Exit Archives - Collective 54

February 20, 2023March 8, 2023

Episode 111 – The Beginner’s Guide to the QOE (Quality of Earnings) Report – Member Case by Elliott Holland

Someday you will sell your firm. After all, none of us can run our firms from the afterlife. When your time to exit comes, you will need to know what your firm is worth. The tool often used to calculate a purchase price is called a QOE, or the quality of earnings report. On this episode, QOE expert Elliott Holland, Founder & CEO at Guardian Due Diligence, will help founders understand what a QOE is, when it is needed, who creates one, how it gets used, and why founders need to get familiar with it.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the ProServ podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those who are not familiar with us, Collective 54 is the first mastermind community dedicated to the needs of boutique pro firms. My name’s Greg Alexander. I’m the founder and I’ll be your host today. On this episode, we’re going to talk about a tool that you’ll use someday when you’re trying to sell your firm. It’s called the q0e, which stands for Quality of Earnings. And we have a true expert who does this for a living. His name is Elliot Holland. He’s also a member of Collective 54. So, Elliot, it’s great to see you. Would you introduce yourself to the audience, please?

Elliot Holland [00:01:02] Absolutely. Great to be here. I’m Elliot Cowan, Harvard Business School, former private equity professional. And now I run a business that helps entrepreneurial business buyers vet acquisition targets using an audit like service called Equality of Earnings that we’ll dive into deeper here in a second. But essentially, I try to help entrepreneurs and keep them away from losing money in very happy situations where there’s huge motivations for people to misstate the truth.

Greg Alexander [00:01:34] Okay, sounds great. So let’s start at the very top. A lot of our members are first time founders. They’ve never been through an exit. Someday they all know that they will sell their firm someday because unfortunately, we can’t run our firms from the afterlife. And since they’ve never been through that process before, this term quote, equality of earnings, they don’t even know what it is. So can you just give us a basic definition?

Elliot Holland [00:02:01] Sure it is an audit service. So for a public company, what they do each year is an audit which looks through extensive information and makes public stock accessible to everyone. What the quality of earnings is is a mini version of that specifically used for buyers of companies to assess the financials of private companies. Anyone on here who owns their own business knows how difficult tech firms can be and how difficult setting up your financials and keeping them straight can be. So imagine a buyer coming into that environment, and the quality of earnings is a tool that can standardize the business financials of any business owner into a package that any investor can consume and make an acquisition decision. But to sum it all up, it is very similar to an audit specifically for the you are buying a company.

Greg Alexander [00:02:54] Okay, very good. And when as a founder, am I most likely to need to use or build a q. O. E.

Elliot Holland [00:03:05] Sure. So the two times that you need to use it, one, if you are looking to grow by acquisition, you see a target company that’s in a market you want to get into. You see somebody you know who’s selling. When you decide to buy their business before you execute that transaction. You want to hire someone to do a quality of earnings. Why? Because there’s. Huge variability in financials relative to what’s presented often times and you don’t want to get had. So that’s one. The second time is if you are approached to sell your business or you decide to take your business to market. Greg talks about this all the time. You’re getting an investment banker or business broker. I would highly encourage you at that moment to get a quality of earnings as well. Here’s why you want to have your own point of view of your numbers before a bunch of picky buyers come in and start hiring the same providers for their benefit. And the pain for an owner who does their own quality of earnings. The pain during the selling process is drastically reduced if they have their own quality of earnings. So those are the two times people should think about quality earnings.

Greg Alexander [00:04:20] Okay. And it sounds intimidating. How long does it take? And, you know, if I’m a first time founder who’s never done it before. Can I pull it off?

Elliot Holland [00:04:32] So it’s easy peasy and I’m smiling only because I’m such an entrepreneurial advocate on both sides, buyers and sellers. So essentially, your bookkeeper, your CPA, and the person sitting in my seat as the equality of earnings company lead or accounting lead do 95% of the work. So to make the process super simple and easy to digest, it’s essentially three steps. As an owner who’s going through one, they send you a list of information. If they’re good at small business kilos, their list is 40 to 60 items. Of those items, two thirds will be handled by your bookkeeper or CPA, and the other third will be handled by maybe a half hour to a 45 minute conversation on the phone. So you get a list, you give it to people to fill it out. You get on a phone call for a half hour to 45 minutes to answer business, marketing certain questions about the business. And then you wait for 3 to 4 weeks for the work to be done. Now, there may be questions in between on step three. Those questions oftentimes are not all that detailed. And oftentimes your controller or your CPA can answer them. So for a owner, it may encumber. Let’s just say it takes 3 hours to sort of get your troops going on the day to another hour for a call. You invest between one and 4 hours in this process. And I’ll also say a lot of us as private business owners have done some interesting things in our financials. You should not be scared of sharing those things because the providers who do this are so used to handling it. Just just be honest. Get it all out and it’ll be done in four weeks.

Greg Alexander [00:06:15] So let’s say I’m a founder and I have a successful firm, so I potentially have an inflated opinion of myself and I think I can do this on my own or I can pencil whip it just by, you know, exploiting my QuickBooks file. And that should be good enough. Am I nuts?

Elliot Holland [00:06:34] Yes, I’d. I’d respectfully laugh at you.

Greg Alexander [00:06:37] Okay.

Elliot Holland [00:06:39] Here’s why. There’s too much money. Okay, So the people I’m speaking to are people who have businesses that are likely going to sell for 1000000 to 40 or $50 million. Right. They’re going to be sold at a lot of cash flow or EBITA. We won’t get into it, but just a multiple a profit to keep it simple. So when you say, hey, I’m going to go cheap and easy and homegrown and I’m going to export my QuickBooks and it’s accounting crap, they don’t care. My business is worth whatever. What you don’t realize is I’m going to be the one on the other side working for the buyer, picking your financials apart at in my 10th degree of detail and then telling you think about things about your financials that are accounting oriented but will affect the price that you won’t understand yet because you have not gone through the process for your own benefit. So let’s just walk you through an example. When sellers don’t do the quality of earnings before, when founders don’t do it, before you get into situations where accounting things, where something is is presented in one way is taken as a big deal, when it’s really a small deal and you’re getting a multiple of profit. So like a 10% difference. So if your profit is a million bucks, if the buyer can go through your front end and shows and show you that your true profit when all the accounting stuff is handled, is even 10% off, right on a4x deal, that $100,000 could be $400,000 worth of lost value. So by, you know, avoiding 22 for a quality of earnings, you just lost 400 K.

Greg Alexander [00:08:15] Yep.

Elliot Holland [00:08:17] That’s before I even talk about you have your own financials. You go through less pain through the whole process because people don’t have to ask as many questions.

Greg Alexander [00:08:25] Yep. Now, so far we’ve been talking about if I, the founder of my firm, is planning on selling my firm, we haven’t talked about the counterparty on the other side of the desk. The firm was thinking about buying my firm and their due diligence process. So it’s likely it’s likely especially, you know, professional acquirers, they’re going to hire their own firm to do their own QE. So there’s really two of them being done. Is that correct?

Elliot Holland [00:08:52] It depends on the size of the business and the buyer. So I would say in the deals that I’ve seen and I focus on deals sort of $2 million to 25, $35 million is where I live. If the seller does the quality of earnings typically be the buyer who comes in will either assess the quality of earnings and the quality of the firm that’s done it, and they may just get their accountants to review it. That’s most often the case because people don’t want to pay twice for the quality of earnings or if there is a second quality of earnings, it’s a sanity check, not a product, a logical exam. So if you’re going to have somebody go through your financials at that level, you want to be the one paying them. You don’t want somebody that somebody else paid doing that exam.

Greg Alexander [00:09:38] Yeah. Okay. Now, the the person who’s buying the firm, the acquirer, they’re going to take this QC and they’re going to do what with it?

Elliot Holland [00:09:48] So let’s just talk about $1,000,000 Eboni business, which is just cash flow, a profit and a four times deal. So you’re selling your business for $4 million. The buyer will come in and do a quality of earnings and say, I’m going to multiply whatever the evil that this found in my quality of earnings by four. So they’re going to go in and look at your income statement, your balance sheet, your working capital, your bank statements, your taxes. Running through that four week analysis. And then they’re going to come back and say, hey, based on our accounting team, your actual EBIT is $900,000. And so now they’re going to say $900,000 times four is 3.6 million, not 4 million. And so our price now just got adjusted, 400 K It also happens in the other way. So they may find that the profit is higher than what was presented, but they’re not in a position to tell you that. So what would buyers do with the quality of earnings is use it as the basis for the EBIT number that they multiply by to get to the value.

Greg Alexander [00:10:52] Okay. And do they share it with the bank if they’re going to fund it that way?

Elliot Holland [00:10:58] Oftentimes, sometimes not. But you should assume that the quality bearings will go to all interested investors, even though sometimes it doesn’t. Depending on the buyer, if they have good relationship with their banks, depending on the size of the deal. Also, as you get out of when you get out of sort of two, three, 4 million and get above that, then the answer is absolutely yes.

Greg Alexander [00:11:22] Correct? Yep. Okay. One last question for you on this. This is a personal pet peeve of mine. Sometimes our members get advice from their broker, the M&A adviser or the investment banker that they got to spend a fortune on acuity and hire a big name firm like a p.w see, which I think is crazy for our members, because those can be very expensive and they don’t need to spend that kind of money because our members businesses, relatively speaking, are easy in simple businesses to do this. So, Eliot, what would you say to that advice?

Elliot Holland [00:11:58] So I don’t think the big firms like Peter them you see, do strong in meeting business quality of earnings well at all. So my point of view is not only will you overpay for it, but you will get the debt. Not that it would be the C, but the DTI, the kids coming straight out of college. The partner who doesn’t want to spend a lot of time on it. You’re not an important entity in their ecosystem of a lot of private equity firms and multiple buyers. So you’re going to get the last bit of energy they have. And when a transaction is this big for you as a founder, it matters that you get the A-Team and a quality sort of driven firm. So I would highly encourage you to look for regional firms that are more that are priced more cost reasonable or due diligence firms like mine that focus on just quality of earnings that have great reputations in the marketplace. You don’t need a quarter million dollar, $100,000 quality of earnings. You need one that solid by a reputable firm. Yep.

Greg Alexander [00:13:00] And not to put you on the spot here, but I know you do this for a living. Give me a range. What’s a ballpark budget figure for something like this?

Elliot Holland [00:13:08] Sure. So 20 to $60000 should cover it for companies that are selling for 1 million to. 25, $30 million. When you get above that, you may ratchet that upper end of the range up a bit, but that is a very reasonable range. You get your quality of earnings done.

Greg Alexander [00:13:26] Okay, Fantastic. Well, listen, we’re out of time. But Elliot, you and I have recently gotten to know each other. You’re a relatively new member. I’m so glad that you’re in the community. Your energy and enthusiasm is infectious, and your area of expertise, as we just learned today, is desperately needed for our community. So on behalf of all the other members, I appreciate you being part of Collective 54 and in particular for making the deposit in the Collective Knowledge Bank today. Thanks a bunch.

Elliot Holland [00:13:52] So excited to be here. Thank you for having me. And I’m glad to be in collective 54 as well.

Greg Alexander [00:13:58] All right, very good. So let me give the audience members a couple of call to action. So let’s say you’re not a member, but you’re thinking about it because you want to meet really interesting people like Elliot and learn about these tools like quality of earnings. Go to collective 54 dot com, fill out the contact us form, and one of our representatives will talk to you about being a member. If you if you are not ready quite yet to be a member and you want to educate yourself further, subscribe to collective 50 for insights and you going to get three things on Monday. You’re going to get a blog, on Wednesday, you’re going to get a podcast, and on Friday are you going to get the chart of the week? And that’s a good way for you to learn more about this if you are a member listening to this, my call to action is a little bit more precise. So the first thing I want you to do in the new Boutique Companion course, there is a Kuo e template I really want to emphasize. It’s an introductory basic template that will get you familiar with kind of what something like this looks like. Of course, to execute it, you’re going to need a professional like Elliott. And then also if you’re not quite ready for a cue because you’re not ready to sell your firm, but you’re really interested in what your firm might be worth on the website. Under resources, we have a tool called the Firm Estimate here. That’s a really fun tool. Takes about 15 minutes to fill out your answer ten questions. It gives you a ballpark range as to what your firm is worth. I really want to emphasize here a ballpark range. It’s not a precise valuation, but check that out if you’re interested. Okay. So that’s the end of today’s show. Thanks for listening. Thanks for being here. We really look forward to Elliott’s private Q&A with the members on one of our upcoming Friday member sessions. But until then, we’ll talk to you on the next one.

February 13, 2023March 8, 2023

Episode 110 – How a Software Development Firm Structured an Equity Incentive for a Key Employee – Member Case by Michael Daoud

Hiring, or promoting, a person into an executive role often requires the Founder to offer an equity incentive to the key employee. This requirement drives a need to understand what the firm is worth today, and how much of the future value should be shared with the key employee. On this episode, Michael Daoud, CEO at Visus LLC, discusses how he valued his firm, and how he structured the equity share with the key employee.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serve podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated entirely to the needs of leaders of thriving boutique producer firms. My name’s Greg Alexander. I’m the founder and I’ll be host on. In this episode, we’re going to talk about negotiating an equity incentive for hiring an executive into your firm, something that we all run into a little bit of a tricky scenario and multiple ways to do it. And we’ve got a great role model with us today. Collective 54 member Michael Daoud. And Michael, as recently gone through this is going to share a little bit of his story with us. So with that, Michael, welcome. Good to see you. And please introduce yourself to everybody.

Michael Daoud [00:01:09] Thank you, Greg Yes, has a great side. I’m Michael Daoud. I’m the founder and CEO of Visus LLC. We are a professional services company focused on software development and our target market is mid-level enterprise companies and we help them improve their operational efficiency and customer experience. And we do that through developing custom applications, content management systems and business intelligence solutions.

Greg Alexander [00:01:37] So it’s Daoud. Not dowd.

Michael Daoud [00:01:40] Correct.

Greg Alexander [00:01:40] Okay. Sorry about that.

Michael Daoud [00:01:43] Problem.

Greg Alexander [00:01:44] Okay, So let’s set it up. So describe the situation. So as I understand it, you’re thinking about adding a member to your team in a pretty important role and you had a need to think about an equity incentive. So give us the backstory, please.

Michael Daoud [00:02:00] Yeah. So I’ve got an opportunity to bring on a very well experienced person, and that can help us with our growth and scale. And part of that incentive is to provide some sort of equity and or that process been trying to determine valuations and things like that. So can probably provide the right balance of things. Always have grown the company so far over the years and it has a certain value. And so we want to figure out what that value is today. So when the equity equation is figured out with this gentleman, then we can determine, you know, targets based on today’s valuation and future valuation.

Greg Alexander [00:02:42] Yeah. Okay. Very good. And that’s an important distinction. So for those that are struggling with the same issue, remember all the value that you created up to this point is yours because the executive coming into the company didn’t help you create that. So establishing what the firm is worth today and then what the firm might be worth in the future, and that gap between its valuation in the future and the valuation today, that’s the value that was created. And the question is how much of that value do you share with a new hire? So determining what the firm is worth today is a tricky thing. So my client is stand that you have an advisory board and they suggested to you that you get a valuation. So first, why did they think that that was worth doing? And then secondly, as you explored the possible ways of doing that, what were your options?

Michael Daoud [00:03:31] Yeah, that’s a great question. Great. So we have a fractional CFO that works with us, and he recently had a client go through an indication of value, so rather than a full valuation. Is this person here in town can do indications of value. Just to kind of give you a rough idea of what the valuation is. The reason the board pushed me to do that, because you and I spoke and you had shared some averages for software development companies in professional services. We have some pretty strong benchmarks. We have strong gross margins, strong EBIDTA. A lot of good processes in place and they felt those all those things put together would provide a stronger valuation. And so as a result, they said, well, maybe getting a good valuation done, and this is prior for me getting the collective 54 estimate, which we can talk about. They thought that it would be a more what’s the word I’m looking for, a more accurate to the actual valuation, if you would, just because of those strong numbers that we have. You know, we posted our numbers in collective 54 and always gotten good feedback of how really strong our margins and EBITDA are. And we work very hard at that every day. Yeah.

Greg Alexander [00:04:59] Yeah. And you’ve got your board gave me great advice because you’re right. Given your performance, your firm is probably worth a premium over similar sized firms because of your outstanding performance and therefore you don’t want to give that value away. You created it. So getting kind of an accurate value is really important. Now, there’s a lot of ways to do this. You can hire a professional appraisal firm, which if you have the money I recommend this is what they do for a living and they’re fantastic at it. That can run. Yeah, they get a really good one done. What you would want to do for a situation like this, since it’s going to dilute your own ownership percentage or potentially dilute it, it’s going to run you around 15 grand. In my experience, the ones that are cheaper than that aren’t really great. So if you’re going to spend the money, my opinion is, is do it right now. If you don’t want to spend the money and you’re looking for, you know, let’s say call it an educated guess, I guess we have a tool collective 54 does called the Firm estimate and it’s free. Now, I want to caution you, it’s not a professional appraisal. It’s an estimate. And, you know, you can use it and determine whether it’s worth anything or not. And Michael and I are going to go over some of the basics of it today, just as a way to help everybody think through this and also just use this as a outline for the broader conversation on on negotiating equity incentives with a new hire. So the inspiration for this was the Zestimate. I don’t know if any of you have used the website Zillow, but you can go to Zillow and you can plug in your home address and they give you a Zestimate, which is, you know, the word estimate with the letter Z on the front of it to represent that it came from Zillow and it’s shockingly fairly accurate. And then if you’re looking to move and you want to maybe make an offer on a home, they can do the same thing for you. So I said to my team, Well, let’s build the equivalent of that in the principles where it’s got to be super easy. So let me walk you through just real high level what it is. And then, Michael, I’d like to get your thoughts on some of this.

Michael Daoud [00:07:05] Sure.

Greg Alexander [00:07:06] So first off, our estimate pivots off of EBITDA. And for those that aren’t familiar with the term EBIT, it’s simply pretax profits. And we establish a range. The range starts at five times EBIDTA and taps out of 15 times EBITA and everything pivots off the EBITDA multiple. There are a series of variables that add to or subtract from the multiple multiple of EBITA and the addition and subtraction are done in one times EBITDA increments per variable. So for example, one of the questions is revenue growth. So if you are growing your top line 30% plus, then you get an extra point of EBIDTA. If you’re growing your firm less than 30%, it’s neutral. You don’t get a subtraction, but it’s neutral. Another example, profit margin. So if you a pretax profit margin is 30 plus percent, you get an extra point of view. But no, if it’s between ten and 30%, it’s neutral and it’s less than 10%. You subtract the point of EBITA and the dimensions we look at are EBITA revenue growth, profit margin. Recurring revenue as in what percentage of your revenue is recurring? Client concentration. Client tenure. Employee tenure. The dependency the firm has on the founder. In the age of the founder, there’s ten variables, that’s all. And you plug those, you answer those questions and out pops an estimate as to what your firm is worth. And then you can play around with those variables. Let’s say you plug them in and you don’t like what what the answer is. And you can say, Well, if I fix this and I fix that, what does it do to me? Or you plug it in and you say, Holy cow, my firm’s worth a ton of money. Maybe you don’t believe it. And then maybe you go back and play around with it. That’s kind of the concept. So Michael, I know, is a little short notice, and I’m not sure if you’ve had a chance to kind of use that tool yet, but did you mess around with it at all? And what did it what did it reveal?

Michael Daoud [00:09:09] I did and it was great. I really enjoyed it because it confirms some things that were doing well. And and I highlighted some of the things that we need to do better. Right? So I know over a collective 54, I’ve heard people having valuations that are companies, as you said, anywhere between five and 15. I even heard 17 ones. But in general, somewhere in that range and five being conservative. But it was a pleasant surprise to me that when we plugged in our numbers, our multiple was seven. So, you know, I was using five and it was nice to see that. And so I think once we put it in. So on the revenue growth rate. You know, that highlighted how much more we need to spend on sales and marketing to for accelerated revenue. And that’s part of the of the offer with this executive to come on board to help with that. But with our strong gross profit margins and other numbers in here, it really helps. One thing that it did highlight for me, we’ve been getting more and more into recurring revenue. Yeah, through support contracts. But you know, having to do the calculation, put it in here. I didn’t realize how small it was compared to the overall revenue, even though it’s been kind of front of mind to work on that. So that’s an opportunity for us to do even better in our multiple by adding more and more of those support contracts.

Greg Alexander [00:10:42] Okay, good. So I’m glad that it was, you know, a reasonable estimates and it confirms your belief that your firm is worth more than five times. The tool says seven times, maybe it’s eight, maybe it’s six. I don’t know. But, you know, it did confirm that belief for a lot of the reasons. Now, what would happen from here, whether you use a free tool and you kind of back of the envelope, it’s like what we’re talking about now. Or if you hire an appraisal firm as now you go back to the executive and say, okay, this is our jumping off point. So just to use easy math, our firm’s worth $10 million and I’m going to hire you, Mr. Executive. And over the next five years, we’re going to go on a journey together. And our hope is at the end of those five years, we double the value of the firm. So let’s say it’s worth $20 million. So therefore, $10 million of value was created. The $20 million end state minus the $10 million jumping off point is 10 million. And then the conversation with the executive coming in is what percentage of that 10 million do you think is fair to share with that executive? And this is where it gets really hard because sometimes there’s not clear attribution as to the executive’s contribution to an extra $10 Million in Value creation. And this is where it gets tricky. So Michael, do you have any thoughts on kind of what a an approach might be to figure out how much of the extra value created should be shared with the executive?

Michael Daoud [00:12:08] Yeah. I mean, you know, in thinking about this and, you know, preparing, you know, some kind of package. You have I as a founder, reflect on say, okay, can I do this on my own without this person? Yeah, probably answer probably is yes. And I believe in myself that I can do it. So what what is the what will this person help me achieve that will get achieved a little bit faster? I think the answer to that is yes as well. So what’s the value for achieving that faster? And, you know, I’ve discussed this with him as well. And I feel that, you know, 10% of that value is fair or that acceleration. And so that’s kind of where we can come to. Yeah.

Greg Alexander [00:12:56] Okay. So I think 10% is fair in your in your situation. And I think the insight that you just share with us is you feel that it’s worth it because this is the key component of Michael story, is that this executive can help him get there faster as he stated, he can do it on his own. He can get there. But this executive might help him get there faster. And then then it’s a judgment call for the entrepreneur or the founder. Do you want to get there faster? Well, if you’re 25 years old, you might not care. If you’re 55, you might kill a lot. So this is where the tradeoff comes in. And 10% is actually generous. You know, if if this was a corporation and somebody was issued stock options as an example, you know, the employee that’s going to get stock options might get, I don’t know, 1% to 2% of the company. And they would vest over time. So 10% is is pretty generous but fair. You know, given what Michael is trying to get done now, as you share this information with this executive, who was it well received? Was there a disagreement? Was it a point of negotiation? Like how did you approach this?

Michael Daoud [00:14:08] Yeah, that’s a great question. So when we start our talks some time ago and it’s been some time it was proposed by him at first as to what he believes his value would be. And in exchange for that and, you know, I felt from day one when he did that, that it was fair, especially for he brings a lot of technical know how and can help us, you know, not only accelerate through the valuation but accelerating some of those some service lines that would help us attain that valuation we’re looking for.

Greg Alexander [00:14:44] Okay. Very good. All right. Well, listen, we’re at our 15 minute mark here. We’re going to continue this conversation and go in much greater depth on our member Q&A sessions with happen on Friday. And I’m sure because I get asked this question all the time by members, I’m sure that’ll be a well attended session. Michael, you’re a great member. You’re always contributing to the collective installing knowledge into our knowledge bank. You did that again here today. So on behalf of the members, I just wanted to publicly thank you for your contributions and for being part of our community.

Michael Daoud [00:15:17] Thank you, Greg, and thank you for starting Collective 54. It’s been an awesome journey to be together with you and the other members.

Greg Alexander [00:15:24] Okay, Awesome. All right. Let me give you a couple of calls to action. So if you’re a member, go play around with the firm estimate at all. Attend Michael’s Q&A session on the Friday when it gets scheduled. If you’re a nonmember again, this tool is free. You can download it off of our website, collective 54 dot come under resources. And then also if that type of content is of interest to you, you can subscribe to collective 54 insights, and if you do so, you’ll get three things per week. You’ll get a blog on Monday, a podcast on Wednesday and a chart on Friday. And if you want to skip all that and just become a member and you want to apply, fill out the Contact Us form on collective 54 icon and somebody will get in contact with you. But great episode today and thanks for listening. And until next time, good luck to you and we’ll talk to you on the next show.

February 6, 2023March 8, 2023

Episode 109 – How To Avoid The Devastating Fall Out Of a Botched Reorganization Inside of a Professional Service Firm – Member Case by Mike Desjardins

The design of your boutique’s organization can either aid or hurt a successful exit. Any astute buyer will factor this into their decision-making. This is why simple integrations are attractive. They are cheap, quick, and have a high success rate. On this episode, Mike Desjardins, CEO at ViRTUS, shares their firm’s best practices for a successful reorganization, including the much-awaited backstory of how his team redesigned key roles to keep their top individual contributors.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Preserve podcast with Collective 54, podcasts from 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 maybe someday exit your boutique pro search firm. My name is Greg Alexander. I’m the founder and I have the privilege of being your host today. And on this episode, we’re going to talk about organizational development, but we’re going to do it with a twist. And the twist is what to do when you have a top performing individual contributor and you promote that person into a supervisory or managerial job. And for whatever reason, it doesn’t work out. And you’ve got to bring that person back into the fold. And the tricky situation to handle. It’s one that our members deal with a lot. It’s a common issue, and we hope to give you some insights as to how to handle that. And we have a wonderful role model this week who has firsthand experience with this. His name is Mike Desjardins, and that was my best French impression. And he’s a member of Collective 54, and he’s going to share his his wisdom with you. So, Mike, it’s good to see you. Welcome.

Mike Desjardins [00:01:43] Yeah, thanks. Great. Thanks for having me on.

Greg Alexander [00:01:45] Would you mind introducing yourself and tell us a little bit about your firm?

Mike Desjardins [00:01:50] Yeah, sure, I’m happy to do so. So my name’s Mike and I live in Vancouver, B.C., Canada, and the firm is Vertis and we’ve been around for 22 years and our focus is 90% on leadership development for medium to large enterprise. So and I’d say medium to large enterprise for us is about 100 million in revenue. That’s usually when a client hits that number where they start to the issues around leadership development that are at the scale that that we operate at. And then 10% of our work is in strategic planning. And that is we do obviously executive team development. So we also work with those executive teams in doing their strategy work as well, which is an annual and quarterly cycle that can go on for 10 to 15 years.

Greg Alexander [00:02:40] Okay, got it. Very good. So as I mentioned, I set up the problem with this promotion of these individual consumers, and I just had a little bit more color to that. You know, we serve entirely boutique professional services firms. And I should I should define that as you have defined your medium size companies. For us, that means more than ten, but fewer than 250 employees. And in that single industry of professional services, that’s the reason why the number 54 is in the name Collective 54. That’s the industry code for pro serve. And people join professional services firms for careers, not jobs. They they value their expertize. They’re motivated intrinsically by things like the job content, the intellectual stimulation, the variety of the problems they may get a chance to solve, the types of people they’ll meet as very, very specific type of person that joins. And it attracts folks that are driven by competence and achievement and they excel at individual achievement. And then when a firm scales, which is what you’re doing, what most of our members are trying to do. The Law of numbers says is we got to promote some people. They get promoted and sometimes it doesn’t go so well. And then we’ve got this issue where we have this almost demoralizing effect on, unfortunately, one of our stars and we get stuck and we don’t know what to do with it. So my team told me that you are the master at handling this. So I’m on I’m on the edge of my seat.

Mike Desjardins [00:04:19] I may have misspoke. I think it would be closer to the truth is that I screwed this up and recovers. And so I have a story to share. I think that’s closer to the truth. All right.

Greg Alexander [00:04:31] Well, let’s hear the story.

Mike Desjardins [00:04:33] And so yeah, the story is, is that I have a team member who is an executive who I have worked with for over 20 years now. And she’s been with me from almost from the very beginning of the business. And her name is Shannon and she is her title right now is director of Learning Strategies as a business group. One of the things that I read was EOS traction. And through reading about U.S., I learned about an integrator role, which effectively is a chief operating officer role. And I started thinking about restructuring the firm in a way where there was a single person in this integrator role. And to me, that logically is Shannon. Now with Shannon, I thought, well, she did great in the integrator role. And I started thinking about the structure of the business and thinking about how well-respected she is in the business. And I thought, you know, everybody would love to report to Shannon. She’s fantastic. And so she moved from having two direct reports to having really effectively almost all the direct reports except business development and accounting, the controller. And so I figured this would be great. She’s going to love this. And as I started chatting with her about the future of her career and what she wanted, she started saying to, I think what I really want is no direct reports. And I love to really focus on being a director, but focus on the future of learning for the business. And that will take me all of my time. And right now I get I sort of get pulled into projects, and I also have. I also direct reports. And so I don’t really get a lot of time to spend on our strategy and on what the future learning is going to look like. And I think that to really achieve this ten-year strategy that we had set out, I need to be able to focus on that. And so in my infinite wisdom, she went the other direction and convinced her that no, she would be great.

Greg Alexander [00:06:40] Of course she did. Class. I got to go out there.

Mike Desjardins [00:06:44] And, you know, offer her the salary and all that kind of stuff to go with it. But what I said to her was, Listen, I think you’re going to be amazing. I know that everybody in the company would love for you to be in this role. And would you be willing to give the role if jobs for six months? If it doesn’t work out. We’ll go back. We will restructure the company and we’ll figure out something different for you. But it won’t. It won’t harm you. You’ll be back. You’ll be financially in the same position you’re in right now prior to being promoted. And and we’ll figure out what that structure is going to be if it doesn’t work. In my mind, I’m like, this is just she’s going to love this. It’s going to work great. I think one of those classic entrepreneurial mistakes that that can get made equally when there’s we’re thinking of profit sharing programs or equity programs. Right. As an entrepreneur, I think about it from my lens. But the reality is that isn’t empathizing with what the other person wants. And in this case, I did the same thing with this promotion. So Shannon got four months into it and we were sitting down for lunch and you know, how’s it going? You know, this is a on I’m. She’s like, I don’t like my life right now. So my grand plan wasn’t working out the way I expected. And I said, Oh, okay, like, what’s going on? And she’s like, I’m back and I love the people I work with and but I’m back doing more of the things that don’t really bring me joy. What brings me joy is working on the future of this business and the strategy, and I’m not getting time to do that. And so, you know, I’d really like to take you up on your offer. I know it’s not six months yet and it’s only four months. And I said, no, I think it’s been long enough for you to figure out whether or not this is the right fit for you. And so I said, okay, well, how do we structure this team? So she and I work together on a newer structure that had her as director of Learning Strategies and had one of our returning teammates who was coming back from maternity leave. After a year, we get a little bit longer in Canada than kid in the States. And we said, okay, well, why don’t we make that role? Director of People in Operations. And her name is Nadia. And so Nadia will roll up the content team and the project management and logistics teams will report to her, and that will free up Shannon to be able to focus on actually on our learning strategies and on this future scale mode of our business, which there is a lot of work that we still have to do on that. And so we did that effective October 15th of 2021. So it’s been a year and almost a month of that structure in place. And what I can say to you is that. What ended up happening is Shannon has dotted line responsibilities to the content team that used to report to her, but she is able to focus on building out the future of the business. And that’s what her day to day looks like. Researching what’s happening in adult learning, researching what’s happening in e-learning and blended learning, and slowly helping to convert what we’re doing into a model that we know will scale more effectively and and also fits really does fit the needs of learners today, particularly post-pandemic as a result of what’s happened and the changes in how people are wanting to learn. It’s quite different than it was prior to March 2020. And Nadia, who’s in her role, is thriving and the team that reports to her loves reporting to her. And so yeah, so it’s actually worked out really well. It’s just worked out differently than I would have expected. And we ended up promoting some people as well. As a result of this change in strategy and a change in approach to our organizational structure. So that’s why I say I would love to take credit for this being some sort of grand plan. I’m definitely not the master, but we kind of scaled our way or I failed my way through it and with Shannon empathizing with me as I had my grand plan and it didn’t work out, we were able to make that change. And then ironically, we put it in an equity based compensation strategy this past June, which level sets everyone’s compensation mark to market every June. And for Shannon, her salary went it went back down when she took the role, but then it went right back up to the level that she would have been asked as the integrator. And so it took a little bit of time for that to happen from October to June when we did that. But when we went to market to look at an individual contributor director role and her salary was actually the same salary it would have had with the direct reports as an integrator in a different capacity, more of a chief operating officer versus director of strategy and saying that’s to bring you full circle of how that worked out. It worked out great for for Shannon, it worked out great for ViRTUS and it ended up working out great for me as well. So yeah, that’s the that’s the full story.

Greg Alexander [00:11:51] And worked out great scenario.

Mike Desjardins [00:11:54] Yeah. Well, right. Sorry for Nadia. Which is why it worked out great for ViRTUS too. So it worked out great for Nadia. She’s just thriving in her role. And then a few other people got promoted as a result of this whole structure change. So, you know, it’s another good lesson. Great for me. I can always have these grand designs of how things are going to work out. And then I go to the team and I ask them about what that’s actually going to look like. And sometimes they just tell me like just plain no. Yeah. And when enough people say that to me, and particularly people that are senior and tenure, then it’s important for me to really like listen and try to understand why they they feel that strongly about this.

Greg Alexander [00:12:37] You know what strikes me about that story and thank you for sharing that. It is a fantastic story and a great use case is obviously you and Shannon had a fantastic relationship built on trust because sometimes when this happens, the person who gets promoted, they don’t feel comfortable sharing with the boss, for lack of a better term, that maybe this isn’t exactly what they want to do. It comes usually with an increased responsibilities and compensation. So they get excited about that and then they take a job, right? And then it doesn’t work out and they feel like they’re failing. And instead of raising their hand and saying, Hey, I want to go back to the old job or let’s reorg around a new job. They leave the company and we’ve been dealing with now it’s changing. It’s moderating now, thank heavens. But we were dealing with this great resignation where a lot of people lost a lot of employees during this time. And sometimes, like, I would call that a an unforced error. Right. I mean, it’s like that was avoidable, I should say. And how did you develop this relationship with her and the culture of your company that we’re. It tolerated the experiment. It didn’t work out. No one’s feelings or egos get bruised and you were able to pivot to a new solution.

Mike Desjardins [00:13:53] You know, I think it’s really taken a village to build to build this culture. And. We we really ought. Brené Brown talks a lot about vulnerability. And in that she’s really talking less about rampant self-disclosure and more about authenticity and transparency. And and we’ve had that in this business the whole time. I think, you know, when we hire, we’re really careful to hire really smart people who are emotionally intelligent and have these qualities that are they’re great to collaborate with. And we’ve run an open book company since 2008. So other than exact salaries, everybody has every other piece of information about this business. So it’s really kind of baked into our culture to have these types of open conversations. And what I’ve noticed it’s happened as a result of that is that there’s really no surprises, right? So when somebody has a review, they’re not surprised by the review because we talk about feedback pretty openly all the time. I think. Inherent in the fact that we’re a leadership development company. If we weren’t doing this and we didn’t have a great culture right. It would be ironic if we were out in the marketplace talking about how leaders should show up. And so I think it’s deliberate. It’s a choice that we’ve made, and it hasn’t hurt us. I can’t think of a scenario in the past where being this way has been to our detriment. Now it means people have their tenures here, and but a short period of time working here is five years that’s growing fast. Whereas I have there’s team members that have been here like Shannon’s 20 years, 12, 14, relatively long period of time. We’re growing now. So we have some, some new people that are joining the company. And when we hire, because we’ve been around for a while and we’ve had these longer term relationships, we take quite a bit of time to get to know people in advance because we’re thinking about this as a long term relationship. When somebody joins our team, we’re not thinking about like, let’s see how it goes over the next couple of years and we’ll see where things are at. We are really thinking long term.

Greg Alexander [00:16:04] And the candidates that you’re interviewing, are they thinking long term as well? And how do you how do you judge that in an interview setting?

Mike Desjardins [00:16:10] I mean, it’s hard, right? Like I. It’s hard because you could say, oh, look at somebody’s LinkedIn profile or look at their resume and have they moved around a number of times? That’s not fair because I think, you know, I look back at where like I turned 50 this year, so I look at where I am right now in my thought process and my decision matrix and and how I think about life. And I think back to when I was 25 and my priorities and my values have shifted as of aged and I’ve had experiences which have helped me to figure out what I want. Now, luckily for me and I only really had two main jobs in life so far away, like I was with a group of companies from 18 to 28, and then I did this from 28 to today. So but not everybody had that. A lot of people are people are trying to figure out what it is their career is going to look like. And they may have to go through different jobs and different companies to sort out what that’s going to be. So I think it’s less about. It’s less about trying to determine whether somebody is interested in a longer term career, and it’s more about creating a culture where that happens. And that’s the decision that we’ve made, is less about trying to figure that out on intake, but instead provide a culture in an opportunity where people actually really do want to stay and grow their careers here. When people have laughed and they’ve laughed and said, a lot of the times are really sad to be leaving, they don’t want to go. But maybe our company isn’t growing as fast as they want to grow. And so even though they’ve been here five years is an opportunity and I’m excited for them because I think that is an awesome opportunity and we don’t have that opportunity here so I’m pumped. There is something like that available and so we would kind of refer to people as alumni and we’re excited that they’re out there in the world doing great things and that we got this unique opportunity to work with them for whatever period of time. We had a chance to do so.

Greg Alexander [00:18:09] Yeah, that’s wisdom there for sure. Let’s come back to Shannon. So the professional services space is one built on apprenticeships. So junior people learn from senior people and then they kind of move up along the way through the apprenticeship model, at least historically. That’s how it’s been done. So our members are more than likely going to fill the promotions that become. Get created because of the growth with internal promotions. It’s a grow your own model, which works really well in the context of a professional firm. So there’s those that are listening right now that are going to want to go promote somebody internally, much like you did with Shannon. And looking back on it now, a year later. You know, what would you have done differently? What lessons would you want to share with those that are getting ready to go promote their Shannon’s today?

Mike Desjardins [00:19:09] You know, I think my mentor, Walter, actually said something to me in as we were talking about this and reflecting on this. He’s mentored me for the past six years, and we were chatting about this exact scenario and he said, you know, the learning here is when people tell you what they really want, believe them.

Greg Alexander [00:19:27] And they’re telling the truth.

Mike Desjardins [00:19:29] And part well and part. Yeah, well, they’re telling their truth. Right. And park what it is that I would want if I were in them because that doesn’t matter. Now there is, there is a piece of it where. So here’s the piece where I think it’s challenging. The balance of that is sometimes I will see people and I will see some that they are capable of, something they haven’t seen yet. And so they might not like. So for Nadia, Nadia was coming back to come into a program designer role. And but Shannon and I in chatting saw she could come back and the director role sounds like she’s the chief the next most senior person here. So why would we why wouldn’t we offer her this director of people in operations role? And she’d be fantastic at it and she’s ready to take that step. And so we went to her saying, Hey, we think you’d be amazing at this job. And and so sometimes it’s it’s it’s seeing the to for people and what they could grow into. And but the flipside of that, of course, is the situation I ran into with Shannon where I, I wasn’t hearing her and I was thinking too much about what I would want if I were her and and why it would be such a great role for her as opposed to really deeply empathizing with what she knew she truly wanted. I think that’s the lesson, is that there’s always going to be this balance of trying to do both, right? Like help somebody along who you might think isn’t, like, ambitious enough for what you see they’re capable of. But tempering that with really hearing them when they say what they want.

Greg Alexander [00:21:17] Yeah, for sure. You know, when we have our Friday member Q&A with you, they’re going to ask a lot of questions about this and and the way you set up the what I would call a job trial. You know, you said let’s try it out for six months and and how you monitored that, etc.. So it’s just a it’s a great use case. It’s a very real issue for our members. So thanks for being on the call today and for sharing your story. And my pleasure. It was very informative. Thank you.

Mike Desjardins [00:21:44] Yeah. I appreciate being on. Thanks. Great.

Greg Alexander [00:21:46] All right. All right. So if you’re listening and you’re a founder of a or a leader of a boutique processor firm, and you’re not yet a member and you want to meet great people like Mike and learn, you know, around stories like this one. Consider joining Collective 54 and you can apply for membership on our website, which is Collective 54 dot com. If you’re not quite ready to join, but you want to educate yourself, we got lots of resources called Collective 54 Insights, so podcast benchmarking data, a blog or a book, etc. And you can also find that at Collective 54 dot.com. But thanks for listening and I’ll see you on the next episode.

January 30, 2023March 8, 2023

Episode 108 – How a Brilliant Founder Expanded Margins By Repositioning His Software Development Shop Into A Strategic Consulting Firm – Member Case by Phil Alves

The quality of the fees earned by your firm is a top priority as you scale and exit. All revenue is not good revenue. Poor fee quality leads to poor margins. On this episode, Phil Alves, CEO at DevSquad, shares how he improved margins and fee quality by repositioning his firm.

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Serv Podcast with Collective 54, podcasts from founders and leaders of boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated entirely and exclusively to helping you grow, scale and someday exit your professional services firm. My name is Greg Alexander. I’m the lucky founder of this group, and I’ll be your host today. And on this episode, I’m going to talk to you about improving your margins and how the importance of that changes over time as you develop your firm. And we’re very lucky to have a great role model with us. He is a collective 54 member. His name is Phil Iles, and he’s going to share a little bit of his perspective with you. So, Phil, it’s great to see you. Thanks for being here. And please introduce yourself and your firm to the audience.

Phil Alves [00:01:13] Yeah, it’s great to be here. Yeah. So my firm is Dev Squad. We specialize in building SaaS products, and I’m feel I’m the CEO of the firm.

Greg Alexander [00:01:23] Okay, very good. And how long you guys been at it?

Phil Alves [00:01:25] Eight years.

Greg Alexander [00:01:27] Eight years. Very good. And your journey? Are you a software engineer yourself turned entrepreneur, or did you come at this from some other way?

Phil Alves [00:01:34] No, that’s it. Yeah, I started as a soft engineer. From their eye. They love product to the product side of yeah. Like creating things and solving problems. And I moved to Utah. I am originally from Brazil. I got a lot of job offers. I decided I would start this company. Of course, having the connection to Brazil helped me have access to talent that wouldn’t be too expensive and interest to the market. And I was part of the first thing they help us have like higher margins. Yeah, but, but a lot of other things that we did after that.

Greg Alexander [00:02:09] Yeah. So let’s jump into that. So the topic today is margins. And I would say the the space that you’re in which I’ll broadly categorize maybe incorrectly as software development tends to be in relation to other professional services, tends to be profitable but not as profitable because software engineers are scarce, they’re in great demand and the labor cost in this space tends to be high and the end client is squeezing fees a little bit. So margins in software engineering tend to be a little bit low. But in your case, that’s not true. So what are you doing to deliver exceptional margins?

Phil Alves [00:02:49] Yeah. So I believe, like you talk about in the book, it cannot be a body shop. You have to when clients come to us, what they’re buying, they’re buying process, they’re buying our culture. So we were very specific about how we do stuff. We do stuff differently. We made it. And then as we keep doing that, we were able to prove that we can do it in a better way than they will be able to do just themselves. So when they hire us, I’m like, You’re not hiring developers, you’re right. But I’m trying to position myself not just as another software development company, but I’m trying to position myself as a consulting firm. They specialize. I have my own way of doing things, and my way is better than you could do by yourself. And you’re going to pay a premium for that. And another thing they like to say, when people are paying us their opinions to tell them what to do, not the other way around, like we are really the experts. And like I think another thing that’s very important for our margins, so we start like kind of like in a platform play, people would hire us because we’re experts in a certain programing language, but we had to move out of that to, to charge more money, you know. So now people hire us because we own a vertical. Our vertical is like we specialize in building SaaS products. We have with a lot of successful SaaS products where people went and have exits. So it’s about you can be selling just the people, just the bodies. You have to sell process and you have to be in a vertical where there’s enough margin for people where people are going to pay for the expertize.

Greg Alexander [00:04:25] Okay. So there was a lot there. I want to unpack that a little bit and congrats to you for having clear command over this subject. I think some of our listeners might not be as advanced, so let’s go slowly here. So one thing you mentioned to me, I call it positioning and you’ve positioned yourself as a consulting firm that specializes in software development as opposed to a software development firm. And that move alone gets you into a different category and it gets the client willing to pay a different fee because they’re comparing you to other consulting firms, which tend to charge more and it gets you out of that category now. And we’re going to go through the other ones that you just rattled off. Well, let’s stay with that one for a moment. Sometimes when you try to reposition yourself in such a way, the client says, give me a break. You know, you might be trying to reposition yourself as a consulting firm, but you’re not really a software development firm. So how did you overcome that perception and how did you convince the world that you really are a consulting firm?

Phil Alves [00:05:22] I think it’s like actually when you are coming up, you’re going to have some customers that you’ve actually got to do consulting and other companies way of actually doing development. And the more of those customers that you actually doing real consulting, it’s the more a track record that you can show. So we are to a point right now that when I meet with a customer, I explain to them, Look, when you hire us, you get a product manager, you get a UI designer, you get a playbook of how we do stuff. And that was developed over the years. So we didn’t start here. Sometimes we did to customers that were less than ideal, but as we kept growing, we just kept getting more and more picky about our customers. If the customer doesn’t believe what I’m trying to sell him, I’ll be like, You’re not a fit. Because at this point we have a funnel. And like last month alone, I had 40 people that reach out to us and then they came back. And if they don’t, if they don’t, it becomes a peaking game. And some people don’t believe or like they don’t. That’s not why they are buying. And that’s okay. We have the software people that are what we are. Sally Yeah.

Greg Alexander [00:06:26] I mean, just a great demonstration of sticking to your ideal client profile, you choosing who you’re going to work with, people that recognize your value and are willing to pay for it. I’m sure there was a time when you were coming up in the early days that you couldn’t pick, you know, all revenue was good revenue. You had to turn the lights on and pay the employees. When did that happen? When did the when did the paradigm shift to where you you have a just a huge funnel and you get to choose who you want to work with.

Phil Alves [00:06:57] I think like when the money was coming and I invest that money in building that funnel, in building the positioning, and it changed when I realize that we’re going to get leads no matter what it like my pay per click and my CEO are delivering what they’re supposed to deliver. And then when I could trust that this I’m going to get customers. That’s when I start to change. And then we can start to replacing. We have customers that work with us maybe for a long time, but there was no ideal customer and then we just replace those customers for your customers. But I think it’s about putting your money in, investing your money in creating the channels and creating the positioning so you can be where you want to be.

Greg Alexander [00:07:37] Okay, so let’s talk about investment. So sometimes founders of boutique process firms, they see excess money in the bank account and the temptation is too strong. They pull it out of the bank account, buy a new car or something like that. You didn’t do that. You kept the money in the business and reinvested it in these ways, which ultimately resulted to where you are today, which is a very successful, thriving firm. So how did you how did you overcome that temptation and how did you resist the urge to build a lifestyle business and decided to really go for it?

Phil Alves [00:08:09] Actually, I read a book called Profit First, and I had some money that I took out, and then that money I could do whatever I want. So I did buy a nice car.

Speaker 3 [00:08:19] A Porsche. I didn’t want an airplane. I have look a lot of it, but most of the.

Phil Alves [00:08:24] Business, the money actually stay in the business and they got to reinvest that money on the business. So it was about having processes like the same way they have a process of how we run the business like fulfillment. I had a process about what I’m going to do with this money and I was only a small portion and it gets smaller as the company get bigger, you know. But there was only a small portion of that money that would go around us play money because you still want to get the rewards of what you were doing. And it was just about sticking to that process. They allowed me to have the money to reinvest in the business.

Greg Alexander [00:08:56] Very good. When I asked about margin improvement, the first thing you said was not being a body shop. And when somebody hires you, they’re not hiring an extra pair of hands. They’re hiring process, playbook, culture, which is a really compelling package. I’m assuming because the margins are where they are, that you’re able to charge a premium and that your target customer is paying a premium for process, playbook and culture. And that’s why that’s why I not the Body Shop. So how were those things developed? How have you protected them? How do you prevent your competitors from stealing it?

Phil Alves [00:09:40] I think it’s very hard to steal culture.

Greg Alexander [00:09:42] Yeah, that’s true.

Speaker 3 [00:09:43] Yeah, good point. You know.

Phil Alves [00:09:47] And that’s kind of like the thing that we from day one, I really emphasize the culture that we want to build and how we want to be. And they have different interactions, like we improve their culture. One thing they really help us do, we start with us. As we grew in the US does cover culture, the covers process, they have ways that you can use to implement those like. So like the same way basically I didn’t try to reinvent the wheel. I read a lot of books. I found processes that work, including your book, and I just replicate it.

Greg Alexander [00:10:21] Yeah. Okay, very good. And tell me a little bit about your culture. And I know iOS covers culture and it suggests how to build it and track it. But each company has its own unique culture. And you’ve mentioned that word so many times here. And in the context of profit and margin expansion, I don’t often hear the word culture, so I’m intrigued by this. Tell me about your culture and how does it contribute to your success?

Phil Alves [00:10:49] I believe that the teams that build amazing software products regardless, it’s not because of the talent, it’s because of the culture the team has. So the team, the culture that we develop is a culture that we say make it happen. Simplicity, we are about simplicity. So we want to be very simple play as a team and the value of your expectations. Those are our four values. We talk about them all the time. We have a lot of softness to the track and people can rewarded or people for keeping the values. When you’re making decisions inside the company, you make decisions based on those values. And I think the biggest one, it’s like make it happen in simplicity. We want to keep it simple and to get things to to the other side and get it done. And like, for example, we work with ADP, big Fortune 500 company. And the way the ADP, this thing you can, they overcomplicate everything. So they come to us and they’re like, wow, you got this done in six months. We had expected doing two years. It is because our culture it I could get the same people to work for ADP but inside my system, my process is if they follow how we work, they also would get the process done in in six months. So like I like to say, culture is the way that we do things around here. And that’s kind of like what we try to to pass down and to always talk about and to develop. And sometimes we have to understand we get bad things about our culture to cultures like how we do things. It’s not only the good things. So like recently we have a lot of people in Brazil or I’m originally from and people are showing up late, late to meetings because that’s part of Brazilian culture. Like you show up late and I’m like, That’s not acceptable. And then we, we correct the things inside our culture. So it became a high performing culture, you know. So yeah, yeah.

Greg Alexander [00:12:34] Now one of the things that you talk to your leadership board about recently was. The the push pull between or the the tension between doing really good work for your current clients, which obviously is very important in taking on new clients. And at some point and this happens to all of us, you have to do more of one or the other. So how do you decide? And how do you balance those two? You know, decide when to take on new clients, when not to take on new clients, when to focus on the existing clients that you have. How do you how do you think through that?

Phil Alves [00:13:10] Yeah. I think it has to be. Do I have the leadership inside my company ready to onboarding new customers? Do I have the customers inside the idea of customers all happy? Because there’s no point in losing the customers that I have just to onboard some new big customers. And we have been growing a lot year over year, but frequently I’m going to be like, we are not taking customers this quarter and we able to sometimes get people to put a deposit down and then start the next quarter. And I was the first time someone paid me a bunch of money not to work. I was like, What?

Speaker 3 [00:13:48] You went out and bought a plant? No, but I played. That’s funny.

Phil Alves [00:13:54] So. But it’s kind of like it is how we work right now. It is. Because if I’m not a body shop, I have to have the time in the consulting. You get the people from down the pyramid, move them down to management. And if I don’t have that person training it, it’s about having the actual leadership ready to onboard customers and add value to understand their culture and understand their playbook. And sometimes I cannot develop these people fast enough. If that’s the case, I have to wait. I’m taking your customers. Yeah.

Greg Alexander [00:14:25] I tell you, that’s a that’s a great problem to have. I mean, you have so much work. The limitation isn’t finding clients. The limitation is developing the talent quick enough. Speaking of talent, you mentioned that you’re from Brazil, but you live in Utah. Is your talent spread out all over the place or is it in one location? Do you use a remote workforce? Does people come to the office? How does it work?

Phil Alves [00:14:47] Yeah. So how about after you had a remote first culture? There’s about ten people that live in Utah. They come to the office if they want to. We do have customers fly here for us to do some workshops. We call the design sprints, so the workshop sometimes will happen in person, but most of our work is remote. And the workforce in Brazil with about 100 people now. Wow. They are they’re all remote anywhere in the country. So there’s no physical location around Brazil. There is one here in Utah, but it’s a remote first. Like you don’t have to always come to the office. You come to the office if you want to or if you have a customer flying here. Like sometimes we do have customers fly for us to do like their two days workshop before we started a project.

Greg Alexander [00:15:29] Now, since culture is connected to the margin expansion that we’re talking about today, you have a remote workforce, remote first. Some would say you can’t build a culture in that environment. You’re clearly proving that not to be true. So is there anything about building culture in the remote workforce that’s different than building culture in an on prem situation?

Phil Alves [00:15:52] Yeah, I think you have to be a lot more intentional when you have a remote workforce, you have to really spend the time. Culture has to be a priority. You have to talk about culture. You have to. I have this thing called the Culture Squad and this people are their own responsibilities to make sure people are understanding and getting the culture and they’re holding events and they’re doing stuff because it’s harder. Like people get to know each other, but. I think there are some of the basic human needs there for fuel and go to the office that are not automatically fulfilled when you work remotely like you want to have connection and you want to have a couple of things that’s a little bit harder. You never want environment and we have been doing that before with Cool to do it so we know how to do it.

Greg Alexander [00:16:38] So tell me about the Culture Squad. I love that idea. So how many people are on the Culture Squad? What do they do for you? How does one earn a spot on the culture squad like that? That sounds like a fun a fun gig to have. Tell me about that.

Phil Alves [00:16:52] So it’s a select group. There’s probably like six or seven people in that group. They get kind of like once a month and they have a budget and their goal is to put together events and things that will promote the culture. So they usually they’re doing workshops where they’re not just themselves, they’re getting someone from the overall company to do a workshop. So they’re promoting their workshop and people are coming, they’re participating. They are like deciding who is the employee of the month and they are running surveys to figure that out. They’re looking at like the reviews that employers give to each other. They are looking at problems that we might have in the culture because like I told you before, I think culture is the good and is the bad and you have to realize when the bad is happening. And so they are responsible to to point that out. So like the leak thing, I didn’t notice that they brought to me and they’re like, hey, people are getting like and their solution was for me to go into the whole company to stop doing, but that sucks.

Speaker 3 [00:17:54] But they will.

Phil Alves [00:17:55] Figure out those problems and they will sometimes have ideas of how to address and how to shrink the culture in different ways. Like so they say, hey, this month we’re going to talk about simplicity, what, what, what, everything that we can do to, to get people to understand what simplicity is. And they’re going to share kids studies. They’re going to do whatever to to get people to understand and put their get to this what I decide. I personally like got together with my management team and we just got people from different areas of the company that really understood the culture to represent who we are and we put those people in their squad. Yeah.

Greg Alexander [00:18:33] You know, one thing you mentioned also was that you guys build SaaS products. That’s your core business. You know, every time you pick up the newspaper, turn on the TV, go online. These days, you know, talk about the SAS industry going through a tough time. Have what’s your take on that? Have you seen any any pull back and is that affected your business or not?

Phil Alves [00:18:53] No, that has an effect on our business. These are mostly public companies that were overall average, in my opinion. A lot of our customers, they’re like smaller in the B2B space. They are like running profitable business and they’re doing this just fine. And we have even more people that are coming to view their SAS products because they are an expert in a niche and they’re building a product for someone just like themselves. Yeah, like we just to start a product for a guy that has I think he has close to a bunch of car washes. I won’t say the number, I’ll say wrong. Well, let’s say more than 100 car washes in the whole country. And then he knows how to run car washes and he knows all the software out there are not great. So he wants to build a software for other business just like his. And of course, he’s very profitable and he’s going to be just fine to the recession or whatever is going to happen in the coming months.

Greg Alexander [00:19:44] And people still get to wash their cars.

Speaker 3 [00:19:47] Yeah, exactly. So.

Greg Alexander [00:19:50] All right. Well, that’s good to hear. I mean, I this is my second company collected 54. My first one was started during a different era back in 2006. And I can tell you, I’m rooting for the SAS industry because the ease that I can run my business now, I mean, I run my entire business off my phone and the cost to run my business has plummeted. And it’s because of all these fantastic SAS products that are available and just cloud computing, cloud computing in general. So I wish you much continued success. I love having you in the group. I love to hear that that a consulting company that specializes in software development can run healthy profits because of things like process and culture and playbooks, you know? And it’s a great counter-example to some who feel the space you operated in has been completely commoditized. So congratulations to you and all the success that you’ve had.

Phil Alves [00:20:44] Thank you very much. It’s great to be here.

Greg Alexander [00:20:46] Okay. All right. So for those are the listeners that are not a member. And you might think about joining because you want to meet really fun and exciting people like Phil go to Collective 54 dot com and you can fill out an application and be considered for membership. If you’re not ready to be a member, but you want to keep educating yourself and consuming content. The same website Collective 54 dot com. There’s a resources section and you can subscribe to insights. You get a weekly podcast blog. We produce a chart of the week, which is a visual representation of benchmarking data. We even have a bestselling book called The Boutique How to Start Scale and Sell a Firm. So I encourage you to to check that out as well. But that’s the end of this show. And thanks for listening. We’ll see you next time.

January 23, 2023March 8, 2023

Episode 107 – From Rookie to President in 7 Years: Why Digital Agencies Need To Develop The Founder’s #2 Right Now – Member Case by Amy Pyles

Acquirers buy the management teams first and the boutique firm second. The due diligence process is heavily weighted to assess the quality of the management team to make a sound investment. On this episode, Amy Pyles, President at Saxum, examines her experience as the person replicating the founder. She will share what has worked and what didn’t work and how they continued to collaborate.

TRANSCRIPT

Greg Alexander [00:00:14] Welcome to the Pro Serve podcast with Collective 54, a podcast for founders and leaders, boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated entirely to helping you grow, scale and maybe someday exit your boutique. My name is Greg Alexander. I’m the founder and I will be your host today on in this episode. I’m going to talk to you about how to build a firm that is not dependent on you for its success. But we’ve got an interesting twist. We’re going to do this from the perspective of the president, the person that you as the founder have entrusted your firm with to run the operation. And we have a fantastic role model today. Her name is Amy Pyles. Amy. It’s good to see you. Thanks for being here.

Amy Pyles [00:01:09] Thanks so much for having me. I’m glad to be here.

Greg Alexander [00:01:12] Would you mind introducing yourself and your firm and what it is that you guys do?

Amy Pyles [00:01:17] Absolutely. So, like I said, I’m Amy Pyles. I am the president of SAC. We are a marketing and PR agency based out of Oklahoma City. But we work with clients all over the U.S., helping them balance purpose and profit and just communicate their story well.

Greg Alexander [00:01:36] Okay, fantastic. For those that are regular listeners, the word sex will sound familiar. One of our members, Renzi Stone, was a featured guest, a role model for us on this show several months ago. And he shared his story of how he built a firm that isn’t dependent on him. He built the firm that has an executive leadership team where it’s about the firm, not an individual. In addition, if you’re reading my new book, The Founder Bottleneck, How to Scale Yourself, you’ll see in Section three where we provide ten role model examples. Renzi story is documented in greater depth there as well, so I would draw it to those two resources. But Amy, we’re going to talk today about, you know, from the perspective of the president, you know, the number two, for lack of a better term. And it’s an interesting perspective and it’s an interesting challenge working with an entrepreneur and I am one and I know how hard that can be. So I’d love to hear from you kind of when this happened, why it happened, and kind of like what was your first, I don’t know, 90 days. Like.

Amy Pyles [00:02:49] Yeah, good questions. So I’ve been with the firm for about seven years now, so it’s been a progression. It wasn’t an overnight discussion, it wasn’t an overnight. You were this and now you have these responsibilities. So that’d be the first thing I’d say. So the first 90 days weren’t all that different because we had been working together towards different responsibilities and giving me exposure to different elements of the business. And we do have a really great leadership team in place, so it wasn’t like the baton was only passed to me to go figure that out. It had been a journey of setting up a really great structure so that Renzi could take on different things, but also to make sure I was ready to step into this role and have the right level of just experience and mentorship over the past seven years to prepare me for this.

Greg Alexander [00:03:45] Yeah, you know, I advocate for this approach, which I call or I don’t call. It’s known as Grow Your Own. And I want to make sure that I mention this to those that are listening. The success rate and the numbers on this are pretty clear. The success rate is much higher when you’re passing the baton internally to someone who is a great culture fit, someone who has earned it versus making it external hire. Because small boutique services firms, the very unique things, the culture is very strong. There are people, businesses, fit matters a lot. And I’ve seen several times where an external hire that was highly competent come in to a firm and it doesn’t go so well. And usually that’s because that’s external hire feels the need to come in and change things. Well, sometimes things don’t need to be changed, sometimes they just need to be tweaked or they need to be done more efficiently or what have you. But you know, the firm is successful in handing the baton over to an internal person. Is is really good. So, Emma, you talked about how you had been getting ready for this. So the first 90 days wasn’t really a major departure. I’d love to hear more about how you got ready for this.

Amy Pyles [00:05:09] Yeah, absolutely. So when I started with the firm, this wasn’t necessarily the progression that I joined for or that we thought I would take. I joined in the delivery side, so I was leading our digital services. So I immediately got good exposure to the clients, to the work that we’re doing and understood not just a methodology but the client side and how we delivered. Now my brain is naturally wired for operations and for business, so I gradually morphed into various different hats and different roles within the agency and moved into our chief operating officer role. And so that gave me a good expansion outside of just one service line and into the business on the executive team and understanding the financial aspects of the business, getting more exposure to the sales side and the client service side. So all of that and all the different hats I got to wear over these seven years really set me up for a well-rounded view of. The business. So it wasn’t coming in, just siloed into the area that I was passionate about or that I had expertize in before that really expanded that view. So I was thinking holistically about the business, not just about how do I make digital more successful here or any other facet of it. I was really looking at it holistically and I think that was some of the best preparation I got was just that exposure and the different hats I wore. Yeah.

Greg Alexander [00:06:36] Sometimes our members, the founders. They have a hard time letting go. This is their baby. It’s their life’s work. You know, they have almost all of their net worth tied up in the firm. You know, their family is dependent upon the income the firm generates, etc., etc.. It’s really hard to let go. And this is one of the obstacles. You know, they they have to find and trust in Amy. How did you earn the trust of Renzo?

Amy Pyles [00:07:06] Oh, gracious. Probably a question better geared towards him, but I can say it from my perspective was lots of conversations. Also, I think entrepreneurs want to be able to pass the baton to somebody who will disagree with them, to somebody that will dove in on an idea or challenge an idea. And I think one of the things that I was able to do is push back at the right ways when it needed to be to show that we could form ideas better together rather than being an order taker or just doing exactly what he had set out. And I think we discovered that we could do things better when we collaborated. And I think that that started to instill trust that I could make decisions, that I could jump in to a big vision idea, but I could also figure out how to tactically make it happen so that we weren’t living in two different worlds all the time, where I wasn’t just doing exactly what he said, but showed that I could make those decisions and lead a project through to completion without him having to hold my hand or be right there with me. Mm hmm.

Greg Alexander [00:08:13] Very good. Another question I want to ask you is that, I mean, the benefit to the founder of delegating strategic items to somebody like yourself is they now free up their time and they can amplify themselves and really go pursue the vision. These entrepreneurs, these visionaries, they have a vision and they want to go after it. But very often that vision never materializes because there’s just not enough hours in the day to go after it. But if they have a great partner like yourself and you can run the firm, they’re now working on tomorrow’s business. While you’re working on today’s business, then that sounds great. On paper, where it breaks down oftentimes is the founder has one foot in the old way, one foot in the new way, and he or she keeps sticking his or her nose where it doesn’t belong. And what’s required there is the partner you in this case has got to manage up. It’s got to get the founder out of the day to day because they make it up when they jump back in. So how do you manage up and what advice would you give others to do so?

Amy Pyles [00:09:24] Yeah, absolutely. You know, I think it has been a journey. It’s not an overnight shift that takes a lot of conversation and it takes having the right places to pull the founder in so that they can have a voice where they should and where they want to. So I think that there’s some strategic managing up of this would be a good opportunity to bring Renzi in or to have him lend his expertize, but quickly know how to transition it out of lending an idea to managing that all the way through. And so I think that that’s the the art of it is knowing those right touch points for input, for collaboration and for vision, but making sure it’s clear that the team is going to take it from there and actually go execute it or let it fall to the wayside, if it should, for the client or whatever that is. So I think that there’s just those strategic elements that you need to be able to pull them in on so that you’re feeding what’s important to them. And they don’t feel completely disconnected, but you’re not letting it linger for too long.

Greg Alexander [00:10:32] Yeah, you know, Saks.com is what we refer to internally as a power member, and that’s defined as a firm that joins as a team as opposed to an individual. And they do so for the things we’re talking about today. So I’ve had a lots of conversations with your peers, you know, the the partner to the founder. And one of the frustrations I hear from them and I want to kind of put you on the spot here is the visionary founder is an idea machine. I mean, they have ten ideas a day and they think every idea is the next great breakthrough idea. And they keep firing off these ideas, you know, to their execution partner. And the execution partner starts to say, oh, my gosh, like, first off, how do we prioritize these? Some of these are crazy. We shouldn’t be spending time on this. Oh, by the way, there’s a finite amount of money of people of hours in the day. Like, how am I going to get all this done? So how do you deal with the crazy entrepreneur who has too many ideas for his own good?

Amy Pyles [00:11:35] We don’t always get it right. I’ll say that first and foremost, we’re not definitely the perfect model student for that. But you know. One of the things that we’ve been trying to work on is a standard language of prioritization so that we can have a matrix where we can say, we’re going to strategically invest here. We’re going to drive daily over here. And then we’re going to delay some these other things that may be great ideas, etc.. So let’s put it in a delay category. And when we’re done with something that we strategically invested in and it’s now daily operations, we can look at what comes in next, or we can stop doing something here because a better opportunity has come. So we’re working on that right now is how do we get that common language that focuses us as an executive team but also gives a place for new ideas to come in and be evaluated against this finite set of man hours and resources and things that we could do. There’s a lot of could but should is always our question. And how do we weigh that in a way that is efficient and business oriented? And we take in a little bit of emotion out of it so that we can weigh those and make better decisions.

Greg Alexander [00:12:46] I like that. That’s a structured thinking towards prioritization, a matrix, if you will. That’s a really good idea. Okay. My last question and then we’ll wrap it up is let’s talk about money budget. So staying on this theme of this visionary founder with a ton of ideas and then he comes to you and says, go execute all these things. Or some of these things, take money. And then there’s a conflict because the founder is pulling the money out of the business and paying himself and then to go do some of these ideas he has, you know, he’s going to make less because it’s going to require investment. And usually these founders don’t want to go to a bank or don’t want to go to an investor. They’ve got a funded through operating cash flow. So how do you reconcile, you know, all the things that your founder wants to do with the hard truth of what the PNL says?

Amy Pyles [00:13:35] Yeah. We are very aligned on what some of our core KPIs for the business are and those metrics. So that helps from the get go of what’s our profit margin, what’s our people ratio that we’re willing to have, what is investment in business development? So we have a lot of predefined and agreed upon metrics that we set that gives us a good rubric to make decisions against. And if an idea comes from anywhere, whether it’s from us up to him or him coming in with an idea, the investment conversation comes with We can’t do it within our metrics. Are we willing to sacrifice one of these? Are we willing to take less profit for a period of time in order to fund that? Or do we want to bring that in in a different way? Ours is typically been we’re willing to sacrifice profit to invest in a way, and we take those out of our kind of KPIs and metrics that we’re measuring the success of the business on. So we can we come to alignment and agreement around how much we’re willing to invest and what’s the sacrifice to profit. And if we can exceed that, then, you know, great for all of us, but we at least have some alignment right there at the metric level.

Greg Alexander [00:14:42] Yeah, fantastic. Okay. Okay. Listen, as I’m going to pointed to a couple of resources. So first, if you’re a founder and you don’t have an army, you need to get one. And the best way to do that, in my humble opinion, is to read my new book, The Founder Bottleneck How to Scale Yourself. And it’s going to talk about how to identify a high potential employee and how to determine what to delegate, how to delegate it and when to delegate it. So that would be step one. Step two would be if you want to take it to the next level and you want to build a firm that doesn’t depend on you, you should enroll your Amy or Amy’s into collective 54 and and specifically have them master the boutique framework. And I’m proud to say that we’ve invested heavily and we now have a detailed how to online training. Chapter by chapter with new exciting tools, you can go do that. So I would point you towards that when that comes out, which should be in the first quarter of 2023. So get yourself an Amy and invest in Amy’s development so that she can help you build a firm that doesn’t depend on you. So, Amy, I could talk to you about this forever, and I’m sure we’ll have a chance to continue our dialog. I’m really looking forward to the Friday session where we’ll have the member Q&A. I’m sure you’re going to get a lot of questions there, but really appreciate you. I love having you in the group. It’s I’ve had a chance to get to know, you know, you here recently and you’re a shining star. And it’s just great to have you in the in the collective.

Amy Pyles [00:16:15] Well, thanks so much. I enjoy it as well.

Greg Alexander [00:16:17] Okay, fantastic. All right. So if you are a founder or a leader of a boutique processor firm and you would like to belong to a community of peers and meet great people like Amy, consider joining Collective 54 and you can apply at Collective 54 dot com if you aren’t ready just yet to join but you want to educate yourself on topics like this and others. I’m going to suggest you subscribe to Collective 54 Insights, and there you’ll find benchmarking data, you’ll find podcasts like this one, you’ll find a great blog. We even have a best selling book called How to Start Scale and Sell a professional services firm. So you can find all all of that there at Collective 54 dot com. But until then, thanks for listening and I look forward to our next episode.

November 7, 2022March 8, 2023

Episode 98 – How the Founder of an IT Services Firm Created a Legacy – Member Case with Jay Smith

How do you successfully exit your business without sacrificing your legacy? On this episode, Jay Smith, President of Security7 Networks, talks about how he built his business to be ready to sell, and the biggest lessons learned in the exit process.

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 today. And today I’m going to talk about why to sell your firm. This is often neglected. When we think about exiting our firms, we often think about how much to sell it for, on what terms, when to sell it, to sell it to. But we often forget the why. And in my opinion, the why is the most important question. And what I hope to accomplish today is to give the audience members something to think about, to make sure that they can get clarity around their why. And we’re very fortunate to have a role model with us today. His name is Jay Smith, is a member of Collective 54, and he will be sharing parts of his extraordinary journey with us today. Jay, welcome to the show. Good to see you.

Jay Smith [00:01:25] Thanks for having me, Greg.

Greg Alexander [00:01:28] Would you mind. Given you’re given a proper introduction, please.

Jay Smith [00:01:33] Sure. My name is Jay Smith. I’m the President of Sales or I used to be the President of Sales of Security seven networks. We recently exited maybe back two weeks ago or so. We’re in the security logical security boutique business, a MSSP managed security service provider. When I look in the years.

Greg Alexander [00:01:54] I’m sorry. Say it again.

Jay Smith [00:01:56] Been at it for around 20 years.

Greg Alexander [00:01:58] Yeah, very good. All right. So let me set this up before I jump into the questions. So the reason to sell your boutique is very personal, and it should be. You know, you’ve poured your life into building the firm and leaving it and handing it to somebody else takes much thought. Someone to sell for the money. Others say they’re bored. Some are just flat out exhausted. Some say the work just became a job. It’s not funny. More Maybe you’re afraid that tomorrow might not be as profitable as today. Sometimes, unfortunately, partners start fighting and one needs to be bought out. Maybe it’s just time to retire, you know, the list goes on and on. Sometimes there’s a health scare, which I know we’ll get into that a little bit. So the wider selling firm’s a very, very particular thing. And and that’s what we hope to discuss with the audience today. So, Jay, I would like to ask and start with your origin story and the origin story. As you know, I think when you’re thinking about why to sell your firm, it’s always a good thing to remind yourself why you started the firm in the first place. So go back 20 years and tell the audience why you started your firm. Please.

Jay Smith [00:03:08] A lot of it was opportunistic. We had worked. My primary business partner and I had worked at a reseller integrator and we thought we could do it better and we didn’t want to have a boss above us telling what he thought was going to be doing it better. And that business started to go away during the DOT bomb kind of time frame. So we saw an opportunity between a lot of accounts that we had built up in our ability and thought that we could actually do it better.

Greg Alexander [00:03:38] Okay. And sometimes it’s a lot easier to work for somebody else than it is to work for yourself and making that leap to start your own firm, something to be taken lightly. So, Jay, maybe share with the audience where you got the courage, the conviction to start your own firm.

Jay Smith [00:03:59] I thought it was necessary, courage or not. But, you know, we were pretty convinced that we could do it better. One of the things that I’ve equated as. As time has gone by is you end up trading one boss for about a thousand bosses. You know, you end up having something I didn’t really realize when we first started out. But every client becomes your boss. Every employee in the tough labor market, you know, in a weird way becomes your boss. You know, your insurer is the you know, the IRS. You know, you’ve got lots of different people that you end up having to answer to. And it becomes a juggling act and a balancing act. So I think we made it or we we thought it looked easier than it was. And then when we got into it, we realized, you know, the challenge of doing it. And it’s really pretty challenging, you know, particularly 20 years.

Greg Alexander [00:04:47] So with the power of retrospection, looking back 20 years, would you do it over again?

Jay Smith [00:04:53] I would I would I would certainly do it, but I would probably have framed it in my mind a little bit differently. You know, it’s it’s more difficult than it looks. And it’s also probably more rewarding than I realized at the time, too.

Greg Alexander [00:05:08] Yeah. You know, there’s a distinction between a small business owner and an entrepreneur. There’s been a lot written about this. But for what it’s worth, my perspective is this. There’s a lot of people that start businesses this far fewer that actually exit them. And to me, you’re really only an entrepreneur. When you go cradle to grave, when you launch a business, you scale it and it’s an asset that somebody else would actually want to buy and you’re able to sell it and you’ve been able to do that. So you are in the rare, the rarefied air, I should say, of being an entrepreneur as opposed to a small business owner. So 20 years is a long time. I believe you’re in your fifties, so it’s not like you had to sell, you know, you’re not 75 or something along those lines. So let me ask the the multimillion dollar question in your case, why did you sell now?

Jay Smith [00:06:01] Probably a kind of a perfect storm. So I’ve got partners. We’re starting to age. You know, I’m going to be 58 in a couple of months. We have one partner, the 61 now, the one that’s, you know, 56, 57. So we started to feel that this was a younger man’s game a little bit. There was a whole element of private equity that has entered our space. So, you know, the managed service provider space is traditionally been very fractured, many, many small organizations without dominant players with sticky revenue. So that’s attracted a private equity component to our space that they find the space very attractive. You know, and you combine that with low interest rates. So, you know, I’ve kind of equated it to, you know, from a selling standpoint, if you want to sell when your second bathroom is all fixed up, when the market condition was right. And we try to have an element of both, you know, we tried to make the second bathroom, you know, is as good as possible. But the market conditions were also really right. It also helped that we had an investment banker who really, you know, changed the level of people that we had talked to previously. We were accepting inbound calls before, and our phone was pretty active, but the investment banker had a very formalized process and we were able to pick off not only from a valuation perspective, but the other deal parameters. So, again, it was that perfect storm of of the right organization, you know, the valuations being good private equity space, you know, helping the valuations, our aging partners. And you had brought up some some medical issues that, you know, that I had had in my past that made me uninsurable. So, you know, we didn’t have an insurance and, you know, making this, you know, a seamless transition for employees, for partners, for for my beneficiaries should something bad happened, also weighed in on some of the decision making.

Greg Alexander [00:08:01] So, Jay, if it’s okay with you, I’d like to to poke on the personal reasons a little bit more. So you mentioned some some health issues. What perspective did that give you on life and what perspective that give you on your professional life?

Jay Smith [00:08:20] So it’s a weird one. I’ve had a pretty challenging family history medically with with heart disease. And when I suffered my first heart attack in my early to mid forties, the er doctor came to me and said Mr. Smith, you know you’ve been, you know, you’ve had your first. You’ve had your heart attack. And I’m like, okay. And it was I was very nonchalant about it. And the reason I was nonchalant is I’ve had, you know, like I said, a a of family history with heart disease and young death. So it was it kind of came as no surprise. And I was very nonchalant about it. So, you know, fast forward three years later, I have another pretty significant one in my health is really good now. I’m under the care of a cardiologist. But, you know, one of the things I, I found is, is I don’t want to leave things left undone. You know, it was real important to me to have, you know, the idea of a legacy and everybody looks at their family in such differently. But I wanted to make sure I was tidy as much as possible. Transitioning the small business while it’s still active with heirs that are not in the business I thought would have been in order. In order. In order about my partners, my employees, you know, my my children, my wife. So, you know, again, there were some some pretty personal reasons. And I don’t think that’s you know, it wasn’t a huge motivating factor, but it did go into that decision making.

Greg Alexander [00:09:50] Yeah, well, I appreciate your willingness to share that with us. And I’ve heard this from several entrepreneurs. You know, the transitioning of a small business is hard. It’s not it’s not an easy thing to do in selling boutique professional services firms is a very tricky and nuanced thing. Which leads me to my maybe my next question and maybe my last question as I look at the clock here. So, Jay, we had spoken for quite a while, you and I, before you entered the exit process. And your level of knowledge there around what it takes to exit a business was actually pretty good. However, you recently sent me a text now that you have exited and you said, Holy cow, I really didn’t know what I now know. So this is my question. So what do you now know about exiting a boutique preserved firm now that you’ve been through it, that you didn’t understand prior?

Jay Smith [00:10:46] There’s a lot probably probably too much to say. But you would always talk about the value of a good investment banker. And we had an excellent investment banker. One of the things that was important to us was to continue to work in the business to help transition. And we’d like to stick around for a bit. You know, we’re not old enough to quite retire and we still think we have some gas left in the tank. One of the things that the investment banker did that helped was when the negotiations started to get a little more challenging, I was told to shut up, which is a hard thing for me to do. In that was the idea to help keep me clean, right? I was going to continue to go with the deal unlike yours, right? That you didn’t want to be your investment banker, didn’t want you in for some particular reasons. My investment banker didn’t want me to get dirty, you know, and I was exposed to that, you know, we were coming along with the package that they wanted us for, for the talent. So that was something that I really didn’t understand how good the investment banker was, despite having you say it, I really, really underestimated deal fatigue. There were a couple of times when I was out of gas and what we chose to do when our exit, my two business partners remain to work in the business while I was working on the business to help the distractions keep to a minimum. And that deal fatigue stuff was real when an investment banker brought me up for sure the accountant did as well. The emotional side of the equation. I found myself getting very, very nostalgic about, you know, my partner and I first started, you know, two guys in a pickup truck. And I found myself thinking back to those days. And, you know, I’ve equated small business and entrepreneurship, like riding a car or driving a car. We’re most often looking through the to the windshield and you see all the opportunity and all the potholes and everything’s forward looking. But every now and then, you take a look in the rearview mirror, and I found myself doing that more and more. So, you know, there’s a whole emotional side of trying to sell your baby. And we wanted to make sure and we did a lot of diligence on the acquiring organization to make sure that it was the right place to to grow our baby up some more. We felt like we had a really good small thing. And, you know, having, you know, a big financial partner, the levered their balance sheet a little bit differently and and really put some gasoline on the on the whole equation was you know so I didn’t I don’t think I, I, I thought that that emotional side would be as significant in the nostalgia coming in. We had some really emotional things go through it. We end up giving bonuses to some of the staff or all of the staff and some of the reactions there were. Unexpected joy for more than I could have given credit. When some of the things that I think you can do as a small business owner is really use your platform of your business to help do good things in your community. And we’ve certainly done those things. But, you know, helping a younger person, getting into the career that’s rewarded you so much. I almost feel like it’s a baton pass and we’ve tried to be a good steward in the space to help grow up the next generation of people that are going to protect our digital assets. So there were things like that that came out of this process. Not underestimating the level of effort I should have could have been more organized. I thought we were. But the whole idea of putting a data room together, maybe before deal in the elements that go into that know we had some of those things, but it would have made less effort during crunch time. So that’s probably the best I can do off the top of my head. But there’s probably a few things in there that would help.

Greg Alexander [00:14:49] Well, listen, you’re like they say there’s no substitute for experience. And what you just walk us through and what what you now know about exiting a boutique process from having been through it compared to what you knew going into it? Yeah. You know, it’s one thing to hear about it or read about it. It’s quite another thing to live it. And I want to I want to make sure that I thank you on behalf of our community, our mastermind group, for your willingness to give back. I’m very proud of you for being able to pull off what you pulled off, particularly how you took care of your employees on the way out. Sometimes that doesn’t always happen. You know, greed can creep into the equation. And that didn’t happen to you. It’s always great to see good things happen to good people. So proud people.

Jay Smith [00:15:33] Thanks so much. Greg means a ton.

Greg Alexander [00:15:35] All right. All right. For those that are in professional services, who want to belong to a community like this and learn from role models like Jay Smith, consider joining Collective 54, which you can find at Collective54.com. And if you want to read some stuff around topics like this and and learn wisdom from people like Jay can always pick up a copy of our book. It’s called The Boutique How to Start Skill and Sell a Professional Services Firm. And you can find it on our website. You can find it on Amazon. So thanks for listening and look forward to the next episode of Jay. Thanks again for being there.

Jay Smith [00:16:11] Thanks so much, Greg.

Jay Smith [00:01:25] Thanks for having me, Greg.

Greg Alexander [00:01:28] Would you mind. Given you’re given a proper introduction, please.

Greg Alexander [00:01:54] I’m sorry. Say it again.

Jay Smith [00:01:56] Been at it for around 20 years.

Greg Alexander [00:04:47] So with the power of retrospection, looking back 20 years, would you do it over again?

Jay Smith [00:15:33] Thanks so much. Greg means a ton.

Jay Smith [00:16:11] Thanks so much, Greg.

October 31, 2022March 8, 2023

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.

October 24, 2022March 8, 2023

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.

September 26, 2022March 8, 2023

Episode 92 – How a Financial Services Firm Is Scaling Beyond a Lifestyle Business by Building a Sales Engine – Member Case with Hamid Akbari

There is an inflection point that all boutiques run into head-on. This is when sales generation happens by the employees and not by the partners. On this episode, Hamid Akbari, President & CEO at Blanc Labs, shares how the firm built its internal sales engine in 18 months and his key takeaways.

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 pro search firm. My name is Greg Alexander. I’m the founder and I’ll be your host today. Today, we’re going to talk about scaling beyond a lifestyle business by building a sales engine. What I hope to accomplish today is to give those listeners the courage to make the investments required. To go beyond a lifestyle business, particularly by investing in sales. It takes a lot of courage to do so, and it’s a big inflection point. And getting through that inflection point requires lots of courage and skill, and hopefully we’ll be able to share some of that with you today. And we’re very lucky to have a fantastic role model who is in the middle of this. His name is Hamid Akbari, and he is going to share with us a little bit about his journey. And he’s a member of Collective 54, and he’s in the middle of this right now. So welcome, Hamid, and would you please give a proper introduction to the audience?

Hamid Akbari [00:01:30] Hi, Greg. Thank you so much for having me on this show. This is Hamid, my company, Blanc Labs is serving mid-size enterprises, typically defined around 500 and higher. Employees primarily market in the financial service industry. Typically, you know financial services company at about $10 billion assets under management and their boss and we started a few years ago at around five years ago and view their technology boutique so we’re serving our clients by helping them the technology helping them reimagine the future, transform themselves and grow from there.

Greg Alexander [00:02:11] Okay. Very good. All right. Let me set this up a little bit before I jump into to the questions that I have. So start ups become boutiques by having the founder of the partners generate referrals and then boutiques become market leaders by building a commercial sales engine. That’s when they go beyond being a lifestyle business. And then someday when you go to sell your firm, a potential acquirer is going to want to see this in place. They want to see that the sales process has the ability to scale. And there’s an inflection point that all boutiques run that run into head on. And that’s when sales generation happens by the employees and not by the founder or founders. The old Preskill firms do not invest in building a professional sales engine because they don’t have to. The founder of the experts said, got large personal networks, and his personal networks expand as they gain more exposure to their niche. And then they can harvest these networks for business. And successful projects lead to happy clients, be clients lead to more word of mouth and word of mouth leads to more referrals. More referrals leads to more business. And this virtuous cycle, so to speak, produces enough business for quite a long time. The founder model can carry the firm through, let’s say, the first five years or so, but then sales flatlines. And this is the inflection point that we’re going to talk about today. Now, why is this? Well, there’s only so many hours in the day and the founder or co-founders are either selling or delivering work. And there’s a constraint. There’s a time constraint. And when when an A founder reaches this point, there’s really two options. So option A is that the is the founder led model. And this means really adding more partners to the equation, recruiting expensive partners who bring with them their own personal networks. And then you repeat this cycle over and over again. The problem with that is that to recruit partners, you’ve got to dilute your equity pool and profits get distributed to the owners. So there’s a price to pay for that. Option B is the opposite, and that is don’t recruit more partners, equity holders with personal networks, but rather build a professional sales model. And this has its own pros and cons. The biggest pro is you keep all the equity. And once you get through this expensive investment and you get on the other side of it, things are really good. But the process of doing it can be difficult. So we’re going to talk to Hamid today about how he’s going through this right now. And it’s a really interesting role model. So, I mean, would you maybe expand upon what I just shared and tell everybody exactly where you are in this journey and and how you got to this point?

Hamid Akbari [00:05:09] Absolutely. Exactly. As you’ve said a few years ago when you started it primarily kind of like promoted our services to our network. So we landed on and the first client to people who knew me, know myself or know my senior member of your team, or they’re a friend of their friends or to referral line of the first few client. It was obviously very expensive to build a commercial sales and marketing team. They’d not have enough revenue and profit to invest in a commercial team. So I took it on myself as well as my senior team, to reach out to netball, to learn. And the first few clients, once we landed, the first few client really entire focus but deliver significant value to those clients because there is no point to bring your client if you cannot maintain your existing client, keep them happy. So they invest a lot of time and effort and then invest a lot of capital in, you know, like making sure they get most value from our technology services. And then from there, we start expanding our services because landing on a major client is noisy. And once we landed, not only we wanted to keep them happy, we wanted to understand what are their pain points. They have an amount of pain points for the pain point. We can serve them better than anyone else. That allowed us to expand our business. Be those client on churn, say a treatment contract where a longer term contract and you know, let’s let’s say a $200,000 contract to a million and so forth that gave us the scale and the team size and the capital to think beyond the next level. And that was about how to bring more client like this one, as you said. Each of us email kind of like out of our existing referral. Our next book is only a finite number of people. I can know personally, obviously, and my team can know personally. So that’s that about the time I started to think about and also engage my senior team, think about how we should escape, how we kind of scale beyond what we are today. And obvious that you could not only expand as expand your business with existing clients, but also acquire new clients. And I cannot operate fair to Greg on my journey they took on to be able to attract new clients.

Greg Alexander [00:07:32] That’s a great set up and thank you for sharing that. As I understand it, you’re about 18 months into this journey of trying to bring on these these next set of anchor accounts, if you will. So what have you learned in the last 18 months?

Hamid Akbari [00:07:48] So one of the things I’ve learned is that from process prospecting, there’s a process pressed on team perspective. From a team perspective, obviously it’s no easier team to to build a commercial team. I define commercial team by a sales team. People can be relational instead of directly a marketing team, but that also required to make sure the client see the value product clearly and in our case, our partners. My last name. Because in technology you can do it alone. You need to rely on big as well as niche size partner to offer the best value to the client. So the first thing I learned is that to build a team as a good fit for our culture and that would be like external hire is noisy team. You can’t really talk to definition of job description type full definition of KPI, but it’s about by takes what this took to be successful. Because then you hire someone you want to, you want to make sure you set that person up for success that doesn’t hit the quota take home drive contrast for for and that color experiment experimentation as well as a lot of that a lot of working after that you have to write higher. Obviously the second kind of process I learned that landing on you will measure a client is no easy thing as well. And to break down that big problem for smaller chunks, for example, one of the things we did is that you know how to focus on the first asset to find, bring in those new leads, how often those leads to the next stage of the funnel so that we have a discovery side to showcase our value to the next client. And then it’s about, you know, how to close and how to once you landed on that account at that new client, how to how to actually expand the business with that client. But other offering they can put on the table to really expand our business because the client as well and so forth. So really it’s a team on the team. Sighs. I learned a lot about how to build a team. Austin I’m learning because they’re growing our team as well in the process as well. I learned a lot by look at that complex problem of sales, which is really not an easy team to sell to many similar clients. Break it down to Chong’s. I’m kind of trying to conquer each stage of that process quarter at a time so that we nail it and we can escape iyon at least twice this time.

Greg Alexander [00:10:04] So I want to probe on the team a little bit and also ask for further commentary regarding experimentation. The reason for my line of questioning here right now is when I speak to members of Collective 54 who are on this journey. They they have the initial courage to try to scale beyond a lifestyle business. And they know that to do so, they got to build this commercial sales and marketing engine, and they have the courage to invest the dollars and then they run into some trouble. You know, the first hire isn’t the right one or the second hire is the right one, etc., and they give up too early. And that’s a mistake because most of our members are domain experts, as you are, and maybe they didn’t grow up in sales and marketing. So it’s it’s realistic to think that you’re not going to get it right the first time. So in thinking about this as an experiment, my question for you would be what advice would you have for the members to set up the experiment correctly so that if they don’t succeed the first time, they don’t quit?

Hamid Akbari [00:11:13] So that’s a very good question. I think it has two parts. Number one is the mindset. So I think building a commercial team for scale is not a quick thing. So we need to set our mindset that it’s going to it’s going to take like quite a bit of time. So we need to be patient around it and to trust the team, and it will give it some time for it to actually like fight on all cylinders and get to breakeven and also generate significant amount of profit. So if we’re fixing fixing our eyes on it very, very quick or quick out and be very quick sells. They may not get there if you’re building a new team, if you’re building it for the first time. That’s our own mindset, obviously. The second thing on the team size and experimentation is the first part of the challenge is that find the right people and honest is not easy to take. So if you had that role in the past that has worked, replicating that high and similar, that may not be that difficult, but building a self esteem for the first time, building marketing team for the first time require record not only being thoughtful, but some experimentation because we need to make sure these people join our boutique for the right motivation. It’s very different from joining Microsoft for a massive enterprise. So do they have the right motivation? Do they understand the KPI? Do you understand why takes to succeed kind of set them up or succeed? Or are they the right fit for the culture? And most importantly, do they have transferable skills that you know, because they have never broken a particular like this? Each of these particular kind of like my boutique, for example, to kind of like a unique. So do you have enough transferable skills and smarts to task? Forget a skill set and grow from there? So I think that’s that’s one part. And as thoughtful as the person is in trying to select the right person because you can’t afford for the first time for sales or marketing team or partnership team. That’s an experiment, right? And if it’s not working, obviously. So it’s in a ways, it’s a paradox. On the one hand, we’ve all heard it hardest, slowly, if it’s not working out to to a very, very quick in terms of the right person. The other part of this paradox is that you also need to trust trust the team, give them time to prove themselves. So. So how do you how do you manage this paradox? What are the KPI or the leading KPI? So that be not this is walking down the right track, you’re making progress and to give it more time and to keep learning versus this specific high of a never make it in this company. Obviously the decision not always is trivial and easy.

Hamid Akbari [00:13:52] So that’s on the team side now on the process side, to build a scalable sales process, being the right tool, right process to qualify leads and so forth. That second process there, that’s quite of learning. If you haven’t done step on marketing before, like I haven’t haven’t done it before. It’s new stuff that you open to learning. Obviously you can go to college and I suspect, but there are certain best practices that you can follow so that the learning becomes organic learning and become better at kind of like building a sales funnel. And maybe it’s very different from every like from farm to farm by really the idea at least my idea is that like minute to minute to tackle it one at a time, right? You need to tackle the big problem, sell break, break it down to smaller part. And every month, every quarter is a piece of the puzzle until I find out you finally make it. And that’s how we did it. I built a sales team initially, the first hire, and I made it really neat for that salesperson. I did not give him the mountain. I give him like a piece of the offering. And I keep building and expanding on the sales team, on the marketing team, on the partnership team and learning so that they make incremental progress towards our goals.

Greg Alexander [00:15:09] I love the emphasis on building the process and the experimentation. And you know, for those that are listening that are in the IT services space as a meet is sales and marketing is a process just like developing a piece of software is a process. And if you can break it down to the fundamental tasks and think about gating the process and leveraging the body of knowledge that’s out there right now, it can get a lot easier. It’s very well-worn territory. Building a commercial sales and marketing team inside of a process boutique that’s been done over and over again. So if you haven’t done it before yourself, you know, don’t go it alone. Tap into those that have done it before. I want to come to the next obstacle that I hear, which is let’s say that I’m a father of a boutique and I’ve got myself to some success and I’m making a lot of money. I like what I’m doing because I enjoy the, you know, the practice of my craft, if you will. Where’s the funding come from? How do I invest in this? Do I take it out of my pocket? Do I use operating profits to fund this? Do I go raise capital? How did you fund this?

Hamid Akbari [00:16:22] That’s a good question. So it really depends on the offering. So if what you’re selling the offering is service offering, the solutions you have is not very profitable. It might be difficult to generate the fund to justify to invest in sales and marketing. In my case, we the VA, we made our offer and sold our offering at a price point and we made our offering of value to the client so attractive for the client that we could generate like a reasonable amount of profit to invest and grow it. And then we keep investing on more solution offering to existing clients. That means that the total contract value, the length of the value, the length of the length of those contract, the value of those contracts and the customer lifetime value are significant enough to justify investing, says our marketing team. It also means that those contract bought size and value on profit gave us the oxygen to be able to invest in our own growth, investment and our growth. But investing in that in IP new offering said they serve the customers better as well as the dollar value available to invest in a commercial to number one. It gives us cash to invest in our growth, including investing in a commercial team. And number two, it justify our eye on that to invest in the commercial team because we know the lifetime value of a new client is very significant. So as expensive it is to invest in a commercial team to try to justify your choice.

Greg Alexander [00:17:56] Yep. So the lesson for those that are listening is you’re probably asking, well, when do I do this? Will you do this? After you’ve established a service offering in an ideal client profile that allows you to earn a substantial amount of profit so that you can redirect that profit, that earned profit towards an investment in building out a commercial sales engine. If you have not done that yet, if you’re still struggling with profit margins or maybe the lifetime value of a client is not where it needs to be, it’s going to be tough to do this. So tackle that first, as Amit has done, and then use those dollars to invest in the commercial sales engine. Okay. I mean, I have one more question for you, and that is this issue of temptation. I know that’s a strange term to use on a business podcast such as this, but the temptation of the founder who’s running a highly profitable lifestyle business is to pull all the money out of the business and stick it in the bank account. The temptation is to not reinvest those dollars into building a commercial team. And when that happens, when we fall victim to that temptation, we get trapped in a lifestyle business we never break through to become a boutique at scale and to build that asset that someday we might be able to sell for the real dollars. So how did you resist the temptation? Where did your courage come from to scale beyond a lifestyle business?

Hamid Akbari [00:19:23] So it does start with a vision. All of us. Then we found a company. We have a vision. And if you don’t have one, that’s a problem. We need to go back to the whiteboard and build that vision, be there single handedly, or with the team and the vision to paint a picture of the future they want to be. What do you want to achieve? And that’s like guiding a staff for us to make the decision. That’s number one. Now, if the vision is to have a fairly small lifestyle company, well, then that’s okay to have a drive to profit. But if the vision is build something more scalable, then it’s then it’s questionable to big draw a profit potential lifestyle. Then when we have to have the vision for skinny the second the the other side of the coin with the vision is that the confidence it’s easy to have a vision but be very scared and frightened that we can’t achieve it. We also need faith and confidence in our vision, obviously, and the faith and confidence I need to be a bit more data driven, need to be with more market, do that. So if I, if I or any founder have a vision to achieve a certain outcome in a certain number of years, then the hard work of building that confidence if actually doing the hard work of seeking out how we can realize that vision, like you said a few minutes ago, like who is the ideal customer for five? Like, how do we serve them by their pain point? How do we differentiate once we have confidence that this idea of Customer five have a true pain point for which they’re keen to pay and we have a real value prop that we can serve them better than anyone else along those offering. Then we have the confidence, and then we can communicate that the team can communicate that to the client, and then we can overcome the temptation of withdrawing money because simply they’re scared that if you say or be scared that the vision didn’t deliver, realized. Because I’ve figured out it’s easy to have a vision. But you don’t have the hard work the. Build a road map toward achieving that vision. Then it’s become hard to have that confidence. Then it’s easy to get tempted by just like short term opportunities.

Greg Alexander [00:21:31] Yeah, well, this is fantastic. I could go on and on forever. I got about ten more questions to ask you, but we’ll will save those for the live Q&A session when we get together with the other members. But I mean, I wanted to make sure that I publicly thank you for your contribution today, the way these collectives work as we make deposits into the knowledge bank so we can all benefit from that. And from time to time we’re able to make withdrawals as well. So today you made a big deposit and knowledge back on a subject that is of particular interest to most of our members. So on behalf of the members, I mean, thank you so much for being here today.

Hamid Akbari [00:22:06] Great for having me.

Greg Alexander [00:22:08] Okay. So for those that are in professional services and want to belong to a community and learn from great people like me, consider applying to Collective 54 you could find as a Collective54.com. And if you want to read more about this subject and others like it, pick up a copy of my book, The Boutique. How to Start Scale and Sell a Professional Services Firm. You can find out at collective54.com or on Amazon. Thanks for listening and I look forward to our next episode.

September 12, 2022March 8, 2023

Episode 90 – How a Marketing Agency Packaged 15 years of Knowledge into a Proprietary Methodology – Member Case with Randell Mauricio

Strategics are usually filling a gap. Either the market shifts or the market leader’s service portfolio is lacking. This gap can be filled by building a practice internally or through an acquisition. On this episode, Randell Mauricio, VP of Operations at WorkerBee.TV, discusses how they built a sustainable firm to attract market leaders.

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 is Greg Alexander. I’m the founder and I’ll be your host today. And today we’re going to talk about the buy versus build conversation and in particular, how to build a sustainable firm with the intention of attracting a potential acquirer at some point down the road. And what I hope to accomplish on this show is to reveal with the help of our role model, which I’ll introduce in a moment, that the buy versus build conversation is happening with or without you, whether you know it or not. And in the event that you do want to sell your firm someday, there’s things that you should be doing right now as you’re growing and scaling your firm to put yourself in a good position to make that happen eventually down the road. We’re very fortunate to have Randall Mauricio. Randall, did I pronounce your last name correctly?

Randell Mauricio [00:01:31] Mauricio.

Greg Alexander [00:01:32] Mauricio. Excuse me. My pronunciation is terrible. I’ve known you for Randall for quite a long time, and I don’t think I’ve ever, ever said your last name. So I’m problem. And he is with WorkerBTV and they are in the process of doing exactly what it is that we’re talking today. So, Randall, would you please provide a proper introduction to the audience?

Randell Mauricio [00:01:55] Yeah, absolutely. First and foremost. Thanks for having me, Greg. And you’re right, we are in the process. In fact, the last meeting I was just on was actually just scratching at the surface of this bigger evolution of our company. But we’ve been around technically 15 years, and I’ve been with this company for, I think coming up to 12 years. I say 12 years because there was a reinvention. The 2008 crash in US significantly hard, but company’s been around for 15 years and we predominantly serve the association marketplace and we’re both a services provider of media production, videos, podcasts, that sort of thing. We aim to be a content machine for our clients and the other division of our company is is SAS and we have some platform services that help associations of that on our mission or our our core competencies and value. We help associations recruit more, retain more and drive revenue. We call those the three R’s. We’ve been doing that for 15 years. And as I mentioned, we’re looking at that next stage.

Greg Alexander [00:03:04] Yeah. All right. Well, very good. So let me introduce some concepts to the audience. So what do I mean by buy versus build? So when a market leader, a potential strategic acquirer, thinks about buying a boutique, they ask themselves a question, Should I buy a firm? Or Can I build this practice myself? And they really analyze that across three dimensions. So the first dimension is how long is it going to take? The second dimension is how much is it going to cost? And the third dimension is what’s the probability of success? So if I was a large firm in the media production space and I wanted to build out a practice that served associations, I would say to myself, okay, well, I could build this practice myself. And that’s going to take, you know, X number of years cost me y number of dollars and I would swag a probability of success percentage at it. Maybe I’ll give myself a 5050 shot or I could pick up the phone and call the good folks at WorkerBTV and say, Hey, you’re already doing this. You’ve been doing it for 15 years. I could get there a lot faster if I bought your firm. It’s it might not be cheaper. But if I consider the time value of money and opportunity cost, maybe it is. And certainly with a 15 year track record, I got a better than 5050 shot at pulling this off. And that’s the key, right? The key is to is to build the firm that you might get one of those calls. Now, you don’t have to accept it and you might say, well, I don’t want to sell my firm, but you do want it to be your choice and not theirs. So I’d love to hear from you as to, you know, what it is that you’re doing with your company that puts you in a position to maybe someday take that call and be able to prove to a strategic acquirer that buying you is better than building the practice internally.

Randell Mauricio [00:05:09] Absolutely. Greg, we’ve been talking a lot with the collector. Talk about, you know, what is a method firm, methodology firm? I really do think that it’s about the methodology, not just the institutional knowledge, but the way that we do things. And furthermore, for an acquirer, the partnerships that we have. And so let’s let me dig into media production for a moment. We have I think we just crossed over the 60 staff members, Mark, and predominantly most of them are here in Canada. And and I get it know, one of the things that we’re looking to do in the coming years is leverage the global workforce. There’s a lot of incentive for doing that. But or 15 years we’ve developed some some unique partnerships that allow us to do things a certain way better, faster, many times cheaper. I’ll give you a really good example right on the onset of our company, the first few years when video production was still a new concept and the association clients, we, we, we serve, they’re not local. I would dare say that 98%, 99% of them are in the US and they’re their business is international. So there’s times where we need to film in the US or in the UK. Here in Asia we’ve developed some partnerships and abilities and acquired some abilities to be able to dispatch the demographers just about anywhere in the world. But we’ve done that over the years. Harping back on two methodology that was in the first few years, in the last recent years, actually, fortunately enough for us, in late 2019, right before the pandemic, we actually acquired a technology. So going back to buy versus build, we actually invested in a technology in a company based out in New York that allows us to decentralize the process of filming. And so we can we’re able to film now using smartphones, iPhone 13, that are capable of filming in 4K. So what that does what that initiates for our clients is you can be in Singapore, your interviewer or somebody could could log in from London. We could have a recorded interview or a podcast conversation just like this that we’re having right now, record that immediately. And at the push of a button, those files are uploaded to our cloud. And later on that day we at WorkerBTV could very well be editing and producing that content. And so to wrap it up in certain partnerships have enabled us to have certain capabilities that, quite frankly, are really unique.

Greg Alexander [00:07:57] You know, it’s a great use case that you just share with us, and I’m going to share with the audience a story. So I was last July 4th, I was in Telluride, Colorado, with my family, hiking and WorkerBTV, was producing some content and they asked if I would be willing to be on the show. And of course I said yes. And one day I came back from a hike and there was a box at my garage and I opened the box and there was this iPhone 13 and a stand in a light and all this. And in 10 minutes I had it set up. And next thing you know, I was being interviewed by a television host and it was there was a little laminated card that said, okay, when you’re done with it, hit this. And literally I hit send, I guess was the button and went on to my my day and had a cup of coffee with my wife. And we went on with the rest of our activities. And it just it struck me because I’ve been around video production companies before and the legacy providers are large firms. I mean, that process, they would have had to have either found a local crew which in a place like Telluride, then maybe there is, maybe there isn’t, but it’s a small town of 2000 people, or they would have to fly in a crew with all the equipment, etc., and it would have been really, really hard. So in this new world we’re living in right now, where everything is decentralized, where virtual everything it seems like is the way to go, virtual office space, you know, you name it. This is an example of a a methodology. And to use Randall’s terms, a capability that a large acquirer might say to themselves, hey, we need to be able to do the same thing.

Greg Alexander [00:09:40] There’s a segment of our market that wants to buy our service in that way, and we don’t have it. So we could figure it out and hire to it or we could go make a deal with WorkerBTV and overnight I have that capability in my firm that’s it’s a great illustrative example to make the point here on developing a capability and methodology that might be attractive to somebody. Now, the challenge here, Randall, is that the large firms, which all of us, members of the boutique tribe, so to speak, compete with the large firms, have to be aware of the fact that they have a gap that needs to be filled. And then when they are aware that they have a gap, they need to know that you’re a best in breed. And whatever that niche is and partnering a buyer, you guys is the right thing. And the best way to make them aware of that gap is to compete with them head on, head in new client acquisition and actually win. And that’s that’s how they become aware of who you are. And they say, geez, how did we lose to that company? I never heard of them before. Maybe I should do some investigation. So has that happened to you? Have you competed with some of the bigger firms? And and have you beat them? And has that got you some attention or is that not happened just yet?

Randell Mauricio [00:11:03] It’s an interesting conversation, an interesting question, Greg, because I dare say it hasn’t happened yet and I’ll give you the context. We’re a bit of an anomaly in that because of the services we provide, but also the platform services that we provide, the SAS platforms where we believe there’s no one out there quite like us. Now, we’ve been seeing in that same zone for the last ten years or so. I think in the last year we’re starting to come out of the woodwork and we’re starting they’re starting to register on our radar where, hey, this actually might be something similar to what we do. And it wasn’t it wasn’t a surprise. We we both know that media production has been around for. For years. We’ve seen over the years how that the pendulum is starting to swing more towards our tech. Right. Ten, 12 years ago when I when I started with this company, by the way, I’m not the founder of this company. But as I alluded to earlier, we’re starting to plan out that next evolution so that our our founder takes on a chairman role anyhow. Ten, 12 years ago, it was I would dare say we were 80% media production. Hmm.

Randell Mauricio [00:12:17] We’ve swung now to about 5050, and I believe it’s it’s going to be 80/20 the other way, 80% tech. And we’ve been very conscious of that. We’ve been very strategic in our staffing and how we’ve structured our offerings and capabilities. We know that there is a certain type of genre that we can produce media for, and we and we’re very clear on that and we try to go after that business. We also know that we are in a global marketplace or workforce, and it’s really difficult to completely to compete with the agencies out there based out of New York, Dallas or wherever, shipping a bunch of work to India or to to the U.K. or to Asia or wherever that may be. So we’re trying to get ready for that. So a long way of saying we haven’t quite experienced that yet, but we’re gearing up for it in are silver bullet, if you will, is to focus more on our tech and hence why we’ve been investing largely in our SAS platforms.

Greg Alexander [00:13:27] And the tech. Just to be clear, the tech is what enables this unique way of capturing video via the iPhone.

Randell Mauricio [00:13:35] That’s part of it, actually. And we’re. Or we’re. Whether it’s a curse or blessing. We, too, just like you, Greg, in your in your prior business, we have a lot of offerings and service lines, but that’s just one. But our our SAS platform is actually video hosting and maybe for for a lack of better terms, I’ll say this, it allows our association clients to do what YouTube will not let you do. And I’ll explain that YouTube won’t let you serve your own banners for a click through. We can’t. YouTube will not let you gather data. We can. YouTube will not outright give you the data of whoever is subscribed to your content names, email addresses. We can do that for you. And if I were to relate this back to our live versus build conversation, we, we over the 15 years of developing this platform. And as you know, it’s it’s a body of knowledge. It’s a body of code and programing. We’ve always had to make the decision, are we going to build this internally or is there something out there that we can either buy or rent or partner with? Yeah. And one of the most one of the more interesting partnerships which we’ve secured is a data analytics firm, basically a data management technology or software. We’ve partnered with this company. If we take that capability layer on top of our existing I.T infrastructure, we’re excited about this because later on this year we’re going to have the ability to manage data preferences and become a rec and recommendations engine, just like YouTube or Facebook. And that’s going to be really powerful for our clients.

Greg Alexander [00:15:19] Yeah, that is powerful. You know, I’m struck by you said that video production been around a long time and it certainly has. But the way that you’re doing it, it’s just a great example of a new way of doing something old. I mean, this whole distributed video capture, the way that you’re hosting some of those examples of how you’re different than of an earlier approach on YouTube. You know, these are all the things that make your methodology, your capabilities attractive and somebody that wants to be able to do that in the future. If you guys do decide that you want to sell, you know, it’ll be an easy decision for them because it’s a it to your point, it’s 15 years of accumulated knowledge and that that is what a strategic acquisition partner would think about. If I’m going to build this myself, am I willing to invest 15 years or am I willing to throw some money at it and get there tomorrow? And that’s the takeaway from from this session, from the membership is whether you plan on selling or not, you want your firm to look great to a larger firm who might approach you for an acquisition. When they think about buy versus build across the three dimensions, how much is it going to cost? How long is it going to take, which is the big one, and what’s the probability of success? And Randall, you’re your role model. Today was fantastic. We’re at our time window here, but I just wanted to thank you for coming on the show and and sharing your story. The WorkerB story. It’s quite a story. And we look forward to the member Q&A.

Randell Mauricio [00:16:57] Thanks, Greg. Appreciate you having me on. This is a pleasure.

Greg Alexander [00:16:59] Okay. 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 Scale and Sell a Professional Services Firm. You can find that on Amazon and our website. And if you’re not a member and you think connecting with a group of peers in a mastermind setting would make sense for you, consider joining Collective54.com. Okay. Thanks again. Take care.

Randell Mauricio [00:17:26] Thanks Greg.

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