How Founder Compensation Changes as a Professional Service Firm Grows Up

How Founder Compensation Changes as a Professional Service Firm Grows Up

As the founder of a boutique professional service firm, you’ve embarked on a unique journey filled with challenges and opportunities. In my book, “The Boutique: How to Start, Scale, and Sell a Professional Service Firm,” I introduced a framework that outlines the three key stages in the lifecycle of a small service firm: Grow, Scale, and Exit. Today, we’ll explore how your compensation as the Founder changes as your firm evolves through these stages.

    1. The Growth Stage: Founders with a Job, Not a Firm

In the early days of your firm, you’re in the Grow stage. During this phase, you’re the primary driver of your firm’s success. You’re not just the founder; you’re also the chief salesperson, project manager, and service provider. In essence, you have a job within your firm.

At this stage, it’s common for founders to pay themselves a salary. Why? Because your primary focus is on selling and delivering work for clients. Your role as an operator is critical, and the salary compensates you for your time and expertise. It ensures your livelihood as you lay the foundation for your firm’s future growth.

The correct amount of salary is best determined by the market. In other words, if you hired someone to perform your duties, what would you have to pay him? The free market determines salary levels. The Founder should pay himself the equivalent.

    1. The Scale Stage: Juggling Two Roles as Founder

As your service firm progresses into the Scale stage, things start to change. You’ve grown beyond being just a service provider; you’re now also an owner who’s actively working on building the firm. This phase is marked by a dual role: operator and owner.

In addition to your salary, you may begin to receive shareholder distributions. These distributions represent the second part of your compensation. While your salary compensates you for your role as an operator, shareholder distributions compensates you for your role as an owner. They reward you for your efforts in growing the firm as a business entity, not just as a practitioner.

The correct amount of distributions is best determined by your working capital needs. Distributions are paid to shareholders out of excess profit. Excess profit is profit more than the working capital needed to run the firm. For example, your working capital requirement might be 6 months of payroll in cash in the bank. Anything cash generated beyond that is considered excess and should be distributed to the Founder in the form of owner distributions.

    1. The Exit Stage: Transitioning to Full Ownership

As your firm matures, it eventually reaches the Exit stage. During this phase, you’ve successfully transitioned from being a hands-on operator to a full-fledged owner. You’ve replaced yourself in the day-to-day operations and are now focusing solely on strategic initiatives that increase the enterprise value of the firm. 

At this point, your compensation structure undergoes a significant change. You no longer pay yourself a salary for your operational role because you’ve delegated those responsibilities to others. Instead, your compensation solely relies on shareholder distributions. This reflects your position as an owner who benefits directly from the firm’s financial success. The salary you once paid yourself can now be redirected to support the new team members who have taken over your operational responsibilities.

And at this stage, the Founder has a critical decision to make. Should he sell the firm, or should he continue to own it? A Founder should sell the firm if there is a buyer willing to pay him a premium for the future distribution stream. The Founder should continue to own the firm if the future distribution stream is larger than what a buyer is willing to pay for it. For example, let’s say your firm is paying you $5 million in annual distributions, and a buyer offers you $20 million to buy your firm. You would accept, or decline, this offer based on whether you feel collecting 4 years of distributions upfront today is a good decision.

Join the Collective 54 Mastermind Community

As you navigate these stages of your service firm’s lifecycle, it’s crucial to have access to a supportive community that understands the unique challenges you face as a founder. That’s why I invite you to consider becoming a member of the Collective 54 Mastermind Community.

In our community, you’ll connect with fellow founders who have walked the same path, gain access to invaluable resources, and receive expert guidance to help you successfully navigate each stage of your firm’s journey. You’ll have the opportunity to learn from experienced professionals and accelerate your firm’s growth and success.

Join us at Collective 54 and take your professional service firm to new heights. Together, we’ll help you master the art of growing, scaling, and ultimately exiting your boutique firm, all while optimizing your compensation along the way.

To learn more about Collective 54 and how we can support you on your journey, visit our website or reach out to our team today. Your fellow founders are waiting to welcome you into our thriving community.

How to Align Sales Compensation with Your Firm’s Ideal Client Profile

How to Align Sales Compensation with Your Firm’s Ideal Client Profile

Understanding Good, Neutral, and Bad Revenue in Professional Service Firms

As the founder of a boutique professional service firm, you understand the importance of growth. But not all revenue is equal. In our quest for growth, it’s crucial to distinguish between good, neutral, and bad revenue – and align our sales compensation accordingly. This approach not only accelerates growth but ensures it’s sustainable and aligned with our core values and business goals.

Good Revenue: The Lifeblood of Your Firm

Good revenue is the kind that comes from clients who fit your firm’s Ideal Client Profile (ICP). These clients are not just profitable; they resonate with your firm’s expertise and values. They are the clients who appreciate your unique offerings and are willing to pay a premium for them. This type of revenue contributes to the long-term health and growth of your firm.

Neutral Revenue: The Opportunistic Capital

Neutral revenue comes from clients who don’t perfectly fit your ICP but still bring in working capital. This revenue is opportunistic and can support your firm during growth phases. However, it’s important not to lose focus on your ICP while dealing with such clients.

Bad Revenue: The Hidden Cost

Bad revenue, the most insidious of all, comes from clients who fall far outside your ICP. This type of revenue can be detrimental as it diverts your firm’s resources, focus, and energy from more aligned opportunities. It can lead to mission drift, employee dissatisfaction, and even damage your brand.

Aligning Sales Compensation

Now, let’s talk sales compensation design. Your sales team is the frontline in attracting and securing revenue. Their compensation should be strategically aligned with the kind of revenue they bring in.

    1. Rewarding Good Revenue

Salespeople should be incentivized to pursue and close deals with ICP-aligned clients. Consider paying a premium for good revenue. This can be in the form of higher commissions, bonuses, or SPIFFS. This not only motivates your team to focus on high-quality leads but also aligns their efforts with the firm’s strategic objectives.

    1. Neutral Revenue Compensation

For neutral revenue, stick to the standard rate of compensation. This acknowledges the effort put in by the sales team while subtly nudging them towards more ICP-aligned prospects.

    1. Discouraging Bad Revenue

Do not compensate sales for bad revenue. This might sound harsh, but it sends a clear message about the firm’s priorities. It’s crucial to communicate why certain clients are considered ‘bad’ for the business so your sales team understands the rationale behind this policy.


In a boutique professional service firm, growth is not just about increasing numbers; it’s about growing right. By aligning your sales compensation with your firm’s ideal client profile, you not only incentivize your team to bring in the most beneficial clients but also ensure that your firm stays true to its vision and values.

Remember, the goal is sustainable growth, and that comes from understanding and valuing the quality of revenue, not just the quantity.

Ideal client profiles and sales compensation are but only two topics discussed by members of Collective. If you think you might want to learn from your peers, consider joining Collective 54. You can apply here.