Category: blog

How to Scale An Accounting Firm to Sell: Know the Growth Facts

Boutiques are attractive to potential acquirers when they are growing. And your growth rate is determined based on growth in revenue and profits. Also, growth is relative. It is relative to the other boutiques in your space and the growth rates of an existing practice inside of a market leader. You are attractive if your accounting firm is growing more and faster relative to the alternatives.

Most professional services firms are private. Therefore, data on growth rates are hard to come by. Accounting firms often think they are growing and scaling nicely, only to learn later that this isn’t the case. And finding this out during due diligence is embarrassing.

If you are devising a scalable plan for your accounting firm so that you can sell your business, remember that growth is relative. Scaling a business takes time. A year or two of great results does not mean you have a sellable boutique.

Case Study: When a Scalable Plan Leads to an Unsellable Firm

I was recently involved in an auction of an IT services company. This company had a strategic relationship with the software provider Tableau. They helped clients use their data to make better decisions through data visualization. The investment bank running the auction touted the boutique as a high-growth firm. 

When I met with the management team, they were proud of their accomplishments. I was presented with slide after slide of steep revenue and profit growth. And this growth was accelerating. I had looked at a few firms in this space and had an unfair information advantage. This boutique grew revenue at 22 percent per year and had done so for about three years. The problem was that their boutique competitors were growing their top lines at twice that rate. 

You see, the data visualization space was hot. A rising tide was raising all ships. When I dropped out of the bidding process, they were insulted. I explained my rationale and provided my evidence. They claimed that my comparisons were not apples to apples, that the firms I compared them to were not “pure plays.” 

This firm was not able to find an acquirer. It appears that I was not the only one with a command of the facts. And the story gets worse. The data visualization space cooled off. Tableau, the golden goose, stopped laying eggs. As their growth rate and scaling slowed, so did the growth rate of its service partners. 

What is the moral of the story? Know your facts. Growth is relative. When creating a scalable plan for your accounting firm, you have to look at your business from all sides. Don’t take your revenue or profit growth at face value. Compare it against competing professional services firms and determine where you truly stand in the market. 

Seven Growth Benchmarks to Consider When Scaling a Business 

Here are a few growth benchmarks for you to consider if you are wondering how to scale an accounting firm to sell at a later date. These are specific to NAICS 54—the professional services industry. And they are specific to the segment—that is, boutiques with between 5 and 250 employees in the United States. 

Proceed with caution. These numbers can change a lot based on the submarkets. For example, law firms are different from marketing agencies and so on. 

• A five-to ten-year track record of consistent growth; 
• Greater than 30 percent top-line revenue growth; 
• More than 75 percent gross margins; 
• Forty percent EBITDA margins; 
• More than twelve months of forward visibility; 
• One year of payroll in cash on the balance sheet; 
• No debt. 

A boutique under five years old will have a tough time selling. One without five to ten years of solid growth in revenue and profits is unsellable. Unfortunately, many boutiques have remarkable top-line growth but no profit growth. This is a deal killer for most. These firms have not decoupled revenue growth from head-count growth. Until they do, they should not try to sell an accounting firm.

When they do, gross margins and EBITDA margins will jump. That is the time to sell. This is when they have a proven, scalable plan and business model. Lastly, forward visibility must be at least a year out. Investors are not going to take your word for it. Performance relative to your scalable plan will be a much-scrutinized item.

Wondering If Your Scalable Plan is Working? Ask Yourself These Questions

When scaling and growing an accounting firm, you need to make sure your scalable plan will hit the growth benchmarks required to sell the firm. Ask yourself these questions to determine if your scalable plan is working for your business: 

1. Are you growing revenue at a faster pace than competing accounting firms? Have you been doing this for years?
2. Are you growing your profits faster than your competitors? Have you been doing this for several years?
3. Are you growing your revenue faster than the practice inside the large market leaders? 
4. Are you growing your profits faster than the practice inside the large market leaders?
5. Are you increasing your cash balance to cover payroll for twelve months?
6. Do you have at least twelve months of forward visibility? 

If you answered no to more than half of these questions, your scalable plan and growth story needs more work. 

Developing a Successful Scalable Plan: Remember Growth is Relative

Growth matters when scaling a business to sell it later. A lot. And relative growth matters even more. A decade of market-beating growth will command an excellent price and excellent terms. 

And profit growth is as important as revenue growth. This indicates that you have cracked the code. You are one of the few who broke the link between revenue and head-count growth. Be sure to run a tight ship. Be prepared to demonstrate reliable forward visibility and plenty of working capital as part of a scalable plan.

For more insights on how to scale an accounting firm, join our mastermind community today. Collective 54 is the first mastermind community for founders and owners of professional services firms. Members enjoy multiple benefits, including peer-to-peer networking, live expert instruction, and small group learning. 

Networking is an Entrepreneur’s Best Asset

When working with boutique owners, I’m often asked, “What’s the best way to help my business grow and become successful?” The answer is business networking. To be an entrepreneur and lead your professional services firm to success, you need to network. 

Many founders and owners of professional services firms fail to recognize the importance of networking in entrepreneurship. It is possibly your best asset in driving your firm. Why? Business networking allows you to connect with and learn from others that share common challenges, experiences, and goals. Not only will you create relationships, but you’ll get the opportunity to learn from the successes and failures of others. 

Still unsure about why networking in entrepreneurship is worth it? Let’s look at what benefits it provides. 

How Business Networking Can Benefit You During Your Firm’s Lifecycle

Business networking must be part of each stage of the business lifecycle journey. You are wrong if you think you’ll only need to network during the growth stage. Boutique owners often fall into the mindset of “going it alone.” Yet, running a firm requires advice and support from many others throughout the journey. 

Here’s how networking benefits entrepreneurs during each stage:

Growth Stage

The United States Bureau of Labor Statistics claims that approximately 20% of small businesses fail in their first year. Yes, many factors can lead to this happening, including cash flow problems and insufficient product or service demand. Yet, a failure to network can be included in this list. 

If you want your professional services firm to see its second birthday, business networking can help you do that. By joining a mastermind group or attending industry events, you can better grow your business. 

Here’s how: 

1. Gain Access to a Growing Network

Successful entrepreneurs start networking close to home. Capitalize on your existing contacts, whether they’re friends, family, or the guy you met on vacation last year. This is how you open doors and expand your professional network when growing your business. Being an entrepreneur means accessing a complex system of connections that provide access to human, social, and financial capital. 

2. Bring Your Concept From Idea to Reality

Business networking also helps you bring your idea from concept to reality. When you have access to an extensive network of connections in the same industry or a similar one, there is a wealth of knowledge at your fingertips. You can harness the intelligence and experience of others who are in or have gone through the trenches like you. This allows you to transform your ideas into tangible business options and implement them faster.

3. Helps You Find the Right Team

It is a myth that great firms are started by a single brilliant person. To grow your professional services firm, you need the right team of people working alongside you. Networking and building professional connections will help you find these individuals. 

When speaking with boutique owners, I remind them that it takes a team to realize a dream. You need to pick your business partners as carefully as you choose your spouse. 

Scaling Stage

Scaling a business requires time, effort, and plenty of advice. This is when you will need to put systems and procedures in place to continue on the path of profitable development. During this time, you will define your core values and develop your firm’s client experience. Essentially, it is your firm’s make-or-break period. 

Leveraging a mastermind community when scaling a firm is extremely important. Learning from peers and mentors helps you find the right people and strategies to scale your firm even further. This is a time for continuous education and accessing collective knowledge. Scaling a business should never be a solitary task. The more support you receive through networking, the more successful you will be. 

Selling Stage

Networking continues to be beneficial even for entrepreneurs looking to sell their boutique firm. Creating a business exit strategy needs to be done with consideration and thought. Speaking to your professional network can open up opportunities for new exit strategy perspectives. Perhaps a connection will even introduce you to a potential buyer for your firm. 

Why You Should Join a Small Business Networking Group

Joining a small business networking group or a mastermind community like Collective 54 will help you grow, scale, and sell your firm bigger and faster than ever. We offer peer-to-peer mentoring, small group learning, and our C54 Business Exchange to encourage member’s firms to hire one another. Many of our members succeed by tapping into  business networking opportunities within our community. 

The importance of networking in entrepreneurship is clear — it empowers you with the tools, knowledge and relationships you need to drive your firm toward success. Boutique founders and owners who join mastermind communities are given the guidance they need to earn more, work less, and sell faster. 
For more insights on how to capitalize on networking to grow your business, join our mastermind community or purchase The BOUTIQUE: How to Start, Scale, and Sell a Professional Services Firm.

Selling a business is a high-risk, high-reward initiative. I want to spend some time on the common mistakes made when selling. I hope that by reading this, you can avoid these land mines. Every situation is different. Yet, these are the most common mistakes I see owners of professional services firms making.

Avoid These 7 Costly Mistakes When Selling a Business

When selling a business, you must do it on your own terms. You started a professional services firm that you built from the ground up. Trying to sell a boutique that is not worth buying or rushing into a fast sell without knowing the buyer can lead to failed business exit strategies. That’s why you need to avoid these costly mistakes.

1. Being Uncertain About Reasons Behind Sale

First, boutique owners are unclear about what they want from the sale. If you are unsure of who you are, you will be unhappy with the sale. If you do not know where your business is headed, you will be unhappy with the sale. No amount of money will change this. After the sale is complete, there is no going back. Be sure that you know what you are doing before you start down the path of selling a business.

2. Selling an Unsellable Business

Second, sometimes boutique owners try to sell an unsellable business. Most boutiques are unsellable. It is not enough to have a successful boutique. Your professional services firm needs to be attractive to a buyer. This requires you to look at your business as an investor would. 

An investor starts by listing all the reasons not to do a deal. The boutique owner starts with a list of all the reasons to do a deal. This gap often cannot be closed. Before trying to sell, be sure that you have something worth buying.

3. Looking For a Fast Sell

Third, it takes years to sell a business. Yet some owners try to sell their boutique in a matter of months. This tends to result in many failed attempts, or worse, a lot of forced sales. The process of selling a business takes about nine months. However, the process of preparing to sell takes two to three years.

A good business exit is a sale that happens on your terms. It takes time to stack every card in your favor. And, as they say, you have only one chance to make a first impression. It’s best to be ready.

4. Underinvesting in Succession Planning

Fourth, boutique owners underinvest in succession planning. This results in seller’s regret. After you sell, you will want to see your boutique do well without you. You will have many employees you care about who are still employed by the boutique. If you hand over your business to a stranger, they may destroy it. 

A large bank balance will not compensate you enough for this tragedy. Spend years grooming your successor. Make sure that your successor builds on what you have already created.

5. Pursuing a Business Exit Strategy Alone

Fifth, entrepreneurs think that they can sell their business on their own. Doing so can result in tactical execution errors that can cost the owner millions. Boutique owners are usually entrepreneur founders. They are very different from hired-gun CEOs. 

Founders have a high risk-tolerance level and supreme confidence in their abilities. They often approach the selling of their business as another problem that has to be solved. They assume that they can figure it out without expert advice. This is a mistake. 

Exit strategies are not an area to go cheap. Hire the best advisers that money can buy. Let these advisers guide you through the process.

6. Taking Feedback After the Sale Personally 

Sixth, boutique owners get attacked after the sale, and they take it personally. Those whom you are leaving behind will be jealous. They will feel cheated and underappreciated. They begin to tell a story that is not based on fact. Rather, it is a story they need to tell to make themselves look and feel good. Do not take it personally. 

This is just business. You created the wealth, and you are the one to realize it. Those who helped you do this have benefited and will continue to benefit in the long run. Remember to sleep peacefully at night. The only thing that matters is what you see in the mirror. 

7. Not Knowing Who is Buying the Business

Seventh, be sure to understand who the business is being sold to. And what their motives are. This is particularly important if you are on an earn-out or are rolling some equity. This prevents unwanted surprises from cropping up. Once you sell it, the buyers own the assets. They are entitled to do whatever they want with it. If you disagree with their plans, do not sell it to them.

Top 10 Business Exit Strategy Questions to Ask When Selling a Business

There are other mistakes to avoid. Every situation is different. However, these are the most common mistakes that boutique owners make. If you are considering selling a business, ask yourself these questions to make sure you are avoiding these exit strategy mistakes:

1. Do you know what you want from selling your business?
2. Do you know what you will do after your business is sold?
3. Is your business attractive to a buyer?
4. Do you have a sellable boutique?
5. Do you have a handpicked successor?
6. Is the successor ready to take over?
7. Do you have an all-star team of advisers to help you?
8. Are you prepared for the postsale criticism headed your way?
9. Do you understand to whom you are selling your boutique to?
10. Do you know their motives for buying?

How to Sell a Business: With Purpose and Patience

You are building a business you could run forever. You are also building a business you could sell tomorrow. If you decide to sell, you want to do so on your terms. Give yourself plenty of time to avoid these common mistakes when selling a business.

For more insights on how to develop a business exit strategy, join our mastermind community. Collective 54 is the first mastermind group for owners of professional services boutiques. Contact us today to learn more about how our community helps businesses like yours.

A change to your pricing strategy is, perhaps, the quickest way to scale. Why? It does not require an investment in people or money to implement. The benefits of revisiting your firm’s pricing are immediate: charge more today than you did yesterday. Are you looking to scale your boutique? Change your pricing strategy first. 

Pricing Mistakes Boutique Owners Make When Scaling a Business

One of the biggest challenges for professional services firm owners when scaling a business is choosing the right pricing strategy. Most boutiques price their services incorrectly from the beginning. Here are the main reasons why:

• Boutiques do not know what their services are worth to their clients. 
• Boutiques do not know what their clients are willing to pay.
• Boutiques cannot logically explain to clients why they charge what they charge. 
• Boutiques cannot quantify the amount of value a client receives from an engagement. 
• The pricing approach is inward out – that is, based on internal costs.
• Boutiques focus too heavily on what their competitors charge for similar services. 
• Sales teams inside boutiques cannot overcome pricing objectives effectively. 

The good news – this problem is simply solved. It takes some sound judgment, but pricing best practices are readily available, and they can make all the difference for owners in developing a scalable plan for their business. Here are a few best practices professional services firm owners should use to get started. 

Scaling a Business: How to Create a Pricing Strategy That Aligns With Your Firm

Many entrepreneurs have asked me how they should choose the right pricing strategy. Here’s what I tell them: “Develop a pricing strategy that matches your business strategy.” For example, if you sell to small businesses, the high-volume, low-price model makes sense. The low-volume, high-cost approach is best if you sell luxury items to the elite. If you sell differentiated products to midtier customers, premium pricing makes sense. For instance, a Lexus costs more than a Camry but less than a Rolls Royce. 

The key takeaway: connect your pricing strategy to your business strategy. Here are two pricing models to consider when scaling a business. 

Price Positioning

Perception is a reality in pricing. Therefore, price positioning is very important. Your firm’s pricing sends a signal to the client. The price influences how a client perceives you. Price too low, and your work will be considered low quality. Price too high, and you will be perceived as difficult to engage. If you price the same as your competitors, you will be perceived as a commodity. 

Clients value specific attributes of your service offering. Understand what those are and influence the perception of your performance in these areas. An example from my past might help you appreciate the power of perception. 

The structure of the management consulting industry has three tiers. The first tier is the large market leaders. The second tier is the midsize boutiques. The third tier is the small start-ups or one-man shops. My firm, SBI, was a tier-two management consulting firm. A midsize boutique. We priced our services below the first tier but above the second tier. What perception did this send to clients? 

It said that we were the best of the boutiques. Clients who wanted to hire a boutique but were afraid to hire us. These clients felt that moving away from a brand-name firm was risky. Yet they were willing to take the chance because hiring us reduced the risk. We were the best of the boutiques and close to the tier-one providers. The perception the price set was that my firm was a premium boutique. This was a powerful differentiator.

Price Versioning 

An alternative pricing strategy to use when scaling a business is price versioning. Use price versioning to allow clients to choose their own price. This will result in them deciding on a proposal faster. Giving clients a choice allows the boutique to link price and value. Price is what you pay. Value is what you get. And the two are never the same. 

For example, personal trainers sell packages to their clients. The bronze package is $/visit. The silver package is a $/fitness program. The gold package is $/wellness program. The choice allows the client to consider what they value: visits, fitness programs, or a wellness program.

Listen to this episode of the Collective 54 podcast, The Revenue: A Practical Guide to Monetize Professional Services, for more tips on identifying revenue streams and monetizing professional services. 

Pricing Questions to Ask When Scaling a Business

Are you wondering whether a new pricing strategy would help you scale? First, you need to understand whether your current pricing is an issue for your clients and business. Ask yourself these questions. If you answer no to most of these questions, you need to revisit your pricing strategy as part of your scalable plan. 

1. Do you know what your services or products are worth to your clients?
2. Can you quantify the value of your work?
3. Do you know how much clients are willing to pay for your offerings?
4. Can you explain the logic behind your pricing model to clients?
5. Does your price demonstrate to the client the link between price and value?
6. Do you charge the most for the service features your clients want the most?
7. Do you charge the least for the services features your clients don’t care much about?
8. Do you allow your clients to choose their price by offering varying price packages?
9. Is your sales team skilled at overcoming price objections?
10. Have you built an annual price increase into your pricing system? 

Looking to Scale Quickly? Change Your Pricing Strategy

Know your worth. Don’t undervalue yourself. What you do is exceptional. Price accordingly. The clients you want know this and will pay you with a smile. You do not want the clients who are unwilling to pay you fairly. 

For more insights on how to scale your consulting business, join our mastermind community. Collective 54 is the first mastermind group for professional services firm owners. Contact us today to learn more about the benefits our group offers firms like yours.

To grow your consulting business, it is best to begin with the problem you will solve for clients. Why? There are lots of firms with solutions that no one will buy. The idea you have for your firm is valid, but only if you can do the following:

• State the problem you solve for clients.
• Determine that the problem is pervasive. 
• Confirm that clients will be willing to pay to solve it. 
• Prove that the problem is urgent. 

Growing a consulting business is challenging. In the early days of your business, you will be working for free. You will be burning through whatever cash you have until clients start paying you. There will be competing professional services firms you’ll need to defeat to grow. You cannot afford to waste time evangelizing a solution. You need to generate paying clients as quickly as possible. So, how do you do that? Identify your client’s urgent problem. 

How to Get More Clients? Identify Your Client’s Urgent Problem  

Hypothesizing that your client’s problem is pervasive without backing it up with research and definitive proof is a waste of time when starting a professional services firm. If you fail here, you will struggle to grow your consulting business further down the line.

Your firm’s solution should be addressing a client’s pain point that is urgent and that they are willing to pay for. If your solution is more of a nice-to-have, you will fail to see an increase in your client base. Let’s look at what happens when you don’t adequately research the need for a solution before entering the market. 

Case Study: Mistakes to Avoid When Growing Your Consulting Business

An entrepreneur recently came to me looking for investment capital. He had an idea for a professional services firm. He was seeking start-up capital to hire staff, develop the service, and take it to market. He explained his solution elegantly. He was clearly a domain expert. His field of expertise was price optimization in the information security business.

I asked him to explain the problem that the target client was experiencing. He answered by saying that the clients were unaware of the problem they had. The problem was demand curve modeling. He was going to bring it to their attention. His target clients did not know they had a problem. Strike one. 

Next, I asked how many clients had this problem. He answered, “All of them.” He showed me that approximately ten thousand information security companies needed price optimization. He stated that he would reach 1 percent market share by the end of year three, resulting in one hundred clients. He suggested that each client was going to pay $250,000. This meant that his three-year revenue projections were $25 million. He assumed that every company in the sector had the problem. Strike two.

I asked if he had confirmed that his target clients were willing to pay $250,000 to solve this problem. He shared a price list from competitors in the space and stated that target clients would hire him because he was 20% cheaper. Lastly, I asked if the problem was urgent, and the answer was “No, but it should be.” Strike three. 

While the entrepreneur had identified a possible solution, his target clients were not even aware that it was a problem for them. Therefore, this solution isn’t solving an urgent pain point. The core takeaway is: If you don’t understand whom you are targeting and their urgent challenges, you will fail to engage them – no matter how loud your voice may be. 

How to Grow Your Consulting Business: Top Questions to Ask 

My advice – be in the painkiller business. Do not be in the vitamin business. Why do more people buy painkillers than vitamins? When you are in pain, it is urgent. You are willing to pay to make the pain stop now. Be sure that your solution addresses a real problem, that the problem is urgent, and that clients are willing to pay to solve it.

If you want to grow your consulting business, use this game plan. Ask yourself the following questions. If you answer no to eight or more of these questions, you do not have a problem worth solving. 

1. When you explain the problem to friends and family, do they understand you?
2. Does the problem exist in various industries and companies of all sizes?
3. Does the problem exist in many geographies?
4. Are clients paying to solve the problem right now?
5. Have clients been paying to solve the problem for years?
6. If clients do not solve the problem, are the consequences severe?
7. Is there a trigger event that puts clients in the market for your solution?
8. When clients have the problem, do they work to solve it by a deadline? 

When strategizing how to grow your consulting business, asking yourself these questions is critical. Professional service firms need to offer relevant service offerings. If your solution isn’t relevant, you will be yet another boutique with solutions that no target client wants to buy. 

Grow Your Consulting Business. Be Lasered Focused On Your Client 

Start with the problem you will solve for clients. Be sure that the problem is easy to understand and that many clients are experiencing it. And be sure that clients are willing to pay to solve it. Lastly, ensure that the problem is urgent and is one that the client cannot ignore.

For more insights into how to grow your consulting business, listen to the Collective 54 podcast today or join our mastermind group.