Episode 160 – The Rise, Fall, and Recovery of a Consulting Firm – Member Case by Michael Ivie

Attend this session and learn how Phyton Consulting got to $3 million per month in revenue before their third birthday, crashed because of a Black Swan event, and executed a world-class recovery emerging stronger than ever. This session will help members identify risk, in all its forms, and develop a risk mitigation strategy to bulletproof their firms.


Greg Alexander [00:00:10] Hey, everybody, this is Greg Alexander, your host of the Pro Serv podcast, brought to you by Collective 54. If you’re not familiar with Collective 54, we are the first mastermind community dedicated to serving the very unique needs of a very unique audience, and that is founders and leaders of boutique professional services firms. And on today’s episode, we’re going to talk about an issue that plagues small services firms. And this is called client concentration risk. We’ve got a member with us today. His name is Michael Ivie, and Michael recently went through this issue, and he’s going to share a little bit about his story with us today. So, Michael, with that, would you please introduce yourself to the audience? 

Michael Ivie [00:01:04] Yeah, sure. Excited to be here. Although in the years I’ve been following you and the Collective 54, I never thought the first time I’d be on your on a podcast would be talking about a negative, thing that I survived, but, I was hoping it’d be a home run, a hit or something, but, you know, nonetheless, here we are. But, Michael Ivey, managing partner, founder at, Python Consulting. We’re a boutique professional services firm based out of New York City with, with its staff and locations across North America. We’re most known for the services that we provide around data management and analytics and AI. Mostly for financial services, I think is what we’re we’re, particularly famous for. And, and we, we really differentiate that is with our subject matter led and execution focused approach, which, you know, it’s kind of code word for just not incubating out of universities and letting our clients train our team for us. But, but doing that and blending, across subject matter domains like risk and regulatory change, financial crimes, core banking, digital transformation, blending that with data management and analytics capabilities as well instead of a more siloed, traditional approach. So, anyway, I, you know, excited to be here today. I thought, I’ll follow your lead on things. I think one thing I’d be very interested to hear from you, Greg, is how you actually define concentration. Risk? Because, you know, my my life working as a, you know, very long time ago worked as a credit officer at a bank, and we won billions to large investment banks. And we used to look at various things. When we talk to these institutions about loaning the money, we look at their, their earnings profile, we look at their liquidity, their, asset quality on their books. But there’s always this the hardest part of doing this was looking at sensitivity to market risk. And, and a big component of that was concentration risk. So we’d ask them who your top ten clients, what are the services they consume from you, and how does that contribute to your earnings? And, and that would have a material impact on our, our ability and willingness to want them. So, vastly different when we talk about concentration risk for fatigue. So I’d love to hear your perspective. Is it do you think of concentration? Risk is the top client, the top five clients? The top ten clients? Yeah. 

Greg Alexander [00:03:26] Yeah. Great question. So why don’t we start there? So and and I’ll give you a very precise answer and then I’ll tell you how it came to an answer. So our definition of client concentration risk or high client concentration risk is when 30% of your revenue, 30% or more of your revenue comes from your top five clients. And the reason why we use that as our definition is that we’ve been in business now for a little over four years, and during that time period, we’ve had 28 of our members exit their firms, and we’ve had four times as many of that try to exit their firms who were unable to. And after watching the contrast between the successful exits and the unsuccessful exits, we’ve settled on this definition. More than 30% of your revenue from your top five clients and. The reason why we settled on that is because of deals that didn’t get done. A large reason why they didn’t get done is because of that particular issue. There were other reasons for sure, such as an over dependency on a brilliant founder and a weak management team, etc. etc. but that that’s really the definition. And you know, where it comes up most often is during the exit. But that’s not the only area. For example, in your past, you know, you made lending decisions based on client concentration risk. And we see our boutique browser firms trying to borrow money all the time, and they get asked this question from their bank. And, you know, the answer is different from bank to bank, but that seems to be a good enough working, definition, you know? And the trouble with it, it’s a catch 22, because when you’re a small firm, you know, having an anchor client is a wonderful thing. You can build an entire firm off of the back of an anchor client because there’s a predictable revenue stream, there’s a growing revenue stream, there’s a meaty client with a great project to hire into, etc., etc. but, you know, careful, you wake up one day and you’re really not a firm. You’re a service provider with a single client. And then if that client goes away, you know, all hell breaks loose, so to speak. Which takes me to really what I wanted to get to, which was, you know, you mentioned it was a negative, that you survived this issue. I would tell you it’s a positive because a lot of times what you dealt with puts a firm out of business. And the fact that you, you survived and you’ve restructured and you’re now thriving again after dealing with that is a testament to your resiliency. So why don’t we turn it over to you and just have you tell everybody the story of what happened? I think that would be really instructive. 

Michael Ivie [00:06:02] Yeah. So Greg and I think that’s a great definition to kind of characterize the scenario. But, you know, I worked at one of the largest consulting firms in the world. And, and, you know, I accidentally started consulting from a very long time ago and learned what I didn’t know. So I wanted to go learn how the best firms are run. And and then so when I went back on the journey to work at boutiques again, we had tremendous success, but then unfortunately got acquired by the same firm I just left to, to. So then I had to start over again. Not too long ago, in 2000, at the end of 2018. So I started, you know, that’s when I started finding consulting and I had to start over at Ground Zero website everything. And and. Yeah, so, we, we got going we, you know, and then we continue to grow 300 plus percent per year all the way through 2022. And, and it certainly, you know, as we scale to a point where we were, you know, doing, you know, over 3 million a month in revenue, it was, a lot of it was driven by our top three clients, the vast majority of it, to be honest. And and part of it is it’s a double edged sword that you alluded to because, it seems like insanity to say, sorry, client, we’re doing too much good work with you at, at that competitive margins. And, and we need to diversify. So turning, you know, turning that revenue down, because we recognize there’s concentration risk forming and our revenue doesn’t make a heck of a lot of sense. And I’ll definitely say having 120 million, our client is a lot easier to manage than $21 million clients. So we didn’t have the infrastructure, the resources, the recruiting power to, to to do it across 20 different clients. I think, you know, looking at today, our revenue is not as low as it did drop as, as these clients, you know, the, the clients I’m referring to being, largely banks. So I think concentration in many forms. So we have financial services at the end of 2020 was 95% of our revenue. Then within financial services, banking was over 80% of it. And by banking I mean commercial retail and investment banking. And and then within that bucket, we had 2 or 3 clients that dominated it. So we had concentration on top of concentration, if you look at it from a layered perspective. And and so we were certainly aware and concerned. But you know, our main client, our largest client was 200 plus year old, organization, form banking organization. And we were the number one, you know, managed services provider in North America for them. And, and so, you know, what are the chances they go bust on your watch? But unfortunately, you know, that is, what we had to deal with, in fact, a broader banking crisis, the worst, you know, crisis since the 2008 crisis for banks. And if you’re watching the news this week, you’ll probably see it looks like wave two of that banking crisis might be coming on us right now. But I’ll tell you, as we go through the story, I mean, why we are we feel like we’re in a vastly different position today than we were even a year ago. And and the, the crisis, while it came to a head when Silicon Valley bank went bust in March of last year and that kind of cascaded a bunch of other dominoes, it really started six plus months before that. You know, when everyone was bent down the hatches, a lot of times the first cuts to go are strategy projects or, or consulting, consulting and, contingent workers. So, so we started feeling the pain well before the crisis came to a head, actually in March. That was our revenue actually bottom. So when the crisis actually was peak, so peak media, that was when we at the bottom was already in that process. And we’ve been up every month since then. So, I what is the silver lining, though? Because we were so busy servicing those largest clients, we were actually able to now pivot some of those calories towards supporting, other clients, adding these other client logos in other industries and other verticals within financial services. So looking at those same concentrations today, now financial services down to less than 20% of our total revenue, less than 80%. So more than 20% now as, as other industries, which is a big step forward in two years, I think, then within banking is now only 30% of our financial services revenues. Now we have insurance and asset management and, other fintechs and other, you know, other category, we’ll call it making up the, the rest. So now, as we come into a potentially round two of a banking crisis, we actually look at it like we can actually grow revenue through a crisis as opposed to having 1 or 2 major clients going down. I’ll pause there for a second. Yeah. 

Greg Alexander [00:10:44] I mean, I have great empathy for you. I mean, the big client is 200 year old institution, and they went poof overnight. I mean, the odds of that are so small. So it’s just, I guess a stroke of bad luck that happened. And I don’t want I don’t want the listeners to overreact to that. I mean, that would be the very definition of a black swan event, I guess. But you’ve taken these steps to diversify, which is really the takeaway from today’s call. You know, if you were to look back, you know, with a, the power of retrospection and you could wave a magic wand and you could speak to your former self. You know, when you launched the new firm in 2018 and you were growing 300% a year, and you got it up to $3 million a month in revenue? I mean, things you were rocking and rolling. What would you have told yourself then to do at that moment, to allow yourself to better cope with what did happen? 

Michael Ivie [00:11:46] Well, actually it’s interesting. I don’t know, that would change an awful lot. I think they were important lessons that we needed to learn. And and honestly, as a risk person, I mean, we always have to have our risk hat on. So I kind of we always knew those were risks and unfortunately was kind of a worst case scenario with, you know, our top three clients, all, you know, two of them going to zero and you know, the other one massively cutting back. So. So that that was tough. I think it it presented a challenge that really pushed us to exceed it. And actually I, I it’s an interesting concept of, you know, we often say in the investment world that diversification dealing free lunch. And that’s when you’re talking about long term consistent saving and investing. But Warren Buffett was famously interviewed and they asked him, they kind of said in, in a matter of fact way that, you know, diversification so critical. He said, well, yeah, for the average person, diversification is great. But if you really know what you’re doing and you’re really in there, you should take those specific idiosyncratic risks, because that’s where the most asymmetric upside exists. And I think we would have never if if I were, if I told myself like back off on on these biggest clients and really focused on others, I’m not sure, you know. I’m not sure how much how successful we would have been with a lot of other clients. And like I said, you know, we were at full capacity just supporting that $120 million client. So, you know, would we have been able to do what we did and build the team that we did? I guess my answer to that is always be thinking about risk mitigation. So if we know we have concentration risk, it’s part of the stage of any entrepreneur’s journey. Is is at some point you probably have some level of concentration and and organically over time we’re going to continue to add new logos. Some logos are going to go up and down and and the top five, top ten list, you know, there will be some names that are kind of there are commonplace there and others that are, you know, hopping on and popping off of that list. So I think, you know, I look at it like, what are the risk mitigation? So there’s a strategy saying so using EOS brokers. And they are they hyper focus on incentivizing your organization to, be doing the sales efforts needed to have that pipeline of new logos coming from new clients? The next thing, I guess, you know, diversification is easy to say, but it takes years to build diversification, at least in, you know, for us, when we’re working with really large, complex organizations. And, you know, the our saving grace is a risk mitigate was the fact that we used a lot of contractors and contingent workers, so we didn’t really have to do much cutting in terms of, you know, our full time, you know, what we call our franchise players, really almost none. In fact, we grew headcount throughout this whole crisis. So it it really was an opportunity for us to invest because we had the kind of confluence of things happening in 21 and 22 where the great resignation people were asking for three, four, five, six, $700,000 base salaries, and they were getting it in some cases. And, and so, you know, and if you give in to that, then your existing talent, they, you know, all else equal, why aren’t they getting it as well. So, you know, we we stuck to our guns. We’ll pay market rate for a contractor. What we need to at that point in time. But you know we didn’t over hire when the euphoria was going on. That put us in a position to do strategic hiring coming out of it. So just one of the many I think silver linings. 

Greg Alexander [00:15:20] Yeah. Great advice. You know, I would I would add, you know, when you think about risk mitigation, you know, having a risk mitigation plan, which is what Michael has and what he’s advising to you, I don’t know if enough of our listeners and members have collected 54, have a formal risk mitigation plan. So that might be the take away. And when we have Michael on for his private Q&A session with the members, we’ll we’ll get into details of what a risk mitigation plan looks like. But just to tease the audience a little bit with what we might discuss, then I always ranked when I had my boutique risk high, medium and low, and I ranked it based on how long would it take to recover. So a very high risk was something that if it happened, it would take me a year to recover from. And therefore I prioritize those risks. And I came up with contingency plans to deal with those first. Then I would say moderate risk might take me six months to recover. And then I would say it like risk might take me a quarter to recover. And I’m not suggesting that that’s the way that you all govern your risk mitigation plan. But a risk mitigation plan starts with not all risks are the same. And ranking them high, medium, low might be helpful. You know, to the audience. And the risk that we’re talking about today is not the only risk that you have as an entrepreneur of a services company, but it is a big one and that is client concentration risk. And as Michael shared with us today, you can’t just flip the switch and diversify tomorrow. I mean, there’s it takes a while to build out a portfolio of clients that are diversified and stable. So client concentration risk is in the high category because, you know, it might take you a year or so to recover from that. All right Michael. Well we try to keep these podcasts short about 15 minutes in length. And we’re at that window here. But I do appreciate you coming on and sharing your story. And I know that when we have our Q&A session with the members, we’ll get into more detail about it. And there’ll be lots of questions regarding this. But congratulations on your remarkable story. You know, you had a huge run up. Unfortunately, you had this black swan event that caused some pain, but you’ve recovered from it very nicely. It’s amazing how levelheaded and non-emotional you are about it. So that’s great, and I’m glad to see that things are turning around for you, and I wish you a lot of luck going forward. 

Michael Ivie [00:17:40] Yeah. Thanks a lot, Greg. And always here. If anyone wants to reach out and talk more about the topic. So. 

Greg Alexander [00:17:46] All right. Great. So a couple of calls to action for audience members. So if you’re not a member of Collective 54, you want to be go to Collective 54.com and fill out an application. We’ll get in contact with you. If you’re not quite ready to become a member yet, I encourage you to subscribe to our newsletter. Which is Collective 54 insights. You can find that on the website as well. That’s where this podcast gets posted. And if you want to dive in a little bit more and, spend some time with it, I suggest you read my book. It’s called The Boutique How to Start Scale and sell a professional services Firm. You can find it on Amazon. It takes about a three hour read, and our content is organized and our programing is organized as that book is. So hopefully those are helpful. And until next time, audience, I wish you the best of luck as you try to grow, scale, and sell your firms.

Episode  121 – Data Strategy: How Boutiques Can Get a 360 Degree View of Their Business  – Member Case by Aron Clymer

The average boutique pro-serv firm is using 10-15 SaaS applications yet none of them talk to each other. This makes it hard to get a true 360-degree view of your firm.

On this episode, data warehousing expert and member Aron Clymer, Founder & CEO at Data Clymer, will show members how to solve this problem easily, and cost effectively.


Greg Alexander [00:00:15] Welcome to the Pro Serv podcast, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, we are collective 54 and which is the first mastermind community focused entirely on the unique needs of scaling professional services firms. My name is Greg Alexander. I’m the founder and I’ll be your host today. And on this episode we’re going to talk about running your firm on data and the importance of having a 360 degree view of your business. Many of our members are struggling with this. We’re creating more and more data because we’re all using a ton of SAS tools, but unfortunately sometimes they’re not well connected and we wind up one day with a mess. So we’ll try to talk about that a little bit. And we have a great role model with us, Aaron Clymer. And in my opinion, Aaron is a unique individual in that his background has solved this problem problem for many, many years. And he is a kind of data warehousing expert, if you will. So we’re lucky to have him. So, Aaron, it’s good to see you. Thanks for being here. And would you introduce yourself in your firm, please? 

Aron Clymer [00:01:30] Yeah. Thanks, Greg. It’s great to be here, too, with you. Thanks for inviting me to the podcast. So, yeah, I’m Aaron Clymer, founder and CEO of Data Climber. We are a company that helps and helps our clients, mid-sized clients, usually some small size as well. Solve that problem of not being able to make decisions quickly based on data. So just being able to have all our data at their fingertips to answer all of their questions quickly. We do that by implementing modern cloud data systems, which entails a series of vendor solutions that we put together to work in concert to enable this this capability. And the idea is to have self-service analytics at everybody’s fingertips in the organization. 

Greg Alexander [00:02:13] Okay. So let’s talk about the realities of our community. So I’ll describe a use case and then you can kind of take us through data warehousing one on one, if you will. So it’s very common for our members to be running a lot of their business office spreadsheets. The financials is typically QuickBooks. They usually don’t have a PSA tool installed. Some might have some type of CRM tool, HubSpot, Salesforce or something along those lines. They all have kind of a, I don’t know, advanced use of Microsoft tools, you know, some shared drives, things of that nature. And they’re very frustrated by this. I mean, like I’ll ask the question, what’s your most profitable clients? And their answer is a guess. Or if they answer it definitively, I double click on the answer. And the underlying process upon which they calculated profitability probably wasn’t accurate. And when I say, you know, why are you running your firm this way, they say, well, you know, I’m just overwhelmed by this. I don’t know what to do. And I can’t truly get a 360 degree view of my business. One additional wrinkle that I’ll throw into the mix is many of them often use fractional resources. So a fractional CFO or fractional technology MSP, something along those lines. And those firms have their own systems that they need to get access to data to. So if that’s the starting point and I hate to be so grim, but let’s start there if that is the starting point, you know, how do I get myself out of this mess? 

Aron Clymer [00:03:51] Yeah, yeah. And believe me, I’ve been there as I’ve grown the company myself. Of course, you know, it it just takes a little bit of education on, you know, some of the solutions that are out there and ways to do it. The good news, it’s night and day, much, much easier relative to ten years ago, I would say even five years ago. The other thing I like is that most of the the tooling out there that we use is, you know, the pricing is based on usage to a large extent. So if you’re not if you’re a small company, you’re not using much, you know, your bill isn’t isn’t so big. And as you grow, you you scale and your costs follow you as you grow. So that’s kind of a nice model even for a small business. But at a really high level, there’s three components to getting this done. You know, you’re running your company, all of us are running our companies, like you said, on multiple SAS tools. I’m probably running on at least 15. And you you can’t analyze data from one system to another system. Very rapidly right now if you don’t have a data warehouse. So you need to get a data warehouse, and that’s a central place where you’re going to put all this data and be able to then get answers quickly and join it together in in ways that make sense for your business. So you get a data warehouse to do that, you have to build some data pipes that pipe data into that data warehouse, and then you’ll need some sort of data visualization exploration tool that allows you to easily interface with this data, ask questions. You don’t have to be technical at all to use these tools. That’s the beauty of it. And any business user with just a little bit of training should be able to ask at least some of the simple questions, like you said, like profitability of of clients. So those are the three pieces a data warehouse, some piping in and then a visualization tool to be able to to ask questions. 

Greg Alexander [00:05:36] Okay. So Professional Services has had a long history of owners asking their employees to enter data. It could be timesheets, it could be forecasting sales opportunities, any number of things. And the employees absolutely hate doing it because non billable administrative time. So they either don’t do it or they pencil whip it, so to speak. And it’s garbage in garbage out issue. So I guess what are your thoughts on that and how do you get employees motivated and compliant with entering data into a centralized data warehouse? 

Aron Clymer [00:06:13] Are you referring to data that can’t be gotten from any other means, or is this a sort of duplication effort of data that already exists? 

Greg Alexander [00:06:22] Well, I mean, the most obvious one is timesheets. So in professional services, people build for their time, so they have to issue timesheets internally. And that’s the way that many firms are run and they don’t want to track their times. That’s just one example of many. But so either don’t do it, so therefore there’s no pipe, there’s no data to go to the data warehouse or they do it and it’s sporadic or inaccurate. And then this data warehouse is populated with junk. 

Aron Clymer [00:06:47] Got it. Yeah. Well, first of all, in that case, I highly recommend going ahead and buying some technology just to solve that problem if you can. You know, they’re not they’re affordable and they’re accurate. And then you have all of this wonderful data to then calculate in the case of time tracking that’s critical or calculating some KPIs that we all want to look at, like utilization, for instance. Right? So to get that right and to get it to be able to look at utilization every day, if you’d like to trend it over any timeframe, you want to, you know, sliced by any number of employees you want to or, you know, there’s lots of ways to look at utilization. And if you have all that in a time tracking tool and you get that in your data warehouse, you know, it’s just effortless almost to then start analyzing your utilization and seeing trends. 

Greg Alexander [00:07:34] Okay. And this data warehouse that sits, I guess, in between all of these disconnected SAS tools and my understanding that correctly. 

Aron Clymer [00:07:41] Yeah, that’s exactly right. And let me extend the example just to make it clear why why you need a data warehouse versus the SAS tool itself. So first of all, you could calculate utilization in your SAS time tracking tool, right? And all these tools come with some sort of analytics. But 99% of the time, those analytic capabilities are actually not great. They’re really hard to understand and they’re not intuitive, they’re very limited. You can’t just calculate any KPI you want often, or you might not be able to calculate it in the way you want to calculate it using your formula. So that’s one thing, getting it into the data warehouse and then having a tool where you can calculate anything and do anything with your data is one thing. But even more importantly is that let’s say you want to create a customer or a client dashboard for all of your clients and just look at, you know, everything you want to see in a nutshell with the client. Well, utilization will be obviously one KPI you probably want to put on there and maybe some more information. Maybe average hourly rate might come out of your time cards as well. But as soon as you need information from your CRM system about what industry is that client and you know, other firms, graphics, other, how many statements work have you had with that client? What’s the history of that that’s in your CRM, right? So that’s somewhere else. And so it’s, you know, having it all together and showing it on a single dashboard, which you can do once you have the data from both those systems and your data warehouse, that’s where you get the real power. You can start just adding, you know, all of your data and that’s how you get that, quote, 360 degree view of your client in this case. 

Greg Alexander [00:09:10] That is a good visual for us to think about that. When you mentioned these affordable, easy to use data warehousing solutions, any particular applications you recommend our community to check out? 

Aron Clymer [00:09:22] Yeah. Yeah. So that’s another thing I love about being in services is I feel like we can just pick and choose the best technology out there and go with those, those vendors and we can enlist. Honestly, come to our clients and say, Look, we’re going to choose the best in class technology for you and your circumstance, for your, you know, for your use cases. We have chosen to partner with Snowflake and Databricks or to to nice one snowflake really leading the pack. They’ve really just exploded in the last five years across the market. And pretty much any any company looking at a data warehouse these days will know of Snowflake because they’ve become so popular and that’s because they’ve really solved I mean it was a it was a huge leap forward in innovation when they came on the scene when I was doing data warehousing ten years ago at Salesforce on an antiquated Oracle data warehouse that frankly was kind of a nightmare to maintain. And there’s all sorts of limitations. I mean, that wasn’t that long ago, right? But five, five, four, three years ago, all of sudden, Snowflake came along and they solved all of the technical headaches with doing data warehousing. So now you just focus on your business, like scaling is indefinite computers and you know, you don’t run out of resources, so you can throw as little or as many people on top of the system and you know, it’ll run fine. And so you can just focus on, okay, what they you want, what are your KPIs, you know, what sort of stuff do you need to analyze? What kind of questions are you asking? And it just moves forward. So Snowflake Databricks and then there are a lot of popular BI tools that a lot of the listeners probably aren’t using today to some extent, like maybe Tableau Power BI is extremely cost effective at first, so Microsoft can really get you with their BI tool, that’s their their analytics tool. But there’s some really nice modern, very cutting edge for cloud, which we would always recommend tools like Sigma computing. They have a spreadsheet interface BI tool. So if you know how to use a spreadsheet, you know the interface is familiar, but yet you can be querying, you know, billion or multi million road tables under the covers and it just works just fine. And actually and I’m not, not, we’re not promoting them in all necessarily but just last week they came out with this amazing feature I’ve never seen in any BI tool in my entire career and that is get back to your original question entering data. You know, all these tools for decades have been read only they’re just to consume your data and visualize it. And, you know, look for look for interesting information that you can then action on. Well, there’s always use cases where you want to enter data. I mean, sales forecasting is a very typical one, right? You may want to see your sales trends for the past two years monthly, and then you want to enter your forecast for the next two quarters, you know, next six, six months maybe. Well, you can never do that in one tool with by a tool. But but Sigma computing, it just recently made that available as a feature. You can literally be looking at your spreadsheet with your report and then just type in your predictions and it’ll save that back in your data warehouse and then you can analyze all that together. So I think that’s actually revolutionary and it just shows how this is space is becoming more and more something that drives your company and you operate your company on top of this data rather than just internal reporting. 

Greg Alexander [00:12:36] And what would you say to a member that’s listening to this right now saying, I get it, you know, I wish I was there, I’m growing at 30% a year. I’ve got bigger problems than I can just limp by on my kind of bootstrapped approach to data. What would you say to that person? 

Aron Clymer [00:12:56] Now I’d start with just to try to add up the cost of all the time you spend doing that and start to get into essentially an idea of how much this is costing you. I think that you’ll find that it’s worth the effort to try to migrate, if not now, soon, because it just adds up quickly. And as you get to a certain size, you then you realize you have a pretty big problem on your hands and it’s even more costly to get off of these manual processes down the road. So it’s it’s easy to get started. These tools are up. You can install it in a day and get going. You know, not saying it takes a day because it takes months to do it to it, to really do it right. The technology is simple. It’s more just the methodology and they approach that most of most founders will need help with. 

Greg Alexander [00:13:43] You know, and at the time of this recording, which is April 20, 23, you know, we’re all kind of awestruck by the power of artificial intelligence, in particular chat. Maybe share with us where you think the future of all this is going and how I might play a role for us. 

Aron Clymer [00:14:02] Yeah, that’s that’s a super fascinating. I’ve been thinking a lot about that. I’m actually going to speak at a couple of conferences this year with the title of How A.I. is Impacting Data in My World, and it’ll probably change dramatically between now and three months when I’m giving the talk. Right. But but what I what I’ve seen is that, you know, things like chatbots are, of course, super helpful and impactful right now. They can do a lot to help us. Our data engineer is actually just check some check some code, actually figure out how to do some complicated things with code if they don’t know how to do it right away. The probably the biggest challenge though, with AI in general and data is that data just like maybe it’s analogies to human language, but data needs to be very specific. And so often these models, these element models like chatbots won’t get it right. And if they can’t get it right, even, I mean, 100% of the time, you don’t want to rely on that for your business necessarily, Right? So there’s going to be it’s going to be a while before all of this stuff can be fully automated with A.I., But A.I. now is doing some really helpful things. It’s dramatically speeding up the time to implement some of these systems because it can give you a first cut. Yeah, what I would suggest for like a data model or how you’d want to organize all this stuff, and then you go through there and you make sure it’s, you know, it’s got your I’s and cross your TS and make sure it’s all correct. Then you deploy it business. Yeah. So it’s expediting some things. Yeah. 

Greg Alexander [00:15:33] It might take years. It’s just going to continue to get better and better. So some of the things we talked about today, which would be the building blocks for something like that, I mean, that should be creating urgency in all of us to get going on having, you know, better data running our business on data because the advancements that are coming are going to be exponential. All right. Well, listen, I’m really looking forward to our upcoming Friday Q&A session with the members. You know, I’ve got like 100 more questions I want to ask you, but we try to keep these things tight to 15 minutes or so. So for those that are listening to this members in particular, I encourage you to register for that event. When you get scheduled with Aaron, then you can ask your questions directly. But until then, Aaron, I just wanted to thank you for being here on behalf of the members. We learned a lot today. We’re very lucky to have you in the community. This is an important thing for all of us to get correct. So thank you for giving us your wisdom today. 

Aron Clymer [00:16:26] Well, thank you. Appreciate it. Great to talk to you. 

Greg Alexander [00:16:28] Okay. All right. And a couple of calls to action for listeners. If you are interested in meeting great people like Aron, consider joining Collective 54. You can find that on our website. Fill out a contact us form and a rep will get in contact with you if you want more content. Maybe not ready to join, consider subscribing to collective 54 insights. There you’ll get three things every week. A blog on Monday, a podcast I’m sorry, a video on Wednesday and a chart of the week. Speaking of data on Fridays. And if you want to get more longform content, check out our book, The Boutique. How to Start Scaling Sell a Professional services Firm. You can find that on Amazon. But thanks for listening today. And until next time, we wish you the best of luck to you. Try to grow, scale and someday exit your boutique pro serve firm.

Episode 96 – How to Make Your Firm Risk Free in the Eyes of a Potential Acquirer – Member Case with Harry Dugan

Investors’ default position is to find reasons not to buy your boutique. They are looking for the risks and approach due diligence as a way to de-risk their investment. On this episode, Harry Dugan, Managing Director at STS Capital Partners shares how to build your firm to minimize those risk for a potential acquirer.


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 not familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and exit your approach to the firm. My name is Greg Alexander. I’m the founder and I’ll be your host today. And today we’re going to talk about how to de-risk your firm through the eyes of a potential acquirer. And my goal today in covering this topic is to make sure that you, as the founders, last leader of your boutique that might want to sell your firm someday. You know how investors or strategic acquirers are looking at your firm? Most of them come into this process. And their default position is to find reasons not to do the deal. U.S.. Are an eternal optimist and you find reasons to do the deal. And sometimes there’s a disconnect there. So I want to make sure that we’re looking at this thing in its entirety, and we’re lucky to have a great role model and expert in this area with us. His name is Harry Dugan, and Harry is a member of Collective 54. This is what he does for a living. He’s been through dozens, if not hundreds of these deals. And he’s going to share his wisdom with us today. So, Harry, welcome to the show. 

Harry Dugan [00:01:41] Hi, Greg. Thank you very much for having me. It’s a pleasure to join you today. 

Greg Alexander [00:01:46] Would you provide a proper introduction of yourself and what your firm does? 

Harry Dugan [00:01:50] Sure. So I’m a managing director with STS Capital Partners. STS is a boutique I bank. We operate around the world. We are exclusively a sell side advisory firm. So we have been working for over 20 years in helping founders and family owned businesses maximize their exits and and achieve success to significance. 

Greg Alexander [00:02:18] Okay. Very good. So let’s talk about the topic today, which is de-risking your deal. So maybe maybe I’ll start with a softball question, which is through the eyes of a potential acquirer. What are maybe the top 3 to 5 things that cause a deal not to happen? 

Harry Dugan [00:02:38] Well, it’s great that you talk about risk and you make some really great points in the book and. And just to start there for a second, you know, buyers, financial buyers and strategic buyers, they’re investors and they don’t want to lose money. You know, they these are folks who, you know, if they’re investing, Warren Buffett famously said the number one and number two rules are, you know, number one is don’t lose money. And number two is never forget. Number one. 

Greg Alexander [00:03:04] You know. 

Harry Dugan [00:03:05] So they you know, they come at this with a very skeptical perspective, you know, especially if they’re very acquisitive, if they’re a financial investor or their private equity firm, you know, their job is to make investments in place money. And they want to make sure that they’re going to get a return and that they know what they’re buying. So they’re going to be very thorough and scrutinize, you know, you as a company through their due diligence process. You know, the I think the biggest thing that kills deals in this case is surprises you. You want to avoid surprises at all costs. And, you know, there’s some ways that you can do that. You know, you need to be honest with yourself. You need to be honest with your banker and your advisors, and you need to choose your moments. But be honest with the buyers as well, because if you have the right advisors, there’s a lot you can do to strategize and put yourself in the best light and avoid those surprises that kill deals through the process. 

Greg Alexander [00:04:11] So, Harry, give me an example of a surprise that would that would cause a problem or maybe something that you see more often than you would like. 

Harry Dugan [00:04:21] Yeah. A lot of times it’s, you know, issues with the history, with the finances of the company, the accounting issues. A lot of points you raise in the book, you know, about the quality of your contracts, the quality of your receivables, the customer concentration. I think that, you know, you need to be be honest and position your business in the best light possible, which is going to make it the most attractive to the buyers. But at the same time, you can’t sweep things under the rug or hide things, whether they’re accounting issues or their lawsuits or their prior employment issues, you know, things like that that come out. If a buyer feels like they’ve gotten to a certain point of their diligence and they feel like they were misled, that that will easily kill a deal. Whereas if you acknowledge these things and you put them out at the right time early in the process, and you give the buyer a reason to say yes and how these aren’t a challenge or they aren’t an issue, or how you either learned from them or dealt with them, then they’re a lot easier to work through. 

Greg Alexander [00:05:28] You know, I’ll give you an example of something that just happened here recently from a member. He is in the middle of building. Someone’s trying to buy his firm and he goes, Hey, Greg, I need your opinion on something. So what’s that? So seven years ago, I got a DUI. Yeah. Should I disclose that? And I said, yes, you should. It goes, well, you know, I don’t want this to derail a deal. I’m like, listen, if this company does your homework, they’re going to find it anyways. And why do you want to lie to me? It was seven years ago. I mean, you’re not an alcoholic. You’re not you’re not in recovery. It was a non-issue. I mean, there’s a lot of people look at you as if I was thinking about buy and you told me that I would not want to buy you even more because I know I’m dealing with somebody who’s who’s honest and is not trying to hide anything. But, you know, sometimes founders, they’re they’re so, I don’t know, private or scared. I know what the word is like. Like, for example, why would somebody working with you as their advisor misrepresent their financials? I don’t I don’t get that. 

Harry Dugan [00:06:27] Yeah, I that’s a great example and it’s spot on. I live through a deal in a very similar circumstance where a seller had a, you know, felony conviction for something stupid he did when he was in his early twenties. And it was 20 years later, but because it was never disclosed and the buyer discovered it on their own, it felt like a betrayal of trust. 

Greg Alexander [00:06:53] Yeah. 

Harry Dugan [00:06:55] Whereas if it would have just been put out there upfront and dealt with, you know, the buyer could have gotten over it, got through it. I think, you know, being honest with with your advisor, you know, not misrepresenting your financials, you know, the sooner you lay all your cards on the table, the more your advisor, your banker, your your team that’s working on the deal can strategize and, you know, work through that stuff. You know, we don’t want to hide anything. We don’t want to mislead anyone. We don’t want to feel like they were misled, you know, even through admitting something, because this is a thorough process. If somebody is going to write you a check for 30 or 50 or $200 million, they are gonna do their homework. And if there’s any skeletons in the closet, they’re going to find them. So you’re better off to just get them together yourself. Be honest with yourself, be honest with your advisors, and then strategize how you’re going to tackle it. 

Greg Alexander [00:07:48] Yeah. You know, another story just to bring this topic to life. Another one of our members was who had a successful exit about a year ago, was bragging to the potential acquirer, which in this case was a strategic about how great their culture was. And the strategic started calling former employees and some of the former employees did not have positive things to say. 

Harry Dugan [00:08:10] Yeah, so. 

Greg Alexander [00:08:11] The culture got exposed. I mean, that’s the kind of diligence that people are going to do. They’re going to call your former employees are going to call your ex clients and just try to sweep those things under the rug. It’s just not a good idea. 

Harry Dugan [00:08:23] But there’s really, really easy stuff. I mean, they teach kids today who are applying for their first job to clean up their social media profiles. They don’t have weird things that you posted late at night after a night out with some friends, you know, come back to bite you and make you be perceived as something you’re not. You know, a lot of times, even when I’m speaking with a new client and I want to make I just want to do some homework on my end to see if there’s somebody, because I’m going to make a big investment in this process, in this relationship. And Greg, as you pointed out several times, you know, bankers get paid when the seller gets paid. Yeah. So I, you know, want to be careful about who I’m partnering with for for this process. And, you know, I’ll just do a Google search on their name, on their company’s name or, you know, look up the company name in lawsuits, see what pops up in the public record, you know, things like that. And when you get into a process, you get into the to the ninth inning with a buyer, you know, they’re going to run a background check on you. I see it all the time. They’re going to ask you to sign a release and they’re gonna run a credit check and a background check. And if you are planning to exit the company and the value is in your leadership team there, they might do background checks on your senior leaders. So if that’s not part of your hiring process, you might want to proactively do that in advance. So you know what you’re getting into. 

Greg Alexander [00:09:48] Yeah, exactly. Let me ask you some tactical questions. So, remember, 85% of our membership are people who have never been through an exit before. They’re the original wealth creators, the founders. They haven’t been through an exit, and they’re doing this for the first time. Is it worth it to get audited? Financials? Is it worth the expense of the effort? 

Harry Dugan [00:10:12] There’s not always audited financials depending on the size of the company and what their financing situation is. I mean, processor companies tend not to have as much working capital requirements as somebody in manufacturing or distribution. So, you know, they might not have a really complicated line of credit that they need for their financials, for their bank. And what’s more important than that is an engagement that you’d hire an accounting firm for, call it quality of earnings. And most buyers will do a quality of earnings engagement, which is not an audit, you know, an audit. I started my career in accounting. So an audit is a technical analysis of is the balance sheet correct? Do the financial statements fairly reflect the position of the company? Equality of earnings is a more thorough analysis where they’re looking at your sales history and trends, your margin trends, your customer concentration, you know, all these things, your cost positions are your are your payroll costs exploding so that a an investor can predict it with the best information they have as to what their return on investment is going to be. And I highly, highly encourage closely held, founder led or family owned businesses, especially if you don’t have audited financial statements to hire a firm to do a sell side. Quality of earnings engagement. And just like with any other skeletons. So that way you are going to know exactly what they’re going to discover in due diligence. You can choose to share that with them in advance, and it can oftentimes speed up the diligence process because everybody has confidence in the numbers. And and, you know, you’ve taken them halfway through the diligence process. 

Greg Alexander [00:11:59] You know, regarding quality of earnings acuity, as it’s referred to, oftentimes, you know, you can hire a brand name accounting firm and spend a lot of money on it, or you can hire a small accounting firm and do it on the cheap. The brand name accounting firm will tell you that if their name is next to it, it’s going to increase the firm’s valuation because it’s more credible. The small accounting firm will say, that’s B.S.. Q Is Acuity the brand name of the accounting firm that does it doesn’t mean anything in terms of its impact on valuation. What say you on that? 

Harry Dugan [00:12:36] I think the firm that you engage for that should be appropriate for the size of your business. You know, if you’re if you’re $20 million pro serve company, you don’t need to hire, you know, KPMG to do your Cuvee. But a, you know, you definitely you don’t want to have a Joe Bob CPA who’s a single operator with a shingle outside of his garage. Do it either. You know, you want to get a reputable regional firm that has a good reputation, that has a practice, that has an M&A practice, that does these a lot. And they’ll know exactly what a buyer is going to be looking for. And they can help take you through it before you feel like there’s somebody, you know, crawling around in your closet. 

Greg Alexander [00:13:24] You know. Now, regarding this, you know, so let’s say I’m the owner of a $20 million processor firm. I hire a reputable accounting firm to do a quote. And I get to the point where I sign an ally and I’m in actual diligence, the acquiring firm, the person I’m selling myself to, are they going to do another query and somebody they hire? 

Harry Dugan [00:13:44] Sometimes it depends on their their risk appetite. Right. You know, you’ve you’ve hired a good firm. You’ve got it. They’ll probably get an their own independent firm to review the query that you did. But it will not be nearly as thorough or exhaustive of a process. 

Greg Alexander [00:14:03] Yeah. Okay. Got it. All right, Harry, my last question regarding, you know, derisking, which is the topic today. Sometimes founders get crazy with add backs and they try to goose their EBIDTA by adding back everything in the kitchen sink. Any rules of thumb here you can share with us? 

Harry Dugan [00:14:23] A. Know, my my personal philosophy is to put everything on the table and the buyer will decide, you know, what’s a what’s valid or not. I think going through a Q of process with with a firm that that has experience with this that that does them for buyers and sellers, they’re going to help with that. And that brings up another great point, Greg, which I forgot to mention is that, you know, the cubes aren’t cheap. You know, depending on the size and complexity your firm, it could be, you know, $50,000. It could be $150,000. But if if the firm that’s doing it finds an ad back, a legitimate add back that you forgot about and you’re selling your company for, you know, call it ten times EBITDA. You know, all they need to find is, is $20,000 and that’s easily paid for themselves. 

Greg Alexander [00:15:12] Yeah, at my experience. 20 K Yeah, yeah. Yeah. So it’s worth it. All right, I will. Listen, we try to keep these episodes short, so we’re at a time window. But on behalf of the members, it’s great to have somebody like yourself in the membership who knows how to get deals done, who’s on the sell side, who deals exclusively with founders and family businesses. So thanks for being on the show today. I really appreciate it. 

Harry Dugan [00:15:36] Thanks for having me, Greg. 

Greg Alexander [00:15:38] Okay. So for those that are in pro serve who want to belong to a community and learn from people like Harry, consider applying to Collective 54 and you can do so at Collective54.com. If you want to read about this subject and others like it, consider picking up a copy of my book which is titled The Boutique On a Start Scale and sell a professional services firm. Thanks for listening and I look forward to talking to you again in our next episode.