Category: Pro Serv Blogs

Posted on

De-coding Poor Margin & Profitability: The Dreaded Ops Black Hole

De-coding Poor Margin & Profitability: The Dreaded Ops Black Hole

The root-cause to declining margins & profitability lies in the deep, dark, spreadsheet-laden abyss of your project financials & resourcing…  “The Operations black hole”. A place where hard-won project dollars shall never, ever, return from… and high-flying consulting space-ships can disappear forever.

Most professional service firms don’t even know the black hole exists. Occasionally they spot it in their rear-view mirror, months after engagements are finished, and in the distance they faintly spot all the $margin they’d expected to make, vaporized by scope-creep, over-delivery & poor pricing.

The gut-reaction is to blame the three main protagonists…

    1. It’s the clients fault – they always push for more, get our team on the back-foot & drag out a project. Problem is – if you’d spotted all of that earlier, you could’ve stopped it… or better still, $charged them!
    2. Or is it the delivery teams fault… I mean, where have all those budgeted hours gone? What side-of-desk extras weren’t subject to a change order? If time was tracked & utilization monitored – you’d have no surprises.
    3. So it must be sales? They over-promise, knock down the price to get the deal… that’s why there’s never any margin left… and they get all the commission & bonuses! Sorry to burst the last bubble, but if you need a standardized offering, based on proven previous project profitability (I wanted to add “productization”, but 4 P’s is enough (just ask E. Jerome. McCarthy)).

So none of them are to blame… and you can’t really point fingers at the resourcing team either, because they’re trying to construct your space-ship, designed to navigate the “operations black hole”, out of plastic, sticky tape & glue… I’m not an intergalactic engineer, but even I know you’ve got to have the right tools, in the hands of the right people, if you want a job done right.

So how do you navigate the Ops black hole?

    1. Get people to accurately track their billable time, at least at client AND project level. Bonus insights coming your way if they track to deliverable & non-billable time too.
    2. Use the time captured data, to start analyzing live projects against their existing budget… and tightly manage any potential scope-creep & over-delivery in real-time. This will surface some scary results. Scary good, scary bad – part of the process!
    3. As you now start to build a bank of delivered projects, start to review which of those generated the highest $gross margin. Look at your charge out & cost rates too.
    4. Analyze the same projects & client work, but with your $cash flow hat on… which enables you to best manage your WIP, speed up billing & cash collection?
    5. Build increasingly repeatable propositions & all new proposals around the best-performing projects. You’ll have solid pricing, billing & resourcing profiles by now. 
    6. When sales say they need prices dropped on future opportunities, get them to evidence from past client work, their proposal delivers the $margin you need.
    7. When delivery say they need more time or people, get them to do similar!
    8. Repeat steps 1-7, improving your process incrementally.

Successfully positioning, incentivizing & motivating people to execute on this plan, will enable you to course-correct from impending ops-black-hole doom, to a spaceship back on-track, with a crew all aligned too. Here’s to killer $margins & profitability for 2024 & beyond. Continued success! 

Interested in exploring these concepts further? I’m just a click away—let’s connect!

Posted on

Seven Signs Your Boutique Professional Service Firm Is an Undifferentiated Body Shop

Seven Signs Your Boutique Professional Service Firm Is an Undifferentiated Body Shop

Hey there, fellow founders of small service firms in North America! I’m Greg Alexander, and today we’re going to delve into a critical topic that might just change the trajectory of your business. We’re going to talk about the seven signs that your boutique professional service firm is at risk of becoming an undifferentiated body shop.

But first, let me introduce you to Collective 54 – the first, and only, community for boutique professional service firm leaders like you. Our mission is to help firms like yours thrive and avoid the pitfalls of becoming just another commodity in the market. Come check us out at www.collective54.com.

So, let’s dive right in and explore the signs that could be holding your firm back from greatness.

    1. Discounting Fees:

If you find yourself constantly lowering your fees to win business, you might be heading down the undifferentiated path. Competing solely on price erodes your value proposition and can lead to a race to the bottom.

Action item: take a fresh look at your value proposition. Is your firm the only place a prospect can get the kind of help you provide?

    1. Modifying Terms:

Are you bending over backward to accommodate clients’ payment terms or contractual agreements? If you’re too flexible on your terms, it can signal a lack of confidence in your unique offering.

Action item: make your contracts noncancelable and nonrefundable. Prospects who are unwilling to accept these terms are not in your ideal client profile, and do not value what you offer enough.

    1. Accepting Unconventional Invoicing Requests:

When clients request invoicing in ways that don’t align with your standard procedures, and you say yes without question, you risk becoming a mere service provider rather than a trusted advisor.

Action item: get paid in advance. No payment, no work. If a client will not pay you in advance, they do not believe in you and are hedging their risk.

    1. Providing Lots of Free Work:

Do you find yourself investing significant time and resources into potential clients before they commit to an engagement? This can lead to a drain on your profitability and an imbalance in your client relationships.

Action item: when you go to the doctor, do you pay for the diagnosis, or do they give it away for free? They run lots of tests, diagnose your symptoms, and you pay for this expertise. Why? It is valuable. Fast follow the medical profession.

    1. Letting the Client Define the Problem:

If you’re always allowing clients to dictate the problem to be solved without offering your expertise and insights, you risk becoming a reactionary service provider rather than a proactive advisor.

Action item: 50% of solving a problem is naming and framing it correctly. Prospects frame problems incorrectly often and send you off to build an inconsequential solution. Insist in being involved in problem definition.

    1. Letting the Client Design the Solutions:

Allowing clients to design the solutions themselves can diminish your role to that of a mere pair of hands, devoid of the strategic value you should be providing.

Action item: a prospect looking for an extra pair of hands to augment their overworked internal team are client to avoid. This is the worst possible position for a boutique professional service firm to be in.

    1. Lacking a Point of View:

Lastly, if your firm just tells clients what they want to hear without offering a unique perspective or point of view, you’re on a slippery slope to becoming an undifferentiated body shop.

Action item: thoroughly research each prospects problem, collecting and analyzing data and providing to the prospect a unique point of view backed up with supporting evidence.

The Consequences of Being an Undifferentiated Body Shop:

Now, let’s discuss the grim consequences of letting your boutique professional service firm fall into the undifferentiated body shop trap.

First and foremost, as a founder, you’ll find yourself working tirelessly to win business, only to see your profit margins squeezed by constant fee discounting. This relentless effort will leave you exhausted and frustrated.

Secondly, the financial picture of your firm may not be as rosy as you’d like. Undifferentiated body shops often struggle to command premium prices, resulting in lower revenue and profitability.

Lastly, your job satisfaction and sense of purpose may dwindle as you become just another service provider, lacking the excitement and fulfillment that comes from being a trusted advisor and problem-solver.

The good news is that it’s not too late to avoid these pitfalls and transform your boutique professional service firm into a thriving, differentiated business. Collective 54 is here to guide you, connect you with like-minded founders, and provide you with the tools and strategies you need to succeed.

Don’t let your firm become just another undifferentiated body shop. Join Collective 54 today, and let’s work together to elevate your business to new heights of success!

Posted on

From Consultant to Authority: Unleash Your Boutique Service Firm’s True Potential

From Consultant to Authority: Unleash Your Boutique Service Firm’s True Potential

In boutique professional services, there’s a crucial distinction that can significantly impact the growth and scalability of your firm. This distinction lies in the roles of being a “Consultant” and an “Authority.” Let’s delve into the definitions and implications of these terms, with examples from within the boutique professional service industry segment.

Let’s start with a basic definition for each.

    • A consultant typically offers expertise, advice, and services to clients based on their knowledge and experience. They often work on a project or retainer basis, billing clients for their time and deliverables.
    • An authority, on the other hand, is recognized as an industry leader and trusted expert in a specific niche or domain. They have a deep understanding of their field and are sought after for their unique insights and perspective. For example, my friend Geoff Smart is the world’s foremost authority on hiring A players. As a result, he built a firm with approximately 175 people and $100 million in revenue from scratch in 1995.

Here is a simple example applying these two definitions to the management consulting segment to illustrate.

    • Consultant: A management consultant may provide strategic advice and project management services to a client looking to optimize their business processes.
    • Authority: An authority in management consulting might be a renowned thought leader who has authored influential books on leadership and innovation, attracting clients seeking transformative solutions.

This subtle, but important distinction has considerable implications for Founders of small service firms. Here are just a few to consider:

    • Increased Earnings Potential
    • Authorities can command higher fees for their services due to their specialized expertise and reputation. Clients are willing to pay a premium for their unique insights and proven results. Most don’t charge by the hour, never negotiate fees, and always get paid in advance.

For instance, a consultant in a marketing agency offering general digital marketing services may charge standard rates for running ad campaigns. An authority in the marketing industry, known for groundbreaking marketing strategies and case studies, can charge premium rates for exclusive consulting services.

    • Scalability:
      • Authorities have a more scalable business model as clients often seek them out, reducing the need for constant client acquisition efforts. Their reputation draws a steady stream of clients. Authorities have more demand than supply and cherry pick which clients and projects to work on.

For instance, a consultant in a software development firm might need to actively market their services to secure new projects continuously.

In contrast, an authority in software development, renowned for pioneering coding techniques, can maintain a waiting list of clients eager to work with them.

    • Exit Strategy:
      • Authorities possess intellectual capital and a strong client base, making them attractive to potential acquirers or investors, making an exit achievable. However, most authorities don’t sell their firms because they are growing fast and generating piles of cash.

For instance, a systems integration firm staffed with consultants may have a successful practice but may find it challenging to sell their firm for there are many just like it. An authority in systems integration, known for developing groundbreaking integration solutions, can attract acquisition offers from firms looking to enhance their capabilities.

If you want to migrate from a firm staffed with consultants to a firm staffed with authorities, and reap the benefits, here is an outline of the steps to take.

    1. Narrow Your Niche: Choose a specific niche or domain within your field where you can develop deep expertise. Ask yourself: “In what field do I know more than anyone else?”
    2. Outlearn the Competition: Invest in continuous learning and stay updated with the latest trends, technologies, and developments in your chosen niche. Ask yourself: “How can I learn at a rate 10x that of others in my niche?”
    3. Create Unique Content: Start sharing your knowledge and insights through various channels like books, blogs, articles, podcasts, webinars, or videos. Ask yourself: “How can I create THE newsletter that is a must read never to be missed publication in my niche?”
    4. Build Your Presence: Establish a strong online presence by developing a professional website and social media profiles optimized for search engines, social media platforms, and large language models. Ask yourself: “When a prospect finds me online do they say ‘oh my gosh. Where has this been all my life?”
    5. Network and Collaborate: Connect with other authorities and influencers in your niche. Collaborate on projects, co-author articles, or participate in panel discussions. Ask yourself: “Who are the people in my niche that I respect and want to be associated with? How do I become a valuable thought partner to them?”
    6. Give Things Away: Provide free resources, tools, or templates that demonstrate your expertise and help potential clients or followers. This showcases your commitment to helping others and establishes trust. Clients will pay when they need to apply the tools. Ask yourself: “How am I going to overcome my fear of giving away my secret sauce?”
    7. Collect and Showcase Testimonials: Encourage satisfied clients to provide testimonials or reviews about their positive experiences with your services. Display these testimonials prominently on your website to build trust. Ask yourself: “which clients are my best sales people and how do I get them in front of prospects to tell my story?”
    8. Speak: Seek opportunities to speak at conferences, webinars, or podcasts related to your niche. Sharing your insights as a speaker can further solidify your authority status. Ask yourself: “If I am truly the authority in this niche, how can someone have a conference without me on the agenda?”
    9. Think in Years Not Days/Weeks/Months: Becoming an authority takes time and consistent effort. Continue to produce high-quality content, engage with your audience, and refine your expertise over the years. Ask yourself: “Am I behaving like a get rich quick scam artist or an authority built to last?”
    10. Adjust: Periodically assess your progress and adjust your strategies as needed. Pay attention to the feedback you receive from your audience and adapt accordingly. Ask yourself: “Is my skin to thin?”

In conclusion, understanding the difference between being a consultant and an authority is crucial for founders of boutique service firms. While both roles have their merits, becoming an authority can lead to higher earnings, easier scalability, and a more promising exit strategy. By positioning yourself as an authority in your niche, you can unlock new opportunities and take your boutique service firm to greater heights.

Wanted to learn from those who evolved from consultant to authority? Join Collective 54, a mastermind community filled with those who have made this change. Apply here.

 

Posted on

The Art of Silence: 6 Reasons Not to Tell Your Employees About the Pending Sale of Your Firm

The Art of Silence: 6 Reasons Not to Tell Your Employees About the Pending Sale of Your Firm

Hey there, fellow founders of boutique professional service firms. If you’re contemplating selling your firm, you’re undoubtedly entering into a complex and potentially game-changing process. It’s a decision that requires careful planning and execution, and one of the crucial questions on your mind might be whether or not to inform your employees about the pending sale. In this blog post, we’re exploring the six compelling reasons why you should consider keeping your cards close to your chest when it comes to sharing this news with your team.

    1. Deals Often Fall Apart During Due Diligence

Let’s face it, folks – deals in the world of business can be as unpredictable as a roll of the dice. Many a promising transaction has crumbled during the due diligence phase for various reasons. Telling your employees about a sale that might not even go through can create unnecessary stress and anxiety. It’s better to maintain business as usual until you have a signed agreement in hand.

2. Employee Distraction Can Lead to a Dip in Results

When the word gets out about a pending sale, employees may start to wonder about their job security. This uncertainty can lead to a dip in their performance and focus, which is the last thing you need during a critical phase like a sale. Such distractions can also undermine the confidence of potential acquirers, making them question the stability and viability of your firm.

3. Loose Lips Can Sink Ships

Employees are a talkative bunch, and news of a pending sale can easily leak into the industry grapevine. Competitors might seize this information to their advantage, and even your clients might pause their relationships with you, uncertain about the firm’s future. Keeping the sale under wraps can protect your business from unnecessary turbulence.

4. Deals Morph During Due Diligence

During the due diligence process, deals often undergo significant changes. These changes can affect who stays, who goes, and the overall structure of the transaction. Until the final details are ironed out, it’s prudent to maintain confidentiality to avoid unnecessary confusion and anxiety among your employees.

5. You’ll Need Everyone On Board to Hit Your Earn Out

If your sale includes an earn-out clause, it’s crucial to keep your team motivated and engaged. Prematurely disclosing the sale can lead to a spike in turnover, with key employees potentially leaving before the deal is finalized. It’s essential to maintain a cohesive and committed team to meet your earn-out goals.

6. You Might Decide Not to Sell

Finally, and importantly, founders have a tendency to change their minds at the eleventh hour. The allure of selling might wane as the details become clearer, or unforeseen circumstances might arise. If you’ve already told your employees about the sale, you’ll face a difficult and potentially disruptive situation if you decide to back out.

In Conclusion: Maintain the Art of Silence

In the world of business, discretion is often your best ally. While transparency with your employees is generally commendable, when it comes to pending sales, it’s often wise to err on the side of caution. Keep these six compelling reasons in mind before prematurely sharing the news with your team.

Remember, a successful sale requires careful planning, strategic thinking, and a well-executed process. Maintain the confidentiality necessary to navigate the complexities of the transaction smoothly. When the time is right, and the deal is firm, you can share the news with your employees, providing them with the stability and reassurance they need to thrive in the transition.

So, dear founders, as you venture into the exciting world of selling your boutique professional service firm, keep these reasons in mind and play your cards close to your chest until the right moment arrives. Your employees will thank you for it, and your potential acquirers will respect your professionalism and discretion.

If you are contemplating a sale of your firm, consider joining Collective 54 by applying here. You can learn a lot from a community of peers going through the same process as you.

Posted on

When Your Exit Needs an Exit: Navigating Financing Contingencies in M&A Deals

When Your Exit Needs an Exit: Navigating Financing Contingencies in M&A Deals

Embarking on the journey to sell your business is a monumental decision, especially for small to lower-middle market business owners. It’s not just a transaction; it’s a pivotal moment that can shape the future of what you’ve built. However, amidst the excitement and potential for growth, there lurks a critical challenge that could derail your plans: counterparty risk, particularly the risk stemming from financing contingencies.

Understanding and addressing this risk early on, specifically at the Letter of Intent (LOI) stage, is crucial. This stage is your best opportunity to gauge the likelihood of a successful transaction before becoming too invested. For businesses in the small to lower-middle market sector—those with total sales under $150 million—engaging in a sale process is not only a significant financial commitment, involving advisors such as attorneys, financial analysts, and accountants, but also a substantial investment of your time.

Counterparty risk in M&A transactions can arise from various sources, but one of the most common and challenging to navigate is the buyer’s inability to secure adequate financing. This issue can affect deals across all market segments and involves both financial buyers (like private equity firms) and strategic buyers (larger companies within your industry).

At the LOI stage, it’s essential to critically assess the risk associated with the buyer’s ability to obtain appropriate financing for your transaction. Some LOIs will explicitly state that the deal’s closing is contingent upon the buyer obtaining suitable financing. However, even without a specific financing contingency, a buyer’s limited access to necessary funds—whether through equity or debt—poses a significant risk to closing the deal.

This financing risk can manifest in various ways:

    • The buyer may have access to financing, but it comes with stringent conditions;
    • The buyer’s ability to deploy cash to purchase your business may be subject to loan covenants restricting investments made to purchase other businesses (like yours) under the buyer’s existing credit arrangements, or otherwise require the approval of the buyer’s existing lenders ; or
    • Alternatively, the buyer could be attempting to raise capital to fund the equity portion of the purchase alongside negotiating the deal.

For business owners, understanding these risks and the potential impact on your transaction is vital. In navigating these waters, the key is to engage in thorough due diligence and direct communication with potential buyers about their financing plans and capabilities. At the LOI stage, it is customary to conduct interviews with key buyer personnel, and appropriate to ask direct questions about the ability of the buyer to purchase and then operate your business. If a buyer cannot commit to make a purchase of your business from available cash, you should ask the buyer to provide you with copies of any written equity or debt term sheets from outside parties in order to assure yourself of the buyer’s ability to rely upon outside financing. You should review those term sheets alongside your financial advisors and attorneys to understand what conditions attend the release of funds for the purchase of your business. Additionally, you should also ask your potential buyer whether they have existing credit arrangements and what conditions those arrangements might impose upon your transaction. In situations where you have the good fortune of evaluating LOIs from different counterparties at the same time, you should obviously preference favorable offers that also present the greatest certainty that the buyer can accomplish a closing of your transaction. This proactive approach can help mitigate risks and ensure that you’re entering into a transaction with a clear understanding of the potential hurdles, saving you time and protecting the investment you’ve made in pursuing the sale.

You might determine that there is still substantial uncertainty about your buyer’s ability to close. For example, if your buyer will be reliant upon an equity capital raise to partially fund your purchase price, it may be reasonable to conclude that the closing could be delayed, or cancelled, if their capital raising efforts are unsuccessful. In such events, you should discuss your options with your advisors to determine the customary protective measures you can take, or agree upon with your buyer, in the event the buyer is unable to close. For example, in smaller transactions (where the purchase price is $5mm or less) requiring a deposit of some portion of the purchase price for the seller’s security is not uncommon and even recently I have seen deposits used in much larger transactions (>$50mm purchase price). Some private equity sponsors are agreeable contribute up to 100% of the purchase price in equity (called a “full equity backstop”) if they are unable to obtain sufficient debt financing to fund a purchase. Although they are uncommon in middle-market transactions, reverse termination fees (where a buyer pays the seller a fee if it cannot close a transaction within some period) and arrangements to pay seller costs where a buyer is unable to close a transaction are other options that should be considered.

In conclusion, while the prospect of selling your business is an exciting one, it’s accompanied by significant risks that need careful consideration. By focusing on counterparty risk at the LOI stage, especially related to financing contingencies, you can better navigate the complexities of M&A transactions, ensuring a smoother journey towards a successful sale. We at Troutman would be delighted to help you evaluate both the counterparty risk related to your buyer and all available strategies to mitigate that risk.

Posted on

Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

As a founder of a boutique professional services firm, you may be contemplating your exit strategy. Understanding the M&A landscape is crucial to identifying who is most likely interested in acquiring your firm. In my experience, the most suitable buyers are typically firms that are substantially larger than yours, generally by a factor of 5-20 times the size of your firm. Here’s why:

The concept of “moving the needle” is central in M&A. For an acquisition to be worthwhile for a buyer, it must have a meaningful impact on their business. However, if the acquisition is too large, the risk and effort involved in closing the deal can become prohibitive. Therefore, a sweet spot exists where the deal is significant enough to be compelling yet manageable in terms of integration and financing.

To identify potential buyers in this sweet spot, we employ a simple yet effective back-of-the-envelope valuation method. By multiplying the number of employees a firm has by $200,000 (a figure that roughly estimates the revenue per employee for professional service firms), we can gauge the size and suitability of a potential acquirer.

Let’s walk through an illustrative example:

Imagine your firm has 10 employees and generates $2 million in revenue. You’re eyeing a sale, and you want to find a buyer for whom your firm would be an attractive proposition without being overwhelming to absorb.

If we apply our method, we’re looking for a firm that has between 50 and 200 employees. Here’s the math for the lower end:

50 employees x $200,000/employee = $10 million in revenue

And for the upper end:

200 employees x $200,000/employee = $40 million in revenue

These figures suggest that companies within this range would find an acquisition of your firm substantial enough to “move the needle” but still be a feasible transaction to complete.

Your next step? Start researching firms that fit this employee count and approximate revenue scale. Industry databases, networking events, and even LinkedIn can serve as starting points. Keep in mind that cultural fit, strategic alignment, and the specific services your firm offers will also play critical roles in attracting the right buyer.

By focusing your search on firms that fall within the 5-20x size range of your own, you increase the likelihood of finding a genuinely interested buyer—one for whom the acquisition of your firm represents a significant, but manageable, opportunity for growth.

Remember, while the revenue-per-employee method is a guide, it’s not a substitute for a thorough valuation and strategic fit analysis. Engaging with a knowledgeable M&A advisor early in the process can help refine your approach and identify the right targets, setting the stage for a successful transaction that delivers value for both you and the buyer.

If you are trying to figure out how much your firm is worth, who to sell it to, and on what terms, consider joining Collective 54 by applying here.  These questions, and many others, get answered by your peers and a curated set of advisors.

Posted on

How to Know the Right Time to Recap or Sell Your Business: An Investor’s Perspective

How to Know the Right Time to Recap or Sell Your Business: An Investor’s Perspective

Imagine you’re in a game where your character has a treasure of immense value, attained through years of sacrifice, risk taking and toil.  The objective of the game is simple – find a buyer for the item and transact at a mutually acceptable price.  Easy, right?  Well, there’s a twist[1]:

    • The buyer’s identity and location are a mystery
    • You can only transact once (i.e. no do-overs)
    • The item’s value fluctuates, and
    • A poorly-timed trade may sentence you to a lifetime of regret and self-loathing

Yikes.  Who would want to play that game?  Well, this mirrors the journey that founders embark upon when contemplating either a recapitalization of their business with a private equity firm partner (a ‘recap’) or the full sale of their business  (an ‘exit’).  Not to worry, there are people and insights that can help across all of the anxiety-laden dimensions of planning a recap or exit.  While the ultimate decision is yours, you are not alone.

Indicators That It’s Time

This piece will focus on timing and is informed by my nearly 20 years of experience as an investor in and seller of businesses.  Interestingly, across the matrix of decisions that a business owner has to make, timing of a recap / exit is one of the more straightforward exercises.  The trick is knowing what indicators to look for.  So, without further ado, here are some signs that the timing might be right:

    1. A comparable business in your industry achieved an appealing valuation. If you see another founder deciding to engage in a recap or exit transaction, it may merit introspection on your own transaction timing.  What’s good about another founder “going first” is that the multiple they sold for will eventually become known in the circles that care about these things[2].  We suggest reaching out to the investment banker(s) that worked on the transaction to learn about what attributes of the other business buyers focused on the most (i.e. the “value drivers”).  If you would like an introduction to one or more investment bankers who have strong qualifications and successful transaction experience working with owners of B2B professional services firms, please email me, and I’ll connect you. 
    1. Proceeds from a transaction will allow you to “hit your number”.  Admit it, you have a magic number in mind (after tax) that you would like to achieve from all of your efforts to develop your business.  This number is typically informed by various objectives for life in retirement such as estate planning goals,  philanthropy, or simply enjoying the well-earned fruits of your labors.  The reason for defining this number before you consider a transaction is to prevent clouded judgment during negotiations.  Therefore, if a transaction is likely to meet or exceed your target, then the timing could be right.  Remember the adage, “Pigs get fat, hogs get slaughtered.”   As importantly, when considering a recap vs. an exit transaction, keep in mind that the recap will provide you with two opportunities to monetize the value created by your team’s efforts while the exit transaction is a one-shot payout.  So the total proceeds and likelihood of reaching your target amount may be substantially greater in the recap scenario.  I’ll share more on this very important topic of recap vs. exit transaction in an upcoming blog post.  
    1. You’ve experienced multi-year growth in revenue and profits. In the words of Bruce Lee, “Long-term consistency trumps short-term intensity.”  This certainly applies to how investors will assess the quality, sustainability, and growth potential of your revenues and profitability.  For instance, if you have an abnormally great year with outsized profitability, you might conclude that you should exit to capitalize on your inflated earnings.  However, if your surge in EBITDA is attributed to one-time revenue wins or other unsustainable factors, a buyer is not likely to give you anywhere near full credit for it. Further, if your financials have been volatile such that there are a lot of ups and downs one year to the next, you’re not going to garner the same multiple as a business that elicits more confidence in the predictability of future financial metrics.  Consistent growth creates a reassuring storyline that will attract more interest.
    1. Value remains for a new investor. Sometimes looming headwinds can drive an owner’s decision to exit.  Conceptually, getting out before these challenges arrive makes sense, but it’s likely that investors are already, or will be, attuned to those same issues, and it may then be too late to drive an optimal outcome from a sale.  Would you purchase an orange with all of the juice squeezed out of it?  Clearly not.  At a minimum, investors are going to need to know that the prospects for growth will remain strong for the next 5-10 years.  Otherwise, they may encounter challenges when they ultimately seek an exit.  Think of it this way, reflect on whether you would want to invest in your business today.
    1. Bringing on a partner could help address the strategic needs of the business. For first-time founders of growing businesses, it’s a truism that their company is the largest entity they’ve ever managed.  For a time, managing growth can be fun and present an array of “high class problems” whose solutions can be fulfilling to solve.  However, growth can transform manageable hills into formidable mountains whose successful summit requires the support of someone that has climbed them before.  A good partner, like a sherpa on Everest, will see the opportunity that these mountains present and be able to help you develop a path forward.  Common strategic challenges that get a founder thinking about bringing on a financial partner include (i) their industry’s transformational change, (ii) investing in and building a formal and scalable sales and marketing system / organization, (iii) a sizable add-on acquisition, or (iv) professionalizing / incentivizing a management team.  

While these signs can guide your decision, the ultimate choice is personal and nuanced, and I wish you well in making it with the full support of your trusted advisors.  Get in touch any time if you ever want to talk through where you are in your journey.

About RLH Equity Partners

RLH is a private equity firm with over 40 years of experience investing in rapidly growing, founder-owned, knowledge-based B2B services firms.  Our value creation strategy is defined by a heightened focus on culture, continuity of founder leadership, an emphasis on organic growth, and a conservative approach to the use of debt.  In our long history, we’ve invested in and divested dozens of businesses and made many decisions about the optimal time to sell the companies in which we are investors.

[1] There are certainly exceptions to all of these items, so simply accept them here for the sake of example.

[2] Two other advantages of allowing a peer company to go first are (i) the number of viable targets for the interested investor/buyer universe has been reduced by one which improves the scarcity value of the remaining peers and (ii) the prospective investors/buyers who finished second, third, and fourth in the process to acquire the peer company probably still want to acquire a business similar to yours and are logical targets for your transaction process.

Posted on

Streamlining Client Onboarding for Quick Wins and Growth Opportunities

Streamlining Client Onboarding for Quick Wins and Growth Opportunities

A Blueprint for Boutique Professional Service Firms

As founders of boutique professional service firms, one of the most critical phases in your client relationship is the onboarding process. This initial phase not only sets the tone for your working relationship but also presents opportunities for quick wins and potential upselling. Let’s explore how to optimize this process through a real-life example and a practical to-do list.

A Success Story from Management Consulting

Consider a management consulting firm that recently won a project with a Global 2000 firm, tasked to assess their new product launch process. Initially, the project’s scope was confined to a single business unit. However, the excellence in their onboarding process led to an unexpected opportunity.

The firm meticulously tailored its onboarding approach, focusing on understanding client needs, setting clear expectations, and delivering early value. This approach not only impressed the primary contacts but also caught the attention of adjacent business units. Within the first 30 days, the exceptional handling of the onboarding process led to a referral into an adjacent business unit, effectively doubling the project’s size.

There is an old saying in professional services, “Do great work and business will come to you.” This is especially true during the new client onboarding process as the firm is still in the honeymoon period with lots of enthusiasm and excitement.

To-Do List for Effective Client Onboarding

To replicate such success, here’s a comprehensive checklist to enhance your client onboarding process:

    1. Understand Client Objectives: Start with a deep dive into your client’s goals and challenges. This understanding is crucial for tailoring your services to deliver immediate value. Do not assume all personnel from the client understands the problem the executive sponsor is trying to solve.
    2. Set Clear Expectations: Ensure that both parties are on the same page regarding project scope, deliverables, timelines, and communication protocols. At times, clients forget what they signed up for.
    3. Quick Win Identification: Identify opportunities for quick wins that can demonstrate your expertise and the value you bring to the table early in the relationship. A quick win is defined as valued delivered inside of the first 30 days.
    4. Personalized Communication: Establish a communication plan that suits the client’s preferences. Personalized interactions can build trust and open doors to additional opportunities.
    5. Regular Check-Ins: Implement a schedule for regular check-ins to discuss progress, address concerns, and adjust strategies as needed.
    6. Feedback Mechanism: Create channels for receiving and acting on feedback. This shows your commitment to meeting and exceeding client expectations.
    7. Showcase Breadth of Services: Without being pushy, strategically showcase the breadth of services your firm offers, making the client aware of how you can support them beyond the current scope.
    8. Leverage Technology: Utilize technology for efficient project management, reporting, and communication. This demonstrates your firm’s competence and reliability.
    9. Build Relationships Beyond the Immediate Team: Network within the client’s organization. Building broader relationships can lead to more referrals and opportunities.
    10. Deliver on Promises: Above all, deliver what you promised, when you promised. This builds credibility and lays the foundation for a long-term relationship. On spec, on budget, and on time- no matter what.

Conclusion: Opening Doors to Growth

An effective client onboarding process is more than a step in client engagement; it’s an opportunity to solidify your firm’s value, build trust, and lay the groundwork for future upselling and cross-selling. By following these steps, you can shorten the time to value for your clients, securing quick wins that pave the way for expanded opportunities and sustained growth.

If you would like to improve on your new client onboarding process, or other areas required to scale a boutique service firm, consider joining Collective 54 by applying here.

Posted on

Navigating the Complexity of the Net Working Capital

Navigating the Complexity of the Net Working Capital

  • Co-authored by Greg Fincke and Patrick Schmelzinger at Equiteq

In the world of mergers and acquisitions (M&A), there are multiple terms and process dynamics that come into play over the course of a transaction. One term that often stands out from the rest due to its complexity is net working capital. While it may seem like just another financial metric, the net working capital in the context of M&A transactions can have potential implications on the overall purchase price of a transaction. The purpose of this post is to provide founders with insight into net working capital, its role in a M&A transaction, and how to effectively prepare for the net working capital adjustment negotiation.

What is Net Working Capital?

Net working capital is definitionally defined as current assets minus current liabilities, but the metric takes a different form in an M&A transaction. Through the lens of a transaction, net working capital is often defined as current assets (excluding cash and cash equivalents) minus current liabilities (excluding short-term debt and debt-like items). The financial metric is utilized to assess the financial health of a business – it is a measure of the company’s ability to satisfy short-term liabilities and operational liquidity. Furthermore, an ideal position for a business is to have positive net working capital.

What is the Net Working Capital Purchase Price Adjustment?

The net working capital purchase price adjustment is often an unfamiliar term to founders prior to embarking on an M&A transaction. When a buyer submits an LOI, the terms will often include that the purchase price assumes the business will be acquired with sufficient levels of net working capital. Said differently, the purchase price implicitly included the value of the company’s net working capital. Buyers include this term to protect against the potential situation where a seller liquidates their current assets from the business and delays satisfying their current liabilities until the transaction is complete – leaving the buyer with a less valuable business. As you may be wondering, how is a sufficient level of net working capital determined and what are the mechanics for the adjustment? During the due diligence phase, buyers dive deep into the components of net working capital, analyzing trends, assessing liquidity ratios, and evaluating historical net working capital cycles. Following their analyses, the buyer will propose what they view as the sufficient level of net working capital, often called the net working capital peg. There are multiple different methods used to calculate a net working capital peg, but a typical approach buyers will take is to present the peg as the average of the last twelve months (“LTM”) net working capital. Please see below an illustrative example of a LTM peg calculation:

The net working capital peg is typically a focal point of negotiation as buyer and seller strive to reach a consensus that is a “win-win” for both parties as the adjustment isn’t traditionally thought of as a mechanism to increase or decrease value. The net working capital adjustment is the difference in the company’s net working capital as of the closing date of the transaction vs. the net working capital peg amount. For example, if the closing net working capital amount is higher (lower) than the net working capital peg, there would be an increase (decrease) to the purchase price. Please see below an illustrative example of how the net working capital adjustment works in practice:

How to Effectively Prepare for Net Working Capital Negotiations to Optimize Value

Rigorous, proactive preparation and strategic planning for net working capital negotiations is critical to ensure maximum negotiating leverage is achieved to arrive at the optimal net working capital peg. Prior to net working capital negotiations, sellers and/or their investment bankers should undergo detailed analyses to understand the historical trends of each balance account to: 1) identify any anomalies that skew historic net working capital trends, 2) understand the cycles of each account (i.e. is there seasonality?), and 3) have thorough analyses to underpin their view of the optimal net working capital peg. Being on the “front foot” with robust and accurate analyses to support your negotiation position and understanding how the buyer might counter enhance your negotiation strategy, mitigate risks, and maximize the potential for a desired outcome.

Conclusion

As founders begin on the M&A journey, understanding the nuances of net working capital and the adjustment becomes paramount. The adjustment underscores the importance of effective due diligence and preparation, sound advice from an investment banker regarding market standards, and tactical negotiation strategy. Mastering the art of successfully navigating the net working capital adjustment is crucial to preserve overall transaction consideration and ensure both parties view the result as a “win-win” ahead of creating a long-term partnership. If you would like to learn more about the net working capital adjustment or the M&A process, please feel free to contact me at [email protected].

Posted on

Safeguarding Your Boutique Professional Service Firm: Identifying and Mitigating Key Client Churn Risks

Safeguarding Your Boutique Professional Service Firm: Identifying and Mitigating Key Client Churn Risks

In the world of boutique professional service firms, maintaining a strong client base is not just essential – it’s imperative. But what happens when a key client unexpectedly walks away? The ripple effect can be devastating, affecting not only your revenue but also your team and overall business stability. In this blog post, we’ll delve into the art of proactively identifying key clients at risk of churning and, more importantly, how to take action when that risk starts to escalate. I will present a simple tool, the stoplight report, used to assess key client health, keeping your firm in the green, not the red.

The Stoplight Report: Assessing Key Client Health

Before diving into action steps, let’s set the stage with a visual representation of the stoplight report approach:

    • Green: No Risk of Churning
    • Yellow: Moderate Risk of Churning
    • Red: High Risk of Churning

Now, let’s explore how to identify clients within these categories and what actions to take accordingly.

Identifying Clients Moving from Green to Yellow

Scenario: Your boutique marketing agency has been serving Client X for years, consistently delivering outstanding results. However, you’ve noticed a slight decrease in their engagement and communication. It’s time to assess if Client X is transitioning from green to yellow.

    1. Monitor Engagement: Keep a close eye on client interactions, project updates, and feedback. A decrease in responsiveness or enthusiasm may be an early warning sign.
    2. Analyze Financials: Review the revenue and profitability associated with Client X. If you notice a downward trend or a plateau, it’s time to investigate further.
    3. Client Feedback: Don’t hesitate to seek feedback directly from the client. Sometimes, they may not feel heard, and addressing their concerns can reinvigorate the relationship.
    4. Upsell Opportunities: Identify opportunities for upselling or expanding your services. Offering something new and valuable can reignite their interest and commitment.
    5. Proactive Communication: Reach out to Client X proactively, expressing your dedication to their success and addressing any issues or concerns promptly.

Identifying Clients Moving from Yellow to Red

Scenario: Despite your best efforts, Client X has not responded positively to your outreach. They have expressed dissatisfaction and are considering exploring other options. It’s time to address the high risk of churning.

    1. In-Depth Analysis: Conduct a comprehensive review of the client’s history, including any ongoing issues, unmet expectations, or misalignments in goals.
    2. Alternative Solutions: Explore alternative solutions to address their concerns. This may involve revising your service offerings, pricing, or delivery methods.
    3. Escalate Communication: If the situation does not improve, consider escalating the matter within your firm. Involve senior leadership or account managers to salvage the relationship.
    4. Mitigation Plan: Develop a mitigation plan that outlines specific steps to rectify the issues. Ensure clear timelines and responsibilities are established.
    5. Diversify Your Client Base: Simultaneously, focus on diversifying your client base to reduce dependence on Client X. Attract new clients to mitigate the impact of potential loss.

The Emotional Context: A Cautionary Tale

Let’s put theory into practice with a cautionary tale. Imagine a boutique marketing agency heavily reliant on one key client, which represents 30% of the firms billings. When this client unexpectedly churned, it resulted in an immediate loss of 30% of the revenue. To stay afloat, the agency had to lay off a 30% of its team, causing emotional distress and instability within the organization. Although this is a fictionalized example meant as a teaching tools, many marketing agencies are operating within reach of this example coming to life. This horror show is avoidable if you switch from being reactive to proactive when anticipating possible churn within the key client segment of your business.

Conclusion

In the competitive world of boutique professional service firms, client churn can be a silent killer. By adopting a proactive approach to identify and address key clients at risk of churning, you can safeguard your firm’s stability and growth. Use the stoplight report method to assess client health, and when you notice clients moving from green to yellow or yellow to red, take decisive actions to salvage the relationship and diversify your client portfolio.

Remember, the key to long-term success is not just acquiring clients but also retaining and nurturing them. Your boutique firm’s future depends on it.

Stay vigilant, stay proactive, and stay green.

If you are concerned about key client churn risk, consider joining Collective 54. This topic, as well as many others, are dealt with directly with peers providing solutions to one another. Apply here.

The first mastermind community for

boutique professional services firms.

Linkedin Youtube Facebook Twitter

© 2024 – Collective 54 LLC   All Rights Reserved.