Tag: Exit Strategy

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The Top 20 Exit Options for a Boutique Professional Service Firm

The Top 20 Exit Options for a Boutique Professional Service Firm

As a founder of a boutique professional service firm, navigating the exit landscape can be a daunting yet pivotal decision. There are a lot more options available to you than you may realize. To assist you, we’ve compiled a comprehensive list of the top 20 most selected exit options. Each option is defined with its pros and cons, providing you with a clear view of your potential paths.

      1. Strategic Sale
      • Definition: Selling your firm to another company that sees strategic value in its acquisition.
      • Pros: Maximizes value, provides quick liquidity.
      • Cons: Results in loss of control, potential cultural clashes.
      1. Financial Sale to a Private Equity Firm
      • Definition: Selling to a private equity firm that invests in companies to enhance their value.
      • Pros: Capital injection, operational expertise.
      • Cons: Focus on short-term returns, possible debt burden.
      1. Management Buyout (MBO)
      • Definition: The firm’s management team buys out the business.
      • Pros: Preserves firm culture, motivates employees.
      • Cons: Funding challenges, emotional complexity.
      1. Employee Stock Ownership Plan (ESOP)
      • Definition: Employees acquire stock, effectively becoming part-owners.
      • Pros: Employee incentives, tax advantages.
      • Cons: Complex setup, potential liquidity issues.
      1. Initial Public Offering (IPO)
      • Definition: Offering shares of your firm to the public in a new stock issuance.
      • Pros: Raises significant capital, elevates public profile.
      • Cons: Increased regulatory scrutiny, market risks.
      1. Recapitalization
      • Definition: Restructuring a company’s debt and equity mixture.
      • Pros: Allows partial liquidity, reduces debt.
      • Cons: Complex process, potential for equity dilution.
      1. Family Succession
      • Definition: Transferring ownership to a family member.
      • Pros: Preserves legacy, maintains culture.
      • Cons: Limited to family members, potential for family dynamics issues.
      1. Merger with a Similar Firm
      • Definition: Joining forces with a similar company to form a new entity.
      • Pros: Operational synergies, enhanced market position.
      • Cons: Integration challenges, diluted brand identity.
      1. Licensing or Franchising
      • Definition: Allowing others to operate under your brand for a fee.
      • Pros: New revenue streams, brand expansion.
      • Cons: Quality control issues, risks to brand reputation.
      1. Liquidation
      • Definition: Dissolving the firm and selling its assets.
      • Pros: Simplicity, immediate closure.
      • Cons: Typically lower returns, impacts on professional legacy.
      1. Joint Venture
      • Definition: Forming a new entity with another firm to pursue shared objectives.
      • Pros: Shared risk, access to new markets.
      • Cons: Shared control, partnership complexities.
      1. Spin-Off of a Division
      • Definition: Separating a part of the company into a new independent entity.
      • Pros: Focus on core business, potential capital raise.
      • Cons: Loss of synergies, operational challenges.
      1. Sale to a Competitor
      • Definition: Selling your firm to a competing company in the same industry.
      • Pros: Possibility of a premium offer, streamlined process.
      • Cons: Market consolidation concerns, cultural integration challenges.
      1. Sale to a Foreign Company
      • Definition: Selling your firm to a company based in another country.
      • Pros: Access to new markets, potential for higher valuation.
      • Cons: Regulatory hurdles, cultural and operational differences.
      1. Partial Sale to an Investor or Another Company
      • Definition: Selling a part of your firm to an investor or another business.
      • Pros: Retains some control, brings in new strategic perspectives.
      • Cons: Shared decision-making, complex valuation.
      1. Asset Sale
      • Definition: Selling individual assets of the firm such as intellectual property, client lists, or equipment, rather than the business entity as a whole.
      • Pros: Targeted liquidation of specific assets, potential for higher valuations on certain assets.
      • Cons: Could leave residual operational challenges, may not provide a complete exit from the business. 
      1. Passive Ownership
      • Definition: Retaining ownership but stepping back from daily management.
      • Pros: Continued income without daily responsibilities, legacy preservation.
      • Cons: Reduced control, dependency on the management team.
      1. Selling to an Industry Aggregator
      • Definition: Selling to a company that acquires businesses in the same industry.
      • Pros: Streamlined process, industry expertise.
      • Cons: Potential for undervaluation, loss of identity.
      1. Hybrid Exit
      • Definition: Combining various exit strategies to achieve desired goals.
      • Pros: Flexibility, maximized value.
      • Cons: Complexity, potential conflicting interests.
      1. Gradual Phase-Out
      • Definition: Slowly reducing involvement and ownership over time.
      • Pros: Smooth transition, reduced operational impact.
      • Cons: Extended timeframe, diminishing influence.

As a founder, it’s essential to weigh these options carefully, considering how each aligns with your personal and professional aspirations. The right exit strategy not only secures your financial future but also ensures the continued success and legacy of your firm.

Are you thinking about selling your firm one day? Do you wonder which of these options is best for you? Or, do you want to know what your firm is worth? These questions, and many others, are addressed by the membership of Collective 54. Consider joining by applying here.

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Merging vs. Selling: 10 Roadblocks Founders Face when Exiting

Merging vs. Selling: 10 Roadblocks Founders Face when Exiting

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Are you on the brink of a successful exit but can’t get over the hump? Merging with another firm may be your best exit strategy.

This video dissects 10 roadblocks founders face when exiting and demonstrates how merging with another business could help alleviate some of those challenges.

In this video, you’ll learn:
– 10 roadblocks founders face when exiting
– How merging with another business can help you achieve a successful exit
– How to analyze the best options for your firm

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Why Every Professional Service Firm Needs a Buy-Sell Agreement

Why Every Professional Service Firm Needs a Buy-Sell Agreement

Navigating the world of business partnerships is both thrilling and challenging. Whether you’re the co-founder of a consulting firm, a marketing agency, a software development firm, or another type of service firm, the common denominator for ensuring long-term harmony and clarity in ownership matters is a well-drafted buy-sell agreement.

Purpose of Buy-Sell Agreements

A buy-sell agreement is akin to a prenuptial agreement for business. It preempts potential disputes by delineating terms and conditions under which a partner can sell their stake, to whom, and at what price. The key purpose is twofold:

    1. Providing Liquidity: Businesses, especially boutique professional service firms, are often illiquid assets. This means if a partner wants to exit, they can’t easily convert their ownership into cash. A buy-sell agreement offers a solution by laying out the terms and conditions under which such an exit can occur, ensuring the departing partner receives fair compensation for their shares.

    2. Limiting Ownership: These agreements ensure that ownership remains within a controlled, desired group. Without them, partners could potentially sell their shares to anyone, which may not be in the firm’s best interest.

Three Key Provisions of Buy-Sell Agreements:

    1. Establishing Transfer Permissions: At its core, a buy-sell agreement mandates that any transfer of shares requires the unanimous consent of co-founders.

      Illustrative Example for Consulting Firms: Let’s say Alex and Jamie co-founded a thriving management consultancy. Alex receives an attractive offer from an external investor to buy half of his shares. With a buy-sell agreement in place, Alex cannot sell without Jamie’s approval. This protects the business from unwanted or potentially disruptive external investors.

    2. Restricting Share Transfer: This provision determines who can buy shares and under which circumstances, ensuring that the firm’s ownership remains within the desired group.

      Illustrative Example for Marketing Agencies: Consider Maria and Jennifer, who co-founded a marketing agency. Their buy-sell agreement stipulates that shares can only be sold to existing partners or family members. Jennifer wants to retire and sell her shares to a close friend who’s a marketing whiz. Although the friend is talented, the buy-sell agreement restricts this sale unless Maria consents.

    3. Obligatory Purchase at Fair Value: This provision ensures that, upon certain trigger events (like death, disability, or retirement), one party must buy, and the other must sell the shares at a predetermined or fairly computed price.

      Illustrative Example for Software Development Firms: Matt and Roberto run a software development firm. If Roberto were to suddenly pass away, their buy-sell agreement might require Matt to buy Roberto’s shares from his heirs at a previously agreed upon price or a price determined by a valuation formula. This ensures that Roberto’s family receives fair compensation and Matt retains full control of the business.

Facilitating the Buy-Sell Discussion:

Creating a buy-sell agreement requires open dialogue among partners about their visions for the firm’s future, their personal financial needs, and their potential exit scenarios.

Tool for Discussion: The “Partnership Alignment Matrix”

    1. Vision for the Firm: Have each partner separately list out where they see the firm, and themselves, in 5, 10, and 15 years. Compare notes. Are you aligned?

    2. Potential Exit Scenarios: List out reasons each partner might exit (e.g., retirement, other business opportunities, health issues). Discuss and prioritize them.

    3. Valuation Mechanisms: Discuss how the firm should be valued in various scenarios. Use industry metrics, get periodic professional valuations, or set a fixed price that’s revisited annually.

Meeting with a mediator or a neutral third party can also be valuable during these discussions to ensure that all concerns are addressed. Here are a few Collective 54 members who can help you think through a buy-sell agreement:

Greg Fincke

Tom Zucker

Frank Williamson

Rick Sapio

In conclusion, while the thrill of starting a boutique professional service firm can overshadow future-focused planning, it’s crucial to prepare for all eventualities. A buy-sell agreement is an indispensable tool that safeguards the firm’s future, provides clarity, and ensures the financial well-being of all partners. Always consult with an experienced attorney when drafting or revising such an agreement.

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Preparing to Sell Your Firm and Make a Successful Exit

Preparing to Sell Your Firm and Make a Successful Exit

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Are you preparing to sell your firm but don’t know where to start? These 3 categories of relationships can help you make a successful exit, but they all require different approaches.

Find out how to build relationships with potential acquirers, when to build those relationships depending on the category they’re in, and how to efficiently prepare for when investors start calling.

In this video, you’ll learn:

    • 3 categories of relationships to pay attention to
    • The right questions to ask potential buyers
    • When to pursue a long-term relationship vs a performance-based relationship
    • A strategy to help keep you prepared for when investors call
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Episode 131 – Why a Merger of Equals Might Be Your Best Exit Strategy – Member Case by Jonathan Wilson

Some members want to exit, but they cannot. The reasons are many. For example, insufficient EBITDA, high client concentration, over-dependence on a founder, and many others. The journey to fix these issues is clear but can take many years and millions of dollars. And for some, this is unattractive. An alternative is a merger of equals. Attend this session and learn from the discussion with Collective 54 member Jonathan Wilson, President & Chief Value Creator at Dubb Value Creation, on how a merger of equals can convert an unsellable boutique into an attractive firm for many acquirers.

TRANSCRIPT

Greg Alexander [00:00:10] Dive all in on the next chapter of your life. Welcome to the Preserve podcast, a podcast for leaders of thriving boutique professional services firms. If you’re not familiar with us, Collective 54 is the first mastermind community dedicated on the niche that we define as boutique producer firms and founders of those firms who tend to have very unique needs. My name is Greg Alexander. I’m the founder and I’m going to be your host. And we’ve got an interesting topic today. Today, we’re going to talk about how a merger of equals is a potential path to exit. Now, let me shape this a little bit before we introduce our role model this week. So let’s suggest that maybe two firms operating independent of each other are led by founders who want to sell their firms, and they’ve tried to sell their firms and have been unable to do so. And there’s a whole variety of reasons for that. For example, maybe the EBITDA dollar amount isn’t large enough, or maybe there is a high client concentration risk or several other reasons which we’ll get into. But if you brought those two firms together, so instead of being two separate firms, they became one firm. These problems go away. For example, all of a sudden the EBIDTA number is big enough. All of a sudden client concentration issue goes away because when you bring the two firms client rosters together, now presto, you have client diversification and on and on we go. So that’s what we’re going to kick around today. It’s something that I think represents a big opportunity for our community, and it’s also something that I don’t think has been explored enough. So to help me explore it, we have the man, the myth, the legend. Jonathan Wilson, he’s the founder of Double Value Creation. Got a chance to get to know him. And let me tell you how best to think about Jonathan. He a unique combination of the CEO whisperer and someone who has great knowledge on M&A transactions because of his journey in his career. So with that, Jonathan, why don’t you please introduce yourself to the audience and maybe tell the team a little bit about your firm. 

Jonathan Wilson [00:02:42] Thank you for saying that. Thank you for the great introduction, Greg. We are focused. So just you know, this Jonathan Wilson here, CEO of Discovery Creation, also chief value creator. We are focused on two elements of our of professional services. One is mergers and acquisitions, and the other is strategy and analytics. When it comes to M&A, otherwise known as merger and all our mergers, acquisitions, sorry. When it comes to M&A, we are focused on three things one being a bull by side services so that anything from M&A strategy to M&A, target assessment to due diligence and then also to integration planning or the first 90 days of integration. We are also focused on full scale side services. So meaning that a company that wants to engage with a full whole transaction, we will engage with them. And then also we are focused on this program called Grow before you sell, and that is where we put together a strategy for you to grow your EBITDA over the course of a 2 to 3 year period. What that may look like, that could be a capital injection, be an investor, that that could be a merger of equals, as you mentioned, but also may be buying small, small acquisitions so that you can accelerate your growth. But that really we focus on from a merger and acquisition perspective. 

Greg Alexander [00:04:22] Okay, great. 

Jonathan Wilson [00:04:23] A strategy. From a strategy perspective, we focus on three things simply planning, execution and strategic governance. 

Greg Alexander [00:04:33] Okay. So maybe just briefly explain to the audience all the stops you’ve had along the way with some of the world’s top professional services firms. 

Jonathan Wilson [00:04:44] Yeah. Thank you for asking that. So background includes Accenture, Bank of America, Deloitte and Grant Thornton. Yeah, my first exposure really was with Countrywide Financial, which became America. 

Greg Alexander [00:04:59] Okay, got it. I wanted to get that out there because, I mean, your resume is unbelievable. So you’re very credible on this topic. All right. Thank you. So let’s dive into it. Right. So I’m going to tee up a few things for you. So let’s say I’m Joe Blow and I’m running X, Y, Z firm, and I’ve been doing it for 20 years and I want to sell. I’ve been trying to sell it. I can’t sell it or I’ve been getting these lowball offers with ridiculous terms. And the first thing they hit me with is you got subscale EBIDTA subscale, limited as defined as EBIDTA less than $3 million. It’s tough to sell a firm when you’re subscale ebidta because it’s just riskier for the potential acquirer. And now I find myself presented an opportunity potentially of a firm who looks just like me. But maybe is another region. Like maybe I’m in Minnesota and this firm is in Philadelphia as an example. And in theory we can slam these two firms together and next thing you know, I go from a non sellable asset because a subscale bidder to an asset that everyone’s going to want because my EBIDTA dollars are big enough. So is that real in your minds and what are some of the maybe the obstacles associated with that that are not obvious? Because on paper duh, that looks like we can go do that, but it can’t be that easy. So help us think through that. 

Jonathan Wilson [00:06:14] It’s actually not easy in a merger of equals. You know, that’s an interesting term in itself. It really does show that you’re willing to collaborate with another organization and together that you’re willing to build something that’s going to be more powerful than either one of you can achieve alone. So, you know, with that said, you want to focus on some of the benefits around doing that, and especially for a company that is in that situation currently today, founders do get tired. I respect that. And you’re ready to move on at certain points. Right. And there’s a few things you want to focus on, one being the synergies, Right. So what can you do together to increase your revenue And then what can you do together to minimize costs? So some of that might be accessing the new are accessing the new market if somebody already has a complementary, complementary service offering and they are in markets that you are not, that seems like a no brainer. Right? And in addition to that, you want to think about that might help. Also with the increased market share. It might also help out with with with kind of a risk diversification, if you will. Keep in mind that if you’re concentrated all in one part of the country, there is a little bit of a risk that to write something happens from now. We have we do have something called micro economic challenges, right? So there are challenges that North East might have at a certain point. There are challenges that the Southwest might have a certain point. So you want to make sure that you are diverse spread across the US. Yeah. The other piece also taking a look at expanded your expanded skills and knowledge base, right? So it’s a nice complementary skills and maybe some people you have to worry about acquiring but you can actually leverage from the complementary firm. Yeah. And those are some of the, those are some of the great things that you could get together. 

Greg Alexander [00:08:07] Very good. So let me I want to follow up question here, because you mentioned the word risk, and I want to talk about something that often sinks boutiques when they try to sell. And it’s the nature of the business. It’s not anyone’s fault. It’s just the way that these things evolve. We tend to have high client and revenue concentration, and that’s defined by if the top five clients are generating more than, let’s say, 30 or 40% of your revenue and profits, then the way that investor looks at that is your risk is risky because of the client and revenue concentration, meaning one or two clients goes away and the whole PNL falls apart. Now the great thing about a merger of equals here would be if you have that problem and you merge with another firm that also has that problem, but they’re not the same clients, then it goes away. But when I present that to people, Jonathan, what I hear is, well, I own 100% of my firm right now and if I merge with someone, I’m going own 50% of my firm. So I don’t want to do that. That’s dilutive. What would your response be to somebody who would share that with you? 

Jonathan Wilson [00:09:05] That’s crazy. That would be my initial response. But, you know, when you when you really think about it, everybody understands the idea of giving out some earnings and some element of control. There’s a reason why people became founders to begin with, right? However, if your ultimate goal is to be sold, you have to think about what you have to give up. Right. And yes, you’re giving out some of that share, but you’re also working together as somebody who has a shared mindset and shared goal. They probably have a background similar to yours. Any other thinking founder for the same reason. The other pieces too, is that their clients actually might be clients, but you might want to also work with. Yeah. So you guys can double down together and and really grow that client and make them happy in a larger way. And also you can actually increase not only your increase in customer satisfaction, but then that one plus one equals three is a real scenario for the company. Yeah. 

Greg Alexander [00:10:05] Yeah. I mean, the well said much better than the way I would have said it. What I say to those people tends to be a little too blunt, which is, Listen, 100% is zero zero. So right now you have a non sellable asset, so you’ve got nowhere to go. So 50% of something is much better in that scenario. So let’s consider it. Now, there’s cultural issues here. Right. You know, you’re all of a sudden you’re this fiercely independent founder. You 100% of your firm and what you say goes. And now you got partners. So in your experience, when all the years you’ve done this with big companies and now your own firm, you know, how how should two strong willed, independent founders think about working together and how might you help them consider that as an alternative? 

Jonathan Wilson [00:10:51] You know, that’s so key. And that is not outside of a merger of equals. That’s really with every single M&A transaction. When you think about culture that’s behind everything that is going to be coming out of a merger of any kind. Right. Because the people are what helps you gain your revenue. They’re also the people that can sink your ship. So those are things you think about from a cold perspective. You want to lead with having them as part of the diligence process. So you want to think about what exactly what are similarities of the cultures, how do you operate, what kind of systems you use, what kind of processes you use? Is it is it a culture of meetings, a culture, ad hoc conversations that matters? You know, there are there are there series is a credit culture that also matters to you. Is one willing to take out more loans than the other? That that also is a big that can also sink our ship senior seat or help partnerships as well. But you want to go through any. You want to go through it like any other judge over the process and think about culture as a unique workstream and combine that with your H.R. element and your communication plan, Strong communication plan. Yeah. 

Greg Alexander [00:12:11] That’s why I would suggest to members who might want to consider this idea, to pick up the phone and call Jonathan and consider having him be your facilitator here. And the reason for that is that, you know, sometimes you need a facilitator and just the presence of an independent third party who can facilitate these conversations makes it easier to do. And that’s why this unique blend of the CEO whisperer through the lens of M&A transactions would be really helpful. And Jonathan is adhering to his code of conduct. And thank you for that. It is. And why make this a sales pitch? But I want to put that out there on his behalf. That’s why somebody like him, you know, a consultant that specializes in M&A transactions, is particularly useful in the use case of a merger of equals. One more thing I want to discuss with you, and we’ll talk at much greater length on this when we have the Friday role model session and we have an hour as opposed to 15 minutes is is I have a situation with some members who want to sell. They go through diligence, which you just brought up, which made me think about this part of diligence as the management meetings and potential acquirer says, You’re a brilliant founder, but you have no depth beyond you. And it’s too risky because if I buy your firm and something happens to you, the firm goes poof overnight. So can a merger of equals solve that problem? That problem defined as founder risk? 

Jonathan Wilson [00:13:38] Well, that’s a good question because, you know, I hate to do it in the answer. 

Greg Alexander [00:13:43] But it does. 

Jonathan Wilson [00:13:45] But it really does. The idea is that sometimes things revolve around a founder, and it wasn’t in that way. Does it mean that there wasn’t open to other ways of working? It just became that that fair number two left at the wrong time or something else happened. So that doesn’t necessarily have to be a big game changer or showstopper, but you do have to make sure that founders open to other ways of thinking, because if if they’re not, then that’s going to be a hard case for managing others, in which case, you know, if you become a larger part of a larger organization, it’s going to be somebody rejecting his way of working. Right. 

Greg Alexander [00:14:26] Yeah, exactly. Exactly. And one of the items that would be discussed during the diligence phase of a merger of equals would be the chart. And you’d say, okay, here’s my org chart and here’s your org chart. We put these things on top of each other. Yes, there are redundancies and there’s also holes. So so for example, maybe, maybe I’ve got a great firm and what I’m really great at as my donor, my domain and I have outstanding client delivery, but I’m weak on sales. Well, then I would want to merge with with a firm who their strength is sales, because that’s what I’m getting in the transaction and maybe their weaknesses client delivery. So in that scenario, one plus one equals three because there’s complementary skills. So you’re looking for how you lay these two orchards together and the organization, the team gets strengthened as a result of that. Now that does two things for you. One, it makes you a lot more attractive to potential acquirer, which is what we’re talking about today. But number two, in the event that you can’t transact after the merger, things happen, economic cycles, etc., the firm’s going to be a lot better off because you’re going to have a stronger team and you might be able to scale to to new heights. So with that, we’re at our our time window here, but I want to point the audience in a couple of directions. So first, if you’re a member and you’re listening, please watch out for the invite that you’ll get from us to attend Jonathan’s role model session. That’s a private Q&A, and you’ll have an opportunity to double click on this idea. And most importantly, ask Jonathan direct questions about, you know, how you might consider this and your firm if you’re not a member and you might think you want to be to learn about things like this and others go to collective 54 Ecom can fill out a form and one of our reps will get in contact with you. And if you just want to further educate yourself on growing, scaling and exiting a firm which would include this topic, but others. I’m going to point you to two books. One’s called The Boutique How to Start Scale and Sell a Professional services Firm, and that’s for everybody, members and nonmembers. If you are a member, there’s a book that’s only available to you. It’s called The Founder Bottleneck How to Scale Yourself and a Merger of Equals is one way to do that. I would encourage you to dive back into that book and really devour its concepts and principles. But listen, the way this works is we’re a collective. The name was chosen for a reason, and that requires members like Jonathan to make deposits in the Knowledge bank, because if we all do that, we all get smarter and that is that knowledge base grows. You’re able to also make withdrawals of that knowledge. So, Jonathan, on behalf of the community, you’re a fantastic member. We’re so lucky to have you. And thanks for sharing your wisdom with us today. 

Jonathan Wilson [00:17:17] You Greg, It’s fantastic to be part of your organization, so I really appreciate you. 

Greg Alexander [00:17:22] Okay, Very good. All right. Well, with that, I wish everybody the best of luck as they try to grow, scale and exit their firms. And until next time, we’ll talk to you then and go get them. 

Jonathan Wilson [00:17:35] Thank you for having me.

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Episode 97 – How a Data Analytics Firm Developed the Courage to Charge More for Their Services – Member Case with Craig Dreiling

Innovation is a new idea. A new service. A new business model. Boutiques that innovate grow and scale rapidly. Continuous innovators become the market leaders. On this episode, Craig Dreiling, CEO at Solutions-101 LLC, shares how his firm was able to innovate and create a new product that commands a higher price. 

TRANSCRIPT

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 that are not familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and exit your professional services firm. My name is Greg Alexander. I’m the founder and I’ll be your host. And today we’re going to talk about a topic that’s not often discussed when we discuss process firms. And that’s the topic of innovation. And what I hope to accomplish today is to prove. That innovating a service can have just as much impact on the success of a processor firm as innovating a product can have on a product company. And we’re very fortunate today to have a role model with us. His name is Craig Dreilling, and he’s a member of Collective 54, and he’s going to be sharing part of his journey with us today. So welcome to the show, Craig. And would you mind giving a proper introduction of you and your firm? 

Craig Dreiling [00:01:25] Absolutely. Well, first of all, thanks for having me and appreciate the opportunity to work with you and Collective 54. But I started a firm back in 2014, 2015, and it was in the dental industry and we started looking at certain aspects of the business side of dentistry and kind of found out that there is a demand for something that was never being fulfilled. And when we figured that out, what happened was, is that there were pieces of it that were being talked about and examined and explored, but there was never a holistic approach to the entire process. So I went in from a different method. And, you know, you always talk about experiences and collective 54 and that’s kind of what we had to do. You know, you can go to a theme park or you can go to a theme park and you can ride rides or you can ride rides. And that’s kind of what we were looking at. There’s this this adventure, this ride going on in the industry, and no one was really kind of explaining it or going through that process. So we were able to kind of capitalize on that and look at that aspect and go from there. So what resulted from that? Long story short, is that we became a medical data analytics company out of it wasn’t what we were looking to do originally, but that’s where it really fell into place and everything started clicking. 

Greg Alexander [00:02:48] Why a medical data analytics company. One thing I love about Collective 54 is I run into all kinds of interesting businesses, and that is one that I’ve never heard of before. And the fact that it was born from the dental industry, which some might suggest is not the most exciting space in the world, is a really interesting use case. So let me set this up a little bit before I jump into the question. So what is innovation in terms of a professional services firm? What could be can be a new idea, as Craig to share with us. It could be a new service offer for the idea become the new service that generates revenue. Sometimes it’s even a new business model. Let me give you a couple of examples that have jumped out at me. So the great Bruce Henderson, who started Boston Consulting Group, which is one of the leading consulting firms in the world, I mean, way back in the day, he invented the experience curve, which we all now know that the first time you do something takes a long time and costs a lot. The hundredth time you do something, you do it a lot faster and a lot cheaper. That’s the experience curve. And he pioneered that and on the back of that Boston Consulting Group was born or let’s think about there was a time in the legal profession when the deposition wasn’t recorded. You could record the deposition that changed the law profession forever. There was a time in the accounting industry where there wasn’t a ledger. Could you imagine that? The ledger was an innovation. Or maybe today when we think about things like blockchain or the web design firm Wix, you know, web design used to be a process that was incredibly labor intensive. Therefore, it was expensive to update websites, come out with new websites, and these days it’s not through artificial intelligence. I mean, you can build a website in just a few, a few moments and it’s not very expensive. So these are all wonderful innovations that have happened in the process of space. The thing that’s often not talked about is the impact that can have on the financials of a company. So Craig, as I understand it, the team has told me that your firm is doing exceptionally well financially and we in comparison to other members through the process of benchmark data. It appears that you’re you’re doing exceptionally well in some key dimensions. For example, your sales cycle is about one third the average sales cycle of our members. Your average deal size, it looks like it’s gone up by a factor of five just in the last year. The amount of revenue generated from new clients is two X, the normal rate for most pro serve firms. So I want to make the leap that this is the result of your innovation. But before I make that leap, I want you to tell me, is that true or not? And what would you attribute all these fantastic results to? 

Craig Dreiling [00:05:36] Yeah, I can confirm that’s true. Those numbers are true and that experience is true, and you can contribute that to a lot of things. First and foremost is the education that I’ve received and starting a business. And when I say education, that’s hitting the ground running, not knowing what you’re doing and trying to figure it out along the way. And I always tell any of our employees or anyone that, you know, ask. There’s there’s two types of people that start a business. There’s that type of person who has to have their business plan completed 100% every crossed, every I dotted. And they won’t start until it’s done. And then there’s people like me who have a general skeleton or outline of that business plan. And we go. And by doing that, you know, post COVID has really changed a lot of things. And it was a good thing for my business because it gave me an opportunity to examine what we were doing. And then just by happenstance, I fell under Collective 54 and it really kind of shined a light on some things that I was doing wrong and not understanding how a person farm or a business, a service form firm really needed to be functioning. That education just came from hard work, trial and error and learning from our own mistakes. And so, yeah, with what we’ve been able to do and how we’ve changed that, you know, going from a month to month type contract into a project based firm has really been what’s expanded the company, those labor wise, employee wise, regional wise. We function in every state in the United States and income wise. 

Greg Alexander [00:07:27] So let’s discuss that a little bit. So the the switch from kind of a timing materials pay as you go month to month model. To a project based B and the impact that that’s had on the amount of revenue and margin that you make. Could you explain that a little bit more to our members that might be wondering what that means or maybe share an example or two? That would be a good illustration. 

Craig Dreiling [00:07:55] Yeah. So when you innovate something, anything, the first thing you’ve got to figure out is, you know, what’s it worth? What’s this widget worth? What’s this process worth? And I didn’t know. I didn’t know how to calculate that. I didn’t know how to even examine that number. But what I did know is our clients were making six digit, sometimes seven digit returns on the work we were doing. And I mean, when I say we were getting peanuts, we were barely getting 1% of that. And so when we finally figured that out and we looked at and we said, hang on for the amount of work that we’re doing, it’s not the same in every situation because every office, every client, every doctor is different. We need to look at this as we’re doing a project, and once that kind of came into focus, it allowed us to say, okay, the amount of effort we’re going to have in this project is X, and if the client’s making, you know, ten times, 15, 20 times what that is, should we feel guilty for charging $60,000 for a client that’s going to make $500,000 return on their investment the first year? And that was kind of what we had to really figure out was how do you calculate that? What your worth. But what’s funny is Greg, after I kind of started looking deeper into some of these concepts and some of these member cases and studies, it really was. What’s the team involvement in this? It’s not an arbitrary number. It is really based on who do you have working on these projects and where do you go from that the cheaper you charge someone. The cheaper the work becomes internally. And one of the things we did when we went from a month to month to a project based firm was we changed not only the caliber of our team, but the caliber of our clients. And that was a game changer. 

Greg Alexander [00:09:48] And you were able to change the caliber of your team and the caliber of your clients because you have an innovative products, product service being applied, medical data analytics in a very well-defined niche, and therefore the value that your client is receiving is exponential. So their willingness to pay, which is a a scientific term used in pricing, willingness to pay has gone up dramatically. So what that means for those that are listening is you switch from a pricing model that’s cost up. In other words, what is my manpower, my level of effort needed to pull off this project? What does that cost me internally? And then I throw a margin on top of that. That’s the incorrect way of pricing. The correct way is to start with what’s the value I’m generating for a client and what percentage of that value will the client share with me? And that determines the willingness to pay. And when you have. Fast revenue growth as Craig does and very profitable engagements that. You’re able to hire a different caliber of person and you’re able to go after a certain type of client because you have the funds and the capital to do so. That’s the byproduct of being innovative, and that’s what we all aspire to do. Craig Let me let me keep on this subject of innovation for a moment, because it’s one thing to innovate once and it’s another thing to have continuous innovation. Sometimes things can become commoditized over time. So how have you maintained this culture of innovation inside your firm? 

Craig Dreiling [00:11:30] So one of the things in any type of medical setting is that it’s a moving target. The companies we have to deal with. So the major insurance companies that we have to deal with in the data we’re pulling, they’re forever changing. They’re creating lease networks with Company A, they’re buying regional companies. They’re dissolving lease networks with Company B, that process never stops moving because that industry is so big. And one of the things I looked at when I started doing this was, is this viable? I literally Greg, I started this in the front seat of my car. I’m not kidding. My wife was working for Johnson and Johnson and her salary was funding this project, all of this data coming in. And so we had just had twins. Oh, my goodness. Yeah. And so I had to look her in the face and say, hey, I think I’m on to something. But in the back of my head, Greg, I had to say, is this viable long term? Well, thankfully. Not everyone, but almost everyone has teeth. It’s nothing that’s going to go away. And so in this field, there’s really not a lot of outside threats that can happen, which means in order for us to stay viable and to answer your question, yeah, we’re always innovating. And one of the things we do is that we don’t market or advertise. We’re actually completely organically grown that our our target audience, you know, we do a lot with CFP, with CPAs, with private equity firms. You know, you would be surprised how many of these national chains are owned by venture capitalists and private equity. That’s a huge sector, but they see what we do. So they utilize our services because they know there’s nothing else out there like it. So we’re always trying to innovate around what the industry is doing to change. You know, you look at, you know, apps and cell phones and those things are always changing. So that’s something that’s always going to be around. Well, medicine is always going to be around. So, yeah, we’re constantly trying to figure out new ways to record the data, to display the data, to get the data out to the clients, to use that data. And I know, Greg, you didn’t say it, but you repeated it one time and it stuck with me. In God, we trust everybody else. Bring data. And that is what we do every day. All day is we bring the data. 

Greg Alexander [00:14:00] Yeah. You know, it’s just a great example of the riches are in the niches and you know, medical data analytics in the delta industry, in the dental industry, excuse me is just, just a great example of that. I want to come back to something that you said, and maybe this is the last line of questioning. You talked about not feeling guilty about charging your clients a certain dollar amount. When I speak to members in our private one on one officer sessions, this topic of guilt comes up a lot and I explore it and it’s an emotional thing and it gets to our our perception of our own self-worth. Tell me a little bit about your own personal sense of guilt as it relates to what you charge clients and it ultimately, how did you overcome it and what advice would you give to those that are listening to this? 

Craig Dreiling [00:14:51] So one of the biggest things about our clients is that, you know, a lot of them who need us can’t afford us. They’re in a situation where they’re saying, hey, you got to call this company and you’ve got to utilize them. They’ve got to fix your books. We’ve got to figure out why your revenue stream is not happening. So that’s one thing I kind of didn’t explain when we work with these clients is because they need to increase their revenue. So the only way to do that is through this data. And knowing that, knowing that the money they’re paying us every month is almost painful for them, but they don’t have a choice. They don’t have another alternative because to my knowledge and to the industry, no one does what we do the way we do it. And so knowing that they’re in a financial hardship, but we can get them to the end of the tunnel is kind of where I had to deal with this. And I had an office and I’m not kidding. It was our first seven digit return for an office, but there is three doctors and one practice and their first year we recovered over $1.4 million for them. 

Greg Alexander [00:15:56] My gosh. 

Craig Dreiling [00:15:57] And our bill, it was when I first started, they paid us $36,000. That’s when the light went off. I was like, wait a minute, we can’t I can’t be doing those kind of relies and not having the caliber of people I need on my team to do that. And so when I struggled with that, it was because I knew they needed our help. But I also needed to be able to employ the best of the best. My Chief Data Officer is PhD. Yeah, the data that comes out of here. So I’ve never seen anything like it. And so I know that by charging our clients what we charge them, they’re getting the best out of us. By not charging that number, I’m getting them to the goal. It’s just probably a little bit more painful along the way. So that’s really where I struggled and coped and came to terms with it. 

Greg Alexander [00:16:51] Yeah. Well, what allowed you to do that and this is a topic for another day, is we have a very clear client around $1.4 million, the 36 grand. So for those that are listening to this, that’s what you’re striving for, is striving for not a squishy or soft cost justification, but a hard cost justification. And that often comes through innovation, you know, being able to do something that no one else can do and prove its worth. And if you’re able to do that, you can charge almost whatever you want. And the result of that is much faster revenue growth and much, much higher margins, which allow a lot of you to hire people like PhDs. Craig, I can talk to you about this forever, but you know, we try to keep these podcasts short to about 15 minutes. So we’re at our window here. But listen, on behalf of the membership, you know, the way that these collectives, ours and others work is, you know, we take from the knowledge bank, but we have to make deposits in the knowledge bank. You know, that’s how peers learn from peers. So you really provide a tremendous value for us today. On behalf of everybody, I want to make sure that I publicly acknowledge and thank you for your contribution to Collective 54. 

Craig Dreiling [00:18:03] Well, thank you. I appreciate your time and I appreciate the opportunity to meet with these members and ask these questions and really get that. It’s kind of like the CliffsNotes version of what to do when running a business, and it’s been instrumental in us growing. 

Greg Alexander [00:18:18] Fantastic. Okay, so for those that are in the professional services space, who want to belong to a community and learn from brilliant people like Craig, consider applying to Collective 54 and you can do that a Collective54.com. And if you would like to read more about this, in addition to listening to podcasts, you can pick up a copy of my book, The Boutique on a start scale and sell a professional services firm. You can find that on our website or you can buy it on Amazon. So thanks for listening. Thanks again, Craig, and we’ll talk to you on our next show. 

Craig Dreiling [00:18:50] Thank you Greg. I appreciate it.

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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.

TRANSCRIPT

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.

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Episode 87 – Why Hiring an Investment Banker is the Right Move for First-time Founders Trying to Exit – Member Case with Frank Williamson

The value of your firm is influenced by the comparables for recently sold firms like yours. On this episode, we invited Frank Williamson, Founder & CEO at Oaklyn Consulting, to share details about comps, valuation, and the benefits of an investment banker. 

TRANSCRIPT

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 that are not familiar with Collective 54, we’re the first mastermind community to help you grow, scale and exit your firm bigger and faster. Specifically for pro serve firms. My name is Greg Alexander and I’m the founder and I’ll be your host. And our topic today is comparables. Otherwise known as comps. And this is for firms that would like to sell themselves at some point. And it discusses how being in the right category or being compared correctly to others like you can have a big impact on the purchase price and the terms of the deal. And to help me with this conversation, we’ve got an exceptional role model this morning. His name is Frank Williamson, and Frank runs Oakland Consulting, which is somebody who helps clients with this particular item. Their services include acquisitions, transaction management, private equity, capital service and so on. And and he and his firm probably know more about this than any any of us ever will. So we’re really lucky to have him with us. So. So, Frank, it’s good to see you. And would you please properly introduce yourself to the audience? 

Frank Williamson [00:01:37] Oh, Greg, it’s great to be here, and I really appreciate what you’re doing for the audience and for the founders of professional services firms. So, yes, we do just what you described, which was well done. We are we’re an investment banking boutique. We work with small and mid-sized companies, nonprofits, professional services firms and others. When there’s a major transaction to navigate, maybe it’s an incoming offer or maybe it’s a very planful strategic sale. You know, maybe it’s the need to raise capital to grow. But we try to be good guides to people through that process. 

Greg Alexander [00:02:17] Okay, fantastic. So, Frank, many of our members are first time founders and entrepreneurs. They haven’t been through an exit before. They probably have listened to guys and gals like me and read all the books and tried to educate themselves. But when I have this conversation regarding comparables and positioning yourself in the proper category, sometimes it’s deer in the headlights. It’s for some reason it’s an abstract idea that’s tough to understand. So I’m wondering if you might offer the audience your perspective on this topic. Maybe share an example or two just to bring some greater clarity to it. 

Frank Williamson [00:02:55] Well, the chapter of your book on comps does the really nice analogy of a real estate broker, and I think a lot of us have more opportunities in life to think about, well, how do I cut the cost per square foot of something? Then how do I comp the whole business? And and we might even wonder why that comping things idea make sense since businesses are so different from one another. But you know, you brought up the in the chapter, I thought, you know, some really good ways to look at it. One of them amounts to saying, well, who are you relative to other similar firms that someone you’re talking to might seem. And and I think importantly. Who are you relative to the kind of firm that in the bigger acquisitive. Company might buy you. Are you like them or unlike them? And I think that having a beat on that really gives people a chance to start talking with their exit. Or it’s a succession partner about how do we fit and what could we do together. And it you know, it’s easy for all of us to go into those kinds of conversations with some kind of analogy. Yeah. And that’s what I think comps are most useful, as is the analogy that gets the conversation going. 

Greg Alexander [00:04:24] Yeah. So for, for listeners that haven’t had a chance to read the book, let’s just stay on the real estate example because it’s easy. You know, let’s say you want to list your house and you hire real estate agents to represent you and you say, well, what’s the house worth? Well, they consider your neighborhood, your street homes that like yours, that have sold. And they boil it down to a metric sometimes, like in Texas where I live, it’s it’s cost per square foot. Then there’s other metrics that we use. Well, in the business world is very similar. If you have a firm that you want to sell, you would hire somebody like Frank’s company to help you do that, and you’d say, What’s it worth? And they would go out and and do some homework and come back with some comps and say, you know, this is this is a range of what your firm might be worth. And here’s what it will trade on. Sometimes it’s a multiple of revenue, sometimes it’s a multiple of immediate. There’s a bunch of different ways that you can value a firm, and getting that incorrect can cost you a lot of money. And I share my story in the book where at one point when I sold my firm, people thought we were a sales training firm and that carried a much lower comp. And we weren’t. We were a management consulting firm which carried a higher comp. And just moving into that category and being able to prove that that’s a category we belonged in, you know, got me a higher price in better terms. And that’s what’s so important. Now, Frank, it’s hard for founders to identify who their comps are, and that’s probably why they hire your firm and partners to figure that out. So how do you how do you find this difficult to locate information? Because these transactions are private companies. The data is not readily available. How do you learn what the going rate is, so to speak? 

Frank Williamson [00:05:56] Yeah, well, there are two parts that good question. One is who to be comped against. Yeah. And then the second one is we’ll get given that I did that, then what’s the going rate. If you don’t mind I’ll just do the, the first 1/1 because I think it’s a little bit easier. Bite of the apple, too, you know, to get in your mouth and you go in and we see many people who haven’t just figured out who are who is comparable to me, who are other people like me. And that I think people can do often on their own by just sort of scanning the business landscape. Who do I compete with? Who else is sold? Who I compete for staff with? You know who who is like me? And who do I want to be like? Like in the case of your story, do I want to be like a management consulting firm? I want to be like a sales training firm. And how will I prove that? Then comes the hard part, which is how do I get to a real number that makes any sense. And and as many people know, you know, price is. At least half the equation. Terms of the rest. You know, if I went out and heard a friend of mine. Tell me he sold his business for 20 times last year’s epitaph. But upon further. Probing with him or with the buyer. You know, I realized that it was eight times at closing and a big profit share that came along. And it was equally 12 times after that. And in any event, the buyer thought they were going to make twice as much off the business as the seller did. And so really the prior year’s earnings weren’t the right number two for the multiple against anyway. It wasn’t how the deal came together, but it makes a great headline. I sold my business for 20 times while going and using that 20 as the basis for account isn’t really going to. Help anyone beyond a great story over dinner about what a great negotiator you are. So it really is hard to get an honest bead on. What are firms like mine selling for in reality? And, you know, our experience is there are few good sources of data around the marketplace, number one. Number two, people who are active in the market have an anecdotal sense that add something important to the data. And number three. Even with that, there’s a big element of small operating companies trading in a market that just, you know, is a you don’t know until you ask kind of market. And finding the way to ask the right questions. It is a lot is a lot of what we do on behalf of clients is a lot of what people get out of investment bankers is can you find a way to ask what the terms really were such that you feel like you’ve got an honest answer? Yeah. 

Greg Alexander [00:09:22] You know, a little bit more about my story and how I stumbled into this because I was a first time father myself and this was a foreign world to me. So as we were gaining some some traction, one of the big consulting firms approached us and said, Hey, we would like to buy you or consider by you. Your firm is worth 1.25 trailing 12 month revenue. I didn’t know any better and I said, okay, well, that’s really not that interesting because we’re growing at 30% a year. So I just hold on to it and then we bid on a company. So we were on the other side of the desk and we participate in an auction run by an investment banker. And we lost. And I was surprised we lost. And when the banker called me and told me we lost and he said we were one third the price we offered, like I think it was like $20 million. And he sold for like 60 and I couldn’t believe the number. And I said to the banker, I said, My goodness, if you could get that for that business, what could you get for mine? And the banker did a great job and they said, Well, they’re adjacent to you. Not exactly like you, but you know, if you probably can get a little bit more because you’re bigger than them, but the only way to really find out is give it a try. So we hired them because they were the experts and they went out. And as luck would have it, thank goodness they got a number that I never thought possible. But what I learned from that experience is. Your business is worth what someone’s willing to pay for it. Right. 

Frank Williamson [00:10:47] And I think that’s such an important lesson and one that one that is hard to have come across when any business owner does probably their first encounter with getting their business valued, which is for some wealth planning purpose or tax planning purpose. They don’t get a valuation report and that uses a wide or very broad set of comps and describes a theoretical transaction to the satisfaction of the paperwork that the IRS needs. That’s you know, that’s a whole different way of thinking about it than what’s the actual transaction, the actual buyer, and what does that actual person need. What really jumped out to me about your story was that you went to develop a bid as a buyer. I assume you did it at what you thought would be a fair price. It would make sense after the deal and you came back with feedback that when you weren’t off by 20%, but it was X to three X. Yeah. In that range. And I think that so perfectly illustrates the question of, well, there was somebody in the market who really wanted that company that you were looking at to the tune of three times more than you wanted it. Yeah. And getting in the zone of what do people really want? What would they pay for is such an important part of really having good dialog. 

Greg Alexander [00:12:18] Yeah. You know, you talked earlier about terms and this is something also I think is underappreciated by our membership. You know, when they think about selling the firm, obviously the first question is, what’s it worth? Excuse me. But they they they don’t put enough emphasis on terms, in my opinion. The example that you gave earlier, you know, when you peel the when someone said, I sold over 20 times last year’s profit, but then you peel the onion back and not really. And I think comps also inform what the terms are. And there was an old phrase, I forget who said it, but you name the price, I’ll name the terms, something along those lines. Great. 

Frank Williamson [00:12:54] Great, great, great. 

Greg Alexander [00:12:55] Yeah. What what does comps and running a process with someone like yourself reveal about terms that typically surprise first time founders? 

Frank Williamson [00:13:09] I would say. I would say that people get surprised by two things. One is because we all talk about multiples and comps as if it were a clean price. Yeah, that’s one. One surprising thing is that buyers and for that matter, sellers don’t make the decision about the price on the basis of last year’s earnings. People are getting together to make a decision based on what’s going to happen after the deal. And it’s a convenient way to express it to say, well, it was some multiple of last year’s earnings that wasn’t really anybody’s decision. So that, I think comes as a surprise to people is, oh, the multiple. Wasn’t the reason that the multiple appear. The other related part that I think is surprising to people is, is for all you know, all of us do sales in the normal part of building our firms. Selling your business. In the end, it’s sales, you know, and it’s it’s it’s best done in my experience as a consultative selling process. When you’re sitting down with someone else, the topic is, What can I do that’s going to impact your business? And then how can we share the results of that? Yeah, and that conversation, in my experience, does as much influence terms as it does to influence price. Interesting cause that’s the point at which you accommodate. Well, was the day after the sale all about the buying company taking over operations and letting the founder leave? Or was it all about providing a new platform for the selling company’s founder so that. She could go run three times as fast as she was able to do alone. Hmm. It’s that kind of business plan that really drives terms and and it may also drive price but a little bit jokingly it can those things can get conflated right in my mind story which by the way, is a true one about the you know, about a client who sold for a price that he they in this case could honestly go say to their friends was 20 times and the buyer could honestly go say to their board, it was seven times because their respective views of what was going to happen afterwards were just different. Hmm. 

Greg Alexander [00:15:49] That is a great story. Well, listen, we’re at our time window here, but Frank, on behalf of the membership, this is an area that our members lack. Experience with so happy because their first time fathers, they haven’t been through a transaction before for the most part. So having an expert like yourself in the community is really helpful in the way the collective works is we all make deposits to the collective body of knowledge and we all learn from it. So on behalf of the members, thank you for doing that today. 

Frank Williamson [00:16:18] Well, thank you so much for having me. I’ve really valued being part of collective group. 

Greg Alexander [00:16:23] And if anybody is thinking about selling their business, I tell you, I say it in the book, I say it on the podcast, don’t go it alone. Hire somebody like Frank to represent you. It’s a mistake when you’re doing this to try to do it on your on your own. And usually a representation like Frank will make your life a lot easier and make you some more money, get you better terms, and just hold your hand through the process. So if you want to get a hold him, do so through the member portal. Okay. So for those that are interested in this topic and others like it, if you haven’t read the book yet, the boutique artist art scale and seller professional services firm, I’ll direct you to that. And then for those that are listening that are not members but would enjoy being part of a community of peers and meet exceptional people like Frank, consider joining our mastermind community. You can find it at collective54.com. Thanks again, Frank. Have a good rest of your day. 

Frank Williamson [00:17:19] Thank you, Greg. Goodbye.

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Episode 85 – Why Waiting Too Long to Sell Your Firm Could Be Very Costly – Member Case with Craig Dickens

The ability to sell your firm will be impacted by the environment. There is a good time to sell and a not so good time to sell. On this episode, Craig Dickens, CEO at JD Merit & Co., will shed light on the financial market trends and how it influences your exit strategy. 

TRANSCRIPT

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 that aren’t familiar with us, Collective 54 is the first mastermind community to help you grow, scale and exit your firm bigger and faster. My name’s Greg Alexander. I’m the founder, and I’ll be your host today. And today we’re going to have a conversation around some financial market trends. And the reason why we’re talking about this is because there’s a good time to sell your firm and there’s a bad time to sell your firm. Sometimes the sun is shining and sometimes it’s a little cloudy. It’s always good to know kind of what the trends are. And the best way to do that is to speak to people that are actively in the market managing these types of things. And we’ve got a great role model example today. His name is Craig Dickens. Craig is with JD American Company, which is a boutique investment bank. And he probably has his pulse or have the pulse of the market and his finger on the market better than most. So we’ve invited Craig to come speak to us today and share with us kind of what’s going on. So with that, Craig, if you wouldn’t mind, please introduce yourself to the group. 

Craig Dickens [00:01:35] Yeah, terrific. Craig Dickens, I’m the CEO of JD Merritt. We’re a middle market investment bank. We focus on four areas, predominantly technology, consumer products as well as infrastructure and the built environment, as we call it. And obviously, pro serve is a market that we’re involved in as well. 

Greg Alexander [00:01:57] Okay, great. So we’re talking in May of 2022 and let’s start at 30,000 feet. So it seems like if you pay attention to the public markets anyways, it’s a different world we’re in right now. So what’s your perspective on things? 

Craig Dickens [00:02:15] Yeah, I guess I got to put a little bit of a backdrop on that because we came off of a record 2021, a lot of transact transactions. M&A activity was unprecedented, capital gains taxes were looming. So I’m still reflecting back to that wonderful time. And then we have, you know, a Ukraine war situation, inflation that’s somewhat out of control and stock market getting pummeled pretty hard. So I guess the keyword here right now is uncertainty. Yeah. And, you know, markets never react favorably to uncertainty. And I think we around here called quarter one the big horns. Yeah. Everybody was waiting to see how the dust settled a little bit. So really an interesting time in the market. Yeah. 

Greg Alexander [00:03:04] You know, for whatever reason, I don’t know how this happened to me, but the times of the greatest prosperity for me were times like this. So I’m old enough to remember the meltdown of the dot com. And I was in the tech industry at the time that I started my boutique just before the financial crisis of 0809, and then I launched Collective 54 and three months later covered it. So my timing hasn’t always been great, but what I found during those time periods is it’s a great shakeout, if you will. Firms that maybe aren’t for real kind of go away. So if you can build a great firm in those conditions, supply and demand actually goes to your favor because there’s far fewer firms, quality firms anyways available for purchase and you can really stand out. And Craig, one thing that I like about you is that you advise your clients to focus on what you can control and to prepare for this. And you talk about reverse engineering your exit, which is just such a catchy way of describing this. So could you expand upon that a little bit? 

Craig Dickens [00:04:14] Yeah, I think, you know, each one of us that’s running a business in these times, right. You know, we need to focus on the things we can control because we can get overwhelmed by what’s going on around us in the process. So again, just to maybe bucket the good news, right, especially thinking about boutique owners, we’ve got rapid rise in digitization. We’ve got a distributed workforce that needs training, I.T. consulting, etc.. And then ultimately the consumer or the customer has been trained to engage our services without us necessarily being in the room. Yeah. And then you have the great resignation, right? So in many ways it’s so hard to hire talent that you have to rent it so pro serve. You know, there’s to your point among the disruption, among the uncertainty, there’s plenty of opportunities and plenty of good news, if you will. But then we’re hit with some of the bad news that we tend to. Right. Interest rates, inflation, I mentioned a few of them. And the inverse of of the great resignation is that many of us are having trouble scaling because we can’t hire the execution and delivery teams that we need to. So, you know, I can only focus on those things that that I can control. And in this case and in this environment, we really have to go back to the best offense is a good defense. We need to prepare ourselves for good times or bad times. And to your point earlier, Gregg, be that standout, right? Be that leader or not that neutral or that laggard to whatever industry or vertical we’re serving so that they see us as head and shoulders above. And again, not to overused the sports analogies, but, you know, we’ve got to be prepared. Those folks that prepare are going to win and those folks that prepare are actually going to get a deal done. Those accidental tourists that have an ally show up on their desk and say, you know, you know, fortune, whatever is going to buy me, you know, that is the rare the rare situation. It’s truly that prepared that that get to a deal. 

Greg Alexander [00:06:27] You know I’ve heard you say on our member calls this term post-transaction economics and for those that might be hearing that term for the first time to find that term force or terms, I should say yes. 

Craig Dickens [00:06:42] So most of us have spent a career operating in our giftedness, in our in our in our specialty. Then we learn as we go how to grow companies. And, you know, exiting a company is a very different exercise and requires some different skills. And we always think about us, right? The marketplace is going to want us. Microsoft is going to buy us. Right. It’s it’s very me centric. But really, I think the most effective and the highest priced deals are where the team gets together and says, okay, what is different about our company? What is the leverage of Bill about our company? And most importantly, who will buy us? And that’s a deep exercise. Right. And you almost want to really strategically analyze those people in what we call the buyer universe, because, of course, everyone wants to sell to Microsoft or Accenture or whomever is their, you know, their ideal, but reverse engineering that and really analyzing the value and showing your buyer the inherent value of when they buy you and they pour water on you, how you will grow in their ecosystem, then you become much more valuable in their eyes. And if we can do that with ten or 12 different acquirers, now we have a rodeo, and that’s where the true outlier multiples come from. 

Greg Alexander [00:08:04] Yeah, it’s a great example. It’s it’s value based selling in many ways. I mean, when you own me, Mr. Acquirer, you know, you can triple me or quadruple me, whatever. And then what’s that worth today? That’s an interesting thing to think about. 

Craig Dickens [00:08:18] What I would add to that Greg, just real quick, I would almost on that omni account based selling side of it, almost treat your acquirer as if you’re analyzing like you’re going to sell them something and then plug you in as the product. Right. And so then you’re highly focused on what you can do under their umbrella with their sales team, with their capital resources, with their technology. And even though you might be a puzzle piece, you know, I’ll give you an example. We we sold a company. It was a small $8 million company, but they had a puzzle piece to an email distribution issue that a big player needed to compete with Brand X. And that puzzle piece became so valuable that, you know, they went up into the double digit multiples to buy that company. So that’s the kind of reverse engineering, if you can get into their kitchen, so to speak, and find out their pain points or the aspirin that they need, that’s that’s huge to value. 

Greg Alexander [00:09:13] So when I speak to members during office hours, which is an opportunity for members to speak to me, those that want to anyways on a 1 to 1 basis. And we’re having the conversation regarding exit. There’s three questions that come up every time. So first is what’s my firm worth? Second is who’s going to buy it? And the third one is, when should I sell it? And I want to spend a moment on that because there’s usually some type of life event that get somebody to think about selling their firm. The most common one is age. They get up, you know, in the 50, 6070s, they want to retire. Most of their net worth is wrapped up in their firm and they need to sell that, generate the capital to retire. And unfortunately, sometimes they don’t think about it until it’s too late and they say, okay, I want to sell my firm in a year. Meanwhile, it’s a non sellable asset because there really isn’t a firm. There’s a brilliant founder with a bunch of helpers and there’s nothing there for. Somebody to buy. So you mentioned that sometimes our timing can be off. So there’s this issue about trying to time a sell around. Retirement is a is a puzzle to me. What advice would you give our listeners around retirement and exiting and and trying to thread that very difficult needle? 

Craig Dickens [00:10:38] Yeah, I think, you know, there’s some fundamental ideas and concepts that people should, should think about as they look at the age question. You know, the facts would tell you and I’ll give credit where credit is due. John Warrillow, who wrote the book Built to Sell, did a survey, and 75% of entrepreneurs equate the sale of their business with retirement. Hmm. So and then they have a number, right? 65 or whatever their retirement number. But what if the market’s not going to favor you at that point? You know, the advice we give entrepreneurs and entrepreneurs by nature, you know, we wouldn’t be doing the things we do and running process of companies and building and growing and scaling companies if we weren’t optimists. But I think many times entrepreneurs wait too long, wait too long to sell and wait too long to adjust their business in a downturn or a slowing growth environment. And that’s really while it’s it’s pretty boring, right. But, you know, 3 to 5 years out from your desired event, you should be getting some advice, some counseling to say, okay, you know, when’s the right time? And just like, you know, I’ve got some friends who bought Apple stock and sold it at at a decent number and then it went up another $100 and they were all upset. You kind of need to leave a little juice in the orange, so to speak, when you’re selling your company. So waiting too long really spells a discounted value. But selling early, as long as you know your number, for what it’s worth, and who the buyers might be. And you run a good process, you know, ultimately, I think you’ll be happy with that outcome even if you have to retire a couple of years early. 

Greg Alexander [00:12:16] Yeah. You know, I was on John Morello’s show and I’ve read his books and I think he’s great and he contributes so much to all of us. One thing that he says often is what what the business is worth to you and what the business is worth are two different things. And if you know what the business is worth to you, you have a number, as you just mentioned, and somebody comes along and they’re willing to offer you more than that. Then you sell it. If the business if you know what the business is worth to you and the offers are below that, then you don’t sell it or you adjust your expectations. So this idea of knowing what your number is, it’s a hard thing there to really calculate. And at least and I think I’m similar to many of our members and that I’m an eternal optimist and an entrepreneur in my blood as well. My number keeps moving all the time. So how do you how do you get a first time founder going through an exit for the first time to get to a number that they’d be willing to accept? 

Craig Dickens [00:13:23] Yeah, that’s the great you know, the number one deal killer is seller expectations. Right. And we see it all the time. You know, we have people put it on a piece of paper, the old envelope test write, you know, my number is 30 million. And when we’re haggling, when we’re up around 60 million, and it’s still tough to make that decision. Right? Well, wait a minute. You said 30. Yeah. You know, so it’s tough and it’s an emotional decision. And I would say that I guess if I go back to the fundamental playbook, right. You got to get a valuation. If you’re serious about knowing what you’re worth, you have to get a valuation and bake that into your budget. And really, that will also give you not only the fundamental value, but it’ll give you those market indices. And if you do it for three or four years, right, you can you can begin to see how the market is is valuing your type of company or your sector or, you know, the various anomalies in the market over time. So that’s that’s number one. Got to do it. Number two, having a conversation with your investment banker and then in particular your CPA and saying, okay, I’ve got the tax man, right. He’s always in every transaction. So knowing your net after tax proceeds is huge. Everybody says, oh, the top line number is 60 million. We’ll have half that as an earn out and all sorts of structure. Right. It’s a very different equation. And if Uncle Sam is going to take, you know, up to half of it, you need to know the net number. And then really the third piece that we have, everybody go through is you have to sit down with your wealth manager. They’re going to run something called a monte Carlo, which is going to tell you under certain conditions in the market, if we plan on taking that wealth and you plan on living to 87.3 years old. Right. Here’s what you’ll have to live on. Yeah. Those fundamental decisions and those kind of things that owners need to do. You’d be surprised how many? Don’t really do that. Yeah. They get into a transaction and then they become confused as to what to do when really these are things that you don’t even need an ally. You don’t even need to be in process. You just need to go out and know your worth, know how much you’ll need, and then how much on an after tax basis you’ll need. Then you can start to deal with the emotional issues of, you know, yeah, I might be a little married to my team, I might be doing too much. I don’t have a strong management team, right, to really start to engineer your exit and think like an investor. Yeah. Versus just a lifestyle. Yeah. 

Greg Alexander [00:15:55] Well, listen, I could talk to you about this forever, but and I look forward to our member Q&A coming up. But we’re out of time. So, listen, your commentary on market trends. You know, I think you said the key word here is uncertainty. And that’s the market that we’re in. However, you know, if you adhere to Craig’s advice and I’d advise all of you to do that, it’s a 3 to 5 year look. And in three or five years, things will be very, very different. So taking some of these best practices and implementing some of them now makes a lot of sense. So so Craig, on behalf of the membership, appreciate you contributing today. 

Craig Dickens [00:16:31] Thanks so much, Greg. Enjoyed it. 

Greg Alexander [00:16:33] Okay. All right. And for those that are interested in this topic and others like it, pick up a copy of the book, The Boutique, How to Start Scaling, sell a professional services firm and for those that might see value and meeting people like Craig and being part of a community of preserve, boutique founders and leaders consider joining our mastermind community and you can find it at collective54.com. Thanks again. Take care. 

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Episode 79 – How to Attract an Unconventional Buyer for a Tough-to-Sell Small Consulting Firm 

Member Case with Marc Weiss

A strong market position can indicate excellent competitive positioning. On this episode, Marc Weiss, CEO of Management One, shares how he positioned his small consulting firm for a successful exit with an unconventional buyer.

TRANSCRIPT

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 that are not familiar with us, Collective 54 is the first mastermind community to help you grow, scale and exit your firm bigger and faster. My name is Greg Alexander and I’m the founder and I’ll be your host today. And on this episode, we’re going to discuss market position. What I mean by market position?

 Well, some boutique founders want to sell their firm someday and positioning their firm in such a way that makes it attractive to a potential acquirer requires some thought. And there’s lots of ways to do this. And some are traditional and some are unconventional. And there’s a particular set of best practices, if you will, to – to leverage when you’re a smaller firm and you have a unique set of possible acquirers. And today we’ve got a guest who – who did exactly this and successfully exited recently. And we’re very fortunate to have him with us today and hear about his story. His name is Marc Weiss. And Marc, would you – first, welcome – and would you properly introduce yourself to the audience? 

Marc Weiss [00:01:33] Hi, everyone. Greg, thanks for having me on today. Appreciate it. Marc Weiss, the CEO of Management One and founder. In the process of selling, we’re almost ready to close, so there’s no flag. So I feel pretty comfortable about it. So we’re good to go. Glad to share my experience. Thank you. 

Management One

Greg Alexander [00:01:54] So, Marc, just for  context, would you explain what Management One does? 

Marc Weiss [00:01:59] Management One provides inventory planning for independent specialty retailers. So we typically service the mom-and-pop marketplace and we forecast their sales and their inventory. And therefore, we’ve created one of the most sophisticated cash flow tools ever used in – in retail. So a retailer knows, you know, how much business they’re going to do. We do a break-even analysis to know what their financials look like and they spend more money on inventory than anything else. So we can manage the proper flow and investment in their inventory. They can have a very positive outcome on their cash flow. 

Greg Alexander [00:02:35] And Marc, you founded this firm when?

Marc Weiss [00:02:36] 35 years ago.

Greg Alexander [00:02:41] Yeah. So it’s obviously a great success story to stay in the business for 35 years. And the retail sector is is really saying something. 

Marc Weiss [00:02:50] Andwith one product!

Greg Alexander [00:02:51] Yeah, really. I mean, that’s really it’s amazing in retail, let’s just say, has gone through quite a transformation over time, probably more so than any other industry, right? 

Marc Weiss [00:03:01] Yeah. The last five years have been remarkable. COVID accelerated everything like it did many industries. But, you know, a lot of things are bouncing back to the way they were a little bit. But it’s all about adaptability. And one of the things that we really work hard to do is adapt and change. And actually we didn’t have to change for almost 30 years. Know what we did really worked – was just a matter of upgrading our technology. But fortunately, right before COVID hit, we decided to change our platform and and did, you know, created, you know, really created a lot of disruption in our own company, but put us in a position to be where we are today and actually put us in a better position. So… 

Deciding to sell 

Greg Alexander [00:03:44] Yeah. So first question for you is. You’ve been doing this for a long time. Obviously love doing it. Why did you decide to sell? 

Marc Weiss [00:03:55] A couple of reasons. One is we’d gone to Cuba right before COVID, and I got Legionnaires disease from one of the hotels. I was really sick, and I was about 12 hours away from being put on a ventilator. So I remember making a promise to myself that if I was given another chapter in my life, I wanted to do something with it. So, you know, I hit I’ll hit 70 this year. And I also felt like some of the passion was starting to go away. 

And I asked my cousin, who’s a successful doctor, I said, why are you – He retired at 65 – As to why did you retire? He said, I didn’t, you know, I stopped reading the journals and I felt like I couldn’t be the best doctor for my patients. And I knew it was time to quit. And I feel like I kind of hit the same stole things. He has to go back to business. But what we do fundamentally I’ve been doing for over 35 years and the people we’ve hired actually are doing a better job at it than I am, and I feel good about turning it over to them and I feel like I would be in their way and I’ve contributed to the level I want to. I want to do something else now. 

Individual buyers

Greg Alexander [00:05:03] Great. Okay. Next question is sometimes boutiques the typical exit path, which you didn’t take and why I find your story so interesting as either sell it to a private equity firm, they sell it to a large strategic, they sell to their employees. Those are those are the three most common ways. Right. You sold it to an individual. Which is really brilliant. So tell everybody a little bit about this individual, how you met him, how this whole thing unfolded. 

Marc Weiss [00:05:35] Yeah, it’s, you know, just the serendipitous story I, I had gotten. We get we get offers. We have three or four offers a week. We might turn them all over to our president. He looks at them, examine them. And, you know, he said, Marc, when you’re ready to sell, let me know and I’ll start pulling the trigger.

 But there was one in particular that came through for some reason. The email struck me in a way that it was written that I actually responded, which I never do. And we kind of got into a conversation. This was about 21 months ago, and we just kind of hit it off. And I said, Well, what brought you to us? Why are you – why do you want to buy my business? And he said, Well, one of my good friends was an MBA, owns a retail business in Seattle and, you know, COVIDhad hit. And we were I think it was like maybe June or July of 2020. And she said, oh, she said, “I work with a I know you want to buy. I know you’re looking to buy a business. I work with a business that maybe they’re interested in selling”. And he said, “Well, what what’s good about – why do you believe in this business?” And she said, “They’d bethe last people I’ve fired before I had to turn off the lights”, I’d be the last person. And he said, nobody ever talks about their vendor that way. So he said, “I was blown away. I respect her a lot. She’s a bright person. She uses data effectively. So I decided to reach out to you.” And so from that conversation, our relationship grew. 

I wasn’t ready to sell then it was COVID, I knew I had to lead the company out of it because we’re in retail. We were we were hit hard, you know, in the early days we were, but we had rebounded by December. We had all our business back, but we stayed in touch. 

And then an interesting thing happened. And so I we use EOS and in December of this year, my my son who runs our planning department now he’s in charge of product development. We are actually developing new products. He called me and he said, Dad, who do I report to? And I said, We report to Mike,, Who’s also a member of the 54 He’s on the the scale side. 

And he said I dont know who to report to. And I said, well you report to Mike. He said, Well, you’re interfering too much. So that night I went to bed and recognized that I really am not the kind of CEO I hoped to be. I really can’t stay, keep my hands out of the cookie jar. And I woke up the next morning, called this individual and said are you still interested in buying the business. And he said, yes. And I said, here’s my number. And he said, I can make that work. And there we are. 

Greg Alexander [00:08:18] Wow. It’s really amazing. I mean, what I love about that story is this started by a happy customer. 

Marc Weiss [00:08:26] Yeah. Started by a happy customer. Yeah. 

Greg Alexander [00:08:28] I mean, that phrase “that they’re the last vendor I turn off before I turn off the lights.” I mean, that’s quite a phrase. So I mean, we’re talking a lot. 

Marc Weiss [00:08:36] We’re very fortunate. We have a lot of raving fans. A lot of our business comes from independent retailers who are in market or carrying our our budgets around with them. And other people ask questions and we get a lot of business just by the referral system within our clients. Our clients have been very loyal and very I’ve told our clients that I saw when I started the business 35 years ago, who’vegone through their own sales. 

Qualifying individual buyers 

Greg Alexander [00:09:01] Yeah. So also we’re talking to Marc Weiss right now about how to position your company for an exit, how to make your company attractive to a potential acquire by having a great market position. And we’re reminded of the obvious, which is build a great company first, have – have fans instead of clients. And it makes it a lot easier to sell your firm when you’re ready to sell your firm ass Marc is his healthcare and his willingness, their desire to retire. 

Okay, so let’s come back to this individual sometimes. Like, for example, if I got approached by an individual, I would be skeptical because the number I would have in my head is typically would exceed what an individual can afford. So how did you qualify the individual that they had the funding to pull the deal off? 

Marc Weiss [00:09:50] Yeah, that’s a great question. It because it’s – it’s a, I guess the word genre, but it’s a whole niche that I never knew existed. It’s called self funding. And this individual’s got a group of people who invest with him and literally pay his salary to help find a business in all his expenses for two -. they give him a two year window to do it, and he was very close to buying another business. But the seller jumped the price at the end of the deal by 30%, and he said,” No, we’re not going to do that.”

 That was after they invested a lot of money in due diligence. So there is he’s self-funded and there’s a lot of them out there. I just happened to follow in No. One. I was kind of curious about it, and I was I did some research about it and that’s it’s – t’s a more robust industry than I knew about. And I talked to one of the person buying the business. I talked to one of his key investors. And I said, because it was hard for me, Greg, even today, I mean, I’ve gotten to know this person over the last two and a half years. Well, I’ll just get his name’s Nate, so it’s called by his name. I’ve known Nate for two for over 20 months, and it has really been a great journey. 

So, you know, I felt like there’s good chemistry. He really got to understand who we are. And it wasn’t just a transaction for me. It was also needed to be a – it needed to be the culture needed to be sustained. I mean, he’s for 35 years in a company, you feel like you’ve built a great culture. We don’t have a problem attracting people. There’s a lot of good we’re a virtual company, so a lot of good things about the company that I wanted to stay in place. And I was afraid if I sold it to a private equity firm, you know, it wouldn’t be there. You know, you and I had talked about an Aesop or something like that, but I wasn’t going to get the kind of money out of it that I wanted. 

So these self-funded opportunities are there and they’re real. And when I talked to one of his investors, I found out that they’ve been in this for 20 years and they’ve done 52 of these transactions on these businesses with capital. So that was important to me, that they’ve kept all the businesses, they help them. They haven’t gone in to change them. They look for businesses that help other businesses succeed and other people succeed. And they they seem to, at least on the surface, share our core values. 

Greg Alexander [00:12:15] Yeah. And what did they find attractive about your firm? 

Marc Weiss [00:12:21] What they found attractive? It was the opportunity of what we were doing. We didn’t have a lot of you know, the competition in our space is really people who use Excel spreadsheets. And we’re much more sophisticated. We have much more sophisticated information. You know, we’ve got they call it greenfields. We’ve got 860 clients. We’ll hit 1000 this year because we’re at a growth rate of about 35%, 33% last year, 35% this year. 

So I think they saw the real opportunity and that we are in a market that’s underserved. I mean, there are literally hundreds you know, there’s I think close to 100,000 businesses that fit into our model. And we’re also in multiple verticals. So, you know, we do everything from college bookstores to a mom-and-pop dress shop or men’s store on the street. 

So we’re we’re – we’ve got – we’re in over 22 verticals. So we’re, we’re pretty diverse, which allows us to sustain ourselves in, in, in any almost any economic area. And, you know, I was reading Chapter 29 and one of our our best year retention was actually in 2008, you know, when people would, you know, when economic – when there’s economic turbulence or recessions, they’re a friend to us. So I think the other part of it is we’re pretty much a recession proof business. 

Greg Alexander [00:13:42] Interesting. And without violating any confidentiality agreements, I’m sure you’re governed by… in terms of the structure of the deal. Were you able to get enough cash at closing that made you happy? Was there an earn out? Like what were some of the terms? 

Marc Weiss [00:14:04] So yeah, it was kind of an odd thing. I have to be careful what I talk about, but I had a happy number that I had to walk away with – the net number. And so we’re, we’re, you know, so I got the net number – and I also I also got a I have also an equity, you know, business on top of it. Okay. So I own about 7% of the business after the deal’s closed. So I get another bite of the apple. 

Self-funding groups

Greg Alexander [00:14:27] So these self-funding groups, which this is a breakthrough for many of our listeners because they have firms similar size to yours and they might be, in some cases, too small to attract the right type of investor that they may want to sell to. Because for them, like you, it’s more than just a transaction. So these self-funding groups are funded well enough to get to your happy number? 

Marc Weiss [00:14:52] Yes, they’re well-funded. Nate’s going to have, I think, seven investors and he’ll be the majority shareholder. But and, you know, I been one of his key investors that I talked to said he’dwrite a check tomorrow for the whole business. But so they like the business. They like the model. 

We also have a great management team. They want to buy businesses where they don’t have to do anything except invest in the resources that’ll help the business grow. You know when you’re a small business, everybody works a lot of hours and you’re overworked. And that’s true in our business. So my team does an amazing job and we just launched a new platform which really stretched our resources. 

So I think that they’ll be able to bring resources to bear that’ll help the whole company. So I think they work for businesses where there’s an opportunity to add resources in the right place. There’ll be a board of directors. So I think that, you know, we fit that kind of – we fit that that model. Part of what they like about us is that Nate can come in and replace me as the CEO. Mm hmm. He’s already bought into our ten year plan. As a matter of fact, he came back to me and he said, you know, EOS goes out ten years, but I’m thinking about where Management One can be 15 or 20 years from now. So that was music to my heart. 

Greg Alexander [00:16:08] Yeah, for sure. 

Marc Weiss [00:16:09] And I think that I think that. So therefore I think there’s a real opportunity for these self-funded businesses. And by the way, I’m getting just in the time that we took – I signed a letter of Intent February. I’ve gotten two or three requests from different self-funded groups almost weekly since then. So they’re out there. 

Conclusion 

Greg Alexander [00:16:32] That’s interesting. Well, Marc, we’re at our time allocation here, but you’re such a great member. You have such a generous spirit and you’re always willing to contribute. So on behalf of behalf of the membership, I appreciate you coming on the show today and sharing your wisdom with us. 

Marc Weiss [00:16:49] Again, if anybody has any questions or thoughts or anything, just feel free to contact me. I’m happy to share my journey. And one thing I want to say, Greg, is I really thought hard about making sure the pipeline’s full when you sell it – our pipeline is full! So when they takes over, I’m going to feel very good because he’s got a whole rush of business that I wish I was here to participate in, so… 

Greg Alexander [00:17:11] Oh, that’s fantastic. All right. Well, listen, for those that are interested in this topic and others like it, you can pick up a copy of the book. Of course, it’s called The Boutique: How to Start Scale and Sell a Professional Services Firm. And for those that are not members yet but might want to be and meet inspirational leaders like Marc. Consider joining our mastermind community, which you can find out. Collective54.com. Thanks again, Marc. Appreciate it. Marc Weiss [00:17:36] Thank you. Have a good day. All right.

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