Collective 54, Author at Collective 54

December 21, 2020June 28, 2023

Episode 14: The Boutique: Are You a True Expert in Your Field?

The “wow” factor matters. Like it, or not, you are in show business. You are an expert. And your firm is made up of experts. No one wants to buy the boutique that regurgitates other people’s innovations. They want to buy the song writers, aka The Rolling Stones.

TRANSCRIPT

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 when selling your firm, the wow factor matters. And when I say the wow factor, I’m referring to the innovation you’re generating in your field of expertise. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is considered to be one of the most innovative thinkers in the professional services industry. And, in fact, don’t take my word for it. Adam Prager of Korn Ferry was recently quoted as saying, and I quote, Greg is a world class visionary in our industry. End quote. Greg, great to see you. Welcome to the show today.

Greg Alexander [00:01:22] Thanks, Sean. Good to be here. And thanks for the kind introduction.

Sean Magennis [00:01:25] Let’s begin with a simple definition of innovation specific to the professional services industry. How would you define it, Greg?

Greg Alexander [00:01:35] So innovation is a new idea, a new service, a new business model, maybe a new way of solving a problem. It matters to professional service firms more than other types of businesses because pro-serve firms position themselves as experts and experts innovate. Clients do not pay firms to regurgitate other people’s innovations. And investors surely do not buy firms that are copy cat body shops. They buy firms who are true experts today and will continue to be excellent.

Sean Magennis [00:02:10] Excellent, Greg. So when I think of innovation, I, I think mostly of products. For example, Elon Musk innovated in the auto industry and brought us the Tesla. Reed Hastings innovated in the entertainment industry incredibly and brought us Netflix. I do not think of professional services firms in this way, so can you share some examples in the pro-serve of industry?

Greg Alexander [00:02:34] I’d be happy to. In fact, I am somewhat of a amateur historian in the professional services industry, and I have found many great examples of innovation in our space throughout history. So here are a few fun ones to think about.

Greg Alexander [00:02:50] I admire greatly, Boston Consulting Group. They have built a private partnership with thousands of employees and billions in revenue. But it all started with their founder, Bruce Henderson, and one of his early innovations called the experience curve. This proved that a company’s costs fell as their experience increased. Today, this is widely understood. Back in the 1960s, this was a real innovation. Let’s turn to the law profession. The law profession has pioneered the use of technology for centuries. For example, in the 1920s, the recorded deposition changed the litigator’s relationship to witness testimony forever. Law firms that embraced this scaled rapidly. Imagine the law today without recorded depositions. Very scary. Well, how about the great Italian innovator Luca Bartolomes Pacioli. Say that 20 times in a row. Around fifteen hundred, he invented a system of record keeping that used a ledger and later he wrote the first accounting books that explained the use of journals. This earned him the title of the father of bookkeeping, bookkeeping. And Sean, if the accounting industry can innovate, anyone can.

Sean Magennis [00:04:13] These are really great, Greg, and super interesting. These pioneers were truly the Zuckerberg’s of their day. Are there any others that come to mind for you?

Greg Alexander [00:04:24] Sure, there are dozens and I enjoy speaking about this. Let me share a few more. So I have recently studied the innovations in the marketing and advertising industry. Sean, did you remember these campaigns? When it rains, it pours and a diamond is forever.

Sean Magennis [00:04:37] Yes. And the second one, to my chagrin, because I had to buy a big one once.

Greg Alexander [00:04:43] Well, these were created by an agency led by a gentleman, by the name of N.W. Ayer in the 19th century. He convinced the likes of AT&T, the U.S. Army, [inaudible] to hire a new kind of firm called the Full Service Agency. Rather than just selling advertising space in publication, he offered planning creative and campaign execution. Mr. Ayer innovated at the firm level, creating an entirely new kind of marketing agency. He was a giant. I wish I had the chance to know him. How about I share a few recent examples because we are living in the golden era of boutique innovation. In 2008, the distributed ledger, known as Block Chain, was invented by Satoshi Nakamoto. Transactions will never be the same. An architect by the name of Daniel Cuzzi has turned shipping containers into working farms, producing the equivalent of five acres per container. And I love Wix. They have injected artificial intelligence into website design. What used to take months now takes nanoseconds. A brilliant example of tech enabled services. You get the point. I could go on and on forever.

Sean Magennis [00:06:09] Wow, these these are inspiring examples of innovative pioneers and the professional services industry from yesterday and today and this is a standard all of us should aspire to. 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 live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Abbie Jones [00:06:49] Hello. My name is Abbie Jones and I own Abbie Jones Consulting. We serve business owners and facility managers in energy, aviation and industrial spaces. Our current footprint is Kentucky, Tennessee, West Virginia, Virginia, Georgia and we’re expanding. These industrial and commercial clients like you turn to us for many services, including campus utility as builds. Our private utility locators, professional land surveyors, professional engineers and drafting staff can upgrade your random paper as built into a single as filled with critical items like shutoffs. Learned how we can make facility managers happy at Abbie-Jones.com. That’s a-b-b-i-e hyphen j-o-n-e-s.com.

Sean Magennis [00:07:37] 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 the collective.54.com. So this takes us to the end of this episode and as is customary, we end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove you were a true expert and you are innovating. If you answer no too many times, you have some work to do. Let’s begin.

Sean Magennis [00:08:33] Number one, have you pioneered a new approach in your niche? Number two, are you more than a one hit wonder? Number three, has your industry adopted your way of doing things? Number four, does your industry use your language as its own? Number five, do the smartest in your niche come to you with the most challenging issues? Number six, as an ecosystem of boutiques formed around your innovation? Number seven, do you mainstage the keynote for the most important industry conference? Number eight, do you get more than fifty thousand dollars for a speech?

Greg Alexander [00:09:34] That’s a real sign that you’re in high demand and a true innovator.

Sean Magennis [00:09:38] Absolutely. Number nine, do employees join your firm for the opportunity to learn from you? And number ten, have you created a legacy that will live on in your niche after you leave?

Greg Alexander [00:09:55] Yeah. I just walked the audience through history and I cited all these examples. Imagine how fortunate we would be if people are speaking about us 500 years from now.

Sean Magennis [00:10:04] That that is part of our goal.

Greg Alexander [00:10:06] Yes, I love that.

Sean Magennis [00:10:08] So in summary, the wow factor really matters. Like it or not, you are in show business. You are an expert. And your firm is made up of experts, investors and acquirers want to invest in and or buy the true experts. The innovators challenge yourself to be one every day.

Sean Magennis [00:10:33] If you enjoy 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 Professional Services Firm. I’m Sean Magennis. Thank you for listening.

December 14, 2020June 28, 2023

Episode 13: The Boutique: A DIY Approach to Raising Growth Capital

Scaling a boutique takes money. This type of money is called scale capital. There are three primary sources of scale capital. Each has a set of advantages and disadvantages. Which is best for you is highly situational.

TRANSCRIPT

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 to scale your firm requires capital, and that not all capital is the same. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has been on both sides of this. While the owner-operator of consulting firm SBI, he raised capital and as chief investment officer of Capital 54, he invest capital into boutiques like yours. This makes him uniquely qualified to help boutique owners think through the need for capital during your scale stage. Greg, great to see you, and welcome.

Greg Alexander [00:01:25] Hey, pal. Good to be with you. I’m looking forward to our discussion today. By the end of the show, we will be reminded that it takes money to make money.

Sean Magennis [00:01:34] It sure does Greg, why don’t we start right there? Why do firms need capital when trying to scale?

Greg Alexander [00:01:41] So scaling usually means entering new markets, launching new service lines, adding more headcount and many other strategic initiatives. And these things take money.

Sean Magennis [00:01:52] Yes, I agree. And at the top of the show, I suggested that not all capital is the same. What sources of capital are available to boutique owners during the scale stage?

Greg Alexander [00:02:05] These days, capital is abundant and there are many kinds. You only have 10 minutes or so, therefore I would focus on a do it yourself approach, which has three types of capital. First, there is free cash flow from operations. This comes from increasing revenue and driving down costs using the spread to scale. I mean, why give it to the government in taxes. Number two is debt. It comes from banks and private lenders. There is a way to do this without mortgaging your soul. And third, we have equity partners. This is when an investor puts in cash in exchange for a piece of the action. Watch out for predators. But the right equity partner can add a lot in addition to capital.

Sean Magennis [00:02:52] This is simple enough. But what are the pros and cons of each of those?

Greg Alexander [00:02:58] Well, free cash flow from operations is the best. The reason this is the best is because it’s cheap and in unlimited supply for well-run boutiques scaling with free cash flow. Preserve the preserves the owners equity. It does not add a debt service burden to the peno in the best of the best boutiques. Know how to allocate intelligently, which acts as a flywheel throwing off more and more of this free cash flow. There are some disadvantages to relying on free cash flow to scale.

Greg Alexander [00:03:34] For instance, instead of putting the free cash back into the business to fund scale, many owners pull it out of the business and pay themselves. This retards growth and adds years to the firm’s timeline toward an eventual exit. This is a difficult temptation to resist. Debt is the next best alternative to free cash flow. In my view, it is not cheap, but it is reasonable as lenders charge modest rates and loans to boutiques and it is also readily available in the two to three times, even arrange the negatives to debt are obvious. But let me quickly point them out. It does add an expense to the PNL as a loan payments need to be made. This will reduce the owner’s income. However, it does preserve the owner’s equity. So this can balance out over time. Unfortunately, young firms cannot secure it unless they personally guaranteed a loan. In some cases, this still does not work because the owner’s personal assets are not enough to act as collateral. Lastly, there is taking on an equity partner. This is cheap in the short term, but expensive in the long term. There is no loan payment to be made, meaning more cash is available. However, the owners stake in the firm is diluted as the equity partner is taking a piece of the business. And when an owner of a boutique sells, the equity partner gets his piece of the pie.

Greg Alexander [00:05:08] And one more thing. It is difficult for a processor firm to attract an equity investor. Many equity investors simply do not invest in people driven businesses. So it is in short supply. But that was a lot. Let me stop talking here.

Sean Magennis [00:05:24] Greg, this is excellent. How about sharing a little from your personal journey to to make sense of this?

Greg Alexander [00:05:31] Sure. So my firm, SBI, used free cash flow from operations as its source of scale capital. In retrospect, this was a mistake. It took 11 years to start scale and sell my firm. If I had taken on some debt, I think I could have cut this time in half. We were able to deploy capital effectively. Each investment resulted in more clients and each initiative resulted in lower costs. More capital would have resulted in even more clients and even lower costs. During my run, the cost of debt was much lower than the return we were generating. I will say, however, I am grateful I did not take on an equity partner. We were able to sell for nine figures. If I had taken on an equity partner, my share of the price would have been much less and I would have had sellers regret.

Sean Magennis [00:06:26] That’s a great personal example Greg. Thank you for bringing this to life. Well, I can’t think of a more important strategic decision for our listeners to get right. This one comes with very high stakes.

Sean Magennis [00:06:43] 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 live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Matt Rosen [00:07:09] Hello. My name is Matt Rosen and I’m the founder and CEO of Allata. Allata serves large enterprise clients in the financial services, healthcare, retail distribution and professional services spaces. Our clients are centered around our offices in Dallas, Phoenix, Provo and Boise. Clients like the Frieman companies and brinks some security turn to us for help with strategic initiatives in the business and digital transformation space, typically creating new revenue streams, building seamless customer experiences and streamlining operations. We help with these initiatives by building digital strategies and roadmaps, assisting with enterprise architecture and design, working with data as an asset and customer, developing solutions which help our clients reach their strategic objectives. If you ever need help with digital strategy data and customer development initiatives, please reach out to me at www.allata.com Or [email protected]. Thank you.

Sean Magennis [00:07:57] 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 [00:08:13] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm, our preferred tool as a checklist. And our style of checklist is a yes, no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, all three of these capital sources are available to you. If you want to know to questions one to three, do not pursue funding scale with free cash flow. If you answer no to questions, four through nine do not rely on debt to fund scale. If you answer no question, 10 do not take on an equity partner. Get it, Greg?

Greg Alexander [00:09:06] I got it.

Sean Magennis [00:09:07] So let’s begin. Number one, are you generating enough free cash flow to fund scale? Number two, do you know where to deploy this extra free cash flow? Number three, are you willing to go without today for scale, tomorrow? Number four, have you been in business for at least five years? Number five, are you generating stable EBITDA every year? Number six, Would two to three times EBITDA be enough to fund scaling your firm? Number seven, can your PNL handled a debt service burden of a loan? Number eight, are you willing to personally guarantee a loan? Number nine, do you have enough personal assets to secure the loan, if you’re open to a guarantee? And number ten, are you willing to dilute your ownership take for the right equity partner?

Sean Magennis [00:10:26] In summary, it takes money to make money. Scaling a boutique takes money. There are different funding sources, each with their own pros and cons, all work well. Which is best for you is highly situational. Take your time to consider this very important strategic decision.

Sean Magennis [00:10:51] 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.

December 6, 2020April 7, 2022

Episode 12: The Boutique: Designing Your Organization to Enable Your Exit

The perceived difficulty, or ease, of integrating your boutique will affect your sale. Understand the org model of the type of firms who might buy you. Redesign your model to be seamlessly integrated if bought. This will increase the chances of exiting.

The Boutique with Capital 54-Episode 12.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 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’ll make the case that your ability to exit is impacted by your org chart. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his experience helping owners design their organization with an exit in mind. Greg, let’s begin by establishing a working definition of organizational design for the purposes of this episode. How should we think about this for the duration of our call?

Greg Alexander [00:01:12] Traditionally, org design is simply what type of people do I need? How many of them do I need? And how should I deploy them? I would tweak this a bit for our listeners who are owners of boutique preserve firms. I would add leverage ratio in cost to the org design leverage ratio simply means how many employees for each owner. So for example, if my firm has three owners and 30 employees, I have a leverage ratio of ten to one. This is relevant because it impacts wealth creation greatly. More owners means less wealth for each owner due to the equity dilution that happens when adding owners slash partners. Costs, the second tweak is simply what do I pay for each role? This is a required tweak for our listeners because labor costs is the single biggest expense. Designing an org chart without considering costs could destroy a PNL if not done carefully.

Sean Magennis [00:02:08] Excellent. Greg, I’ve been taking notes, so let me read this back to you to make sure I got it. Org design means five things. Number one, the type of people I need. Two, the number of people I need, three, the way I should deploy them, for instance, by geography or industry, vertical, et cetera. Number four, the leverage ratio. And number five, the labor cost of the of the org model that I get this correct?

Greg Alexander [00:02:38] You did, those five things, if you keep them top of mind and you will design an excellent organizational model.

Sean Magennis [00:02:44] Outstanding. So with this understanding, help me and the audience understand how this impacts an exit.

Greg Alexander [00:02:52] Sure the connection is not obvious, but let’s be sure it’s there and it’s very strong. So the entity that buys you a firm must figure out how to integrate it into their firm. Org design is front and center during this integration thought process. Potential buyers will not buy your firm if they feel the integration will be difficult. Difficult integrations are costly. They took a long time and they result in bad deals. In contrast, simple integrations are very attractive to buyers. They’re cheap, quick, and they lead to excellent returns. This means the design of your organization can aid or hurt your ability to sell your firm. Your org model will be heavily scrutinized during diligence.

Sean Magennis [00:03:43] Yes, I can see the connection. And to summarize, the easier an organizational model is to digest, the more likely it is your firm will be bought. This begs the question, Greg, how can our listeners design their organizations now to enable them to get purchased?

Greg Alexander [00:04:01] OK, so let’s start with some things to avoid. So here are three things to consider. First, eliminate all complexity. The design principle should be simplicity. Unfortunately, in my work advising boutiques, I often see overly complex org models tried to avoid making this mistake. Second, stay away from the Matrix. At times, owners of process firms struggle to make the hard decision of who reports to who. So to please everybody they let some report to more than one person. This is called the Matrix. Integrating a matrix is very hard. Stay away from it. I see deals fall apart during the diligence stage simply because the matrix exists. And then third, organize around either geography, industry or function. Organizational models built around one of these dimensions are clean and they’re very easy to understand and very easy to absorb.

Sean Magennis [00:05:06] This is so right on. This is excellent. Keep it simple. Avoid the matrix. And I’m going to just say that fifteen times with a huge number of exclamation marks because I lived there for seven years. Running a global…

Greg Alexander [00:05:19] It sounds great, but it’s a nightmare.

Sean Magennis [00:05:20] The complexity is so difficult for people to understand and grasp internally. And you can imagine what it’s like externally. If you’re trying to sell. So stick with the geography industry, vertical or job function. That makes total sense. Any other org model design ideas?

Greg Alexander [00:05:37] Yeah. Let me share one more and it’s a little counterintuitive. So that would be stay small enough to be bought. Which I know right now, our listeners are probably cringing because their growth businesses. So what do I mean by this? Acquirers tend to shy away from buying boutiques with hundreds of employees. They are too difficult to integrate. The more people, the greater level of integration difficulty, some owners are insecure. And to establish credibility, they like to talk about how many employees I have. They believe the more employees they have, the more legit they are in the eyes of clients or investors. This is a flawed thinking. Investors are going to calculate your revenue per employee. They use this metric to determine the quality of your firm. The higher revenue per employee, the more desirable you are as an acquisition candidate. The formula for revenue per employee is very simple. Revenue is the numerator and employee count is the denominator. If you have a large number of employees, your revenue per employee is going to be small. So this last piece of counter-intuitive advice is stay small enough to be bought.

Sean Magennis [00:06:53] Greg, I love this. I think you’re absolutely correct. It is counter-intuitive. Fewer employees are a good thing. It’s really interesting.

Sean Magennis [00:07:05] 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 live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Jamie Shanks [00:07:31] Hello, my name is Jamie Shanks. I’m the CEO of Sales for Life. And we focus on increasing self-generated sales pipeline at scale, focusing on helping mid-market and enterprise sales organizations meet and exceed their quota. Our pervasive challenge that we’re solving is that companies continue to hire sellers rather than focusing on increasing the yield per seller. On average, we help these organizations increase their yield per seller by 20 percent more pipeline coverage within six to twelve months. If you need to reach us, you can reach us at salesforlife.com, which is www.salesforlife.com. You can reach me on LinkedIn. Jamie Shank’s or my email is [email protected].

Sean Magennis [00:08:25] 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 the collective54.com.

Sean Magennis [00:08:41] OK, so this takes us to the end of this episode. And as is customary, we’ll end with a 10 question yes-no checklist. We conclude each episode in this fashion to help you, our listeners apply the learnings directly to your business. This creates your take-home value. Let’s jump into the checklist. Ask yourself these 10 questions. If you answer yes to eight or more of these questions, you’re likely to get all of your earn-out. If you answer no too many times, you’re likely to leave a lot of money on the table.

Sean Magennis [00:09:17] Question number one, will your organizational model be easy to absorb? Number two, are you organized around either geography, industry or function? Question number three, you stayed away from The Matrix? Question number four, are you large enough to be interesting, but small enough to integrate easily? Number five, does your org model reflect the niche you serve? Number six, does your org model reflect your business model?

Greg Alexander [00:10:00] So a little something on that. Generally speaking, two types of business models. The first is high margin, low volume. The second is low margin. High volume. And your org model needs to reflect that. Right. So in the high margin, low volume business, you probably have few employees. A lot more senior and a lot more expensive. On the flip side, if you have a low margin, high volume business, you probably have lots and lots of juniors right around.

Sean Magennis [00:10:36] Excellent, Greg. So number seven, is the organizational model a good starting point for an easy integration? Number eight, is your organizational model flexible enough to morph into somebody else’s?

Greg Alexander [00:10:49] For example, stay away from labor unions.

Sean Magennis [00:10:51] …and Matrix organizations. Number nine, does the organizational model reflect the true cost to operate your boutique? And number 10, will it be obvious to a potential acquirer where the synergies will come from? In summary, the perceived difficulty or ease of integrating your boutique will affect your ability to exit. Your org model directly impacts your ability to exit.

Sean Magennis [00:11:25] 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.

November 23, 2020April 8, 2022

Episode 11: The Boutique: Earn Your Earn Out

Most acquisitions fail. The primary reason for failure is poor culture fit. Do not hide your culture. Lead with it. You want your sale to be successful. Therefore, you need to find a buyer who fits your culture.

TRANSCRIPT

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 many do not earn their earn out post sale. And the primary reason is a poor culture fit with the new ownership team. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his experience helping owners earn 100 percent of their earn out. Greg, let’s begin by establishing a working definition of culture for the purpose of this episode. How should we think about culture for the next fifteen minutes?

Greg Alexander [00:01:19] Good question. So if we limit it to 15 minutes, boy, we could talk for days about culture. But for today, let’s establish a simple definition. So and this is to say culture, I would suggest, is a common set of beliefs and behaviors. So when someone says this is the way things get done around here, they are talking about the culture.

Sean Magennis [00:01:42] Got it. I recently read an article published in the Harvard Business Review. It was written by a McKinsey consultant, and he claimed that 70 to 90 percent of acquisitions fail. And the root cause of all this failure is poor culture fit. Our listeners are owners of boutique professional services firms. They all will eventually want to sell their business. A good majority of them will have an earn out as part of their deal. Greg, if 70 to 90 percent of these deals fail, this means that most of our listeners will never see the money tied to their earn out. How can we help them avoid this very costly era?

Greg Alexander [00:02:23] Yeah, I hate it when I see this because it’s very likely that you’re going to have an earn out when you sell and you deserve those dollars you built a great farm and it makes sense for the purchaser of your firm to include an earn out as part of the deal that gives them kind of downside protection. So let’s make sure that that the listeners earn their earn out and they avoid this mistake. So the key to realizing the earn out is to make the deal successful for the acquirer. And that’s a new way of thinking. Most times when you’re selling your firm. You want to make it successful for yourself. And of course, that’s important. But you’re going to earn your earn out if you make it successful for the acquirer and the key to that is merging the culture of the acquired firm with the culture of the new ownership team. So how the heck does someone do this? So let’s begin with some context before we get to our recommendations to the audience. So boutiques have cultures, most of which are very strong. Usually the culture of the boutique originates from the founder. The founder designed a culture that he or she wanted to work in. In fact, job satisfaction is one of the primary reasons founders start their firms. There were frustrating working inside a big corporation and somebody else’s culture. So as the firm grows, the founder recruits the early employees. And guess what? They are hired because they fit the founders culture. They are people he or she wants to work with. The firm continues to grow in these early employees perpetuate the culture by recruiting the next set of employees who also get along with the founder and sync well with the culture and on and on it goes until one day the boutique has hardened around, quote unquote, its culture. This culture gets so strong that employees to not fit with it, are rejected almost like an organ transplant is rejected by its host. Clients are affected by this culture as well. Clients who view the world the way the founder does become the boutiques best clients. I share this with the audience to demonstrate how a culture of a boutique comes to be. This culture emerges over the years. The founder, early employees and the most loyal clients are heavily invested in it. They love the culture. In any attempt to change it is viewed as an attack. So you can see how emerging this type of culture is. So very hard.

Sean Magennis [00:04:55] Exactly, Greg. This context is very, very helpful. I can’t help but think that what makes a boutique successful is its culture. It’s also the thing that eventually becomes its biggest problem. Is that. Is that accurate?

Greg Alexander [00:05:10] Yes, this is correct. And the reason your statement is correct is when one firm buys another firm, these two distinct cultures collide. If the two firms see the world the same way, they become one bigger and better and happier firm. If the two firms see the world differently, the integration is a mess. And this results in the opposite outcome. Separate fiefdoms inside the firm fighting each other. Turf battles emerge over client ownership. Budget power structures, et cetera. Key employees quit and important clients take their business elsewhere. This results in numbers getting missed and missed. Revenue and profit goals result in earn outs not getting paid out. This can even in some cases, digress into nasty lawsuits and an eventual divestiture.

Sean Magennis [00:05:59] Exactly, Greg. And no one wants lawsuits or messy disputes. And our listeners want to realize the full amount of their earn out. If culture fit is what causes this mess. How can a listener determine culture fit before selling their firm?

Greg Alexander [00:06:15] It’s hard to do. It’s a little squishy, but I would suggest that prevention is the best course of action. So here’s a few things to consider when trying to determine culture fit prior to selling. So first, consider the origin stories of both firms. Do the founders have similar backgrounds? Are the founders, still the dominant cultural force inside the firm? Do the early employees resemble the founder, are the founder or founders and early employees still involved in the business? Have they become the legends? And what does this mythology tell you about the culture? Next, examine the cross functional collaboration inside the firm. If there is a lot of it, this suggests a cooperative environment. This indicates an open culture willing to partner. If there is a little of it, this would suggest fiefdoms already exists and will likely get worse. Post sale. I would also look for cultural artifacts. For example, if there are celebrations on significant dates, this would suggest a fun group. If there are contests with leaderboards, this would suggest a competitive group. If employees are acknowledged for years of service, this would suggest a loyal group. If there are a lot of legal documents and rules, this would suggest a cautious group. If there is a relaxed dress code, this might suggest a laid back group, or if people stay at budget motels when on the road. This would suggest a frugal group and on and on it goes. There are many clues, just pick your head up and look for them.

Sean Magennis [00:08:03] This is very helpful, Greg. It illustrates to me that there is no right or wrong culture. Rather, the question remains, will the cultures fit with each other?

Sean Magennis [00:08:17] 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 cell phones at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

David Aspinall [00:08:43] Hello. My name is David Aspinall. I am the CEO of Autocon, a global technology services company. We serve clients by supplementing that technology teams with consultants who are all on the autism spectrum. Our clients are small, medium and large brands such as AT&T, Ella Kaede and Cover My Meds, who understand the value and diversity that high performance autistic talent brings to their team. These clients turn to us for help with data or engineering, software development, quality assurance and more. We solve these problems by providing high performing autistic consultants, along with a managed services approach to neurodiversity in the workplace that ensures success. If you need help with your technology, teams are reaching your diversity inclusion goals through neurodiversity. Please reach out to me at autocon.us or search Google for Autocon.

Sean Magennis [00:09:41] 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 [00:09:57] Okay, this takes us to the end of this episode. And as is customary, we will end with a 10 question yes, no checklist. We conclude each episode in this fashion to help listeners apply the learnings directly to their business. This creates for you your take home value. Let’s jump into the checklist. Ask yourself these 10 questions. If you answer yes to eight or more of these questions, you are likely to get all of your earn out. If you answer no too many times, you’re likely to leave a lot of money on the table.

Sean Magennis [00:10:32] Question number one, is the founder still involved in the business? Number two, does the founder’s origin story shed a light on the boutiques culture? Number three, are the firms legends still involved in the business? Number four, do they personify the culture? Number five, does the firm work well across functions? Number six, do the artifacts indicate the firm’s culture? Number seven, do employees who are cultural mismatches get rejected by the firm?

Greg Alexander [00:11:19] You know, I would suggest on number seven, cultural mismatches getting rejected by the firm, that’s a positive. Sometimes my people might look at that as a negative and say when we hire somebody who’s not like us, they don’t fit in. And as in the case of investing in a boutique, that’s a positive. You want the culture to be so strong that those that take to it stay with the firm for 10, 15, 20 years.

Sean Magennis [00:11:45] Excellent point. Number eight, do the firm’s best clients share a set of common beliefs with the firm? Number nine, are their deep relationships between the legends and your best clients? And number ten, is it crystal clear to potential acquirer how your boutique behaves?

Greg Alexander [00:12:08] Yeah. And lastly, on number ten, when someone’s doing diligence and they’re assessing your culture, which is a difficult thing to assess, and hopefully this episode makes that less difficult. If someone’s critical of your culture, don’t sell your firm to them.

Sean Magennis [00:12:21] Yep.

Greg Alexander [00:12:21] Right. Because you’re going to run into this mismatch.

Sean Magennis [00:12:23] Agreed.

Greg Alexander [00:12:24] And to your earlier point, there’s not a right culture or a wrong culture. It’s just a culture. And do these cultures, can they coexist well? If somebody is doing diligence on you and they’re suggesting that there’s a cultural problem, runaway. On the flip side, if you feel like even though you’ve just met these people, you feel like you’ve known them for years and years and years. That’s a good sign that you guys will, well, your cultures will merge well together post sale.

Sean Magennis [00:12:48] Totally agree Greg and taking the time is a critical characteristic as well. So in summary, remember that most acquisitions fail and this prevents owners from earning their earn out. The primary reason for this is poor culture fit. Don’t hide your culture. Lead with it. You want your sale to be successful. Therefore, you need to find a buyer who fits your culture.

Sean Magennis [00:13:14] 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.

November 16, 2020April 7, 2022

Episode 10: The Boutique: Do You have a Bankable Team?

Acquirers buy teams first, and firms second. The quality of the management team is of major importance to the buyer. It can take years to develop a bankable team. Think like an investor. Would you bet the farm on your team?

&amp;amp;amp;lt;span data-mce-type=”bookmark” style=”display: inline-block; width: 0px; overflow: hidden; line-height: 0;” class=”mce_SELRES_start”&amp;amp;amp;gt;&amp;amp;amp;lt;/span&amp;amp;amp;gt;

The Boutique with Capital 54-Episode 10.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 that a choir is by
bankable teams first and firms second. That the quality of your management team is of
major importance to the potential buyer of your boutique. I’ll try to prove this theory by
interviewing Greg Alexander, Capital 54’s chief investment officer. Greg, many would say
you were the nation’s leading expert in evaluating management teams in the professional
services industry. Let’s start with some basics. What are investors looking for primarily in
management teams?
Greg Alexander [00:01:20] OK. The basics are what you might expect before I invest in a
boutque, I start by looking at the biographies of the leadership team. I try to determine if
they have the proper level of experience to scale the firm. I have found that the team that
got the firm to this point is often not the team to get the firm to the next level. I also try to
locate any holes in the management team. Sometimes owners run very lean to keep
payroll low and EBITA high. This is a mistake because the true scale of firm to a few
hundred million a firm requires a fully staffed executive leadership team. So those are
some of the basics.
Greg Alexander [00:01:54] Yeah, this makes sense, Greg. So the biographies,
biographies of the team and a fully staffed team, these are the basics. But how about
beyond the basics, what else do you look for when assessing the quality of the
management team?
Greg Alexander [00:02:09] Yeah, beyond the basics I tend to gravitate to the following. So
first, is the management team staying with the business post sale? If they are not, I’m not
going to invest. Their desire to depart at closing tells me they’re not committed to the
business. I understand the wish to take some chips off the table and I’m okay with
rewarding management teams with some liquidity. But I’m buying the future. I’m not buying
the past. And I want to see them double down with me and get after it. Next, I look for an
industrial strength strategy. This means do they know where to play and how to win? Does
each employee understand how their role in the execution of the strategy impacts results?
I want to see a data supported strategy that cascades targets that align each employee
with the boutiques strategy. The existence of such a strategy would indicate a quality
management team, and one of my favorites is the growth story. I want to see from the
management team the size of the market, its rate of growth, the share of the market that
they have today, and how this share will grow over time. I want them to tell me where is
the growth going to come from? Will it be high water raising all ships? Will it come from,
let’s say, the launch of new services or entrance into new markets? Will it come from
simple price increases? The list is long of possible growth elements of the strategy, and I
want to see the operating leverage they will deliver. And this means how much of the
revenue growth is going to drop to the bottom line. So, for example, will profits increase
due to digitization, labor arbitrage or other means? So these are all examples of investible
management team or what some might call a bankable team.

Sean Magennis [00:04:11] These are outstanding examples. Greg, you often talk about a
bankable team, the term bankable. What does this mean?
Greg Alexander [00:04:21] Yeah, a bankable team. So this phrase can summarize, really
this entire episode. So in my opinion, here’s what it means. A bankable team is a team I
would bet the farm on. When an investor invests in a boutique professional services firm,
he or she is making a bet and he is betting on the team’s ability to pull off the growth story.
It’s where the rubber meets the road and where the men are separated from the boys, or in
some cases where the women are separated from the girls. So, for example, Sean, I bet
on you and your team when I backed Capital 54, I was and continue to be convicted in my
belief that you will build the most successful investment firm in the professional services
space. Did I love the idea? Yes, of course I did. But the idea without you was worthless to
me. The team matters more than the idea.
Sean Magennis [00:05:16] The bankable team. I love the idea, Greg, and so appreciate
this opportunity we are on.
Sean Magennis [00:05:25] 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.
Dan Stevens [00:05:51] Hello. My name is Dan Stevens. I own WorkerBee.tv. We serve
local, national and global organizations and associations by helping them leverage the
power of video and multimedia. These clients turned to us for help with content
development and distribution so that they can truly measure the impact and ROI of their
communications, marketing and education investments. We solve this problem by
providing both platform and video and multimedia services in a turnkey manner. If you
need help with video, online platforms or content strategy, please reach out to me at
[email protected].
Sean Magennis [00:06:32] 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 [00:06:49] So, OK, this takes us to the end of this episode. And as is
customary, we end with a 10 question, yes, no checklist. We do this to reward you, the
listener, with some immediate take home value. Ask yourself these 10 questions. If you
answer yes to eight or more of these questions, you have a bankable team. If you answer
no too many times, you don’t. And this will prevent you from selling your firm effectively.
Sean Magennis [00:07:18] Question number one, is the management team staying with
the business post sale? Number two, is there an industrial strength strategy developed
that an investor can bet on? Number three, does the management quality go at least one
layer deep on the [inaudible]?
Greg Alexander [00:07:43] Often overlooked.
Sean Magennis [00:07:44] Yes.
Greg Alexander [00:07:45] You know, the partners or the founders present themselves to
the investors and then the person doing diligence goes one level below that and they run
into the junior varsity.

Sean Magennis [00:07:56] Yes.
Greg Alexander [00:07:56] Right. So a bankable team means beyond just the founders
and the owners.
Sean Magennis [00:08:02] Really good point.
Sean Magennis [00:08:03] Question number four, does the management team drive the
strategy deep into the organization? Number five, are there cascading targets that reach
all the way to the frontline employees? Number six. is there a believable growth story?
Number seven, is the management team capable of getting the boutique to this future
state?
Greg Alexander [00:08:33] Let’s talk about that for a moment. Sometimes the
management team can spell out a growth story but they’re not the team to get them there.
Or maybe they’re part of the team to get them there and they need to go recruit some new
talent to get them there. And, you know, if we would have flipped this for a moment. So if I
was somebody selling a firm and I was evaluating investors, that would be one of my
questions. How are you going to help me recruit exceptional talent? It’s not just about the
money they give you. It’s about the.
Sean Magennis [00:09:04] It’s the how.
Greg Alexander [00:09:04] Exactly right.
Sean Magennis [00:09:06] Great. Question number eight, is the management team
excited and passionate about attempting to get this growth story done?
Greg Alexander [00:09:14] Another one, very often tired people try to sell their firms. I’ve
been doing this for 30 years. It’s time to leave. That’s not a very exciting story.
Sean Magennis [00:09:24] Absolutely. Question number nine, have all the holes or gaps
in the team been addressed? And question number ten, do the forward projections reflect
the true costs to operate the firm in the future?
Sean Magennis [00:09:42] In summary, remember that acquirers by teams first and firms
second. The quality of the management team is of major importance to a potential buyer. It
can take years to build a bankable team. Get started today.
Sean Magennis [00:09:59] 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 Sell a
Professional Services Firm. I’m Sean Magennis. Thank you for listening.

November 9, 2020August 24, 2022

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.

November 2, 2020May 10, 2022

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.

October 26, 2020May 10, 2022

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.

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.

Do you have any patents?
Do you have copyrights?
Do you have any trademarks?
Are you generating revenue by granting the right to use your intellectual property to anyone?
Are you collecting data that clients will pay to have access to?
Are you inventing methodologies that third parties will pay to be able to use?
Are you coding your knowledge into licensable application tools?
Will individuals pay you for a certification to validate their skills?
Are you a true professional services firm and not a body shop?
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.

October 26, 2020May 10, 2022

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.

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.

October 12, 2020June 28, 2023

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.

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.

Cookie	Duration	Description
cookielawinfo-checkbox-analytics	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional	11 months	The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy	11 months	The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.