Tag: Exit

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Why Every Professional Service Firm Needs a Buy-Sell Agreement

Why Every Professional Service Firm Needs a Buy-Sell Agreement

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

Purpose of Buy-Sell Agreements

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

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

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

Three Key Provisions of Buy-Sell Agreements:

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

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

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

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

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

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

Facilitating the Buy-Sell Discussion:

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

Tool for Discussion: The “Partnership Alignment Matrix”

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

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

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

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

Greg Fincke

Tom Zucker

Frank Williamson

Rick Sapio

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

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Choosing the Right Attorney When Selling Your Firm: A Guide from Collective 54

Choosing the Right Attorney When Selling Your Firm: A Guide from Collective 54

Selling a boutique professional service firm is a significant endeavor, and having the right attorney by your side can make all the difference in ensuring a smooth and successful transaction. But with so many attorneys and law firms out there, how do you choose the right one? In this article, we will present a top ten list to guide founders in selecting the ideal attorney for selling their firm.

    1. Large Firm vs. Small Firm: Making the Right Choice

One of the first decisions to make is whether to work with a large law firm or a smaller boutique firm. Each option has its advantages. Large firms often offer a wider array of resources, a broader network, and extensive industry expertise. On the other hand, smaller firms tend to offer more personalized attention, direct access to senior attorneys, and a potentially more cost-effective approach. Both large firms and small firms can get the job done. Which do you prefer?

    1. Interviewing Attorneys and Law Firms: Sample Questions

When interviewing potential attorneys, asking the right questions can help you assess their suitability for your needs. Some sample questions to consider:

    • What is your experience in handling mergers and acquisitions?
    • Can you provide examples of deals like mine that you’ve successfully completed?
    • How will you communicate with me throughout the process?
    • What is your approach to managing conflicts of interest?
    • How do you handle disagreements or challenges during negotiations?
    • Can you outline the general timeline for a deal like mine?

A common mistake made by founders of small service firms is hiring their personal attorney to negotiate the sale of their firm. Avoid making this mistake by hiring a separate attorney with the specific experience you need.

    1. Checking References: Ensuring Reliability

Checking references is crucial to gaining insights into an attorney’s track record and reputation. Reach out to references who have worked with the attorney on similar transactions. Ask about their experiences, communication style, and overall satisfaction. Aim to contact at least three references to ensure a well-rounded perspective. Perform reference checks after the initial interview phase.

    1. Understanding Relevant Transaction Experience

An attorney’s transaction experience is a critical factor in your decision-making process. Look for experience in deals similar in size, complexity, and industry. Focus on attorneys who understand the nuances of your industry and can anticipate potential challenges. They should have a proven track record of successfully navigating the intricacies of M&A transactions.

    1. Personality: Finding the Right Fit

Selling your firm is undoubtedly a stressful endeavor. Having an attorney who can ease that stress through effective communication and a compatible personality is essential. You’ll be working closely with your attorney throughout the process, so it’s crucial that you feel comfortable, understood, and confident in their abilities.

    1. Role of Junior Attorneys: Understanding the Team

Law firms operate in teams, and junior attorneys often play integral roles in transactions. Make sure you understand who will be on the team and what their responsibilities will be. While senior attorneys bring experience, junior attorneys may handle day-to-day tasks, research, and document preparation. Ensure there’s a clear line of communication with both senior and junior members.

    1. Cost: Navigating Financial Expectations

Discussing fees and billing practices upfront is essential. Ask for an estimate of the total cost before the project begins. Request a sample bill to understand how charges are structured. Insist on monthly billing to stay informed about ongoing expenses. To manage costs, set a threshold for telephone call charges and ask for detailed explanations for any charges exceeding a specific limit. Consider taking an active role in the drafting process to minimize costs.

    1. Embracing Legal Technology: Improving Efficiency

Legal technology has evolved significantly in recent years. Inquire about the law firm’s use of technology to streamline processes, enhance due diligence, and cut costs. A tech-savvy attorney can leverage tools for document management, contract analysis, and data security, leading to improved outcomes and a more efficient transaction.

    1. Industry Knowledge and Business Acumen

For founders of boutique professional services firms, having an attorney who understands your industry and demonstrates business acumen is vital. Look for an attorney who can act as a thought partner, offering strategic insights beyond legal matters. A deep understanding of your industry landscape can lead to more tailored advice and better decision-making.

    1. Setting Expectations for Timeliness

Clear communication about expectations for turnaround times, response times, and overall project milestones is crucial. Ensure your attorney can provide a realistic timeline for each phase of the transaction. Timeliness is essential for meeting deadlines, managing negotiations, and maintaining transparency throughout the process.

In conclusion, choosing the right attorney when selling your firm requires careful consideration of various factors. Deciding between a large or small firm, conducting thorough interviews, checking references, understanding experience, gauging personality fit, grasping the role of junior attorneys, discussing costs, embracing technology, evaluating industry knowledge, and setting expectations for timeliness are all key elements in making an informed decision. By following this top ten list, you’ll be well-equipped to select an attorney who will guide you through the complexities of selling your firm and ensure a successful transaction.

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Preparing to Sell Your Firm and Make a Successful Exit

Preparing to Sell Your Firm and Make a Successful Exit

Play Video

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

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

In this video, you’ll learn:

    • 3 categories of relationships to pay attention to
    • The right questions to ask potential buyers
    • When to pursue a long-term relationship vs a performance-based relationship
    • A strategy to help keep you prepared for when investors call
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Waiting too Long to Sell

Waiting too Long to Sell

Play Video

There’s a good time to sell your firm, and there’s a bad time. But how do you know when it’s the right time to exit?

Watch this video and discover the environmental factors that play into selling your firm, the value of knowing what’s happening in your niche, and how to prevent a situation where you’re forced to sell.

In this video, you’ll also learn:

    • 5 environmental factors that play into selling your firm
    • Why you need to understand deal activity in your industry
    • How to identify if your firm is sellable
    • The importance of landing your firm in an existing category
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Knowing When to Leave: The Founder’s Role in a Professional Service Firm

Knowing When to Leave: The Founder’s Role in a Professional Service Firm

The early launch days of a professional service firm are often characterized by the visionary leadership of its founder. The founder’s dedication, expertise, and passion are instrumental in establishing the firm and shaping its culture. However, there comes a time when the founder must evaluate whether it is appropriate to continue in their current role or hand over management responsibility to a CEO. This decision can be challenging, as it involves considering what is lost when a founder leaves versus what is gained from new leadership.

During the early days, the founder plays a pivotal role in setting the direction, building relationships, and establishing the firm’s reputation. They possess deep industry knowledge and are often the driving force behind the firm’s initial success. The founder’s commitment and personal touch are instrumental in attracting clients, fostering a cohesive team, and navigating the challenges of starting a business.

However, as the firm grows, the demands and complexities increase exponentially. Scaling a professional service firm requires a different set of skills, including operational expertise, strategic vision, and leadership acumen. Recognizing these evolving needs is crucial in determining the right time for the founder to transition to a different role or bring in a CEO.

Several indicators can help assess if the founder should consider a change. One common sign is the adoption of “flavor of the week” strategies that cause employee whiplash. If the firm frequently changes its direction without a clear long-term vision, it can lead to confusion, disengagement, and reduced productivity among employees. Similarly, high turnover in the C-suite, growth stagnation at a certain size, excessive internal politics, and the founder becoming a bottleneck for decision-making are all signs that a founder may have overstayed their role.

When a founder leaves, there are various impacts on the firm. One of the immediate consequences is the morale issues that loyal employees may experience. The founder’s departure can create a sense of uncertainty and loss, especially if they were deeply involved in day-to-day operations. It becomes crucial for the new CEO or leadership team to step in and provide reassurance, transparency, and stability during this transition period.

The departure of a founder also necessitates a period of shakeout in the management team. With new leadership, there may be adjustments in roles and responsibilities, potentially resulting in some executives leaving or being replaced. This phase requires careful communication, clear expectations, and support for the team members who remain.

Maintaining positive relationships with clients is another vital aspect following a founder’s departure. Clients often develop strong ties with the founder, and it is crucial to reassure them that the firm’s values, quality, and commitment to excellence will continue under new leadership. Open and honest communication is key to retaining clients and ensuring a smooth transition.

In some cases, it may be possible for the founder to remain within the firm but in a different role. This arrangement allows the founder to continue contributing their expertise and industry knowledge while relieving them of operational and management responsibilities. However, the likelihood of a founder agreeing to such a new structure depends on individual circumstances, personal aspirations, and the founder’s ability to adapt to a different role within the organization.

Research studies have shed light on the percentage of founders who successfully make it to the exit. According to a reputable source, a study conducted by Harvard Business School found that only around 25% of founders are still at the helm when a professional service firm reaches the exit point. This statistic highlights the common occurrence of founders transitioning out of their leadership roles as firms evolve and grow.

Here is a specific tool designed exclusively for founders of professional service firms to assess if they have stayed at their firm too long. It is a SWOT analysis, which stands for Strengths, Weaknesses, Opportunities, and Threats. It has been adapted to help founders evaluate their position within the firm. Here’s how you can apply it:

    1. Strengths: Assess your personal strengths and skills as a founder. Are your core competencies aligned with the current needs and strategic direction of the firm? Evaluate if your expertise and leadership style are still relevant and effective in the evolving business landscape.
    2. Weaknesses: Reflect on your limitations and areas where you may have become a bottleneck or hindered the firm’s growth. Consider if there are aspects of the business that would benefit from new perspectives or different skill sets. Assess whether your weaknesses are impeding the firm’s progress and if they can be addressed through training, delegation, or restructuring.
    3. Opportunities: Identify opportunities for growth, innovation, and expansion that may require new leadership or different expertise. Consider emerging trends, market shifts, and evolving client needs. Assess if promoting someone to CEO or transitioning to a different role would enable the firm to seize these opportunities more effectively.
    4. Threats: Evaluate potential threats and challenges that could impact the firm’s long-term success. Assess if your continued involvement as the founder poses any risks, such as limited scalability, difficulty in attracting and retaining top talent, or being resistant to change. Consider whether new leadership would mitigate these threats and position the firm for sustained growth.

Additionally, seeking feedback from peers from a mastermind community, such as Collective 54, can provide valuable insights into your role and impact within the firm. Their perspectives can help you gain a more objective understanding of whether you have overstayed your position and if it’s time for a transition.

Remember, self-assessment tools are meant to guide your reflection and decision-making process, but ultimately the choice to stay or leave rests on your personal circumstances, aspirations, and the best interests of the firm.

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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.

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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.

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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. 

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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.

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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.

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