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.

Episode 39: The Boutique: 4 Different Recruiting Needs for Professional Services Firms to Scale

As your boutique professional service firm scales, talent acquisition shows up on the list of top priorities. Collective54 founder Greg Alexander discusses why the ability to recruit at scale separates the winners from the losers.

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 your boutique scales, recruiting shows up on the list of things to excel at. The days of recruiting from your personal network are over, and the ability to recruit at scale separates the winners from the losers. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is considered one of the industry’s best talent pickers. In fact, Dr. Jeff Smart in his best selling book, Who the A Method for Hiring suggests Greg is one of the best he’s ever seen. Greg, great to see you and welcome.

Greg Alexander [00:01:26] Sean, it’s good to be with you. I see that you dug up Dr. Smart’s classic book and who Jeff and Randy who run smart and associates are the best in the world at hiring the right people. I encourage everyone to read that book and check them out. I was flattered to be mentioned as a success story in their work.

Sean Magennis [00:01:45] Will do. Greg, I have heard you mentor boutique funders in the area of recruiting. So during these conversations you discuss how there are four different recruiting needs when scaling. Can you walk the audience through these four?

Greg Alexander [00:02:01] I’d be happy to, but before I do, allow me to place this into the proper context. If you are a small, young firm in the startup phase, this does not apply to you. Recruiting in the startup phase is not a mission critical task. The needs are basic in most jobs can be filled from personal networks. In contrast, if you are a firm trying to scale, meaning build something more than a lifestyle business, then recruiting is a mission critical task. Not all the jobs can be filled from personal networks as there are just too many of them to fill. And also the stakes are higher. So, for example, as you leave the scale stage and start to prepare for exit, you will need to recruit a CEO so you can ride off into the sunset. If you miss higher this role, you can kiss your earnout goodbye. Recruiting goes from a passive activity to a mission critical task as you mature. Does this make sense, Sean?

Sean Magennis [00:03:00] Yes, it does. Thanks for setting the table, Greg, and for the context.

Greg Alexander [00:03:05] OK, so let’s jump into the four different types of recruiting as a firm scales. I will start with the first big change, replacing generalist with specialist. As you scale, you will attract more sophisticated clients. These clients will pay you more and therefore expect more. These clients are experienced buyers of professional services and they know what to look for. For example, they will require you to name and describe the team on the account in the proposal. This means you will need to spell out the years of experience, industry references, project case studies and many other items. The prospect is deciding on which firm to select, due in part to the bios of the account team. If you recruit generalist, you will lose too many deals and will not be able to scale sophisticated clients. The types of clients our audience wants to work for, the mad, hyper specialized talent. Does the first recruiting change makes sense?

Sean Magennis [00:04:12] Yes, it does, Greg. So switch from recruiting generalists to recruiting specialists in response to the needs to more sophisticated clients. What is the second recruiting change that happens as you scale?

Greg Alexander [00:04:26] The second recruiting change that pops up when scaling a boutique is the need to hire a manager of managers. You see, startups are filled with small teams, boutiques are filled with medium sized teams, and the market leaders are filled with large teams. Therefore, startups hire managers who manage individuals, boutiques, hire managers who manage other managers and market leaders, hire managers who lead entire departments. So during the scale stage, owners of boutiques need to recruit or develop managers of managers at about midsize. The need for this role again, manager of managers shows up. So this is the second recruiting change and does that make sense?

Sean Magennis [00:05:14] It sure does. So when small startups graduate to the scale stage in their life cycle, the need to hire managers of managers shows up for the first time. This is a big change and it makes logical sense. What is the third recruiting change on the journey?

Greg Alexander [00:05:33] So the third recruiting change that pops up when scaling and boutique is the need to hire executives, boutiques at scale require an executive leadership team. These executives have autonomy to make decisions. They’re not simply executing the founders plan. They are drafting their own plans in at times even have their own independent profit and loss statement, which means they have spending authority. Does the third recruiting change make sense to you?

Sean Magennis [00:06:00] It does Greg and I have seen many a founder stumble at this point. This requires giving up some control and that can prove to be difficult for some. What is the fourth and final recruiting change as a firm scales?

Greg Alexander [00:06:17] So the fourth change that pops up when scaling is a need to reassign the founder. So we all love our founders. They are the pioneers who created jobs and wealth. However, at a certain point, founders become a bottleneck founders. They want to launch new services into new markets and innovate. They do not want to install process and systems and scale. And yet that’s what’s needed at this stage. Therefore, founders must hire or promote a new CEO. The objective is not for the founder to stop working or to work less. Rather, it’s to make the founders contributions much more impactful. The CEO runs today’s business while the founder is developing tomorrow’s business. This one two punch accelerates the pace of scaling. Does that fourth recruiting change makes sense?

Sean Magennis [00:07:15] It absolutely does. Greg and I especially like the word reassign as opposed to replace. We are not showing the founder the door. Instead, we are creating an environment that allows his or her creativity to blossom and not be strangled.

Greg Alexander [00:07:31] Yeah, that’s correct. I mean, where would jobs have been without Cook or Zuckerberg? Without Sanders?

Sean Magennis [00:07:36] Absolutely. Excellent advice and examples as usual. Greg, thank you.

[00:07:44] 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.

Matt Rosen [00:08:09] Hello, my name is Matt Rosen. I’m the founder and CEO of Allata. Allata service enterprise clients in the financial services, health care, retail distribution and professional services sectors. Our clients are nationwide and we have offices in Dallas, Pheonix, Salt Lake City and Boise. Our clients, such as Freman Associates, and the Army Air Force Exchange, turn to us for help with strategic initiatives typically creating new revenue streams, creating digital customer experiences or increasing productivity. We help our clients by building digital strategies and roadmaps, designing product custom, developing software and helping them gain insights into their data. If you ever need help with a digital strategy, product development, customer development or data initiative, please reach out to me at [email protected] and the websites www.allata.com.

Sean Magennis [00:08:56] 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 recruiting strategy is working for you. If you want to know too many times, recruiting and the lack thereof is more than likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:10:01] Number one, the individual contributors need to evolve into manages? Number two, the managers need to evolve into managers of managers? Number three, do managers of managers need to evolve into executives? Number four, do you need to shift from generalists to specialists? Number five, are you attracting sophisticated clients with higher expectations? Number six, has the founder become a bottleneck? Number seven, can the impact of the founder be amplified if partnered with the CEO? Number eight, does Decision-Making need to be pushed to those closest to the clients? Number nine, is it time to shift from experimenting with the model to scaling the model? And number ten, is it true that what got you here won’t get you there?

Greg Alexander [00:11:17] You know what I love about those 10 questions in particular in this episode is there’s a yes box in a no boxes, no maybe box.

Sean Magennis [00:11:24] That’s exactly right.

Greg Alexander [00:11:26] So you founders’ out there when you’re asking yourself these questions, make sure you’re you’re answering accurately.

Sean Magennis [00:11:32] Thank you, Greg. In summary, recruiting as a startup is not a mission critical task, yet when scaling, it is the need for specialists, managers, executives and a CEO arrive on the scene. These are new roles and usually cannot be filled correctly from the founder’s personal network. To scale, your boutique needs to become a master recruiter.

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, our audience, for listening.

Episode 38: The Boutique: How to Market and Sell Like a Pro

Founders of boutiques can increase their rate of growth by professionalizing their marketing and sales approach. On this episode, learn the fundamental building blocks to professionalize your firm’s sales and marketing skills.


TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with the 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 founders of boutiques can increase their rate of growth by professionalizing their marketing and sales approach. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg founded Sales Benchmark Index in 2006 and went on to become one of the world’s foremost experts in the field of sales and marketing effectiveness. Today, he will offer you the fundamental building blocks to professionalize your sales and marketing efforts. Greg, good to see you. Welcome.

Greg Alexander [00:01:20] Hey, Sean. So in prep for this show, I did a little homework on myself. So the year 2020 was my twenty seventh year carrying a quota, so to speak. And I have made my number 25 out of 27 years, which is 92 percent of the time. I missed in the year 2000 while I was at EMC in the dotcom bubble burst and I missed it in 2020 while at Capital 54 because the global pandemic destroyed the economy. I mention this not to brag in any way. When I saw the title of the show, How to Market and Sell Like a Pro, I felt compelled to check myself to see if I am indeed a pro. And I’m a proud I’m very proud of that 92 percent success rate over almost three decades. But more importantly, gosh, I learned a lot and I’ll share that with you guys today.

Sean Magennis [00:02:09] And you’re still doing it, Greg, which I admire tremendously. So, yes, it’s these lessons from the battlefield that I want you to share with the audience. But first, why is it that you think so many of our listeners struggle in this area?

Greg Alexander [00:02:23] Yeah, well, most CEOs and founders of boutiques are not natural marketers or salespeople. They are experts. Many are giants in their field. In some cases, some are on TV. The best seller list, the speaking circuit. However, when I look at their panels, I’m shocked to see how little revenue they bring in. I asked myself, how can this be? Well, these brilliant experts would rather go to the dentist and make a sales call. They simply do not know how to go to market with their services. And their personal networks only generate so many referrals so they they never grow past the point of a nice little lifestyle business.

Sean Magennis [00:03:01] Greg, this is so accurate. I mean, we’re living this, you know, today with so many of our collective 54 members. I see it every day. What I find frustrating is many of these brilliant boutique CEOs, they know this. They want to fix it. They just don’t know how to. What advice do you have for these folks?

Greg Alexander [00:03:21] So these CEOs need to be great at two things. Number one, they need to attract new clients. And number two, they need to generate additional revenue from existing clients. And when I say great, I mean it. They need to develop these as fundamental core competencies on par with their domain expertize.

Sean Magennis [00:03:42] Agreed. So these are the two fundamental building blocks and the standard to deliver to is great, not good, but these are a little abstract for me. So can you unpack this a little more?

Greg Alexander [00:03:55] How much time do we have?

Sean Magennis [00:03:57] Let’s say about 10 minutes.

Greg Alexander [00:03:58] OK, here are the Cliff Notes. I will start with the seven building blocks of a great sales model. So number one prospecting process. This is a consistent way for business developers to find opportunities. Number two, buyer journey map. This is an outline of how a prospect buys your type of service. Number three, sales methodology. This is a step by step method to convert opportunities into clients. Number four, channel optimization. This is how the right services will be sold to the right clients at the right time. Number five, incentive system. This is a compensation mechanism that motivates every employee to generate revenue. Number six, training program. This is a program to increase the effectiveness of each employee when pursuing sales opportunities. And lastly, number seven, coverage model. This is a headcount allocation plan to ensure that the target market is properly covered. Well, that was quick. Listeners should ask themselves, do they have these seven building blocks in place? Are you ready for the marketing Cliff Notes?

Sean Magennis [00:05:09] Yes, go for it.

Greg Alexander [00:05:11] OK, so here are the marketing Cliff Notes. There are nine building blocks of a great marketing model, number one brand strategy. This is an inspiring story uniquely relevant to your target clients. Number two, value proposition messaging. This explains to a client how they move from the problematic status quo to an opportunity filled future by hiring your firm. Number three, positioning statements. This articulates why your firm is better than the alternatives. Number four, campaign strategy. This is hyper targeted marketing campaigns that hit the sweet spot of your market. Number five, content strategy. This allows you to earn brand preference by satisfying the information needs of your target clients. Number six is budget. This is dollars and non billable hours assigned to specific accounts to stimulate demand. Number seven is agency. This is a trusted service partner who can help you execute all of this and has two more. Number eight is lead generation. This is a method to attract the right clients to your firm and the right quantity. And lastly, number nine is clients marketing. This is a method for delivery staff to locate new opportunities inside the current client base. So listeners should gut check themselves against these nine basics. I went through that really quickly that I communicate clearly.

Sean Magennis [00:06:43] Yes. Greg, you did this worked out this worked out well. Listeners think of these as two checklists to run yourself through to see if you are marketing and selling like a pro. If you do not have these items, you are behaving like an amateur. And this may be the reason revenue growth is not where you want it.

Greg Alexander [00:07:04] You know, one last thing, Sean, I want to mention, if I may remember, that marketing and selling services is entirely different than products. So why is this? Well, products are sold and consumed and services are bought and experience, and that’s a big difference. So, for instance, I watch the halftime show on Super Bowl. It featured the artist called The Weekend. I went to Spotify, listen to his music music and I bought it. I never met the weekend. It was sold to me. I consumed it. In contrast, I recently needed to update my estate plan, I hired an attorney, we met, we worked together to produce the new estate plan. The service and the person delivering it cannot be separated. The service is experience, not consumed. The attorney did not sell it, but rather helped me buy it through a great experience. The point is to not make the rookie mistake of trying to use best practices to market and sell products in the professional services industry. They just don’t work.

Sean Magennis [00:08:06] That’s great practical advice. Greg, 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.

Kris Sugatan [00:08:38] Hello, my name is Kris Sugatan. I own Sugatan.IO. We are founders of E Commerce Brands all over the world. These clients turn to us for help with scaling their brands by acquiring new customers profitably. We solve this problem by creating video and graphic ads that convince the viewer to buy your product. If you need help with acquiring a new customer profitably, reach out to me at [email protected] That’s [email protected]

[00:09:15] 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, there was a lot to absorb, this takes us to the end of the episode, let’s try to help you, the listener, 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 marketing and selling strategy is working for you. If you answer no too many times your marketing and selling strategy is more than likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:10:21] Number one, is it obvious to prospects who you serve and how you serve them? Number two, is it obvious to prospects why you are the best at what you do?

Greg Alexander [00:10:36] So this goes to both value proposition and positioning statements.

Sean Magennis [00:10:40] Number three, are you in front of enough prospects to hit your revenue targets?

Greg Alexander [00:10:45] Lead generation.

Sean Magennis [00:10:47] Number four, do you understand how clients decide to hire someone like you?

Greg Alexander [00:10:53] How they buy versus how you sell.

Sean Magennis [00:10:56] Number five, can you consistently win more than 50 percent of the time?

Greg Alexander [00:11:01] Now, some listen again and say that’s too high of a bar to clear. And I would call B.S. on that. If you close rates beyond 50 percent, you’re pitching the wrong clients.

Sean Magennis [00:11:09] Right. So if you’re targeting is right, if it’s working properly, generation, psychographic, demographic, you’re going to exceed that 50. Number six, are you extending your reach through multiple marketing channels?

Greg Alexander [00:11:22] And here’s what’s unique about a boutique. You don’t have brand recognition. Nobody knows who you are. So you got to get the word out.

Greg Alexander [00:11:28] Right.

Sean Magennis [00:11:28] Yep. Bingo. Number seven, but you and your team motivated to bring in more revenue?

Greg Alexander [00:11:35] Put your money where your mouth is.

Sean Magennis [00:11:36] Incentivize. Number eight, are you and your team highly trained to win new business? Sharpening that saw. Number nine, are you covering your market sufficiently?

Greg Alexander [00:11:49] Often overlooked, but coverage is a big issue.

Sean Magennis [00:11:52] And number 10, do you have an agency capable of multiplying your efforts?

Greg Alexander [00:11:58] Don’t go it alone here? Listen, you don’t clean your own teeth, go to a dentist. So when it comes to marketing, in particular, find an agency and hire them.

Sean Magennis [00:12:05] I love that, Greg. And we have many great agencies in Collective 54. So in summary, I bet you the listener is an expert in your field, a true giant who knows more about your domain than just about anybody. I’m here to tell you that is not enough. If no one knows about your brilliance, what good is it? The world is filled with bankrupt ideas. Master your go to market, elevate your marketing and sales capability to professional grade. Earn what you were worth. 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. Greg, thank you. And thank you, our audience, for listening.

Episode 37: The Boutique: The One Thing No One Tells You about Scaling your Firm

Founders of boutiques often mistakenly equate the number of employees with success. However, lots of employees signal a poorly run firm. Collective 54 founder Greg Alexander makes the case for lean staffing and illustrates the impact to profitability.

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 fewer employees are better than many employees. Founders of boutiques often mistakenly equate number of employees with success when in fact lots of employees signals a poorly run firm. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg’s firm, SBI, at the time of exit averaged one million dollars in revenue per employee. This was driven by having fewer employees than most, this resulted in exceptional profitability and wealth creation for the owners. Greg, I’m looking forward to this. Good to see you and welcome.

Greg Alexander [00:01:33] It’s good to be with you. What a great topic we have today.

Sean Magennis [00:01:37] So, Greg, I often encounter boutique owners with bloated staffs and below average margins. Why is this happening?

Greg Alexander [00:01:46] Somewhere along the way, it became cool to say, quote, Hi, my name is so-and-so. The name of my company is X, Y, Z, and we are a 200 person firm in the blah blah, blah, blah space. Founders brag about lots of people to establish credibility, and maybe this works on the uneducated, but when I hear this, I think, oh no, this poor schmuck is working his tail off and not making any money.

Sean Magennis [00:02:14] So, Greg, what advice would you give a listener who is making this mistake?

Greg Alexander [00:02:18] Geez, where do I begin? I think the first thing I should do is explain that labor is the biggest expense in a professional services firm, often 80 percent of the total expense line. Therefore, anything you can do to reduce labor expenses, do it because this will equate to more profits. I mean, the best boutique in the world would have no employees and lots of clients and revenue.

Sean Magennis [00:02:43] Yeah, exactly. And let’s assume this poor schmuck, as you affectionately referred to earlier, was actually willing to listen. What steps would you have him or her take?

Greg Alexander [00:02:55] I would ask Mr. Schmuck three questions. Question number one, how many people do you need and why? The question number two, what type of people do you need and why? And question number three, which organizational structure would work for you and why?

Sean Magennis [00:03:13] And Greg, how would he know the answers to these questions?

Greg Alexander [00:03:17] Well, he would know the answers to these three questions if he understood three things. First, he would understand the skill level needed to perform the work skill level could be simply junior, mid-level or senior as an example. Second, he would understand the knowledge required to perform the work knowledge level could be simply industry knowledge or knowledge of the problem or knowledge of the solution. And third, he would know how long it would take to perform the work. This is measured in hours and rolled up into a level of effort budget.

Sean Magennis [00:03:57] Got it. And when he had the answers to these questions, what would he do with them?

Greg Alexander [00:04:02] Well, this would tell him how many people he needed and what type. And this is the most important part. He would have the data he needs to engineer a profitable organizational model.

Sean Magennis [00:04:15] How so Greg?

Greg Alexander [00:04:17] So after he knows what it really takes to perform the work, I mean, down at the task level, he will notice he is destroying profits. My friend, poor Mr. Schmuck will see almost every time he can do the work with less people, with more junior people and at less cost.

Sean Magennis [00:04:36] And how does he see that ?

Greg Alexander [00:04:39] Listen, we’re living in a different time today. The service delivery has forever been altered in three very distinctive ways. First, services can be automated with technology. For example, look at what is happening with robo advisors in the wealth management space. Portfolio managers are being replaced by algorithms by the thousands. Second work can be offshored. The big market leading firms offshore approximately 40 percent of their work, yet boutiques offshore about five percent. This is a missed profit opportunity. And third, the gig economy is here in the professional services space. And for real, you can now rent a Harvard MBA X McKinsey type from the to marketplace for less than one hundred bucks an hour. You can get excellent graphic design work from one of collected fifty four members, Russ Perry at Design Pickle for as little as five hundred dollars per month flat fee. These are just a few examples. If Mr. Schmuck picked his head up, he would see there a profit improvement opportunities all around him. Adding headcount is a lazy man’s way of scaling. The days of proving your success with large staffs have been replaced by today’s standard, which is profit. Standard of proof now is profit, not number of employees. There’s nothing cooler than fat profits. I encourage all of our listeners to intelligently design the org structure. Do not just throw heads at every problem.

Sean Magennis [00:06:20] 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 their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Don Goldstein [00:06:54] Hello, my name is Don Goldstein. I am president and part owner of 5Q. 5Q primarily serves commercial real estate companies across the United States. Our clients turn to us for help with maximizing technology, efficiency, security and compliance. We provide worry free I.T. with our full spectrum of technology solutions through four service lines I.T. and cyber leadership, I.T., managed services, cyber security, managed services and I.T. project management. If you need assistance in any or all of these areas, reach out to me at [email protected]

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 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 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 employee count is working for you. If you answer no, too many times, you are likely unsure of how many employees you need, which is getting in the way of your attempts to scale a profitable firm. Let’s begin.

Sean Magennis [00:08:41] Number one, can you decouple the rate of revenue growth from the rate of headcount growth?

Greg Alexander [00:08:47] Yeah, I mean, this is so important. You grow in revenue, 30 percent headcount of 30 percent. You’re running in place if you’re growing revenue, 30 percent in headcount growth to, let’s say, 10 percent, you’re expanding your margins.

Sean Magennis [00:08:58] Yes. Number two, are most of your problems, people related?

Greg Alexander [00:09:03] They say all your problems walking around on two feet. So fewer people, fewer problems.

Sean Magennis [00:09:08] Number three, is your payroll your biggest expense?

Greg Alexander [00:09:12] Obvious question.

Sean Magennis [00:09:13] Number four, can technology perform work that humans are doing today? Number five, are you offshoring less than 40 percent of your work?

Greg Alexander [00:09:25] Yeah, there’s still some fear there and our listeners need to get over this. I mean, this is well-worn territory at this point.

Sean Magennis [00:09:32] And the quality of offshoring is spectacular.

Greg Alexander [00:09:35] Sure.

Sean Magennis [00:09:36] Number six, can you flex up or flex down headcount to match demand in close to real time?

Greg Alexander [00:09:44] This is what’s great about these talent marketplaces like CATALIN.

Sean Magennis [00:09:49] Number seven, are you skilled at labor arbitrage? Number eight, is it clear that scale does not refer to the number of employees, but to the amount of cash flow? Number nine, is it hard to match revenue and expenses?

Greg Alexander [00:10:09] In a project based firm, it’s brutally difficult.

Sean Magennis [00:10:13] Number ten, do you have limited forward visibility in your business?

Greg Alexander [00:10:18] Yeah, and again, most of the listeners here run some version of a product project based firm. So forward visibility is a problem. That’s why these flexible labor models are so critical.

Sean Magennis [00:10:29] And really keeping all of those relationships warm.

Greg Alexander [00:10:31] Yes.

Sean Magennis [00:10:32] So, in summary, the best boutique would have no employees. Labor is your biggest cost. Organize to reduce employee related expenses. This will drive your profits up. 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 Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 36: The Boutique: The 3 Commandments of Service Design

Collective 54 founder Greg Alexander discusses how to re-think service design and delivery to accelerated profits.

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 there are three commandments of service design. The service offering is to the founder of a professional services firm, what the product is to the founder of a product company. It’s how they deliver value to the client and designing it correctly is a mission critical task.

Sean Magennis [00:01:01] I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is actually one of the pioneers in service offering design in the boutique professional services industry. His approach has helped many founders rethink how they deliver their service value, leading to accelerated profits. Greg, great to see you. Welcome.

Greg Alexander [00:01:29] Good to be here.

Sean Magennis [00:01:30] OK, Greg, let’s jump in. Explain to our listeners why they should care about this subject.

Greg Alexander [00:01:36] OK, so many founders and executives leading boutiques are not imaginative when designing their service offerings. They do not think about how to design the service in a way that increases the value it brings to clients while simultaneously decreasing the cost to deliver it. So let me share a story to make this point. Not too long ago, I met a brilliant bookkeeper. She developed a way for small business owners to outsource bookkeeping for one hundred and nineteen bucks per year. Her prospects are those who do bookkeeping in-house, paying internal staff on average 40,000 dollars per year. She is, get this, three hundred and thirty six times cheaper for the same service as you can imagine, she is shooting ducks in a barrel and growing like a weed. So how did she do it? She reimagined. Our bookkeeping should be performed by uniquely blending technology automation in offshore labor. This is an example of a boutique founder winning because of intelligence service design.

Sean Magennis [00:02:42] Geez, I would not put growth and bookkeeping in the same sentence, but it seems to me this is a commodity service with an with an attractive growth prospects.

Greg Alexander [00:02:52] When I met her, I entered the meeting with the same assumption and she corrected this false assumption by telling me that she is one of a 183,000 bookkeeping firms in the U.S. That is a lot of firms, a lot of firm owners making money in the bookkeeping space.

Sean Magennis [00:03:09] And why are you attracted to such a crowded field?

Greg Alexander [00:03:13] I am attracted to her because she’s going to take lots of share. For instance, her typical competitor charges a small business owner sixty two hundred dollars per year for the same service. The way this will play out is more and more small business owners will outsource bookkeeping because of the 40000 dollar per year internal cost mentioned earlier. When these new prospects enter the market, they will look at her service at 119 dollars a year in her competitor’s service at sixty two hundred dollars a year. She’s going to win a lot of deals and take a lot of share. She just needs to get into as many deals as possible. Her close rate will be crazy high. This is why I’m attracted to her.

Sean Magennis [00:03:55] Greg, this is a great story. What lessons should the audience take from this?

Greg Alexander [00:04:00] Gosh, there are many. Let me share a few. So the first lesson is to be imaginative with designing a service. Too many boutique founders, a conventional in this area, for example, they turn their expertize into a methodology. They hire expensive domestic labor, train them on it and take it to market. This conventional approach constrains growth. Why? To earn an acceptable margin on this, a founder must charge a certain price and sometimes his price will price them out of the market. As you can see in the bookkeeping story, a little tech automation and offshore labor can go a long way. The second lesson is commodity services are ripe for disruption prior to meeting her. I would not have believed that bookkeeping is a growth industry and in the aggregate it is not. But she is a growth company. What is different between her and her industry? Intelligent design. The third lesson takes us to the three commandments of service design. Are you ready for them?

Sean Magennis [00:05:00] Yes have at it.

Greg Alexander [00:05:01] OK, so clients are boutiques for one of three reasons. The first reason is you can do what they can do better. The second reason is you can do what they can do faster. The third reason is you can do what they can do cheaper. Ideally, the boutique combines better, faster, cheaper into a single value proposition. And when I say better, faster, cheaper, I mean in relation to the alternatives, which can be internal staff, other boutiques, the big firms, etc.. So the three commandments of service design are better, faster, cheaper.

Sean Magennis [00:05:38] Excellent. I understand the three commandments better, faster, cheaper. How should we listen to put them to work in his or her business?

Greg Alexander [00:05:47] I suggest two immediate actions. First, screen all your current service offerings against the Three Commandments. If they are not clearly better, faster or cheaper than the alternatives, redesign them or sunset them. Second, screen your service roadmap against the Three Commandments. Do not bring a new service to market until you know for sure it is better, faster and cheaper than the alternatives.

Sean Magennis [00:06:13] Greg, that’s great practical advice. Thank you. Of course, this assumes our listeners have a service roadmap, but that is a topic for another day.

Greg Alexander [00:06:22] It is.

Sean Magennis [00:06:26] 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.

Jessica Nunez [00:06:52] Hello, my name is Jessica Nunez. I own TruePoint Communications. We serve a company’s marketing needs with B2B and consumer services. Our clients turn to us to propel their brand forward through marketing, public relations and social media. We solve this problem by providing a custom marketing and communication strategy tied to business goals and designed to meet the unique needs of their core audience. If you need help with awareness for your business that propels your brand forward, visit our website at TruePointAgency.com.

[00:07:27] 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 service design is working for you. If you answer no too many times your service design is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:08:27] Number one, are you offering a service that clients already by? Number two, are there many legacy firms providing the service? Number three, are these legacy firms ripe for disruption?

Greg Alexander [00:08:45] Yes, I mean, one, two and three, if you answer yes to those three questions, I mean, you’re in a great space.

Sean Magennis [00:08:49] Yep.

Greg Alexander [00:08:50] Just outmaneuver everybody.

Sean Magennis [00:08:52] Number four, can you use less expensive labor to deliver it?

Greg Alexander [00:08:57] And that’s where to start, because 80 percent of the cost structure is is human capital.

Sean Magennis [00:09:01] Number five, can you use technology automation to streamline it? Number six, can you perform the service better than the alternatives?

Greg Alexander [00:09:13] And that’s in the eyes of the beholder. The client.

Sean Magennis [00:09:14] Right. Number seven, can you perform the service faster than the alternatives? And number eight, can you perform the service cheaper than the alternatives? Number nine, can you combine better, faster and cheaper into a single value proposition? And number ten, are you staying away from the latest fad that might not have staying power?

Greg Alexander [00:09:45] So number 10 may appear to be out of place when compared to one through nine, but it’s been there for a reason, and that is sometimes boutique owners think the only way to grow is to get into the new thing. And as you saw with bookkeeping, that’s not true. You know, if you’re in a large, quote, commodities market, then be the disruptor. And if you are the disruptor, meaning you do things differently, can make a lot of money in traditional marketplaces.

Sean Magennis [00:10:08] That’s what I love about this Greg, it’s introducing contrarian thoughts, very powerful. So in summary, entrepreneurs often do not put innovation and service design in the same sentence. Boutiques do not look at themselves as disruptors. The innovator label is most often only applied to leaders of product companies. Yet the facts point in another direction. 67 percent of the US economy comes from the service industry, and 49 percent of the workforce is employed by small businesses. The biggest opportunity for you is to disrupt the legacy professional services sector. 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 for listening.

Episode 35: The Boutique: How to Prevent Greed from Stopping Your Exit

Greed, if left unchecked, can get in the way of a successful exit. On this episode, Collective 54 founder Greg Alexander shares a shareholder alignment framework to help you keep greed from stopping your successful exit

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 greed, if left unchecked, can get in the way of a successful exit. I’ll try to prove this theory by interviewing Greg Alexander. Capital 54’s founder and chief investment officer. Greg has developed a framework to help you keep greed from sinking your deal. Greg, as always, good to see you. And welcome.

Greg Alexander [00:01:06] Thanks, pal. Nice to be here. I see we are tackling one of the seven deadly sins today. Maybe we should start by saying 10 Hail Mary’s.

Sean Magennis [00:01:16] I use that frequently, but I think we’re okay as I actually took… My mother would be proud. Greg, in all seriousness, what does greed have to do with exiting a boutique professional services firm?

Greg Alexander [00:01:32] Unfortunately, a lot. A common reason that attempts to exit fail is a lack of shareholder alignment. A good deal for some is not a good deal for others. Disagreements over who gets what and when they get it have sunk. Many deals. Greed is a very powerful force.

Sean Magennis [00:01:52] It is indeed. And I can see this being a real issue as many professional services firms are organized as partnerships with each partner being a shareholder. They all have rights and getting everyone on the same page can be tricky. Greg, I. I often hear you speak about shareholder and stakeholder alignment. Can you define these terms for our audience?

Greg Alexander [00:02:16] Sure, a shareholder, is anyone who owns a share in the boutique. A stakeholder is a person or group who has a stake in the business. For instance, in boutiques, clients, they’re a stakeholder. They rely on the firm. So they have a stake in the firm’s business. Or your bank is a stakeholder. They depend on you to pay back the line of credit, for instance.

Sean Magennis [00:02:45] And why do shareholders and stakeholders play an important role when an owner is trying to exit?

Greg Alexander [00:02:52] They can prevent a deal from happening. So let’s start with the shareholders. For instance, they will vote on the exit, either approving it or not. If enough shares vote against the deal, it does not happen. And at times, it can be nuanced and more nuanced than this. For example, let’s say one of our listeners is the majority shareholder and he has enough power to approve the exit. However, his junior partner, who owns 10 percent of the shares, does not want the deal to happen. The junior partner can cause real problems as he is a key employee. And if he threatens to quit, the acquirer might get cold feet and not do the deal. The investor is buying a people driven business. And if key employees do not want to stay, they’re not going to go through with the sale. Majority and minority control are an important element, but in practical terms, not as much as you think. The same can be said about stakeholders. Stakeholders have rights and can prevent deals from closing as well. For example, the landlord is protected by the lease agreement. The bank is protected by the loan agreement. In some cases, stakeholders are not protected by legal agreements, but they might as well be. For example, a key client legally cannot prevent a deal from happening, but they can stop it in other ways. The key client can tell an investor during diligence that if this deal goes through, he will take his business to a competitor that can stop a deal dead in its tracks.

Sean Magennis [00:04:36] I can clearly see how getting both the shareholders and the stakeholders on the same page is absolutely mission critical. This is a tough question. How is this accomplished?

Greg Alexander [00:04:51] Well, as they say, half of a solution to a problem is recognizing that you have one. So if you’ve listened to this show, you’re halfway there. The remaining 50 percent can broking- can be broken down into two actions. So, number one, have the difficult alignment conversations before you attempt an exit, negotiate who gets what and when they get it way before a deal is on the table. And number two is to remind everyone about the alignment frequently during the process. It’s important to keep everyone in the boat focused on the predetermined definition of success. When offers start coming in, you cannot let anyone conveniently change their mind.

Sean Magennis [00:05:41] This is excellent advice, Greg. Negotiate internally first and get everyone to agree on an acceptable price and deal terms prior to attempting an exit. 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.

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Sean Magennis [00:07:31] Okay, so this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows 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 greed in check. If you answer no, too many times, shareholders and stakeholders will put your deal at risk by bickering over who gets what and when they get it. Let’s begin.

Sean Magennis [00:08:14] Number one, do you have more than one shareholder?

Greg Alexander [00:08:18] You know, obviously, if you’re the sole proprietor.

Sean Magennis [00:08:21] It is a lot easier.

Greg Alexander [00:08:22] It is a lot easier. Yeah.

Sean Magennis [00:08:24] Number two, do they agree on an acceptable price?

Greg Alexander [00:08:28] You know, I would tell you this is a difficult conversation and the reason for that is, is that when you get all the shareholders together in a room and you asked a question, you know, what would you accept for the firm? They throw out these numbers and they have no basis, in fact. So handling this with care and making sure that everybody understands the common way upon which to value a firm like yours and bring some type of method to the conversation helps a lot.

Sean Magennis [00:08:52] And you always said preparation is key and planning and taking the time to do it properly.

Greg Alexander [00:08:57] Sure.

Sean Magennis [00:08:58] So number three, do they agree on the terms of the deal?

Greg Alexander [00:09:01] Another issue. You know, sometimes people are doing this for the first time, so they don’t understand things like rolling your equity or an earn out, how much cash is paid at closing, etc..

Sean Magennis [00:09:12] Number four, are everyone’s expectations, which is what we discussing, are everyone’s expectations realistic?

Greg Alexander [00:09:19] Yeah.

Sean Magennis [00:09:20] Number five, do you have multiple stakeholder groups?

Greg Alexander [00:09:24] Yep. So don’t just pay attention to shareholders. Make sure you’re thinking about your stakeholders as well.

Sean Magennis [00:09:29] And number six, do you know what each stakeholder group wants? Number seven, are their expectations realistic? Number eight, do you know which stakeholder groups could get in the way? Number nine, do you know what the acquirer will require from each of them? And number ten, can you find a compromise between the acquirer and the stakeholder group?

Greg Alexander [00:09:57] Yeah, there’s always a compromise. OK. So the solution to preventing greed from stopping your exit is just find- just find common ground and, you know, at the risk of being crude. Don’t be a pig, yourself. You know, if you want to keep greed in check. Don’t be greedy.

Sean Magennis [00:10:14] Yes. Well said, Greg. So in summary, remember that shareholders own part of your firm. They have rights and will need to agree with you and your deal. And keep in mind, you have stakeholders as well. They also need to agree for you to close. It is best to get alignment prior to attempting to exit. There is usually a compromise that makes everyone happy. However, this compromise is very hard to identify under the hot lights of a deal.

Sean Magennis [00:10:49] 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.