Category: Pro Serv Podcasts

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Episode 56: Cash Flow: Where to Find Working Capital to Scale – Member Case with William Lieberman

C54 member William Lieberman, Managing Partner of The CEO’s Right Hand, shares insights on cash flow and where to find working capital to scale your professional services firm.

Transcript

Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board Member, and your host. On this episode, I will make the case that boutiques run on cash flow. They do not run on net income or EBITDA. I’ll try to prove this theory by interviewing William Lieberman, managing partner of the CEO’s right hand. William provides outsourced financial CFO and accounting services to clients that are growing or scaling. They offer end to end solutions for ongoing or one time project needs that span a broad spectrum of industries, including finance, technology, e-commerce, investment banking and digital advertising strategy. You can find William at theceosrighthand.co. William, great to see you and welcome. 

William Lieberman [00:01:29] Thanks, Sean, it’s great to be here. 

Sean Magennis [00:01:31] Excellent. So let’s get started, I’d like you to do an overview. Can you briefly share with the audience an example of why cash flow is so critical to scaling a boutique? 

William Lieberman [00:01:43] Absolutely. You know, everyone’s heard the old adage. Cash is king, right? Cash flow is the fuel of your business. And without that fuel, the race card can’t go around the track. You have to have positive cash flow in order to make investments in the people, in the systems and other equipment and things like that that are necessary to truly scale the business. So as a quick example, we have a professional services firm as a client that’s doing large multi-million dollar projects and they have municipal clients and they stretch out their payments 60 90 days plus. And these are large, large payments. And that causes a great deal of cash strain on the business. So they don’t have the fuel because they’re cash poor to really increase the business and increase the investment in sales and marketing. So we’re helping them raise some capital to get that fuel because the business itself doesn’t generate enough cash enough cash flow. Yes, but there’s lots of examples where cash flow is generated from the business, and that’s truly what you need to scale. 

Sean Magennis [00:02:47] You know, it’s it’s such a good point. You make, you know, one cash is king, you know, in your example, you know, aging receivables and the inability to collect on those in a timely fashion on big numbers. That’s a variable that that is sometimes very difficult to manage unless you have a great client relationship. We have a really good team that can help you with that. So thank you for sharing those particular examples because I think for our listeners, those are things that are very recognizable and understandable. So I’d like to get your thoughts on some of the best ways to think about finding cash to scale. I’ll take you through four things that we have seen and get your thoughts on each. So the first one is and this is in the form of of a of a question is why is cash flow more important than net income and EBITDA for a firm trying to scale? 

William Lieberman [00:03:44] Well, net income and EBIDTA are important measures of profitability. So how well, how healthy is the business, but they’re done on an accrual basis, not a cash basis. So they give you a picture of my generating enough revenue or how much revenue generated when my expenses to generate those revenues and therefore what of my profits? But that’s not the fuel of the business. That’s not how much cash is really being thrown off by those revenue generating activities. So if you are, you know, delivering $100000 worth of services and it costs you $60000, you make a $40000 profit. But what are you really collecting and when are you going to get that $100000? And they take a month or two or three. And so in some cases, your cash flow could be negative if you’re not collecting in a timely fashion on the revenue generating. But at the same time, you’re profitable. Yes. So you really have to look at cash all the time, as it is truly the key measure in order to know how much fuel you have to invest in the business to scale. 

Sean Magennis [00:04:47] Really well put simply put, very understandable. So the second issue it’s often said entrepreneurs mismanage cash flow. Do you agree with the statement? And if so, how can an entrepreneur prevent the lack of cash flow in their business? 

William Lieberman [00:05:05] Well, to answer your question, absolutely. Entrepreneurs mismanaged cash flow all the time. And by the way, it happens large public, multibillion dollar companies, too. Yes. It’s not just the smaller companies would happen. So what, what we really do and we do this for ourselves, we do this for our clients is we look at a 13 week, week by week cash cash. So how much are we going to collect from each of our clients? And what do we forecast for sales and how is that going to turn into collections? And then what are the operating expenses that we’re going to have to pay on a week by week basis for the next 13 weeks? And then as importantly, what are the cash expenses that are not operating? So do we have debt service? Do we have capital expenditures, maybe distributions and dividends, things like that? Yeah. So we get a full picture of all the ins and outs. And from there we know are we going to run out of fuel in the tank? And therefore, what can what do we need to do about it now so that we proactively, you know, don’t don’t run out of gas halfway around the track? 

Sean Magennis [00:06:07] You know, those are those are excellent. And so my challenge to our listeners going out would be to adopt exactly what William has said, the 13 week week, two week cash forecast. Clear understanding of expenses by week. And then other things that need to be service like debt service, etc. And you know, the ins and the outs, as you’ve said, I mean, absolutely vital. And I’m going to go out on a limb here, William, and say, if you’re not doing that now, there are people, there are specialists and advisors that can help you. Is that is that a good a good recommendation? 

William Lieberman [00:06:42] Yeah, absolutely. You know, we do that for our clients and there’s lots of firms out there that provide expert advice in terms of how to best manage cash flow and in your forecasting methodology. 

Sean Magennis [00:06:53] Excellent. So number three, I often see our listeners who are owners of boutique professional services firms trying to raise capital when they do not need it. They think they need X amount of capital to scale when in fact they’re often generating enough cash from operations to fund scaling. Now, sometimes this isn’t the case, but what do you think? What is your opinion on this concept? 

William Lieberman [00:07:19] Well, first and foremost, capital is expensive, outside capital is very expensive. You’re giving up a percentage of your business if you’re raising equity. And if you’re raising debt, you know debt can be risky depending on how much you get. So to the extent that you can always rely upon the working capital coming out of your business to fund investments to scale? That’s absolutely ideal. Right. So that’s that’s the critical piece to this is to make sure that you understand how much bit, how much cash is being generated and ensuring that you have enough fuel in that tank. So, you know, when you think about the forecast modeling that you should be doing it, every entrepreneur should be doing it. It gives you those knobs and dials of the business so you can decide how much cash you’re able to reinvest in the business versus taking it out as a distribution or leaving it in the business and not making any money. 

Sean Magennis [00:08:14] Right. And that’s a balance, right? How much can you reinvest should you build a certain cash reserve depending on the type of business you have? Is this is there forward visibility to a book of business coming in? I’m sure all those variables are in your knobs and dials. 

William Lieberman [00:08:30] Correct. And it’s one of the important things that we’ve seen is that entrepreneurs often make a mistake by relying upon the forecast from the salespeople, right, which are always optimistic. Salespeople are optimistic by nature. Absolutely. We always recommend have the CFO, you know, really look in at those forecasts and really dial it based on historical results of delivering on what the salespeople are saying. 

Sean Magennis [00:08:57] That is a great piece of advice and I’d like you have seen, you know, I’ve seen forecasting go go sideways when you have a disconnect between, you know, the accuracy of the forecasting and the reality of either previous business or what you’ve got actually in the pipeline. That’s great. So we’ve we’ve seen that one of the best ways to boost cash flow is to measure it correctly. And we have found the best way to measure it is at the project level. You know, when you measure cash flow in the aggregate, it can hide waste. What are your experiences in this? 

William Lieberman [00:09:33] Well, yes. You know, I love what you said because it’s it’s the whole and it’s you cannot measure it and cannot manage it and funds that right. Yes, I absolutely agree. If you look at things in an aggregate, there’s all sorts of hidden gotchas, hidden expenses that you wouldn’t otherwise see. So by looking at it, a profitability and cash flow on a project by project or client by client basis, you can see which clients are really generating the profits of the cash that are fueling your business and which ones maybe sucking cash precisely those ones. Hey, maybe when you make a decision here, guys about either firing the client or increasing your fees or decreasing expenses, whatever dials that you need to change, you need to do that on a client by client basis. And we look at that every month for our clients as an internal business, as well as helping our clients do the same for theirs. 

Sean Magennis [00:10:28] That’s extraordinary valuable. And you know, listeners, please take what William is saying seriously into consideration. Your ability to scale is directly proportional to your capability to have these dials, to have this detailed knowledge at your fingertips, project by project really, really manage your cash flow as carefully as you can, and you will be surprised at how it could potentially unlock additional source of sources of funding so that you don’t have to give away a high percentage of your business to attract an outside investor or an expensive debt source. William, thank you. It’s super clear that managing, measuring and boosting cash flow is key to scaling a boutique firm. So this will take us to the end of the episode, and this is customary. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist, and our style of checklist is a yes no questionnaire. We aim to keep it simple by asking only 10 questions in this instance. If you answer yes to eight or more of these questions, you need to have a solution to cash flow. If you answer no a lot, you don’t have an issue. William has graciously agreed to be our peer example today. I will ask William the yes, no question so we can all learn from his example. Let’s begin. 

Sean Magennis [00:12:00] Number one. Will you run out of working capital if you double your firm? 

William Lieberman [00:12:07] And for us, it’s a no, we are completely virtual companies, we have really low overhead and our operating expenses are less than 10 percent of revenue. Fantastic because we use contractors to deliver our services. If we double our client base, we just add more contractors. And that’s the beauty of the accordion model.

Sean Magennis [00:12:27] I like it very clear. Number two, will you need short term debt if you double your firm? 

William Lieberman [00:12:35] For us, no. What we do is we keep an amount of cash on hand that covers our operating expenses in our contractor expenses, so we always have a minimum level. And as we grow, we increase that minimum reserve so that we never have to borrow money. 

Sean Magennis [00:12:51] Excellent. Number three, will you develop a collections problem if you double your firm? 

William Lieberman [00:12:58] So no, what we’ve done is put in place from the beginning from the sales point of sale understanding with the client. Here’s how we build. Here’s how we invoice. Here’s our net terms, etc. And then we have a formal process that escalates up if something looks to become a problem starting with client service, but all through invoicing and collections. And so we and we review it every week. 

Sean Magennis [00:13:22] So you have a weekly review process with triggers that alert you to any difficulties. 

William Lieberman [00:13:28] Absolutely. Finally, go through every client every week. 

Sean Magennis [00:13:31] Outstanding. So, William, question number four, will your cash flow payments exceed your cash income if you double your firm? 

William Lieberman [00:13:42] No, because our model is to have a very specific percentage, say, 55, 60 percent of what we believe to our contractors. So no matter how much business we’re doing. I know exactly how much cash is going out and how much we’re able to retain. And this, of course, assumes that we don’t have any collection issues which would solve.  

Sean Magennis [00:14:04] Outstanding thank you. Number five, will you have a hard time getting enough cash on the balance sheet to double your firm if you decided to do it? 

William Lieberman [00:14:14] No, because we have a very controlled growth plan in place, so we’re purposely not making large, large investments that outstrip our ability to fund from operating cash flow. So, you know, I always like to lead with. 

Sean Magennis [00:14:28] Good. So number six, when growth has spiked in the past, did your cash flow ever turn negative? 

William Lieberman [00:14:36] So this just happened recently where the answers no. But we had a big spike in quarter two of this year, and we had a best quarter ever way, way higher because we had a lot of one time money. So we build and collected and paid our our people and generate enough cash flow to pay out the partners of a significant distribution. 

Sean Magennis [00:14:55] Very nice. Congratulations. That’s a problem all our listeners should have. It’s great. Number seven, will payroll growth exceed accounts receivable growth when you double your boutique? 

William Lieberman [00:15:09] So because our contractor costs are 100 percent tied to revenue growth, there’s a one to one relationship between our growth and revenue. So, no, as the revenues go up, we pay out more. As revenues go down, we pay less. And so as we double it will, it will be perfectly fine. 

Sean Magennis [00:15:29] Excellent. Number eight, will cash flow problems be hidden due to lack of forward visibility? 

William Lieberman [00:15:36] No, because we implement, you know, we eat our own dog food, so we implement a 13 week cash flow forecast as we every week we update it and we can see what’s going on with cash. So we always have that forward visibility on here. 

Sean Magennis [00:15:49] Very nice, William. Number nine, will it be hard to generate the yield on your cash deposits? 

William Lieberman [00:15:57] Well, so assuming I understand the question, then this one’s a yes. Okay. If you mean cash that’s sitting sitting around in a bank or some kind of financial institution that doesn’t generate anything right? So we prefer to either distribute out to the partners and we make our own investments or preferably invest back the business. 

Sean Magennis [00:16:16] Excellent answer. That’s exactly what I was getting at. And then number ten, will you be at risk of paying your future obligations if you double your firm? 

William Lieberman [00:16:26] No, we have a very controlled model, so no, not at all. 

Sean Magennis [00:16:30] Outstanding, William. In summary, boutiques run on cash. They don’t run on net income or EBITDA, which is measured on the accrual basis. As you so rightly pointed out, do not run out of cash as you try to scale. A huge thank you to you, William, today for sharing your expertize and for our listeners if you enjoyed the show and want to learn more. Pick up a copy of the book The Boutique How to Start, Scale and Sell a Professional Services Firm. Written by Collective 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening. 

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Episode 54: The Client: 2 Sales Tools to Win Bigger, Faster, and More Often – Member Case with Nate Kievman

There are two sales tools that allow boutique founders to win bigger, faster, and more often. On this episode, we discuss these tools with C54 member Nate Kievman, CEO of Linked Strategies.

Transcript

Sean Magennis [00:00:16] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board Member, and your host. On this episode, I will make the case that there are two sales tools that allow boutique founders to win bigger, faster and more often. I’ll try to prove this theory by interviewing Nate Keivman, CEO of Linked Strategies. Nate, I’m known and getting to know for a while. He’s a highly sought after digital strategist. He brings a no nonsense business approach to digital and social strategies, and his company Linked Strategies is a consulting firm that specializes in delivering clients a steady stream of highly targeted and pre-qualified meetings with top executives, CEOs, VP’s thought leaders and other key decision makers who are typically made extremely hard to reach. He can be found at linkedstrategies.com, Nate, great to see you and welcome. 

Nate Keivman [00:01:33] Thank you, Sean. Thanks for having me today. 

Sean Magennis [00:01:35] It’s such a pleasure. So let’s start with an overview. Can you briefly share with the audience an example of a sales tool you developed to win bigger, faster and more often? 

Nate Keivman [00:01:49] Yeah, absolutely, Sean, I think it’s an interesting perspective to think about the tool itself that helps you win deals. And I think there’s actually two and I call it an impact analysis, and this is something that is a self-created tool for any organization, especially in the management consulting space who we serve. I think about 90 percent of our clients are in that space. So what they’re looking for is a way to articulate value more clearly and then get their client to agree to that value. And what’s interesting about that is if you do it really powerfully, it very quickly ups your price model and in and it builds your pricing based on the value you’re bringing versus the market competition. So, for example, we just wrapped up our biggest deal ever at a four and a half million dollar contract. Our average deal prior to this was one hundred and fifty thousand dollars a year. And what we’re looking at doing and the reason that we did this as we said, OK, what’s the market value that we’re bringing? And then can we scale that? And so what we did is we created two things and I said two, right? So one is the impact analysis. The other is the sales process of a thing called we call co-creation. And if you can build a sales process that builds a co-creation model into it, then that, coupled with an impact analysis, is almost impossible not to land very significant deals. 

Sean Magennis [00:03:15] I love that. So an impact analysis and a sales process, you’re co-creation model. Outstanding. So, Nate, I’d like to get your thoughts on two tools that we also recommend in this area. I’ll walk you through each one and get your thoughts on each of the two tools are the demographic profile and the psychographic profile. So let’s start with the demographic profile. This is a description of a particular type of client based on unique identifiers such as gender, age, industry, job title, geography. And it focuses on quantifiable attributes and is objective. What are your thoughts on this concept? 

Nate Keivman [00:03:59] I think it’s a baseline for being able to access any given market, right? You have to understand who they are. We call it your total digital universe. Like how do we know our market right? And in the day and age that we live in, we have such accessibility that we’ve never seen before in our in our world to where there’s no excuse for you as an organization not to have your total digital universe at your fingertips. And what I mean by that is the ability to communicate with them, by email, by phone, by social and having that database something that’s always in your hand and always live. 

Sean Magennis [00:04:35] Well, that’s right on. So the next one is a psychographic profile. This is a description of a type of client based on also on unique identifiers such as once needs, goals, challenges, priorities. It’s the qualitative attributes and it’s more subjective. What do you think about that, Nate? 

Nate Keivman [00:04:56] Well, I mean, it’s the holy grail of data, right? So if if if I could figure that one out permanently, we’d be doing a lot more of those bigger deals, right? So the we end up figuring the psychographic out through a thing called the five psychological triggers. And this is a way that executives actually interact, not just think it’s interesting. So we’re most marketing and most sales fall into the habit of if I say my client is this and I talk about my big background and pedigree, that’s enough, right? But it’s not for an executive what an executive actually makes decisions on and when. The reason they’re executives, by the way, is they make great decisions fast. That’s kind of part of the the role too great. So, so, psychologically and globally. This is applicable. So in Abu Dhabi, to London, to New York, to Australia and Sydney, it’s the same for executives, which is there are limited on time. They’re good at making decisions and they make decisions on three core areas outside of trust and credibility. So trust and credibility is the baseline, but time, money and risk are the three critical components that get them to say yes, that’s what’s been able to get us from like just a single call. The email that’s extremely long, by the way, and that’s a different conversation point. Yes, that’s what we’ve been able to land a conversation for one of our clients with with Elon Musk and then one with Tim Cook, right from an email. And it’s something that opens the door that you never knew possible because of the way you articulate your value as it pertains to them and how they see time, money and risk. 

Sean Magennis [00:06:39] You know, that’s that’s absolutely fascinating. And I love what you’ve just shared. One of the one of the things that differentiates you is what you said at the end of your remarks, which is this long email. And because so many marketers go out with trying to get something catchy, some pain points to two word line, you know, two sentence line. Give us a quick insight into this long email concept because I think our listeners need to hear this. 

Nate Keivman [00:07:08] As it’s really important, everybody so executives are great at making decisions, but they also don’t have a lot of time. So a long emails, actually respectful of time, not disrespectful of time, and people don’t understand that because what you need to be able to do is give them enough. And remember, there’s four what if you if you look at the various personality tests out there, there’s four kind of primary personas, maybe six, depending on which one you’re using. Yes. And and CEOs tend to fall on one of two classes and then a little bit of one of the third and. And so what we do is we write to each of those different persona types in order of their attention span. And so when you write that way, you have to understand that there’s a thing called the power statement that you have to build to get their attention. And that’s all short. That’s true, yes, but they’re not going to make a decision to give up their most valuable asset, which is their time, unless they can get a little more information right there without clicking on something and having to go dig for it. So that’s why we’ve been able to modify this over 10 years of and tens of millions of emails and and figure out the Hey, this stuff, this is this is the way to get executives. It doesn’t mean that’s the way to get sales professionals, by the way is going to be better for them, right? But if you want executives? Yeah, you go. There’s a model for it. 

Sean Magennis [00:08:26] Outstanding that that that was a great definition. So we’ve also found that selling services is much harder than selling a product. So when a prospect buys a product, they put their trust in the product itself. When a prospect buys a service, they put their trust in the people delivering the service. So therefore, and you’ve said this establishing trust is essential. What do you think of this? 

Nate Keivman [00:08:50] I think that the reason that the sales process is one of the critical tools to success that we talked about earlier. I I teach a methodology where rapport building and this is from some really great colleagues of mine that have fed into this and are happy to give them as resources. But you know, we’ve done a combination of learnings over tens of thousands of sales calls, hundreds of thousands of sales calls now with our clients to the market that we’ve been serving them right. And we can see out of all that, all that data. Who’s winning at higher percentages versus others? And what do they do differently over others? Well, the ones that are really, really good at closing on a brand new conversation for the first time from a new relationship. They’re really, really good at building rapport, and the process for that is a consultative sales. So consultants and the reason I love serving the consulting industry is by default, you’re naturally a consultant. You have all the tools within you to be very good at this process. However, by default, what most people do is they get into their pitch and they sell themselves. And yeah, they just throw up on them. And right, and that’s honestly your consulting because you’re super smart in your category. But the bottom line is, is you’re doing something that’s the same for everybody. Rapport is not built by talking about the city you live in and connecting on something really generic on a sports team. It’s built by understanding their challenges, understanding where they’re trying to go and watch the gap between them. And can you or can’t you solve that? That’s how Raptors built. And that’s what we do as consultants anyway. We just don’t always recognize it. So what we tend to do is we want to get into really hurry up and tell them about us. But they don’t care. They want to know is what we do able to solve their problem first. And that’s what we need to focus on. 

Sean Magennis [00:10:42] That is a powerful distinction. And listeners, please remember that. So sales tools like those we just discussed, they’ve been around forever. If they truly can help win bigger deals faster and more often, you would think they’d be used more often. So when when I look at firms and I think you’re the same, they’re either not present or if they are, they’re not used properly. So why is this? Why should leaders of boutique professional firms care about what you’ve just been sharing? 

Nate Keivman [00:11:15] Because it will grow you exponentially. I mean, we have we have a I have a great management consulting firm and they’re but on the smaller end of the companies that typically start with us, they started about six hundred thousand dollars right when COVID hit. And we help them understand this methodology and the combination of understanding some of the tools that we’ve outlined, right? The tools are the beginning, the sales process, the impact analysis that by itself should double triple quadruple, sometimes topple your your price. They went from a seventy thousand average deal per year to a $500000 average deal per six months. Wow. And then on the back end of their contracts, they got a three year contract at a million dollars a year, so they went from all that and just over the last 18 months, and now they’re a $5 million firm. So I think about the speed of impact and the speed of growth. You can grow in three primary areas really, really fast as a management consulting firm, increase your price right there over a shorter term or consolidate the term over a longer period of time either way, and then close more deals and get more leads, like if you can do all three at the same time, you’ll have exponential growth and it’s almost guaranteed. So that’s where I think that if what I’m saying resonates, you know, an impact analysis, understand how to build a rapport and have a really well-structured first call because you win the deal on the first call and and then understand that process will increase your prices very quickly. And that’s the fastest and easiest way to grow your company. I did that 100 percent growth for three years straight, and all I did was focus on my price and my term. 

Sean Magennis [00:12:52] So those are outstanding points. And, you know, brings me to brings me to a question. So a lot of our listeners will get off this podcast and they’ll go, OK, so how do I implement this? How do I get started in this? Give them some. Give them some tips on what to do immediately after hearing. You know what you’ve just said 

Nate Keivman [00:13:13] Sure, I think. It’s really hard to get to your own core value. I was just looking at a website of a person I’m talking to later today, and he’s in the management consulting space and I’m like, Wow, they really struggle to articulate their value. And so what happens is most management consulting firms grow from referrals because they can’t articulate their value clear enough for people to actually want to desire it because they’re not saying it clear enough, right? And so. So I think that the starting point is to get really, really clear on your core value to the market, right? And how to articulate that spend time, spend money on that because that’s going to create the big breakthrough, right, where we’re working with one of the largest financial institutions in the world coming up and the first thing they’re hiring us for is that as the core message, right? What’s the core value? How do I crack through on the messaging first and then we can go start sharing that message with the market? And so the second thing I would say is an impact analysis is a simply put, it’s an Excel sheet that grabs certain assumptions and articulates everything you do into a monetary impact on their organization. So like the the company I mentioned earlier, that went from six hundred to five five million a year culture transformation company and well, that’s a hard one to articulate into. You know, what’s the financial impact of this? Yes. And so but but there’s a lot of ways to do it, and so turn everything from whether it’s time saved or it’s hours saved or it’s, you know, you know, risk eliminated or whatever it is that all translates to dollars. Figure out how to translate it to a dollar and a bottom line impact and then use that into your process. And then what it is is it’s a little quick gut check, and what it becomes is a business case that helps you win the bigger deal, right? 

Sean Magennis [00:15:13] Yeah, I love that night. I absolutely love that. That’s very practical, very doable. And obviously they can always reach out to you, which would be really in a very important for those that would need your type of expertize. So this is great. There is no part of the boutique that this information will not change. Every sales script changes. Every process to deliver a service would get rewritten to reflect this enhanced understanding of the client. So a firm should change its marketing messages, its pricing position and the hiring profiles realistically of its staff. So to win bigger, faster and more often requires the boutique to obsess over the client every little detail without this information dynamically updated regularly. You’re not client focused. So this is a good reminder tools that can truly help you understand your client. OK. 

Sean Magennis [00:16:11] This takes us to the end of the episode. Let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is checklist, and our style of checklist is a yes or no questionnaire. We aim to keep it simple by asking only 10 questions in this instance. If you answer yes to eight or more of these questions, you know your client strategy is working. If you answer no too many times, your lack of client knowledge will impede your ability to win more business. Nate has graciously agreed to be our peer example today. And Nate, I’ll ask you the yes no questions, so we’ll all learn from this example. So let’s begin. 

Sean Magennis [00:16:58] Number one, do you have a demographic profile of your target client? 

Nate Keivman [00:17:03] Yes. 

Sean Magennis [00:17:05] Number two, do you have a psychographic profile of your target client? 

Nate Keivman [00:17:11] I do. 

Sean Magennis [00:17:12] Number three, do you have an elevator pitch that speaks directly to the target client? 

Nate Keivman [00:17:19] Absolutely. 

Sean Magennis [00:17:20] Number four, do you understand the personal goals of the client? 

Nate Keivman [00:17:26] I do. 

Sean Magennis [00:17:27] Number five, do you understand the professional goals of the clean? 

Nate Keivman [00:17:32] I do. 

Sean Magennis [00:17:33] Number six. Do you understand the obstacles preventing the client from accomplishing their personal goals? 

Nate Keivman [00:17:42] Yes. 

Sean Magennis [00:17:43] And number seven, do you understand the obstacles preventing the client from accomplishing their professional goals? 

Nate Keivman [00:17:51] Yes. 

Sean Magennis [00:17:53] Number eight, do you understand the likely objections that your client is going to submit to you? 

Nate Keivman [00:18:00] Yes. 

Sean Magennis [00:18:02] Number nine, do you understand the client’s top priorities? 

Nate Keivman [00:18:07] Yes. 

Sean Magennis [00:18:08] And number ten, do you understand the emotional makeup of the client? 

Nate Keivman [00:18:15] Most of the time. 

Sean Magennis [00:18:17] I love that, you know, and this is an example to our listeners, somebody like yourself that literally this is your business should answer yes to those. And the challenge to our listeners from both you and I need is please think through all of these, apply them to your business. And if you can’t answer sufficiently, then go back to work and really focus, focus on getting to know your client. So in summary, know thy client. Get inside their hearts, their souls, their minds. Try to know them better than they know themselves. Take this knowledge and drive it into everything you do. Because when a prospect bumps into you, they should say to themselves, These people get me, Nate, thank you for sharing your expertize with us. It’s great to see you.

If you enjoyed the show and want to learn more. Pick up a copy of the book The Boutique How to Start, Scale and Sell the Professional Services Firm. Written by Collector 54 founder Greg Alexander.

And for more expert support. Check out Collective 54 the first mastermind community for founders and leaders of boutique professional services firms.

Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening.

Posted on

Episode 55: Mistakes: 7 Mistakes to Avoid When Selling Your Business – Member Case with TK Herman

There are 7 common mistakes made when trying to sell a professional services firm. On this episode, we interview TK Herman, President and Co-Founder of Aptera, a focused IT consultancy and managed services provider.

Transcript

Sean Magennis [00:00:15] Welcome to the boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board Member, and your host. On this episode, I will make the case that there are seven common mistakes made when trying to sell a professional services firm. I’ll try to prove this theory by interviewing T.K. Herrman, president and co-founder of Aptera.  Aptera is a focused IT consultancy and managed service provider.  Aptera transforms your ability to deliver custom software with high performing development teams, coaches and consultants. They are a trusted partner of Fortune 500 companies with a track record of tackling complex global development projects. TK, great to be with you and welcome. 

TK Herman [00:01:21] Yeah, thanks so much for having me, Sean, I really appreciate the invite onto the show. 

Sean Magennis [00:01:25] It’s such a pleasure. Let’s start with an overview. Can you briefly share with the audience an example of a mistake to avoid when selling your firm? 

TK Herman [00:01:35] Yeah, I think, you know. So we recently went through an acquisition, so I’ve got experience in this realm and you know, one of the things that I would say that there are three areas of knowledge in the world. There’s the what you know, there’s the what you don’t know. And then there’s the what you don’t know that you don’t know.  And and through the whole process, there were a lot of things in the realm of what you don’t know. You don’t know that I came across. And so I’m I’m a much smarter person today than I was, you know, four or five months ago. And one of those things would just be, you know, kind of asking the question and really trying to spend more time aligning some of the changes that are going to be happening with the integration of the two companies. Because, you know, I think that everyone is focused on getting to the same endpoint, but how to get there in the timeframe and in how to go about that, I’d be a slight difference. That’s just one example of of something that you might consider thinking about. 

Sean Magennis [00:02:35] That, you know, that’s a wonderful example. And I share that with you because in a in an example that we’ve helped with recently. Soon, as the acquirer was identified, they advocated for starting integration conversations early on because it is often left to the end. And it really does make a difference when the rubber hits the road that you’ve thought through all the nuances so. So thank you for that example. It’s a critical one. And you know, if I think about selling a boutique, we know it’s a high risk, high reward initiative. We also know that every situation is different. So I’d like to spend some time getting your thoughts on the common mistakes made when selling. I’ve selected seven to walk you through, and I’ll ask to get your thoughts on each and feel free to share whatever comes up for you as we go through these. So the first mistake is that boutique owners are unclear as to what they want from a sale. So if you’re unsure of who you are, you’ll be unhappy with the sale. If you don’t know where you’re headed, you’ll be unhappy with the sale. What are your thoughts on this concept? 

TK Herman [00:03:47] I would completely agree with that, I think that before you. The more time that you can spend sort of self reflecting and look in the mirror to really understand what is the goal and why you’re heading down this path, the more likely likely you’ll be to be happy on the other end of the transaction. You know, and again, I think you hit on those points, whether it’s, you know, what am I looking for for my company? Because, you know, more often than not, acquisitions are done to move the company forward. Right? And then also, from a personal perspective, you know, what is life look like after that? And what does that mean to you? And and if you’ve had the business for quite some time and you have somebody else coming in and kind of running the business, you know, is that going to affect you emotionally? Some people will say yes, some people will say no, but I think, I think really sitting down and reflecting on those points and having a very clear understanding of where things sit for you personally on the side. And I think to the last thing I’d say is is the more conversations that you can have with people that have gone through this process to just try to learn from them along the way, I think that that that would be extremely helpful. 

Sean Magennis [00:04:55] Those are those are great points of advice. And that brings up mistake number two, which is sometimes boutique owners try to sell an unsellable business. And so your boutique needs to be attractive to a buyer. It almost requires you to look at your business through the lens of an investor. What do you think of that TK? 

TK Herman [00:05:17] I would 100 percent agree with that. You know, when when you’re selling a professional services company, there’s no, you know, machines to buy or inventory to buy. The person that’s acquiring your business is really acquiring the team that you’ve built and the client relationships that you’ve cultivated over the years. And so you need to be really need to become really clear on that. And then also look at and say, how reliant is this business upon you or you and a few people? Because the the the more you can get the business to the point where it’s not really reliant upon you to drive the day to day pieces forward, the more value there is in the business. 

Sean Magennis [00:05:58] You know, again, I can’t agree with you more because that’s what we see so often. Getting in the way of a successful sale is that the owner founder hasn’t thought of it in the way that you’ve just expressed.  You know, mistake number three. It can take years to sell a boutique. Yet some owners try to sell a boutique in a matter of months, and a good exit is an exit on your terms. It does take time to stack the deck in your favor. What are your opinions on this? 

TK Herman [00:06:29] You know, it’s so interesting because we did not anticipate going through the acquisition even at the beginning of this year. And so this is we obviously knew an acquisition would happen at some point in time. That was always the end game. But did not expect that this year, even really in the next couple of years. And and the right opportunity came along and we decided to move forward with it now. We were fortunate that we had sort of positioned the company and set things up in a way that it made that process easier. But I’ve spoken with a handful of people since the acquisition that just reached out for some advice. And you know, I can’t stress enough the importance of again, making sure you have the right leadership team in place, making sure you have, you know, processes and procedures and those kind of things that are easy for an acquire to come in and kind of take charge of and move forward. But then also there is just a tremendous amount of back back office work that needs to be done. So making sure that you’re accounting, you know, is all in order making sure our files are all in order. Because the more that know, the more time you spend there, the the easier it’s going to be through the diligence process. You know, that’s one of the things that that, you know, our comptroller had mentioned to me during the process. Gosh, if I had known we were going to do this, I could have spent the last year actually even preparing that much better. And I couldn’t argue with that. That’s a very valid 

Sean Magennis [00:07:52] No, it’s a very valid point. No. And but that’s a great point for our listeners, too, is that, you know, you’re a practical example of somebody that was fortunate because you were prepared and you had a lot of things in place. But if you had had to do it over again, potentially, you know, in the example of the accountant having that time to prepare is so much better and could potentially impact, you know what you get out at the end of the day from the from the sales price. So let’s talk about you. You alluded to this several times. Let’s talk about succession planning and often owners under invest in succession planning. And after you sell, you’ll want to see that your boutique does well without you. So what are your thoughts on the importance of succession planning? 

TK Herman [00:08:42] I think it’s I think it’s highly important again, even if a sale is is. You know, a decade down the road. Yes, I think from day one, when you start a business, you should start setting the business up for it to run without being there day in and day out. And it’s the old adage, you know, you have a choice. You can either work in the business or you can work on the business side. And it’s it’s very difficult. You know, I’ve certainly empathize with companies that are small that have, you know, just five or 10 people because the owner has a really difficult time sort of balancing those two things. But if you can, if you can from the beginning focus and say, I’m going to spend, you know, even if it’s 51 percent of my time on the on the business things. And over the course of time, you’ll get to the point where where that becomes kind of your main role in the business. And I think there’s there’s to me, there’s three key ingredients to setting up a leadership team or setting up a team to be able to carry the business forward. And they’re very simple. The first one is just hire outstanding human beings. Yes, just just great people. Obviously, they need the skill set that they they you just want great human beings to represent you to to work with you every single day and to help deliver that great experience to your clients. And then the second piece is is point them in the direction that you want them to go. And the more narrow that direction can be, the better, obviously. So yes, we we were for a long time kind of a shotgun approach, and we started trying to narrow that down to more of a rifle, but point them in the direction you want to go. And then the third piece is, in my opinion, it’s the hardest piece and that is get out of their way. So in other words, you know, you’ve hired great people, you’ve pointed them in the right direction and then now it’s your job to get out of their way and let them move forward and let them make mistakes, you know, and let them learn from those mistakes. A phrase that I always use is Don’t let perfect ruin good. If there’s one thing that I can say that my business partner and I have did a good job of over the years was creating an environment where we let people try things and make those mistakes. And there were times where I, I would look at something that somebody wanted to do, and I would think in my head, that’s never going to work. But I also looked at and said, OK, if it doesn’t work, is this going to be a detrimental thing to our business? Is it going to hurt the client hurt and hurt an employee? And if the answer was no and there really wasn’t a significant risk and let them go down that road because A, I could be wrong, I’m not. I don’t have all the answers, right? But B also, if if it if it didn’t work, there’s a whole lot of lessons to be learned there. And the more that you empower people like that, the more you’ll find yourself having time to work on the business as opposed to in 

Sean Magennis [00:11:25] Outstanding and I loved you three key ingredients, and I’ll refer back to them at the end of the of the podcast because I think they they certainly resonated for me. So let’s talk about mistake number five. This mistake is where entrepreneurs think that they can sell their business on their own. It can result in tactical execution errors that can cost millions of dollars, and our recommendation is to hire the best advisors that money can buy. What is your opinion on this best practice? 

TK Herman [00:11:55] So actually, it is actually kind of a funny story that reflects back to Greg Alexander, who obviously has been on your podcast numerous times. Yeah. And so we were fairly deep into diligence and deep into the process, and I was having a conversation with Greg and and he said, Hey, do you have counsel? And I’m like, You know, of course we have a lawyer, and he goes, No, but do you have somebody with experience in this? And I’m like, Oh, I think they are. And and he goes, OK, hang on. Let’s pause a second. And he said, You have to you’ve got to go out and find somebody that really not only not only in an attorney, but also your accountant, and make sure that they’re experienced in this. And so I did that. I took that advice and and asked around, found somebody and holy mackerel. My eyes were open because we again we were we were fairly deep into diligence. I was very fortunate that that that this law firm was able to to take us on. But there were so many things, so many things that I had. I would have had no idea of the level of questions that needed to be asked. And so I can’t stress that point enough. That’s 100 percent true. 

Sean Magennis [00:13:01] Absolutely fantastic. And then mistake number six is boutique owners often get attacked after the sale. This is more personal. You know, they can take it personally, and this causes seller’s regret. So our recommendation there is give yourself the permission to not take it seriously and really guide yourself. What are your thoughts about this? 

TK Herman [00:13:24] Yeah, I would agree with that. I think that you have, you know, a wide variety of reaction, you know, everything from from people that are very upset that you sold the business to people that are excited about the opportunity and it’s easy to find yourself like anything else. For example, if I was a new YouTuber and I started a new YouTube. You know, I’m going to get some heat and some shade thrown at me on on the comments and I have a choice to make. Do I focus on those? Yes, or do I focus on the positive things that are coming out of it? And so like anything else in life, whether it’s whether it’s selling your business or anything you do. You know, the more that you can like align your your, your mindset and and your heart under the positive things, the better off you’ll be, for sure. 

Sean Magennis [00:14:10] Yeah, wonderfully answered. And then finally, mistake number seven is to be sure to understand who the business is being sold to and what their motives are. It’s particularly important if you’re on an Earnhardt or rolling in some equity. This prevents unwanted surprises from cropping up. The buyers ultimately own the asset once you’ve sold it. What are your thoughts about this? And I know it’s early in for you, but what are your thoughts? 

TK Herman [00:14:36] Yeah, I would totally agree with that. And even if there’s not an earnout or there’s not equity, I’m very much I’m very much invested in the people. You know, we had our business for 18 years and I care deeply. I care to actually care more about the people that work for us than I care about the work product that they delivered. And I always believed that if we if we operated that way as a company that will come back and give us good karma sort of in return. And so, yeah, I would totally agree with that. The more that you can align yourself and ensure that the things are aligned, the better the whole process will be. And you know, some of those things, that’s where it goes to, I think, going out and asking a lot of questions of people who have been through the process before because you as somebody new coming into this won’t have any idea of what questions to ask. And and that’s that’s certainly an area where there are things that that could probably be easily missed 

Sean Magennis [00:15:33] A great point. And again, thank you. I mean, these are all very vital mistakes to avoid, and there are many others, too. To your point, I mean, going through and having great advisors, having them give you the benefit of the wisdom of what they recommend asking is also very key and every situation is different. However, we’ve given you seven of the most common mistakes for you to avoid as a boutique owner of a professional services firm. TK thank you. This brings us to the end of this episode. I prepared a 10 question Yes/No checklist, listeners. Please ask yourself these 10 questions. If you answered yes to eight or more of these, you will avoid making these mistakes when selling your firm. T.K. has graciously agreed to be our pure example today. Thank you, TK. So I’ll ask you the essential question so we can all learn from this example. So question number one, do you know what you want from the sale? 

TK Herman [00:16:38] I would say yes, when we went into this, I would say yes. 

Sean Magennis [00:16:41] Excellent question number two. Do you know what you were going to do after the sale? 

TK Herman [00:16:48] Yes, that was a yes for for me personally as well.

Sean Magennis [00:16:52] Great. Number three, is your business attractive to a buyer? 

TK Herman [00:16:57] Yes, it was. You know, and again, we we worked hard over the years to to to be very deliberate about creating an attractive company. 

Sean Magennis [00:17:07] Great. Number five, do you have a handpicked successor? 

TK Herman [00:17:12] We did have a leadership team that was able to basically roll the business forward, even if we hadn’t sold the business they were, they were making the majority of the decisions along the way. So we we were in a good spot for sure. 

Sean Magennis [00:17:24] And I did skip number four because you had a sellable boutique and you’d kind of illustrated that before. Number six is the successor ready to take over? 

TK Herman [00:17:36] Yeah, I would say yes. But again, we we were purchased by a large company, so that’s a little more complex. But but as far as that, the people we had, yes, I would say without a doubt, they’re just top notch people. 

Sean Magennis [00:17:49] Excellent. Number seven, have you lined up an all star team of advisers to help you? 

TK Herman [00:17:56] I didn’t, but I have them now. So if I was ever going to do this again now, I would know who to call. Excellent. 

Sean Magennis [00:18:05] Eight. Are you prepared for the post-sale criticism headed your way? 

TK Herman [00:18:10] You know, I don’t think that I was I know that there would be a lot of emotion around it, but some of that I did not expect. But I understand it for sure. And so that’s probably one area that I didn’t prepare mentally for, like I like, I probably should have. 

Sean Magennis [00:18:25] Yes. And then number nine, do you understand who you were selling your boutique to? 

TK Herman [00:18:30] Yes. Yes.

Sean Magennis [00:18:32] And No. 10. Do you understand their motives for buying? 

TK Herman [00:18:37] Yes, we’ve we’ve we felt pretty confident in in their motives and why they wanted to acquire us. We actually had the good fortune of having a very, another company that was acquired by them that we were very friendly with their owner. And so we were able to get some behind the scenes look into things prior to the acquisition. 

Sean Magennis [00:18:57] T.K. Fantastic. I’m just going to remind the audience again about the three key ingredients that you alluded to during the course of our time together. The first was hire outstanding human beings. I thought that was profound. And then point them in the direction that you want them to go and keep it narrow. And then the third, which I think is a vital lesson. Certainly, it has been for me and I think it will be for our listeners. In fact, I know it will be for our listeners is get out of their way, which is the hardest thing to do. So again, thank you all of our listeners. You’re building a business that you could likely run forever. You’re also building a business you could sell tomorrow if you do decide to sell. You want to do so on your terms. Give yourself plenty of time to avoid the mistakes that T.K. and I have shared with you today.

And if you enjoyed the show and want to learn more, pick up a copy of the book The Boutique How to Start, Scale and Sell the professional services firm written by Collective 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms.

Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective 54.com to learn more.

Thank you for listening. 

Posted on

Episode 53: Leverage: Work Smarter Not Harder and Make More – Member Case with Lawrence King

Boutique firms often grow but do not scale. On this episode, Lawrence King, CEO of Headstorm discusses how to work smarter, not harder and why improved leverage increases incomes and wealth.

Transcript

Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis, Collective, 54 Advisory Board Member, and your host. On this episode, I will make the case that sometimes boutiques grow, but don’t scale. I’ll try to prove this counter-intuitive theory by interviewing Lawrence King, CEO of Headstorm. Headstorm is a technology consultancy dedicated to building innovative technical solutions for Fortune 500 companies. Fast growing start ups and literally everything in between. Lawrence’s expertize includes designing, developing and supporting distributed systems, cloud platforms, mobility data analytics and token based security models. You can find Lawrence at www.HeadStorm.com. Lawrence, great to see you and welcome. 

Lawrence King [00:01:24] Thanks for having me, Sean. 

Sean Magennis [00:01:26] Such a pleasure. So too many boutique owners are growing but are not making more money in the process. Can you briefly share with the audience an example of how you’ve dealt with this issue? 

Lawrence King [00:01:37] Yeah, I think that there becomes a time if you’re not, there was a point in which we weren’t too focused in terms of our service offerings. And and in doing that, you’re trying to solve lots of different problems and you end up throwing lots of bodies at it. Bodies that you’re throwing at it may be their skill sets may not match up with the work that’s needed or they just in many cases, it the profitability would would get hit in that way. But you’re growing, you’re still adding revenue incrementally, but your profitability is really taking. 

Sean Magennis [00:02:13] Yeah, listen, you’ve hit the nail on the head. And so there are, you know, there are some thoughts that I’d like to to get your input on that we recommend. So I’ve selected five things I’ll walk you through and get your thoughts on each. So the first is if revenue growth and headcount growth are proportional, the owner doesn’t increase necessarily his or her income from that growth. So it’s not until headcount growth is decoupled from revenue growth that an owner grows his income. What are your thoughts on this? 

Lawrence King [00:02:48] Yeah, that’s a little bit of a tough one, because if you think about it growing literally eight or linearly, I could say if a company, if their net net, let’s say they’re a bit as 15 to 20 percent, yes. And I know that if if I’m doing 10 million this year and 20 million next year and and I’m operating the business the same way, I’m just adding headcount and my mark, my EBITDA is already 10 or 15. I’m going to get more, you know, revenue, right? I think that where that where that starts to fall apart is, is as you start to scale those profit margins. They don’t they don’t stay the same. And as you’re adding headcount, you’re also probably not running a leveraged model. And so your your EBITDA and end number is going to be, you know, much lower than probably where you started. 

Sean Magennis [00:03:35] Yes. Yes, that’s that’s an excellent point. And you know, it brings us to our next question, which the top expense by a wide margin for a professional services firm is their labor cost and more headcount. Naturally, more means more expense, potentially less income. And as a firm takes on more work, don’t they need more heads to complete it? Or how do you think differently about that? 

Lawrence King [00:04:00] Oh man, it’s yes. But to get to a leverage model is is really a challenge. It actually forces you to start with the service offerings in mind. You have to really focus on what you’re offering and scope. It is something that you can hire against, something that you can train against and something that you can deliver against with low cost resources. And so if you’re trying to deliver all different types of solutions, you’re never going to get that opportunity. 

Sean Magennis [00:04:26] You know, you’ve again, you’ve dovetailed right into the next thing that I was going to talk about, which is re-engineering your service and also you’re scoping. So let’s talk about leverage then. So the definition of leverage is the number of employees to owners. And an example of how to calculate the leverage leverage ratio is a firm with, say, 30 employees with three owners would have a 10 to one leverage ratio. The higher the leverage ratio, the more money the owner makes. So why is this? You know, it’s because a profit pool divided by three people is obviously better than a profit pool divided by up to 10 people. How do you think about leverage in this context, Lawrence? 

Lawrence King [00:05:09] Yeah. So I look at it as a shape and we’re a leveraged pyramid. 

Sean Magennis [00:05:14] Yeah. 

Lawrence King [00:05:15] And I can tell you that when we hire to maintain that leverage, I’ll give you an example of last year. Last year, the way that we were hiring, we were hiring very reactively to different projects. And we actually when I looked at our staff from consultants, senior consultants, project leaders, directors and partners, yes, we formed a diamond. 

Sean Magennis [00:05:32] Interesting. 

Lawrence King [00:05:33] And so I built out this whole pro forma so I could play out the numbers and see if I was to hire against the forecast and maintain my pyramid to where I had more consultants than I did senior consultants, more senior consultants than I did project leaders and middle management and so forth. Yes, there’s a gain of about 10 percent there to the gross margin. If you manage that properly. Mm-Hmm. 

Sean Magennis [00:05:56] I mean, that’s that is a unique ability and kind of what I would advocate probably your secret sauce in that area. So when you you’ve spoken about owners often have expense of senior staff performing junior grade work. This obviously destroys profitability and owners income. And so what do you think the fix is for for that scenario? 

Lawrence King [00:06:21] I think how we solve it is when we build our project teams, the project teams take on pyramids in and of themselves, and there is utilization pyramids in there. And so if we have a partner that’s managing quality, they’re probably billable five percent of the time. I like it. And then a director is also a part of that, and he’s probably billable 10 percent. Yep. And then as part of our expectations framework, the directors know, hey, overall, you need to be billable for 30 to 50 percent of the time, but your other, you know, 60 and 70 percent needs to be focused on high value, high, high fee craft. Yeah, I the type of work and that could either be doing business development activities, thought leadership, building intellectual capital within the firm that we can resell coming up with new go to market service offerings. Yes, all of those type things. So we really break it down in terms of what the expectation at every level is and the allocation of time from billability to working on internal intellectual capital. 

Sean Magennis [00:07:25] I mean, it sounds remarkable and you’ve obviously got the process and the systems down, you know, almost to a fine art. How do you how do you keep track of that? What sort of tools techniques do you use to keep track of that, Lawrence? 

Lawrence King [00:07:38] Yeah, great question. So the very first thing I started that drove that really drove that our strategy was building this pro forma. I knew it. Let me start with the end in mind. So I said, Listen, I want to be able to do a 20 to 25 percent EBITDA. Yeah, so that means I have to do if my is probably going to be 20 to 25 percent and I know that my gross margin has to be 50 at all times. 

Sean Magennis [00:07:59] That’s right. 

Lawrence King [00:08:00] I know what we pay our staff now. I just have to work. I know how many PTO days they have. I know the vacation, the holidays, how many hours are there. And then I look and I plug all that in and it spits out the rates that I have to charge. And then I look at those rates and I say, Wow, those are high. How are we going to get those? Yes, that’s when it’s a pivot moment. They say, Listen, we have to be super focused. We have to come up with go to market strategies and engagement models that aren’t time and materials based, their fixed fee, even contingency based, and they have to be tied to high value solutions that we’re delivering in order to get that. And so that’s really framed up how the focus of where we’re we’re looking at if we want to compete, if we think of consulting as a spectrum, staffing on the far side and then high end differentiation on the other, we want to compete over here, so we have to be delivering those types of solutions. Got to get back to earlier question. So we built an internal application called MTM Headstorm MTM. And what that does is it’s a dashboard every day as a as a leadership team. This is directors and partners. We look and we see what their utilization is across the company. We see what the realization is by project and we try it. We’ve got a threshold there that we try to be at 100 percent realization. That’s meaning that we’re charging 100 percent of our standard rate. If it’s if it’s the partners have the opportunity to to discount it by 10 percent if they want to. But we have to. But the pro forma accounts for that. And so if this matches, if we’re staying within this 90, 90 percent to 100 percent realization, then we’re on target with the pro forma. And that’s really sort of how we manage where these projects are. And then we got a bench, you know, and there’s times where, yes, you hire we we now if you hire, reactively, what we’ve done is if you hire, reactively, you get a project and then you start hiring for it, you’re going to compromise talent, you’re going to compromise the roles and the leverage. Yeah. So rather and you may have attrition and culture issues down the road. So we did areas as we simply created a forecast to give to our recruiting department to say, you need to hire this many of each of these levels every month. And that will make sure that we 

Sean Magennis [00:10:04] stay, stay in that pyramid. 

Lawrence King [00:10:06] In that pyramid. And then it’s up to us as as the partners to sell the work and to make sure that we’re putting those people, you know, getting them busy and billable. 

Sean Magennis [00:10:15] You know, thank you for sharing that because what that illustrates to our listeners is the importance of being on the data and the information and the intelligence of what’s happening daily. You said that, you know, your MTM system gives you a view every day, and I’m assuming that that also, you know, enables you to to really accurately address the trigger point for your pivot because you can’t afford to pivot just, you know, once a quarter, once a year or once every six months, right? I mean, you could you could be pivoting literally on a daily basis with with with what you have at your fingertips. 

Lawrence King [00:10:49] Right. That’s right. And and so we really manage that. We also look at so so we have our utilization, we have our realization. And then we’ve got with Pipedrive is our CRM. Yes, it’s really cool because we book in there all of our existing work and income that’s coming and the revenue coming in monthly that’s already sold work. Yes. And we have forecasted work on a monthly run basis. So we know, hey, we’ve got enough in the pipeline that we’re going to be doing, you know, two million next month or whatever those numbers are. And that gives us a really predictable way to think about staffing and hiring, scoping these scoping right. 

Sean Magennis [00:11:31] Which is critical. Lawrence, this is fantastic. I mean, you know, the idea of leverage is not new. It’s obviously been around for a long time, and it means that the solutions are readily available. I mean, your examples of. Of how you built MTM, how you’re running Headstorm. A just extraordinary and I think a really important lesson for our listeners who are building boutique professional services firms is take Lawrence’s his lessons and really apply them. It’s not easy to run a professional services firm. It’s not easy to maintain leverage right? 

Lawrence King [00:12:05] No. It’s a challenge. 

Sean Magennis [00:12:07] It’s a challenge. But the way that you’ve architected it and the tools that you’re using, the information that you’re getting on realization, on utilization, on seniority, on scoping, very, very key. So this will help you if you adopt some of these lessons and insights, it’ll help you work less, hopefully earn more, work smarter and not harder. So this brings us to the root cause of the big issue. Revenue outside of scope should be turned away. Lawrence, what do you think about that? 

Lawrence King [00:12:40] Absolutely. Yeah, yeah, absolutely. I’m doing. I’m doing it today. 

Sean Magennis [00:12:44] Excellent. So again, this allows you as an owner to balance expense of senior staff and allocate assignments to junior staff capable of doing the work at good cost profile. It’s what pushes up the leverage ratio and your pyramid example of what allows an owner to make more money as the firm grows. So, Lawrence, this takes us to the end of this episode and as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist, a style of checklist as a yes, no question, we aim to keep it simple. So in this instance, if you answer yes to eight or more of these questions, leverage or lack thereof is not preventing you from scaling. If you want to know too often, then poor leverage may be the reason that growth is not equating to your personal income. So, Lawrence, I’m going to walk you through these, and let’s begin. 

Sean Magennis [00:13:42] So number one is your leverage of employee to owner at least 10 to one? 

Lawrence King [00:13:47] Yes. 

Sean Magennis [00:13:49] Excellent. Number two is the proper mix of junior middle and senior staff clear to you? 

Lawrence King [00:13:56] Yes. 

Sean Magennis [00:13:56] Yeah. Given your example, I mean, that’s so well done. Number three, do you understand the skills mix of a project before you sign it? 

Lawrence King [00:14:06] Most of the time, most of the time, I would say the only caveat there is is that potentially if you don’t have the staff but you want to take the project, then then you know, kind of putting some. We tend to air on putting, you know, more senior people in for junior roles in that case. Yes, but it has to be a strategic account. There has to be a reason for doing it. 

Sean Magennis [00:14:25] And then, you know, at your fingertips, what are you know, what your return is going to be on that? All right. Yeah. So number four, do you understand which revenue is good and which is bad? 

Lawrence King [00:14:38] Yeah, it’s hard, but you know, all revenue seems good, but there’s there’s a lot of times that, for example, you know, if the account’s not a strategic account, if it’s not one that is going to become a flywheel, yes, there’s just distract you if it’s going to take away your bench. So you might perhaps miss out on another opportunity. Yeah, those are the types of things that go through our head and we make those decisions. 

Sean Magennis [00:14:59] Excellent. Number five, do you have a zero tolerance policy for one off projects? 

Lawrence King [00:15:07] Mostly, I think it just comes back down to the strategic nature of the project. 

Sean Magennis [00:15:12] Number six, do the owners work on the business instead of in the business? Do you work on the business instead of in the business? 

Lawrence King [00:15:21] I am. That is that’s a great question. I am transitioning, that is a tough one because I still bring in, you know, probably the lion’s share of the revenue. Yes, and I need to keep that going. But realizing that I this to create the value for the firm, I need to be able to hand it over with, you know, turnkey where I’m not needed. And so a lot of the focus is building processes and training and right now, that type of thing. So I could step step away more. 

Sean Magennis [00:15:52] And that’s brilliant. You know, the first step is in acknowledging that and then it’s literally having the discipline and holding yourself accountable to getting there, right? But it’s it’s a balance. Everything is every business is nuanced. Number seven, do your service offerings come with procedure manuals for the staff? 

Lawrence King [00:16:09] Yes. Yeah, so we call them playbooks, are run books. 

Sean Magennis [00:16:12] Excellent. Number eight, do you assign work to teams strategically versus reactively? You address that a little bit. 

Lawrence King [00:16:21] Yeah. When we have a bench, it’s more strategic. Yes, when we don’t have a bench and we’re just trying to, you know, take on new projects and hire at the same time, it becomes a little bit more reactive, but there’s a balance. We’ll try to make some strategic folks on the account and then come back a couple of months later and fix it. Maybe rebalance it. 

Sean Magennis [00:16:43] Excellent. Number nine, does your hiring plan forecast demand for a specific leverage ratio? 

Lawrence King [00:16:51] Yes, absolutely. 

Sean Magennis [00:16:52] And number 10, do your financial goals match up with the leverage ratio assumptions in your business plan? 

Lawrence King [00:16:59] Yeah, that’s that’s the that’s that’s pro forma that drives everything. I’m on that thing probably twice a week. 

Sean Magennis [00:17:04] I love it. I bet you. I bet you. Three quarters of the people listening and the members of Collective 54 would love to get insights on that from you. 

Lawrence King [00:17:12] So happy to share. It was great building it, going through the process of building it, understanding all of the levers. Just going through that process now makes me understand it that much better. 

Sean Magennis [00:17:23] Well, you can see it. I mean, you’ve got your you’ve got all of the all of the information, all the facts at your fingertips. So, Lawrence, thank you. In summary, scaling means working less and making more. It does not just mean growing. If you want to earn what you’re worth, decouple revenue growth and headcount growth. Follow the leverage tips that Lawrence has given you, and your definition of success is not the number of employees you have, but rather it’s how much net income you produce. Lawrence, a huge thank you for being with us today.

And if you’ve enjoyed the show and want to learn more pick up a copy of the book The Boutique How to Start, Scale and Sell the professional services firm written by Collector 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first expert community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale and exit your firm bigger and faster. Go to Collective54.com to learn more.

Thank you for listening. 

Posted on

Episode 52: Sell Your Business: The Difference Between a Happy and an Unhappy Exit – Member Case with Renzi Stone

Renzi Stone, Founder, and CEO of Saxum discusses the essential questions to consider when selling a professional services firm, including the importance of knowing your why when developing a business exit strategy..

Transcript

Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. The goal of  this show is to help you grow, scale, and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board member, and your host.

In this episode, I will make the case that step number one in developing a business exit strategy and selling a professional services firm is knowing why you were selling before you sell. I’ll try to prove this theory by interviewing my friend Renzi Stone. Renzi is the Chief Executive Officer,  and Founder of Saxum, an award-winning 50-person integrated digital marketing agency and consultancy headquartered in Oklahoma City with a distributed workforce across the United States. You can find Saxum at www.saxum.com. We’re going to learn a lot from Renzi. Renzi, great to be with you, and welcome. 

Renzi Stone [00:01:24] Sean, excited to be with Capital 54 and Collective 54. And looking forward to talking about business exit strategies. 

Developing a Business Exit Strategy: Know Your ‘Why’

Sean Magennis [00:01:32] Fantastic Renzi. So let’s start with an overview. Can you briefly share with the audience an example of why knowing the reason to sell your professional services firm is so vitally important? 

Renzi Stone [00:01:45] I think if you’re going to start off thinking about selling your firm, you really need to think first about why you’re in it, to begin with. Is there something else you have to offer your clients and your team members? And so it’s a good question. But I think the first thing that I would have to say is that every firm should make a critical decision. Am I in a lifestyle firm, or am I a scale firm? 

And so, to answer that question for me, Sean, I would say I am in a scale firm. This means that I am required, as a condition of my employment as the CEO of this company, to be thinking about what the outcome over many years looks like. And the only way to have an outcome that is achievable on a scale firm is you have to build it to sell. 

Sean Magennis [00:02:43] I love that. And that is so crystal clear the way that you distinguished that. And for the listeners’ sake, clearly articulating for yourself in a very deliberate way, whether you’re a lifestyle firm or a scale firm. Outstanding, Renzi, this is such a personal topic. I’m glad you’re here with me today because I know, you know, you’re a deep thinker. You have a strong set of core values. 

So I’d like to get your thoughts on some important, you know, considerations and questions when thinking of selling your professional services firm. It’s a long list. I’ve only selected five things, and I know that you’ve probably got several more. But I’d like to get your thoughts on each. 

So the first one is the reason to sell your boutique is very personal, and it should be. You’ve poured your life into building the firm; leaving it, handing it to somebody else takes much thought. How have you approached this? 

Renzi Stone [00:03:40] Well, I think the thing that I think about about the decision to sell my firm, and it’s really important to note, Sean, I haven’t exited my firm. 

Sean Magennis [00:03:51] Correct. 

Renzi Stone [00:03:52] I aspire to have a firm that has enough value that an exit is possible. 

Sean Magennis [00:04:00] Got it. 

Renzi Stone [00:04:01] So to answer the question, the things that I’m thinking about as it relates to a business exit strategy are systems, talent, processes, and the why for me is: Have I brought the firm as far as it can go under my leadership? And when I think about our clients. 

So one of the things I say all the time, Sean, is no clients, no Saxum – the only people that send money to Saxum. Unfortunately, our clients’ are the ones that send money to us, not vendors, not my friend, and certainly not my mom and dad. So if clients are the ones that send money to Saxum, my job as the Chief Executive Officer  is how do I create more value for those clients? And if I create value, they’ll refer me to other people. They’ll increase their scopes of work. 

And so the decision to sell for anybody is based on the idea of: Can you create more value for your clients by making that move? Any amount of money that I put in my pocket, any amount of lifestyle change that creates is only secondary to the first objective, which is how do you create more value for clients? And I think, Sean, I think if you get that backward , you are really at risk of having a failed acquisition, even if it gets closed. It may not perform. 

Selling a Business: Various Reasons Why Boutique Owners Sell

Sean Magennis [00:05:29] I so appreciate you sharing that and that perspective because I agree with it 100 percent, and you touched on the money aspect. Some owners of boutiques sell exclusively for the money. And in your view, how important is the money aspect of selling? 

Renzi Stone [00:05:49] Well, look, anybody who takes the risk, who puts capital and time at risk. And by the way, that’s in reverse order. Yes, time and capital at risk. Got it over 18 years. It’s 2021 right now. For 18 years, I have put my time and my capital at risk. Yes, I have put it at risk at the expense of doing other things with my time and my capital. 

So money is absolutely a consideration for any boutique owner who’s thinking about selling. What I would argue is if all you can think about is the money, you’ve missed the whole point of creating something of value. 

Sean Magennis [00:06:34] Well, well, well said. I’ve also heard that some owners sell because they’re bored. Some are exhausted. Some say that they that their work became a job. It’s not fun anymore. What are your thoughts on this aspect? 

Renzi Stone [00:06:50] Well, I am also a believer that yesterday is gone and tomorrow has yet to come. And so we all have to live in the present. And if in the present we are not challenged, we don’t have vision. So the job of a CEO, Sean, as you know, is to have vision. You must have vision, and the vision must be compelling. It must be. It must be something that can be translated. It must be something that can be owned by others. 

But if you fail to create a vision, you have failed to create something that is growing. And so I think to answer your question, people that leave boutiques because they’re tired or because they’re worn out, what they’re really saying is I don’t have a vision for the future. And so, the vision for the future is required. And I think anybody who continues to have a vision for the future should really ask themselves if it’s the right time to sell. 

Sean Magennis [00:07:50] Beautifully said again. And you know, that’s a lot. There’s a lot of psychology and psychological challenge behind that, and I loved you saying live in the present. It’s challenging to do so, but that’s where the reward is. And I love your comment about vision. It has to be compelling, and it has to be lived 24-7. So many boutiques are partnerships. At times, partners start fighting. One needs to be bought out. You know there are complications with that. What are your thoughts on this? 

Renzi Stone [00:08:22] Well, you’re talking to somebody who doesn’t have partners. And so…. 

Sean Magennis [00:08:25] For a reason, I presume. 

Renzi Stone [00:08:28] Well, I had a partner at the very outset of the business, and I did all the work, and the partner received all the benefit. And so I said, “Hey, partner, either you buy me, or I buy you.” And the partner said to me, “Well, I don’t want to own it because I don’t want to run it.” And I said, “Well, I don’t want to run it because I’m working for you 50 percent of the time.” And so it caused quite a conflict, as you might imagine. 

And so we resolved the situation. I bought his shares for a premium price, and then I own the rest of the business, so I own 100 percent of the business today. I would say for any professional services firm  owner who is at odds with the value creation with their partner, I would say that today is the best day to resolve it. 

And if you don’t resolve it today, then  tomorrow, and if not tomorrow, then the day after. I’ll tell you this, what most people do, Sean, is they don’t resolve it correctly. They just allow it to fester, which creates resentment which creates unequal value creation. And it’s a disaster waiting to happen. 

And we hear this in Collective 54 all the time. And it’s complicated, and it’s distracting to fight with a partner. But I would argue I addressed my problem. It was a problem. And as a result, I’ve created millions of dollars of value outside of that partnership, and it would not have been a good deal for me if I had stayed in that relationship. 

Sean Magennis [00:10:06] Wow, that is practical. It’s vulnerable, and it’s real. Thank you, Renzi. That’s outstanding. Another reason to sell is that some professional services firm owners are afraid, and you’ve touched on this a little bit, that tomorrow might not be as profitable as today. So what do you think about that? 

Renzi Stone [00:10:26] So I have a series of advice that I present to our team annually. There are 28 of them, but number one, Sean, is do not be afraid. Do not be afraid. And my counsel for anybody who thinks tomorrow might not be as good as today is, we have no idea. We just don’t know. And I’ll tell you; I have to tell myself the reasons. Number one on my list is because I have to tell it to myself regularly. 

Sean Magennis [00:11:02] Yeah, that’s that’s excellent. So, um, I’ve met owners who’ve had happy exits, and I’ve met owners who have had unhappy exits. And you know, what’s the difference? Those who had happy exits knew why they were selling. Those who had unhappy exits did not. 

10 Questions to Ask When Selling a Professional Services Firm

So, Renzi, this has been extraordinary, and we’re going to dive into our 10-question format. It brings us to the end of the episode. Our preferred tool is a checklist, and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only these ten questions. If you answer yes to eight or more of these, you know why you are selling and will likely have a happy exit. 

Renzi graciously agreed to be our peer example today, and I’m going to switch it up slightly. I’m going to remove one. I’m going to add this because Renzi has really done his homework, and we’re going to go through his list of questions which are very similar but with one or two subtractions. So I’ll start out by asking the first question: Do you have a clear vision of your future? 

Renzi Stone [00:12:17] Sean, I’m a goal setter. You and I know each other a little bit. I’ve written down my goals since I was 10 years old. I have tracked my goals for most of the last 20 years. I write them down, and I work at them. I have a vision for where I’m taking my business, and I’m executing against it. 

And so the answer is today, I have a clear vision for the future, which is probably the reason I haven’t exited a couple of years ago. Sean, I would tell you that I did not have a clear vision, but then I got one. Yes, and so it’s made a huge difference. 

Sean Magennis [00:12:55] Excellent. So does selling your boutique help you get there? 

Renzi Stone [00:13:01] The option to sell my boutique helps me get there, so yes. But it’s an option. Not an imperative. 

Sean Magennis [00:13:09] Fantastic. Number three, do you know why you do what you do? 

Renzi Stone [00:13:15] Saxum, we have a mantra called obsessed for good. Obsessed for good means that you want your professional service consultant to be obsessed with your work. We want to be obsessed with the issues and the challenges facing our world. For means we’re serving others. We are serving others and good means that the expectation is excellence. And so obsessed for good is how we define our why. That’s why we do what we do. 

Sean Magennis [00:13:57] Incredible. I, you know, listeners, if you could articulate the way Renzi did those specific items, that would get you way ahead of the game. Number four, would selling the firm bring you closer to your ultimate purpose? 

Renzi Stone [00:14:13] Well, I think anybody who’s the owner and CEO of a professional service firm or any firm, the values are reflected in who they are as individuals. So being obsessed for good carries into my personal life, and I would expect it to only increase as I get older, and I move on to new challenges if I ever do. 

Sean Magennis [00:14:39] Again, well said. Number five, I know you have a set of values, so do you have a set of values that define how you want to behave? 

Renzi Stone [00:14:48] Yes, and there are four of them. They make up the acronym BOLD, which is brave, original, lively, and driven. Those are the values of the firm. Those are the values that we operate by. That’s how we create value for our clients. 

Sean Magennis [00:15:04] Outstanding. I’m going to skip now, and I’m going to ask you a question. Do you know the type of community you want to be part of? 

Renzi Stone [00:15:14] One of the things I’ve noticed about boutique owners is that a lot of them are alone, and they don’t have anybody to talk to. And so, if you are somebody who is running a firm or a Managing Director or a partner, you have to surround yourself with a community of like-minded  thinkers, like minded values, not necessarily thinkers, not necessarily people who just think like you. 

Diversity is obviously a huge benefit to people that take advantage of that. And so personally, I value authentic relationships, people that tell me the truth. Yes, and I value feedback. We should all be seeking feedback all the time. Feedback is a gift when we get it. We can take it or leave it, but it helps us. 

Sean Magennis [00:16:03] Yeah. So this is an allied question, and you answer it in the way that you want to answer. So would selling a firm allow you to spend time with these people? Or how would you respond to that? 

Renzi Stone [00:16:19] I’ve made a decision to spend time with people who are positive and life-giving, not people that suck energy and take. So I’m a giver. I believe that when you give, you get. There’s all sorts. There’s two thousand years of human truth in that. And so I spend my time with those types of people, and I try not to spend time with people that take life away. 

Sean Magennis [00:16:47] I could not agree with you more. The next question will the proceeds of the sale fund something more than material possessions? 

Renzi Stone [00:16:57] No, I think just material possessions, Sean. No, just joking.

Sean Magennis [00:17:02] I just want a boat and a few toys. No, I get that. It’s a trick question. 

Renzi Stone [00:17:07] Yeah. So, my family we have a family foundation. Isaiah Stone Foundation, which has raised almost a million dollars for research in epilepsy and helping families who have children with epilepsy. We lost a child. And so, I would definitely see spending more time on epilepsy research and supporting families who are dealing with the devastating effects of epilepsy. 

Sean Magennis [00:17:32] That’s a noble cause, and I commend you for doing it. And then the final question is are you personally prepared for the next chapter? Whatever that will be of your life. 

Renzi Stone [00:17:45] I think so. I think so. The big question is: Does anybody really enter a chapter fully prepared? I’m the guy that did not know what I wanted to do when I grew up, but I’m going to bring it back here at the very end to something you said a few minutes ago about happiness. People, are they happy when they exit? 

And I’ll just tell a quick story I had. I had dinner with my family in a restaurant last year, and we went to the restaurant. Our waiter was such a great guy, and he made us feel so special, and we just had a great time. We laughed, and we told stories, and I don’t remember what exactly it was, but it was just a great family dinner. At the end of the meal, he came up and he said, “Are you happy with how dinner went?” We all kind of looked at each other, and we said, “Yeah, we’re very happy about how dinner went.” And he said, “Of course, you walked in here happy.” 

Sean Magennis [00:18:42] Wow. I mean, I got a little cold shiver there. I mean, that’s powerful. 

Renzi Stone [00:18:47] You walked in here happy, and so I have a friend who just exited the business for nine figures. He was unhappy before he sold the company. And guess what? He’s still unhappy now. Yes, so unhappy. But if we can all, if you’re happy already, chances are you’ll be happy at the end of a business exit strategy. And chances are, you’ll be happy if you lose everything. It’s not tied together quite that tightly. Yeah. 

Sean Magennis [00:19:17] Renzi, I knew this would be a remarkable episode, and you’ve encapsulated all these thoughts so well. You know, every entrepreneur exits. We all have our final resting place, which is the great consistency in life. We all die. You cannot run your boutique from the grave, and most of us sell our firms before that event happens. 

There are good exits. Some professional service firm owners are happy after they sell, and we would wish for everybody to be happy after they sell. And there are bad exits where some owners on unhappy good exits and I would take your thoughts, Renzi. Good exits start with a heartfelt, well-thought-out reason to sell to continue living in the present. 

A huge thank you for sharing your wisdom today and for our listeners. If you enjoyed the show and want to learn more, pick up a copy of the book “The Boutique How to Start, Scale and Sell a Professional Services Firm”, written by Collector 54 founder, Greg Alexander.

For more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale, and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening.

Posted on

Episode 51: Scale Capital: A DIY Approach to Raising Growth Capital – Member Case with Josh Miramant

Scaling a boutique professional services firm requires raising capital, and not all capital is the same. On this episode, we interview Josh Miramant, Founder and CEO at Blue Orange Digital, to learn about the three sources of scale capital. When scaling a business, these are the sources of scale capital to be mindful of:

Transcript

Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. The aim of  this show is to help you grow, scale, and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board member and your host. 

In this episode, I will make the case that to scale your professional services firm requires capital and that not all capital is the same. I’ll try to prove this theory by interviewing Josh Miramant, Founder and CEO at Blue Orange Digital. 

Blue Orange is a data science and machine learning, consulting and development firm. They build modern data warehousing to support machine learning, and A.I. Blue Orange helps companies integrate these insights to drive data driven decisions. And the decision making. You can find Josh atBlueOrange.digital. Josh, great to  be with you. Welcome.

Josh Miramant [00:01:24] Thanks Sean, it’s great to be here, thanks for having me.

Sean Magennis [00:01:26] Hopefully, I did justice to that explanation of all the great things you do.

Josh Miramant [00:01:30] Or how many buzzwords in our space. You couldn’t have nailed it better, Sure.

Member Case: How to Raise Capital When Scaling a Business

Sean Magennis [00:01:35] So, Josh, let’s start with an overview. So why do professional services firms need capital when trying to scale is the big question. Scaling a business usually means entering new markets, launching new service lines, adding more headcount and many other strategic initiatives. These things all take money. 

So can you briefly share with the audience an example of how you raise capital to scale your firm or how you think about raising capital when scaling a business ?

Josh Miramant [00:02:05] Sure. Yeah, so I’ve spent a lot of time thinking about this and just a little background. I’ve actually started to venture back companies prior, so I actually came out of SAS product and a large equity-reduced  background. And this is my first professional services firm, and it’s quite a different beast. 

And in many great ways, like high profit generating types of business initiatives that you can use things like cash flow to reinvest in growth all the way over to, you know, the challenging pieces that they’re very cash hungry business models. 

To be honest, they’re going to take a lot of efforts like investing and resourcing and staffing and having a bench and resource allocation and all these things that are very, quite expensive. And these have to be very well forecasted when you’re thinking about a financial backing. So we’ve taken a pretty holistic approach to our financial backing for this, and actually luckily enough, I sold my last company, and so I was able to, fortunately, do some self investing. 

But we quickly wanted to move to more institutional as we’ve grown along. So, I opened up and started with friends and family debt around the world who lived in debt for our organization. And in the early days, I was able to personally back just under a half million dollars of the total, personally backed notes through successive orders of friends and family. 

It’s more institutional, the different tiers of raise. And then we even looked at some other side of… We had discussions with investment banks and private equity firms about potential acquisitions or investments based on the equity side. And that starts to move seats around equity raise and even some interesting partnership model equity raises that we’re even currently talking about. So it’s a pretty interesting range of options that we’ve explored in total so far.

The Three Different Sources of DIY Capital to Consider When Scaling a Business

Sean Magennis [00:03:54] You know, I love that, and your experience is so uniquebecause you’ve come to me to share with our listeners from the perspective of having, youknow, started to venture back more tech firms. This is your first professional servicesfirm, so you bring all of the knowledge there and then you know you’re in this sort of

reinvention mode, and yet you’re still leveraging these unique sources of finance. 

So this is going to be great for our listeners to get your insights. So Josh, what I thought I’d do is, you know, at the top of the show, I suggested that not all capital is the same. And these days now, and I don’t know if you’re finding this, but certainly I am, that capital is abundant in the market, and there are very, very many different kinds. So I’d like to get your thoughts on what we call a do-it-yourself  approach. 

I’ll illustrate three types of capital. And yes, I know they are more so if you want to throw out some others that you’ve got personal experience in, that would be great too. So the first one I’d like your input on is free cash flow from operations. 

So this comes from increasing revenue, driving down costs, using the spread between those to scale a business. And scaling with free cash flow preserves the owner’s equity and does not add a debt service burden to the PNL. What are your thoughts on this, Josh?

1. Free Cash Flow From Operations

Josh Miramant [00:05:21] And this is one of the absolute magic parts about

professional services agencies that you’re able to have a lot of control and a lot. It puts youin an interesting position. I love that. That’s the name of a professional services agency. 

I mean, you summarized that I think is an absolutely beautiful part about cash flow, which is owner equity and not having to dilute too early in your growth phase. And my philosophy on when I entered into professional services, my philosophy was that our profit, our dividend would be the measure of our success, and that’s controlled. But I would show how successful we were in the market. 

And I think that was something that allowed us to think about our growth planning based on our cash flow. And that was truly as we got in and developed more client base and showed more market adoption and how to sell  better. We were able to expand our growth, and I think that was a nice guardrail-controlled mechanism. And once we got our sea legs under us and take over 10 million topline this year, we will be able to start thinking about taking on more debt burden, or now you’re in the other options at the top. 

And a bit about that growth, that controlled growth to getting that point with a lot of capital reinvestment was incredibly helpful for planning, aka not growing too quickly. Yes, having some of the scale constraints, but also being very thoughtful with where you’re making a capital investment. 

One thing I would say that we’ve learned and learned late and  became a major challenge for us in the early days because our monthly invoices were pretty modest and so we can afford to cover a lot of how we’re doing. And so you have your cash flow is usually not like a 60-day window, we do a month at work. We would bill and have a net 30 payment. And I’ve heard a lot of different firms and colleagues do it differently, but that was a 60-day  cycle. If everyone pays on time and at end of  billing.

Sean Magennis [00:07:13] Yes.

Josh Miramant [00:07:13] We have started moving heavily into reducing down that cash flow cycle, going into lower net 15 or even upfront invoicing on net 30. So you’re really reducing under 30 days and quite candidly with very little pushback. And from a cash flow perspective, we shipped about 80 percent of our current clients, which we have a pretty long client lifecycle in almost every new one onto that with very little exclusion, and that movement to that shorter revenue cycle is actually massively increased the amount of cash flow we’ve had. 

It’s amazing to even grow quicker and have to take on less your interest for equity release or dilution really steps of an option. So it’s, I think, controlling your cash, obviously just goal to get cash in and spend it, not to think about that later and then planning. But I would say even more thoughtful ways of having a discussion with our client upfront. 

We’re pretty candid. “We’re a small boutique, and we want to get to cash flow so we can invest in your team to make sure we have good management.” And they were right alongside us, supporting us on some tighter cash flow cycle. So love cash flow, and obviously like to keep and reserve  equity. So at the end of the day, that’s the cheapest money you’re going to get out there.

Sean Magennis [00:08:22] You know, I love what you’ve said and everything you’ve

said, you know, I totally agree with. One of the interesting things you said, and I don’t want

this to be lost on our listeners, is that you were surprised at the ability to get paid upfront or

get a shorter payment cycle on your AR. That is fantastic. And I think a lot of owners of

boutique firms don’t have the courage, or they fear asking for that. 

So give me a little bit more on that as to how you went about it, because I think our listeners if all they do is get from this the shortening of the AR or getting prepayments upfront that will leapfrog

their ability to use free cash flow for other things.

Josh Miramant [00:09:05] Yeah. This is easily one of  the most important thing that’s happened. We’re really still growing this year. Our  growth was big, and so every dime counts right now. For us, we’re doing multiple types of financing plus we’re hiring like crazy . 

We have larger amounts of, you know, resource allocation like unallocated resource between projects, all the things you expect from the management of our company. But the thing that’s amazing was when we tried these conversations. First off, understanding what’s right for your business, how is it logical for your clients to pay you appropriately. You want to make sure you consider, but not every conversation was about what the risk was the company taking for giving us money.

And I think that was important to have that conversation. So our business. We actually had a message that was thinking about how they would consider it. So saying, you know, “Hey, we’re going to invoice the upfront, we’re going to keep it at net 30. So we’ll be completing all of the work that we’re offering this revenue for. It’s a really it’s not payment upfront, it’s invoicing upfront and you just align the end of payment to work the most recently completed.” And everybody love that we’re asking for payment upfront. 

Accounting teams freak out. They’re like, “Oh, we don’t want to put risk of giving you our cash and not sure how the work would be done.” None of that risk was there. It’s like, “Hey, if we’re doing such a terrible job on delivery, your cash is still sitting in.” The bank knew all the leverage, and we stand by our great work. There is zero risk here, and you’re just helping us with keeping control of our cycle. 

The narrative thinking about what our clients worried about completely changed our messaging. And so the second thing that once there was any pushback, and we did have a couple of clients, you know, very friendly, say, “Oh, we don’t like it, it’s kind of like a retainer site or deposit. We never talked about that, right?” 

We can then say, “Hey, let’s get rid of this. It’s no problem. But could you help us out instead of a net 30, which is pretty industry-standard,  let’s do a net 15 or net 10. And they are like, “Oh, of course, that’s no problem.” So now we’re in  this discussion where we just decreased our AR by twenty-five  percent.

Sean Magennis [00:11:03] Twenty-five .

Josh Miramant [00:11:04] Yeah, yeah. We started that conversation, yeah, 20 percent, excuse

me, but we started the conversation instead of just being like, “Oh, it’s 60, and hopefully

they pay on time,” and now I’m scrambling cash three payroll cycles later. And so it’s just

having a conversation with them and thinking of the messaging. 

You’re bringing it out to clients the way that safely risks their position and ultimately, deliver good work and have no problem with the payments close to cycle. That’s the kind of the cardinal rule here.

Sean Magennis [00:11:30] It’s so smart and it’s so good and you’re both at the same time. What you’re doing is you’re educating your team to operate on that basis and you’re educating your client, you know, so it’s a really good and it and if it’s positioned, as you’ve said and messaged, well, it’s a win win for both. 

And I know that’s a trade statement, but thank you for sharing that because underneath your original comments were these two very specific tactics which if a boutique firm can do that, it’s going to be golden. 

2. Debt

So let’s get to number two. So the second aspect is debt. So debt typically would come from a bank. It would come from a private lender. It may not be cheap, but it is reasonable as lenders charge modest rates on loans and it’s also readily available in the two to three times EBITDA range is what we would typically see. What’s your opinion on debt?

Josh Miramant [00:12:23] Yes, I loved it. Personally, I always like to start with my best and the worst but, I would love to help you frame this. And there is this spectrum of a professional service founder. That’s the greed fear spectrum. And I love how he thinks about this. 

On the greed side, you don’t want to give up your equity. This is the thing you’re building. That’s the compounding value. And candidly, particularly with when you’re investing cash flow, investing your earnings back into the business. These are cash-hungry machines that take a lot of it, and it’s part of your investment can be tied up pretty heavily in the ownership of a firm. 

That’s always a concern of the owner of not being too tied into a single, you know, having some diversity in a portfolio, not just a company. And so I think it’s an interesting on the greed side you want to keep that compounding engine because they can take out your salary and whatever disbursements are that you choose. 

But the angle  there is just coming down to the fear side, which is not making payroll. It’s not being able to hire. It’s not being able to grow quick enough. And I think that’s always this dichotomy that exists that I always take this metric on. Debt is this wonderful piece that’s kind of, you know, stepping partially into the equity, I think will get a chance to talk about my thoughts there in a minute.

Sean Magennis [00:13:39] Yes.

Josh Miramant [00:13:40] The debt is a wonderful play.. I think there’s a couple of things to consider. What you’re spending it on is crucial. So I think it’s always focusing on, you know, it’s like, I think that debt should be considered on the opex experience. Never capex, I think that’s a little later in my rules. 

There’s other thoughts there, but like on there is that you can service and keep revenue coming when you’re looking at that. I think there’s angles of debt being made notes two to three, but I think that’s a reasonable starting point, depending on personal liquidity or other factors that you have for backup. 

But I think I also think taking on debt with consideration of a repayment calendar like based on your projections and knowing what worst case is and best case is, and keeping it modest until you have a pretty confident projection into your repayment calendar. And then surely just I think you’re right, like apples pretty cheap right now in general has been more expensive. Some pretty, really very, very favorable interest rates, but very tangibly looking how much that money’s costing you.

Sean Magennis [00:14:37] Yes.

Josh Miramant [00:14:37] And I think that’s a big piece of how much are you are losing out on future revenue and is that is it smarter to keep cash flow and grow slower or smarter to take that, capture that revenue and turn it into more accountability. And I think that at the right point that is absolutely something you should do. 

We’ve raised our friends, and family around. I took out a line of credit from the traditional bank, Chase is our banking partner in a quarter-million line of  credit, which was really friendly to, you know, have this beautiful, beautiful debt option there. Because it’s only paying and you’re using it, which is lovely. It’s right at your fingertips. 

And then we’ve gone and got another $400000 debt financing round, which is pretty good for our books right now. On a more traditional note and still pretty favorable interest rates and the interest on it is pretty modest. So it’s a very nice opportunity for us to have, you know, feel very comfortable on our AR cycle and tied with upfront billing amount in a really strong cash position, even with this large growth factor, which is so nice to see.

Sean Magennis [00:15:45] And I would assume that you’ve also got some good forward visibility on contracting that’s coming forward because that helps you manage your greed fear component that you just spoke to, right?

Josh Miramant [00:15:58] Couldn’t be more apt there, and I think honestly, the

amount I would be sensitive to take out as much debt as I have unless we had contracts in place. We have even things that I was sensitive to. I’m not taking extending my debt financing options until we had a diverse set of contracts that were pretty far. 

I don’t want just one big client, or a couple, a few small ones that are kind of tailing in cycle with low visibility. It was, you know, we could lose a good chunk of our, you know, any individual client has no impact on our financial stability. That took a while to build, for sure. Toyour point of forecasting and de-risking alone actually was less about being able to service, you know, a few thousand dollars a month of interest, which is not in…the percentages are tiny. Yeah, but it’s actually coupled with a repayment schedule and projections against that with their contracts, we can stick to that calendar. Either way, it just means other future growth constraints, but still better offer market opportunity with clients, which took off.

Sean Magennis [00:17:00] You know, brilliant, and you’ve also hit on a couple of additional key things like client quality. So the ability of the client to pay, which is critical. Diversification of your client group, so you’re not anchored. You know you don’t have all your eggs in one basket, and then you’ve got your backlog in the quality of your contracting. So fantastic. 

I mean, this is exactly what we want listeners to really get a handle on because when using a debt instrument, all those factors should be in place, and you need to be able to feel comfortable and go to sleep at night. You know that you’re not going to wake up one morning and not be able to service the debt, right?

Josh Miramant [00:17:40] Yeah. So just a note to add. I think that in the early days, and I’m getting some questions that are on, fortunate enough to have some pretty decent-sized loans, personal back loans. And I think that’s best. I think what is also very exciting when we can move beyond me not having personal back loans, that was great money. 

And that’s where certainly takes a lot more to build a business to that point. But I do think that was a healthy risk appetite that I was willing to a smaller scale to then show repeated receivables and show a consistent client base. But that transition from I would certainly say that if debt is where you’re looking to go as you’re building a company up to 100 employees, which is our top line, but the size that we’re building on. 

I certainly get meaningful amounts of money or large enough amounts of money just on the business alone until we got a little bigger. And then it became something where that was because of the combination of cash flow and this just being not as much of covering the percentage of our MR. And it’s interesting how that became a really good solution on the company’s books.

Sean Magennis [00:18:44] I love that, and you know, it works right in the early stages. You

take the personal guarantee in the middle. I saw you don’t need to do it. You know there’s an appropriate time to take on personal risk, and then there’s a time, as you’ve just illustrated, where the company can take on that risk on the balance sheet. 

3. Equity Partners

So let’s flip to the third aspect, which is equity partners. So this is when an investor puts cash in exchange for a piece of the business, and then the owner’s stake is diluted as a result. What do you think about equity for a boutique professional services firm?

Josh Miramant [00:19:24] Yes, I got a little more sensitive when it comes to equity with a company like a professional services firm. First off, as I mentioned in my background, I think equity raises are really important. I think it’s just when and what you’re looking to build your firm. I think those are two questions that you need to understand here. 

So let me share my thinking around that. So unlike a SaaS product, where you just think high multipliers. High multiples and valuation are the expectation. If you are successful on strategy, whatever X your thinking about right, your projection on a professional service  depends on a little variability of your space. 

And how much tech work or how much automation is inside of the way that you do what you do, when is or what the product is understood, what you’re building,you’re looking at 2.5 to 4.5 range multiplier. Those are rough numbers that are going to be different for every one of your listeners here. But that’s kind of where our sector fell, our cutting edge buzzword tech stocks, or a little bit more depending on how strong your sales team and all these factors are not getting the details.

Sean Magennis [00:20:29] Yes.

Josh Miramant [00:20:30] So it’s interesting to think about when you look at those multiples, what are you looking to build? You’re really looking to scale a business. You need a lot more money. You need to invest in bigger sales organizations, but that comes once you make it to the next stage. Like, I always look at our objective and goals as a company is to move into that 25 to 30 million top-line revenue company as we scale-out.

And I look at that is what my investment team talks about is the platform layer of a professional services agency. That’s their terms. I like it. If you’re looking to scale a business, it’s like when you become a platform that things like taking on, you know,an equity raise and acquiring other companies you can actually absorb into you. 

If there is an option, there would be not typically a lot of business selling you to other firms, which I’ve actually done some other interesting areas around equity partnership equity, which is an interesting area that we’ve been talking about with a few of our partners lately. 

Yes, it’s very compelling because it actually reduces some of the equity dilution or my owner dilution along with the and while still getting pretty good terms, some capital. But the biggest factor is you are trading control, and it’s usually in a very good way. If you’ve got a good partner and you take on a good relationship with the firm because that’s expertise and all the things that come with a high or higher opportunity in addition to cash. 

So lots of good. But that control factor is important when you start thinking about what you’re looking to execute. So I think that equity when a founder and how I feel about it, when a founder feels really confident in their business model and can sell it well and they should know how much equity they’re going to give up for capital.

Sean Magennis [00:22:09] Exactly.

Josh Miramant [00:22:09] We did a full two-term sheet equity raise and I didn’t feel comfortable of the evolution at the time. And they were generous terms, that I think, appropriately valued our company. But it just the dilution meant was more of a control consideration on one side. And candidly, if it was done now, I think it might be below a margin where my control factor would be given up. 

So it’s a little bit to the founders role, like we’re looking to scale quite large and leaving up 50 percent of our equity right now. So when we’re being raised too much dilution down the road, but it can get a little bigger, have more receivables, are valued more competition or have more staff, the value of the company starts giving you competitive options. It’s a little individual, but I love equity. I just think the time, and the goals are crucial to be considered.

Sean Magennis [00:22:52] I love that. So the time and the goals are crucial for consideration. This is excellent, Josh. Really. So I can’t think of a more important, high-stakes strategic decision for our listeners to get right. As we’ve gone through these three, there are others. So this takes us to the end of this episode. 

Scaling a Business: Questions to Ask When Raising Growth Capital

And by the way, we’re going to have plenty of opportunities to discuss this, particularly in Collective 54 going forward. So this has been extraordinarily valuable. As is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. 

Our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. So in this instance, if you answer yes to eight or more of these questions all three of these capital sources are available to you. 

If you answer no to questions one to three, don’t pursue funding to scale with free cash flow. If you answer no to four to nine, don’t rely on debt. And if you answer no to question 10, don’t take on an equity partner. Josh as graciously agreed to be our peer example today. So,Josh, I’ll just ask you these 10 questions. Give us a simple yes or no.

Sean Magennis [00:24:08] And here we go. So number one, are you generating enough

free cash flow to fund scale?

Josh Miramant [00:24:17] Yes.

Sean Magennis [00:24:19] Number two, do you know where to deploy this extra free cash

Flow?

Josh Miramant [00:24:25] Oh, yes.

Sean Magennis [00:24:26] I love it. Number three, are you willing to go without today for

scale tomorrow?

Josh Miramant [00:24:34] Yes.

Sean Magennis [00:24:36] Number four, have you been in business for at least five

years?

Josh Miramant [00:24:41] Yes, we have.

Sean Magennis [00:24:42] Number five, are you generating stable EBITDA every year?

Josh Miramant [00:24:51] Beside COVID, yes.

Sean Magennis [00:24:52] OK. Oh, that’s good, I mean that listen, that’s real, right? You’re being honest.

Josh Miramant [00:24:55] It’s exciting years.

Sean Magennis [00:24:57] Exciting years. Number six, would two to three times EBITA be enough to fund scaling your firm?

Josh Miramant [00:25:04] Yes.

Sean Magennis [00:25:05] Yeah. Number seven, can your PNL handle the debt serviceburden of a loan?

Josh Miramant [00:25:11] Yes.

Sean Magennis [00:25:12] Number eight, are you willing to personally guarantee a loan?

Josh Miramant [00:25:18] Yes.

Sean Magennis [00:25:18] Yeah. You’ve done it.

Josh Miramant [00:25:20] Done it in the trenches on that one.

Sean Magennis [00:25:21] Absolutely. Number nine, do you have enough personal assets to secure the loan if open to a guarantee?

Josh Miramant [00:25:29] Yes.

Sean Magennis [00:25:30] And number ten. Are you willing to dilute your ownership, take for

the right equity partner?

Josh Miramant [00:25:37] Yes.

Sean Magennis [00:25:38] Outstanding, so in summary, it takes money to make money, scaling a boutique takes money. There are different funding sources, each with its own pros and cons. All can work well, which is best for you is highly situational. And Josh, you’ve said that. 

So take your time, listeners, to consider this very important strategic decision. Josh, a huge thank you today for sharing all of the real-life examples. I love your enthusiasm. I love the fact that you’re in Manhattan. I could hear the traffic, which we haven’t heard a lot in the last six months. It’s brilliant and makes me feel as if we’re in the real world.

And for our listeners, if you enjoyed the show and want to learn more, pick up a copy of the book “The Boutique: How to Start, Scale and Sell a Professional Services Firm”, written by Collective 54 founder Greg Alexander

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms.Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening.

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Episode 50: Are you Losing to “Do Nothing”? – Member Case with Beth Trejo

Beth Trejo, CEO, and Co-Founder of Chatterkick, discusses how to stop losing to a competitor we call “Do Nothing.” Boutique professional services firms lose more deals to “Do Nothing” than any other competitor. If you want to bring on new clients, you will need to defeat this competitor to grow your professional services firm.

Transcript

Sean Magennis [00:00:17]: Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale, and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board Member, and your host. 

I will make the case that boutiques lose more deals to a competitor, we call “Do Nothing” than  any other competitor. I’ll try to prove this theory by interviewing Beth Trejo, the CEO, and co-founder of Chatterkick. Beth educates business leaders on social media tools and gets their digital recruitment, social media, and digital customer service efforts working. You can find Beth at chatterkick.com. Beth, great to see you, and welcome. 

Beth Trejo [00:01:14]: Thank you, I’m excited to be here today. 

Sean Magennis [00:01:16]: Likewise, we’re so excited to have you. So, Beth, our description of the competitor we called “Do Nothing” refers to the project that went away. The prospect did not hire a firm, any firm. They just decided not to move forward with the project. In other words, they decided to do nothing. Has this problem occurred for you in your line of business? 

Beth Trejo [00:01:40]: Yes, and we actually see this a lot. We focus on the social media platforms, and many times these are the first things that people set aside when they’re busy, or they hand their social media keys to an intern, and then the intern goes away. And so it’s one of the most overlooked opportunities that I think a lot of businesses have in multiple categories, not just direct retail. 

Sean Magennis [00:02:03]: Yeah, you know, that’s what we find, too. And so, just following up from there, do you feel that this is a top competitor that boutiques must defeat to grow? And why do you feel that way? 

Beth Trejo [00:02:16]: Yes, I do, and I think the “Do Nothing” competitor really does demonstrate a core value that a lot of the professional services firms have, which is expertise and their advice. And let me give you an example. 

Sean Magennis [00:02:30]: Yes, please. 

Beth Trejo [00:02:31]: One time that we had a particular customer and they were looking to recruit a salesperson, and this “Do Nothing” approach actually cost them millions of dollars. So, what happened was they were in this business. They were a manufacturing company, and their lifetime customer value is really high. So, they were looking to recruit a sales individual that, you know, they were super excited about when they found a candidate. 

This candidate had expertise in the industry, and they were going to take this new product line and really get it off the ground. He’s super excited about this candidate, the business buzz. And they got to the final stage of the interview process, and they offered the candidate position, and the candidate declined. And they were just completely perplexed. They couldn’t figure out what happened. 

And they asked the candidate, and the candidate said that they had multiple offers from this business and their competitor, and they felt like their competitor, the offer they accepted, felt more “modern” than this business. And this business was innovative. It was high technology-driven. It was all of the things. 

Sean Magennis [00:03:51]: Yes. 

Beth Trejo [00:03:51]: But online, they had a website that was old school. 

Sean Magennis [00:03:56]: Yes. 

Beth Trejo [00:03:57]: They had a social media presence that was pretty much nonexistent. And maybe a couple of tweets that were left from Happy Memorial Day a few years ago. And so it really was. They didn’t have a presence, so they didn’t get to tell their story, and their story was formed for them, which was that they weren’t a modern company, and they lost the candidate. 

Sean Magennis [00:04:22]: That is such an extraordinarily good example, and it just showcases the nuances and the importance of having all of these elements defined. And then, you know, there’s this concept of mystery shopping where, you know, I think it’s so critically important for people to mystery shop themselves so they know what candidates you know, think, and feel. Is that something you guys do? 

Beth Trejo [00:04:45]: Yes, we definitely just kind of take a customer journey approach. Can people find basic information about you? Do you have a presence online that is an authentic reflection of who you are?  I don’t think that people are looking for perfection, whether it’s candidates or it is customers. But, they want to feel like they have good information and they want that authenticity. So, stock photos – throw them away. I would rather have a candid picture of your team over lunch than a stock photo of people that don’t look like those who work at the business.

Sean Magennis [00:05:18]: Yeah, that makes total sense. So, OK, defeating this “Do Nothing” competitor. It sounds like it will save founders a ton of time and boost revenue. I’d like to get your thoughts on some of the best practices that we recommend in this area. 

There are four specific things I’ll walk you through, and I’ll have you share your thoughts on each? The first is to be sure you can state the problem you solve for your clients clearly. I often ask a professional services firm  founder what problem they solve for clients. And they typically tell me about their solution. So, what are your thoughts about this? 

Beth Trejo [00:05:56]: Yeah, and I really think from our angle, the power of social media really lets you cross multiple operational areas of your business. Yes. The first is it does give you a competitive advantage because if you have a microphone, you can tell your own story. And it’s not just the story that your employees that maybe left in an unfavorable way could tell about you. It’s not the story that your history necessarily defines you. 

But, if you have these channels, they really are a communication channel. And so it can build loyalty, gain a competitive advantage, and help you build real connections. Yes, because I do think that that is the currency of our future. It’s how deep can you connect with your audience? 

Sean Magennis [00:06:41]: You’ve hit the nail on the head. The second thing to do is to determine if the problem you’re solving is pervasive. So to grow your professional services firm, we need lots of sales opportunities. What are your thoughts on this concept? 

Beth Trejo [00:06:55]: So, I think for as it relates to social media, I think and even just creating a digital presence, we really are living in a world of you need that existence online, and you need to make sure that you have proof or validation. 

It’s funny. Testimonials are not as important in terms of the word testimonials. People like the word review because review feels less forced than testimonial. And we want as consumers, again across all categories, to feel like we have control to source information about our businesses and the people that we work with, and we don’t want it dictated to us in, you know, a non-authentic way. 

Sean Magennis [00:07:39]: I like that. So the concept of reviews rather than testimonials that’s very powerful. Number three that we recommend is it’s a problem proving the problem is urgent. So when a founder pitches a prospect, a prospect of determining what he or she, you know, is hearing is worthy of making it on the priority list, what do you think of this idea? 

Beth Trejo [00:08:03]: I think, especially as it relates to the “Do Nothing” competitor, urgency is really important because what can happen is if you’re complacent and you just let your presence exist online, or you’re not actually trying to make it better, your story gets told for you. And people are really busy picking up little pieces of breadcrumbs. 

We see this all the time with reviews and again, especially in professional services industries. They don’t collect and capture reviews as much as maybe retail businesses may. But what happens then is if you get two bad ones and you had zero, now you have two two-star reviews. And you start making that times ten, and all of a sudden, you’re not ahead of that, and it’s a really difficult thing to fix.. 

So, my recommendation from an urgency perspective is you have to get ahead of it because this is our world of people leaving reviews and talking about your business. And so, if you’re not getting ahead of the curve and it is urgent, you’re going to be missing out. 

Sean Magennis [00:09:10]: And it’s a 24-7 all on environment. So having the discipline to look at those to respond, to capture them, to learn from them, I guess, is equally important. 

Beth Trejo [00:09:22]: Hundred percent. 

Sean Magennis [00:09:22]: Yeah. So the fourth recommendation to defeat “Do Nothing” is to confirm that a prospect is willing to pay for the solution. Often founders make the pitch, the prospect says yes, and then they see the price, and then that yes, becomes a no. What are your thoughts on this? 

Beth Trejo [00:09:39]: Yeah, I think there’s a little bit again, especially in the professional services category of the what is the cost of “Do Nothing” right? And this is a pure cost of losing a critical employee or losing your current employees because, you know, the grass looks greener on the other side. 

Yes, the cost of PR mitigation strategies, I can tell you that’s very expensive, very expensive. And we see this example all the time. And I mentioned this on the review side of things. But if there was something said about you, and there was a swarm of people that just really hurt your reputation, you’re going to need not only just an outside person to help navigate that, but your employees are also going to have to spend a lot of time. 

So there are definitely resources internally that you’re probably going to have to put on that. And I’m sure that those all could be calculated into a total cost analysis. 

Sean Magennis [00:10:34]: Yeah, I think that’s an excellent answer and unpacking of that. Beth, this has been fantastic. There are four ideas: state the problem clearly, pursue only pervasive problems, prove the problem is urgent and use a cost justification to increase the prospect’s willingness to pay. These will defeat “Do Nothing”, and they’ll help our audience members grow. 

OK, so this takes us to the end of the episode. Beth, let’s try to help listeners apply this. We end each show with the tool. We do so because this allows the listener to apply the lessons to his or her firm. Our preferred tool is a checklist, and our style of checklist is a yes or no questionnaire. We aim to keep it simple by only asking 10 of these. 

In this instance, if you answered yes to eight or more of these questions, your strategy to defeat “Do Nothing” is working for you. If you want to know too many times, not identifying the problem is likely getting in the way of your attempts to grow. So, Beth has graciously agreed to be our peer example today. Beth, I’ll ask you the yes, no question so we can learn from this example. 

Sean Magennis [00:11:47]: So, number one, can you explain the problem to your family? Do they understand it? 

Beth Trejo [00:11:55]: Yes, social media is relevant in multiple categories and industries. 

Sean Magennis [00:11:59]: Outstanding. Number two, when you explain the problem to your friends, do they understand it? 

Beth Trejo [00:12:06]: Same answer, I don’t think that anybody would argue that social media isn’t baked into all of our lives. 

Sean Magennis [00:12:11]: Number three, does the problem exist in more than one industry? 

Beth Trejo [00:12:17]: It’s a human-to-human  world these days, and we need to make sure that we’re not just living in a B2B or B2C space. 

Sean Magennis [00:12:23]: I love that answer. Number four, does the problem exist in companies of all sizes? 

Beth Trejo [00:12:30]: Absolutely, from a small little retailer to a large manufacturer. 

Sean Magennis [00:12:35]: Yeah, to a one-man band up to, you know, a global multinational. Does the problem exist in many geographies? 

Beth Trejo [00:12:43]: Yes, and I would argue that it connects us to more geographies than we don’t even probably realize we’re connected to. 

Sean Magennis [00:12:49]: Again, completely agree with that. Number six, are clients paying to solve the problem today? 

Beth Trejo [00:12:57]: Yes, they’re either paying with their time, or they’re hiring someone to help them. 

Sean Magennis [00:13:01]: Number seven, have clients been paying to solve the problem for years? 

Beth Trejo [00:13:07]: As long as social media has existed, they realized that it takes a lot of work, and the trickiest part about it is it doesn’t shut off. 

Sean Magennis [00:13:14]: Yep, that’s 100 percent. Number eight, if the client does not solve the problem, are the consequences severe? 

Beth Trejo [00:13:22]: Very much so, we gave that example with that PR crisis or just losing a key candidate. 

Sean Magennis [00:13:26]: Yep. Number nine, is there a trigger event that puts the client into the market for your solution? 

Beth Trejo [00:13:34]: I think if you start a business, you need to have a presence online. 

Sean Magennis [00:13:37]: Yeah, I think that’s a baseline. That’s table stakes today, right? 

Beth Trejo [00:13:41]: Exactly. 

Sean Magennis [00:13:42]: And number ten, when clients have the problem, do they work to get it solved by a certain deadline? 

Beth Trejo [00:13:49]: Yes, and I think from a deadline perspective, it really does kind of come in waves. But, the consistency is half the battle of social media, and it’s more than just posting on the holidays. 

Sean Magennis [00:13:59]: You know, I love that, and that’s such an important lesson for listeners to understand and then to model. I’m assuming that there are great examples out there that people can, you know, fast follow. What are your thoughts on that? 

Beth Trejo [00:14:12]: Oh, there are so many businesses that are doing it right, and they’re upending different categories. These smaller companies are really competing against large behemoth brands just by connection. And that’s the thing that I would encourage your listeners to do. Social media isn’t just about pushing information. It’s about really listening and building true relationships with your audiences and developing a community. 

Sean Magennis [00:14:37]: Beth, thank you. I mean, this has been extraordinary. And again, I would encourage our listeners to reach out to you if they have any needs in this particular area. So, in summary, “Do Nothing” is defeating you at least 50 percent  of the time, whether you know it or not. 

To beat this competitor, be sure to pick a problem to solve that is pervasive, it’s urgent, it’s one that prospects are willing to pay to solve and be sure you can explain it simply. In other words, start with the problem, not the solution. And in the context of social media, make sure that you are very prepared and that you are literally following it 24-7. Big thank you to Beth for sharing these great examples for us today. 

Sean Magennis [00:15:23]: If you enjoyed the show and want to learn more. Pick up a copy of the book “The Boutique: How to Start, Scale and Sell the Professional Services Firm”, written by Collective 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale and exit your professional services firm bigger and faster. Go to our website to learn more. Thank you for listening. 

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

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

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to The Boutique case study series with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow, scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host. On this episode, I will make the case you do not want to be trapped inside a lifestyle business. The opportunity cost of spending your prime in a lifestyle business is too large. I’ll try to prove this theory by interviewing Greg Alexander, chief investment officer and founder of Capital 54. Greg has developed a three part framework to address this issue, and today he’ll demonstrate how to use it. Hey, Greg, welcome. 

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

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

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

Sean Magennis [00:01:55] Absolutely. 

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

Sean Magennis [00:02:33] Yes. 

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

Sean Magennis [00:04:47] Excellent. 

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

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

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

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

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

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

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

Sean Magennis [00:08:24] Yup. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you for listening. 

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

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

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that to scale the boutique requires a strategy and that a collection of tactics is not a strategy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is considered by some as a master strategist and has a lot to share on this topic. Greg, great to see you. Welcome.

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

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

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

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

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

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

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

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

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

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

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

Sean Magennis [00:04:57] Yes.

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

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

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

Sean Magennis [00:05:58] Greg, this is so different and and so clear. This is not a budgeting exercise. I love it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

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

Sean Magennis [00:07:34] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your strategy is working for you. If you answer no, too many times, your strategy is more than likely getting in the way of your attempts to scale. So let’s begin.

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

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

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

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

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

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

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

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

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

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

Sean Magennis [00:10:15] And number 10, does the strategy specify how to respond to competitor attacks? So in summary, a collection of tactics is not a strategy, nor is a financial model or an annual budget, a strategy outlining what is not as useful as a strategy that outlines how. Scaling does require a strategy, and it should be focused on making you more valuable to your clients. If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. Thank you, Greg. I’m Sean Magennis and thank you to our audience for listening.

Posted on

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

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

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that to scale the boutique requires a strategy and that a collection of tactics is not a strategy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is considered by some as a master strategist and has a lot to share on this topic. Greg, great to see you. Welcome.

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

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

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

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

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

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

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

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

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

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

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

Sean Magennis [00:04:57] Yes.

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

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

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

Sean Magennis [00:05:58] Greg, this is so different and and so clear. This is not a budgeting exercise. I love it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

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

Sean Magennis [00:07:34] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your strategy is working for you. If you answer no, too many times, your strategy is more than likely getting in the way of your attempts to scale. So let’s begin.

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

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

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

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

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

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

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

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

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

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

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

If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. Thank you, Greg.

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

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