Episode 98 – How the Founder of an IT Services Firm Created a Legacy – Member Case with Jay Smith

Episode 98 – How the Founder of an IT Services Firm Created a Legacy – Member Case with Jay Smith

How do you successfully exit your business without sacrificing your legacy? On this episode, Jay Smith, President of Security7 Networks, talks about how he built his business to be ready to sell, and the biggest lessons learned in the exit process.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and exit your professional services firm. My name is Greg Alexander. I’m the founder and I’ll be your host today. And today I’m going to talk about why to sell your firm. This is often neglected. When we think about exiting our firms, we often think about how much to sell it for, on what terms, when to sell it, to sell it to. But we often forget the why. And in my opinion, the why is the most important question. And what I hope to accomplish today is to give the audience members something to think about, to make sure that they can get clarity around their why. And we’re very fortunate to have a role model with us today. His name is Jay Smith, is a member of Collective 54, and he will be sharing parts of his extraordinary journey with us today. Jay, welcome to the show. Good to see you. 

Jay Smith [00:01:25] Thanks for having me, Greg. 

Greg Alexander [00:01:28] Would you mind. Given you’re given a proper introduction, please. 

Jay Smith [00:01:33] Sure. My name is Jay Smith. I’m the President of Sales or I used to be the President of Sales of Security seven networks. We recently exited maybe back two weeks ago or so. We’re in the security logical security boutique business, a MSSP managed security service provider. When I look in the years. 

Greg Alexander [00:01:54] I’m sorry. Say it again. 

Jay Smith [00:01:56] Been at it for around 20 years. 

Greg Alexander [00:01:58] Yeah, very good. All right. So let me set this up before I jump into the questions. So the reason to sell your boutique is very personal, and it should be. You know, you’ve poured your life into building the firm and leaving it and handing it to somebody else takes much thought. Someone to sell for the money. Others say they’re bored. Some are just flat out exhausted. Some say the work just became a job. It’s not funny. More Maybe you’re afraid that tomorrow might not be as profitable as today. Sometimes, unfortunately, partners start fighting and one needs to be bought out. Maybe it’s just time to retire, you know, the list goes on and on. Sometimes there’s a health scare, which I know we’ll get into that a little bit. So the wider selling firm’s a very, very particular thing. And and that’s what we hope to discuss with the audience today. So, Jay, I would like to ask and start with your origin story and the origin story. As you know, I think when you’re thinking about why to sell your firm, it’s always a good thing to remind yourself why you started the firm in the first place. So go back 20 years and tell the audience why you started your firm. Please. 

Jay Smith [00:03:08] A lot of it was opportunistic. We had worked. My primary business partner and I had worked at a reseller integrator and we thought we could do it better and we didn’t want to have a boss above us telling what he thought was going to be doing it better. And that business started to go away during the DOT bomb kind of time frame. So we saw an opportunity between a lot of accounts that we had built up in our ability and thought that we could actually do it better. 

Greg Alexander [00:03:38] Okay. And sometimes it’s a lot easier to work for somebody else than it is to work for yourself and making that leap to start your own firm, something to be taken lightly. So, Jay, maybe share with the audience where you got the courage, the conviction to start your own firm. 

Jay Smith [00:03:59] I thought it was necessary, courage or not. But, you know, we were pretty convinced that we could do it better. One of the things that I’ve equated as. As time has gone by is you end up trading one boss for about a thousand bosses. You know, you end up having something I didn’t really realize when we first started out. But every client becomes your boss. Every employee in the tough labor market, you know, in a weird way becomes your boss. You know, your insurer is the you know, the IRS. You know, you’ve got lots of different people that you end up having to answer to. And it becomes a juggling act and a balancing act. So I think we made it or we we thought it looked easier than it was. And then when we got into it, we realized, you know, the challenge of doing it. And it’s really pretty challenging, you know, particularly 20 years. 

Greg Alexander [00:04:47] So with the power of retrospection, looking back 20 years, would you do it over again? 

Jay Smith [00:04:53] I would I would I would certainly do it, but I would probably have framed it in my mind a little bit differently. You know, it’s it’s more difficult than it looks. And it’s also probably more rewarding than I realized at the time, too. 

Greg Alexander [00:05:08] Yeah. You know, there’s a distinction between a small business owner and an entrepreneur. There’s been a lot written about this. But for what it’s worth, my perspective is this. There’s a lot of people that start businesses this far fewer that actually exit them. And to me, you’re really only an entrepreneur. When you go cradle to grave, when you launch a business, you scale it and it’s an asset that somebody else would actually want to buy and you’re able to sell it and you’ve been able to do that. So you are in the rare, the rarefied air, I should say, of being an entrepreneur as opposed to a small business owner. So 20 years is a long time. I believe you’re in your fifties, so it’s not like you had to sell, you know, you’re not 75 or something along those lines. So let me ask the the multimillion dollar question in your case, why did you sell now? 

Jay Smith [00:06:01] Probably a kind of a perfect storm. So I’ve got partners. We’re starting to age. You know, I’m going to be 58 in a couple of months. We have one partner, the 61 now, the one that’s, you know, 56, 57. So we started to feel that this was a younger man’s game a little bit. There was a whole element of private equity that has entered our space. So, you know, the managed service provider space is traditionally been very fractured, many, many small organizations without dominant players with sticky revenue. So that’s attracted a private equity component to our space that they find the space very attractive. You know, and you combine that with low interest rates. So, you know, I’ve kind of equated it to, you know, from a selling standpoint, if you want to sell when your second bathroom is all fixed up, when the market condition was right. And we try to have an element of both, you know, we tried to make the second bathroom, you know, is as good as possible. But the market conditions were also really right. It also helped that we had an investment banker who really, you know, changed the level of people that we had talked to previously. We were accepting inbound calls before, and our phone was pretty active, but the investment banker had a very formalized process and we were able to pick off not only from a valuation perspective, but the other deal parameters. So, again, it was that perfect storm of of the right organization, you know, the valuations being good private equity space, you know, helping the valuations, our aging partners. And you had brought up some some medical issues that, you know, that I had had in my past that made me uninsurable. So, you know, we didn’t have an insurance and, you know, making this, you know, a seamless transition for employees, for partners, for for my beneficiaries should something bad happened, also weighed in on some of the decision making. 

Greg Alexander [00:08:01] So, Jay, if it’s okay with you, I’d like to to poke on the personal reasons a little bit more. So you mentioned some some health issues. What perspective did that give you on life and what perspective that give you on your professional life? 

Jay Smith [00:08:20] So it’s a weird one. I’ve had a pretty challenging family history medically with with heart disease. And when I suffered my first heart attack in my early to mid forties, the er doctor came to me and said Mr. Smith, you know you’ve been, you know, you’ve had your first. You’ve had your heart attack. And I’m like, okay. And it was I was very nonchalant about it. And the reason I was nonchalant is I’ve had, you know, like I said, a a of family history with heart disease and young death. So it was it kind of came as no surprise. And I was very nonchalant about it. So, you know, fast forward three years later, I have another pretty significant one in my health is really good now. I’m under the care of a cardiologist. But, you know, one of the things I, I found is, is I don’t want to leave things left undone. You know, it was real important to me to have, you know, the idea of a legacy and everybody looks at their family in such differently. But I wanted to make sure I was tidy as much as possible. Transitioning the small business while it’s still active with heirs that are not in the business I thought would have been in order. In order. In order about my partners, my employees, you know, my my children, my wife. So, you know, again, there were some some pretty personal reasons. And I don’t think that’s you know, it wasn’t a huge motivating factor, but it did go into that decision making. 

Greg Alexander [00:09:50] Yeah, well, I appreciate your willingness to share that with us. And I’ve heard this from several entrepreneurs. You know, the transitioning of a small business is hard. It’s not it’s not an easy thing to do in selling boutique professional services firms is a very tricky and nuanced thing. Which leads me to my maybe my next question and maybe my last question as I look at the clock here. So, Jay, we had spoken for quite a while, you and I, before you entered the exit process. And your level of knowledge there around what it takes to exit a business was actually pretty good. However, you recently sent me a text now that you have exited and you said, Holy cow, I really didn’t know what I now know. So this is my question. So what do you now know about exiting a boutique preserved firm now that you’ve been through it, that you didn’t understand prior? 

Jay Smith [00:10:46] There’s a lot probably probably too much to say. But you would always talk about the value of a good investment banker. And we had an excellent investment banker. One of the things that was important to us was to continue to work in the business to help transition. And we’d like to stick around for a bit. You know, we’re not old enough to quite retire and we still think we have some gas left in the tank. One of the things that the investment banker did that helped was when the negotiations started to get a little more challenging, I was told to shut up, which is a hard thing for me to do. In that was the idea to help keep me clean, right? I was going to continue to go with the deal unlike yours, right? That you didn’t want to be your investment banker, didn’t want you in for some particular reasons. My investment banker didn’t want me to get dirty, you know, and I was exposed to that, you know, we were coming along with the package that they wanted us for, for the talent. So that was something that I really didn’t understand how good the investment banker was, despite having you say it, I really, really underestimated deal fatigue. There were a couple of times when I was out of gas and what we chose to do when our exit, my two business partners remain to work in the business while I was working on the business to help the distractions keep to a minimum. And that deal fatigue stuff was real when an investment banker brought me up for sure the accountant did as well. The emotional side of the equation. I found myself getting very, very nostalgic about, you know, my partner and I first started, you know, two guys in a pickup truck. And I found myself thinking back to those days. And, you know, I’ve equated small business and entrepreneurship, like riding a car or driving a car. We’re most often looking through the to the windshield and you see all the opportunity and all the potholes and everything’s forward looking. But every now and then, you take a look in the rearview mirror, and I found myself doing that more and more. So, you know, there’s a whole emotional side of trying to sell your baby. And we wanted to make sure and we did a lot of diligence on the acquiring organization to make sure that it was the right place to to grow our baby up some more. We felt like we had a really good small thing. And, you know, having, you know, a big financial partner, the levered their balance sheet a little bit differently and and really put some gasoline on the on the whole equation was you know so I didn’t I don’t think I, I, I thought that that emotional side would be as significant in the nostalgia coming in. We had some really emotional things go through it. We end up giving bonuses to some of the staff or all of the staff and some of the reactions there were. Unexpected joy for more than I could have given credit. When some of the things that I think you can do as a small business owner is really use your platform of your business to help do good things in your community. And we’ve certainly done those things. But, you know, helping a younger person, getting into the career that’s rewarded you so much. I almost feel like it’s a baton pass and we’ve tried to be a good steward in the space to help grow up the next generation of people that are going to protect our digital assets. So there were things like that that came out of this process. Not underestimating the level of effort I should have could have been more organized. I thought we were. But the whole idea of putting a data room together, maybe before deal in the elements that go into that know we had some of those things, but it would have made less effort during crunch time. So that’s probably the best I can do off the top of my head. But there’s probably a few things in there that would help. 

Greg Alexander [00:14:49] Well, listen, you’re like they say there’s no substitute for experience. And what you just walk us through and what what you now know about exiting a boutique process from having been through it compared to what you knew going into it? Yeah. You know, it’s one thing to hear about it or read about it. It’s quite another thing to live it. And I want to I want to make sure that I thank you on behalf of our community, our mastermind group, for your willingness to give back. I’m very proud of you for being able to pull off what you pulled off, particularly how you took care of your employees on the way out. Sometimes that doesn’t always happen. You know, greed can creep into the equation. And that didn’t happen to you. It’s always great to see good things happen to good people. So proud people. 

Jay Smith [00:15:33] Thanks so much. Greg means a ton. 

Greg Alexander [00:15:35] All right. All right. For those that are in professional services, who want to belong to a community like this and learn from role models like Jay Smith, consider joining Collective 54, which you can find at Collective54.com. And if you want to read some stuff around topics like this and and learn wisdom from people like Jay can always pick up a copy of our book. It’s called The Boutique How to Start Skill and Sell a Professional Services Firm. And you can find it on our website. You can find it on Amazon. So thanks for listening and look forward to the next episode of Jay. Thanks again for being there. 

Jay Smith [00:16:11] Thanks so much, Greg. 

Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and exit your professional services firm. My name is Greg Alexander. I’m the founder and I’ll be your host today. And today I’m going to talk about why to sell your firm. This is often neglected. When we think about exiting our firms, we often think about how much to sell it for, on what terms, when to sell it, to sell it to. But we often forget the why. And in my opinion, the why is the most important question. And what I hope to accomplish today is to give the audience members something to think about, to make sure that they can get clarity around their why. And we’re very fortunate to have a role model with us today. His name is Jay Smith, is a member of Collective 54, and he will be sharing parts of his extraordinary journey with us today. Jay, welcome to the show. Good to see you. 

Jay Smith [00:01:25] Thanks for having me, Greg. 

Greg Alexander [00:01:28] Would you mind. Given you’re given a proper introduction, please. 

Jay Smith [00:01:33] Sure. My name is Jay Smith. I’m the President of Sales or I used to be the President of Sales of Security seven networks. We recently exited maybe back two weeks ago or so. We’re in the security logical security boutique business, a MSSP managed security service provider. When I look in the years. 

Greg Alexander [00:01:54] I’m sorry. Say it again. 

Jay Smith [00:01:56] Been at it for around 20 years. 

Greg Alexander [00:01:58] Yeah, very good. All right. So let me set this up before I jump into the questions. So the reason to sell your boutique is very personal, and it should be. You know, you’ve poured your life into building the firm and leaving it and handing it to somebody else takes much thought. Someone to sell for the money. Others say they’re bored. Some are just flat out exhausted. Some say the work just became a job. It’s not funny. More Maybe you’re afraid that tomorrow might not be as profitable as today. Sometimes, unfortunately, partners start fighting and one needs to be bought out. Maybe it’s just time to retire, you know, the list goes on and on. Sometimes there’s a health scare, which I know we’ll get into that a little bit. So the wider selling firm’s a very, very particular thing. And and that’s what we hope to discuss with the audience today. So, Jay, I would like to ask and start with your origin story and the origin story. As you know, I think when you’re thinking about why to sell your firm, it’s always a good thing to remind yourself why you started the firm in the first place. So go back 20 years and tell the audience why you started your firm. Please. 

Jay Smith [00:03:08] A lot of it was opportunistic. We had worked. My primary business partner and I had worked at a reseller integrator and we thought we could do it better and we didn’t want to have a boss above us telling what he thought was going to be doing it better. And that business started to go away during the DOT bomb kind of time frame. So we saw an opportunity between a lot of accounts that we had built up in our ability and thought that we could actually do it better. 

Greg Alexander [00:03:38] Okay. And sometimes it’s a lot easier to work for somebody else than it is to work for yourself and making that leap to start your own firm, something to be taken lightly. So, Jay, maybe share with the audience where you got the courage, the conviction to start your own firm. 

Jay Smith [00:03:59] I thought it was necessary, courage or not. But, you know, we were pretty convinced that we could do it better. One of the things that I’ve equated as. As time has gone by is you end up trading one boss for about a thousand bosses. You know, you end up having something I didn’t really realize when we first started out. But every client becomes your boss. Every employee in the tough labor market, you know, in a weird way becomes your boss. You know, your insurer is the you know, the IRS. You know, you’ve got lots of different people that you end up having to answer to. And it becomes a juggling act and a balancing act. So I think we made it or we we thought it looked easier than it was. And then when we got into it, we realized, you know, the challenge of doing it. And it’s really pretty challenging, you know, particularly 20 years. 

Greg Alexander [00:04:47] So with the power of retrospection, looking back 20 years, would you do it over again? 

Jay Smith [00:04:53] I would I would I would certainly do it, but I would probably have framed it in my mind a little bit differently. You know, it’s it’s more difficult than it looks. And it’s also probably more rewarding than I realized at the time, too. 

Greg Alexander [00:05:08] Yeah. You know, there’s a distinction between a small business owner and an entrepreneur. There’s been a lot written about this. But for what it’s worth, my perspective is this. There’s a lot of people that start businesses this far fewer that actually exit them. And to me, you’re really only an entrepreneur. When you go cradle to grave, when you launch a business, you scale it and it’s an asset that somebody else would actually want to buy and you’re able to sell it and you’ve been able to do that. So you are in the rare, the rarefied air, I should say, of being an entrepreneur as opposed to a small business owner. So 20 years is a long time. I believe you’re in your fifties, so it’s not like you had to sell, you know, you’re not 75 or something along those lines. So let me ask the the multimillion dollar question in your case, why did you sell now? 

Jay Smith [00:06:01] Probably a kind of a perfect storm. So I’ve got partners. We’re starting to age. You know, I’m going to be 58 in a couple of months. We have one partner, the 61 now, the one that’s, you know, 56, 57. So we started to feel that this was a younger man’s game a little bit. There was a whole element of private equity that has entered our space. So, you know, the managed service provider space is traditionally been very fractured, many, many small organizations without dominant players with sticky revenue. So that’s attracted a private equity component to our space that they find the space very attractive. You know, and you combine that with low interest rates. So, you know, I’ve kind of equated it to, you know, from a selling standpoint, if you want to sell when your second bathroom is all fixed up, when the market condition was right. And we try to have an element of both, you know, we tried to make the second bathroom, you know, is as good as possible. But the market conditions were also really right. It also helped that we had an investment banker who really, you know, changed the level of people that we had talked to previously. We were accepting inbound calls before, and our phone was pretty active, but the investment banker had a very formalized process and we were able to pick off not only from a valuation perspective, but the other deal parameters. So, again, it was that perfect storm of of the right organization, you know, the valuations being good private equity space, you know, helping the valuations, our aging partners. And you had brought up some some medical issues that, you know, that I had had in my past that made me uninsurable. So, you know, we didn’t have an insurance and, you know, making this, you know, a seamless transition for employees, for partners, for for my beneficiaries should something bad happened, also weighed in on some of the decision making. 

Greg Alexander [00:08:01] So, Jay, if it’s okay with you, I’d like to to poke on the personal reasons a little bit more. So you mentioned some some health issues. What perspective did that give you on life and what perspective that give you on your professional life? 

Jay Smith [00:08:20] So it’s a weird one. I’ve had a pretty challenging family history medically with with heart disease. And when I suffered my first heart attack in my early to mid forties, the er doctor came to me and said Mr. Smith, you know you’ve been, you know, you’ve had your first. You’ve had your heart attack. And I’m like, okay. And it was I was very nonchalant about it. And the reason I was nonchalant is I’ve had, you know, like I said, a a of family history with heart disease and young death. So it was it kind of came as no surprise. And I was very nonchalant about it. So, you know, fast forward three years later, I have another pretty significant one in my health is really good now. I’m under the care of a cardiologist. But, you know, one of the things I, I found is, is I don’t want to leave things left undone. You know, it was real important to me to have, you know, the idea of a legacy and everybody looks at their family in such differently. But I wanted to make sure I was tidy as much as possible. Transitioning the small business while it’s still active with heirs that are not in the business I thought would have been in order. In order. In order about my partners, my employees, you know, my my children, my wife. So, you know, again, there were some some pretty personal reasons. And I don’t think that’s you know, it wasn’t a huge motivating factor, but it did go into that decision making. 

Greg Alexander [00:09:50] Yeah, well, I appreciate your willingness to share that with us. And I’ve heard this from several entrepreneurs. You know, the transitioning of a small business is hard. It’s not it’s not an easy thing to do in selling boutique professional services firms is a very tricky and nuanced thing. Which leads me to my maybe my next question and maybe my last question as I look at the clock here. So, Jay, we had spoken for quite a while, you and I, before you entered the exit process. And your level of knowledge there around what it takes to exit a business was actually pretty good. However, you recently sent me a text now that you have exited and you said, Holy cow, I really didn’t know what I now know. So this is my question. So what do you now know about exiting a boutique preserved firm now that you’ve been through it, that you didn’t understand prior? 

Jay Smith [00:10:46] There’s a lot probably probably too much to say. But you would always talk about the value of a good investment banker. And we had an excellent investment banker. One of the things that was important to us was to continue to work in the business to help transition. And we’d like to stick around for a bit. You know, we’re not old enough to quite retire and we still think we have some gas left in the tank. One of the things that the investment banker did that helped was when the negotiations started to get a little more challenging, I was told to shut up, which is a hard thing for me to do. In that was the idea to help keep me clean, right? I was going to continue to go with the deal unlike yours, right? That you didn’t want to be your investment banker, didn’t want you in for some particular reasons. My investment banker didn’t want me to get dirty, you know, and I was exposed to that, you know, we were coming along with the package that they wanted us for, for the talent. So that was something that I really didn’t understand how good the investment banker was, despite having you say it, I really, really underestimated deal fatigue. There were a couple of times when I was out of gas and what we chose to do when our exit, my two business partners remain to work in the business while I was working on the business to help the distractions keep to a minimum. And that deal fatigue stuff was real when an investment banker brought me up for sure the accountant did as well. The emotional side of the equation. I found myself getting very, very nostalgic about, you know, my partner and I first started, you know, two guys in a pickup truck. And I found myself thinking back to those days. And, you know, I’ve equated small business and entrepreneurship, like riding a car or driving a car. We’re most often looking through the to the windshield and you see all the opportunity and all the potholes and everything’s forward looking. But every now and then, you take a look in the rearview mirror, and I found myself doing that more and more. So, you know, there’s a whole emotional side of trying to sell your baby. And we wanted to make sure and we did a lot of diligence on the acquiring organization to make sure that it was the right place to to grow our baby up some more. We felt like we had a really good small thing. And, you know, having, you know, a big financial partner, the levered their balance sheet a little bit differently and and really put some gasoline on the on the whole equation was you know so I didn’t I don’t think I, I, I thought that that emotional side would be as significant in the nostalgia coming in. We had some really emotional things go through it. We end up giving bonuses to some of the staff or all of the staff and some of the reactions there were. Unexpected joy for more than I could have given credit. When some of the things that I think you can do as a small business owner is really use your platform of your business to help do good things in your community. And we’ve certainly done those things. But, you know, helping a younger person, getting into the career that’s rewarded you so much. I almost feel like it’s a baton pass and we’ve tried to be a good steward in the space to help grow up the next generation of people that are going to protect our digital assets. So there were things like that that came out of this process. Not underestimating the level of effort I should have could have been more organized. I thought we were. But the whole idea of putting a data room together, maybe before deal in the elements that go into that know we had some of those things, but it would have made less effort during crunch time. So that’s probably the best I can do off the top of my head. But there’s probably a few things in there that would help. 

Greg Alexander [00:14:49] Well, listen, you’re like they say there’s no substitute for experience. And what you just walk us through and what what you now know about exiting a boutique process from having been through it compared to what you knew going into it? Yeah. You know, it’s one thing to hear about it or read about it. It’s quite another thing to live it. And I want to I want to make sure that I thank you on behalf of our community, our mastermind group, for your willingness to give back. I’m very proud of you for being able to pull off what you pulled off, particularly how you took care of your employees on the way out. Sometimes that doesn’t always happen. You know, greed can creep into the equation. And that didn’t happen to you. It’s always great to see good things happen to good people. So proud people. 

Jay Smith [00:15:33] Thanks so much. Greg means a ton. 

Greg Alexander [00:15:35] All right. All right. For those that are in professional services, who want to belong to a community like this and learn from role models like Jay Smith, consider joining Collective 54, which you can find at Collective54.com. And if you want to read some stuff around topics like this and and learn wisdom from people like Jay can always pick up a copy of our book. It’s called The Boutique How to Start Skill and Sell a Professional Services Firm. And you can find it on our website. You can find it on Amazon. So thanks for listening and look forward to the next episode of Jay. Thanks again for being there. 

Jay Smith [00:16:11] Thanks so much, Greg.