Acquirers buy teams first, and firms second. The quality of the management team is of major importance to the buyer. It can take years to develop a bankable team. Think like an investor. Would you bet the farm on your team?
The Boutique with Capital 54-Episode 10.mp3
Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build
conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in
on the next chapter of your life.
Sean Magennis [00:00:16] 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 a choir is by
bankable teams first and firms second. That the quality of your management team is of
major importance to the potential buyer of your boutique. I’ll try to prove this theory by
interviewing Greg Alexander, Capital 54’s chief investment officer. Greg, many would say
you were the nation’s leading expert in evaluating management teams in the professional
services industry. Let’s start with some basics. What are investors looking for primarily in
management teams?
Greg Alexander [00:01:20] OK. The basics are what you might expect before I invest in a
boutque, I start by looking at the biographies of the leadership team. I try to determine if
they have the proper level of experience to scale the firm. I have found that the team that
got the firm to this point is often not the team to get the firm to the next level. I also try to
locate any holes in the management team. Sometimes owners run very lean to keep
payroll low and EBITA high. This is a mistake because the true scale of firm to a few
hundred million a firm requires a fully staffed executive leadership team. So those are
some of the basics.
Greg Alexander [00:01:54] Yeah, this makes sense, Greg. So the biographies,
biographies of the team and a fully staffed team, these are the basics. But how about
beyond the basics, what else do you look for when assessing the quality of the
management team?
Greg Alexander [00:02:09] Yeah, beyond the basics I tend to gravitate to the following. So
first, is the management team staying with the business post sale? If they are not, I’m not
going to invest. Their desire to depart at closing tells me they’re not committed to the
business. I understand the wish to take some chips off the table and I’m okay with
rewarding management teams with some liquidity. But I’m buying the future. I’m not buying
the past. And I want to see them double down with me and get after it. Next, I look for an
industrial strength strategy. This means do they know where to play and how to win? Does
each employee understand how their role in the execution of the strategy impacts results?
I want to see a data supported strategy that cascades targets that align each employee
with the boutiques strategy. The existence of such a strategy would indicate a quality
management team, and one of my favorites is the growth story. I want to see from the
management team the size of the market, its rate of growth, the share of the market that
they have today, and how this share will grow over time. I want them to tell me where is
the growth going to come from? Will it be high water raising all ships? Will it come from,
let’s say, the launch of new services or entrance into new markets? Will it come from
simple price increases? The list is long of possible growth elements of the strategy, and I
want to see the operating leverage they will deliver. And this means how much of the
revenue growth is going to drop to the bottom line. So, for example, will profits increase
due to digitization, labor arbitrage or other means? So these are all examples of investible
management team or what some might call a bankable team.
Sean Magennis [00:04:11] These are outstanding examples. Greg, you often talk about a
bankable team, the term bankable. What does this mean?
Greg Alexander [00:04:21] Yeah, a bankable team. So this phrase can summarize, really
this entire episode. So in my opinion, here’s what it means. A bankable team is a team I
would bet the farm on. When an investor invests in a boutique professional services firm,
he or she is making a bet and he is betting on the team’s ability to pull off the growth story.
It’s where the rubber meets the road and where the men are separated from the boys, or in
some cases where the women are separated from the girls. So, for example, Sean, I bet
on you and your team when I backed Capital 54, I was and continue to be convicted in my
belief that you will build the most successful investment firm in the professional services
space. Did I love the idea? Yes, of course I did. But the idea without you was worthless to
me. The team matters more than the idea.
Sean Magennis [00:05:16] The bankable team. I love the idea, Greg, and so appreciate
this opportunity we are on.
Sean Magennis [00:05:25] And now a word from our sponsor. Collective 54, Collective 54
is a membership organization for owners of professional services firms. Members join to
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for the right price and on the right terms. Let us meet one of the collective 54 members.
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Sean Magennis [00:06:32] 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.
Sean Magennis [00:06:49] So, OK, this takes us to the end of this episode. And as is
customary, we end with a 10 question, yes, no checklist. We do this to reward you, the
listener, with some immediate take home value. Ask yourself these 10 questions. If you
answer yes to eight or more of these questions, you have a bankable team. If you answer
no too many times, you don’t. And this will prevent you from selling your firm effectively.
Sean Magennis [00:07:18] Question number one, is the management team staying with
the business post sale? Number two, is there an industrial strength strategy developed
that an investor can bet on? Number three, does the management quality go at least one
layer deep on the [inaudible]?
Greg Alexander [00:07:43] Often overlooked.
Sean Magennis [00:07:44] Yes.
Greg Alexander [00:07:45] You know, the partners or the founders present themselves to
the investors and then the person doing diligence goes one level below that and they run
into the junior varsity.
Sean Magennis [00:07:56] Yes.
Greg Alexander [00:07:56] Right. So a bankable team means beyond just the founders
and the owners.
Sean Magennis [00:08:02] Really good point.
Sean Magennis [00:08:03] Question number four, does the management team drive the
strategy deep into the organization? Number five, are there cascading targets that reach
all the way to the frontline employees? Number six. is there a believable growth story?
Number seven, is the management team capable of getting the boutique to this future
state?
Greg Alexander [00:08:33] Let’s talk about that for a moment. Sometimes the
management team can spell out a growth story but they’re not the team to get them there.
Or maybe they’re part of the team to get them there and they need to go recruit some new
talent to get them there. And, you know, if we would have flipped this for a moment. So if I
was somebody selling a firm and I was evaluating investors, that would be one of my
questions. How are you going to help me recruit exceptional talent? It’s not just about the
money they give you. It’s about the.
Sean Magennis [00:09:04] It’s the how.
Greg Alexander [00:09:04] Exactly right.
Sean Magennis [00:09:06] Great. Question number eight, is the management team
excited and passionate about attempting to get this growth story done?
Greg Alexander [00:09:14] Another one, very often tired people try to sell their firms. I’ve
been doing this for 30 years. It’s time to leave. That’s not a very exciting story.
Sean Magennis [00:09:24] Absolutely. Question number nine, have all the holes or gaps
in the team been addressed? And question number ten, do the forward projections reflect
the true costs to operate the firm in the future?
Sean Magennis [00:09:42] In summary, remember that acquirers by teams first and firms
second. The quality of the management team is of major importance to a potential buyer. It
can take years to build a bankable team. Get started today.
Sean Magennis [00:09:59] 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. I’m Sean Magennis. Thank you for listening.
