Episode  125 – How a Founder of a Consulting Firm Added Equity Partners to Scale Beyond a Lifestyle Firm – Member Case by Mike Braun

Episode  125 – How a Founder of a Consulting Firm Added Equity Partners to Scale Beyond a Lifestyle Firm – Member Case by Mike Braun

Mike Braun started Pivotal Advisors with his brother to get off an airplane and make a living with less stress. One day he realized he wanted more than a lifestyle business. This required the recruitment of the next generation of leaders who wanted a piece of the pie. Mike masterfully created a plan to allow for equity to be shared with the new team. And in the process, he built a legacy, a firm that would last long after he and his brother were gone.

TRANSCRIPT

Greg Alexander [00:00:10] Welcome to the Pro Serv podcast, a podcast where leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community focused entirely in exclusively on the very unique needs of the boutique professional services sector. My name is Greg Alexander. I’m the founder and I’m going to be your host today. And on this episode we’re going to talk about how ownership structures in boutiques change over time. For example, sometimes we start our firms and we own all of it, or maybe we start it with another partner. And then over time, you know, key employees start to contribute. The firm gets bigger and you need to maybe include others in the ownership structure, and doing that correctly can be tricky. So we’re going to talk about that today and hopefully you can learn something. We have a great role model with us today. His name is Mike Braun. And Mike’s been through this and he’s going to share a little bit with us how he has been able to make this happen. So, Mike, it’s good to see you. Thanks for being here. Please introduce yourself and tell us a little bit about your firm. 

Michael Braun [00:01:29] Thanks very much for that. Glad to be here. So our firm is a sales effectiveness firm, which you may be familiar with. And although a little smaller markets were probably down market from when you played before, and we think of it as working with the small to midsize market for people that have an underdeveloped sales team and they’re trying to get more out of it, which is we find to be a large majority of CEOs are trying to get more out of their sales teams. 

Greg Alexander [00:02:00] Yeah, very good. Okay. And as I understand it, you started the firm and it was an equal partnership between yourself and another person. And then over time, it became four owners. Is that correct? 

Michael Braun [00:02:15] That is correct. And the the first 5050 not only was another person, the other person was my brother. 

Greg Alexander [00:02:20] Oh. 

Michael Braun [00:02:21] So so we have the family component here as well. So we we we ran around in other businesses and both grew up through the sales side, learned a lot and decided that we were going to share all of our knowledge and start a business that we knew something about. And our goal and this is a funny part, our goal was. We’re not going to get on airplanes because we were both road warriors. And we’re going to make a living and we’re never going to have partners. 

Greg Alexander [00:02:52] Okay. 

Michael Braun [00:02:53] So that was the original movie, right? 

Greg Alexander [00:02:57] COVID certainly helped with the airplane thing, but it went from two partners to four partners. So what happened? 

Michael Braun [00:03:06] Well, as we went on and you know, we started this back in 2008 and the other, you know, bad part of life and recession was hitting. So we’ve been through a couple of them now. As time went on, I think we we decided probably very late in the game for me, but we decided it was a great lifestyle business for us and a few other people. But now we wanted more and to get more we needed to move on and we actually needed to make it a business. We could scale and grow. And to do that, we needed to bring in some other highly talented people. And we brought those people in. We needed a way to retain them. And then, of course, these smart young people started asking questions like, Well, if we grow this thing and knock it out of the park, what’s in it for me? 

Greg Alexander [00:03:50] Those damn smart people.

Michael Braun [00:03:52] And I think what happened is we said we’re not going to get to where we want to fast by ourselves. 

Greg Alexander [00:04:02] Okay. So let me ask some tactical questions. So that’s good context for us. So, you know, the first thing you got to get right when you’re cutting new partners into the partnership is the valuation. So how did you get everybody to agree on what the firm was worth? 

Michael Braun [00:04:18] Great question. And I did I didn’t take your advice for the chapter as I hadn’t read it yet. You know, go go get a good investment banker and no, go get really smart people to help you. So I did some work, created a valuation formula, took it up cheap to some accounting friends of mine. Not that they’re cheap. They’re professional accounting valuation people, but I got them to do it sort of on the gratis take a peek kind of thing. We came up with a financial formula that said, you know, I think cleanly said, here’s how much we’re earning here and here’s what our cash flow is and that kind of stuff. Then you have to pick your multiple, right? And it’s it’s how do you pick a multiple when you’re when you don’t you’re not really selling, you’re not really in the market. You don’t have good comparables. So we just went and found a study that said, here’s what the average management consulting comparable is. And I think it was 2012. And we all said, is that a good benchmark for us internally to put a number on it and through some discussion on the matter? Everybody said, yeah, as an internal number, it’s probably not the maximum we would get if we sold the business. But for us, that says a metric that we can use. 

Greg Alexander [00:05:37] Yeah, perfect. I mean, the most important thing is to get agreement from all the parties, which is sound like you were able to do is, which is great. Which takes me to my next question because it’s one thing to say this is how we’re going to value the firm. And then there’s another thing to say, you know, here’s who, here’s who has the rights to do X, Y, and Z. Because once once people become partners, they have rights. So how did you handle governance? 

Michael Braun [00:05:59] Great question. And it took a pretty big evolution in our myself because I had one between my brother and I, which was relatively easy to put together. But now you start to bring in other people in and you’ve got the whole control issue. So so the way we did it is we said we still have to make sure that we keep controlling interest. So that kind of divided very quickly how many shares were available. And then we even set it up so that there’s. Sort of different levels of membership, if you will. So he and I still have what I would call company control. And there are really minority partners that share in the income. Producing distributions as well as if we ever did sell the company, they would obviously get their share of that, but they had less. If we disagreed, they would have less say and. What we’re going to do or what process moving forward. And that took some work because, you know, being a minority shareholder, everybody wants equity. So they realize what being a minority shareholder is really about. 

Greg Alexander [00:07:08] Right. You know, everybody wants equity until they have to pay for it. So did you guys grant the equity or did you sell it? 

Michael Braun [00:07:15] Great question. I am one of those people that never bring up equity. I don’t I don’t believe in that. Right. It’s like I worked for this. I’m not going to give it to you because you work hard. So they paid in in in each of them did differently. One, save money for a period of time, although we did it kind of like a stock option locked in a price. Instead, you can buy in at this price. And then, you know, it took a couple of years to save that money and, you know, physically wrote a check. The other person said. I want to get in faster. And so we basically did a seller financed who said, okay, you’re bought in today, but we’ll do an installment purchase over a period of time and you can buy it. But either way, they are buying shares to become owners of the company. 

Greg Alexander [00:08:04] And are they still doing that? And how long does it take to buy the shares? Is there a schedule? 

Michael Braun [00:08:10] There’s a schedule, but one is, you know, wrote the check upfront. So they saved for about two years and bought in. The second one will have bought in after about two and a half years. 

Greg Alexander [00:08:22] Okay. Very good. You know, I’m glad to hear you say this because you and I are similar in the sense I don’t believe in giving equity away. I think you got to earn it and it should be paid for, otherwise it’s really not worth anything. So but, you know, sometimes people struggle with that, but you learn real quick who really wants to be a partner. I mean, if they’re willing to save up for two years and buy the stock, then they’re all in. You know, if they’re not, then maybe they’re not. So the advice to the listeners would be is to is to follow that. It’s a good screening tool. Tell me a little bit about how you and your brother, over time as you decided you wanted more than a lifestyle business and you’re going to grow it? You know, it’s one thing for the equity to change in the minority rights to come into play, but what about the day to day job and responsibilities? How did that change over time? 

Michael Braun [00:09:09] Yeah, it was it was really interesting because one of the things we said is, you know, we have to. We’re going to have to migrate. And then, of course, if you do that, if you do, I’ll give you a general idea. So. I’m in my early sixties. My brother’s four years younger than I am. His other two partners are 15 years younger than we are. So now you got four partners with completely different time horizons that have completely different ideas of the time frame to grow this business or move to the next step. Right. Yep. So we started putting things in place pretty quickly Where? I started giving away. Responsibilities on finance and product development and giving away responsibilities on managing the delivery team, if you will. And my brother ran the BD in the marketing side of things largely, so I was building myself out of it and continue to do that, which is a weird spot to be. That’s probably another podcast. And but we. We really started getting clear about who’s doing what and who owns what. In that process, with a much more focused goal on how do we how do we drive enterprise value, not just not just matches EBITA, but enterprise value, and how are we going to grow this thing? And in course, some of the group just call us the younger part of the group was let’s take every dollar reinvested in the business and grow this thing over the next 15 years. And as the eldest partner and the we don’t want to, we would keep some of them on the right. So we were in that mode and continue to be. But I think the happy medium, you know, if I think about when, when one of the other members talking about the rule of 40 when it comes to sort of profit and valuation that was super helpful around let’s be in 2020, let’s have real cash flow, let’s have real money, let’s have a real firm in in let’s grow at 20%. And some years we were pretty close. So many years were just off that. But, but that’s the model where we’re chasing after, you know. 

Greg Alexander [00:11:28] And Mike, after having a successful family lifestyle business, life’s pretty good. Everybody’s making money, you’re not on an airplane, etc., etc.. I mean, what caused you to wake up one day and say, you know, I want to do something more than a lifestyle business? 

Michael Braun [00:11:45] You know, really, we always said we wanted a company, not just our own little practices, because we could have done that. We did build the company and we brought other people in right away. But I think it really changed. And this is probably something for everybody to think about. When we said we want this thing to live beyond us, there’s going to be a day where we and I and that wasn’t even really that close when we started having these conversations. We are still probably half a decade. And yet if it’s going to live on, it’s got to live beyond us. And how do we make something that continues to provide value to our clients, continues to provide, solve the problems for them, and gives people great careers? You know, when I’m off doing something else, yeah, I’m never going to get there. Otherwise, you know, this is going to look like I’m going to work till I’m done working. And then this thing goes, Yeah, which was going to be a problem for my brother, who had four years left. Right. Like. Like, Sorry, dude, I’m out. And that just wasn’t feasible. And then we said, maybe. Maybe we have to build a real growing company here. And to do that, we need some other people. 

Greg Alexander [00:12:56] Now, sometimes founders. Aren’t as idealistic as that. Maybe there are two. Capitalistic, meaning they sell their firm, they get a bunch of cash they don’t really want. They don’t care what happens to the firm after that. They’ve been validated, so to speak, and they look at their bank balance and it puts a smile on their face and they ride off into the sunset. Others say, You know, I really care about my clients and want them to be treated well afterwards. I really care about my employees. I want them to have good-paying jobs and career opportunities afterwards. You know, there’s people that fall, you know, in the middle between those two things. So obviously, you know, you made substantial changes because you care what happens to your firm after you leave. Was there a particular influence that made you think that way? 

Michael Braun [00:13:47] Oh, my. That’s a that’s a really good question. And I will also say it’s as much as it sounds like I did that perfectly. There are days where you think about the bank account. 

Greg Alexander [00:13:56] Yeah, sure. Always. Right. 

Michael Braun [00:13:57] Right. And so if I’m honest about it, there are days where it was like, well, how do we maximize this? And then there are other days where it’s no, we got to do the right thing by the employees. And then there are other days where it’s like, Hey, these clients deserve the best. And so you do run around that triangle a little bit. But but from an influence perspective. This is going to sound really, really weird, but I’m going to go back to my mother with tell us, as kids, you know, if you do the right thing by people and hold your head high, you don’t have to be the richest person in the room. Yeah, maybe without even thinking about that. That was buried in there at age six, right? Yeah. 

Greg Alexander [00:14:42] Yeah. Great advice. You know, I think we all need role models. Parents obviously can play that role. You know, for me, you know, I studied entrepreneurship. That’s what I’m passionate about. And the most successful entrepreneurs that there’s always somebody who has more money than you. 

Michael Braun [00:14:59] Oh. 

Greg Alexander [00:15:00] Oh, I mean, I don’t care who you are. It could be Elon Musk. And now he’s no longer the richest person in the world. But the really successful entrepreneurs measure their life’s work around impact. And that’s not to say that you shouldn’t make a profit. You should. However, impact is greater than that. And I think what you’re doing is fantastic. And it sounds like you guys have given a lot of thought to this. And as a result of that, you’ve built a great company and you’re in your early sixties and you know the next chapter, your life might start here relatively soon. And it sounds like the firm’s in good hands afterwards. So I really appreciate you coming on the on the podcast. I’m really excited for the private member Q&A that we’ll have with you where members can ask you questions directly, but on behalf of the membership, appreciate you making a contribution today. 

Michael Braun [00:15:48] Thanks for the time today and again, thanks for your input into it. You were part of all that thinking. Great. 

Greg Alexander [00:15:52] I’m glad to hear that. Okay, so a few takeaways for the listeners. So if you are a member, look for the invite to Mike’s Q&A and be sure to attend that so you can ask your questions to him directly. If you’re not a member, I encourage you to think about joining. You can go to Collective 54 dot com and fill out a contact us form and we’ll get in contact with you if you want to consume some more content. A couple of ideas for you. One is subscribe to our newsletter collected 54 insights that comes out every week. You get a blog on Monday, a video on Wednesday and a chart on Friday, a little bit more digestible. And then we’ve got a couple of great books. We have the boutique How to Start Scale and Sell a professional services firm. You can find that on Amazon. And then we have a member-only book available to members only, I should say, called The Founder Bottleneck How to Scale Yourself. And it talks about some of the things we discussed today, which is legacy succession, etc. So I’d point you in those directions, but thanks for listening. And until next time, I wish you all the best of luck as you try to grow a scale and sell your firm someday. Take care.