Author: Collective 54

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Episode 4: Rate of Growth – The Ultimate BS Detector

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

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

 

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

TRANSCRIPT

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

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

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

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

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

Sean Magennis [00:02:27] Yes. 

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

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

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

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

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

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

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

Greg Alexander [00:07:00] Correct. 

Sean Magennis [00:07:01] Outstanding. 

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

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

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

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

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

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

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

Sean Magennis [00:10:50] Precisely. 

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

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

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

Sean Magennis [00:11:24] Excellent. 

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

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

Sean Magennis [00:12:14] Yes. 

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

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

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

 

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

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

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

 

TRANSCRIPT

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

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

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

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

 

 

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

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

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

Sean Magennis [00:07:00] Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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Episode 2: Seven Mistakes to Avoid When Selling Your Firm

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

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

 

TRANSCRIPT

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

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

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

TRANSCRIPT

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

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

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

Sean Magennis [00:02:22] Yes. 

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

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

Sean Magennis [00:03:33] Yes. 

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

Sean Magennis [00:05:54] Yes. 

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

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

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

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

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

Sean Magennis [00:06:31] Yes. 

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

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

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

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

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

Sean Magennis [00:09:01] Got it. 

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

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

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

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

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

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

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

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

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

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

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

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

Sean Magennis [00:16:17] Exactly. 

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

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

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

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

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

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

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

Sean Magennis [00:19:08] Got it. 

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

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

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

Sean Magennis [00:19:50] I’m sure. 

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

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

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

Sean Magennis [00:20:08] Yep. 

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

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

Greg Alexander [00:20:30] Yep. 

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

Greg Alexander [00:20:33] Exactly. 

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

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

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

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

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

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

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

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

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

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

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

Greg Alexander [00:22:26] I love it. 

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

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

Sean Magennis [00:22:35] Oh, yeah. 

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

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

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

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