Episode 40: The Boutique: What No One Tells You About Failed Attempts to Exit

A top reason owners fail to exit is a decline in performance during the process of selling the firm. On this episode, we discuss how to avoid making this mistake.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case a top reason that owners failed to exit is a decline in performance during the process of selling their firm. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has helped many owners avoid this mistake and has some practical advice on the subject. Greg, good to see you. Welcome.

Greg Alexander [00:01:09] Thanks, pal. Good to be here. It looks like today we’re going to take one of the WTF moments on this space. Should be a lot of fun.

Sean Magennis [00:01:18] Yes. This is a WTF moment for sure. Greg, for the benefits of our new listeners and for our regulars. Can you explain the issue we are discussing today in more precise terms?

Greg Alexander [00:01:29] Sure. So after selecting an investment banker, the official process to sell a firm kicks off. The workload placed on the management team to successfully exit is large. For instance, there is a never ending stream of information request. This creates a huge distraction and the net result of this distraction is a decline in revenue and profit performance during the nine or so months it takes to exit. This decline causes the potential buyers to doubt the dependability of the projections. And unfortunately, with their confidence shaken, investors pull out of the deal. This happens far too often. The good news is, is this is avoidable.

Sean Magennis [00:02:16] So let’s explore this good news. How can one avoid this mistake, Greg?

Greg Alexander [00:02:20] So there are some best practices to follow. Let me share a few of them here. First time the process to sell the firm when there is a robust backlog, backlog is defined as work that is signed and under contract. It has not been delivered yet. The future revenue is highly dependable. It reduces the risk of a decline in performance during the process. A good rule of thumb is to have nine to 12 months of backlog heading into the process. So, for example, let us say a firm communicates to a buyer a 12 month revenue projection of 50 million dollars. An owner should have at least thirty seven and a half million or the equivalent of nine months under contract. In backlog before kicking off the process to sell. This will keep the cash flow flowing at a crucial time.

Sean Magennis [00:03:12] That is an excellent example. It’s extraordinarily practical. So what are some other ways to avoid failing to exit due to a decline of performance during the process to sell?

Greg Alexander [00:03:25] Next after backlog, I recommend turning your attention to the sales pipeline. I suggest a sales pipeline of five to one. For instance, let us say that you’re a 12 month projections for new businesses, 10 million. This suggests having visibility on 50 million in new work before the process to sell your firm begins. A five to one project pipeline provides enough coverage to hit the target.

Sean Magennis [00:03:54] Boy, that’s a good one. And it seems reasonable as a five to one pipeline ratio suggests a 20 percent close rate, which is conservative. How about some other advice for our listeners, Greg, on this issue?

Greg Alexander [00:04:07] Here’s an idea I have seen work brilliantly, but for some reason it is not often implemented. The idea is to split the business development team in two. Team one is committed to bringing in new business. Team two is committed to selling the firm. This addresses a common, overlooked mistake, which is underestimating the work required to sell the firm. For instance, owners of a firm are typically rainmaker’s. They bring in a lot of new business when their time is consumed with selling the firm. They’re not bringing in new clients. The revenue takes a hit and the exit falls apart by dividing up the workload. This can be prevented. And before I get off my soapbox, let me share a few other tactical ideas. Bullet proof the forecast. Investors are buying the firm based on the future growth it will generate. They are very skeptical. And we’ll put your forecast under the bright lights. Lastly, it’s a good idea. Think about transaction preparedness. Firm leaders will be asked to perform work. They have never done before. For example, you’ll be asked to prepare materials such as an information memorandum and many others. Get your hands on a few examples. Well, ahead of trying to exit and give yourself enough time to practice before trying to exit. This will shorten the time it takes to go to market and will result in a shorter sales process.

Sean Magennis [00:05:42] Fantastic, Greg. So split the BD team in two, bullet proof the forecast, and practice transaction preparedness. These are items our listeners can get to work on immediately. Thank you, Greg.

Sean Magennis [00:06:01] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Frank Digioia [00:06:26] My name is Frank Digioia and I am the CEO and owner of the Fort Group. At the Fort Group, we offer a wide range of marketing services and solutions across many industries to help solve marketing challenges for clients navigating a marketplace that’s in transition. By that, I mean marketing in the middle of a monumental digital transformation. These clients look to us for various marketing services, including strategy, channel and sales, promotion, digital, as well as the creative needs. We solve these challenges by partnering with our clients and working hard to find the right solutions with the right resources. If you need help with these marketing services, feel free to reach out to me at [email protected]

Sean Magennis [00:07:05] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the Collective54.com.

Sean Magennis [00:07:23] Okay, this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm, our preferred tool as a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions in this instance, if you answer yes to eight or more of these questions, you can sustain performance during the process to sell your firm. If you answer no too many times, you’re likely to blow your opportunity to exit. Let’s begin.

Sean Magennis [00:08:02] Number one, do you have enough backlog prior to launching the process to exit? Number two, do you have enough pipeline prior to launching the process to exit? Number three, can the new business team stay focused on bringing in clients during the exit process? Number four, can the owners work be delegated to others during the exit process? Number five, is the forecast reliable? Number six, will the forecasts remain reliable during a time of great distraction? Number seven, have you provided enough deal support to the finance team? Number eight, can the finance team handle the constant requests for reports and information? Number nine, have you reviewed examples of the common documents used during transaction preparedness? And number ten, have you attempted a practice run in putting together these documents?

Sean Magennis [00:09:22] In summary, many exit attempts fail because the distraction of trying to exit causes a dip in revenue and profit performance. This should and must not happen to you, selling your firm is a big project lasting almost a full year. Get yourself ready ahead of time and be sure to time your attempt to exit correctly.

Sean Magennis [00:09:48] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 35: The Boutique: How to Prevent Greed from Stopping Your Exit

Greed, if left unchecked, can get in the way of a successful exit. On this episode, Collective 54 founder Greg Alexander shares a shareholder alignment framework to help you keep greed from stopping your successful exit

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host on this episode. I will make the case that greed, if left unchecked, can get in the way of a successful exit. I’ll try to prove this theory by interviewing Greg Alexander. Capital 54’s founder and chief investment officer. Greg has developed a framework to help you keep greed from sinking your deal. Greg, as always, good to see you. And welcome.

Greg Alexander [00:01:06] Thanks, pal. Nice to be here. I see we are tackling one of the seven deadly sins today. Maybe we should start by saying 10 Hail Mary’s.

Sean Magennis [00:01:16] I use that frequently, but I think we’re okay as I actually took… My mother would be proud. Greg, in all seriousness, what does greed have to do with exiting a boutique professional services firm?

Greg Alexander [00:01:32] Unfortunately, a lot. A common reason that attempts to exit fail is a lack of shareholder alignment. A good deal for some is not a good deal for others. Disagreements over who gets what and when they get it have sunk. Many deals. Greed is a very powerful force.

Sean Magennis [00:01:52] It is indeed. And I can see this being a real issue as many professional services firms are organized as partnerships with each partner being a shareholder. They all have rights and getting everyone on the same page can be tricky. Greg, I. I often hear you speak about shareholder and stakeholder alignment. Can you define these terms for our audience?

Greg Alexander [00:02:16] Sure, a shareholder, is anyone who owns a share in the boutique. A stakeholder is a person or group who has a stake in the business. For instance, in boutiques, clients, they’re a stakeholder. They rely on the firm. So they have a stake in the firm’s business. Or your bank is a stakeholder. They depend on you to pay back the line of credit, for instance.

Sean Magennis [00:02:45] And why do shareholders and stakeholders play an important role when an owner is trying to exit?

Greg Alexander [00:02:52] They can prevent a deal from happening. So let’s start with the shareholders. For instance, they will vote on the exit, either approving it or not. If enough shares vote against the deal, it does not happen. And at times, it can be nuanced and more nuanced than this. For example, let’s say one of our listeners is the majority shareholder and he has enough power to approve the exit. However, his junior partner, who owns 10 percent of the shares, does not want the deal to happen. The junior partner can cause real problems as he is a key employee. And if he threatens to quit, the acquirer might get cold feet and not do the deal. The investor is buying a people driven business. And if key employees do not want to stay, they’re not going to go through with the sale. Majority and minority control are an important element, but in practical terms, not as much as you think. The same can be said about stakeholders. Stakeholders have rights and can prevent deals from closing as well. For example, the landlord is protected by the lease agreement. The bank is protected by the loan agreement. In some cases, stakeholders are not protected by legal agreements, but they might as well be. For example, a key client legally cannot prevent a deal from happening, but they can stop it in other ways. The key client can tell an investor during diligence that if this deal goes through, he will take his business to a competitor that can stop a deal dead in its tracks.

Sean Magennis [00:04:36] I can clearly see how getting both the shareholders and the stakeholders on the same page is absolutely mission critical. This is a tough question. How is this accomplished?

Greg Alexander [00:04:51] Well, as they say, half of a solution to a problem is recognizing that you have one. So if you’ve listened to this show, you’re halfway there. The remaining 50 percent can broking- can be broken down into two actions. So, number one, have the difficult alignment conversations before you attempt an exit, negotiate who gets what and when they get it way before a deal is on the table. And number two is to remind everyone about the alignment frequently during the process. It’s important to keep everyone in the boat focused on the predetermined definition of success. When offers start coming in, you cannot let anyone conveniently change their mind.

Sean Magennis [00:05:41] This is excellent advice, Greg. Negotiate internally first and get everyone to agree on an acceptable price and deal terms prior to attempting an exit. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Scott Conard [00:06:22] Hello, my name is Dr. Scott Conard and I own Converging Health Consulting. Warren Buffett talks about health care being a tapeworm on the economy. Well, it’s a vampire on young companies who need their capital for growth. We serve companies that want to decrease the cost while improving their health benefit offering. They turn to us for help with the number two cost in most service companies health benefits. We initially work with them to flatten and then lower their costs while building a stronger culture, loyalty and engagement. We do this by having a 20 minute call with a CEO or president and their H.R. staff, where we explain a 30 day free evaluation of their current situation from a contractual and clinical viewpoint. If you need help with reducing health benefit costs while building and improving a stronger culture, reach out to me at [email protected] or 817-691-4970.

Sean Magennis [00:07:15] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:07:31] Okay, so this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions in this instance, if you answer yes to eight or more of these questions, you have greed in check. If you answer no, too many times, shareholders and stakeholders will put your deal at risk by bickering over who gets what and when they get it. Let’s begin.

Sean Magennis [00:08:14] Number one, do you have more than one shareholder?

Greg Alexander [00:08:18] You know, obviously, if you’re the sole proprietor.

Sean Magennis [00:08:21] It is a lot easier.

Greg Alexander [00:08:22] It is a lot easier. Yeah.

Sean Magennis [00:08:24] Number two, do they agree on an acceptable price?

Greg Alexander [00:08:28] You know, I would tell you this is a difficult conversation and the reason for that is, is that when you get all the shareholders together in a room and you asked a question, you know, what would you accept for the firm? They throw out these numbers and they have no basis, in fact. So handling this with care and making sure that everybody understands the common way upon which to value a firm like yours and bring some type of method to the conversation helps a lot.

Sean Magennis [00:08:52] And you always said preparation is key and planning and taking the time to do it properly.

Greg Alexander [00:08:57] Sure.

Sean Magennis [00:08:58] So number three, do they agree on the terms of the deal?

Greg Alexander [00:09:01] Another issue. You know, sometimes people are doing this for the first time, so they don’t understand things like rolling your equity or an earn out, how much cash is paid at closing, etc..

Sean Magennis [00:09:12] Number four, are everyone’s expectations, which is what we discussing, are everyone’s expectations realistic?

Greg Alexander [00:09:19] Yeah.

Sean Magennis [00:09:20] Number five, do you have multiple stakeholder groups?

Greg Alexander [00:09:24] Yep. So don’t just pay attention to shareholders. Make sure you’re thinking about your stakeholders as well.

Sean Magennis [00:09:29] And number six, do you know what each stakeholder group wants? Number seven, are their expectations realistic? Number eight, do you know which stakeholder groups could get in the way? Number nine, do you know what the acquirer will require from each of them? And number ten, can you find a compromise between the acquirer and the stakeholder group?

Greg Alexander [00:09:57] Yeah, there’s always a compromise. OK. So the solution to preventing greed from stopping your exit is just find- just find common ground and, you know, at the risk of being crude. Don’t be a pig, yourself. You know, if you want to keep greed in check. Don’t be greedy.

Sean Magennis [00:10:14] Yes. Well said, Greg. So in summary, remember that shareholders own part of your firm. They have rights and will need to agree with you and your deal. And keep in mind, you have stakeholders as well. They also need to agree for you to close. It is best to get alignment prior to attempting to exit. There is usually a compromise that makes everyone happy. However, this compromise is very hard to identify under the hot lights of a deal.

Sean Magennis [00:10:49] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 32: The Boutique: The Anatomy of the Buy vs. Build Decision

To sell your firm you must prove to a buyer that buying your firm is a better move than building the practice internally. Collective 54 founder Greg Alexander reviews a framework to assess the buy vs. build decision from the perspective of an investor.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host on this episode. I will make the case that to sell your firm, you must prove to a buyer that buying your firm is a better move than building the practice internally. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s, founder and chief investment officer. Greg has developed a framework to help you think through the buy versus build decision from the perspective of an investor. Greg, great to see you. Welcome.

Greg Alexander [00:01:11] Thanks, Sean. Good to be with you today.

Sean Magennis [00:01:13] So allow me to set the stage a bit before I begin asking you some questions. When considering an acquisition, a strategic acquirer starts with a fundamental question. Should we buy this boutique or build the practice internally and owners who want to sell their boutiques must make it more attractive for a strategic to buy. Greg, in this context, what makes it more attractive to buy?

Greg Alexander [00:01:41] Three things. Time, cost and probability of success.

Sean Magennis [00:01:46] So time, cost and probability of success. Let’s take this one at a time when you say time. What do you mean exactly?

Greg Alexander [00:01:56] Sure. When a strategic buyer is looking at acquisition it is often to fill a gap. The market shifts and at times larger firms portfolio of service offerings falls behind. Clients are asking them for help in a certain area and they cannot deliver. So they must often miss the revenue opportunity. This gap can be filled either by building the capability internally or it can be filled by purchasing a firm who specializes in the area. The urgency on which the gap needs to be filled drives the timeline. If the market allows the strategic enough time to build the capability internally, they will. However, if the market is moving very fast, the strategic will buy a boutique. This gives them the capability the day the deal closes. And this is much, much faster.

Sean Magennis [00:02:49] Excellent. That this makes total sense. So let’s now turn to number two cost. So in this context, how does cost impact the buy versus build decision?

Greg Alexander [00:03:01] Well, cost is just as important as time. So, for example, right now, marketing agencies are buying up tech specialists. Why? Their clients are demanding more and more digital capability from them. And it is very expensive to build this out internally. Those who have tried to do so have failed miserably and paid a lot of dump tax. It is much more cost effective to acquire boutiques with specific digital capabilities.

Sean Magennis [00:03:33] I can see that, Greg, and there are many examples of multi-million dollar technology mistakes. Number three is probability of success. I think I know what you’re referring to here, but please expand for the audience.

Greg Alexander [00:03:48] So probability of success is often added to time and cost when deciding to buy or build. Professional services firms are only as successful as their reputation allows. A few high profile failed projects and a firm could become worthless overnight. When a large firm expands into new service areas, they are putting at risk long standing client relationships and millions of dollars of annual billings. They cannot afford to stub their toe, so they often buy and pay up great boutiques just to be sure this is going to work.

Sean Magennis [00:04:30] These are great examples, Greg. So this three point framework to think through the buy versus build decision from the viewpoint of the buyer is very helpful.

Sean Magennis [00:04:43] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Charles Fenstermaker [00:05:09] Hello. My name is Charles Fenstermaker. My family owns CH Fenstermaker and Associates LLC. For over 70 years, we served customers in the energy market as well as state and municipal governments, primarily throughout the Gulf Coast region. Our clients turn to us for help with projects dealing with surveying and mapping, civil engineering and environmental regulatory challenges. If you need our help in the surveying civil engineering and environmental regulatory space, you can find us at www.Fenstermaker.com. That’s www.f-e-n-s-t-e-r-m-a-k-e-r.com.

Sean Magennis [00:05:49] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com.

Sean Magennis [00:06:05] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm, our preferred tool as a checklist. And our style of checklist is a yes, no questionnaire. We aim to keep it simple, by asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, strategics will find buying you is more attractive than building internally. If you to no, too many times strategics will most likely decide not to buy you and instead build internally. Let’s begin.

Sean Magennis [00:06:48] Question number one, as the market shifted, creating a gap in the service portfolios of the market leaders in your niche? Number two, are these market leaders aware of this gap?

Greg Alexander [00:07:03] Don’t assume that sometimes these big firms are just plotting blind. Yeah.

Sean Magennis [00:07:08] Number three is the gap, one that urgently needs to be filled? Number four, have you directly competed with the market leaders on a deal in this specific area? Number five, did you win?

Greg Alexander [00:07:25] Yeah, I mean, the quickest way to get people’s attention is be to beat them at that deal.

Sean Magennis [00:07:29] Question number six, do the market leaders know they lost to you? Number seven, do they know they lost because you have a capability advantage over them?

Greg Alexander [00:07:40] This is key. Very often they assume they lost because you were cheaper. What would be fantastic if the listeners could pull this off, is you competed head to head, you won and you were more expensive than them. That will really catch their attention.

Sean Magennis [00:07:54] Outstanding. Number eight, if they were to fill the gap, would it be faster to buy you? Number nine, if they were to fill the gap, would it be cheaper to buy? And number ten, does their probability of successfully filling the gap go up if they buy you?

Sean Magennis [00:08:16] In summary, the buy versus build discussion is happening with or without you. It is best for you to participate in and frame that discussion. Make a strong case that acquiring your firm is faster, cheaper and more likely to be successful than building out an internal practice.

Sean Magennis [00:08:40] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique Artist Start Scale and Sell a professional services firm. I’m Sean Magennis. Thank you for listening.

How to Reduce Investor Risk When Selling a Business

Episode 28: The Boutique: The Fine Line Between Risk Taking And Carelessness

One of the keys to selling your business is to reduce investor risk and eliminate the risk for the buyer. In this episode, Greg Alexander and Sean Magennis discuss how owners can increase the attractiveness of their firms and the mistakes they must avoid when reducing investor risk. 

Why Do Owners Struggle to Reduce Investor Risk When Selling a Business? 

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. This show aims to help you grow, scale, and sell your firm at the right time for the right price and on the right terms. 

I’m Sean Magennis, CEO of Capital 54 and your host. In this episode, I will make the case that one of the keys to selling a business  is to eliminate the risk for the buyer. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has helped many boutique business owners increase the attractiveness of their firms by reducing investor risk. Greg, good to see you. 

Greg Alexander [00:01:05] Thanks, Sean. This will be a controversial episode.

Sean Magennis [00:01:09] I love it.

Greg Alexander [00:01:10] Some of our listeners are running firms that carry a lot of investment risk, and I bet some of them don’t even know it. I might inadvertently call some babies ugly today.

Sean Magennis [00:01:20] Well, the good news is we do not have a live studio audience, so you will not hear the boos. On a serious note, tell us why some boutique owners have blind spots in this area when selling a business.

Greg Alexander [00:01:36] Firm owners think like operators; they do not think like investors. Therefore, they approach a deal with all the reasons it works. Whereby, the investor approaches a deal with all the reasons it will not work. For investors, their number one goal is to not lose money. A return is expected for sure. But the rate of return is considered only after the threat of capital loss is calculated.

Sean Magennis [00:02:05] Greg, you’re correct on this one. Our listeners are owners of firms, but they are also entrepreneurs and founders, and as a breed, we’re an optimistic bunch. We have to be. I can see how this glass is half full mentality can be a hindrance when trying to develop a business exit strategy and selling a business.

Example: How Not to Exit Your Business

Greg Alexander [00:02:26] Yeah. Let me share a story to bring this to life. So a few years ago, a media buying firm put itself up for sale. For those unfamiliar with a media buying firm, these firms buy advertising space for media companies and sell it to advertising agencies. The advertising agency uses the space to place ads for its clients. 

This firm’s specialty was newspapers. This was pre-Internet. A roll-up  of media rep firms was happening. A few large firms are buying up all the boutiques. This owner was getting a lot of interest. Yet, he blew it. He had a golden opportunity to exit immediately for a very high price, and he royally screwed it up.

Greg Alexander [00:03:13] Sadly, he eventually had to file bankruptcy because, as you know, the newspaper advertising business got crushed by the Internet. What was the fatal mistake made by this owner? He was unable to complete due diligence quickly. 

His financials were a mess. His personal life was wrapped up in them. He was unreasonable with his add-backs . His family members were on the payroll and didn’t do any work. His salary was not reflective of the true cost of the position. He took family vacations and charged them as business expenses. I mean, this guy was a real cowboy. All of this could have been worked out. However, a land grab was underway.

Greg Alexander [00:04:02] Speed was of critical concern. The firms, particularly the big firms, looked at his books and concluded it was simply too much work. And it would take too much time to figure out this mess. So they bought this guy’s competitor instead. His competitors were running tight ships and could close quickly. This was a tragic story.

Sean Magennis [00:04:28] Geez, what a shame. So the moral of the story is to run a tight ship. Greg, what advice would you have for our listeners to help them avoid this type of tragic outcome when selling a business?

How to Reduce Investor Risk: Mistakes Professional Services Firms Should Avoid

Greg Alexander [00:04:41] The big lesson here is that there’s a fine line between taking risks and being careless. Entrepreneurs are risk-takers , and therefore they build great boutiques, but this cannot go too far. If it does, once in a lifetime, wealth creation opportunities can pass you by.

Sean Magennis [00:05:03] Greg, give our listeners some examples of how they might be taking it too far. What mistakes should they avoid?

Greg Alexander [00:05:10] Gosh, there are so many. For example, don’t cheat on your taxes. Investors and potential acquirers hate cheaters. Don’t be careless with the law. You know, if you push the limits here and get caught. Lawsuits will get filed against you. These get found during diligence. That can kill a deal as fast as you can say sorry. 

And heaven forbid if you were in the crosshairs of government regulators, you know, then you’re in real trouble. You’re not going to be able to sell. So stay far away from regulators. So those are just a few obvious mistakes to avoid when selling a business.

Sean Magennis [00:05:45] Those are great examples, Greg, and extremely good reminders.

Sean Magennis [00:05:53] And now a word from our sponsor. Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow, scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Brenna Garratt [00:06:18] Hello, my name is Brenna Garratt. I own Sustena Group of Business-to-business brand development firm. Most of our clients are mid-sized B2B companies with investor or private equity backing. 

Our key areas of focus are business, and tech-enabled  services, technology, and health care. We work closely with executive leaders and private equity firms. Our clients seek our help when their brand strategy is out of sync with their business strategy. 

We solve these challenges by developing a strategic foundation, the brand infrastructure, and go-to-market brand activation programs to help our clients articulate their business and brand. If you’re interested in learning more, please visit sustenagroup.com or connect with me at [email protected] And lastly, a nod to Collective 54. The organization has been absolutely invaluable to me.

Sean Magennis [00:07:10] If you are trying to grow, scale, or sell your firm and feel you would benefit from being a part of a mastermind community of peers, visit Collective54.com.

Questions to Ask When Reducing Investor Risk and Selling a Business

Sean Magennis [00:07:29] So, this will take us to the end of this episode. And as is customary, we end each show with a tool. This allows a listener to apply the lessons to his or her firm. Our preferred tool to use is  a checklist. And our checklist-style is a yes-no questionnaire. 

We aim to keep it simple by asking only ten yes-no questions. If you answer yes to eight or more of these questions, you have successfully de-risked your deal. If you answer no too many times, you are too risky for investors. So, let’s begin.

Greg Alexander [00:08:05] Number one, do you have five years of audited financials?

Greg Alexander [00:08:10] Yeah. I mean, such an easy thing to do.

Sean Magennis [00:08:12] Exactly.

Greg Alexander [00:08:13] Pay somebody; they can do it. It’s beneficial not only when selling a business , but it also is beneficial as an operator because it gets you thinking about your business as an investor would.

Sean Magennis [00:08:22] Great example. Number two, do you have five years of tax returns? Number three, are you operating according to industry-standard  accounting principles? Number four, do you have a few, if any, add-backs?

Greg Alexander [00:08:39] I mean, don’t be a cowboy.

Sean Magennis [00:08:40] Exactly. Number five, is your personal financial life clearly separated from your business financials? Number six, have you ever been sued? Number seven, have you ever sued anyone? Number eight, are you clear of any outstanding legal action?

Greg Alexander [00:09:05] If you have any, settle.

Sean Magennis [00:09:07] Yep. Number nine, are you using industry-standard  legal contracts with clients, employees, and suppliers? And number ten, are you compliant with your industry regulations?

Sean Magennis [00:09:24] In summary, do not give a buyer a reason to say no when selling a business. Run a tight ship. Run your boutique by the book. Operating in the gray area will make a potential buyer nervous. And any gain from doing so is just not worth it.

Sean Magennis [00:09:44] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled “The Boutique How to Start Scale and Sell a Professional Services Firm.” I’m Sean Magennis. Thank you for listening.

Episode 23: The Boutique: EXIT HACK: BUILDING A LARGE UNIVERSE OF POTENTIAL BUYERS

A key to selling your professional services firm is building a wide and deep universe of potential buyers. On this episode, we discuss how to develop broad interest with potential acquirers.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with the show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that the key to selling your firm is to build a wide and deep universe of potential buyers. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg, maybe more than any other thought leader understands how to develop broad interest in a boutique from potential acquirers. Greg, great to see you and welcome.

Greg Alexander [00:01:06] Thanks, pal. Great topic today. By the end of this show, I hope our listeners learn how to tilt the supply and demand equation in their favor.

Sean Magennis [00:01:13] Amen. So maybe we should start out with that very thing. Supply and demand. How does this economic theory apply to selling a professional services firm?

Greg Alexander [00:01:25] OK. It might not be obvious, so let me explain. Supply and demand will impact one’s ability to sell the firm. Let’s consider first the supply side. If there are many boutiques like yours available for sale, valuations are going down and the opposite is true. If you are the only firm in your niche willing to sell, valuations are going up. And if we flip the coin, and considered the demand side. If the universe of buyers is wide and deep, the chances of a successful exit increase. If the number of potential buyers is small, exiting will be difficult.

Sean Magennis [00:01:58] Excellent. I can see how supply and demand effect valuations and the probability of exiting. This begs the question, how does an owner of a boutique manipulate supply and demand?

Greg Alexander [00:02:10] So this is where the investment banker earns his feet. It is their job to generate lots of demand for your firm. They are skilled at doing this using a variety of methods, starting with market maps, adjacencies, segmenting the private equity investors and many others. They are experts at throwing a wide net.

Sean Magennis [00:02:31] Greg, it’s one thing to build a list and yet quite another to generate real interest from firms on this list. How is this done in your experience?

Greg Alexander [00:02:42] This is where the owner and the banker need to partner. The investment banker will build an exhaustive list of potential buyers. But he or she will need the owner’s help preparing the pitch. An owner can contribute at this stage, by given the banker compelling strategic rationale to buy your boutique and I advocate for developing this deal, rationale for each buyer, for customizing it for that specific buyer. This will increase the positive response rates the investment banker generates.

Sean Magennis [00:03:14] Excellent Greg. So let’s save our listeners some time by giving them some examples of what might go into such a customized pitch.

Greg Alexander [00:03:24] There are many, but here are a few since our show is meant to be short. Maybe buying a boutique opens up a new market for a strategic acquire. Or maybe if I buy your boutique, it will strengthen my value proposition and help me sell more of my core services. At times I must acquire because I’m at a competitive disadvantage in buying new fixes that a common one these days is firms buy boutiques to diversify revenue streams. For example, my firm has too much client concentration and I can buy you. Which brings a whole new set of clients. These are but a few, do you get the picture?

Sean Magennis [00:04:03] I do Greg, so simple and practical examples listeners can use as a starting point. Really excellent.

Sean Magennis [00:04:13] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Brenda Hurtado [00:04:39] Thank you, Sean. Hi, my name is Brenda Hurtado. I’m president of The Point Group. The Point Group is a marketing communications firm built from a different model. We’re an integrated full service agency with strategists from both the agency side and the client side. Our unique combination of business acumen and marketing expertize brings a fresh perspective and approach to find creative solutions that truly make a difference and drive business results. For more than 25 five years, we’ve worked with startups, the Fortune 50 brands to help them enter new markets, position them for growth and improve their customer engagement strategies. At the Point Group, we create work that works to learn more about the company. See us at thepointgroup.com.

Sean Magennis [00:05:23] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the Collective54.com.

Sean Magennis [00:05:40] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple. By asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, you have a large universe of buyers. If you answer no too many times your buyer pool is too small, which means you might not be able to exit. Let’s begin.

Sean Magennis [00:06:21] Do you know how many firms like yours are for sale?

Greg Alexander [00:06:25] Quickest way to find that out is play the role of an acquirer. Pick up the phone, call people and say, hey, you want to sell your firm? I’m interested in buying. And you can get a really quick gauge for how many firms like yours are for sale.

Sean Magennis [00:06:36] Excellent. Number two, have you completed a market map?

Greg Alexander [00:06:42] For those in our family with that term, does Google market map, and there’s lots and lots of how to step by step guides to create one.

Sean Magennis [00:06:49] Correct. Number three, has this market map produced an exhaustive list, exhaustive list of potential buyers? Number four, does this map include adjacent markets?

Greg Alexander [00:07:02] Yeah, and this is important. Don’t think too narrowly. You know, there’s markets to the left and right, a view that also contain possible acquirers.

Sean Magennis [00:07:10] Number five, does the map include private equity firms with a known interest in firms like yours? Number six, have you developed the strategic rationale to buy your firm? Number seven, have you customized this deal rationale for each potential buyer? Number eight, do you know the leading investment banker in your niche? Number nine, have you approached them about representing? And number ten, has this investment banker creatively enlarged the universe of potential buyers for you?

Sean Magennis [00:07:56] In summary, keep in mind that supply and demand will impact your exit. Take the time to strategically approach the market. The goal is to build a wide and deep universe of buyers. There are many more buyers than you likely realize, some of them just might respond well to what you have built. And one of them might be willing to pay you a lot for your firm.

Sean Magennis [00:08:24] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 20: The Boutique: The Best Way to Get the Highest Price

The best way to get the highest price for your firm at exit is to get the comps right. In this episode, we discuss how to drive up valuations through the proper positioning of professional services firms.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal for this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I’ll make the case that the best way to get the highest price for your firm at exit is to get the comps right. I’ll try to prove this by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is a master of driving up valuations through the proper positioning of professional services firms. Greg, good to see you and welcome.

Greg Alexander [00:01:06] Thanks, Sean. I’m looking forward to making our listeners some money today.

Sean Magennis [00:01:09] I love it. Let’s begin by grounding the audience in a definition of a comp. What does that mean?

Greg Alexander [00:01:17] So the term comp, comps, is short for the word comparables and the word comparables is meant to define the valuations in the terms, firms like yours get when they sell. For instance, the last time you sold your home, the price you sold for was determined by the price of similar homes in your neighborhood. By looking at comps, a buyer can get a feel for the fair market value of a firm.

Sean Magennis [00:01:44] Got it. So the last time we bought a home, our real estate agent provided me the cost per square foot of homes in our neighborhood and how they were selling. In essence, these were comps. So when selling a firm, does it work the same way?

Greg Alexander [00:02:00] It does. But in this case, there is no real estate agent. Instead, there is an investment banker who performs similar duties. Also, in this case, there is no cost per square foot. Instead, there is a multiple of EBITDA, which determines how much a firm is worth. Am I making sense here?

Sean Magennis [00:02:18] Yes, you are. So owners of firms hire typically an investment banker who markets the firm to potential buyers. And the price of the firm is determined by the multiple of EBITDA. Can you help the listeners understand how comps play a role in this?

Greg Alexander [00:02:36] Sure. It’s pretty straightforward. So when I sold my firm, I hired M.H.T. as my investment banker. I chose them because they had represented firms in my niche before and had firsthand knowledge as to how much firms like mine were sold for. This established our comps in practical terms when the price I was seeking from buyers was challenged. They justified our asking price by referencing the comps.

Sean Magennis [00:03:02] Got it. So I think it would be great. Greg, if if you could share with the audience how category positioning affects the comps.

Greg Alexander [00:03:10] Sure. So I’ll use my personal story as the use case here. So my firm, SBI, was originally placed in the sales training category and this was not correct. We did not train sales teams. We were a management consulting firm specializing in sales effectiveness. The correct comps for us were other management consulting firms. This distinction was a big deal as it affects EBITDA multiples greatly. At the time, sales training firms were being bought for five and a half times EBITDA. Management consulting firms were being bought for nine times EBITDA. In addition, sales training firms were not perceived to be high growth firms. Yet my firm had a 10 year compounded growth rate of 30 percent when we were correctly positioned. As a high growth firm in the management consulting space, our multiple went to 11 times EBITDA. These two modifications to how our firm was positioned resulted in a multi-million dollar increase in the purchase price.

Sean Magennis [00:04:18] Greg, that’s that is a great story and it solidifies the mission critical nature of really getting the comps right. So this aspect of exit readiness is literally worth millions.

Greg Alexander [00:04:31] It truly is.

Sean Magennis [00:04:35] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Brandon Hernandez [00:05:01] Hello. My name is Brandon Hernandez. I am the owner of Wholegrain Consulting. We service clients in the USDA, FDA and CPG food landscape. These clients turn to us for help in supply chain, Q8, QC, regulatory compliance, command source and selection and negotiation, and a small research and development arm. We solve this problem by being an outsourced, hourly, customizable solution for your company. If you need help with any of these areas, please reach out to www.whole-grain-consulting.com or you can reach out to me directly at [email protected] Thank you.

Sean Magennis [00:05:42] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:05:59] OK, so this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 yes-no questions. In this instance, if you answer yes to eight or more of these questions, you have your comps right. If you answer no too many times, you might lose millions because your comps are not accurate. So let’s begin.

Sean Magennis [00:06:38] Number one, do you have a list of boutiques in your category that recently sold? Number two, do you know the price paid for each of them? Number three, do you know the deal terms for each?

Greg Alexander [00:06:57] You know, right now our listeners are saying no, no and no to the first three questions, and that’s followed up with. I get why you want this data. How do you get it? Let me tell you how I did it. I just picked up the phone and I called the owners of these boutiques. And an interesting thing happened, which is worthy for the listeners right now. People love to brag about their deals.

Sean Magennis [00:07:16] Yes, they do.

Greg Alexander [00:07:17] So when you ask him, what did your firm sell for? They stick their chest out and they give you their big number. We ask him, you know what, the terms of the deal, where they express it to you. So don’t be bashful. Just pick up the phone. You’d be surprised what you find out.

Sean Magennis [00:07:31] Great advice, Greg. Number four, do you know the investment banker who represented each? Number five, do you know the names of the investors who bid on each of these deals? Number six, do you know who won the deal for each? Number seven, do you know exactly why the winner won?

Greg Alexander [00:07:56] And the right investment banker can help you answer all of these questions.

Sean Magennis [00:08:00] Precisely. Number eight, is your boutique in the correct category? Number nine, is the correct category for your boutique, obvious to potential buyers?

Greg Alexander [00:08:13] You know, that’s an interesting question, because I learned from my personal experience. I just assumed that people that were looking at my business knew that we were a management consulting firm. And what I realized was, is they had no idea, you know, who we were, what we did. And they defaulted us to the wrong category. And if I didn’t correct them…

Sean Magennis [00:08:34] Yep.

Greg Alexander [00:08:35] It would have cost millions.

Sean Magennis [00:08:37] Excellent point, Greg. And finally, number ten, you trying to sell your boutique to the right group of buyers?

Greg Alexander [00:08:45] There’s people out there that are looking for your type of business. And there’s people out there that would never buy your type of business. So make sure that you don’t waste any time talking to the wrong buyer group.

Sean Magennis [00:08:57] Excellent, thank you, Greg. And in summary, comps are very important. They can add and subtract a huge amount to the purchase price and they can significantly alter deal terms. Be sure you are positioned in the correct category and be sure to pursue the correct buyer group.

Sean Magennis [00:09:19] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thanks for listening.

Episode 18: The Boutique: How to Determine if Now is The Time to Exit

There is a good time to sell. And there is a bad time to sell. Unfortunately, this is largely out of your control. Focus on building a highly desirable boutique and be patient. Wait for the sun to be shining.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that there is a good time to sell your boutique and a bad time to sell your boutique. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has developed a set of indicators that firm owners can use to help time an exit. Greg, great to see you. Welcome.

Greg Alexander [00:01:07] Thanks, Sean. Good to be here. And what a great topic we have today.

Sean Magennis [00:01:09] Yeah, let’s jump right into it. So how can an owner of a boutique professional services firm determine if the time is right to exit?

Greg Alexander [00:01:17] The first point I’d like to make is that timing does really matter. Often firm owners do not appreciate this fact. They are compelled to sell for some personal or operational reason. And they put themselves up for sale regardless of the macro environment. And when they are unable to find a buyer, they get frustrated.

Sean Magennis [00:01:36] Greg. So true. And forecasting the future can be extraordinarily difficult. So how can a listener understand when the time is right?

Greg Alexander [00:01:48] So I’ve developed a list of indicators that can point to optimal timing. You’re right. Forecasting with precision is tough here, but there are some indicators that can maybe get you 80 percent of the way there. Things to pay attention to, allow me to share a few.

Sean Magennis [00:02:03] Great.

Greg Alexander [00:02:04] First. Pay attention to the deal activity in your niche. Niches get hot and they get cold. If firms like yours are being bought, this would suggest that it’s a good time to sell. Second, analyze the transactions and try to determine the drivers behind the recent activity. Why are firms like yours being purchased at this particular moment in time? This will indicate the strength of the trend. And if it is likely to continue, if it is, then it might be a good time to sell. And then third, it is wise to consider the point in the economic cycle. One finds themselves in, for example, during times of economic expansion, the ability to exit goes up. And in contrast, during times of recession, the ability to exit goes down. Are these making sense?

Sean Magennis [00:02:57] Yes. Greg, they they are. So really pay attention to deal activity in the niche, the drivers behind the activity as a trend predictor, and then the economic cycle. Those are reliable indicators one can use to time an owner’s exit. Are there any others?

Greg Alexander [00:03:18] There are some others. I would encourage our listeners to look at multi-year trends of their particular niche. Investors want exposure to growing markets. If your niche has a healthy organic growth growth rate and has for some time, this is an indicator. The timing is right.

Greg Alexander [00:03:38] I’d also point to the debt markets as they play a big role in the timing of an exit. If the banks are lending and are lending in a deals like yours, the ability to exit goes up a lot. If the banks are tightening, this restricts the funding available for your deal. And this will hurt your ability to close. And the last idea off the top of my head, expanding on the last comment is the pool of available capital in general. Are there large pools of available capital being deployed in your niche? For example, has your niche attracted private equity investors or private lenders or lots of strategic acquirers cetera? The larger the pool of available capital, the more likely you will be able to exit. Now, if the funds are not there, it will be very hard to pull off an exit.

Sean Magennis [00:04:32] Excellent additions to the list of indicators, Greg. So a multi-year organic growth rates, the state of the debt markets and the size of the available pools of capital. All these, our listeners can watch out for.

Sean Magennis [00:04:49] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Bob Dianetti [00:05:15] Hello, my name is Bob Dianetti. I own BrainSpark Talent Development. We serve H.R. and learning and development leaders in the manufacturing and professional services industries. These clients turn to us for help with employee engagement issues. We solve this problem by workforce assessments, followed by pinpoint training interventions. If you need help with disengaged employees, reach out to us at www.brainsparktalent.com or [email protected] Thank you very much.

Sean Magennis [00:05:48] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:06:05] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no question. We aim to keep it simple. By asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, it is time to sell. If you answer no too many times, the timing may not be right. Let’s begin.

Sean Magennis [00:06:40] Number one, are they large pools of available capital in your niche? Number two, are the multi year industry trends in your niche favorable? Number three, are banks lending in your niche? Number four, are private lending institutions lending into your niche? Number five, are interest rates low, allowing for deals to get done? Number six, can your boutique handle a decent amount of debt on the balance sheet?

Greg Alexander [00:07:21] So that’s maybe a non obvious one and that’s related to interest rates. So most of these deals will be funded with both equity and debt.

Sean Magennis [00:07:30] Yes.

Greg Alexander [00:07:31] And when somebody is considering how much debt they can put on a deal, they’re thinking about the strain it would put on the PNL. So make sure you understand, you know, how much debt you can handle on your balance sheet and given the interest rate environment, what the debt service requirements would be on the business.

Sean Magennis [00:07:50] Excellent point, Greg. Number seven, are deals happening in your space? And Greg, a quick question on this one. Where does a boutique owner go to find out if deals are being done in the space?

Greg Alexander [00:08:03] Yeah, it’s difficult because most of these businesses are private. So they’re not publicly reported, you know, and required by law. But there’s all kinds of specialty data sources out there that track deal activity, particularly in the private equity world. So, I mean, simply just a Google search.

Sean Magennis [00:08:26] Yes. Then investment bankers who specialize in the space are…

Greg Alexander [00:08:30] That’s another great source for sure.

Sean Magennis [00:08:31] Excellent. Eight, do you know the drivers of this deal activity? Number nine, are you at the right point in the economic cycle? And number ten, if they had to, would a buyer make an all cash offer?

Sean Magennis [00:08:51] So in summary, there is a good time and a bad time to attempt an exit. Unfortunately, this is largely out of your control. However, there are indicators that can help you time your exit. Know what they are. Watch out for them. Listen to what the market is telling you. Be patient. Wait for the sun to be shining bright, then exit.

Sean Magennis [00:09:17] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 16: The Boutique: Tomorrow is More Important than Today.

What have you done for me lately? Buyers of your boutique are purchasing who you are becoming. They are not buying who you have been. Yesterday is worthless to them. They are looking forward. And need to be excited about your potential to improve. 

TRANSCRIPT

 

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all on the next chapter of your life.

 

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that the ability to sell your firm for the right price is more about your future and less about your past. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his perspective on how to prove to investors that your future is very bright. Greg, today’s show will focus on helping owners paint a bright picture for their future. How should our audience begin that process? 

 

Greg Alexander [00:01:14] The big idea for today is continuous improvement. Investors and potential acquirers do not want to buy a development project. They want to invest in a firm that is accretive immediately and whose contribution increases over time. When considering an investment, they will need to understand how a firm continuously improves. 

 

Sean Magennis [00:01:33] Excellent. And how will they do that? 

 

Greg Alexander [00:01:36] Well, there are many ways. Let me share a few just to get the audience thinking a bit. Investors will want to see how and how often a boutique upgrades their methodologies. They do not want to buy firms with aging methods that are no longer attractive to clients. So, for instance, years ago, if you recall, Six Sigma was all the rage. Today, not so much. It is important that boutiques stay on the leading edge. Another way, potential buyers consider firms continuous improvement ability is to plot client satisfaction scores over time. So, for example, if client sat has flatlined, this would suggest a future might not be very exciting. Boutique owners should have a keen eye on the trend line associated with client satisfaction. And here’s one more to consider, technology adoption is often viewed as a sign of a firm’s progressiveness. For example, small management consulting firms are still producing PowerPoint decks as deliverables, whereas the larger firms produce custom apps instead. Today, there seems to be an app for everything. If a firm is still producing decks, it is a sign that they might not make it through this digital transformation wave that is upon us. 

 

Sean Magennis [00:02:58] I get that, Greg. So updating one’s methodologies consistently, improving client sat over time and technology adoption are three ways to prove to an investor that a firm can continuously improve. These are three excellent practical examples, and I’m sure there are others. Greg, are there any others? 

 

Greg Alexander [00:03:21] Sure. There’s hundreds. So since we try to keep our shows short, let me just share a few more. So profit growth is probably the purest way to demonstrate continuous improvement. Profit growth proves to an investor that the firm has decoupled revenue growth with headcount growth. And as our listeners know at this point, that’s the silver bullet. This is how a firm scales. A firm whose revenue and headcount growth are the same does not have a bright future. Investors are unlikely to bet on that type of firm. Pricing improvement is also another excellent way to prove continuous improvement. If a boutique can raise prices with existing clients, they have a very bright future. The same client willing to pay more for the same service says the quality of the work has gone up. And lastly, let me conclude with the ultimate sign. A firm is continuously improving. The ultimate sign is the firm’s client roster. For example, if a boutique client roster goes from no names to brand name clients or from struggling clients to thriving clients, that says a lot about the firm’s future. 

 

Greg Alexander [00:04:42] The logo sheet looks a lot better with Amazon on it than it did with Kmart. 

 

Sean Magennis [00:04:48] Fantastic. So profit growth, price improvement and declined roster as three additional signs a firm is continuously improving, all pointing to a very bright tomorrow. I can see why this would attract potential investors and acquirers. 

 

Sean Magennis [00:05:10] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members. 

 

Jerome Redmond [00:05:36] Hello. My name is Jerome Redmond. I own American Truck Training. We serve the Oklahoma City metro, in other areas around Oklahoma and soon the entire United States. These clients turn to us for help with obtaining a commercial driver’s license and job placement. We’ve solved this problem by addressing the vast shortage of CDO drivers across the country. The country needs over 60000 CDO drivers. So we’re training individuals through private and government agency funding to obtain a commercial driver’s license and training. If you need help with training your professional drivers, reach out to me at AmericaLovesTrucking.com and Jay Redmond, that’s [email protected] 

 

Sean Magennis [00:06:18] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com. 

 

Sean Magennis [00:06:35] OK. So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes no checklist. We aim to keep it simple by asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove your future is really bright. If you answer no too many times, you’ve got some work to do. Let’s begin. 

 

Sean Magennis [00:07:14] Number one, do you version control your methodologies? 

 

Greg Alexander [00:07:18] So V1, V2, V3 thats what that means. 

 

Sean Magennis [00:07:20] Yes. Number two, do you progressively certify your employees? 

 

Greg Alexander [00:07:26] One oh one, two oh one, three oh one. 

 

Sean Magennis [00:07:29] Number three, are you charging existing clients more for the same service? Number four, are your client satisfaction scores trending up over time? Number five, are your employee engagement scores trending up over time? 

 

Greg Alexander [00:07:50] Often overlooked. 

 

Sean Magennis [00:07:51] Yes. 

 

Greg Alexander [00:07:51] But employees want to be intrigued by the work they’re doing and if they’re just doing the same thing over and over and over again, they’re going to get bored. 

 

Sean Magennis [00:08:04] Yep. It kills their passion. 

 

Sean Magennis [00:08:07] Number six, all your profit margins trending up? Number seven, have you replaced onsite delivery with virtual delivery? 

 

Greg Alexander [00:08:17] This is a great point. Yeah. I mean, we’re right in the middle of this global pandemic and this was once once optional. Now it’s mandatory and firms that can make it from onsite to virtual are gonna make it. 

 

Sean Magennis [00:08:32] Yes. Number eight, have you digitized your client deliverables? 

 

Greg Alexander [00:08:37] Yeah, this is gonna wipe out, I guess, half the firms. I mean, if you don’t have the ability to write code going forward, it’s game over. 

 

Sean Magennis [00:08:45] Yep, agreed. Number nine, have your price levels trended up over time? And number ten, and the ultimate proof point, has the quality of your client roster improved over time? 

 

Sean Magennis [00:09:01] So in summary, buyers are interested in who you are becoming. They are less interested in who you have been. Tomorrow is much more important than yesterday. They need to be excited about your ability to continuously improve. 

 

Sean Magennis [00:09:19] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening. 

 

Episode 14: The Boutique: Are You a True Expert in Your Field?

The “wow” factor matters. Like it, or not, you are in show business. You are an expert. And your firm is made up of experts. No one wants to buy the boutique that regurgitates other people’s innovations. They want to buy the song writers, aka The Rolling Stones.

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TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that when selling your firm, the wow factor matters. And when I say the wow factor, I’m referring to the innovation you’re generating in your field of expertise. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is considered to be one of the most innovative thinkers in the professional services industry. And, in fact, don’t take my word for it. Adam Prager of Korn Ferry was recently quoted as saying, and I quote, Greg is a world class visionary in our industry. End quote. Greg, great to see you. Welcome to the show today.

Greg Alexander [00:01:22] Thanks, Sean. Good to be here. And thanks for the kind introduction.

Sean Magennis [00:01:25] Let’s begin with a simple definition of innovation specific to the professional services industry. How would you define it, Greg?

Greg Alexander [00:01:35] So innovation is a new idea, a new service, a new business model, maybe a new way of solving a problem. It matters to professional service firms more than other types of businesses because pro-serve firms position themselves as experts and experts innovate. Clients do not pay firms to regurgitate other people’s innovations. And investors surely do not buy firms that are copy cat body shops. They buy firms who are true experts today and will continue to be excellent.

Sean Magennis [00:02:10] Excellent, Greg. So when I think of innovation, I, I think mostly of products. For example, Elon Musk innovated in the auto industry and brought us the Tesla. Reed Hastings innovated in the entertainment industry incredibly and brought us Netflix. I do not think of professional services firms in this way, so can you share some examples in the pro-serve of industry?

Greg Alexander [00:02:34] I’d be happy to. In fact, I am somewhat of a amateur historian in the professional services industry, and I have found many great examples of innovation in our space throughout history. So here are a few fun ones to think about.

Greg Alexander [00:02:50] I admire greatly, Boston Consulting Group. They have built a private partnership with thousands of employees and billions in revenue. But it all started with their founder, Bruce Henderson, and one of his early innovations called the experience curve. This proved that a company’s costs fell as their experience increased. Today, this is widely understood. Back in the 1960s, this was a real innovation. Let’s turn to the law profession. The law profession has pioneered the use of technology for centuries. For example, in the 1920s, the recorded deposition changed the litigator’s relationship to witness testimony forever. Law firms that embraced this scaled rapidly. Imagine the law today without recorded depositions. Very scary. Well, how about the great Italian innovator Luca Bartolomes Pacioli. Say that 20 times in a row. Around fifteen hundred, he invented a system of record keeping that used a ledger and later he wrote the first accounting books that explained the use of journals. This earned him the title of the father of bookkeeping, bookkeeping. And Sean, if the accounting industry can innovate, anyone can.

Sean Magennis [00:04:13] These are really great, Greg, and super interesting. These pioneers were truly the Zuckerberg’s of their day. Are there any others that come to mind for you?

Greg Alexander [00:04:24] Sure, there are dozens and I enjoy speaking about this. Let me share a few more. So I have recently studied the innovations in the marketing and advertising industry. Sean, did you remember these campaigns? When it rains, it pours and a diamond is forever.

Sean Magennis [00:04:37] Yes. And the second one, to my chagrin, because I had to buy a big one once.

Greg Alexander [00:04:43] Well, these were created by an agency led by a gentleman, by the name of N.W. Ayer in the 19th century. He convinced the likes of AT&T, the U.S. Army, [inaudible] to hire a new kind of firm called the Full Service Agency. Rather than just selling advertising space in publication, he offered planning creative and campaign execution. Mr. Ayer innovated at the firm level, creating an entirely new kind of marketing agency. He was a giant. I wish I had the chance to know him. How about I share a few recent examples because we are living in the golden era of boutique innovation. In 2008, the distributed ledger, known as Block Chain, was invented by Satoshi Nakamoto. Transactions will never be the same. An architect by the name of Daniel Cuzzi has turned shipping containers into working farms, producing the equivalent of five acres per container. And I love Wix. They have injected artificial intelligence into website design. What used to take months now takes nanoseconds. A brilliant example of tech enabled services. You get the point. I could go on and on forever.

Sean Magennis [00:06:09] Wow, these these are inspiring examples of innovative pioneers and the professional services industry from yesterday and today and this is a standard all of us should aspire to. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Abbie Jones [00:06:49] Hello. My name is Abbie Jones and I own Abbie Jones Consulting. We serve business owners and facility managers in energy, aviation and industrial spaces. Our current footprint is Kentucky, Tennessee, West Virginia, Virginia, Georgia and we’re expanding. These industrial and commercial clients like you turn to us for many services, including campus utility as builds. Our private utility locators, professional land surveyors, professional engineers and drafting staff can upgrade your random paper as built into a single as filled with critical items like shutoffs. Learned how we can make facility managers happy at Abbie-Jones.com. That’s a-b-b-i-e hyphen j-o-n-e-s.com.

Sean Magennis [00:07:37] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the collective.54.com. So this takes us to the end of this episode and as is customary, we end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove you were a true expert and you are innovating. If you answer no too many times, you have some work to do. Let’s begin.

Sean Magennis [00:08:33] Number one, have you pioneered a new approach in your niche? Number two, are you more than a one hit wonder? Number three, has your industry adopted your way of doing things? Number four, does your industry use your language as its own? Number five, do the smartest in your niche come to you with the most challenging issues? Number six, as an ecosystem of boutiques formed around your innovation? Number seven, do you mainstage the keynote for the most important industry conference? Number eight, do you get more than fifty thousand dollars for a speech?

Greg Alexander [00:09:34] That’s a real sign that you’re in high demand and a true innovator.

Sean Magennis [00:09:38] Absolutely. Number nine, do employees join your firm for the opportunity to learn from you? And number ten, have you created a legacy that will live on in your niche after you leave?

Greg Alexander [00:09:55] Yeah. I just walked the audience through history and I cited all these examples. Imagine how fortunate we would be if people are speaking about us 500 years from now.

Sean Magennis [00:10:04] That that is part of our goal.

Greg Alexander [00:10:06] Yes, I love that.

Sean Magennis [00:10:08] So in summary, the wow factor really matters. Like it or not, you are in show business. You are an expert. And your firm is made up of experts, investors and acquirers want to invest in and or buy the true experts. The innovators challenge yourself to be one every day.

Sean Magennis [00:10:33] If you enjoy the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 12: The Boutique: Designing Your Organization to Enable Your Exit

The perceived difficulty, or ease, of integrating your boutique will affect your sale. Understand the org model of the type of firms who might buy you. Redesign your model to be seamlessly integrated if bought. This will increase the chances of exiting.

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The Boutique with Capital 54-Episode 12.mp3

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in the next chapter of your life.

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I’ll make the case that your ability to exit is impacted by your org chart. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his experience helping owners design their organization with an exit in mind. Greg, let’s begin by establishing a working definition of organizational design for the purposes of this episode. How should we think about this for the duration of our call? 

Greg Alexander [00:01:12] Traditionally, org design is simply what type of people do I need? How many of them do I need? And how should I deploy them? I would tweak this a bit for our listeners who are owners of boutique preserve firms. I would add leverage ratio in cost to the org design leverage ratio simply means how many employees for each owner. So for example, if my firm has three owners and 30 employees, I have a leverage ratio of ten to one. This is relevant because it impacts wealth creation greatly. More owners means less wealth for each owner due to the equity dilution that happens when adding owners slash partners. Costs, the second tweak is simply what do I pay for each role? This is a required tweak for our listeners because labor costs is the single biggest expense. Designing an org chart without considering costs could destroy a PNL if not done carefully. 

Sean Magennis [00:02:08] Excellent. Greg, I’ve been taking notes, so let me read this back to you to make sure I got it. Org design means five things. Number one, the type of people I need. Two, the number of people I need, three, the way I should deploy them, for instance, by geography or industry, vertical, et cetera. Number four, the leverage ratio. And number five, the labor cost of the of the org model that I get this correct? 

Greg Alexander [00:02:38] You did, those five things, if you keep them top of mind and you will design an excellent organizational model. 

Sean Magennis [00:02:44] Outstanding. So with this understanding, help me and the audience understand how this impacts an exit. 

Greg Alexander [00:02:52] Sure the connection is not obvious, but let’s be sure it’s there and it’s very strong. So the entity that buys you a firm must figure out how to integrate it into their firm. Org design is front and center during this integration thought process. Potential buyers will not buy your firm if they feel the integration will be difficult. Difficult integrations are costly. They took a long time and they result in bad deals. In contrast, simple integrations are very attractive to buyers. They’re cheap, quick, and they lead to excellent returns. This means the design of your organization can aid or hurt your ability to sell your firm. Your org model will be heavily scrutinized during diligence. 

Sean Magennis [00:03:43] Yes, I can see the connection. And to summarize, the easier an organizational model is to digest, the more likely it is your firm will be bought. This begs the question, Greg, how can our listeners design their organizations now to enable them to get purchased? 

Greg Alexander [00:04:01] OK, so let’s start with some things to avoid. So here are three things to consider. First, eliminate all complexity. The design principle should be simplicity. Unfortunately, in my work advising boutiques, I often see overly complex org models tried to avoid making this mistake. Second, stay away from the Matrix. At times, owners of process firms struggle to make the hard decision of who reports to who. So to please everybody they let some report to more than one person. This is called the Matrix. Integrating a matrix is very hard. Stay away from it. I see deals fall apart during the diligence stage simply because the matrix exists. And then third, organize around either geography, industry or function. Organizational models built around one of these dimensions are clean and they’re very easy to understand and very easy to absorb. 

Sean Magennis [00:05:06] This is so right on. This is excellent. Keep it simple. Avoid the matrix. And I’m going to just say that fifteen times with a huge number of exclamation marks because I lived there for seven years. Running a global… 

Greg Alexander [00:05:19] It sounds great, but it’s a nightmare. 

Sean Magennis [00:05:20] The complexity is so difficult for people to understand and grasp internally. And you can imagine what it’s like externally. If you’re trying to sell. So stick with the geography industry, vertical or job function. That makes total sense. Any other org model design ideas? 

Greg Alexander [00:05:37] Yeah. Let me share one more and it’s a little counterintuitive. So that would be stay small enough to be bought. Which I know right now, our listeners are probably cringing because their growth businesses. So what do I mean by this? Acquirers tend to shy away from buying boutiques with hundreds of employees. They are too difficult to integrate. The more people, the greater level of integration difficulty, some owners are insecure. And to establish credibility, they like to talk about how many employees I have. They believe the more employees they have, the more legit they are in the eyes of clients or investors. This is a flawed thinking. Investors are going to calculate your revenue per employee. They use this metric to determine the quality of your firm. The higher revenue per employee, the more desirable you are as an acquisition candidate. The formula for revenue per employee is very simple. Revenue is the numerator and employee count is the denominator. If you have a large number of employees, your revenue per employee is going to be small. So this last piece of counter-intuitive advice is stay small enough to be bought. 

Sean Magennis [00:06:53] Greg, I love this. I think you’re absolutely correct. It is counter-intuitive. Fewer employees are a good thing. It’s really interesting. 

Sean Magennis [00:07:05] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members. 

Jamie Shanks [00:07:31] Hello, my name is Jamie Shanks. I’m the CEO of Sales for Life. And we focus on increasing self-generated sales pipeline at scale, focusing on helping mid-market and enterprise sales organizations meet and exceed their quota. Our pervasive challenge that we’re solving is that companies continue to hire sellers rather than focusing on increasing the yield per seller. On average, we help these organizations increase their yield per seller by 20 percent more pipeline coverage within six to twelve months. If you need to reach us, you can reach us at salesforlife.com, which is www.salesforlife.com. You can reach me on LinkedIn. Jamie Shank’s or my email is [email protected]

Sean Magennis [00:08:25] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the collective54.com. 

Sean Magennis [00:08:41] OK, so this takes us to the end of this episode. And as is customary, we’ll end with a 10 question yes-no checklist. We conclude each episode in this fashion to help you, our listeners apply the learnings directly to your business. This creates your take-home value. Let’s jump into the checklist. Ask yourself these 10 questions. If you answer yes to eight or more of these questions, you’re likely to get all of your earn-out. If you answer no too many times, you’re likely to leave a lot of money on the table. 

Sean Magennis [00:09:17] Question number one, will your organizational model be easy to absorb? Number two, are you organized around either geography, industry or function? Question number three, you stayed away from The Matrix? Question number four, are you large enough to be interesting, but small enough to integrate easily? Number five, does your org model reflect the niche you serve? Number six, does your org model reflect your business model? 

Greg Alexander [00:10:00] So a little something on that. Generally speaking, two types of business models. The first is high margin, low volume. The second is low margin. High volume. And your org model needs to reflect that. Right. So in the high margin, low volume business, you probably have few employees. A lot more senior and a lot more expensive. On the flip side, if you have a low margin, high volume business, you probably have lots and lots of juniors right around. 

Sean Magennis [00:10:36] Excellent, Greg. So number seven, is the organizational model a good starting point for an easy integration? Number eight, is your organizational model flexible enough to morph into somebody else’s? 

Greg Alexander [00:10:49] For example, stay away from labor unions. 

Sean Magennis [00:10:51] …and Matrix organizations. Number nine, does the organizational model reflect the true cost to operate your boutique? And number 10, will it be obvious to a potential acquirer where the synergies will come from? In summary, the perceived difficulty or ease of integrating your boutique will affect your ability to exit. Your org model directly impacts your ability to exit. 

Sean Magennis [00:11:25] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.