Episode 49: The Boutique: WHAT TO DO IF TRAPPED INSIDE A LIFESTYLE BUSINESS?

The opportunity cost of spending your prime in a lifestyle business is too large. On this episode, we discuss a 3-part framework to address this issue and demonstrate how to use it.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to The Boutique case study series 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 you do not want to be trapped inside a lifestyle business. The opportunity cost of spending your prime in a lifestyle business is too large. I’ll try to prove this theory by interviewing Greg Alexander, chief investment officer and founder of Capital 54. Greg has developed a three part framework to address this issue, and today he’ll demonstrate how to use it. Hey, Greg, welcome. 

Greg Alexander [00:01:13] Hey Sean, good to be with you, big, big topic today, let’s see if we can help some folks escape the trap of a lifestyle business. 

Sean Magennis [00:01:18] Fantastic. You know, it reminds me of Harry Houdini, right? We’ve got to give you that capability. So Greg, can you provide a brief overview of your three-part framework? 

Greg Alexander [00:01:31] Sure, let’s start by identifying the signs of this trap. Listeners are wondering if they are trapped or will they become trapped. Our listeners tend to be people who do not want a lifestyle business. They want to scale to something more substantial. Here’s some thoughts help diagnose if you are trapped. And Sean, allow me little leeway here, because… 

Sean Magennis [00:01:55] Absolutely. 

Greg Alexander [00:01:56] Sure, please. A lifestyle business is an average business. It’s not a bad business, it’s not a good business. It’s certainly not a great business. It’s OK. It provides a decent living, does not require an unreasonable level of effort. It fits nicely into one’s lifestyle with a wonderful work life balance. It’s better than working for a soulless big corporation. Owners of a lifestyle business are never going to get rich. And for some, that’s OK. Lifestyle firms are never going to quote put a dent in the universe, as the great Steve Jobs used to say. 

Sean Magennis [00:02:33] Yes. 

Greg Alexander [00:02:35] They’re not going to attract the most interesting clients with the most fascinating problems. A lifestyle business will be filled with really nice people, but maybe not top talent. Top talent avoids lifestyle businesses they want to grow, to be stretched and to really go for it. And there’s nothing wrong with the lifestyle business at all. For many, this is perfect. However, many who are operating a lifestyle business today wish they were not. They launched their firms with higher ambitions and with different intentions, but they fell into a trap unknowingly trap is if it ain’t broke, don’t fix it. When things are quote unquote fine, there was no reason to break glass rock the boat. The bills are getting paid. The grief factor is low. The founder is happy. Life is all right. The problem is complacency sets in year after year passes by, the founder has been lulled to sleep. Then one day he or she wakes up and says, I want something more from life, my life’s work should mean something. Someday I’m going to want to retire. I’m going to need to sell my firm. I do not want to keep doing this. It’s my 60s, 70s and God forbid, belong beyond that. I got to turn this into more than a lifestyle business, or I’m never going to be financially secure. This trap carries a huge cost. Cost I’m referring to is the opportunity cost. This cost can be quantified. Let me give you an example. A boutique life cycle is approximately 15 years from cradle to grave. Ask yourself at the end of the 15 years, what do you have to show for your efforts? Compare this to what you might have had if you took a different path, whatever that different path may be. And in my experience, this produces a gap and the gap is big. Let me share some data to make my point. And then we can jump into the three part framework. 

Sean Magennis [00:04:47] Excellent. 

Greg Alexander [00:04:49] A lifestyle business in pro serve has about 20 employees doing about four million in revenue, and approximately eight are in the province. An owner of this type of business will pay him herself about a half million dollars. After taxes this is about, let’s say, 250k 300000, depending on where you live and after you satisfy your living expenses, maybe you can save about $100000 per year. So over a 15 year period, that’s 1.5 million, or maybe a little more due to investment returns that’s rounded up to a goal to make. This is not enough to be financially secure, given inflation and life expectancy increases. In reality, it’s not enough for much of anything. The cost of living 15 years from now is going to be much higher, especially in key areas such as health care. Yeah, under this hypothetical approach, you’re going to work yourself right into the cemetery. If I compare this outcome to the alternatives doesn’t compare, well, heck, you might be better off with a civil service job and 40 hours a week, three weeks vacation and a pension. There are other ways to spend your prime your career that will produce a lot more, and you, the brave founder the person who creates jobs for people. You just you’re worth more than that. And I feel the saddest thing in life is a wasted prime. So I wanted to come and speak to you today and urge you not to waste your prime and avoid the trap of a lifestyle business. That makes sense Sean? 

Sean Magennis [00:06:25] Greg, it makes 100 percent sense. I mean, this is strictly I mean, this is so important, it’s a wake up call for many. I see it all the time, and I know you do. The good news is we are making our listeners aware of it, so hopefully they can avoid this trap. So, Greg, if I’m someone who is concerned with this, what would I do? 

Greg Alexander [00:06:48] OK, good question. So this is where the three part framework comes in. So a founder of a boutique has three options trapped in a lifestyle business. Option number one is to shut the business down and do something else. Option number two is the pivot, this means course correct before it’s too late. An auction number three is to persevere in this means to stay the course. 

Sean Magennis [00:07:10] OK, Greg. So three options shutdown, pivot or persevere. You provided me three checklists, one for each option to help listeners determine which option is best for them, and I’d like to have you demonstrate each checklist for the audience. I’ll take you through each option and get your recommendations on each. So option one is shut the business down and there are four questions to answer. Number one, are we out of moves? 

Greg Alexander [00:07:41] So if you’re contemplating shutting the business down, it’s a tough thing to think about. So are we out of moves? What does that mean? Well, have you tried everything you can? Have you studied all the best practices? Try to get them implemented? Have you sourced all the best advice if you’ve already done all that and you’re still a lifestyle business, shut it down. The opportunity cost is too great. If you haven’t exhausted all of the best practices and the advice it’s available to you, we keep going but make a commitment to yourself that you’re going to implement some of the things that you want. 

Sean Magennis [00:08:12] Excellent. So number two is, are we miserable? Do we hate the clients, our coworkers, et cetera? 

Greg Alexander [00:08:19] Yes. So you’re contemplating shutting the business down? That’s the section where one right now that’s option one. 

Sean Magennis [00:08:24] Yup. 

Greg Alexander [00:08:25] You know, if you’re miserable, you hate coming to work every day. If you find yourself daydreaming about something else to do and your heart’s not in it. So if that if you find yourself in that situation, then you’re better off to shut the business down if you’re not in that situation, if you still love what you’re doing. Then stick with it, because you probably can crack the code. 

Sean Magennis [00:08:45] Excellent. So again, in the context of shutting the business down, this question is do you still believe in the vision for your business? 

Greg Alexander [00:08:55] Yeah. So one thing I learned on my journey is a vision changes over time. You know, I look back at the original vision I had for myself. My ambition was modest as time went on and I had some success. My my ambition kept expanding. So periodically, it’s a wise move to take a pause and say to yourself, Hey, if I realize my current vision, am I going to fulfill my dreams? The answer to that question is yes, don’t shut the business down. Keep going for it. The answer a question is no. Then what do you do when you’re running in place? You’re pursuing a vision that, even if you’re successful, isn’t worth it? 

Sean Magennis [00:09:30] Yep. And then the fourth one and this is is the window of opportunity closing? 

Greg Alexander [00:09:36] Yeah. And this is the one that’s outside the control of the of the founder. So are you running out of time? Are your competitors beating you? Are there lots more competitors coming into the market today? So this window of opportunity, all businesses have, you got to make sure. You know, is that window open? How long is it going to be open for? And that’s a critical thing to consider if you’re contemplating shutting the business down. 

Sean Magennis [00:09:58] Yeah. Excellent. Thank you, Greg. So the next option is to pivot pivot. It’s an overused term. You feel there are seven types of pivots specifically for boutique professional services firms. Let’s see if we can get through these efficiently. So the first one is what you term a zoom in pivot where a single feature becomes the whole service offering. What are your thoughts on this? 

Greg Alexander [00:10:26] So if you’re going to pivot, you’re not going to shut the business down. You want to get out of a lifestyle business. One of the pivots to consider is to zoom into it. This means sometimes founders over engineer their service offerings. So this type of pivot would result in a much simpler service to deliver, which will mean much higher profits. And with those profits, you can fund your expansion plan. And if successful, you’ll get yourself out of a lifestyle business. So if the answer yes to this question, then execute a service offering pivot. If you answer no, then the solution to a lifestyle business trap is not associated with assuming to the excellent Greg. 

Sean Magennis [00:11:07] The next one is a zoom out pivot. The current service becomes only a feature. What are your thoughts on this? 

Greg Alexander [00:11:15] So this is the flip side of that coin. So sometimes a service line is not compelling enough. There are things that need to be added to it to compel clients to buy it. So ask yourself that question. You know the problem that my client is having, can I truly solve? If you can’t, then you’re going to have to add things to your service line, so if you find yourself in that situation, then you might want to execute the zoom out pivot. If you don’t, you probably. You probably should not. 

Sean Magennis [00:11:43] Excellent, Greg. The third is client segment pivot, a shift to a new set of target clients. Unpack that for us. 

Greg Alexander [00:11:54] Yeah, so oftentimes owners of lifestyle businesses are unclear as to who their ideal client really is. And this results in wasting resources, pursuing the wrong business and lifestyle businesses. A resource constraint is there’s only so much time going, so much money going, so many staff members. So you can’t waste these resources. So getting really tight. I knew that client is an ideal client is super important. And ask yourself the client to serve, and today they’re going to get you out of the trap of a lifestyle business. If the answer is no, then execute a client segment. Go after different client with a different set of problems. 

Sean Magennis [00:12:34] Very important. Greg Number four, a client problem pivot. So the current problem of the focus is not urgent enough. This is critical. Greg, what is your what are your thoughts on this? 

Greg Alexander [00:12:47] Yeah. So this is the kissing cousin of the client segment. Right? So sometimes lifestyle boutique partners, they’re selling vitamins, not painkillers. So this pivot would be going after only urgent problems that are clients are willing to pay to solve. I see this all the time somebody launches a firm. It’s a nice to have is a small number of clients that are willing to hire you for that nice to have. And then you stall up because the problem isn’t urgent. It’s not pervasive. So by definition, you’re trapped in a lifestyle business. 

Sean Magennis [00:13:23] Yep, makes total sense. Number five is a business architecture pivot, and there are two types of business architectures. One High margin, low volume we call elephant hunting. Number two low margin, high volume rabbit hunting. What are your thoughts on this? 

Greg Alexander [00:13:43] This is a big one. Problem is trapped in a lifestyle boutique. Try to run two business models at the same time. There’s never enough money. There’s never enough talent to pull that off. This pivot would be to focus on one business architecture and be good at it. The added commentary I’d give you here is we tend to lie to ourselves on this. We like to say we have we apply discretion to the type of business we take. It’s really not true. Sometimes in the early stages, especially if your lifestyle, business or revenue is good revenue. But that’s the trap. That’s the trap that puts you in a lifestyle trap. So avoid that pick the business architecture. You’re going to fall with elephants or rabbits and stick to it. 

Sean Magennis [00:14:27] I like that, Greg very much. Number six is value capture pivot. This is a monetization model change. For example, should you switch from hourly billings to retainers, fixed beds, performance based contracts, licensing subscriptions, events or royalties? What are your thoughts on this? 

Greg Alexander [00:14:49] Yeah. So this is where all the breakouts are happening right now. So we try to roll role model ourselves after companies that have escaped the trap of a lifestyle business. What do they share in common? Well, services firms are prioritizing their services. Which allows them to switch their pricing strategy or their monetization strategy. And because they’re able to do that, they can go from one time fees to recurring revenue. And there’s probably nothing more powerful than escaping a lifestyle business in recurring revenue. So this is what everybody should be thinking about is value capture, pivot and the ingredient to execute that is the ability to prioritize your services. 

Sean Magennis [00:15:28] Greg, I couldn’t agree with you more. And if you and I look at our members within collective 54, those that are truly scaling have recognized the value of this capture pivot. You know, they monetizing their expanding their service line and their revenue sources. It’s remarkable what some of them are doing. And for our listeners, you know, consider looking at collective 54 from that standpoint because it’ll add tremendous value to your enterprise value when you decide to sell one day. Yup. So Greg, number seven, go to market pivot the three types of go to market approaches of a boutique. One is viral. So word of mouth and referrals to what we call sticky landing and expanding in the client, and three paid outbound cold outreach and marketing support to drive inbound. What are your thoughts on this? 

Greg Alexander [00:16:24] Yeah. So historically, the most common cause of being trapped in a lifestyle business is the lack of a commercial sales engine. Founders rely solely on word of mouth referrals. Well, this eventually runs dry as a personal network is finite. So if your only source of leads is word of mouth, you are trapped and you’re going to stay trapped. So if you find yourself in a lifestyle business, are you worried that that might happen to you in the future? You’ve got to build this commercial sales engine that can allow you to scale beyond the benefits of word of mouth. 

Sean Magennis [00:16:56] Greg, that was incredibly thorough. We now know what the term pivot really means to a boutique professional services firm. And this brings us to the final option, which is to persevere. This option would be sticking with the current plan, but executing it better. Give us your thoughts on this, Greg. 

Greg Alexander [00:17:19] Sure, well, executing the current plan better as opposed to pivoting usually means three things. It can mean swapping out the team. It can mean training the team, or it can mean giving the team more time. A word of caution here. Kicking the can down the road and taking no action is not persevering. That’s procrastinating. To prevent yourself from procrastinating. Remind yourself of your opportunity cost. The cost of inaction for a founder trapped in a lifestyle business is very large, and it’s growing every day. Your prime is X number of years. If you think you have the right strategy. And the key to escaping is better execution, take a very hard look at the team. Sean, one of the things that I would like to mention here is that the material that I shared with the audience today is not original material of Greg Alexander. I’m standing on the shoulders of giants people like. Stephen Blank, Eric Rice from the lean startup, etc.. Yes. And and I just wanted to make sure that I gave them proper credit. What I’ve done is I’ve curated it and edited it to make it uniquely applicable to the boutique professional services firm. But there’s a huge body of knowledge behind this topic. Should I shut the business down? Should I pivot or should I persevere? 

Sean Magennis [00:18:48] Outstanding, Greg, and thank you for that acknowledgment because that body of knowledge is accessible to our listeners. I love the way you synthesized it. I love the way you’ve simplified it. And that’s a huge, huge benefit to our listeners. So it’s super clear that answering these three questions do we shut the business down? Should we pivot and course correct? Or do we persevere? Are the keys to getting out of the trap of a lifestyle business? This brings us to the end of this episode.

A huge thank you to you, Greg, for sharing this today.

If you enjoyed the show and want to learn more. Pick up a copy of Greg’s book, titled The Boutique How to Start, Scale and Sell a professional services firm. I’m Sean Magennis.

Thank you for listening. 

Episode 48: The Boutique: What to Do If Trapped Inside a Lifestyle Business

How you manage unsolicited interest in buying your boutique will impact your ability to exit.  On this episode, we discuss how firm owners can capitalize on inbound interest.   

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 that to scale the boutique requires a strategy and that a collection of tactics is not a strategy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is considered by some as a master strategist and has a lot to share on this topic. Greg, great to see you. Welcome.

Greg Alexander [00:01:08] Thanks, Sean. This is very timely. I was looking at it from the other day who was trying to raise capital, and I asked them for their strategy doc. They sent me a spreadsheet populated with business plan assumptions. And as you know, that’s not a strategy. And this reminded me of how much work we must do in this area.

Sean Magennis [00:01:24] Yes. You know, for some reasons, there’s a knowledge gap in this area. Why do you think that is?

Greg Alexander [00:01:30] I think founders of boutiques know they need a strategy, and I feel as if they want one, yet when they look for help, all they run into is how to materials for product companies. And this leads them down the wrong path. Strategy for a professional services firm is very different. And unfortunately, there’s just not a lot out there on this topic.

Sean Magennis [00:01:50] Well, Greg, that’s what we are here for. And maybe this podcast will help. Heck, maybe there’s a new book in this for you.

Greg Alexander [00:01:57] I’m still recovering from the heavy lift of writing my last one, so maybe someone else can take that on.

Sean Magennis [00:02:03] Well, the boutique is fantastic, so let’s hope. OK, pick up on the thread on how strategy for product companies is different than strategies for services firms.

Greg Alexander [00:02:14] Sure. So here’s our strategy. And a product company gets built. The executive team builds a list of attributes that make a market attractive. These are items such as organic growth rates, number of companies, target trends and so on. This produces a list of vertical industries to pursue. This list of industries gets further segmented into a list of companies to pursue. And ultimately the data gets cut to names and accounts who might want to buy the products, including an estimate on spend potential. A debt gets created that says some version of the following. Our strategy is to target this list of clients in these industries. With these products, everybody nods in agreement. The Excel formulas are double checked and the and the goals get cascaded down to the department heads. This is a what exercise as in what are we going to do? This does not work for a professional services firm.

Sean Magennis [00:03:08] Why not Greg?

Greg Alexander [00:03:10] A strategy for professional services firms must be a how exercise. It starts with, how are we going to become more valuable to clients? Pro serve firms are better served with a how based strategy because of the nature of competition. Pro serve firms do not have the advantages present in product businesses which allow product businesses to get away with what based strategies. For instance, does Google have to ask how questions? No. How come? They have huge barriers to entry by controlling 60 percent of the search traffic. Pro serve firms do not have these types of advantages. For example, McKinsey is a top consulting firm in the world and they only have three percent market share. If they stop becoming more valuable to their clients, they are easily replaced. They do not have an install base locked into their firm. Does this make sense?

Greg Alexander [00:04:02] It does. Professional services firms need a different strategy development process built on how questions with the ultimate how question being how do I become more valuable to my clients? Can you give me some other How strategy questions that should be addressed in a boutique strategy?

Greg Alexander [00:04:23] So here are a few big ones that probably you could really think through and write many sophisticated answers to. So, for example, how do I raise client satisfaction? That’s a big macro question, huh? How can I elevate the skills in my team so I can raise prices? You know, oftentimes boutique owners don’t realize is a relationship between skill and price. Next, how can I redesign the work to improve utilization rates, you know, when’s the last time you broke out your work breakdown structure and reengineered the way you deliver the service?

Sean Magennis [00:04:57] Yes.

Greg Alexander [00:04:59] Or let’s say, how can I specialize in new ways of further differentiating us from the competitors? Because if you’re a boutique, you’re competing with generalist. So the more specialized you are, the more likely you’re going to win. So these are just a few. And they link back to the key macro question. How do I become more valuable to my clients?

Sean Magennis [00:05:19] Greg, is that it? Just switch from what to how?

Greg Alexander [00:05:25] I wish it were that easy. Each how question needs an answer and the answer must include another how. This is the how to part of the strategy, the action plans. This means a goal timeline, budget project team and accountability owners, deliverables and key milestones. This cuts through all the bullshit and gets to the action to be taken. And it is this style of strategy that that takes a pretty scale firm and scales them to a dominant player and their niche.

Sean Magennis [00:05:58] Greg, this is so different and and so clear. This is not a budgeting exercise. I love it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

GQ Fu [00:06:33] Hi, my name is GQ co-founder and CEO of LTV Plus, we serve E Commerce and SAS businesses mainly based in North America and Europe, with some based in other parts of the world. When e-commerce and customer experience executives and directors have issues recruiting agents, training agents and expanding their coverage to meet the demands of their customers, they turn to LTV Plus to help them scale their customer service teams through world class customer service outsourcing. We solve this problem by providing highly trained, dedicated customer service agents that are selected based on the brands and industries they serve. We also provide recovery services to help generate more sales and full payment recovery services to recover lost revenue for subscriptions based online businesses. If you need help with scaling your customer service team to meet the demands of your customers, reach out to me at [email protected] or check out our website at ltvplus.com.

Sean Magennis [00:07:34] 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. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a 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 questions. In this instance, if you answer yes to eight or more of these questions, your strategy is working for you. If you answer no, too many times, your strategy is more than likely getting in the way of your attempts to scale. So let’s begin.

Sean Magennis [00:08:36] Number one, does your strategy outline how the firm will develop new capabilities that the competitors do not have?

Greg Alexander [00:08:45] And of course, this assumes, you know, what the competitors have.

Sean Magennis [00:08:48] Precisely. Number two, does your strategy detail why the competitors cannot match them?

Greg Alexander [00:08:55] Yeah, an often overlooked is because you develop something. If it’s easily copied, that’s a tactic. It’s not a strategy.

Sean Magennis [00:09:01] Right. Number three, does your strategy specify how these capabilities will be pushed into the market? Number four, does the strategy, explain how your resources are going to be deployed? For example, money, people and time. Number five, does the strategy specify how this resource deployment is different than your competitors? Number six is the strategy supported by enough clients sourced evidence?

Greg Alexander [00:09:36] This is a big one. So oftentimes, you know, our founders who we love envision themselves as master strategists and they say the clients don’t know what they need. Let me tell them. That’s a big mistake.

Sean Magennis [00:09:49] Number seven, does the strategy specify who oversees each program?

Greg Alexander [00:09:54] Got to have an owner for everything.

Sean Magennis [00:09:56] Number eight, has the team been properly incented to execute the plan? Number nine, does the strategy detail how the competitors plan to beat you?

Greg Alexander [00:10:07] Yeah, so a good tool there is a SWAT. Understand, where you’re weak and how you might get attacked.

Sean Magennis [00:10:15] And number 10, does the strategy specify how to respond to competitor attacks? So in summary, a collection of tactics is not a strategy, nor is a financial model or an annual budget, a strategy outlining what is not as useful as a strategy that outlines how. Scaling does require a strategy, and it should be focused on making you more valuable to your clients. 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. Thank you, Greg. I’m Sean Magennis and thank you to our audience for listening.

Episode 47: The Boutique: THE DOS AND DON’TS OF STRATEGY DEVELOPMENT FOR BOUTIQUES

Scaling a boutique professional services firm requires a strategy. Yet many owners have a collection of tactics and call it a strategy. Learn about how firms should approach creating their strategy.   

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 that to scale the boutique requires a strategy and that a collection of tactics is not a strategy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is considered by some as a master strategist and has a lot to share on this topic. Greg, great to see you. Welcome.

Greg Alexander [00:01:08] Thanks, Sean. This is very timely. I was looking at it from the other day who was trying to raise capital, and I asked them for their strategy doc. They sent me a spreadsheet populated with business plan assumptions. And as you know, that’s not a strategy. And this reminded me of how much work we must do in this area.

Sean Magennis [00:01:24] Yes. You know, for some reasons, there’s a knowledge gap in this area. Why do you think that is?

Greg Alexander [00:01:30] I think founders of boutiques know they need a strategy, and I feel as if they want one, yet when they look for help, all they run into is how to materials for product companies. And this leads them down the wrong path. Strategy for a professional services firm is very different. And unfortunately, there’s just not a lot out there on this topic.

Sean Magennis [00:01:50] Well, Greg, that’s what we are here for. And maybe this podcast will help. Heck, maybe there’s a new book in this for you.

Greg Alexander [00:01:57] I’m still recovering from the heavy lift of writing my last one, so maybe someone else can take that on.

Sean Magennis [00:02:03] Well, the boutique is fantastic, so let’s hope. OK, pick up on the thread on how strategy for product companies is different than strategies for services firms.

Greg Alexander [00:02:14] Sure. So here’s our strategy. And a product company gets built. The executive team builds a list of attributes that make a market attractive. These are items such as organic growth rates, number of companies, target trends and so on. This produces a list of vertical industries to pursue. This list of industries gets further segmented into a list of companies to pursue. And ultimately the data gets cut to names and accounts who might want to buy the products, including an estimate on spend potential. A debt gets created that says some version of the following. Our strategy is to target this list of clients in these industries. With these products, everybody nods in agreement. The Excel formulas are double checked and the and the goals get cascaded down to the department heads. This is a what exercise as in what are we going to do? This does not work for a professional services firm.

Sean Magennis [00:03:08] Why not Greg?

Greg Alexander [00:03:10] A strategy for professional services firms must be a how exercise. It starts with, how are we going to become more valuable to clients? Pro serve firms are better served with a how based strategy because of the nature of competition. Pro serve firms do not have the advantages present in product businesses which allow product businesses to get away with what based strategies. For instance, does Google have to ask how questions? No. How come? They have huge barriers to entry by controlling 60 percent of the search traffic. Pro serve firms do not have these types of advantages. For example, McKinsey is a top consulting firm in the world and they only have three percent market share. If they stop becoming more valuable to their clients, they are easily replaced. They do not have an install base locked into their firm. Does this make sense?

Greg Alexander [00:04:02] It does. Professional services firms need a different strategy development process built on how questions with the ultimate how question being how do I become more valuable to my clients? Can you give me some other How strategy questions that should be addressed in a boutique strategy?

Greg Alexander [00:04:23] So here are a few big ones that probably you could really think through and write many sophisticated answers to. So, for example, how do I raise client satisfaction? That’s a big macro question, huh? How can I elevate the skills in my team so I can raise prices? You know, oftentimes boutique owners don’t realize is a relationship between skill and price. Next, how can I redesign the work to improve utilization rates, you know, when’s the last time you broke out your work breakdown structure and reengineered the way you deliver the service?

Sean Magennis [00:04:57] Yes.

Greg Alexander [00:04:59] Or let’s say, how can I specialize in new ways of further differentiating us from the competitors? Because if you’re a boutique, you’re competing with generalist. So the more specialized you are, the more likely you’re going to win. So these are just a few. And they link back to the key macro question. How do I become more valuable to my clients?

Sean Magennis [00:05:19] Greg, is that it? Just switch from what to how?

Greg Alexander [00:05:25] I wish it were that easy. Each how question needs an answer and the answer must include another how. This is the how to part of the strategy, the action plans. This means a goal timeline, budget project team and accountability owners, deliverables and key milestones. This cuts through all the bullshit and gets to the action to be taken. And it is this style of strategy that that takes a pretty scale firm and scales them to a dominant player and their niche.

Sean Magennis [00:05:58] Greg, this is so different and and so clear. This is not a budgeting exercise. I love it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

GQ Fu [00:06:33] Hi, my name is GQ co-founder and CEO of LTV Plus, we serve E Commerce and SAS businesses mainly based in North America and Europe, with some based in other parts of the world. When e-commerce and customer experience executives and directors have issues recruiting agents, training agents and expanding their coverage to meet the demands of their customers, they turn to LTV Plus to help them scale their customer service teams through world class customer service outsourcing. We solve this problem by providing highly trained, dedicated customer service agents that are selected based on the brands and industries they serve. We also provide recovery services to help generate more sales and full payment recovery services to recover lost revenue for subscriptions based online businesses. If you need help with scaling your customer service team to meet the demands of your customers, reach out to me at [email protected] or check out our website at ltvplus.com.

Sean Magennis [00:07:34] 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. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a 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 questions. In this instance, if you answer yes to eight or more of these questions, your strategy is working for you. If you answer no, too many times, your strategy is more than likely getting in the way of your attempts to scale. So let’s begin.

Sean Magennis [00:08:36] Number one, does your strategy outline how the firm will develop new capabilities that the competitors do not have?

Greg Alexander [00:08:45] And of course, this assumes, you know, what the competitors have.

Sean Magennis [00:08:48] Precisely. Number two, does your strategy detail why the competitors cannot match them?

Greg Alexander [00:08:55] Yeah, an often overlooked is because you develop something. If it’s easily copied, that’s a tactic. It’s not a strategy.

Sean Magennis [00:09:01] Right. Number three, does your strategy specify how these capabilities will be pushed into the market? Number four, does the strategy, explain how your resources are going to be deployed? For example, money, people and time. Number five, does the strategy specify how this resource deployment is different than your competitors? Number six is the strategy supported by enough clients sourced evidence?

Greg Alexander [00:09:36] This is a big one. So oftentimes, you know, our founders who we love envision themselves as master strategists and they say the clients don’t know what they need. Let me tell them. That’s a big mistake.

Sean Magennis [00:09:49] Number seven, does the strategy specify who oversees each program?

Greg Alexander [00:09:54] Got to have an owner for everything.

Sean Magennis [00:09:56] Number eight, has the team been properly incented to execute the plan? Number nine, does the strategy detail how the competitors plan to beat you?

Greg Alexander [00:10:07] Yeah, so a good tool there is a SWAT. Understand, where you’re weak and how you might get attacked.

Sean Magennis [00:10:15] And number 10, does the strategy specify how to respond to competitor attacks? So in summary, a collection of tactics is not a strategy, nor is a financial model or an annual budget, a strategy outlining what is not as useful as a strategy that outlines how. Scaling does require a strategy, and it should be focused on making you more valuable to your clients.

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. Thank you, Greg.

I’m Sean Magennis and thank you to our audience for listening.

Episode 46: The Boutique: What Founders Ought to Know about Team Composition

The composition of the founding team must be carefully considered. Boutiques are often formed by a group with overlapping skills which makes it hard to scale. Learn about how the team may need to change over time if a boutique is to reach its full potential.

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 the composition of the founding team must be carefully considered. Unfortunately, many boutiques are formed by a group of friends with lots of skills overlap, which makes it very hard to scale beyond a lifestyle business. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has a point of view on how our founding teams should be put together, and he will share it with us today. Greg, great to see you. Welcome.

Greg Alexander [00:01:16] Hey, Sean, good to be here today.

Sean Magennis [00:01:18] OK, Greg. So today we’re going to talk about the composition of the founding team and how it might need to change over time if a boutique is truly to reach its full potential. Why is this worth the listeners attention?

Greg Alexander [00:01:32] Hmm, that’s a good question. Let me see. How about I answer that with a cautionary tale?

Sean Magennis [00:01:39] Please do. I love your stories.

Greg Alexander [00:01:42] OK, so a buddy of mine a few years back was a leading provider of jury consulting services. He is a social scientist and helps clients with jury selection, a brilliant guy in a fascinating field. Anyway, he and four of his coworkers quit working for the man and opened up their own shop. They went belly up at the end of year two. He took me out for ribs to ask me for some career advice. I waited for a few beers to be in him and then asked what the heck happened? I mean, he is a bona fide expert in a well defined niche with lots of demand for services.

Sean Magennis [00:02:15] What did he tell you, Greg?

Greg Alexander [00:02:17] So it turns out he made a rookie mistake, a mistake lots and lots of founders make. He founded the company with his coworkers who were all alike. For example, these guys all love doing the work. They were geeks of a sort and kicked out about the technical aspects of the job. In this case, this meant they loved trial strategy, pretrial research and especially witness preparation. However, none of them, and I mean not even one, enjoyed selling the work. The word sales was beneath them. And for the first year or so, they did not need to sell their personal networks, generated enough referrals to make a go at it. However, this eventually dried up, a low hanging fruit had been picked and soon there was not enough work to survive

Sean Magennis [00:03:00] Geez, yikes. I’m sure that made for a bad dinner date. What advice did you give him now?

Greg Alexander [00:03:05] A night eating dry rubbed ribs at the smoke and roast is never a bad evening.

Sean Magennis [00:03:09] Love it.

Greg Alexander [00:03:11] The advice I gave him is the advice I will give our listeners. First, he had too many founding partners. Five is just too many. The perfect founding team to take you through the first ten million or so in revenue is three. Second, the three need to be very different people with very different skills. No overlap. In the early days, resources are constrained. You cannot afford to be suboptimized with redundant skills. You need a partner who is a true rainmaker, a person who can bring in clients consistently and professionally, meaning beyond harvesting a referral network. Next, you need a partner who is excellent at service delivery. This partner could not sell weed to a Jamaican on holiday, but boy, he can deliver on time, on spec and on budget every time he or she can move around a project plan like Travolta moves around a dance floor and the third partner needs to be a process engineer who can quickly turn snowflake projects into standardized offerings, which can be sold and delivered repeatedly and profitably. So in other words, one plus one plus one equals ten.

Sean Magennis [00:04:14] This is a great reminder. I think the mistake made by this jury consultant is made by a lot of funders in the opening. I told the listeners that the founding team also morphs over time. Can you elaborate on this a bit?

Greg Alexander [00:04:29] Sure. My commentary here is directed at our listeners who are between one and 10 million in revenue to break out and get beyond 10 million often requires that reassignment of the founder, reassignment of the founding partners, or in some cases the termination of a founding partner or two. So why is this? Sometimes mistakes we have discussed on this show have been made, but it is a few years into the journey and there is a reluctance to change relationships run deep. However, if this poorly constructed team is allowed to continue, it will become a true obstacle for growth. A roadmap to consider as one possible solution to this can be described as follows. Over time, the biggest department will be the delivery team. This is where the largest number of employees will set. Assign the leadership of the delivery team to the partner who is the best people manager. Even if this partner is not a master project manager, that is OK at this stage because the critical competency is people management. Assign the responsibility for creating services to the partner who is most like a lone wolf. This department will be a one man shop for some time. The partner who likes to work alone could lead this part of the business well. His or her job is that of individual contributor creating things for others to use. Assign the responsibility for marketing and sales to the partner who can manage egos the best, this department will be smaller than the delivery team in terms of number of employees. However, salespeople are your biggest pain in the butt, these guys and gals are divas and require lots of care and feeding. It is best to not be in the position of having to fit a square peg in a round hole. Prevention is preferred. However, if you’re living with a legacy structure, this is a framework to find a compromise.

Sean Magennis [00:06:22] Perfect, Greg. So my hunches, many of our listeners will find themselves in this pickle. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

Darrell McDaniel [00:06:56] Hello, my name is Darrell McDaniel and I own NStar Global Services. We serve high tech manufacturing companies in semiconductor, solar and pharmaceutical industries by providing a comprehensive asset lifecycle management and critical technical services, both domestic and globally. Our clients turned to us to assist them with equipment moves providing operation and maintenance services for their equipment facilities and their talent acquisition needs. NStar strives to deliver insightful and flexible services that efficiently solve our customer equipment service issues. So whether you need help moving equipment or operation and maintenance services or finding that right talent for your manufacturing needs, please reach out to our global services and [email protected] Thank you.

Sean Magennis [00:07:50] 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. OK, this takes us to the end of the episode. We’re going to try and help listeners apply this. We end each show with a tool. We do so because this allows a 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 questions. In this instance, if you answer yes to eight or more of these questions, your team composition is working for you. If you want to know too many times your team composition is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:08:51] Number one, does your founding team consist of three or more partners? Number two, is there no overlap in skills among the founding partners?

Greg Alexander [00:09:04] and remember the three big skills to start as someone who sells the work, someone who delivers the work and somebody who builds a service offering.

Sean Magennis [00:09:11] Got it. Number three, is there a loss in capacity due to confusion over who is doing what?

Greg Alexander [00:09:18] Yeah, all hands on deck is actually a bad thing.

Sean Magennis [00:09:21] Yeah. Number four, do you have a partner responsible for acquiring clients? Number five, do you have a partner responsible for servicing clients? Number six, do you have a partner responsible for developing service lines?

Greg Alexander [00:09:39] Bright line distinctions.

Sean Magennis [00:09:41] Number seven, can the partner who owns the service department scale to dozens of employees? Number eight, can the partner who owns the marketing and sales department handle big egos? Number nine, is the partner who owns the service development effort, comfortable being a lone wolf? And number ten, do the partners complement rather than compete with one another?

Greg Alexander [00:10:11] Now some listeners might be saying, well, I don’t want any partners, I just want to do it myself. Well, you still need to have those skills. They got to fill the void. Right. But you can’t do it all yourself. Right. Right.

Sean Magennis [00:10:23] Greg, thank you again. And in summary, it takes a team to realize the dream. The composition of the founding team must be carefully considered and it will morph over time. Pick your partners very carefully.

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 the Professional Services Firm. I’m Sean Magennis.

Thank you for listening.

Episode 45: The Boutique: Leadership – Dictator vs. Democracy: Which is Best for You?

As boutiques scale the way decisions are made must change. Collective 54 Founder Greg Alexander shares why the decision-making leadership of the founder is diminished as boutiques scale.

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 that as boutique scale, the way decisions get made must change. A start up benefits from the speed of a single decision maker, however, during scale, the decision making ability of the central figure gets diminished. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has helped many boutiques transition their power structures. Greg, great to see you. Welcome.

Greg Alexander [00:01:14] It’s nice to be here, Sean. Transitioning the governance system as a firm scale’s is a very important topic. So I’m glad we’re speaking about that today.

Sean Magennis [00:01:21] Yeah, I can’t agree more. Greg, can you set this up for the audience? Why should a founder of a scaling boutique really care about power structure.

Greg Alexander [00:01:30] Sure. So early stage growth firms require a dictator to be successful. These firms do not have time to build consensus. They must rapidly iterate and move very quickly. And the scope of the decisions that need to be made is small at this stage. The personal willpower of the founder dictator is a key reason these types of firms succeed. Strong leadership is crucial, and the skills needed in a dictator type of leader are easily defined and readily available am my making sense?

Sean Magennis [00:02:04] Yes, yes, you are correct. Please continue.

Greg Alexander [00:02:07] So when a firm starts to scale, it needs to implement a democracy. The boutique is larger and leadership must represent the team. More people need to have a say the dictator is removed from the front lines, his or her proximity to clients becomes more distant. As a result, his or her decision making ability becomes diminished. This person’s once prophetic instincts become dulled.

Sean Magennis [00:02:34] I completely understand that now. So owners of firms, when attempting to scale, need to make more and more complicated decisions. And the best people to make those decisions are those closest to the clients. A somewhat removed dictator is no longer the person uniquely qualified to steer the ship.

Greg Alexander [00:02:55] And you are correct.

Sean Magennis [00:02:56] So how does a boutique transition from the powerful dictator to a democracy?

Greg Alexander [00:03:01] Well, very carefully, as some foreigners do not want to go quietly, the strong willpower that made them successful in the first place now becomes a liability.

Sean Magennis [00:03:12] So, Greg, surely there must be some best practices to handle this transition smoothly?

Greg Alexander [00:03:17] Yeah, there are all firms go through this, at least the ones who scale beyond a nice lifestyle business.

Sean Magennis [00:03:22] So share some of these best practices with our listeners.

Greg Alexander [00:03:25] OK, so I’m going to try to simplify. So bear with me. All right. So the transition typically involves the election of a board. The board is comprised of the equity partners and at least one external independent board member. I play and have played this role. The board meets quarterly and it is mandated to make policy decisions. It is important to note that the board does not run the firm they have focused entirely on long term reporting to the board is a managing partner. The managing partner acts like a CEO does in a corporation. He or she is the boss and is accountable to the results. The managing partner has an executive leadership team that reports to him or her. Normally, the executive leadership team is comprised of the department heads. For example, the leader of the delivery staff is almost always on the ELT. This way the employees from each department are represented. These three bodies, the board, the managing partner and the Executive Leadership Team Act much like the checks and balances system in our government. For instance, the board is the legislative branch. The managing partner is the executive branch. In the executive leadership team is the judicial branch. The ultimate power sits with the owner or owners. The board answers to the owner. Think of the owner or owners, much like you would think about the shareholders of a public company. They own the company, but they do not run it. They elect a board to represent them and the board, selects a managing partner to run the firm. I’m dramatically oversimplifying, but does this basic structure make sense?

Sean Magennis [00:05:06] It certainly does in simplicity is preferred, makes it makes total sense. And I can clearly see how this power structure enables a firm to scale. And I do recognize how different this is than a small firm with all roads leading to a one shot caller.

Sean Magennis [00:05:26] And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

Russ Perry [00:05:52] Hey there, my name is Russ Perry and I’m the founder and CEO of Design Pickle. Design Pickle offers, flat rate graphic design and custom illustrations to fit any team’s needs. We work with marketing teams, agencies and entrepreneurs across the world. Turn to us to help level up and scale your creative content. Find out more at designpickle.com.

Sean Magennis [00:06:12] 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 [00:06:30] OK, this takes us to the end of the episode, let’s try to help listeners apply this, Greg. We end each show with a tool. We do so because this allows a 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 question that 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, your decision making is working for you. If you answer no too many times your decision making is more than likely getting in the way of your attempts to scale. Let’s begin with the questions.

Sean Magennis [00:07:14] Number one, have you transitioned from a growth stage boutique to a scale stage firm?

Greg Alexander [00:07:21] So the way that you would know that is when your aspirations change. So are you moving from aspiring to make more money. To building a firm that’s bigger than you, you know, moving beyond a lifestyle business. So that’s how you would answer that question.

Sean Magennis [00:07:37] That’s a good distinction. Number two, are you attempting to become a market leader? For example, one of the 4100 firms who have reached scale.

Greg Alexander [00:07:47] And if you are so now, if you’re going from scale to market leadership, then you absolutely need to embrace democracy over dictator.

Sean Magennis [00:07:55] Number three, do you have a dictator in place today?

Greg Alexander [00:07:58] If you do try to try to handle a a peaceful transition of power, a coup d’etat is not a good idea.

Sean Magennis [00:08:07] Number four, have the dictators once great instincts begun to deteriorate? Number five, have the number of decisions to be made gone up considerably? Number six, has the complexity of the decisions to be made increased substantially? Number seven, does it make sense to distribute authority closer to the client?

Greg Alexander [00:08:31] Right, so if you answered yes to five and six, the number of decisions in the complex decisions has increased, then it does make sense to distribute authority close to the client. However, if you’re running a very simple business with very few decisions to make in the ones, you do have to make a simple that. Maybe not.

Sean Magennis [00:08:48] Yep, got it. Number eight, do the employees want a greater say in policy making? Number nine, do the owners want to delegate decision making more?

[00:08:59] So this is what’s in it for the owners. You know, if if they have to make every decision every day, they’re probably working more than they want to make, more than they want to work. So by distributing decision making down to trusted lieutenants who can do it for them, they actually reduce their workload.

Sean Magennis [00:09:13] And work smarter, not harder.

Greg Alexander [00:09:14] It’s exactly right.

Sean Magennis [00:09:15] And number ten, do you have a person capable of serving as a managing partner?

Greg Alexander [00:09:20] So this is the biggest issue. Dictators, right. Those that are the founders that drive their firms to certain level of success, they oftentimes don’t want to relinquish power. So the way to do it, at least the way that that I did it and those that I’ve seen, pull this off, do it as they grow their own. Yes, risk is really high when you’re bringing somebody in from the outside. But if you’re if you’re grooming a successor over a number of years, this becomes easier.

Sean Magennis [00:09:45] I love it. The institutional knowledge. Yes, the culture knowledge is so key. So in summary, we do love our founders. They had the guts to start the firm and the skill to grow it. However, growing a boutique and scaling it are two very different things. Scaling does not mean doing more of what you are doing. It means doing what you would doing differently. This is the point whereby dictators plateau and a new governance system is needed.

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. Greg, thank you.

I’m Sean Magennis and thank you, our audience for listening.

Episode 44: The Boutique: How to Split Up the Pie in a Professional Service Firm

Splitting the equity in a partnership is difficult. However, there is a proper way to do it that results in lots of wealth being created. Learn how to fix broken legacy partnership agreements as you grow, scale, and exit.

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’ll make the case that splitting up the equity in a partnership is difficult. However, there is a proper way to do it and it results in lots of wealth being created. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s Chief Investment Officer, Greg has helped many boutique owners fix broken legacy partnership agreements. Greg, good to see you and welcome.

Greg Alexander [00:01:09] It’s good to be here, Sean and you are correct, I was just helping an owner unravel a one sided agreement. Splitting up the pie is very tricky.

Sean Magennis [00:01:16] OK, let’s start there. Share the story with us.

Greg Alexander [00:01:19] OK, so a husband and wife team started a marketing agency and early on they promoted a key employee to partner and gave them 20 percent of the equity. This was in response to the employee receiving an attractive job offer from another agency. In the beginning, everyone was happy and it seemed to be working. As time went on, the husband and wife started resenting the new partner. The new partner was not delivering the expected revenue, yet he was getting distributions from their efforts.

Greg Alexander [00:01:52] Also, the husband and wife wanted to take the agency in a new direction, but the new partner did not. He resisted and the way the operating agreement was written as he was able to stop it. The situation deteriorated and got hostile, with lawyers and others coming in, a valuation firm was hired to figure out a buyout price. Of course, no one could agree on what his 20 percent was worth and how the buyout would be paid over time. It got ugly and it looks like 20 percent of the equity is now dead equity.

Sean Magennis [00:02:26] So, Greg, what’s going to happen in this situation?

Greg Alexander [00:02:28] Well, they are still fighting and a resolution has not been agreed to yet. However, I’m glad, you know, we let off with this story because there’s a big lesson to be learned here from this example.

Sean Magennis [00:02:39] Greg, what is that lesson?

Greg Alexander [00:02:41] So equity arrangements need to be flexible. So for our listeners, the evolutionary path is a startup that becomes a growth firm, that becomes a firm at scale and then eventually becomes a firm an exit. And equity splits need to change as they move along this life cycle, for example, it is almost impossible to split equity as a startup. There are no clients, there’s no revenue, no profits. It’s also almost impossible post startup in the growth stage. Yes, there are clients and revenue, but there’s no intellectual property or intellectual capital to be valued at that time. The firm is still not worth anything because nobody would buy it. 100 percent of zero is zero. This changes in the scale stage as the firm is now worth something and it changes again in the exit stage because after exit, some partners are leaving and some are staying on. That dictates the need for a new equity split.

Sean Magennis [00:03:38] Greg, this is so key. And before we move on to scale and exit, how should a boutique owner split equity at a startup or in the growth stage?

Greg Alexander [00:03:46] So when starting the firm, I recommend valuing the equity solely based on contributed capital. So, for example, let us say it takes a startup boutique a million dollars to launch. So if you put up 300K and I put up 700K then the equity split is 30 percent you and 70 percent me. A lot of boutique owners split up equity based on sweat equity instead of contributing capital. And this is a big mistake and it leads to hardship down the road. So why is that? Well, it’s impossible to accurately assign a value to sweat equity. So, for example, what percentage of equity should go to a great rainmaker versus an average rainmaker? The questions too difficult to answer instead. Sweat equity is accounted for in salaries, not in equity. For instance, if a partner was responsible for project management, they get paid a salary that reflects the going rate for a project manager. That is the value of the role and it is set objectively in the open market. Does that make sense?

Sean Magennis [00:04:45] Yes, it does. But what happens when a partner does not have any capital to put into a firm at launch, but over time ends up contributing a lot to the firm as it scales? OK, so now you’re talking and this happens all the time and therefore equity splits need to be dynamic, not static.

Sean Magennis [00:05:02] Yes.

Greg Alexander [00:05:02] So in this case, the partners use a tool called the Buy-Sell Agreement. This is a contract that stipulates how a partners share of a business can be bought and sold. It defines that equity splits can happen under certain conditions and it defines exactly how it will happen. For example, it is common that the buy sell agreement establishes how shares in the firm will be priced, who they can be sold to, how they would be paid for, etc.. So having a buy sell agreement in place provides the needed flexibility to dynamically adjust equity splits at as circumstances change.

Sean Magennis [00:05:37] Greg, is this common?

Greg Alexander [00:05:39] Well, yes and no. Buy-Sell agreements are well-worn territory and are an established best practice. A boutique owner could hire an attorney and get one in place very quickly and inexpensively. However, many boutique owners do not have one in place. And you might ask why? Well, this is because founders think they do not need them. They cannot imagine a scenario where the need for one would arise. This is foolish. If you scale your firm in one day, go to sell it. There is a better than average chance someone other than the founder has equity. Founders want to keep all the equity, but I remind them that 100 percent of zero is zero. Sharing the wealth with those who earn it is a very good idea. In my experience. When the founders shares the wealth, more wealth is created for everyone. Magical things happen when employees become owners.

Sean Magennis [00:06:26] That’s excellent advice, Greg, and great examples. Thank you. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Tad McIntosh [00:06:59] Hello, my name is Tad MCIntosh, I own HumCap, a human resources consulting and recruitment forum. We help small businesses with their growth, human resources and recruitment needs. We get asked very often about how we can help you have strategic value in human resources in your growing company. We also get ask what are the risks in H.R. as I grow my company? We solve these problems by building customized H.R. and recruiting solutions for each and every one of our clients. If we can help you with your needs, with our experience and recruiting professionals, please call me at 469-484-6023 or email me at [email protected] Thank you and have a great day.

[00:07:51] 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. So, OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a 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, your equity splits are working for you. If you answer no too many times, your equity split is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:08:52] Number one, is your firm owned by more than one person? Number two, do the owners contribute to wealth creation in different proportions? Number three, are the owners at different stages in life?

Greg Alexander [00:09:09] Yes, so we should talk about that. So if you start your firm and someone’s in their 50s and someone’s in their 20s, you know, over time that person in their 50s is going to want to exit before the person in their 20s. So that’s the reason. That’s just an obvious example of why dynamic splits as opposed to static splits.

Sean Magennis [00:09:28] That makes a lot of sense. Number four, do the owners have different financial needs?

Greg Alexander [00:09:33] Some might need more cash, so therefore they get a higher salary. Some might be more interested in long term wealth creation. So they take a lower salary to get a higher equity split.

Sean Magennis [00:09:42] Again, makes total sense. Number five, do the owners have different visions of the future? Hence your example. Number six, have the partner contributions fluctuated over the years?

Greg Alexander [00:09:55] And again, this is another good governance seal of approval here. If the equity split is dynamic, then somebody can’t rest on their laurels just because they got, let’s say, 20 percent of the firm, you know, at year three and year ten if they’re not contributing, then they should not hold on to the 20 percent in perpetuity forever.

Sean Magennis [00:10:14] Yep. Number seven, has resentment crept into the relationships?

Greg Alexander [00:10:19] Its all the time. Business partnerships are like marriages.

Sean Magennis [00:10:22] Yep. Number eight, are you living with a legacy ownership structure that is now outdated?

Greg Alexander [00:10:28] Yep.

Sean Magennis [00:10:29] Number nine, will rising stars require equity to be retained?

Greg Alexander [00:10:34] Yeah. And the foolish owner here says, well, fine, I’m not going to give him equity. Well, those rising stars will quit. They’ll go start their own firms and now you’ll have new competitors and you’ll have a talent drain. So, you know, don’t be penny wise and pound foolish.

Sean Magennis [00:10:52] Great advice, Greg. And then to wrap us up, number ten, has the ownership structure distorted policymaking?

Greg Alexander [00:10:59] Yeah, and that’s a separate issue. Governance is separate than ownership. So you could have different classes of shares with different voting rights, but that’s a whole nother topic for another day.

Sean Magennis [00:11:07] Yep. Thank you, Greg. In summary, during the start up and growth stage of a firm development, split up the equity based on contributed capital. However, as the firm scales put a buy sell agreement in place, this converts dysfunctional static equity arrangements into healthy, dynamic ones. This will result in more wealth for everyone involved. 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.

Episode 43: The Boutique: Reach- Define Your Market with One Word

Collective 54 founder Greg Alexander discusses why the size of your market is most accurately measured by your ability to reach the decision makers in your niche. Growing a boutique is hard and the size of the prize needs to be worth the level of effort.

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 that the size of your market is most accurately measured by your ability to reach the decision-makers in your niche. Growing a boutique is hard, and the size of the prize needs to be worth the level of the effort. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg has an incredible war story to share with you today. You’re in for a treat, listeners. Greg, great to see you, and welcome.

Greg Alexander [00:01:15] Hey, Sean, good to be with you today.

Sean Magennis [00:01:16] So, Greg, today we’re going to discuss a really common mistake made by founders of boutique professional services firms. And this mistake is not accurately sizing their market. The consequence of this mistake are below-average growth and subpar owner income. Why does market sizing matter?

Greg Alexander [00:01:38] It matters because to grow a boutique, the founder needs to know where to play and how to win. I mean, that’s the essence of strategy and sizing. The market falls into the where to play bucket. If the founder goes after a tiny market, she will get frustrated because at maturity, the firm will not amount to anything more than really just a lifestyle business. If the founder goes after a huge market, the founder will also get frustrated because he will be a shrimp in a big ocean constantly fighting for survival. This makes market selection a mission-critical item on the founder’s strategic agenda. And step one in market selection is sizing your market.

Sean Magennis [00:02:17] So Greg, this might be new to some of our listeners when asked what market they’re in. Often small business owners do not fully understand the question and might respond with something like marketing and advertising or IT services. As you know, this is inaccurate. Can you give the audience a simple example to illustrate what we are discussing today?

Greg Alexander [00:02:41] Sure. I will share how I screwed this up in the early days of SBI. My war story will do a nice job of describing this. So my firm SBI was a sales consultancy. Back then, if someone asked me what market I was in, I would say sales consulting, which I now know is not a market, but a description of a service. This was of no strategic value because this phrase could mean many different things. Later, I learned I was in B2B sales consulting. This is still not great, but adding B2B told me I was not interested in pursuing the Miller Brewing Company, for example. With time, I got a little wiser and determined I was going to focus just on the United States, this was insufficient still. But by adding geography, I knew I was not going to spend marketing dollars in Germany. I began using market selection to make strategic decisions, B2B and geography told me where to go, where to play. With a little more time, I learned there were 12 and a half million B2B companies in the United States. Now, I was getting somewhere because I had my first number. As time passed, I realized my average engagement was about three hundred thousand dollars. I studied role models and learned that at maturity, most boutiques penetrate about one percent of the market. I figured if I could do the same, so at maturity I could get to thirty seven and a half million. Back of the envelope math was one percent to twelve and a half million companies, a 300K a piece, which equaled thirty-seven point five million. This gave me confidence because the size of the prize was worth the level of the effort. Then someone taught me that a single company had multiple buyers in it, for example, we often got hired by the head of marketing in addition to the head of sales. So this doubled the size of my market to 75 million and continuing on with my war store here. I then learned a very important piece of information. I learned how to think about market selection like an owner, not an employee. This was revealed to me when I learned about the concept of enterprise value. Enterprise value is what a firm is worth at exit. At my space, this was calculated by multiplying a firm’s EBITA by eight. So in my case, our EBITDA was 50 percent. So in 75 million we would earn thirty-seven point five million. And EBITA, when I multiply that by eight, that proved to me that I had a chance of creating 300 million dollars in wealth for myself. At that point, I committed my whole self to the business. It was crystal clear that the size of the market was worth the level of effort I had put into my firm. And as luck would have it, multiples crept up to 11 times EBITDA so my initial estimate of market size was conservative. That was a lot that I reviewed with you there. But did that make sense to you?

Sean Magennis [00:05:47] Yes. Yeah, Greg, it did. This is a great story and with great sort of intrinsic educational value. You spoke about some of the decisions this marketing, this market sizing exercise allowed you to make. Are there any others with sharing?

Greg Alexander [00:06:02] Yes, there’s one big lesson that changed everything. That lesson is the most important variable to consider when selecting a market based on its size is your ability to reach the decision-maker. I learned very quickly that my target customer was very hard to reach. I mean, their gatekeepers and gatekeepers. So a one percent penetration rate was a pipe dream. So after lots of wasted time and money trying to get these people interested in our services with very little success, we changed everything.

Sean Magennis [00:06:36] Oh, my goodness. What did you do, Greg?

Greg Alexander [00:06:39] We focused all of our attention on a subset of the market. We concentrated all of our resources on the early adopter segment. You see, we were pioneering, applying the science of benchmarking to the art of sales. The people who were interested in this crazy idea were the kind of people who loved pioneering new approaches. These people are called early adopters. We had to get our services in front of them. So our marketing money went into content marketing. This allowed the early adopters to self-identified themselves by subscribing to our content. I wrote my first book followed by a blog, a podcast, a video series and an old school print magazine. The early adopters found our content because this is what they do. They look for bleeding-edge ideas. They began subscribing to our media products. This resulted in a database of about 250000 early adopters. These 250000 were reachable. That’s the keyword. The heck, they were our fans. They came to us. So in the end, back in those early days, our market was really two hundred and fifty thousand early adopter B2B sales and marketing leaders in the United States who subscribe to our content. That, my friend, is a tight description of a market. Let me repeat that. So here was our description of the market back then, our market was 250000 early adopter B2B sales and marketing leaders in the United States who subscribe to our content. One can make a lot of strategic decisions with that type of description. And with that niche, we exploded. A close rate went above 50 percent. The sales cycle length got cut in half. And given our brand affinity with these people, we were able to charge more. This made us without this move, I wonder what we would have become. This is why selecting a market by sizing it correctly is mission-critical.

Sean Magennis [00:08:56] Greg, this is an incredible story that teaches a hugely important lesson. Reach, as in your ability to get in front of decision-makers with budget, is the number one attribute of market selection and it determines the size of the prize more than anything else. My goodness, Greg, this episode will save our listeners years of frustration. Thank you. Thank you. Thank you.

Greg Alexander [00:09:24] And this is why I’m here. I’m glad my war stories are useful.

Sean Magennis [00:09:26] Greg, they are. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

Ryan Gales [00:09:57] Hello, my name is Ryan Gales, CEO of Jenkins/Gales & Martinez, Inc, an architectural and construction management firm. We serve public and private clients specializing in education, transportation, medical and civic projects around the country. These clients turn to us for help with implementing their vision and ensuring their projects are completed on time and within budget. If you need help with envisioning and building projects for your future, come visit us at www.JGMINC.com.

Sean Magennis [00:10:28] 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. This takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a 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 questions. In this instance, if you answer yes to eight or more of these questions, you have sized your market correctly. If you answer no too many times you have size your market incorrectly. Let’s begin.

Sean Magennis [00:11:25] Number one, are there thousands of targets to pursue? Number two, are they reachable? Number three, when they are reached, will they consider you?

Greg Alexander [00:11:40] You know, that’s a subtle thing. Sometimes you can get a referral and get in front of somebody, but they’re really not going to consider you.

Sean Magennis [00:11:46] It’s a key. Number four, can you win your fair share of opportunities?

Greg Alexander [00:11:52] So is your product good enough?

Sean Magennis [00:11:54] And you want to exceed 50 percent.

Greg Alexander [00:11:56] That’s right.

Sean Magennis [00:11:57] Number five, can you win your fair share consistently? Number six, when you do win, is the amount of money spent worth the pursuit?

Greg Alexander [00:12:09] So let’s pause here for a moment.

Sean Magennis [00:12:10] Sure.

Greg Alexander [00:12:11] So when I’m working with boutiques, they say they always want to give me the exception. You know, look at this one deal I did with this one big company. But they can’t do it consistently, consistently, or they win the one big logo for like six grand.

Sean Magennis [00:12:26] Yeah.

Greg Alexander [00:12:26] It’s like, who cares? It’s not worth it.

Sean Magennis [00:12:28] Right.

Greg Alexander [00:12:28] Anything worth pursuing has to be done at scale.

Sean Magennis [00:12:32] That makes a lot of sense. Number seven, is the market large enough to support your boutique, assuming modest penetration rates? And you went for one percent.

Greg Alexander [00:12:42] I know, which was a pipe dream.

Sean Magennis [00:12:44] Amazing. Number eight, are they new targets to pursue every year? That is is the market growing?

Greg Alexander [00:12:51] Very important.

Sean Magennis [00:12:52] Very important. And number nine, can you drive up the engagement size of the time? And number ten, will there be a reasonable rate of repeat purchases?

Greg Alexander [00:13:04] So that’s often overlooked, right? If you work your tail off to reach these people, once you have their attention, make sure you can continue to sell to them.

Sean Magennis [00:13:12] Yeah, I absolutely agree. So in summary, Greg, we’ve recorded 48 episodes of the show. I think this is my favorite. Listeners, please be sure that the size of the prize is worth the level of effort you put in. And for heaven’s sake, don’t forget to factor in reach. 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.

Episode 42: The Boutique: 3 Ways to Pay Partners Correctly

Designing the compensation system for Partners at boutique professional service firms requires special treatment. Partners are not like other employees and getting their pay system correct requires strategic thought.

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 that designing the compensation system for partners at the boutique professional services firm requires special treatment. Partners are not like other employees, and getting their pay system correct requires strategic thought. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. On this show, I typically hold up Greg, as an example to follow. This show will be different in this instance, Greg made a few mistakes that actually cost him millions of dollars. Today, he will share his mistakes in the hopes of helping you avoid them. Greg, sorry to put you on the spot. And good to see you and welcome.

Greg Alexander [00:01:31] Hey, pal, give me a minute, will you? It looks like I’m getting ready to eat some humble pie and I want to grab some extra napkins because it’s going to be messy.

Sean Magennis [00:01:40] Don’t feel bad. No one is perfect. And that includes you. I appreciate your willingness, though, Greg, to share the mistakes along with the victories.

Greg Alexander [00:01:49] Of course I’m kidding. I’ve made more than my fair share of mistakes, and I’m happy to share if it helps others.

Sean Magennis [00:01:55] I know it will. So let’s get into it. Greg, tell me about this topic. Paying partners. Why is it important to our listeners?

Greg Alexander [00:02:03] So as a firm scale’s, it adds more partners, loyal employees earn the right to have a seat at the table. When this happens, these loyal employees get any job description. Individual contributions get replaced with firm building activities. For example, partners often own recruiting and they frequently are charged with employee training. Sometimes they’re asked to head up a new industry practice or in some cases maybe move overseas to expand internationally. Whatever it is, the days of just selling and delivering work are over. It is no longer about personal billings, but rather now it’s about the success of the firm exclusively. So the question is, how should a partner be compensated for these different activities?

Sean Magennis [00:02:43] Yes, this this makes sense. So our audience members are scaling their firms some dramatically. So and you’re right, this is leading to superstars earning the job title of partner. And with the new job comes new responsibilities, which requires a new compensation system where should a listener start.

Greg Alexander [00:03:04] Well, this shows about comp. This means salary and bonus in equity is ownership, not compensation. So I will leave the equity discussion for another show. Is that right?

Sean Magennis [00:03:15] OK, yes, this show is 10 to 15 minutes. So let’s shelve equity for another episode. Give you give me your take on salary and bonus.

Greg Alexander [00:03:25] OK, so I will discuss salary first as it is easy, my advice would simply to be calculate the going rate for the role and pay at the midpoint. For instance, a quick search on salary.com tells me a business development partner in my hometown of Dallas earns one hundred and twenty six thousand dollars at the midpoint, benchmark data is widely available. Pick your source. The reason you pay at the midpoint is simple. You are not a startup and yet you are not a market leader yet you are in between the two. Therefore pay in the middle obviously can you can tweak this up or down. But I like to keep things simple. My main point is to pay according to the market rate partners are labor. Labor is a commodity priced in the open market. There are buyers and sellers for this labor. The equilibrium point between buyer and seller is the price for the commodity. If the partner quit your firm, this is what she would fetch in the open market. If you recruited a new partner to the firm, this is what you would pay. Eliminate all the subjectivity from salary discussions. Let it be a data driven decision. Does this make sense?

Sean Magennis [00:04:35] Makes perfect sense. And the simplicity of this is actually wonderful. You mentioned bonuses are harder, so let’s jump to that.

Greg Alexander [00:04:44] Yeah, bonuses are much harder. So why is that? So it’s hard to find the balance between past contributions, current contributions and investments today that will lead to future contributions. So, for instance, you may have a partner that took on a strategic initiative that runs in the red this year, breaks even next year, and turns profitable two years from now. So how do you pay this partner? If you penalize him for the short term EBITA hit, he will never take on another strategic initiative if you reward him when the strategic initiative turns profitable, is that reward forever or is there an expiration date on it? This is a very tricky decision. There are three systems available and most firms choose one of these three. You want me to briefly describe this?

Sean Magennis [00:05:37] Yes, please, Greg, because I want to save some time for your war story.

Greg Alexander [00:05:42] OK, so the first system is based on seniority. The longer your tenure, the more you make. This has the benefit of being very easy to administer. But the younger partners hate paying the old farts forever. The second system is the performance based system. Each party gets assigned some goals and he or she gets paid if they are met. This sounds great as who does not love a meritocracy. The problem with this, however, is there is no incentive to build the firm. Pay that prioritizes short term performance can destroy a boutiques ability to scale at scaling takes longer than a year or two. The third system is called a reconciliation system. This involves a compensation committee made up of the owners and awards are handed out by vote. It comes with a formula usually tied to enterprise, wealth creation or partner distributions. It is subjective, but it does allow for a judgment to be applied. And since all partners are on the jury, the system does have integrity. Personally, I believe this is the best system for firms trying to scale. It does the best job of balancing the short term with the long term. Did I describe these three systems clearly?

Sean Magennis [00:07:00] Yes, you did. Thank you. So our listeners have three choices in front of them now, one seniority to performance based, three, reconciliation and listeners I recognize the devil is in the details. So if you have questions about this, reach out to our team at Collective 54 and they will help you. OK, Greg, would you please share your personal story?

Greg Alexander [00:07:28] Oh sure. I think I would call this Confessions from a Mad Man. So as I transitioned from a startup to a boutique, I did not change the partner compensation system. This cost me millions of dollars over time and it created tension among the partners. Our system was very unsophisticated. I paid partners a very generous salary that was well above the market rate. For example, the first group of partners earned 2x what they could fetch in the open market. To make matters worse, bonuses were paid as distribution’s. The distributions were paid based on the partners equity stake.

Greg Alexander [00:08:07] For example, if a partner owned 25 percent of the firm, they got 25 percent of the distributions. This was a huge mistake. Equity is different than pay. As we became very successful, partners were pulling millions of dollars out of the business. Yet this payment had very little to do with their contributions to the firm. The root cause of this mistake is easy to identify. I felt a loyalty to the early partners. They took a risk to join me in the early days and they took equity in lieu of cash. As time went on, I wanted to reward them for their early sacrifices.

Greg Alexander [00:08:43] However, I never contemplated when this debt was paid, I just kept paying that debt in perpetuity. They took advantage of me, the right thing to do would have been to refuse the excessive compensation for obscene but greed and envy of powerful forces for humans to resist. And I’m sure they felt they deserved what they were getting. All of us, including me, tend to overstate actually worth. The problem is that a new group of partners emerged and they were way underpaid.

Greg Alexander [00:09:17] The effect they were having on the business was large and growing, it eclipsed the contribution from the legacy partners. And as time went on, this compounded the gap between the old partners and the new partners became extreme. The dollar should have shifted from the legacy parties to the new partners, yet it did not. This was a failure in leadership. I mean, this poor leadership, fractured relationships. It created some bad blood. And I deeply regret this. Friends became enemies. Sadly, the shame of it all is this was all avoidable. I just did not know any better at the time. So please learn from my mistakes. Maybe my salvation can be realized in helping you steer clear of this grief.

Sean Magennis [00:10:02] Well, Greg, I’m I’m literally speechless and not for the reason you may think I’m speechless at how honest you are with our audience. It takes great humility to share something as personal in a medium like this. And I know this will be heard by thousands of people. So on behalf of our listeners, Greg, thank you. You know, I. I know you are living your mission statement every day, my friend.

Greg Alexander [00:10:27] Thanks, pal. Now, let me get up off this therapy couch and let’s cut to the checklist.

Sean Magennis [00:10:34] OK, you got it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

Satish Manduva [00:11:05] Hello, my name is the basement. I work at Intellisoft Technlogies. We serve Fortune 500 clients in providing solution architecture, application development and consulting services. We are providing solutions in artificial intelligence, using our product data, market study and virtual learning with our product that brings these clients turn to us for help with any big data and AI solutions. We solve this problem by providing solutions for insurance, Teleco and financing the industry. Example fraud analytics for insurance, default analytics for finance and constant analysis for the health care. If you need help with any big data or AI solutions in finance, insurance or teleco, reach out to me at [email protected] www.Intellisofttech.com

Sean Magennis [00:12:03] 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. So this takes us to the end of the episode, let us try to help listeners apply this, we end each show with a tool. We do so because this allows a 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, my instructions are a little different than normal. So please pay attention. Loyal listeners. If you answer yes to questions one and two, you do not need a new partner pay system if you answer no to questions one and two, you’ve got some work to do. If you answer yes to questions three, four and five, a seniority system might work for you. If you answer no to questions three, four and five, then a seniority based system is not for you. If you answer yes to questions, six, seven and eight, consider a performance based system. If you answered no to these questions, a performance based system is not a good fit for you. And lastly, if you answer yes to questions nine and ten, the reconciliation system might be best for you if you answer no to questions, nine and ten you can rule out the reconciliation system.

Greg Alexander [00:13:48] Very good.

Sean Magennis [00:13:50] Hopefully everyone gets this. Here goes number one, are you paying salaries based on external benchmarks? Number two, are you paying salaries at the midpoint of the benchmarks? Number three, are years of service, a fair way to pay partners? Number four, are senior partners past contributions contributing to today’s wealth creation?

Greg Alexander [00:14:21] Often overlooked.

Sean Magennis [00:14:22] Yes. Number five, will your younger partners stick around to wait for the senior partners to retire?

Greg Alexander [00:14:30] Oftentimes, no.

Sean Magennis [00:14:32] Number six, do you have clear objectives for each partner? Number seven, is it clear when the objectives are met? Number eight, is it possible to balance short term and long term wealth creation with these objectives? Number nine, will partners perform with integrity if placed on the bonus compensation committee?

Greg Alexander [00:15:01] Be very careful of politics there.

Sean Magennis [00:15:03] And number ten, can you develop a methodology that fairly attributes wealth creation to partner activities?

Greg Alexander [00:15:12] What’s important about number 10 is it’s about wealth creation and wealth creation attribution is hard.

Sean Magennis [00:15:18] Yep. So thank you, Greg. In summary, boutiques add partners over time. Paying partners correctly impacts the scalability of the boutique. Consider these three systems and learn from Greg’s mistakes. 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. Thanks for your candor today, Greg, and thank you to our audience for listening.

Episode 41: The Boutique: Why Engagement Type is a Key to Growth

The type of client engagement you sell and deliver determines the growth strategy of a boutique. There are two types of engagements – elephants and rabbits and understanding which you are hunting is a key to growth.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54 for 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 the type of engagement you sell and deliver determines the growth strategy of a boutique. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg says there are two types of engagements elephants and rabbits, and understanding which game you’re hunting is a key to growth. Greg, I’m not a hunter, but I’m looking forward to the show. Good to see you. Welcome.

Greg Alexander [00:01:10] So let me ask you a question. What do you get when you make Jumbo the elephant with the Easter Bunny?

Sean Magennis [00:01:16] I have no idea.

Greg Alexander [00:01:18] So the answer is some kind of Frankenstein monster that is very ugly and suffers a painful early death.

Sean Magennis [00:01:25] And what what the heck does that have to do with engagement type?

Greg Alexander [00:01:30] So firms that mix incompatible engagement type, such as elephant engagements with rabbit engagements are also ugly. They live a painful existence and they die young.

Sean Magennis [00:01:43] Ha. OK, so elephant and rabbit. Now I see the connection to Jumbo, the elephant and the Easter Bunny. Listen, the two of the mating is an image I hope does not stick in my mind. OK, what the heck is an elephant engagement and what the heck is a rabbit engagement?

Greg Alexander [00:02:03] OK, so a firm that hunts elephants is a firm built around a small number of clients who are each spending a lot with the boutique. Their engagements are big. A firm that hunts rabbits is a firm built around a large number of clients who each spend a little. Their engagements are small and quick, and the type of engagements you pursue determines the type of firm you become. Firms that try to do both often do not grow, and unfortunately, most of them die young.

Sean Magennis [00:02:37] Greg, why is this?

Greg Alexander [00:02:39] Well, there are many reasons, but let me share two examples. So example number one is the sales motion is very different when hunting elephants and when hunting rabbits, for example, elephant hunting requires long sales cycles, a solution selling methodology, a high skill level in the cellar, and an ability to get to the C suite as they control the big budgets and contrast rabbit hunting have short sales cycles, a transactional selling methodology, an average skilled seller, and you can hit your goals selling to mid-level managers who have departmental budgets.

Sean Magennis [00:03:20] Aha. I can see the difference in the sales approach. So trying to do both in one boutique would be a lot to manage and too much complexity. So two of everything, for example, hiring profile, training program, compensation system, etc.. What is the second example?

Greg Alexander [00:03:39] OK, so example number two is the service delivery is very different when delivering elephant projects and rabbit projects with elephant projects an engagement could last a year plus, this means staff continuity is key. Project management is complex with milestones, deadlines and billing. It’s probably some type of a monthly fee tied to time reporting. In contrast, rabbit projects might get done in a month or two. Staff continuity is not needed as they are barely there long enough to say hello. There was no need for heavy project management, and billing is likely some percentage upfront in the balance at completion. These two engagement types are just different animals.

Sean Magennis [00:04:24] Yes, I can see the differences in the service delivery to trying to do both in one boutique would be a nightmare to manage an unnecessarily complex. Just the headache of accounts receivables, different legal paperwork with SOWs and master service agreements. Boy, tracking utilization of staff would be a maze of confusion. It’s just not worth it. What should a founder of a boutique do about this?

Greg Alexander [00:04:49] So a founder should pick a lane and stick to it. Trying to be all things to all people is just not worth it. And engagement type is where to focus more so than client type. I have seen boutiques manage large and small clients inside one firm well, however, I’ve rarely seen a boutique managed different engagement types inside one firm well, the reason is engagement type dictates almost everything, such as how you price the staffing model, the number of clients you can handle at one time. The list goes on and on. Your two choices are serving a small number of clients who spend a lot or serving lots of clients who spend a little elephant or rabbit.

Sean Magennis [00:05:28] Great practical advice, Greg and I, and I don’t think listeners will ignore the analogy. Thank you. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

Richard Echeandia [00:06:03] Hello, my name is Richard Encheandia. I owned Conxin, Incorporated. At Conxin, we serve large U.S. organizations as they select and implement large scale software systems like enterprise resource planning or customer relationship management systems. Because of the size, complexity and organizational impact of these systems. Many of these projects experience significant cost overruns, delays and far too frequently project cancelations. Conxin solves these problems with experienced professionals and an innovative and highly actionable framework that defines 36 different elements for large scale programs. For each of these elements, we provide the checklists, planning and execution tools you and your team need to be successful. If you need help bringing your large scale projects in on time and on budget, reach out to us at [email protected]

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 the Collective54.com. OK, this takes us to the end of the episode, let’s try to help listeners apply the now. We end each show with a tool. We do so because this allows a 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, your engagement type is working for you. If you answer no too many times your engagement type is more than likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:08:01] Number one, do you want to serve a small number of clients? Number two, do you want to live and die by the big deal? Number three, can you handle the lumpiness that comes with elephant hunting?

Greg Alexander [00:08:19] Yeah, when you have a six month sale cycle, you’re going to be holding your breath for a while.

Sean Magennis [00:08:23] Absolutely. Number four, do you want to stay engaged with clients for an extended time?

Greg Alexander [00:08:30] You know, some of our beloved founders, they love the thrill of the hunt. And after they win the deal, they don’t want to hang around. So they would be better off hunting rabbits.

Sean Magennis [00:08:37] Yeah, it’s addictive. That adrenaline deal to deal. Number five, can you get in front of big companies that can afford large projects? Number six, can you hire the expensive talent needed to deliver on those expensive projects? Number seven, can your cash flow support periods of time with low utilization rates? It’s a big challenge.

Greg Alexander [00:09:02] Sure.

Sean Magennis [00:09:03] Number eight, is the problem you solve complex enough to warrant long engagements? Number nine, is the service you offer robust enough to require expensive engagements? And number ten, are you comfortable with the risk that comes from high revenue concentration?

Greg Alexander [00:09:23] Yeah. So if you’re hunting, elephants are going to have a small number of clients, right, where we’re rabbits to spread your risk.

Sean Magennis [00:09:28] Right. Greg, thank you. So in summary, the type of engagement you sell and deliver determines a lot. The boutiques that offer both types of engagements have a high failure rate. Pick one and be the best you can be on that type of engagement. 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.

Episode 40: The Boutique: What No One Tells You About Failed Attempts to Exit

A top reason owners fail to exit is a decline in performance during the process of selling the firm. On this episode, we discuss how to avoid making this mistake.

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 a top reason that owners failed to exit is a decline in performance during the process of selling their firm. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has helped many owners avoid this mistake and has some practical advice on the subject. Greg, good to see you. Welcome.

Greg Alexander [00:01:09] Thanks, pal. Good to be here. It looks like today we’re going to take one of the WTF moments on this space. Should be a lot of fun.

Sean Magennis [00:01:18] Yes. This is a WTF moment for sure. Greg, for the benefits of our new listeners and for our regulars. Can you explain the issue we are discussing today in more precise terms?

Greg Alexander [00:01:29] Sure. So after selecting an investment banker, the official process to sell a firm kicks off. The workload placed on the management team to successfully exit is large. For instance, there is a never ending stream of information request. This creates a huge distraction and the net result of this distraction is a decline in revenue and profit performance during the nine or so months it takes to exit. This decline causes the potential buyers to doubt the dependability of the projections. And unfortunately, with their confidence shaken, investors pull out of the deal. This happens far too often. The good news is, is this is avoidable.

Sean Magennis [00:02:16] So let’s explore this good news. How can one avoid this mistake, Greg?

Greg Alexander [00:02:20] So there are some best practices to follow. Let me share a few of them here. First time the process to sell the firm when there is a robust backlog, backlog is defined as work that is signed and under contract. It has not been delivered yet. The future revenue is highly dependable. It reduces the risk of a decline in performance during the process. A good rule of thumb is to have nine to 12 months of backlog heading into the process. So, for example, let us say a firm communicates to a buyer a 12 month revenue projection of 50 million dollars. An owner should have at least thirty seven and a half million or the equivalent of nine months under contract. In backlog before kicking off the process to sell. This will keep the cash flow flowing at a crucial time.

Sean Magennis [00:03:12] That is an excellent example. It’s extraordinarily practical. So what are some other ways to avoid failing to exit due to a decline of performance during the process to sell?

Greg Alexander [00:03:25] Next after backlog, I recommend turning your attention to the sales pipeline. I suggest a sales pipeline of five to one. For instance, let us say that you’re a 12 month projections for new businesses, 10 million. This suggests having visibility on 50 million in new work before the process to sell your firm begins. A five to one project pipeline provides enough coverage to hit the target.

Sean Magennis [00:03:54] Boy, that’s a good one. And it seems reasonable as a five to one pipeline ratio suggests a 20 percent close rate, which is conservative. How about some other advice for our listeners, Greg, on this issue?

Greg Alexander [00:04:07] Here’s an idea I have seen work brilliantly, but for some reason it is not often implemented. The idea is to split the business development team in two. Team one is committed to bringing in new business. Team two is committed to selling the firm. This addresses a common, overlooked mistake, which is underestimating the work required to sell the firm. For instance, owners of a firm are typically rainmaker’s. They bring in a lot of new business when their time is consumed with selling the firm. They’re not bringing in new clients. The revenue takes a hit and the exit falls apart by dividing up the workload. This can be prevented. And before I get off my soapbox, let me share a few other tactical ideas. Bullet proof the forecast. Investors are buying the firm based on the future growth it will generate. They are very skeptical. And we’ll put your forecast under the bright lights. Lastly, it’s a good idea. Think about transaction preparedness. Firm leaders will be asked to perform work. They have never done before. For example, you’ll be asked to prepare materials such as an information memorandum and many others. Get your hands on a few examples. Well, ahead of trying to exit and give yourself enough time to practice before trying to exit. This will shorten the time it takes to go to market and will result in a shorter sales process.

Sean Magennis [00:05:42] Fantastic, Greg. So split the BD team in two, bullet proof the forecast, and practice transaction preparedness. These are items our listeners can get to work on immediately. Thank you, Greg.

Sean Magennis [00:06:01] 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.

Frank Digioia [00:06:26] My name is Frank Digioia and I am the CEO and owner of the Fort Group. At the Fort Group, we offer a wide range of marketing services and solutions across many industries to help solve marketing challenges for clients navigating a marketplace that’s in transition. By that, I mean marketing in the middle of a monumental digital transformation. These clients look to us for various marketing services, including strategy, channel and sales, promotion, digital, as well as the creative needs. We solve these challenges by partnering with our clients and working hard to find the right solutions with the right resources. If you need help with these marketing services, feel free to reach out to me at [email protected]

Sean Magennis [00:07:05] 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 [00:07:23] Okay, 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 a 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, you can sustain performance during the process to sell your firm. If you answer no too many times, you’re likely to blow your opportunity to exit. Let’s begin.

Sean Magennis [00:08:02] Number one, do you have enough backlog prior to launching the process to exit? Number two, do you have enough pipeline prior to launching the process to exit? Number three, can the new business team stay focused on bringing in clients during the exit process? Number four, can the owners work be delegated to others during the exit process? Number five, is the forecast reliable? Number six, will the forecasts remain reliable during a time of great distraction? Number seven, have you provided enough deal support to the finance team? Number eight, can the finance team handle the constant requests for reports and information? Number nine, have you reviewed examples of the common documents used during transaction preparedness? And number ten, have you attempted a practice run in putting together these documents?

Sean Magennis [00:09:22] In summary, many exit attempts fail because the distraction of trying to exit causes a dip in revenue and profit performance. This should and must not happen to you, selling your firm is a big project lasting almost a full year. Get yourself ready ahead of time and be sure to time your attempt to exit correctly.

Sean Magennis [00:09:48] 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.