• Why profitability and sellability are different conditions that require different work
• What sophisticated buyers actually evaluate in a boutique professional services firm, beyond revenue and margin
• The most common sellability gaps, and how to close them before you go to market
• Why the time to find those gaps is well before diligence, not during it

Jeff Klaumann: Hey everybody, welcome to the ProServe Podcast, brought to you by Collective 54. I'm Jeff Klaumann, I'm the president of Collective 54, and I'm your host. If you're new to the show, here's what we're all about. Helping you do three things. Make more money, make scaling easier, and make an exit achievable. Everything we record here is built exclusively for boutique professional services firms. So, if you're in the expertise business. If you market, sell, and deliver expertise, this show is for you. We have a great exit-focused topic today. Many founders who run firms carry the same incorrect assumption. If the firm is profitable, somebody will want to buy it. We often treat profit as the proof, but it isn't. Profitability and sellable are two very different things. Unfortunately, a lot of founders only find that out at the worst possible moment, when the number comes back from a buyer, and it's far below what they had in their minds. So… This is what we're going to talk about today. The gap is our show. So to help us think through it, I have Frank Williamson on the show. Frank is the founder of and CEO of Oakland Consulting. 10 years running Oakland, more than 200 transaction advised, and he does the work as a consultant rather than a broker. He's a Collective 54 member, and I've known Frank for years. He knows his stuff, so I'm glad to have him on the show. So, Frank, welcome back. It's great to have you on today. Why don't you take a moment to introduce yourself?

Frank Williamson: Well, Jeff, thanks so much for having me on, and just as a plug for Collective 54, being part of this community has done so much for how we run our business. It definitely is a better one than it would have been otherwise. Yes, really briefly. The ideal around a lot of professional services is you get yourself into a position where you're as far away from hourly billing as you can, you're as hooked to your client's success as you can. as you can be, and often that means some kind of value-added revenue that is unrelated to your underlying costs. In our industry, investment banking or business brokerage, depending on the size of the company that we were serving, The norm, rather than the exception, is that people charge value-added fees, commissions, at the end of a successful sale. And that works great in many cases. But, like all of us, when we charge commissions, we'd like to know, will we get it? Can we do it with the expected amount of work, and is it going to happen on time? And not every sale is predictable in that way, so we help the part of the market where the commission's too small, it's too uncertain. Or it might be an unusually large amount of work to navigate the transaction. Puts us in a wonderful place of… of, being a complement rather than a competitor to our peers, because we advise on what they consider bad deals. It also is the most rewarding Mergers and acquisitions in investment banking practice you can imagine, because you really do help people on the one hand, and on the other hand, we get to see the market more than anyone else, which is really crazy valuable. You have a great… question for us, Ed, that you set up at the beginning of this call, which is… Can you be profitable, but not saleable? And my guess is… a decent number of people come to Collective 54, profitable, but not saleable. Some probably come not all that profitable, and also not saleable, and the goal is be both at the end, and they really aren't the same thing. Probably the easiest way to think about it is, do you go… Well, I started, say, it's, do you go from one project to another in your business? But for all of us. in the community and listening to this podcast, we kind of know the answer is, you know, avoid being too project-based. And so the next thing is, have you really thought about, and this is at the time of exit, not during grow and scale, but have you really thought about what is it you're selling? And is it something that another company or an investment firm can actually buy? And that seems sort of weird. Say, well, I've got a business. I mean, that's what I'm selling, it's my business. But if you break it down a little bit from that, you're like, okay, but what is the quid pro quo? I'm gonna get money in return for some specific things. Well, what are they? Are they only, you know, that the bigger company picks up 50 talented people at one time, instead of having to hire them. Or is it, yes, that, plus a sales process that is made routine and runs all the time, even as sales reps change, plus long-term contracts that can transfer from one company to another? I mean. Those last things are assets to buy in a service company, and that you get paid for. Just the staff, for example, or just a long-term experience with the same clients, going from one project to the next, is really squishy. And… Put you in a risky place about, do you have something that's both profitable and scalable?

Jeff Klaumann: Well, you hit on a really important part, Frank, and that is really risk and repeatability. When it comes down to a transaction, the buyer is looking at those two two things stronger than anything else. What's the risk profile of the deal? Can this really be repeated over and over again? So, this is one of the hard things for a founder to really look at, especially when they look at their P&L and their income statement, they say, wow, we have a great business. But let's define that, you know, put some meat on the bones as it relates to the difference between profitable and a sellable one.

Frank Williamson: Let's see, so a couple of things, and there are a few that I've, you know, that… That you hit on often in other podcasts, and in the, you know, in the… community sessions, and that is what's actually going on in your P&L. You know, did you get your gross profit right? You know, if you… I mean, maybe you look profitable and you're not, and then… and if you are… If you're still at a point where you are doing cash-based accounting. then your financial statements probably aren't telling the story about how you get sales and how you get paid, and how you spend expenses. That would be one. If you are confused about what's a direct cost and what's an overhead cost, you're going to have a hard time describing to a buyer what their profit might be. yours might look better or worse than it is. And… If you are really closely held by a small group. And you are sensibly managing the business to minimize taxes. Probably the costs of management. Of a future manager by a buyer are very muddy. Because you have ether. overstated the cost of management, because the way that the partners agreed to compensate themselves, or just as likely, you have understated the cost of management, because the partners are looking at profit distributions instead of other things, and and so it is… It is first, it is totally appropriate. That all of us with closely held firms manage our businesses so that we understand them, we can manage our own risks, and we don't pay more taxes than necessary. And at the same time, when it comes to be sale time. are buyers gonna look at the business through a different lens? And so, that's piece number one is, are you actually profitable? Well. How you keep your books matters a lot, and, you know, and… Get that so a buyer can see it easily. As early as you can, and you'll just be in better shape for telling the story.

Jeff Klaumann: Well said. You know, that's really one of those important lenses when you start to move to selling your firm, is you kind of have to take your operator hat off and put it up on the shelf, and you have to put an investor hat on, and you have to look at your business through a completely different lens, and think of it from a completely different risk profile, if you will. So that is an important shift, and almost every… firm in our community starts with a founder with some expertise. They probably don't want to work for someone anymore, they want to hang their own shingle, they have some relationships, and of course, they have some great founder's judgment. That's the typical origin story. So, how does a founder honestly tell whether the business is still just them, how they originally started, versus something that is truly sellable, or something that's going to be discounted extensively when it comes to exit?

Frank Williamson: I think there are Two really good ways to tell. One… is… can you… and… the person, let's say it's a bigger company, or an investment… the staff, an investment fund, or something, but really think of it as a person, not an entity. Can you and another person Have a… Rich. Data-filled conversation about the future after a transaction. And, like, the granular future. This is what we think revenue will be. This is for the additional sales we can achieve together. These are the expenses that we're going to add, or we're gonna cut. Like, these are the things we're gonna do at the level of detail. If you're in a position where you can have that conversation, and it's not a… wave-your-arms conversation. It's a real planning conversation. Then what that means… Is that you've got a Predictable business. that another person could help you run, whether you leave immediately or not. It might still rely on your judgment, might still rely on your sales, might still be a bunch of the things that haven't been worked through about the founder's bottleneck. But if you can see the future along with someone else, and you can together feel confident in it, you… that's a symptom of good building blocks, sort of good bones underneath the business. So I would say… people should challenge themselves. Can they sit down with another person, not an imaginary one, but with another person, and really have a planning conversation? And for practice, maybe they do it with their partners and say, look, can we really get comfortable about the, you know, about what the future is, and hold ourselves accountable for 5-year plan, right? Something long. The second thing, I think, is the founder's bottleneck issue. I mean, and I think the… what we're talking about here is sort of the test for how saleable is it. I think if you… make the KPIs of your business the founder's bottleneck KPIs. You know, how… how are we progressing on non-founder sales as a percent of the total? How are we progressing on non-founder delivery as a percent of the total? You know, have we built in, you know, a job description and pay for the visionary role and the integrator role. I mean, all those kind of components of maturity that That are part of the lessons that… that you all highlight. Our… really, really powerful for, is it a saleable business? Because what you're trying to… Chain person who's in this owning up management. And if we're talking about an owner-manager, like, in order to do that really effectively, those two roles need to have gotten themselves separate before the deal.

Jeff Klaumann: That's fantastic, and maybe for the benefit of the listeners who are unfamiliar, the founder bottleneck is a term that we use within Collective 54 that really describes, kind of, the early stages of the firm, where the firm runs on, kind of, founder heroics. The founder wins business, the founder has expertise to deliver the business. Decisions are made, by the founder, lots of them, most of them. And the challenge with that is that's founder magic. That's the repeatability that is only present because the founder is there. So, as Frank was illustrating, you have to remove that dependency of the founder winning the work, the founder delivering the work. And once those things are removed, the sellability of your asset, so to speak, is going up. And that's a perfect transition into. You know, one of the things that we wanted to talk about today, and that is that you've said that by the time you enter the room, the hard work has already been done. You know, what should a founder do well in advance of selling that really helps them have real deal leverage in the future?

Frank Williamson: Yeah, that's a great question. You know, our world is not far in advance. You know, people meet us at the point of a transaction, and you know, sometimes they meet us at the point of a transaction having come their way. You know, they're opportunistic. Sometimes they meet us at the point of having Decided they're gonna declare victory, and now's the time, and sometimes… capitulation, it meet us when it's transaction time. So what makes it, you know, from a distance makes it more saleable? Are all the things… make it healthy and, for lack of a better term, autonomous. You know, can the machine keep running when the owner, so important for the sale, because only the ownership is changing, ideally, and the management is not, that the owner can step away for a minute, and those are all the good lessons of Collective 54's frameworks, and how, you know, how in this community we think about growing, scaling, and exiting. Now, you get right up on the point, then there's a question about Sailability when you're right there. And, With the caveat that we tell almost all our clients that they'll be stronger negotiators if they're very clear about their no-deal option. So be prepared to walk away as a way to have backbone in the negotiation, and have thought through what you're going to do that enables you to walk away. But beyond that, we also… Have a general belief that every business is saleable at some terms. when the time comes, right? And owner might not like the terms, right? So the point of all that pre-work was that you would get terms that you like. if you're not preparing, you might get terms, they're just not ones you like. You know, we were working… Recently, with a software development company, all the headwinds in software development these days, right, of, you know. big clients, often chunky, AI, you know, as a competitive threat, all these things, and in project-based work. For whatever reason, these owners did not want an internal sale to their employees when they were ready to You know, to exit. And, and really wanted to uncover every rock to sell the business. And… and… The logical buyers in that case are other software development companies who are growth-minded and are looking to You know, build scale by acquisition. if you get really big doing that, you can be owned by an investment fund, and so probably they're trying to do a bunch of acquisitions to get big enough to be that size. That'd be who the buyer is. So, can you sell a small business to a large or similar business? Like, almost certainly yes, because it's a… A lot of work to go… hire 20 people who are all talented and work well together, right? So you've got in there an asset that is, here a bunch of people are working together. You've got an asset of a track record of projects. But what you don't have In the case of this business and many others that, you know, are dev shops, is, you know, is a predictable future of where revenue's gonna come from for the next 5 or 6 years. You've got the hope the sales process will work, but you've got to, you know, you've got a hard-to-see future. And that was back to this question of, could you, with a specific other person, describe the future? That was their… their challenge the whole way… through, and they got there, by the way, just about with one buyer, and one of the things they did in describing the Future was realize that they share a large client. That large client turned out to be risky, and the client dropping one, maybe both, we don't know about the buyer right now. But that client proving itself to be risky. killed that particular version of the deal. And, you know, But… Could they have completed something anyway in which you could call it the sale of a business? But it's really sort of merging your team into theirs. Like, yes, you… You could have. These folks had a… eventually had a backup plan that was a no-deal one, in which they could say, well, if we're not going to get a certain amount of cash at closing, we're okay walking away. And… You know, we'll find other things to do. Update. could have. Completed a deal at… Some terms. Probably something that can be called a sale, but was really an acquihire.

Jeff Klaumann: That's a great example to really demonstrate the difference, because a firm that's at that size, of course, hey, they're profitable at this point, but is it really sellable? And then you introduce one of the ugly parts of a transaction, client concentration, and the risk that comes along with it, and before you know it, the deal's in jeopardy, so that's a… A great proof point, so to speak. You hit on one thing, and maybe we can wrap up after this final question, is earlier you were talking about terms, and I saw that recently you wrote an article about how terms beat price. So, why don't we take a second to talk through that, and then we can wrap up our show today.

Frank Williamson: Well, yeah, let's begin with that old saying that, you know, that you and I are doing business together, Jeff, and, you know, I can choose whether you choose the price. you know, or you choose the terms, and I get the other one, I will always take the terms. Because we can make any price appear to be the price, right? That, I think, is a… is a really important thing for people to remember. In mergers and acquisitions, the price is very assumption-intensive. Validating those assumptions is a big deal. Lots about the price in even the cleanest deals gets a second look at about 90 days after the deal is done, and about 18 months after the deal is done. So… How the pieces… how the articulation of when and how the price will be paid, and how it can be clawed back. are crazy important. And, you know, and are a little bit counterintuitive. And so I… I would give that guidance to people who… who haven't done… much M&A work over time is, like, like everybody's contract details. You know, again, it's just sales, you know, so it's not… mystical. But like everybody's contract details, there are some little tricks buried in our contracts. There are some tricks buried in… Mergers and acquisitions, negotiations, and so just be aware they're there, and, you know, have a good guide for the journey. Maybe this helps as a closing thing. For small professional services firms. Price. is… in 3 buckets, and it's easy to think about it as, you know, as the little game with 3 upside-down cups, and you're moving them around. And those 3 buckets are cash at closing. Cash over time, and compensation. And value will move. Among those buckets, however you and the buyer want it to move. And the best way to think about price is it's the sum of what's in all three buckets. And if you do that, then you can just free yourself from a lot of constraints about, did I get the price I want? Be like, well… The next level down question is the one that'll really tell you how you did on the deal. Did I get the price at closing that I needed? Did I get the price over time with the right amount of risk that I needed? And if something had to sub in as comp… that we had to call compensation in order to get to where we needed to get to, okay. I'll put it in that bucket. So…

Jeff Klaumann: That's a great, great visual of the three buckets. You're exactly correct. Those are indeed the three buckets and ways to think about it. So, Frank, thank you so much for joining me today. It has been fantastic to have you on the show.

Frank Williamson: It's a total pleasure. Thanks for having me.

Jeff Klaumann: Absolutely. All right. Well, before we wrap, a couple calls to action. If you're a member, keep an eye out for the invitation to our private Q&A session with Frank, where you can ask him your questions directly. If you're not a member, and today's conversation has you thinking about joining, head over to Collective54.com, fill out an application, and we'll be in touch. And if you're not quite ready for either of those, there's plenty more content on our website. Check it out at Collective54.com, and it includes past episodes as well as insights on the industry. So, thanks for listening. Until next time, I wish you the best of luck as you grow, scale, and someday exit your firm.