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.

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.

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.

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.

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.

Navigating the Complexity of the Net Working Capital

Navigating the Complexity of the Net Working Capital

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.


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].

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.


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 Corporate Transparency Act Mandates New Requirements for Business Owners | Schwab Center for Financial Research

The Corporate Transparency Act Mandates New Requirements for Business Owners | Schwab Center for Financial Research

As you prepare to meet with your CPA this year, you may have some new reporting requirements about your business. Here is some information on the new Corporate Transparency Act from Schwab Center for Financial Research’s Austin Jarvis.


The Corporate Transparency Act (CTA) was passed as part of the National Defense Authorization Act for Fiscal Year 2021. The CTA mandates the creation of a database of “Beneficial Ownership Information” (BOI) and the filing of beneficial information effective January 1, 2024. New entities created after January 1, 2024, are required to file a report within 30 calendar days of their creation, and existing entities as of January 1, 2024, have until January 1, 2025, to file a report. Any changes after the initial report is filed (due to sales, minor children reaching majority, death, etc.) are required to be reported within 30 days of the change occurring.

The stated purpose of the law is to combat money laundering and the concealment of illicit money using shell companies in the United States. However good the intentions may be, the regulations have been written so broadly that nearly every small business in the United States could be required to make informational filings or incur penalties of $500 a day (up to $10,000) and up to two years in prison.

The following is a broad overview of the CTA to help build awareness of the new rules. Due to the complexities and nuances of the rules, it is important to discuss your unique circumstances with your professional team to ensure you remain fully compliant with the law.

Who is required to report?

The CTA requires certain reporting companies to disclose the identities of their beneficial owners to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

What qualifies as a reporting company?

Under the CTA, a reporting company is a corporation, limited liability company (LLC), or other similar entity created by filing a document with the Secretary of State (or a foreign entity registered to do business in the state). Entities that are highly regulated, such as banks, insurance companies, and accounting firms, are exempt from the reporting requirements. Charitable entities and large operating companies (defined as having more than 20 full-time employees, $5 million in gross receipts or sales, and a physical office in the U.S.) are also exempt from reporting.

Are trusts reporting companies? Generally, trusts are not reporting companies because they are not formed by filing a document with the Secretary of State.

Who is a beneficial owner?

The law defines beneficial owners as individuals who directly or indirectly:

1) exercise substantial control over the reporting company, or

2) own or control at least 25% or more ownership interest in the reporting company.

Substantial control could mean that the individual serves as a senior officer, has authority to appoint or remove senior officers, or has influence over important decisions made by the reporting company or a majority of the board of directors.

Furthermore, individuals may exercise substantial control, directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.

Indirect ownership, or control of a company or its ownership interests, may include:

    • Joint ownership with one or more other persons
    • Ownership through another individual acting as a nominee, intermediary, custodian, or agent
    • Ownership as trustee, grantor/settlor, or beneficiary of a trust
    • Ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the reporting company

Can a trust be a beneficial owner? If a trust owns 25% or more or a reporting company, or has significant control over it, the trust is a beneficial owner. However, because the law states that a beneficial owner must be an individual, the trust document will have to be reviewed to determine whether the grantor, trustee, or beneficiaries are considered beneficial owners, given the facts and circumstances.

Who is not considered a beneficial owner?

    • Minor children. However, the reporting company must report information regarding the minor child’s parent or legal guardian. Once the minor attains the age of majority, an updated report must be filed with FinCEN within 30 days.
    • An individual whose only interest in a reporting company is a future interest through a right of inheritance.
    • A creditor of a reporting company.
    • Agents, nominees, intermediaries, or custodians acting on behalf of another person.

What information must be provided to FinCEN?

Reporting companies (as defined above) must file with FinCEN: the business name, current address, state of formation, and the Employer Identification Number (EIN) of each entity, as well as the name, birthdate, address, and government issued photo ID (driver’s license or passport) of every direct or indirect beneficial owner of the entity.

What is the impact on business operations?

The CTA may have an impact on small business operations as the owners will now have to incur the administrative costs associated with compliance. Some business owners claim the law will affect their privacy and confidentiality, because their personal information will be disclosed to FinCEN.

In addition, the CTA may have implications for mergers and acquisitions. Potential buyers may require access to the beneficial ownership information as part of their due diligence process. This could make it difficult to attract buyers or negotiate favorable terms.

What is the impact on estate planning?

The CTA is likely to have a chilling effect on the use of LLCs, which have become popular in estate planning over the last decade. Individuals who value privacy are likely to forgo the use of LLCs in favor of other structures that still allow for some level of anonymity, such as irrevocable trusts. Individuals who continue to use LLCs despite the loss of privacy will likely face the added compliance costs of reporting to FinCEN, maintaining accurate records, and updating reports whenever membership shares are transferred.

Bottom line

The CTA is a new law with the goal of preventing certain financial crimes. The requirements of the law put new burdens on certain businesses and entities that carry stiff penalties if ignored. Anyone who owns more than 25% of a business or has substantial control over a business should consult with their attorney, CPA, and other professionals to determine whether they are required to comply with the CTA.

Austin Jarvis, JD

As Director of Estate, Trust, and HNW Tax for the Schwab Center for Financial Research, Austin provides analysis and insights on topics including complex estate, gift, and trust planning, advanced charitable strategies, business succession, and executive compensation.

Important disclosures

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Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

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Understanding the Transition: From Non-Recurring to Recurring Revenue Models in Boutique Professional Service Firms

Understanding the Transition: From Non-Recurring to Recurring Revenue Models in Boutique Professional Service Firms

Understanding the Challenge

For founders of boutique professional service firms, the shift from a non-recurring revenue model to a recurring revenue model is often a strategic move towards long-term stability and growth. However, this transition can be challenging, especially in terms of cash flow management. This article aims to guide you through this complex yet rewarding journey.

The J Curve: A Critical Concept

Before delving into the specifics, it’s essential to understand the concept of the J Curve in the context of this transition. The J Curve is a visual representation of a company’s cash flow following a significant investment or change in business strategy – initially, there’s a significant outflow of cash (the bottom of the ‘J’), but with time and effective management, the curve ascends, leading to increased profitability.

How the J Curve Applies

When switching to a recurring revenue model, your firm initially faces increased costs without immediate returns. These costs include client acquisition, setting up systems for recurring billing, and potentially, a temporary dip in revenues as you transition existing clients or onboard new ones. This initial phase represents the bottom of the J Curve.

Calculating Break-Even for a Given Client

To navigate this period, a clear understanding of the break-even point for each client is crucial. Here’s how to calculate it:

    1. Cost to Acquire (CTA): This includes marketing expenses, sales team costs, and any other costs directly related to acquiring a new client.
    2. Cost to Serve (CTS): These are the ongoing costs of servicing a client, including labor, software, or other resources.
    3. Overhead Allocation: Allocate a portion of your firm’s overhead costs to each client, based on a reasonable metric like revenue contribution or service hours.

Break-Even Point Calculation

Your break-even point is when your cumulative revenues from a client equal the sum of CTA, CTS, and allocated overhead.

The Exponential Profit Beyond Break-Even

Once the break-even point is met, each additional dollar from the client significantly contributes to your firm’s profitability. This exponential increase is due to the recurring nature of the revenue and the decreasing marginal cost of serving a client over time.

The number one reason boutique professional service firms do not make the transition to recurring revenues is they cannot handle the cash crunch. Firms get used to big checks hitting the bank account in a traditional project-based billing cycle. It is difficult to tell a client not to pay them so much this quick but rather pay them over time pro rata over the life of the contract. The founder sees the payroll going out without the revenue coming in and the cash balance in the bank account dwindle month over month, panics, and says “recurring revenue is not for us.” This is a mistake and there are solutions to the cash flow issues.

Overcoming Cash Flow Obstacles

Short-Term Solutions

    • Leverage Credit Facilities: A short-term loan or line of credit can help manage cash flow during the initial phase.
    • Re-negotiate Payment Terms: With suppliers or landlords, for instance, to align outflows with your new revenue model.

Long-Term Strategies

    • Optimize Client Acquisition Costs: Use data-driven marketing and sales strategies to reduce CTA.
    • Efficiency in Service Delivery: Streamline processes to lower CTS.
    • Client Retention: Implement strategies to retain clients, as the longer a client stays, the more profitable they become.


Transitioning to a recurring revenue model in a boutique professional service firm is a strategic move towards sustainable growth. Understanding and managing the J Curve, accurately calculating the break-even point, and implementing strategies to mitigate cash flow challenges are key to successfully navigating this transition. With careful planning and execution, the move to a recurring revenue model can lead to increased stability and profitability for your firm.

Are you wondering how to transition to recurring revenue? Or how to address the cash flow issues associated with the move? These strategic questions, as well as many others, get answered by your peers in the Collective 54 mastermind community. Consider joining by applying here

The Hidden Language of LOIs: How to Avoid Traps and Decode Buyer Intentions

The Hidden Language of LOIs: How to Avoid Traps and Decode Buyer Intentions

In the dynamic world of business transactions, understanding the nuances of Letters of Intent (LOIs) can be the difference between a successful sale and a negotiation that falls short of expectations. LOIs serve as a beacon of interest from potential buyers, signaling their readiness to acquire your business. Yet, it’s crucial to recognize that the issuance of an LOI often places the buyer in a position of advantage. With a team of advisors at their disposal, buyers craft LOIs that subtly favor their stance in upcoming negotiations. This initial step, while seemingly straightforward, is laden with strategic implications that require careful consideration. For entrepreneurs contemplating the sale of their business, this post sheds light on the strategic considerations surrounding LOIs, offering insights to navigate these waters with confidence.

A. The Binding Nature of Non-Binding Agreements

 A common misconception about LOIs is their non-binding nature. While it’s true that LOIs are generally not considered final agreements, their terms significantly influence the negotiation landscape. Both explicit and implicit provisions within an LOI set the stage for purchase agreement discussions, making it challenging to renegotiate terms without substantial leverage. Moreover, legal precedents show that courts may interpret LOIs as binding under certain conditions, emphasizing the importance of approaching these documents with the same diligence as definitive agreements.

B. Deciphering Key Terms: Beyond the Surface

Structure – The structure of your transaction—whether an asset sale or a stock sale—carries profound commercial and tax implications. It’s essential to delve into the buyer’s assumptions and expectations, as these can reveal hidden requirements that impact the deal’s structure and financial outcomes. For instance, a buyer’s expectation for a step-up in the cost basis of assets can significantly influence the purchase price, even if not explicitly stated in the LOI.

Imagine you’re selling your business, and your LOI mentions that the buyer expects to receive the benefit from a “step-up” in cost basis when they buy your assets. This means they’re hoping to increase the value of the assets for tax purposes, which will allow the buyer to take depreciation and amortization deductions with respect to their future income taxes. Even if this tax advantage isn’t clearly stated in your initial agreement, the buyer might still expect it to be part of the deal based on the type of purchase they’re making. For example, if your company is an LLC taxed as a partnership or disregarded entity, generally a purchase of your equity in the company will be treated as a sale of assets. If your LOI mentions that the buyer is purchasing your LLC equity, they could argue that a “step-up” in cost basis should be presumed under the LOI. If for some reason the purchase is not able to deliver that “step-up” (say, because your company is actually taxed as a corporation), the buyer may seek a purchase price reduction. We have seen buyers successfully argue for such reductions on these facts in other transactions.

Funding – How your purchase price is funded can have profound implications on your tax liability and your ability to receive the price at all. You should consult with your tax advisor when evaluating the terms of any seller financing or earn-out. These items can be structured advantageously to the buyer while, for tax purposes, leaving you with disadvantageous tax treatment on portions of your purchase price. If your buyer offers equity interests as a part of the purchase price, ensure that your counsel and tax advisors have reviewed those portions of the LOI. Ask for a summary of terms and pro forma cap table with respect to those interests and discuss with your tax advisor if there are tax-efficient means of obtaining the interests.

Price Protections. When a buyer talks about wanting “customary” or “appropriate” protections for the purchase price in the LOI, it can be a bit confusing. Usually, when they say “customary,” they’re looking for a few specific things to protect the price they’re paying. This includes setting aside cash from the purchase price in an escrow account to cover losses that the buyer suffers from taking on undisclosed liabilities of your business or deficiencies in your business’s working capital. Buyers often want insurance from you (called “indemnities”) against any losses they may suffer for promises you made about the business that turned out to be untrue (representations and warranties). Sometimes, buyers might not spell out all their desired protections in detail in the LOI, saying they need to do more due diligence first. It’s a good idea to ask the buyer what they typically expect in terms of these protections. If your deal is big enough, it might be worth talking about getting third-party insurance coverages for the representations and warranties you make. You shouldn’t have to guess what the buyer wants for price protections in your LOI.

Closing Conditions. Closing conditions are the things your buyer need to happen, and are either done by you, or your buyer, to put your buyer in position to close the deal. The closing conditions in the LOI should be reviewed carefully both to ensure that the conditions are attainable if both parties act in good faith and to set expectations in case a buyer communicates new conditions pre-closing. Be mindful of any closing conditions requiring the action or approval of a third party. For example, many LOIs contain financing contingencies, which make the closing of the transaction dependent upon the Buyer securing acceptable financing. Closing conditions should be reviewed carefully with your counsel, who can help you understand what closing conditions are reasonable, and when to ask your buyer to revise or even remove conditions.

C. Don’t React to Your LOI, Be Proactive

In my experience, the most effective sellers have already marshalled their resources by the time their LOI arrives. If you are anticipating receipt of an LOI, you should have your team of advisors and internal experts assembled and ready to review it prior to it crossing your inbox. That core team should be composed of, at a minimum, your trusted financial advisor, tax advisor or accountant, and an experienced M&A attorney. You may need other internal experts (HR, IT, regulatory, facilities management, etc.) or stakeholders to participate in the LOI review process, and you should consider, with the counsel of your core team, involving them, subject to appropriate confidentiality agreements. Once you have an LOI to review, be prepared to review it and accept the commentary and guidance of your team. Collectively, by leveraging your knowledge of the business and the experience of your team, you can optimize your LOI negotiations with a buyer and set your deal on a path towards a successful closing. If you are evaluating an LOI, or would like to discuss how to prepare to receive one and build your LOI team, my office would be delighted to help you. I can be reached at [email protected]; tel: 704-916-1521.