct.

Sean Magennis [00:14:47] Good. And then finally, number ten: Can the commercial sales team be expanded significantly without breaking the boutique?

Greg Alexander [00:14:55] Yeah. So this is a really interesting component. In fact, this one can be a show in and of itself. So for every quote, sales head you have you’re going to have an assumption for the amount of revenue that they can bring in. And that’s going to be impacted by a lot of things linked to the sale cycle, win rate, the size of the deal, is the salesperson generating their own leads or the leads coming from another source. 

There’s a lot of factors that go into that. But in the end, you’ll get to a point where you’ll know plus or minus 10 percent with the revenue production, per sale said is. Now, you’ve got to think through how that impacts your service deliver, because, in theory, if you go out and hire ten salespeople, you’re going to generate a lot more business. Can the back end handle it?

Sean Magennis [00:15:42] Exactly.

Greg Alexander [00:15:43] So, figuring out how to tie the delivery engine of the back of the house to the front of the house is really important. And this question number 10 is really important because sometimes that’s overlooked. They hire all the salespeople, they generate all the new business. Everybody’s excited, and next thing you know, the delivery team is 120 percent capacity.

Sean Magennis [00:16:04] And you can’t deliver the business.

Greg Alexander [00:16:05] Can’t deliver it, and then clients sat falls, employee sat falls and you actually create a problem for yourself.

Sean Magennis [00:16:10] Yep.

Greg Alexander [00:16:10] So don’t forget the downstream impact of this.

Sean Magennis [00:16:13] Outstanding, Greg. Outstanding. So the path from a boutique to market leader results in creating a viable, superb commercial sales engine. Potential buyers would rather wait until you have made it through this inflection point. Jumping in prior to this is simply too risky for many. 

If you want to sell your firm, invest resources into developing a scalable sales and marketing engine. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled “The Boutique How to Start Scale and Sell a Professional Services Firm.” I’m Sean Magennis. Thank you for listening.

How a Professional Services Firm Can Monetize Its Intellectual Property

Episode 7: The Boutique: Move Beyond the Billable Hour and Monetize Your Intellectual Property

You have more intellectual property than you think, and you can monetize it. In this episode of The Boutique podcast, Sean Magennis and Greg Alexander discuss how professional services firms can learn how to monetize their intellectual property to better attract acquirers when selling their business. 

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all into the next chapter of your life.

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow, scale and sell your firm at the right time for the right price and terms. 

I’m Sean Magennis, CEO of Capital 54 and your host. In this episode, I’ll make the case that you have more intellectual property than you think and that you can monetize it. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert in helping professional services firms monetize their intellectual property. Greg, let’s start with the basics. What is intellectual property? 

What is Intellectual Property?

Greg Alexander [00:01:06] Yep, that is the right question to lead with, and I would tell you that boutiques are very confused about intellectual property. Some of them think that they have a lot when they really don’t have any, and others think that they don’t have any, but they’re sitting on a goldmine. This confusion gets cleared up when you attempt to sell your boutique very quickly. 

So if you have real intellectual property, investors will place a value on it. If you do not, investors will not consider it in their valuation. So this begs the following questions: What is intellectual property? And how do professional services boutiques create it? 

So, roughly speaking, intellectual property is an invention to which one owns the rights, and these rights are protected by patent copyrights or trademarks. 

Sean Magennis [00:01:51] Excellent. So I’m going to use the term IP for intellectual property. What are some examples of IP in the professional services industry? 

Intellectual Property Examples in the Professional Services Industry

Greg Alexander [00:02:00] Yeah. So firms create intellectual property regularly . So, for instance, many consultants published books. These books are protected by copyright. Consultants turned authors receive royalty payments from their publishers. Some boutiques collect benchmark data. 

They then license access to this benchmarking database to clients. A licensing agreement protects this benchmark data asset. Boutiques often create innovative methodologies to solve certain problems. They frequently enter into licensing agreements with third parties. These third-party firms pay a licensing fee to the boutique. 

This grants them the right to use the methodology. If these third parties violate the licensing agreement, they can be sued. It is not uncommon for both teams to convert their knowledge into tools. These days, these tools are turned into software applications. The clients of the professional services boutiques pay perceived license to use these tools, but if the application licensing agreement is in breach, the boutique can seek damages. 

Yet, other boutiques create certification programs that validate someone’s experience. Individuals pay boutiques to become certified in a specific skill. A popular example of that is PMP, a project manager professional. If an individual falsifies a certification, they can be taken to court. 

So these are some examples of intellectual property inside a professional services firm and how creative professional services firms monetize this intellectual property. And as a result of that, how they can move beyond the revenue stream defined by the billable hour. 

How to Monetize Intellectual Property As a Professional Services Firm?

Sean Magennis [00:03:51] Great examples, Greg. So professional services firms owners have lots of ways to make money and monetize this intellectual property. Boutiques that have real intellectual property are selling services. They’re not selling bodies. This distinction is why they are considered a professional service. 

Acquirers are not interested in buying subcontractor body shops. They’re interested in buying professional services firms, and intellectual property is the key difference. Greg, do you have a war story you can share that might help the audience understand this a little better? 

Greg Alexander [00:04:28] I’ve got a great one. 

Sean Magennis [00:04:29] Excellent. 

Greg Alexander [00:04:30] So I was advising a civil engineering firm about a year ago. The owner was truly brilliant, and he was a giant in his field, and he had an amazing way to hire and make profitable inexperienced engineers, and I would tell you that this was his secret sauce. 

So, this inexperienced labor was cheap, and it allowed him to charge his clients less, and as a result, he won most of the bids he submitted. He wanted to sell his firm. He hired an investment banker, and a month later, the banker fired him. This doesn’t happen often. 

And he told me, the banker said that his firm was not sellable. Nobody was going to buy it, and the reason no one was gonna buy it was because he had no intellectual property. He was a body shop filled with kids working for cheap. He disagreed with the banker. This brilliant entrepreneur began to explain to me his proprietary methods, and they were impressive, and he was very proud of them. 

I interrupted him and asked how these methods were protected. Were there any patents, copyrights, or trademarks? And the answer was no. And that’s OK. I then asked him if this secret sauce was generating any revenue. And the answer was also no. 

His clients were not paying for the right to use any of it. The clients were simply asking him to perform a job. At the completion of the job, he was paid a fee. So I had to agree with the banker. He was a body shop. 

There was no intellectual property. He wasn’t a professional services firm. He was making a great living, and there’s nothing wrong with that. But he had no leverageable assets. There was nothing really to buy. So that is why investors were not interested in his firm. 

Sean Magennis [00:06:22] I’m assuming a large percentage of boutiques like this, the great lifestyle businesses, they’ll produce an excellent living for the owners for years to come, and there’s nothing wrong with this. However, they are not the boutiques that owners can sell. 

If your goal is to sell your firm, then it is important that you have intellectual property. Greg, excellent conversation on intellectual property inside of our professional services industry. 

Greg Alexander [00:06:54] There’s one thing I’d like to add here if I can. 

Sean Magennis [00:06:56] Yes, of course. 

Greg Alexander [00:06:58] You know, I started out by saying that intellectual property was if you had trademark copyright or patent, and obviously, you have those three things, that’s definitive proof. Another way to prove that you have IP is it shows up in you in your billings. 

So, for example, if you’re selling a service and the going rate for that service is 500 dollars an hour, and you’re getting 600 dollars an hour, and the difference there is 100 dollars, you can prove that someone’s willing to pay you more for the right to use your intellectual property. 

That’s something beyond providing labor that’s attracting to them and the savvy investor, which I’d like to think Capital 54 is, we don’t rule somebody out. 

Sean Magennis [00:07:41] Yes. 

Greg Alexander [00:07:41] If they don’t have a patent, copyright, or trademark. We looked to see, you know, what type of fees are they generating? What’s the quality of those fees relative to the others in the marketplace? And if they’re getting a premium, that’s proof, at least as far as I’m concerned, that there really is intellectual property there. 

Sean Magennis [00:07:58] An excellent distinction. Greg, thank you. 

Sean Magennis [00:08:04] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field., 

Collective 54 is the only national peer-to-peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling, and maximizing business valuation. Today, we have the pleasure of introducing you to Lawrence King, founder and CEO of Headstorm, a high-powered technology consultancy dedicated to building innovative technical solutions for fast-growing startups all the way to Fortune 500 companies. 

Lawrence King [00:08:49] My name is Lawrence King, and I’m happy to be featured on this podcast. Headstorm is a product and engineering firm focused on building data platforms and digital software solutions. We have a unique approach and mindset in our industry that we measure our success not just by building digital solutions but also on ensuring our solutions capture the intended ROI. 

We do this through strong product design thinking, effective engineering practices, and a sales enablement strategy to help our clients bring these solutions to market. My primary focus at Headstorm is building our culture and capabilities from the inside out. This means we design, engineer, and incubate our own products and are constantly improving and refining the processes and methodologies we bring to our clients. 

Part of the idea behind drinking our own champagne is that we have developed a culture of experimentation and professional growth that produces next-gen consultants highly capable of solving 21st-century problems. 

Sean Magennis [00:09:41] Please get to know Lawrence and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

10 Questions Professional Services Firms Should Ask When Monetizing Intellectual Property

Sean Magennis [00:09:59] So, in an effort to provide immediate takeaway value for you today, I’ve again prepared ten questions. Yes, no checklist. Please ask yourself these ten questions and remember, if you answer yes to eight or more of these questions, you have a real monetizable intellectual property that will attract a buyer. 

  1. Do you have any patents?
  2. Do you have copyrights?
  3. Do you have any trademarks?
  4. Are you generating revenue by granting the right to use your intellectual property to anyone?
  5. Are you collecting data that clients will pay to have access to?
  6. Are you inventing methodologies that third parties will pay to be able to use?
  7. Are you coding your knowledge into licensable application tools?
  8. Will individuals pay you for a certification to validate their skills?
  9. Are you a true professional services firm and not a body shop?
  10. Is it crystal clear to a potential buyer that your boutique is not just a well-run lifestyle business?

Sean Magennis [00:11:41] There’s a lot of confusion as to what intellectual property is. A boutique with true intellectual property is a very valuable one. There are many ways to codify knowledge to leverage intellectual property. Lifestyle businesses progress into highly valued boutiques when this intellectual property is created. 

Sean Magennis [00:12:05] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled “The Boutique How to Start Scale and Sell a Professional Services Firm.” I’m Sean Magennis. Thank you for listening.

How Can Professional Services Firms Transform Revenue Into Wealth

Episode 6: The Boutique: Transform Income into Wealth

All revenue is not good revenue. In this podcast episode, Sean Magennis and Greg Alexander discuss the different types of revenue and which create more wealth for owners of professional services firms. You will learn what good fees are and why they increase the value of your firm and improve your business exit strategy. 

Episode 6: Transform Income into Wealth

All revenue is not good revenue. You will learn that some types of revenue create more wealth for owners than others.

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all into the next chapter of your life.

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow, scale, and sell your firm at the right time, for the right price, and on the right terms. 

I’m Sean Magennis, CEO of Capital 54 and your host. In this episode, I’ll make the case that all revenue is not good revenue. Some types of revenue create more wealth for owners than others. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert in converting income into wealth. Greg, hi. What types of fees are considered high-quality fees? 

How Can Professional Services Firms Increase Fee Quality?

Greg Alexander [00:01:09] Yeah, and that’s really important because we’re trying to convert income into wealth, and the way that you do that is by having high fee quality. OK. So what does this really mean? So it’s a very deep topic. 

Greg Alexander [00:01:22] I know lots of professional service firms, leaders, and owners who make a great income, but very few are wealthy. This is disappointing and unfortunate because they’ve built great firms, and they should have their cake and eat it, too. 

Sean Magennis [00:01:41] Yes, indeed. 

Greg Alexander [00:01:42] They should have a big balance sheet and lots of net worth, and they should also have a great annual income, but unfortunately, that’s not happening. I’m reminded of the phrase, “it’s not what you make that matters, but what you keep that counts.” 

Sean Magennis [00:01:55] Great phrase. 

1. New Versus Existing Client Revenue

Greg Alexander [00:01:56] Yeah. So there are lots of ways to convert annual income into personal net worth, and it’s worth this time here to talk about that. So let me share four easy-to-understand ideas. 

So the first analysis of fee quality, which is the active ingredient in wealth creation, will focus on new versus existing client revenue. Boutiques that depend heavily on new client acquisition have poor fee quality. Yes, all firms need a steady stream of new clients, and I’m not suggesting otherwise. 

However, this type of revenue, new client revenue, is very expensive to generate, and it’s usually not very stable. It requires heavy investment in business development in the BD dollars, and the non-billable hours could be deployed elsewhere, generating a high return. 

Also, boutiques are addicted, and that’s a keyword, addicted, which I think many are to new client fees often are hit and run specialists. Or some call them churn and burn boutiques. They perform well for a period of time, but eventually, they stop growing because word gets out that the sales pitch is better than the product delivery, and this hurts new client acquisition, which is the very thing that they are dependent on. 

Professional services firm boutiques that depend heavily on revenue from existing clients also have poor equality. It is true that firms generate fees from existing clients. However, this type of revenue eventually disappears. The nature of boutique work is that it is temporary. Clients are renting your expertise. At some point, they stop paying the rent. They no longer need the work to be reformed, or they take it in-house. 

So boutiques that are over-indexed to existing client fees forget how to hunt. They wake up one day needing new clients, and they cannot generate them. These boutiques often devolve into lazy lifestyle businesses. So we’re talking about converting income into wealth. 

The key to making that happen is high fee quality, and that comes from a proper balance of fees generated from new clients and existing clients. To give the audience a rough rule of thumb, I would shoot for about a 60/40 split: 60 percent of fees sourced from existing clients and 40 percent of fees sourced from new clients, and that’s a healthy balance. 

Sean Magennis [00:04:39] Got it, Greg. So a 60/40 split: 60 percent from existing and 40 percent sourced from new clients. So you mentioned you have four ideas to share. We’ve gone through one. What is number two? 

2. Length of Contracts

Greg Alexander [00:04:55] OK, so the next analysis of fee quality is the length of your contracts. Potential investors want to see long-term contracts with clients. So, for example, a management consulting firm that performs a 30-day strategy assessment would be labeled a firm that has poor fee quality because it’s only a 30-day contract. 

However, the professional services boutique that performs the strategy assessment, then engages in solution development, and then engages in the implementation might have a contract length of, let’s say, 12 months. That type of firm has very high fee quality because of the length of the contract. 

Sean Magennis [00:05:37] Got it so simple. The longer the contract, the higher the fee call. 

Greg Alexander [00:05:41] Yes. 

Sean Magennis [00:05:43] Very, very good. What is number three? 

3. Fee Predictability

Greg Alexander [00:05:47] OK. So after analyzing new versus existing clients and taking a look at the length of a contract, investors will look at fee predictability. So a boutique whose services build on one another is very attractive. These boutiques often produce high feed quality due to the predictability of their future feed. So let me give an example. 

Greg Alexander [00:06:11] An estate planning attorney is going to have very high fee predictability. Why is that? State plans often need updating. The attorney, the professional service provider who writes your estate plan, is very likely going to update it for you. The future fee is highly predictable.

 An estate plan written, let’s say, for a 50-year-old changes when the parents pass away or when grandkids arrive on the scene. Therefore, that estate plan attorney has a very high fee quality. He can see how his service is going to be consumed well into the future, and you can see in that example how fee predictability is built right into the service offering. 

Sean Magennis [00:06:55] Yeah that makes complete sense. Really interesting. So I understand the predictability of the fee that is made is more or less valuable. However, I didn’t consider increasing predictability through service offering design. So will you address that in number four? 

Greg Alexander [00:07:17] No. Number four is going to be around cash collections. But let me address it here, if that’s OK. 

Sean Magennis [00:07:21] Yeah, absolutely. 

Greg Alexander [00:07:21] So very often, you know, it’s an obvious thing that you want to follow on fees from your current clients. But the way that most boutique owners address that is through their business development process, you know. They modify their sales… a marketing campaign, and I define that as a push approach, and that’s more difficult. 

A pole approach is if you design the service offering so that when someone consumes the service, they’re going to want to consume more of it for a logical reason. So I gave you the example of the estate planning attorney. 

Sean Magennis [00:08:03] Yes. 

Greg Alexander [00:08:04] I also gave you the example of the management strategy consulting firm. So let’s think about that. Let’s say I’m a strategy consulting firm, and I start off every project with an assessment. Well, my assessment should be delivered back to the client in such a way that encourages them to ask me to develop solutions to the problems that were identified, and then so that’s project number two. 

Sean Magennis [00:08:25] Yes. 

Greg Alexander [00:08:26] And then when I deliver those solution recommendations, it should be obvious to the client that I would be helpful in executing or implementing those solution recommendations – that’s project number three. And if you add all three of those up, that’s probably a 12-month gig, right? 

Sean Magennis [00:08:42] Yes. 

Greg Alexander [00:08:43] And it wasn’t me selling the client. It wasn’t push. 

Sean Magennis [00:08:46] Got it. 

Greg Alexander [00:08:47] It was all pull. 

Sean Magennis [00:08:48] All pull. 

Greg Alexander [00:08:48] Yeah. 

Sean Magennis [00:08:49] Makes a lot of sense. So let’s now go to number four. What is number four, Greg? 

4. Cash Collections

Greg Alexander [00:08:53] OK. So investors often examine for quality, also based on cash collections. So boutiques that have aging accounts receivables have poor quality, and obviously, in contrast, firms that are paid upfront have high fee quality. Investors love firms that can use free cash flow to grow. 

Sean Magennis [00:09:13] Yes. 

Greg Alexander [00:09:14] If your boutique gets paid in advance, you’re unlikely to need cash infusions down the road to fund your growth initiatives, and that’s very attractive to financial buyers, people like private equity firms. 

So, as a rule of thumb, firms that rely on short-term debt to run are not attractive. So the way that you might action that is even if you’re a project-based firm, the way that you write your contracts and the way you handle your payments, you should be trying to collect payment in advance of doing the work. 

So let’s say you’re writing a  one hundred thousand dollar contract that’s going to take three months to complete. Ask the client to pay 50 percent upfront, 25 percent at the midpoint, and twenty-five percent of that at the conclusion. And just by doing that… 

Sean Magennis [00:10:00] Yes. 

Greg Alexander [00:10:01] As opposed to sending the traditional invoice with Net 30, it improves cash collections substantially and solves your AR problem. 

Sean Magennis [00:10:09] Outstanding advice, Greg. From experience, listeners. So excellent. Greg, thank you for unpacking four things that we can do to increase fee quality and, as a result, convert income truly into wealth. 

Sean Magennis [00:10:27] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field. Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling, and maximizing business valuation. 

 

Today, we have the pleasure of introducing you to Jeffrey Pruitt, who is the CEO and chairman of Tallwave, a business design and innovation company that helps organizations build, bring to market and scale great products. 

Jeffrey Pruitt [00:11:10] Thanks, Sean. It’s great to be part of such a strong organization. I founded Tallwave with partners in 2009 with the mission to help clients transform ideas and businesses in the digital age. I also serve as a general manager of Tallwave Capital, which raised $13.2 million in seed funding in 2014, earmarked for the technology sector. 

It’s been the most active Arizona Fund, funding 28 companies in the western region who raised over 56 million in total capital. As an Arizona native, I bring nearly 20 years of technology-focused leadership to the post. Over the past eight years, we have led Tallwave to exponential growth or exchange acquisitions, which has helped earn Tallwave a spot in the INC 5000 list of fastest-growing companies over the last three years. 

I recently was named… Business Leader of the Year by the Arizona Technology Council and a most admired leader and tech titan finalist from the Business Journal. This is a testament to the great leaders, employees, and client partners of Tallwave. I also serve as an executive leader of the IDEA Enterprise, a program developed by Arizona State University that connects leading-edge teams with senior business leaders. Thank you. 

Sean Magennis [00:12:25] Please get to know Jeffrey and other business owners who are leading innovation in the professional services industry by visiting us at Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

Sean Magennis [00:12:43] In an effort to provide immediate takeaway value for you, the audience, I’ve prepared again a ten question  checklist. Please ask yourself these ten questions. If you answer yes to eight or more of these, you have high fee quality. 

Number one: Did you generate about 60 percent of your fees from existing clients? 

Number two: Do you generate approximately 40 percent of your fees from new clients? 

Number three: Is the average client contract longer than 12 months? 

Number four: Do your projects naturally build on top of one another? 

Number five: Is your service built to pull through on the upsell? 

Number six: Is your service designed to pull through cross-selling? 

Greg Alexander [00:13:49] So let’s distinguish between those two. 

Sean Magennis [00:13:51] Yes, please. 

Greg Alexander [00:13:52] So upsell means selling more of what somebody has already bought. So instead of them buying three, they buy ten. Cross-sell is to get them to buy something different than what they’ve already bought. So the greatest cross-sell question of all time was, do you want fries with that? 

Sean Magennis [00:14:09] Love it, yes, and you know who makes the best fries in the world, by the way? 

Greg Alexander [00:14:14] Who’s that? 

Sean Magennis [00:14:15] McD. 

Greg Alexander [00:14:15] Yeah, I agree. 

Greg Alexander [00:14:17] So at the moment of purchase, someone’s buying a Big Mac, and somebody says you want fries with that. You know, the conversion rate there is really, really high, and they obviously designed their product offering in that case in such a way, and then they came up with the bundle and the coke and all that. 

Sean Magennis [00:14:34] Yes. 

Greg Alexander [00:14:35] So that’s a difference between upsell and cross-sell. I just wanted to clarify that. 

Sean Magennis [00:14:38] Thank you, Greg. So number seven: Are your fees predictable? Number eight: Do you collect your fee in advance of performing the work? 

Greg Alexander [00:14:52] You know, just a comment on number seven, if I can. In terms of fee predictability, another way to think through that- and I’ll use the accounting industry as an example – we all have to file our taxes on April 15th. Okay. So if you’re somebody who’s going to invest in a accounting firm, you know that there is this kind of natural, compelling event, right? 

Sean Magennis [00:15:11] Yes. 

Greg Alexander [00:15:12] So now that was dictated by the federal government mandating when your taxes were due, so there’s a natural advantage there. So if you’re an owner of a professional services firm right now and you’re saying, “Well, I don’t have the law on my side, you know, how can I establish dates upon which business has to be completed?” 

Well, one way to think about it is your client’s fiscal year, and in most fiscal years, there’s the planning process. And if you’re on a calendar fiscal year, meaning January through December, most companies start their planning process, let’s say, in late Q3, early Q4. So let’s say August to October, and many times during that planning process, there is a need for external assistance and this is just one example of many. 

The way you can increase your fee predictability is you can build service offers in  in packages that are relevant to clients at certain moments of their fiscal year. So, when you start getting people used to buying from you, especially existing clients that way, then you have some fee predictability which will make yourself very attractive to a potential buyer. 

Sean Magennis [00:16:20] Excellent. Thank you, Greg. 

Sean Magennis [00:16:24] Question number nine: Can you fund your growth from free cash flow. And finally, question number 10: Can you pay your bills without using debt? Very key. 

Greg Alexander [00:16:37] Yeah. You know, a lot of times, growing professional services firms have a hard time hitting payroll every month. 

Sean Magennis [00:16:43] Yes, indeed. 

Greg Alexander [00:16:44] The reason why that is, is that their clients are delaying their payment, but yet, payroll can’t be delayed. So they go to short-term lenders to bridge the gap on payroll, and obviously, that is expensive and risky. So you want to get away from that, and the way you get away from that is you get paid in advance. 

Sean Magennis [00:17:01] Thank you for that, Greg. So as we’ve learned from today’s podcast, all revenue is not necessarily good revenue. There are good fees and then there are bad fees. Good fees attract buyers. They increase the value of your firm and they improve the odds of exiting. Bad fees push buyers away. They decrease the value of your firm and they will likely prevent you from selling your business. 

Sean Magennis [00:17:31] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled “The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. We thank Greg again, and thank you for listening. 

 

Episode 5: Create Wealth by Converting Client Relationships into Balance Sheet Assets

A key to attracting a buyer to purchase your firm is your ability to prove you have healthy client relationships. Learn how to convert client relationships into appreciating assets on a balance sheet.

Episode 5: A key to attracting a buyer to purchase your firm is your ability to prove you have
healthy client relationships. Learn how to convert client relationships into appreciating
assets on a balance sheet.

 

 

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in on the next chapter of your life.

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that a key to attracting a buyer to purchase your firm is your ability to prove that you have healthy client relationships. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has helped many firm and their leaders convert client relationships into appreciating assets on a balance sheet. Greg, great to have you today. How would you frame up this critical topic? 

Greg Alexander [00:01:18] Yeah. You know, the key here is the balance sheet. So if you’re if you’re an owner of a professional services firm right now, you probably get your monthly reports from your accounting firm and the one you pay most attention to is cash flow and the next one you probably pay most attention to is income and maybe you look at the balance sheet once in a while. However, as an owner, not an employee, as an owner the balance sheet is the most important of all the financial reports and the client relationships are actually assets on the balance sheet. So that’s my advice. First, as a way to frame this up, is that, I would you know, think about your balance sheet first, focus on that. So the balance sheet calculates the net worth of a firm, you know, i.e. what a firm is worth and it does so by listing the firm’s assets and then it subtracts its liabilities. So for those of you who are not financial wizards out there, let me just give you a real simple quick analogy to illustrate and maybe I’ll use your your home as my example here of your balance sheet. So let’s say the assets of your home are the land it sits on in the house itself and let’s say these two assets, the land and the structure worth half a million dollars and the liabilities of your home are primarily the mortgage and for this, let’s assume your mortgage is 300 grand. So by simply subtracting the liabilities from the assets in this example, I can see that your net worth of your home is two hundred thousand of the equity of your home is two and a thousand. So a firm’s client relationships are its assets and like all assets, they should be proactively managed and cared for so that they appreciate in value. And unfortunately, many firms turn their clients into depreciating assets and this happens when they treat their clients as transactions. Clients are viewed as deals. So the framing of this conversation today, Sean, is to think of your clients as balance sheet assets, much like your home. You know, you get a new roof…

Sean Magennis [00:03:23] Yes. 

Greg Alexander [00:03:23] …Install a new air conditioner, you paint the house, you take care of it so it goes up in value. And the same thing has to happen with the client relationships. 

Sean Magennis [00:03:31] That’s a beautiful analogy and and very understandable. So, Greg, when you when you are considering a firm to invest in, how do you go about assessing the health of their client relationships? Because this is this is key. 

Greg Alexander [00:03:45] If it is so, there are many ways. Where do I get started? Here, let me let me try to share maybe a few simple ones for the audience. So one area that will be placed under the microscope is revenue concentration. So many boutiques have really sexy looking financial statements. But when you peel the cover off, you can see that they really are house of cards. They generate most of their revenue profits from a very small number of clients and if one of these clients was to leave, the financials completely fall apart. And unfortunately, this is very common, especially with project based boutiques. These firms live and die by the big deal in their operating model is very unreliable and therefore not sellable. So be sure not to have a single client equal to more than, let’s say, 10 percent of your billings so that would be kind of one thing to consider, revenue concentration. 

Sean Magennis [00:04:37] Yes. 

Greg Alexander [00:04:38] Another simple one to get started with is the tenure of relationships. So firms that generate billings from clients for years are very attractive. This suggests that the client relationships are very strong. If the firm did not deliver value than the clients would go elsewhere. So as it relates to tenure of relationships, a rule of thumb is that the average client tenure should be three years or more. Okay, another one to consider as it relates to client relationships and whether or not they’re appreciating or depreciating assets on your balance sheet could be client quality as a measure of the strength of relationship. So, for instance, let’s say your firm generates billings from startups. That’s going to discourage buyers. Startups have a very high failure rate in revenue from this segment can be unreliable. In contrast, if your boutique generates its billings from the Fortune 500. This will encourage buyers. Large enterprises are unlikely to disappear overnight. So revenue from this segment is going to be really valuable. So those are some ways to think about measuring the strength of your client relationships. 

Sean Magennis [00:05:54] Outstanding, Greg and resonates strongly with me because in my experience, particularly when I was running my boutique for 14 years, I had many clients for the entire 14 year duration. In fact, some of my strongest relationships were those that we sold in the early days and went with us and through the cycle and we learned so much from that and that was a key to us unlocking the value that we received when we sold that business. So really important. So revenue concentration, client tenure and client quality. These are really fantastic, Greg. So there are three easy to understand items and hopefully you are audience members will absolutely spend time making sure you get these three right. So, Greg, an additional item is what should a professional services firm leader do to improve these three, these three areas? 

Greg Alexander [00:06:52] So investors are going to steer away from boutiques that do not institutionalize their relationships. So evidence of this can be found in kind of well documented client account plans. Buyers will want to see that these critical client relationships are housed inside of a customer relationship management system that’s used by all. 

Sean Magennis [00:07:13] Yes. 

Greg Alexander [00:07:13] A risk that a buyer takes from buying a boutique is key employee turnover and sometimes these key client relationships sit with key employees, and when the key employee leaves, they take the clients with them. And buyers are not going to acquire your firm if that potential potential exists, even even if it’s a slight potential of happening, they’re going to run away. The acquire will want to know that these relationships are with the firm, the institution, not with the employee. So that if the employee quits the billings, don’t go away and this requires the institutionalization of your client relationship. So that’s the key thing. So make sure that your clients are clients of the firm. They’re not clients of a single person and if you can prove that by having tools like this, CRM systems, account plans, et cetera, that’ll give great confidence to a potential buyer that these clients are likely to stay with you over time. 

Sean Magennis [00:08:13] Wonderful point, Greg and again, resonates with me because as an owner of a professional services firm, institutionalizing the ownership of your key clients, in fact all your clients has got to be one of the top five priorities. 

Sean Magennis [00:08:32] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field, Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling and maximizing business valuation. Today, we have the pleasure of introducing you to an extraordinary individual. Pete Lerma, who’s principle owner and founder of Lerma, a full service branding, creative and interactive agency dedicated to crafting insightful, relevant communications primarily for the Hispanic market. 

Pete Lerma [00:09:18] We’re a next generation full service branding agency. We’re in the business of connecting brands and their customers. Increasingly, that engagement happens through digital. We pride ourselves on being one of the most digitally savvy ad agencies in the country and it’s the kind of knowhow that’s allowed us to take avocados from Mexico to the Super Bowl five times in a row as their digital and social agency and we’ve consistently made them the most talked about brand in digital and social media in and around the Super Bowl. I lead a team with operations in Dallas and Mexico City, and a few of the other brands on our roster include the American Red Cross, Bud Light, Rita’s, Ocean Spray and the Home Depot. 

Sean Magennis [00:10:00] Please get to know Pete and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

Sean Magennis [00:10:19] So, again, in an effort to provide you immediate takeaway value, I have again prepared a ten question, yes or no checklist. Please ask yourself these 10 questions. And if you answer yes to eight or more of these questions, you can prove you have a healthy client relationship. 

Sean Magennis [00:10:40] Number one, Are your client relationships an asset on your balance sheet? 

Greg Alexander [00:10:43] So let me dove in here a minute. 

Sean Magennis [00:10:45] Please. 

Greg Alexander [00:10:46] So when you get your balance sheet, this is an easy question and I love the fact that you set it up as yes, no. When you look at your balance sheet, are your clients on the balance sheet? Probably not. Right. So right away… 

Sean Magennis [00:10:56] Great point redo your your balance sheet. 

Greg Alexander [00:10:59] Redo your balance sheet, right and then when you read through your balance sheet and you’re going to place a client relationship on the balance sheet, what do you have to do? You have to value it. 

Sean Magennis [00:11:06] Yes. 

Sean Magennis [00:11:06] What’s that relationship worth? 

Sean Magennis [00:11:08] Yes. 

Greg Alexander [00:11:08] Well, you can do a simple understanding as to what the profitability of that client is. How much EBITDA does that client produce? You probably have a good feel for what your multiple of EBITDA is between five and ten, let’s say. So if a client is generating one hundred thousand dollars in annual profits, you know, that client’s worth 500000 to a million.

Sean Magennis [00:11:29] At exit. 

Greg Alexander [00:11:30] You can value it right on your balance sheet. Right. So that’s a that’s a very easy thing for an owner to do, is just to take out your balance sheet. Yes. No, my clients on their if they’re not, I got to get them on there. And how do I value them? 

Sean Magennis [00:11:43] Excellent. Number two, is this client asset appreciating in value? 

Greg Alexander [00:11:50] Yes. So here’s an easy way to do that, right? Put multiple annual balance sheets next to each other and maybe maybe you can project into the future, even go back in time. So, for example, if I’m doing business with X, Y, Z company when they first become a client four years ago. OK. So each year for the last four years. What were they worth? Were they going up in value or not? Yes. And if they weren’t going up in value, how come? 

Sean Magennis [00:12:13] Right. Great question to ask and ensure to the extent you can, an appreciating client value. 

Sean Magennis [00:12:20] So question number three, do you have a diversified client base with no one client worth more than 10 percent of your total revenue? Number four, does the tenure of your client relationship exceed three years? Number five, are your client businesses stable? Number six, are your clients and relationships stable? What is that, Greg? =

Greg Alexander [00:12:56] Yes. So here’s what that means. So you can be doing business with a company and at that moment in time, that company is doing well. But when you peer into your client’s customers, those are end customers. How are they doing? So, for example, for many, many years we thought General Electric was the very definition of a rock solid customer and all of us would be honored if they were on our client roster. Not anymore. Why? They were overexposed to the oil industry, the oil industry became very unstable and took G, GE right into the tank. I don’t even think they’re part of the Dow Industrial Average anymore. So peek into…

Sean Magennis [00:13:40] Yes. 

Greg Alexander [00:13:41] …The customers of your clients and try to get a feel for how stable is their business. 

Sean Magennis [00:13:46] Outstanding, and that goes to truly knowing your customer. It’s not a trite it’s not a trite saying, is it? 

Greg Alexander [00:13:52] Right. 

Sean Magennis [00:13:54] So question number seven, do you have account plans? Number eight, have you institutionalize your client relationships into a customer relationship management system. Isn’t that key, Greg? 

Greg Alexander [00:14:11] It is, a couple of things on seven and eight, account plans and CRM. So if I’m doing due diligence, OK, and part of my due diligence is understanding healthy client relationships and in my information request, I asked for log in credentials to your CRM system. You tell me we don’t have one. The conversation doesn’t proceed. 

Greg Alexander [00:14:30] If I ask… 

Sean Magennis [00:14:31] No doubt. 

Greg Alexander [00:14:31] Right. If I ask you for access to your account plants, which ideally would be in your CRM system, but if they’re not and I say, hey, here you you tell me that your top 10 clients are these and I ask you for acount plans for each and you don’t have them and your answer is, well, all that we have all in information, but it’s in the salesperson’s head. That’s a major red flag because again, if that key employee walked out the front door, is all that tribal knowledge goes with him or her. So these have to be documented and that’s a sign of institutionalizing the relationships. 

Sean Magennis [00:15:03] Outstanding, and a follow on number nine. Very, very important is are the client relationships with the firm and not with your key employees? 

Greg Alexander [00:15:13] Yes and one quick trick there that we look for when we’re doing diligence is executive sponsored program. So most professional services firms have partners and they’re the highest up in the organizational chart and to all of those partners make, you know, fairly regular client visits with the key clients. 

Sean Magennis [00:15:33] Yes. 

Greg Alexander [00:15:33] And do they own those? So that, again, because partners are less likely to leave the firm because they have ownership. So if the relationships are held by the partners, at least partially, then that’s an indication that the client relationships have been institutionalized. 

Sean Magennis [00:15:49] Outstanding, and then finally, question number ten, will the billings from your client relationships stay when the key employee quits? 

Greg Alexander [00:15:58] Yes. Obviously, that’s what this is all about. 

Sean Magennis [00:16:00] Yep. And if you follow our sponsor, Collective 54, we have a concept called the strategy defense, which is all part and parcel of maintaining and ensuring that you have your revenue concentration, your client tenure and most importantly, your client quality. So if you answered yes to eight or more of these questions, you have excellent client relationships. This will make you very attractive to potential buyers. Client relationships are an asset. Like other assets, some relationships appreciate in value and others depreciate, appreciating client relationships will increase the value of your firm. Depreciating client relationships will decrease the value of your firm. 

Sean Magennis [00:16:49] When trying to exit for a great price, bullet proof your client relationships. If you enjoyed the show and want to learn more, please pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell the Professional Services Firm. 

Sean Magennis [00:17:08] I’m Sean Magennis. Thank you for listening. 

Episode 4: Rate of Growth – The Ultimate BS Detector

Your rate of growth is your most important number. Learn why it is more important than your size, client roster, and service offerings.

In Episode 4 of The Boutique, Sean and Greg talk your rate of growth being your most important number. Learn why it is more important than your size, client roster, and service offerings.

 

After listening to the Podcast, you are invited to join a Q&A session on Friday, October 9th facilitated by Greg Alexander, Chief Investment Officer of Capital 54. Register Here

TRANSCRIPT

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in on the next chapter of your life. 

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that your rate of growth is your most important number. It is much more important than the size of your firm. It is more important than your client roster, and it is more important than your service offerings. Potential acquirers want to see strong growth in top line revenue and bottom line profits. I’ll try to prove this by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg really is a true expert when it comes to growing revenues and profits in the professional services sector. Greg, what advice do you have for the audience with regards demonstrating growth to a potential investor? 

Greg Alexander [00:01:28] Yeah, so the first thing to understand is, is what does good growth look like from the perspective of an investor? So as the chief investment officer of Capital 54, you know, when I consider making an investment into a firm, I’m looking for the following… So roughly a five to ten year track record of consistent revenue and profit growth and also, you know, within those five to ten years, that means revenue growth roughly 20, 20 to 30 percent top line. Shoot for gross margins in the 70 to 80 percent range and look for net margins in the 30, the 30 to 40 percent range is probably a good number to shoot for. 

Sean Magennis [00:02:08] Mm hmm. So, Greg, these are those are really high bars to to leap over. So I’m curious, tell me why the five to ten year requirement firstly. 

Greg Alexander [00:02:18] Yeah. You know, I tell you a recent story that might illustrate why sustainability of growth is key and that’s really the word here. \. 

Sean Magennis [00:02:27] Yes. 

Greg Alexander [00:02:27] And that’s the reasons for the five to ten years. So I was recently involved in an auction run by an investment bank for an I.T. services company. This firm had a strategic relationship with a software provider in a very hot area called data analytics, and they helped clients use the data to make better decisions through data visualization and the bank running the auction touted the boutique as a high growth firm. When I met with the management team, they were very proud of what they had accomplished and I was presented with slide after slide of steep revenue and profit growth, and the growth was accelerating. Now, see, I had looked at a few firms in this space and I had a somewhat uncommon and maybe unfair information advantage. This firm was growing revenue at roughly 22 percent per year and had done so for about three years. Problem was that their boutique competitors, other firms I had looked like it, looked at, excuse me, were growing their top lines at twice the rate. You see that the data visualization space was hot and kind of high water was raising all ships. When I dropped out of the bidding process, this firm, unfortunately, was insulted and when I explained my rationale and provided my evidence, they claimed that my comparisons were not apples to apples and that the firms I compared them to would not, quote, pure place. 

Greg Alexander [00:03:55] This firm ultimately was unable to find an acquirer. So it appears that I was not the only one who felt this way and had seen other firms at the command of the facts and unfortunately, the story gets worse and this is why the requirement of five to ten years is so important. You see, the data visualization space cooled off a bit. The software provider, the golden goose, so to speak, stopped laying the eggs. And as the rate of growth slowed, so did the growth rate of its service partners. So it’s not enough to ride a wave so to speak you know. You have got to have a real business that can make it through let’s say it’s a decade. 

Sean Magennis [00:04:35] So, Greg, I assume the moral of the story is growth is relative and most importantly, know your facts. Know your data if you’re doing the comparisons. Is that accurate? 

Greg Alexander [00:04:46] It is. You know, sometimes I get pitches and they say, you know, hey, you know, I’m a large firm. A number of employees of big revenue and you look at the growth and it’s five, seven, ten percent, you know and so the size of the firm is less important to the investor. It’s the rate of growth and the relative rate of growth that really matters. 

Sean Magennis [00:05:05] Yes, it makes total sense and additionally, I’m curious why you include profit growth in your list of requirements. Many young firms focus on profit and we see that coming out of Silicon Valley and other places around the world. They don’t focus on profit growth. They spend their time obsessing over top line revenue growth. 

Greg Alexander [00:05:27] Yeah. You know, unfortunately, a lot of firms have great top line growth, but no profit growth. And that’s a deal killer for most especially for me. The key thing to think about as it relates to a services business, and this is different than a product business, and maybe this is the most significant difference between selling a product firm and a services firm. Yes, a services firm has to figure out how to decouple revenue growth from headcount growth and until they can do that, they’re not going to generate any profits. You can grow from 20 million to 40 million, but if you’re doubling headcount in the process, you’re not making any more money. So until they really figure this out and there’s a lot of ways to do that, that go beyond the scope of today’s podcast, but until they figure that out, they shouldn’t try to sell the firm. When they do, gross margins and EBITDA margins will jump and that’s the time to sell. You know, you open in your podcast, you want to sell at the right time for the right price on the right terms. That’s the right time when you figure that out because you’ll see lots of growth and EBITDA and that will prove that you have a sustainable, scalable business model and that’s when you have lots of firms interested in making an investment in your firm. 

Sean Magennis [00:06:47] Thank you, Greg. So top line growth for our listeners, bottom line profitability. Those two have to be done the right way in order for you to get the right price and an effective sale. 

Greg Alexander [00:07:00] Correct. 

Sean Magennis [00:07:01] Outstanding. 

Sean Magennis [00:07:05] We will be right back after a word from our sponsor. Now let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field. Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling and maximizing business valuation. Today, we have the pleasure of introducing you to my dear friend Sanjay Jupudi. He’s president and founder of Qentelli, a firm focused on business transformation through digital innovation. 

Sanjay Jupudi [00:07:45] As the president and founder of Qentelli. I offer more than 18 years of experience leading global teams, working with Fortune 500 organizations, building companies and heading operations, sales and delivery. Being in leadership roles at enterprises, nurturing startups and as an entrepreneur, I provide hands on experience and product development, implementation and I.T. consulting spanning across Europe, Americas and Asia. Qentelli empowers their clients to build right operational models and to deliver a great digital experiences and Qentelli worked with clients from various industry domains and leading geographically distributed teams that provide a broad range of services, including customer experience management, customer experience testing, enterprise mobility, dev ops and quality. 

Sean Magennis [00:08:31] Please get to know Sanjay and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about our collective 54 can help you accelerate your success. 

Sean Magennis [00:08:50] So here we go again. Greg, in an effort to provide immediate takeaway value for you, our audience. I prepared a 10 question. Yes, no checklist. Listeners, please ask yourself these 10 questions. If you answer yes to eight or more of these questions, you have an excellent growth story that will attract investors. Number one, are you growing revenue faster than your boutique competitors? Number two, have you been doing so for more than a few years? Number three, are you growing your profits faster than your boutique competitors? Number four, have you been doing so for more than a few years? Number five, you’re growing your revenue faster than the practice inside the lodge market leaders. 

Greg Alexander [00:09:56] Let me. Let me interrupt you there just for one moment, because we didn’t talk about this. But this is important. 

Sean Magennis [00:10:00] Yes, please. 

Greg Alexander [00:10:02] When you go to sell your firm, there’s really two types of buyers. There’s the private equity buyer and there’s a strategic buyer. The strategic buyer can be defined as another firm that wants to buy your practice to expand their offerings. So when they when they consider that it’s a buy versus build conversation, I can build the practice myself by hiring people and trying to sell the same service or I can buy a boutique and bring that into my firm. Those are two ways to do it. So this question number five, how you’re growing your revenue faster than are you growing your revenue faster than the practice inside the the large market leaders is really important, because if you’re not, those strategic buyers are not going to be interested in your firm. They can do what you do better than what you’re doing. So why bother you?

Sean Magennis [00:10:50] Precisely. 

Greg Alexander [00:10:51] Right. On the flip side, if they identify your practice area as strategically relevant for them and they’ve been trying to get it done, but they can’t. You’re going to become more attractive to them because they can buy you throw some money at it and solve a strategic problem. So that’s why that question is in here. 

Sean Magennis [00:11:07] Excellent, Greg. So very much a creative to their market, which will which will give them an opportunity to buy versus doing it themselves. And then the follow on to number five was, again, have you been growing your revenue for more than a few years? 

Greg Alexander [00:11:22] Right. And that’s a sustainability factor. 

Sean Magennis [00:11:24] Excellent. 

Sean Magennis [00:11:25] Number seven, are you growing your profits faster than the practice inside your largest marketing competitor’s? Very much like your previous point. And then number eight, have you been doing so for more than a few years? Number nine, are you growing your cash balance to cover payroll for at least 12 months? And number 10, do you have at least 12 months of forward visibility? 

Greg Alexander [00:11:57] Yeah. So let’s talk about nine in 10 a bit. There’s a difference between cash flow and income. And boutique businesses run on cash flow so it’s one thing to grow your revenues and it’s one thing to grow your profits but you also want to be growing your cash balance. 

Sean Magennis [00:12:14] Yes. 

Greg Alexander [00:12:14] So that you can use that free cash flow, so to speak, to fund growth initiatives, whether that be bringing out new services, investing in marketing, hiring new people, whatever it may be, so that the look at cash is different than the look at revenue and different than look at profits. 

Sean Magennis [00:12:32] Outstanding, thank you. Greg. So what we’ve learned today is growth matters a lot and relative growth matters even more. A year or two of great results doesn’t mean that you have a sellable, sustainable boutique. A decade of market beating growth will command an excellent price and excellent terms and profit growth. Greg, as we’ve discovered and experienced, is as important as revenue growth. This indicates that you have cracked the code. You were one of the few who broke the link between revenue and headcount growth. Please be sure to run a tight ship. Be prepared to demonstrate reliable forward visibility and plenty of working capital. 

Sean Magennis [00:13:27] Again, thank you, Greg. And if you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m your host, Sean Magennis. Thank you for listening. 

 

Episode 3: How to Prove Your Firm is Not a Body Shop

How to position your firm in its marketplace is strategically important. Learn how to position yourself well in your market which is a critical way to determine the strength of your value proposition.

In Episode 3 of The Boutique, Sean and Greg talk how to position your firm in its marketplace is strategically important. Learn how to position yourself well in your market which is a critical way to determine the strength of your value proposition.

 

TRANSCRIPT

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in on the next chapter of your life.

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, our podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that the position of your firm in its marketplace is strategically important.

I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert in identifying a market position and in helping firms take actions to achieve this position. An acquirer of your firm will find your boutique attractive if you are positioned well in your market. Market position is a way to determine the strength of your own value proposition. A strong market position can indicate excellent competitive positioning. So, Greg, what is
the first step in establishing the most attractive marketing position one can get for your firm?

Greg Alexander [00:01:36] You know, I think it’s important to underline something that you said there, which is market position is a way to determine the strength of your value prop. So that’s what we’re really after here is the strength of your value proposition. So with that as a grounding. Right. The first step is to think like an investor and ask this
question. How will a potential, potential buyer of my firm measure the strength of our value proposition otherwise said measure our position in the market? So there are some obvious ways to measure the strength of your value problem. So, for instance, fee level in fee volume are two basics in any due diligence process. A fee level below, let’s say 250 bucks an hour, will suggest that your body shop. Body shops, if they sell, typically do so for a very low price and on very unattractive terms, you don’t want to be a body shop. A fee level, let’s say 500 bucks an hour will suggest that you have monetize real intellectual property. You’re not selling time. You’re not selling arms and legs. Instead, you’re selling knowledge and skills. So firms such as this are capable of selling and when they do sell, they do so at a premium price. Fee volume, on the other hand, indicates market position by suggesting the size of the overall market. So, for example let’s say you’re doing 50 million dollars a year. So that’s fee volume is 50 million a year, suggests a large market opportunity. Now, why is that? It’s understood that boutiques are not the market leaders. They’re the emerging market leaders and they typically penetrate their markets at, let’s say, somewhere between one and ten percent. So in this example, if you’re doing 50 million dollars a year in fee volume, that suggests that you’re working in a market opportunity that’s greater than five hundred million dollars and could be quite a bit larger than that and buyers of firms want to buy firms that are high growth, but that also still have a lot of runway in front of them. So when they’re thinking about their position that you’re boutique has in its market relative to the competitors and they’re trying to understand the strength of your value proposition. Some of these basics, like fee level and fee volume, are ways to prove that you’re not a body shop.

 

 

Sean Magennis [00:04:07] Got it, Greg. And obviously that runway comment is vitally important to have lots of runway ahead of you. So how about some suggestions beyond the basics, such as fee level and fee volume? What else what else is there, Greg?

Greg Alexander [00:04:20] Sure. So savvy acquirers are going to consider more precise indicators of your market position. So an example that might be client return on investment and this is often overlooked in it’s absolutely critical. You know, the slang term for this is client ROI. So boutiques that can scale to market leaders can prove their worth to clients. So what’s a simple way to illustrate this? Let’s say a client buys a service for half a million dollars and the realized benefit from that project is, let’s say, five million. So this is a 10 times return on fee. That’s a clear client ROI and if you’re a firm that can prove that you’re gonna be very attractive to a buyer. That’s a savvy buyer looking at the strength of your value proposition. Is there a clear before and after result? In contrast, let’s say that a client buys a service for half a million and it’s realized benefit is something subjective, such as
well trained employees. That’s poor client ROI. Well trained employees are at benefit from the project for sure, but it’s not quantified and it’s not in relation to the cost of the project. So these boutiques are likely not to become market leaders and a savvy acquirer is gonna know that. Another way that investors measure a boutiques market position is call point.

So what does that mean? So call point refers to the title of the person buying your service. For instance, if board members are buying your service, that’s a high call point. If the CEO or the CEO’s direct reports of buying your service, that’s a high call point. However, if your call if your call point title is like a director or manager, that’s considered by investors to be a low call point and firms with low call points have a hard time scaling. This is, that’s because they’re really selling a service that’s not worthy of an executive’s time to solving a problem an executive has delegated to junior staff and this indicates that the boutiques
service is not as, not that important to clients and that’s going to make it very hard for a boutique to scale. And investors are looking for high growth firms that have lots of runway in front of them and they can scale and one way to assess that is who do you call on? Who buys your service? And maybe one more just off the top of my mind is cycle resiliency. This is particularly important as we record this. The world is suffering from COVID-19.

Sean Magennis [00:07:00] Yes.

Greg Alexander [00:07:01] And a cycle resiliency is often considered by acquirer’s as an indicator of market position or the strength of your value prop and this cycle resiliency refers to having a boutique perform in periods of recession. Recessionary periods cause clients to cut most all non-essential budgets and unfortunately, this can include discretionary budgets that many boutiques rely on. Firms that see steep declines in financial performance during recession, that have poor market position and those that do well and maybe even expand during a recession have very strong valued propositions and it’s those boutiques and have the best chance of selling their firm’s.

Sean Magennis [00:07:48] Outstanding points Greg, and lot to unpack and think about here. So client ROI call point and cycle resiliency. These are all great market proof points. Greg, when you sold your firm SBI, how did you demonstrate to the buyer that you had a really strong market position?

Greg Alexander [00:08:12] Yeah, so in my case, the strength of our value proposition and our position in the market was obvious. Our acquirer evaluated us through the lens of each of those attributes and we we happen to show really well in each category. However, we probably shined brightest when it came to cycle resiliency and in fact, I can I can tell you with clarity that that actually drove the purchase price. In fact, our purchaser paid more for our firm because of how well we did during recessions and just some quick history for those that don’t know my personal story. I found in my firm sales benchmark index in 2006
and many fragile young firms were wiped out during the great financial crisis of 2008 through, let’s say, 2010. Yet we pushed right through this period with no problems and looking back, it’s really remarkable to say that and it’s in it’s a testament to the great employees that we had there and the loyal clients that we had. You know, SBI was only three years old when the world fell apart and we were selling a discretionary item that was easily cut by clients during those brutal times but our clients didn’t cut our services. In fact, just the opposite. They added to that and our revenue and profit growth really accelerated during the Great Recession and on a peer to peer comparison basis, we were growing at roughly twice the rate of our peers during that part, period and after the deal closed, you know, the acquirer’s mentioned to us that, you know, that really struck them as to how strong our market position was and it gave them great confidence to pay a premium for our service because they felt that if we made it through the Great Recession, if another recession hit, we were likely to make it through it again and as I understand it, the firm is
doing really well during COVID-19 so that that, you know, proved out. So cycle resiliency was a big deal for us.

Sean Magennis [00:10:14] Thank you Greg, and what a great set of examples and a testament to you and your team and obviously what I’m hearing too is your loyal customers really profound. So listeners, as you can see, market position is really important to potential acquirers. It tells them whether you have a compelling value proposition. It also tells them are you a position relative to your competitors.

Sean Magennis [00:10:43] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field, Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling and maximizing business valuation. Today, we have the pleasure of introducing you to an exceptional person. Joe Gagnon, he’s CEO of Performance Tea, where his mission is to help people achieve their potential.

Joe Gagnon [00:11:23] Hi, I’m Joe Gagnon, the CEO and co-founder of Performance Tea. I see myself as an adventurer, entrepreneur and innovator. I’m the author of Living the High-Performance Life, an Ordinary Joe’s Guide to the Extraordinary. I’m a multi-time turnaround CEO and founder of the High Performance Life, a philosophy regarding techniques for mental toughness, Creative Problem-Solving leadership and personal effectiveness. As an advisory board member, I provide expertise in growth strategies to emerging companies. I’m an avid blogger and passionate endurance athlete, having completed 75 marathons and ultra races and in 2017 I ran a marathon on six continents on six consecutive days.

Sean Magennis [00:12:11] Get to know Joe and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success.

Sean Magennis [00:12:31] Greg, here we go again with our top 10 checklist. Greg Alexander [00:12:34] Drumrolls.

Sean Magennis [00:12:35] Drumroll. In an effort to provide you immediate value, I prepared again 10 questions on a yes no checklist. Please ask yourself these 10 questions.

Sean Magennis [00:12:48] Number one. Is your average fee level above five hundred dollars per hour? Question number two, if not, can you prove that you are not a body shop. Number three, is your fee volume big enough to prove that you are in a large market? Number four, if not, can you prove that you are in a large and growing market with a lot of runway ahead of you. Number five, do you have a clear client return on investment? Number six, if not, can you prove that your clients realize a good cost benefit tradeoff? Number seven, do you call on the board of directors of your target client? Number eight, do you call on the CEO of your target client? Number nine, did your financial performance hold up well during the last recession? And number 10, can you prove to a potential acquirer that your boutique is cycle resilient? If you answered yes to eight or more of these questions, you occupy a really strong position in your market. If you answered no to eight or more of these questions, you have a weak market position. It would be wise to hold off on your sales process until this is addressed. Acquirer’s want to buy firms with validated market positions. This reduces their risk and increases their upside. There are many ways for a market position to be evaluated. Please be sure that your case is bulletproof.

Sean Magennis [00:15:00] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book entitled, The Boutique How to Start Scale and Sell the Professional Services Firm.

Sean Magennis [00:15:14] I’m Sean Magennis. Thank you for listening.

Episode 2: Seven Mistakes to Avoid When Selling Your Firm

There are 7 common mistakes made when trying to sell a professional services firm. Learn how this theory is proved and how to avoid making these mistakes.

In Episode 2 of The Boutique with CapitaL 54, the team pinpoints 7 common mistakes made when trying to sell a professional services firm. Learn how this theory is proved and how to avoid making these mistakes.

 

TRANSCRIPT

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in on the next chapter of your life.

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow, scale, and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host. On this episode, I will make the case that there are seven common mistakes made when trying to sell a professional services firm. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54′ s chief investment officer. We can all learn a lot from Greg as he has seen dozens of firms trying to sell their business every year. Selling your boutique is a high risk, high reward initiative. I’d like to spend some time on the common mistakes made when selling. My hope is that by listening to this, you can avoid these landmines. Every situation is different. However, these are the most commonly made mistakes. Mistake number one is boutique owners are unclear as to what they want from the sale. Greg, why do you think this mistake keeps happening? 

 

 

Greg Alexander [00:01:38] That’s a great one and it is appropriately listed as number one because if you get this wrong, the impact is great. On a previous episode, I think it was titled The Difference Between a Happy in an Unhappy Exit. Now, I encourage the audience to look at that and listen to that. I went into detail on how to understand why you’re selling and I really encourage everybody to check that out because it’s, it’s foundational. But to summarize here, if you’re unsure of who you are, you will be unhappy with the sale. If you don’t know where you are headed, you will be unhappy with your sale. There’s no amount of money that will change us. I’m speaking from personal experience and I’m also speaking on behalf of those who I’ve helped sell their firms after the sale is complete, there’s no going back. So be sure that you know what you were doing before you go down this path. 

Sean Magennis [00:02:31] Powerful, powerful number one message. So mistake number two is sometimes boutique owners try to sell an unsellable business. Greg, it appears that that comes up a lot. Why is that? 

Greg Alexander [00:02:46] You know, most boutiques really are unsellable. It’s not enough to have a successful boutique. Your firm needs to be attractive to a buyer and that requires you to look at your business as an investor would, not as an operator. The investor starts by listing all the reasons not to buy your business, and the owner starts with a list of all the reasons to do a deal and this gap often cannot be closed. So prior to selling, be sure that you have something worth buying a lot more this and in coming subsequent episodes of this show but before you take your business out to sell, make sure it’s somebody might want to buy it. 

Sean Magennis [00:03:30] Outstanding. Greg, so mistake number three, it takes years potentially to sell a boutique. Yet some owners try to sell their firm in a matter of months. You and I have seen this. This results in many failed attempts or worse, a lot of forced sales. Why does this happen, Greg? 

Greg Alexander [00:03:51] Well, the process to actually conduct a transaction somewhere between six and 12 months. I’d say most often around nine months. It’s about how long it took me to sell my firm. However, the process of preparing to sell can take two to three years and you want to take your time preparing to sell because you want to exit on your terms. It takes time to stack the deck in your favor and as they say, you only have one chance to make a first impression. So it’s best to be ready, so don’t force it. Understand what investors are looking for. Give yourself time to make sure that your business has all the attributes that would make it attractive to a potential buyer and that’s going to take two or three years to get ready and then the actual transaction itself might take around nine months. 

Sean Magennis [00:04:40] So factor in your nine-month plan and make sure that you truly are ready to sell. Let’s pivot to mistake number four. A man is boutique owners under-invest in succession planning. What are the consequences of underage investing in succession planning, Greg? 

Greg Alexander [00:04:58] The big one is seller’s regret. After you sell, you’re going to want to see your boutique do well without you. You’re going to have many employees you care about who are still employed by the firm. If you hand over your baby to a stranger, they may destroy it. A big bank balance does not compensate you enough for this tragedy. I would recommend spending years grooming your successor and make sure that they build on what you have created when you sell your firm it should be a great moment in your life, you don’t want to have any seller’s regret and seller’s regret will show up with after you leave if within a year or two you don’t even recognize the firm and people that you care about have been mistreated. So be sure that you really know what you’re getting into before you sell it. 

Sean Magennis [00:05:49] Excellent point Greg, and I’ve seen you live that in your own career very powerfully with your successor. Mistake number five. This is where entrepreneurs think that they can sell a business on their own. This results in tactical execution errors that can cost the owner millions. What’s the root cause of that mistake? 

Greg Alexander [00:06:12] Yeah, I for the life of me, I can’t understand why anybody would want to do this, but it happens all the time and I think the root cause here is that most boutique owners are entrepreneur founders, and that means they are very different from hired gun CEOs. Founders as a group have a high-risk tolerance level and they are supremely confident in their own abilities. They approach the selling of their business is just another problem to solve, or maybe just another sales campaign, and they assume that they can figure it out. This is a big mistake and this is not an area to go cheap. Hire the best advisor, advisors that money can buy. Investment bankers, attorneys, accountants and let these advisors guide you through the process. This is where you truly get what you pay for. 

Sean Magennis [00:07:05] It makes a lot of sense. So mistake number six. This is where boutique owners often get attacked after the sale and they take it very personally. This may cause and does cause sellers regret. What’s behind this aspect, Greg? 

Greg Alexander [00:07:23] Human nature. I mean, yeah, you know, those that you are leaving behind are going to be jealous. They’re going to feel that that they were cheated and underappreciated and sometimes I see they begin to tell a story that’s not based, in fact. Rather, they tell themselves a story that they need to tell and make themselves look good and feel good. And when this happens, I’ll tell you, if you’re somebody listening and you think this isn’t going to happen to you, it is. Don’t take it personally. This is just business. You’ve created the wealth and therefore you’re the one to realize it. Don’t apologize for that. Those who helped you along the way have benefited and they’re going to continue to benefit. Rest your head peacefully on the pillow at night. All that matters is what you see in the mirror. 

Sean Magennis [00:08:14] Beautifully said, Greg. So mistake number seven is to be sure to understand who the business is being sold to and what their motives and motivation are. Why is this aspect important? 

Greg Alexander [00:08:30] Yeah, this is we’re selling a services business is very different than selling a product business. So a professional services business would fall into that category and this is really important, particularly if you’re on an earn-out or you’re rolling some equity. So those that are listening that might not understand those terms and earn-out says that you agree to a purchase price and that the proceeds come to you over time based on hitting some milestones or rolling some equity refers to that you sell a portion of your business, not all of your business, and you roll, quote-unquote, roll your equity into the New Deal with the intent of selling the rest of it or another portion of it down the road. So if you fall into those two categories, which the majority will one or the other or both. Who you’re selling the business to is really important because you have proceeds yet to come. So be really sure that you know what the terms are, that there are no unwanted surprises that crop up. You know, the buyers own the asset. Once you sell it, they’re entitled to do whatever they want with it. If you don’t agree with their plans, do not sell to them.

Sean Magennis [00:09:46] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on collective 54 members who are making an impact in the professional services field, Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling, and maximizing business valuation. Today, we have the pleasure of introducing you to someone I’ve known for many years. Renzi Stone, founder, and CEO of Saxum, an integrated marketing communication consulting agency. 

Renzi Stone [00:10:27] Saxum is an award-winning 50 person integrated digital marketing and communication agency. I founded the company in 2003 to take on issues that are shaping lives, our communities, and the world. We’re obsessed for good, which means that we move mountains for our clients, tackling their most important issues. We are experts in energy and infrastructure, champions of social good, and passionately at work, helping disruptive innovators build better communities. Saxum as a proud nine-time Inc five thousand honoree. As a CEO and a leader, I endeavor to always add value with purpose. The world needs more of that. 

Sean Magennis [00:11:13] Please get to know Renzi and other extraordinary business owners who are leading innovation in the professional services industry. Visit us at Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

Sean Magennis [00:11:34] So critically important to understand who you’re selling to and what their motivations are. There are other mistakes to avoid as well. Every situation that you as a listener and boutique owner are going to face is different. However, these are the most common mistakes that boutique owners make. In an effort to provide immediate takeaway value for the audience, I prepared a 10 question, yes, no checklist. 

Greg Alexander [00:12:01] You and your 10 no questions. Yes, no questions.

Sean Magennis [00:12:05] You’re gonna love me for these. Listeners, ask yourself these 10 questions. If you answer yes to eight or more of these, you’ll avoid making these mistakes. 

Sean Magennis [00:12:15] Number one, do you know what you want from the sale? Number two, do you know what you are going to do after the sale? Number three, is your business attractive to a buyer? Number four, do you, in fact, have a sellable boutique? Number five, do you have a hand-picked successor? Number six, is the successor ready now to take over? Number seven, have you lined up an all-star team of advisers to help you? Number eight, are you prepared for the post-sale criticism headed your way? Number nine, you understand who you are selling your boutique to. And number 10, do you understand truly their motives for buying? 

Sean Magennis [00:13:35] Greg, it’s been great to speak to you, for, for our listeners. If you are building a business, you could run forever. You are also building a business you could sell tomorrow. If you decide to sell, you want to do so on your terms. Give yourself plenty of time to avoid these common mistakes that we’ve shared with you on this episode. 

Sean Magennis [00:14:00] If you enjoyed the show and want to learn more, please pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you, Greg, and thank you to our listeners for being with us. 

Episode 1: The Difference Between a Happy and an Unhappy Exit

Step 1 in selling a professional services firm is knowing why you are selling, before you sell. Learn from an owner who figured this out and executed a massively successful exit.

In the breakout episode of The Boutique Sean and Greg talk step 1 in selling a professional services firm: knowing why you are selling, before you sell. Learn from an owner who figured this out and executed a massively successful exit.

 

TRANSCRIPT

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all-in on the next chapter, life.

Sean Magennis [00:00:15] Welcome to the boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host. On this episode, I will make the case that step number one in selling a professional services firm is knowing why you are selling before you sell. I’ll try to prove this by interviewing Greg Alexander, Capital 54’s chief investment officer. We can learn a lot from why Greg sold his firm. The reason to sell your boutique is very personal, and it should be. You poured your life into building the firm. Leaving it, handing it to someone else takes much thought. Some owners sell for the money. Others say they are bored. Some are exhausted and some say that the work became a job. It was not fun anymore. Some are afraid that tomorrow might not be as profitable as today. At times, partners start fighting and one needs to be bought out. Maybe it’s time to retire. Or maybe you’re getting divorced and your assets are being divided. A health scare causes some to consider selling. The list is long. I’ve met owners who have had happy exits and I’ve met owners who have had unhappy exits. What’s the difference? Those who had happy exits knew why they were selling and those who had unhappy exits did not. Greg, over to you, did you have a happy exit? 

Greg Alexander [00:02:08] I did. I’m very fortunate to be one of those who did have a happy exit. You know, I’ve got wisdom to share with the audience now, because it’s been a few years since I sold my firm. 

Sean Magennis [00:02:22] Yes. 

Greg Alexander [00:02:22] And I can look back on that and give some advice. And I agree with what you said, that key to a happy as it is, knowing why you’re selling. So I knew exactly why I was selling. So let me let me share my story with you, as I think it might be a good example. 

Greg Alexander [00:02:39] So I first became financially independent in my 20s. I got lucky and went to work for a hot tech firm before it took off. I performed well and therefore was rewarded with stock options. And then the stock shot up and so did my personal net worth. However, what I learned from that experience was is that, that success was not fulfilling to me, and fulfillment will be a key theme that will come out in my story and will directly tie back to why you’re selling being a key to a happy exit. So the success I have with the high tech firm in my 20s wasn’t fulfilling and the reason why that was, is that, although I was financially independent as a young man, I was very unsure if my success was due to luck or if it was due to my ability. 

Sean Magennis [00:03:33] Yes. 

Greg Alexander [00:03:34] And that that drove me crazy. That was the proverbial… What keeps you up at night? So I started my firm to answer a question, which was, how good am I? And it’s very important. I understand, when you’re selling your firm to think back to why you started in the first place. It gives you great context to make the decision to sell and not to sell and really when to sell. So my thinking back then when I was trying to answer the question, how good am I? Was that starting a firm from scratch was the purest way to find out. I started with no customers, no product, no employees. I put all my money into the firm and rolled the dice. If I blew it all, I was prepared to start over. I was young. I had a lot of years in front of me. If I was successful, I could look in the mirror and know what I was made of. And to me very personally, you know, living a life with not knowing when I was made of was just not worth living. And then time went on, as it does. And as I moved into my thirties and early for 40s, I matured. I developed a personal mission statement. So I had a purpose. I outlined a vision of my future that I wanted to pursue that got me to jump out of bed every day. I determined how I wanted to behave and this was done by developing the set of eight core values that I challenged myself to live by every day. Although not deeply religious, I became more spiritually aware. My political leanings and philosophical beliefs revealed themselves, and I became a skilled decision-maker and the result of that was that I made good decisions, which created new opportunities. And these new opportunities allowed me to think through what I was doing with my life, with my firm, in contrast to the new opportunities. In addition, I met many different types of people through my work at my boutique and this taught me which tribe I wanted to belong to. 

Sean Magennis [00:05:54] Yes. 

Greg Alexander [00:05:55] And I discovered how best to spend my time. I knew what made me special and probably more importantly, I knew what my limitations were. 

Sean Magennis [00:06:06] So profound personal insights here, Greg. 

Greg Alexander [00:06:09] Yeah, it was. And I think all of us go through that as we mature. 

Sean Magennis [00:06:15] Yes, indeed. 

Greg Alexander [00:06:17] And while this was happening to me, I was deliberate in doing it, but not so much in pursuit of selling my firm. I was just doing it as I was growing up. But it became incredibly valuable to me as I was faced with a decision. 

Sean Magennis [00:06:31] Yes. 

Greg Alexander [00:06:32] So this personal journey journey led me to goal setting ultimately and I settled on a single goal, which was self-actualization and many of the readers have probably heard that term, it’s part of Maslow’s hierarchy of needs and it can be most simply understood by saying it’s the highest level of psychological development where the actualization of one’s full personal potential is achieved and this occurs only after all the other needs have been fulfilled. And you can see why this concept of full personal potential was meaningful to me, because I started with my my firm, with the burning question, how good am I? And the firm was like an experiment or an explanation or exploration, I should say, to try to answer that. So this full, personable, tangible goal was really important to me. So with this goal kind of crystallize in my head and I should point out, this took many years. It didn’t happen. 

Sean Magennis [00:07:31] Didn’t happen overnight. 

Greg Alexander [00:07:34] Yeah. But with this goal, I kind of firmly planted in my head a bit. I began to evaluate my boutique against the goal. So, for example, was being the owner and CEO of this firm helping me self actualize. Ultimately, I reached the conclusion that the answer was no and that was really hard to come to grips with. 

Sean Magennis [00:07:54] I can see that. 

Greg Alexander [00:07:55] But it was true. The firm was providing things to me that were no longer important or were much less important than they once were. So, for example, all of my basic needs, you know, a house to live in, clothes to wear, food to eat, etc., you know, all those things were secured for a lifetime. You know, my family and I, we’re we’re stable for a lifetime. I had also done something that I think many professional service owners don’t do, and that is I had established an identity outside of work. Many firm owners, their personal identity is completely wrapped up in their firm. So the idea of selling their firm really means selling themselves or losing their identity, which can be very frightening for many but I had I had a very clear identity outside of work and my need to belong to belong to a community, to belong to, you know, something bigger than myself was being fulfilled elsewhere that wasn’t wrapped up in my firm. 

Sean Magennis [00:09:01] Got it. 

Greg Alexander [00:09:02] So, you know, I had I had answered the question at this point, you know, I started the firm to answer the question, how good am I? Because I was unfulfilled with my previous life and I had been tested. I was certain of what I was made made of. You know, the firm was very successful, more successful than I had ever dreamed. I had become very wealthy. I had received plenty of recognition. I was validated internally first and then externally. So if you think about it, I had reached the point of diminishing returns. There was really nothing left for me inside of the boutique. So right at that time, I got another injection of luck. I had a very good friend of mine, quasi mentor, who knew that I loved to read a kind of sense that I was at, you know, maybe a transition point in my life and handed me a book that had a big impact on me and that book was titled Halftime: Moving from Success to Significance and its author was Bob Buford and I highly recommend it to the readers listeners. The big idea of this book is how to live the second half of your life. Repeating the first half of your life was discouraged. First half success. According to the author, is no longer enough things like homes, cars, vacations, private schools, and so on eventually lose their appeal. You know I mean, how many steaks can eat? 

Sean Magennis [00:10:37] Absolutely right, Greg. This is hard-hitting. These are the things to dive into. 

Greg Alexander [00:10:43] So the second half is about significance, not about success. So making an impact on others, mentoring the next generation, contributing to society becomes the second half scorecard and this intrigued me because I had just turned forty-seven years old. My own mortality came into my purview. And what made this book really useful is that in the appendix there were all kinds of exercises and being the the diligent student than I am, I put myself through them and I drove my wife crazy because I forced her to do it as well. And then, you know. 

Sean Magennis [00:11:28] Smart man alignment Greg. 

Greg Alexander [00:11:31] And over many bottles of wine, we kind of compared our answers and these exercises were designed to serve as a personal definition of second half significance. So what came out of this was a new plan and it was very clear to me how I wanted to live my 50s in my 60s and 70s and then throughout the rest of my life and that path that I wanted to live was not the path that I was on and it became obvious to me that this second half plan was bold. I had been accused of dreaming big and it needed to be funded and the only way I could generate the funding, to fund the plan was to sell the boutique, to sell my firm. 

Sean Magennis [00:12:26] Just incredible sharing and I’m very moved by, by your story and also the concept that Bob Buford has in his book Moving from Success to Significance, which is what you’ve done. That’s been my experience of you and thank you for sharing that, Greg, you know, as president of YPO for seven years and as a very long term board member of EO for over 16 years, I’ve seen this journey play out many times, not quite like yours. You know, some sometimes it doesn’t go as well as your exit, and sometimes it does, obviously. 

Sean Magennis [00:13:04] We will be right back after a word from our sponsor. Now let’s turn the spotlight on collective 54 members who are making an impact in the professional services field. Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling and maximizing business valuation. Today, we have the pleasure of introducing you to Sam Bretzfield, who’s founder and chief executive officer of bGlobal, one of Bangladesh’s leading outsourcing companies providing cost-effective programming and interactive production services. 

Sam Bretzfield [00:13:48] My name is Sam Bretzfield and I’m a technology-driven entrepreneur, investor, and advocate helping to build great companies such as EarthLink, Big Global, Direct Fresh, Six Beyond, and several others. I bring over twenty-five years of leadership experience working with global Fortune 500 enterprises as well as early-stage startups and have extensive international experience building high performing companies and project teams in emerging markets from concept to customer delivery. As the founder and CEO of bGlobal, we are passionate about offering exceptional and tailored fit programming and development services that are cost-effective and offset your operating costs using the latest technologies. These services form the backbone of the company and satisfied clients come back month after month to bGlobal, to benefit from our extensive experience, creativity, and innovation. bGlobal has operations in the United States, the Middle East, Europe, and South Asia. Please visit www.bglobal.com to learn more. 

Sean Magennis [00:14:54] Please get to know Sam and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

Sean Magennis [00:15:16] In these podcasts, we’re going to go through the value contribution to our audience and so in an effort to provide immediate take home value, I prepared 10 questions on a yes no checklist and I’m going to ask each of our listeners to really answer these questions for yourself. So if you answer yes to eight or more of these, you know why you are selling your business and why you’ll have a happy exit. 

Sean Magennis [00:15:47] Number one, do you have a clear vision of your future?

Greg Alexander [00:15:52] So let me put a little color on that. The word vision is often thrown around. In the context of this show and thinking about why you might want to sell your firm. What the vision means is what is your aspiration? You know, what do you want to be doing five, 10, 15 years from now? And your vision may be continuing to work in the firm, and if that’s the case, don’t sell. 

Sean Magennis [00:16:17] Exactly. 

Greg Alexander [00:16:18] But your vision may be, I don’t know, travel around on my yacht in the Mediterranean from June through September. Well, if that’s the case, you’ve got to sell your firm. So that’s what the vision means is what’s your aspiration? 

Sean Magennis [00:16:29] Good distinction, Greg. Number two, does selling your boutique help get you to the vision that you’ve just created? Number three. Do you know why you do what you do? Greg, unpack this one. 

Greg Alexander [00:16:46] Yeah, so I can tell you what a bad answer is. Right. Do you know why you do what you do if you say, cause I need to make money. That’s a bad answer. There’s a lot of ways to make money and I would imagine anybody who owns a professional services firm is a highly skilled person. They can make money a million different ways. Right. So the why you do what you do is your purpose, right? It’s why do you exist? You know, what do you do? What drives you? What gets you out of bed? And when determining whether or not to sell your firm, which is what the show is about. If why you do what you do, is consistent with the reason for the firm’s existence, then you shouldn’t sell. If why you do what you do is inconsistent with the firm… In other words, you’ve grown or outgrown your firm, then maybe you should consider so. Yeah. 

Sean Magennis [00:17:37] Excellent. Number four, would selling the firm bring you closer to that purpose? 

Greg Alexander [00:17:44] Right. Which says you’ve got to define the purpose in the first place. 

Sean Magennis [00:17:48] Question number five. Do you have a set of values that define how you want to behave? 

Greg Alexander [00:17:54] Yes. I’ll tell you a story there. So as firms mature, their culture morphs. So when I started my firm, we were a sales consultancy and as the founder of that firm, co-founder of that firm, the culture of the firm was very representative of a sales culture. You know, we were aggressive, we competed hard, etc. with very high expectations. Bringing in new business was highly rewarded. Well, you wake up 10 years later and here’s what you realize. You started firm to go to work for yourself, then you wake up one day and you realize you’re working for your employees. It changes. Mm-hmm. So, your values either have to change to reflect the new reality or your values remain the same and you realize that you’re out of place that that you no longer fit with the firm, and when that happens, it’s very important to hand the firm over to somebody who’s appropriate for its next wave. It doesn’t mean that that person’s better or worse than you. 

Sean Magennis [00:19:08] Got it. 

Greg Alexander [00:19:08] It just means that they’re the right person for that time, and you’re no longer the right person for that time so it’s time to move on and that happened to me. When I was the perfect person for the first 10 years of that firm, but for that firm to become who it needed to become and I’m glad to say it has it required a new style of leader. So that’s what that question is meant to surface. 

Sean Magennis [00:19:29] And and it required your self-introspection and loved the setup to this odd guest because, you know, in terms of the hierarchy of needs and your authentic focus on your purpose and vision allowed you to get to that point. 

Greg Alexander [00:19:45] For sure, it wasn’t easy. You know, there was a lot of pride swallowing, ego-bruising… 

Sean Magennis [00:19:50] I’m sure. 

Greg Alexander [00:19:51] That happened there. But, you know, I can say, looking back on it now, that it was definitely the right move. 

Sean Magennis [00:19:56] Outstanding, question number six. Would the sale of your boutique, allow you to behave the way you want. 

Greg Alexander [00:20:04] Yes. So for me, that was a case. I mean, what I’ve realized is I’m a habitual entrepreneur. 

Sean Magennis [00:20:08] Yep. 

Greg Alexander [00:20:09] So, you know, the founding of Capital 54 allows me to be around other entrepreneurs and be part of their journey and so it’s allowing me to behave the way that I want to behave. Whereas being in a larger firm that’s no longer a start up, we know [inaudidble].

Sean Magennis [00:20:26] Yeah, it restricted you.

Greg Alexander [00:20:30] Yep. 

Sean Magennis [00:20:30] Number seven, do you know the type of community you want to be a part of? That’s an entrepreneur. 

Greg Alexander [00:20:33] Exactly. 

Sean Magennis [00:20:35]  Number eight. Would selling your firm allow you to spend time with these people? 

Greg Alexander [00:20:40] Yeah, that’s the other thing. You know, in order to have a successful firm, you can mail it in. 

Sean Magennis [00:20:46] No question about that. 

Greg Alexander [00:20:47] It’s all-consuming. All right. So sometimes owners think they they can do both. You know, they can maybe pull back the reins and what they’re doing today and start the new journey. The minute they do that, they’re shooting themselves in the foot because the firm itself starts to deteriorate. 

Sean Magennis [00:21:07] Yes. Good point number nine, will the proceeds of the sale fund something more than your material possessions? So what you’re doing. 

Greg Alexander [00:21:18] Yeah, for sure. And, you know, again, I learned that the highway, you know. You sell your firm, you get a pile of money and you start buying things, and then you realize that the wow factor wears off in about three hours. 

Sean Magennis [00:21:32] I love that Greg. And then finally, number 10. Are you personally prepared for the next chapter of your life? 

Greg Alexander [00:21:40] Yeah. You know, this actually should be number one, and the reason why that is, is that I would recommend those that are listening that when you do this, close the chapter and move on. Keeping one foot in the first half and one foot in the second half is not good. Just make the break. Reinvent yourself. Start over. Dive all in on the next chapter of your life, so you got to know what that next chapter is and you got to spend the time to think about what that next chapter is before you go after it. 

Sean Magennis [00:22:16] Outstanding. Greg, thank you for sharing, sir. 

Greg Alexander [00:22:19] My pleasure. 

Sean Magennis [00:22:19] Honestly with us. As we all know, every entrepreneur exits. We all die. 

Greg Alexander [00:22:26] I love it. 

Sean Magennis [00:22:26] I don’t want to be depressing but we do. 

Greg Alexander [00:22:28] I love this. Sometimes I speak to entreprenuers and I say, where would you like to exit? And they say, well, I’m not going to exit. I’m like, Oh, yeah. 

Sean Magennis [00:22:35] Oh, yeah. 

Greg Alexander [00:22:35] Show me how you’re going to run your business from the grave. 

Sean Magennis [00:22:38] And that’s it. You cannot run your boutique from the grave. Most of us sell our firms before we die. There are good exits. Some owners are happy after they sell. And then there are bad exits. Some owners are unhappy after they sell. Good exits start with a heartfelt, well thought out reason to sell. 

Sean Magennis [00:22:59] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start, Scale, and Dare I say, successfully sell a professional services firm. I’m Sean Magennis. Thank you, Greg, and thank you to our listeners for being with us.