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Episode 55: Mistakes: 7 Mistakes to Avoid When Selling Your Business – Member Case with TK Herman

There are 7 common mistakes made when trying to sell a professional services firm. On this episode, we interview TK Herman, President and Co-Founder of Aptera, a focused IT consultancy and managed services provider.

Transcript

Sean Magennis [00:00:15] Welcome to the boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board Member, and your host. On this episode, I will make the case that there are seven common mistakes made when trying to sell a professional services firm. I’ll try to prove this theory by interviewing T.K. Herrman, president and co-founder of Aptera.  Aptera is a focused IT consultancy and managed service provider.  Aptera transforms your ability to deliver custom software with high performing development teams, coaches and consultants. They are a trusted partner of Fortune 500 companies with a track record of tackling complex global development projects. TK, great to be with you and welcome. 

TK Herman [00:01:21] Yeah, thanks so much for having me, Sean, I really appreciate the invite onto the show. 

Sean Magennis [00:01:25] It’s such a pleasure. Let’s start with an overview. Can you briefly share with the audience an example of a mistake to avoid when selling your firm? 

TK Herman [00:01:35] Yeah, I think, you know. So we recently went through an acquisition, so I’ve got experience in this realm and you know, one of the things that I would say that there are three areas of knowledge in the world. There’s the what you know, there’s the what you don’t know. And then there’s the what you don’t know that you don’t know.  And and through the whole process, there were a lot of things in the realm of what you don’t know. You don’t know that I came across. And so I’m I’m a much smarter person today than I was, you know, four or five months ago. And one of those things would just be, you know, kind of asking the question and really trying to spend more time aligning some of the changes that are going to be happening with the integration of the two companies. Because, you know, I think that everyone is focused on getting to the same endpoint, but how to get there in the timeframe and in how to go about that, I’d be a slight difference. That’s just one example of of something that you might consider thinking about. 

Sean Magennis [00:02:35] That, you know, that’s a wonderful example. And I share that with you because in a in an example that we’ve helped with recently. Soon, as the acquirer was identified, they advocated for starting integration conversations early on because it is often left to the end. And it really does make a difference when the rubber hits the road that you’ve thought through all the nuances so. So thank you for that example. It’s a critical one. And you know, if I think about selling a boutique, we know it’s a high risk, high reward initiative. We also know that every situation is different. So I’d like to spend some time getting your thoughts on the common mistakes made when selling. I’ve selected seven to walk you through, and I’ll ask to get your thoughts on each and feel free to share whatever comes up for you as we go through these. So the first mistake is that boutique owners are unclear as to what they want from a sale. So if you’re unsure of who you are, you’ll be unhappy with the sale. If you don’t know where you’re headed, you’ll be unhappy with the sale. What are your thoughts on this concept? 

TK Herman [00:03:47] I would completely agree with that, I think that before you. The more time that you can spend sort of self reflecting and look in the mirror to really understand what is the goal and why you’re heading down this path, the more likely likely you’ll be to be happy on the other end of the transaction. You know, and again, I think you hit on those points, whether it’s, you know, what am I looking for for my company? Because, you know, more often than not, acquisitions are done to move the company forward. Right? And then also, from a personal perspective, you know, what is life look like after that? And what does that mean to you? And and if you’ve had the business for quite some time and you have somebody else coming in and kind of running the business, you know, is that going to affect you emotionally? Some people will say yes, some people will say no, but I think, I think really sitting down and reflecting on those points and having a very clear understanding of where things sit for you personally on the side. And I think to the last thing I’d say is is the more conversations that you can have with people that have gone through this process to just try to learn from them along the way, I think that that that would be extremely helpful. 

Sean Magennis [00:04:55] Those are those are great points of advice. And that brings up mistake number two, which is sometimes boutique owners try to sell an unsellable business. And so your boutique needs to be attractive to a buyer. It almost requires you to look at your business through the lens of an investor. What do you think of that TK? 

TK Herman [00:05:17] I would 100 percent agree with that. You know, when when you’re selling a professional services company, there’s no, you know, machines to buy or inventory to buy. The person that’s acquiring your business is really acquiring the team that you’ve built and the client relationships that you’ve cultivated over the years. And so you need to be really need to become really clear on that. And then also look at and say, how reliant is this business upon you or you and a few people? Because the the the more you can get the business to the point where it’s not really reliant upon you to drive the day to day pieces forward, the more value there is in the business. 

Sean Magennis [00:05:58] You know, again, I can’t agree with you more because that’s what we see so often. Getting in the way of a successful sale is that the owner founder hasn’t thought of it in the way that you’ve just expressed.  You know, mistake number three. It can take years to sell a boutique. Yet some owners try to sell a boutique in a matter of months, and a good exit is an exit on your terms. It does take time to stack the deck in your favor. What are your opinions on this? 

TK Herman [00:06:29] You know, it’s so interesting because we did not anticipate going through the acquisition even at the beginning of this year. And so this is we obviously knew an acquisition would happen at some point in time. That was always the end game. But did not expect that this year, even really in the next couple of years. And and the right opportunity came along and we decided to move forward with it now. We were fortunate that we had sort of positioned the company and set things up in a way that it made that process easier. But I’ve spoken with a handful of people since the acquisition that just reached out for some advice. And you know, I can’t stress enough the importance of again, making sure you have the right leadership team in place, making sure you have, you know, processes and procedures and those kind of things that are easy for an acquire to come in and kind of take charge of and move forward. But then also there is just a tremendous amount of back back office work that needs to be done. So making sure that you’re accounting, you know, is all in order making sure our files are all in order. Because the more that know, the more time you spend there, the the easier it’s going to be through the diligence process. You know, that’s one of the things that that, you know, our comptroller had mentioned to me during the process. Gosh, if I had known we were going to do this, I could have spent the last year actually even preparing that much better. And I couldn’t argue with that. That’s a very valid 

Sean Magennis [00:07:52] No, it’s a very valid point. No. And but that’s a great point for our listeners, too, is that, you know, you’re a practical example of somebody that was fortunate because you were prepared and you had a lot of things in place. But if you had had to do it over again, potentially, you know, in the example of the accountant having that time to prepare is so much better and could potentially impact, you know what you get out at the end of the day from the from the sales price. So let’s talk about you. You alluded to this several times. Let’s talk about succession planning and often owners under invest in succession planning. And after you sell, you’ll want to see that your boutique does well without you. So what are your thoughts on the importance of succession planning? 

TK Herman [00:08:42] I think it’s I think it’s highly important again, even if a sale is is. You know, a decade down the road. Yes, I think from day one, when you start a business, you should start setting the business up for it to run without being there day in and day out. And it’s the old adage, you know, you have a choice. You can either work in the business or you can work on the business side. And it’s it’s very difficult. You know, I’ve certainly empathize with companies that are small that have, you know, just five or 10 people because the owner has a really difficult time sort of balancing those two things. But if you can, if you can from the beginning focus and say, I’m going to spend, you know, even if it’s 51 percent of my time on the on the business things. And over the course of time, you’ll get to the point where where that becomes kind of your main role in the business. And I think there’s there’s to me, there’s three key ingredients to setting up a leadership team or setting up a team to be able to carry the business forward. And they’re very simple. The first one is just hire outstanding human beings. Yes, just just great people. Obviously, they need the skill set that they they you just want great human beings to represent you to to work with you every single day and to help deliver that great experience to your clients. And then the second piece is is point them in the direction that you want them to go. And the more narrow that direction can be, the better, obviously. So yes, we we were for a long time kind of a shotgun approach, and we started trying to narrow that down to more of a rifle, but point them in the direction you want to go. And then the third piece is, in my opinion, it’s the hardest piece and that is get out of their way. So in other words, you know, you’ve hired great people, you’ve pointed them in the right direction and then now it’s your job to get out of their way and let them move forward and let them make mistakes, you know, and let them learn from those mistakes. A phrase that I always use is Don’t let perfect ruin good. If there’s one thing that I can say that my business partner and I have did a good job of over the years was creating an environment where we let people try things and make those mistakes. And there were times where I, I would look at something that somebody wanted to do, and I would think in my head, that’s never going to work. But I also looked at and said, OK, if it doesn’t work, is this going to be a detrimental thing to our business? Is it going to hurt the client hurt and hurt an employee? And if the answer was no and there really wasn’t a significant risk and let them go down that road because A, I could be wrong, I’m not. I don’t have all the answers, right? But B also, if if it if it didn’t work, there’s a whole lot of lessons to be learned there. And the more that you empower people like that, the more you’ll find yourself having time to work on the business as opposed to in 

Sean Magennis [00:11:25] Outstanding and I loved you three key ingredients, and I’ll refer back to them at the end of the of the podcast because I think they they certainly resonated for me. So let’s talk about mistake number five. This mistake is where entrepreneurs think that they can sell their business on their own. It can result in tactical execution errors that can cost millions of dollars, and our recommendation is to hire the best advisors that money can buy. What is your opinion on this best practice? 

TK Herman [00:11:55] So actually, it is actually kind of a funny story that reflects back to Greg Alexander, who obviously has been on your podcast numerous times. Yeah. And so we were fairly deep into diligence and deep into the process, and I was having a conversation with Greg and and he said, Hey, do you have counsel? And I’m like, You know, of course we have a lawyer, and he goes, No, but do you have somebody with experience in this? And I’m like, Oh, I think they are. And and he goes, OK, hang on. Let’s pause a second. And he said, You have to you’ve got to go out and find somebody that really not only not only in an attorney, but also your accountant, and make sure that they’re experienced in this. And so I did that. I took that advice and and asked around, found somebody and holy mackerel. My eyes were open because we again we were we were fairly deep into diligence. I was very fortunate that that that this law firm was able to to take us on. But there were so many things, so many things that I had. I would have had no idea of the level of questions that needed to be asked. And so I can’t stress that point enough. That’s 100 percent true. 

Sean Magennis [00:13:01] Absolutely fantastic. And then mistake number six is boutique owners often get attacked after the sale. This is more personal. You know, they can take it personally, and this causes seller’s regret. So our recommendation there is give yourself the permission to not take it seriously and really guide yourself. What are your thoughts about this? 

TK Herman [00:13:24] Yeah, I would agree with that. I think that you have, you know, a wide variety of reaction, you know, everything from from people that are very upset that you sold the business to people that are excited about the opportunity and it’s easy to find yourself like anything else. For example, if I was a new YouTuber and I started a new YouTube. You know, I’m going to get some heat and some shade thrown at me on on the comments and I have a choice to make. Do I focus on those? Yes, or do I focus on the positive things that are coming out of it? And so like anything else in life, whether it’s whether it’s selling your business or anything you do. You know, the more that you can like align your your, your mindset and and your heart under the positive things, the better off you’ll be, for sure. 

Sean Magennis [00:14:10] Yeah, wonderfully answered. And then finally, mistake number seven is to be sure to understand who the business is being sold to and what their motives are. It’s particularly important if you’re on an Earnhardt or rolling in some equity. This prevents unwanted surprises from cropping up. The buyers ultimately own the asset once you’ve sold it. What are your thoughts about this? And I know it’s early in for you, but what are your thoughts? 

TK Herman [00:14:36] Yeah, I would totally agree with that. And even if there’s not an earnout or there’s not equity, I’m very much I’m very much invested in the people. You know, we had our business for 18 years and I care deeply. I care to actually care more about the people that work for us than I care about the work product that they delivered. And I always believed that if we if we operated that way as a company that will come back and give us good karma sort of in return. And so, yeah, I would totally agree with that. The more that you can align yourself and ensure that the things are aligned, the better the whole process will be. And you know, some of those things, that’s where it goes to, I think, going out and asking a lot of questions of people who have been through the process before because you as somebody new coming into this won’t have any idea of what questions to ask. And and that’s that’s certainly an area where there are things that that could probably be easily missed 

Sean Magennis [00:15:33] A great point. And again, thank you. I mean, these are all very vital mistakes to avoid, and there are many others, too. To your point, I mean, going through and having great advisors, having them give you the benefit of the wisdom of what they recommend asking is also very key and every situation is different. However, we’ve given you seven of the most common mistakes for you to avoid as a boutique owner of a professional services firm. TK thank you. This brings us to the end of this episode. I prepared a 10 question Yes/No checklist, listeners. Please ask yourself these 10 questions. If you answered yes to eight or more of these, you will avoid making these mistakes when selling your firm. T.K. has graciously agreed to be our pure example today. Thank you, TK. So I’ll ask you the essential question so we can all learn from this example. So question number one, do you know what you want from the sale? 

TK Herman [00:16:38] I would say yes, when we went into this, I would say yes. 

Sean Magennis [00:16:41] Excellent question number two. Do you know what you were going to do after the sale? 

TK Herman [00:16:48] Yes, that was a yes for for me personally as well.

Sean Magennis [00:16:52] Great. Number three, is your business attractive to a buyer? 

TK Herman [00:16:57] Yes, it was. You know, and again, we we worked hard over the years to to to be very deliberate about creating an attractive company. 

Sean Magennis [00:17:07] Great. Number five, do you have a handpicked successor? 

TK Herman [00:17:12] We did have a leadership team that was able to basically roll the business forward, even if we hadn’t sold the business they were, they were making the majority of the decisions along the way. So we we were in a good spot for sure. 

Sean Magennis [00:17:24] And I did skip number four because you had a sellable boutique and you’d kind of illustrated that before. Number six is the successor ready to take over? 

TK Herman [00:17:36] Yeah, I would say yes. But again, we we were purchased by a large company, so that’s a little more complex. But but as far as that, the people we had, yes, I would say without a doubt, they’re just top notch people. 

Sean Magennis [00:17:49] Excellent. Number seven, have you lined up an all star team of advisers to help you? 

TK Herman [00:17:56] I didn’t, but I have them now. So if I was ever going to do this again now, I would know who to call. Excellent. 

Sean Magennis [00:18:05] Eight. Are you prepared for the post-sale criticism headed your way? 

TK Herman [00:18:10] You know, I don’t think that I was I know that there would be a lot of emotion around it, but some of that I did not expect. But I understand it for sure. And so that’s probably one area that I didn’t prepare mentally for, like I like, I probably should have. 

Sean Magennis [00:18:25] Yes. And then number nine, do you understand who you were selling your boutique to? 

TK Herman [00:18:30] Yes. Yes.

Sean Magennis [00:18:32] And No. 10. Do you understand their motives for buying? 

TK Herman [00:18:37] Yes, we’ve we’ve we felt pretty confident in in their motives and why they wanted to acquire us. We actually had the good fortune of having a very, another company that was acquired by them that we were very friendly with their owner. And so we were able to get some behind the scenes look into things prior to the acquisition. 

Sean Magennis [00:18:57] T.K. Fantastic. I’m just going to remind the audience again about the three key ingredients that you alluded to during the course of our time together. The first was hire outstanding human beings. I thought that was profound. And then point them in the direction that you want them to go and keep it narrow. And then the third, which I think is a vital lesson. Certainly, it has been for me and I think it will be for our listeners. In fact, I know it will be for our listeners is get out of their way, which is the hardest thing to do. So again, thank you all of our listeners. You’re building a business that you could likely run forever. You’re also building a business you could sell tomorrow if you do decide to sell. You want to do so on your terms. Give yourself plenty of time to avoid the mistakes that T.K. and I have shared with you today.

And if you enjoyed the show and want to learn more, pick up a copy of the book The Boutique How to Start, Scale and Sell the professional services firm written by Collective 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms.

Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective 54.com to learn more.

Thank you for listening. 

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Episode 52: Sell Your Business: The Difference Between a Happy and an Unhappy Exit – Member Case with Renzi Stone

Renzi Stone, Founder, and CEO of Saxum discusses the essential questions to consider when selling a professional services firm, including the importance of knowing your why when developing a business exit strategy..

Transcript

Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. The goal of  this show is to help you grow, scale, and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board member, and your host.

In this episode, I will make the case that step number one in developing a business exit strategy and selling a professional services firm is knowing why you were selling before you sell. I’ll try to prove this theory by interviewing my friend Renzi Stone. Renzi is the Chief Executive Officer,  and Founder of Saxum, an award-winning 50-person integrated digital marketing agency and consultancy headquartered in Oklahoma City with a distributed workforce across the United States. You can find Saxum at www.saxum.com. We’re going to learn a lot from Renzi. Renzi, great to be with you, and welcome. 

Renzi Stone [00:01:24] Sean, excited to be with Capital 54 and Collective 54. And looking forward to talking about business exit strategies. 

Developing a Business Exit Strategy: Know Your ‘Why’

Sean Magennis [00:01:32] Fantastic Renzi. So let’s start with an overview. Can you briefly share with the audience an example of why knowing the reason to sell your professional services firm is so vitally important? 

Renzi Stone [00:01:45] I think if you’re going to start off thinking about selling your firm, you really need to think first about why you’re in it, to begin with. Is there something else you have to offer your clients and your team members? And so it’s a good question. But I think the first thing that I would have to say is that every firm should make a critical decision. Am I in a lifestyle firm, or am I a scale firm? 

And so, to answer that question for me, Sean, I would say I am in a scale firm. This means that I am required, as a condition of my employment as the CEO of this company, to be thinking about what the outcome over many years looks like. And the only way to have an outcome that is achievable on a scale firm is you have to build it to sell. 

Sean Magennis [00:02:43] I love that. And that is so crystal clear the way that you distinguished that. And for the listeners’ sake, clearly articulating for yourself in a very deliberate way, whether you’re a lifestyle firm or a scale firm. Outstanding, Renzi, this is such a personal topic. I’m glad you’re here with me today because I know, you know, you’re a deep thinker. You have a strong set of core values. 

So I’d like to get your thoughts on some important, you know, considerations and questions when thinking of selling your professional services firm. It’s a long list. I’ve only selected five things, and I know that you’ve probably got several more. But I’d like to get your thoughts on each. 

So the first one is the reason to sell your boutique is very personal, and it should be. You’ve poured your life into building the firm; leaving it, handing it to somebody else takes much thought. How have you approached this? 

Renzi Stone [00:03:40] Well, I think the thing that I think about about the decision to sell my firm, and it’s really important to note, Sean, I haven’t exited my firm. 

Sean Magennis [00:03:51] Correct. 

Renzi Stone [00:03:52] I aspire to have a firm that has enough value that an exit is possible. 

Sean Magennis [00:04:00] Got it. 

Renzi Stone [00:04:01] So to answer the question, the things that I’m thinking about as it relates to a business exit strategy are systems, talent, processes, and the why for me is: Have I brought the firm as far as it can go under my leadership? And when I think about our clients. 

So one of the things I say all the time, Sean, is no clients, no Saxum – the only people that send money to Saxum. Unfortunately, our clients’ are the ones that send money to us, not vendors, not my friend, and certainly not my mom and dad. So if clients are the ones that send money to Saxum, my job as the Chief Executive Officer  is how do I create more value for those clients? And if I create value, they’ll refer me to other people. They’ll increase their scopes of work. 

And so the decision to sell for anybody is based on the idea of: Can you create more value for your clients by making that move? Any amount of money that I put in my pocket, any amount of lifestyle change that creates is only secondary to the first objective, which is how do you create more value for clients? And I think, Sean, I think if you get that backward , you are really at risk of having a failed acquisition, even if it gets closed. It may not perform. 

Selling a Business: Various Reasons Why Boutique Owners Sell

Sean Magennis [00:05:29] I so appreciate you sharing that and that perspective because I agree with it 100 percent, and you touched on the money aspect. Some owners of boutiques sell exclusively for the money. And in your view, how important is the money aspect of selling? 

Renzi Stone [00:05:49] Well, look, anybody who takes the risk, who puts capital and time at risk. And by the way, that’s in reverse order. Yes, time and capital at risk. Got it over 18 years. It’s 2021 right now. For 18 years, I have put my time and my capital at risk. Yes, I have put it at risk at the expense of doing other things with my time and my capital. 

So money is absolutely a consideration for any boutique owner who’s thinking about selling. What I would argue is if all you can think about is the money, you’ve missed the whole point of creating something of value. 

Sean Magennis [00:06:34] Well, well, well said. I’ve also heard that some owners sell because they’re bored. Some are exhausted. Some say that they that their work became a job. It’s not fun anymore. What are your thoughts on this aspect? 

Renzi Stone [00:06:50] Well, I am also a believer that yesterday is gone and tomorrow has yet to come. And so we all have to live in the present. And if in the present we are not challenged, we don’t have vision. So the job of a CEO, Sean, as you know, is to have vision. You must have vision, and the vision must be compelling. It must be. It must be something that can be translated. It must be something that can be owned by others. 

But if you fail to create a vision, you have failed to create something that is growing. And so I think to answer your question, people that leave boutiques because they’re tired or because they’re worn out, what they’re really saying is I don’t have a vision for the future. And so, the vision for the future is required. And I think anybody who continues to have a vision for the future should really ask themselves if it’s the right time to sell. 

Sean Magennis [00:07:50] Beautifully said again. And you know, that’s a lot. There’s a lot of psychology and psychological challenge behind that, and I loved you saying live in the present. It’s challenging to do so, but that’s where the reward is. And I love your comment about vision. It has to be compelling, and it has to be lived 24-7. So many boutiques are partnerships. At times, partners start fighting. One needs to be bought out. You know there are complications with that. What are your thoughts on this? 

Renzi Stone [00:08:22] Well, you’re talking to somebody who doesn’t have partners. And so…. 

Sean Magennis [00:08:25] For a reason, I presume. 

Renzi Stone [00:08:28] Well, I had a partner at the very outset of the business, and I did all the work, and the partner received all the benefit. And so I said, “Hey, partner, either you buy me, or I buy you.” And the partner said to me, “Well, I don’t want to own it because I don’t want to run it.” And I said, “Well, I don’t want to run it because I’m working for you 50 percent of the time.” And so it caused quite a conflict, as you might imagine. 

And so we resolved the situation. I bought his shares for a premium price, and then I own the rest of the business, so I own 100 percent of the business today. I would say for any professional services firm  owner who is at odds with the value creation with their partner, I would say that today is the best day to resolve it. 

And if you don’t resolve it today, then  tomorrow, and if not tomorrow, then the day after. I’ll tell you this, what most people do, Sean, is they don’t resolve it correctly. They just allow it to fester, which creates resentment which creates unequal value creation. And it’s a disaster waiting to happen. 

And we hear this in Collective 54 all the time. And it’s complicated, and it’s distracting to fight with a partner. But I would argue I addressed my problem. It was a problem. And as a result, I’ve created millions of dollars of value outside of that partnership, and it would not have been a good deal for me if I had stayed in that relationship. 

Sean Magennis [00:10:06] Wow, that is practical. It’s vulnerable, and it’s real. Thank you, Renzi. That’s outstanding. Another reason to sell is that some professional services firm owners are afraid, and you’ve touched on this a little bit, that tomorrow might not be as profitable as today. So what do you think about that? 

Renzi Stone [00:10:26] So I have a series of advice that I present to our team annually. There are 28 of them, but number one, Sean, is do not be afraid. Do not be afraid. And my counsel for anybody who thinks tomorrow might not be as good as today is, we have no idea. We just don’t know. And I’ll tell you; I have to tell myself the reasons. Number one on my list is because I have to tell it to myself regularly. 

Sean Magennis [00:11:02] Yeah, that’s that’s excellent. So, um, I’ve met owners who’ve had happy exits, and I’ve met owners who have had unhappy exits. And you know, what’s the difference? Those who had happy exits knew why they were selling. Those who had unhappy exits did not. 

10 Questions to Ask When Selling a Professional Services Firm

So, Renzi, this has been extraordinary, and we’re going to dive into our 10-question format. It brings us to the end of the episode. 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 these ten questions. If you answer yes to eight or more of these, you know why you are selling and will likely have a happy exit. 

Renzi graciously agreed to be our peer example today, and I’m going to switch it up slightly. I’m going to remove one. I’m going to add this because Renzi has really done his homework, and we’re going to go through his list of questions which are very similar but with one or two subtractions. So I’ll start out by asking the first question: Do you have a clear vision of your future? 

Renzi Stone [00:12:17] Sean, I’m a goal setter. You and I know each other a little bit. I’ve written down my goals since I was 10 years old. I have tracked my goals for most of the last 20 years. I write them down, and I work at them. I have a vision for where I’m taking my business, and I’m executing against it. 

And so the answer is today, I have a clear vision for the future, which is probably the reason I haven’t exited a couple of years ago. Sean, I would tell you that I did not have a clear vision, but then I got one. Yes, and so it’s made a huge difference. 

Sean Magennis [00:12:55] Excellent. So does selling your boutique help you get there? 

Renzi Stone [00:13:01] The option to sell my boutique helps me get there, so yes. But it’s an option. Not an imperative. 

Sean Magennis [00:13:09] Fantastic. Number three, do you know why you do what you do? 

Renzi Stone [00:13:15] Saxum, we have a mantra called obsessed for good. Obsessed for good means that you want your professional service consultant to be obsessed with your work. We want to be obsessed with the issues and the challenges facing our world. For means we’re serving others. We are serving others and good means that the expectation is excellence. And so obsessed for good is how we define our why. That’s why we do what we do. 

Sean Magennis [00:13:57] Incredible. I, you know, listeners, if you could articulate the way Renzi did those specific items, that would get you way ahead of the game. Number four, would selling the firm bring you closer to your ultimate purpose? 

Renzi Stone [00:14:13] Well, I think anybody who’s the owner and CEO of a professional service firm or any firm, the values are reflected in who they are as individuals. So being obsessed for good carries into my personal life, and I would expect it to only increase as I get older, and I move on to new challenges if I ever do. 

Sean Magennis [00:14:39] Again, well said. Number five, I know you have a set of values, so do you have a set of values that define how you want to behave? 

Renzi Stone [00:14:48] Yes, and there are four of them. They make up the acronym BOLD, which is brave, original, lively, and driven. Those are the values of the firm. Those are the values that we operate by. That’s how we create value for our clients. 

Sean Magennis [00:15:04] Outstanding. I’m going to skip now, and I’m going to ask you a question. Do you know the type of community you want to be part of? 

Renzi Stone [00:15:14] One of the things I’ve noticed about boutique owners is that a lot of them are alone, and they don’t have anybody to talk to. And so, if you are somebody who is running a firm or a Managing Director or a partner, you have to surround yourself with a community of like-minded  thinkers, like minded values, not necessarily thinkers, not necessarily people who just think like you. 

Diversity is obviously a huge benefit to people that take advantage of that. And so personally, I value authentic relationships, people that tell me the truth. Yes, and I value feedback. We should all be seeking feedback all the time. Feedback is a gift when we get it. We can take it or leave it, but it helps us. 

Sean Magennis [00:16:03] Yeah. So this is an allied question, and you answer it in the way that you want to answer. So would selling a firm allow you to spend time with these people? Or how would you respond to that? 

Renzi Stone [00:16:19] I’ve made a decision to spend time with people who are positive and life-giving, not people that suck energy and take. So I’m a giver. I believe that when you give, you get. There’s all sorts. There’s two thousand years of human truth in that. And so I spend my time with those types of people, and I try not to spend time with people that take life away. 

Sean Magennis [00:16:47] I could not agree with you more. The next question will the proceeds of the sale fund something more than material possessions? 

Renzi Stone [00:16:57] No, I think just material possessions, Sean. No, just joking.

Sean Magennis [00:17:02] I just want a boat and a few toys. No, I get that. It’s a trick question. 

Renzi Stone [00:17:07] Yeah. So, my family we have a family foundation. Isaiah Stone Foundation, which has raised almost a million dollars for research in epilepsy and helping families who have children with epilepsy. We lost a child. And so, I would definitely see spending more time on epilepsy research and supporting families who are dealing with the devastating effects of epilepsy. 

Sean Magennis [00:17:32] That’s a noble cause, and I commend you for doing it. And then the final question is are you personally prepared for the next chapter? Whatever that will be of your life. 

Renzi Stone [00:17:45] I think so. I think so. The big question is: Does anybody really enter a chapter fully prepared? I’m the guy that did not know what I wanted to do when I grew up, but I’m going to bring it back here at the very end to something you said a few minutes ago about happiness. People, are they happy when they exit? 

And I’ll just tell a quick story I had. I had dinner with my family in a restaurant last year, and we went to the restaurant. Our waiter was such a great guy, and he made us feel so special, and we just had a great time. We laughed, and we told stories, and I don’t remember what exactly it was, but it was just a great family dinner. At the end of the meal, he came up and he said, “Are you happy with how dinner went?” We all kind of looked at each other, and we said, “Yeah, we’re very happy about how dinner went.” And he said, “Of course, you walked in here happy.” 

Sean Magennis [00:18:42] Wow. I mean, I got a little cold shiver there. I mean, that’s powerful. 

Renzi Stone [00:18:47] You walked in here happy, and so I have a friend who just exited the business for nine figures. He was unhappy before he sold the company. And guess what? He’s still unhappy now. Yes, so unhappy. But if we can all, if you’re happy already, chances are you’ll be happy at the end of a business exit strategy. And chances are, you’ll be happy if you lose everything. It’s not tied together quite that tightly. Yeah. 

Sean Magennis [00:19:17] Renzi, I knew this would be a remarkable episode, and you’ve encapsulated all these thoughts so well. You know, every entrepreneur exits. We all have our final resting place, which is the great consistency in life. We all die. You cannot run your boutique from the grave, and most of us sell our firms before that event happens. 

There are good exits. Some professional service firm owners are happy after they sell, and we would wish for everybody to be happy after they sell. And there are bad exits where some owners on unhappy good exits and I would take your thoughts, Renzi. Good exits start with a heartfelt, well-thought-out reason to sell to continue living in the present. 

A huge thank you for sharing your wisdom today and for our listeners. If you enjoyed the show and want to learn more, pick up a copy of the book “The Boutique How to Start, Scale and Sell a Professional Services Firm”, written by Collector 54 founder, Greg Alexander.

For more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale, and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening.

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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.

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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.

Posted on

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.

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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.

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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.

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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.

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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. 

Posted on

Episode 11: The Boutique: Earn Your Earn Out

Most acquisitions fail. The primary reason for failure is poor culture fit. Do not hide your culture. Lead with it. You want your sale to be successful. Therefore, you need to find a buyer who fits your culture.

 

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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 many do not earn their earn out post sale. And the primary reason is a poor culture fit with the new ownership team. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his experience helping owners earn 100 percent of their earn out. Greg, let’s begin by establishing a working definition of culture for the purpose of this episode. How should we think about culture for the next fifteen minutes?

Greg Alexander [00:01:19] Good question. So if we limit it to 15 minutes, boy, we could talk for days about culture. But for today, let’s establish a simple definition. So and this is to say culture, I would suggest, is a common set of beliefs and behaviors. So when someone says this is the way things get done around here, they are talking about the culture.

Sean Magennis [00:01:42] Got it. I recently read an article published in the Harvard Business Review. It was written by a McKinsey consultant, and he claimed that 70 to 90 percent of acquisitions fail. And the root cause of all this failure is poor culture fit. Our listeners are owners of boutique professional services firms. They all will eventually want to sell their business. A good majority of them will have an earn out as part of their deal. Greg, if 70 to 90 percent of these deals fail, this means that most of our listeners will never see the money tied to their earn out. How can we help them avoid this very costly era?

Greg Alexander [00:02:23] Yeah, I hate it when I see this because it’s very likely that you’re going to have an earn out when you sell and you deserve those dollars you built a great farm and it makes sense for the purchaser of your firm to include an earn out as part of the deal that gives them kind of downside protection. So let’s make sure that that the listeners earn their earn out and they avoid this mistake. So the key to realizing the earn out is to make the deal successful for the acquirer. And that’s a new way of thinking. Most times when you’re selling your firm. You want to make it successful for yourself. And of course, that’s important. But you’re going to earn your earn out if you make it successful for the acquirer and the key to that is merging the culture of the acquired firm with the culture of the new ownership team. So how the heck does someone do this? So let’s begin with some context before we get to our recommendations to the audience. So boutiques have cultures, most of which are very strong. Usually the culture of the boutique originates from the founder. The founder designed a culture that he or she wanted to work in. In fact, job satisfaction is one of the primary reasons founders start their firms. There were frustrating working inside a big corporation and somebody else’s culture. So as the firm grows, the founder recruits the early employees. And guess what? They are hired because they fit the founders culture. They are people he or she wants to work with. The firm continues to grow in these early employees perpetuate the culture by recruiting the next set of employees who also get along with the founder and sync well with the culture and on and on it goes until one day the boutique has hardened around, quote unquote, its culture. This culture gets so strong that employees to not fit with it, are rejected almost like an organ transplant is rejected by its host. Clients are affected by this culture as well. Clients who view the world the way the founder does become the boutiques best clients. I share this with the audience to demonstrate how a culture of a boutique comes to be. This culture emerges over the years. The founder, early employees and the most loyal clients are heavily invested in it. They love the culture. In any attempt to change it is viewed as an attack. So you can see how emerging this type of culture is. So very hard.

Sean Magennis [00:04:55] Exactly, Greg. This context is very, very helpful. I can’t help but think that what makes a boutique successful is its culture. It’s also the thing that eventually becomes its biggest problem. Is that. Is that accurate?

Greg Alexander [00:05:10] Yes, this is correct. And the reason your statement is correct is when one firm buys another firm, these two distinct cultures collide. If the two firms see the world the same way, they become one bigger and better and happier firm. If the two firms see the world differently, the integration is a mess. And this results in the opposite outcome. Separate fiefdoms inside the firm fighting each other. Turf battles emerge over client ownership. Budget power structures, et cetera. Key employees quit and important clients take their business elsewhere. This results in numbers getting missed and missed. Revenue and profit goals result in earn outs not getting paid out. This can even in some cases, digress into nasty lawsuits and an eventual divestiture.

Sean Magennis [00:05:59] Exactly, Greg. And no one wants lawsuits or messy disputes. And our listeners want to realize the full amount of their earn out. If culture fit is what causes this mess. How can a listener determine culture fit before selling their firm?

Greg Alexander [00:06:15] It’s hard to do. It’s a little squishy, but I would suggest that prevention is the best course of action. So here’s a few things to consider when trying to determine culture fit prior to selling. So first, consider the origin stories of both firms. Do the founders have similar backgrounds? Are the founders, still the dominant cultural force inside the firm? Do the early employees resemble the founder, are the founder or founders and early employees still involved in the business? Have they become the legends? And what does this mythology tell you about the culture? Next, examine the cross functional collaboration inside the firm. If there is a lot of it, this suggests a cooperative environment. This indicates an open culture willing to partner. If there is a little of it, this would suggest fiefdoms already exists and will likely get worse. Post sale. I would also look for cultural artifacts. For example, if there are celebrations on significant dates, this would suggest a fun group. If there are contests with leaderboards, this would suggest a competitive group. If employees are acknowledged for years of service, this would suggest a loyal group. If there are a lot of legal documents and rules, this would suggest a cautious group. If there is a relaxed dress code, this might suggest a laid back group, or if people stay at budget motels when on the road. This would suggest a frugal group and on and on it goes. There are many clues, just pick your head up and look for them.

Sean Magennis [00:08:03] This is very helpful, Greg. It illustrates to me that there is no right or wrong culture. Rather, the question remains, will the cultures fit with each other?

Sean Magennis [00:08:17] 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 cell phones at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

David Aspinall [00:08:43] Hello. My name is David Aspinall. I am the CEO of Autocon, a global technology services company. We serve clients by supplementing that technology teams with consultants who are all on the autism spectrum. Our clients are small, medium and large brands such as AT&T, Ella Kaede and Cover My Meds, who understand the value and diversity that high performance autistic talent brings to their team. These clients turn to us for help with data or engineering, software development, quality assurance and more. We solve these problems by providing high performing autistic consultants, along with a managed services approach to neurodiversity in the workplace that ensures success. If you need help with your technology, teams are reaching your diversity inclusion goals through neurodiversity. Please reach out to me at autocon.us or search Google for Autocon.

Sean Magennis [00:09:41] 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 [00:09:57] Okay, this takes us to the end of this episode. And as is customary, we will end with a 10 question yes, no checklist. We conclude each episode in this fashion to help listeners apply the learnings directly to their business. This creates for you 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 are 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 [00:10:32] Question number one, is the founder still involved in the business? Number two, does the founder’s origin story shed a light on the boutiques culture? Number three, are the firms legends still involved in the business? Number four, do they personify the culture? Number five, does the firm work well across functions? Number six, do the artifacts indicate the firm’s culture? Number seven, do employees who are cultural mismatches get rejected by the firm?

Greg Alexander [00:11:19] You know, I would suggest on number seven, cultural mismatches getting rejected by the firm, that’s a positive. Sometimes my people might look at that as a negative and say when we hire somebody who’s not like us, they don’t fit in. And as in the case of investing in a boutique, that’s a positive. You want the culture to be so strong that those that take to it stay with the firm for 10, 15, 20 years.

Sean Magennis [00:11:45] Excellent point. Number eight, do the firm’s best clients share a set of common beliefs with the firm? Number nine, are their deep relationships between the legends and your best clients? And number ten, is it crystal clear to potential acquirer how your boutique behaves?

Greg Alexander [00:12:08] Yeah. And lastly, on number ten, when someone’s doing diligence and they’re assessing your culture, which is a difficult thing to assess, and hopefully this episode makes that less difficult. If someone’s critical of your culture, don’t sell your firm to them.

Sean Magennis [00:12:21] Yep.

Greg Alexander [00:12:21] Right. Because you’re going to run into this mismatch.

Sean Magennis [00:12:23] Agreed.

Greg Alexander [00:12:24] And to your earlier point, there’s not a right culture or a wrong culture. It’s just a culture. And do these cultures, can they coexist well? If somebody is doing diligence on you and they’re suggesting that there’s a cultural problem, runaway. On the flip side, if you feel like even though you’ve just met these people, you feel like you’ve known them for years and years and years. That’s a good sign that you guys will, well, your cultures will merge well together post sale.

Sean Magennis [00:12:48] Totally agree Greg and taking the time is a critical characteristic as well. So in summary, remember that most acquisitions fail and this prevents owners from earning their earn out. The primary reason for this is poor culture fit. Don’t hide your culture. Lead with it. You want your sale to be successful. Therefore, you need to find a buyer who fits your culture.

Sean Magennis [00:13:14] 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.

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