Tag: Exit

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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. 

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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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How a Professional Services Firm Can Monetize Its Intellectual Property

Episode 7: The Boutique: Move Beyond the Billable Hour and Monetize Your Intellectual Property

You have more intellectual property than you think, and you can monetize it. In this episode of The Boutique podcast, Sean Magennis and Greg Alexander discuss how professional services firms can learn how to monetize their intellectual property to better attract acquirers when selling their business. 

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 into the next chapter of your life.

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

I’m Sean Magennis, CEO of Capital 54 and your host. In this episode, I’ll make the case that you have more intellectual property than you think and that you can monetize it. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert in helping professional services firms monetize their intellectual property. Greg, let’s start with the basics. What is intellectual property? 

What is Intellectual Property?

Greg Alexander [00:01:06] Yep, that is the right question to lead with, and I would tell you that boutiques are very confused about intellectual property. Some of them think that they have a lot when they really don’t have any, and others think that they don’t have any, but they’re sitting on a goldmine. This confusion gets cleared up when you attempt to sell your boutique very quickly. 

So if you have real intellectual property, investors will place a value on it. If you do not, investors will not consider it in their valuation. So this begs the following questions: What is intellectual property? And how do professional services boutiques create it? 

So, roughly speaking, intellectual property is an invention to which one owns the rights, and these rights are protected by patent copyrights or trademarks. 

Sean Magennis [00:01:51] Excellent. So I’m going to use the term IP for intellectual property. What are some examples of IP in the professional services industry? 

Intellectual Property Examples in the Professional Services Industry

Greg Alexander [00:02:00] Yeah. So firms create intellectual property regularly . So, for instance, many consultants published books. These books are protected by copyright. Consultants turned authors receive royalty payments from their publishers. Some boutiques collect benchmark data. 

They then license access to this benchmarking database to clients. A licensing agreement protects this benchmark data asset. Boutiques often create innovative methodologies to solve certain problems. They frequently enter into licensing agreements with third parties. These third-party firms pay a licensing fee to the boutique. 

This grants them the right to use the methodology. If these third parties violate the licensing agreement, they can be sued. It is not uncommon for both teams to convert their knowledge into tools. These days, these tools are turned into software applications. The clients of the professional services boutiques pay perceived license to use these tools, but if the application licensing agreement is in breach, the boutique can seek damages. 

Yet, other boutiques create certification programs that validate someone’s experience. Individuals pay boutiques to become certified in a specific skill. A popular example of that is PMP, a project manager professional. If an individual falsifies a certification, they can be taken to court. 

So these are some examples of intellectual property inside a professional services firm and how creative professional services firms monetize this intellectual property. And as a result of that, how they can move beyond the revenue stream defined by the billable hour. 

How to Monetize Intellectual Property As a Professional Services Firm?

Sean Magennis [00:03:51] Great examples, Greg. So professional services firms owners have lots of ways to make money and monetize this intellectual property. Boutiques that have real intellectual property are selling services. They’re not selling bodies. This distinction is why they are considered a professional service. 

Acquirers are not interested in buying subcontractor body shops. They’re interested in buying professional services firms, and intellectual property is the key difference. Greg, do you have a war story you can share that might help the audience understand this a little better? 

Greg Alexander [00:04:28] I’ve got a great one. 

Sean Magennis [00:04:29] Excellent. 

Greg Alexander [00:04:30] So I was advising a civil engineering firm about a year ago. The owner was truly brilliant, and he was a giant in his field, and he had an amazing way to hire and make profitable inexperienced engineers, and I would tell you that this was his secret sauce. 

So, this inexperienced labor was cheap, and it allowed him to charge his clients less, and as a result, he won most of the bids he submitted. He wanted to sell his firm. He hired an investment banker, and a month later, the banker fired him. This doesn’t happen often. 

And he told me, the banker said that his firm was not sellable. Nobody was going to buy it, and the reason no one was gonna buy it was because he had no intellectual property. He was a body shop filled with kids working for cheap. He disagreed with the banker. This brilliant entrepreneur began to explain to me his proprietary methods, and they were impressive, and he was very proud of them. 

I interrupted him and asked how these methods were protected. Were there any patents, copyrights, or trademarks? And the answer was no. And that’s OK. I then asked him if this secret sauce was generating any revenue. And the answer was also no. 

His clients were not paying for the right to use any of it. The clients were simply asking him to perform a job. At the completion of the job, he was paid a fee. So I had to agree with the banker. He was a body shop. 

There was no intellectual property. He wasn’t a professional services firm. He was making a great living, and there’s nothing wrong with that. But he had no leverageable assets. There was nothing really to buy. So that is why investors were not interested in his firm. 

Sean Magennis [00:06:22] I’m assuming a large percentage of boutiques like this, the great lifestyle businesses, they’ll produce an excellent living for the owners for years to come, and there’s nothing wrong with this. However, they are not the boutiques that owners can sell. 

If your goal is to sell your firm, then it is important that you have intellectual property. Greg, excellent conversation on intellectual property inside of our professional services industry. 

Greg Alexander [00:06:54] There’s one thing I’d like to add here if I can. 

Sean Magennis [00:06:56] Yes, of course. 

Greg Alexander [00:06:58] You know, I started out by saying that intellectual property was if you had trademark copyright or patent, and obviously, you have those three things, that’s definitive proof. Another way to prove that you have IP is it shows up in you in your billings. 

So, for example, if you’re selling a service and the going rate for that service is 500 dollars an hour, and you’re getting 600 dollars an hour, and the difference there is 100 dollars, you can prove that someone’s willing to pay you more for the right to use your intellectual property. 

That’s something beyond providing labor that’s attracting to them and the savvy investor, which I’d like to think Capital 54 is, we don’t rule somebody out. 

Sean Magennis [00:07:41] Yes. 

Greg Alexander [00:07:41] If they don’t have a patent, copyright, or trademark. We looked to see, you know, what type of fees are they generating? What’s the quality of those fees relative to the others in the marketplace? And if they’re getting a premium, that’s proof, at least as far as I’m concerned, that there really is intellectual property there. 

Sean Magennis [00:07:58] An excellent distinction. Greg, thank you. 

Sean Magennis [00:08:04] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field., 

Collective 54 is the only national peer-to-peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling, and maximizing business valuation. Today, we have the pleasure of introducing you to Lawrence King, founder and CEO of Headstorm, a high-powered technology consultancy dedicated to building innovative technical solutions for fast-growing startups all the way to Fortune 500 companies. 

Lawrence King [00:08:49] My name is Lawrence King, and I’m happy to be featured on this podcast. Headstorm is a product and engineering firm focused on building data platforms and digital software solutions. We have a unique approach and mindset in our industry that we measure our success not just by building digital solutions but also on ensuring our solutions capture the intended ROI. 

We do this through strong product design thinking, effective engineering practices, and a sales enablement strategy to help our clients bring these solutions to market. My primary focus at Headstorm is building our culture and capabilities from the inside out. This means we design, engineer, and incubate our own products and are constantly improving and refining the processes and methodologies we bring to our clients. 

Part of the idea behind drinking our own champagne is that we have developed a culture of experimentation and professional growth that produces next-gen consultants highly capable of solving 21st-century problems. 

Sean Magennis [00:09:41] Please get to know Lawrence and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

10 Questions Professional Services Firms Should Ask When Monetizing Intellectual Property

Sean Magennis [00:09:59] So, in an effort to provide immediate takeaway value for you today, I’ve again prepared ten questions. Yes, no checklist. Please ask yourself these ten questions and remember, if you answer yes to eight or more of these questions, you have a real monetizable intellectual property that will attract a buyer. 

  1. Do you have any patents?
  2. Do you have copyrights?
  3. Do you have any trademarks?
  4. Are you generating revenue by granting the right to use your intellectual property to anyone?
  5. Are you collecting data that clients will pay to have access to?
  6. Are you inventing methodologies that third parties will pay to be able to use?
  7. Are you coding your knowledge into licensable application tools?
  8. Will individuals pay you for a certification to validate their skills?
  9. Are you a true professional services firm and not a body shop?
  10. Is it crystal clear to a potential buyer that your boutique is not just a well-run lifestyle business?

Sean Magennis [00:11:41] There’s a lot of confusion as to what intellectual property is. A boutique with true intellectual property is a very valuable one. There are many ways to codify knowledge to leverage intellectual property. Lifestyle businesses progress into highly valued boutiques when this intellectual property is created. 

Sean Magennis [00:12:05] 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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How Can Professional Services Firms Transform Revenue Into Wealth

Episode 6: The Boutique: Transform Income into Wealth

All revenue is not good revenue. In this podcast episode, Sean Magennis and Greg Alexander discuss the different types of revenue and which create more wealth for owners of professional services firms. You will learn what good fees are and why they increase the value of your firm and improve your business exit strategy. 

Episode 6: Transform Income into Wealth

All revenue is not good revenue. You will learn that some types of revenue create more wealth for owners than others.

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 into 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. In this episode, I’ll make the case that all revenue is not good revenue. Some types of revenue create more wealth for owners than others. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert in converting income into wealth. Greg, hi. What types of fees are considered high-quality fees? 

How Can Professional Services Firms Increase Fee Quality?

Greg Alexander [00:01:09] Yeah, and that’s really important because we’re trying to convert income into wealth, and the way that you do that is by having high fee quality. OK. So what does this really mean? So it’s a very deep topic. 

Greg Alexander [00:01:22] I know lots of professional service firms, leaders, and owners who make a great income, but very few are wealthy. This is disappointing and unfortunate because they’ve built great firms, and they should have their cake and eat it, too. 

Sean Magennis [00:01:41] Yes, indeed. 

Greg Alexander [00:01:42] They should have a big balance sheet and lots of net worth, and they should also have a great annual income, but unfortunately, that’s not happening. I’m reminded of the phrase, “it’s not what you make that matters, but what you keep that counts.” 

Sean Magennis [00:01:55] Great phrase. 

1. New Versus Existing Client Revenue

Greg Alexander [00:01:56] Yeah. So there are lots of ways to convert annual income into personal net worth, and it’s worth this time here to talk about that. So let me share four easy-to-understand ideas. 

So the first analysis of fee quality, which is the active ingredient in wealth creation, will focus on new versus existing client revenue. Boutiques that depend heavily on new client acquisition have poor fee quality. Yes, all firms need a steady stream of new clients, and I’m not suggesting otherwise. 

However, this type of revenue, new client revenue, is very expensive to generate, and it’s usually not very stable. It requires heavy investment in business development in the BD dollars, and the non-billable hours could be deployed elsewhere, generating a high return. 

Also, boutiques are addicted, and that’s a keyword, addicted, which I think many are to new client fees often are hit and run specialists. Or some call them churn and burn boutiques. They perform well for a period of time, but eventually, they stop growing because word gets out that the sales pitch is better than the product delivery, and this hurts new client acquisition, which is the very thing that they are dependent on. 

Professional services firm boutiques that depend heavily on revenue from existing clients also have poor equality. It is true that firms generate fees from existing clients. However, this type of revenue eventually disappears. The nature of boutique work is that it is temporary. Clients are renting your expertise. At some point, they stop paying the rent. They no longer need the work to be reformed, or they take it in-house. 

So boutiques that are over-indexed to existing client fees forget how to hunt. They wake up one day needing new clients, and they cannot generate them. These boutiques often devolve into lazy lifestyle businesses. So we’re talking about converting income into wealth. 

The key to making that happen is high fee quality, and that comes from a proper balance of fees generated from new clients and existing clients. To give the audience a rough rule of thumb, I would shoot for about a 60/40 split: 60 percent of fees sourced from existing clients and 40 percent of fees sourced from new clients, and that’s a healthy balance. 

Sean Magennis [00:04:39] Got it, Greg. So a 60/40 split: 60 percent from existing and 40 percent sourced from new clients. So you mentioned you have four ideas to share. We’ve gone through one. What is number two? 

2. Length of Contracts

Greg Alexander [00:04:55] OK, so the next analysis of fee quality is the length of your contracts. Potential investors want to see long-term contracts with clients. So, for example, a management consulting firm that performs a 30-day strategy assessment would be labeled a firm that has poor fee quality because it’s only a 30-day contract. 

However, the professional services boutique that performs the strategy assessment, then engages in solution development, and then engages in the implementation might have a contract length of, let’s say, 12 months. That type of firm has very high fee quality because of the length of the contract. 

Sean Magennis [00:05:37] Got it so simple. The longer the contract, the higher the fee call. 

Greg Alexander [00:05:41] Yes. 

Sean Magennis [00:05:43] Very, very good. What is number three? 

3. Fee Predictability

Greg Alexander [00:05:47] OK. So after analyzing new versus existing clients and taking a look at the length of a contract, investors will look at fee predictability. So a boutique whose services build on one another is very attractive. These boutiques often produce high feed quality due to the predictability of their future feed. So let me give an example. 

Greg Alexander [00:06:11] An estate planning attorney is going to have very high fee predictability. Why is that? State plans often need updating. The attorney, the professional service provider who writes your estate plan, is very likely going to update it for you. The future fee is highly predictable.

 An estate plan written, let’s say, for a 50-year-old changes when the parents pass away or when grandkids arrive on the scene. Therefore, that estate plan attorney has a very high fee quality. He can see how his service is going to be consumed well into the future, and you can see in that example how fee predictability is built right into the service offering. 

Sean Magennis [00:06:55] Yeah that makes complete sense. Really interesting. So I understand the predictability of the fee that is made is more or less valuable. However, I didn’t consider increasing predictability through service offering design. So will you address that in number four? 

Greg Alexander [00:07:17] No. Number four is going to be around cash collections. But let me address it here, if that’s OK. 

Sean Magennis [00:07:21] Yeah, absolutely. 

Greg Alexander [00:07:21] So very often, you know, it’s an obvious thing that you want to follow on fees from your current clients. But the way that most boutique owners address that is through their business development process, you know. They modify their sales… a marketing campaign, and I define that as a push approach, and that’s more difficult. 

A pole approach is if you design the service offering so that when someone consumes the service, they’re going to want to consume more of it for a logical reason. So I gave you the example of the estate planning attorney. 

Sean Magennis [00:08:03] Yes. 

Greg Alexander [00:08:04] I also gave you the example of the management strategy consulting firm. So let’s think about that. Let’s say I’m a strategy consulting firm, and I start off every project with an assessment. Well, my assessment should be delivered back to the client in such a way that encourages them to ask me to develop solutions to the problems that were identified, and then so that’s project number two. 

Sean Magennis [00:08:25] Yes. 

Greg Alexander [00:08:26] And then when I deliver those solution recommendations, it should be obvious to the client that I would be helpful in executing or implementing those solution recommendations – that’s project number three. And if you add all three of those up, that’s probably a 12-month gig, right? 

Sean Magennis [00:08:42] Yes. 

Greg Alexander [00:08:43] And it wasn’t me selling the client. It wasn’t push. 

Sean Magennis [00:08:46] Got it. 

Greg Alexander [00:08:47] It was all pull. 

Sean Magennis [00:08:48] All pull. 

Greg Alexander [00:08:48] Yeah. 

Sean Magennis [00:08:49] Makes a lot of sense. So let’s now go to number four. What is number four, Greg? 

4. Cash Collections

Greg Alexander [00:08:53] OK. So investors often examine for quality, also based on cash collections. So boutiques that have aging accounts receivables have poor quality, and obviously, in contrast, firms that are paid upfront have high fee quality. Investors love firms that can use free cash flow to grow. 

Sean Magennis [00:09:13] Yes. 

Greg Alexander [00:09:14] If your boutique gets paid in advance, you’re unlikely to need cash infusions down the road to fund your growth initiatives, and that’s very attractive to financial buyers, people like private equity firms. 

So, as a rule of thumb, firms that rely on short-term debt to run are not attractive. So the way that you might action that is even if you’re a project-based firm, the way that you write your contracts and the way you handle your payments, you should be trying to collect payment in advance of doing the work. 

So let’s say you’re writing a  one hundred thousand dollar contract that’s going to take three months to complete. Ask the client to pay 50 percent upfront, 25 percent at the midpoint, and twenty-five percent of that at the conclusion. And just by doing that… 

Sean Magennis [00:10:00] Yes. 

Greg Alexander [00:10:01] As opposed to sending the traditional invoice with Net 30, it improves cash collections substantially and solves your AR problem. 

Sean Magennis [00:10:09] Outstanding advice, Greg. From experience, listeners. So excellent. Greg, thank you for unpacking four things that we can do to increase fee quality and, as a result, convert income truly into wealth. 

Sean Magennis [00:10:27] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field. Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling, and maximizing business valuation. 

 

Today, we have the pleasure of introducing you to Jeffrey Pruitt, who is the CEO and chairman of Tallwave, a business design and innovation company that helps organizations build, bring to market and scale great products. 

Jeffrey Pruitt [00:11:10] Thanks, Sean. It’s great to be part of such a strong organization. I founded Tallwave with partners in 2009 with the mission to help clients transform ideas and businesses in the digital age. I also serve as a general manager of Tallwave Capital, which raised $13.2 million in seed funding in 2014, earmarked for the technology sector. 

It’s been the most active Arizona Fund, funding 28 companies in the western region who raised over 56 million in total capital. As an Arizona native, I bring nearly 20 years of technology-focused leadership to the post. Over the past eight years, we have led Tallwave to exponential growth or exchange acquisitions, which has helped earn Tallwave a spot in the INC 5000 list of fastest-growing companies over the last three years. 

I recently was named… Business Leader of the Year by the Arizona Technology Council and a most admired leader and tech titan finalist from the Business Journal. This is a testament to the great leaders, employees, and client partners of Tallwave. I also serve as an executive leader of the IDEA Enterprise, a program developed by Arizona State University that connects leading-edge teams with senior business leaders. Thank you. 

Sean Magennis [00:12:25] Please get to know Jeffrey and other business owners who are leading innovation in the professional services industry by visiting us at Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

Sean Magennis [00:12:43] In an effort to provide immediate takeaway value for you, the audience, I’ve prepared again a ten question  checklist. Please ask yourself these ten questions. If you answer yes to eight or more of these, you have high fee quality. 

Number one: Did you generate about 60 percent of your fees from existing clients? 

Number two: Do you generate approximately 40 percent of your fees from new clients? 

Number three: Is the average client contract longer than 12 months? 

Number four: Do your projects naturally build on top of one another? 

Number five: Is your service built to pull through on the upsell? 

Number six: Is your service designed to pull through cross-selling? 

Greg Alexander [00:13:49] So let’s distinguish between those two. 

Sean Magennis [00:13:51] Yes, please. 

Greg Alexander [00:13:52] So upsell means selling more of what somebody has already bought. So instead of them buying three, they buy ten. Cross-sell is to get them to buy something different than what they’ve already bought. So the greatest cross-sell question of all time was, do you want fries with that? 

Sean Magennis [00:14:09] Love it, yes, and you know who makes the best fries in the world, by the way? 

Greg Alexander [00:14:14] Who’s that? 

Sean Magennis [00:14:15] McD. 

Greg Alexander [00:14:15] Yeah, I agree. 

Greg Alexander [00:14:17] So at the moment of purchase, someone’s buying a Big Mac, and somebody says you want fries with that. You know, the conversion rate there is really, really high, and they obviously designed their product offering in that case in such a way, and then they came up with the bundle and the coke and all that. 

Sean Magennis [00:14:34] Yes. 

Greg Alexander [00:14:35] So that’s a difference between upsell and cross-sell. I just wanted to clarify that. 

Sean Magennis [00:14:38] Thank you, Greg. So number seven: Are your fees predictable? Number eight: Do you collect your fee in advance of performing the work? 

Greg Alexander [00:14:52] You know, just a comment on number seven, if I can. In terms of fee predictability, another way to think through that- and I’ll use the accounting industry as an example – we all have to file our taxes on April 15th. Okay. So if you’re somebody who’s going to invest in a accounting firm, you know that there is this kind of natural, compelling event, right? 

Sean Magennis [00:15:11] Yes. 

Greg Alexander [00:15:12] So now that was dictated by the federal government mandating when your taxes were due, so there’s a natural advantage there. So if you’re an owner of a professional services firm right now and you’re saying, “Well, I don’t have the law on my side, you know, how can I establish dates upon which business has to be completed?” 

Well, one way to think about it is your client’s fiscal year, and in most fiscal years, there’s the planning process. And if you’re on a calendar fiscal year, meaning January through December, most companies start their planning process, let’s say, in late Q3, early Q4. So let’s say August to October, and many times during that planning process, there is a need for external assistance and this is just one example of many. 

The way you can increase your fee predictability is you can build service offers in  in packages that are relevant to clients at certain moments of their fiscal year. So, when you start getting people used to buying from you, especially existing clients that way, then you have some fee predictability which will make yourself very attractive to a potential buyer. 

Sean Magennis [00:16:20] Excellent. Thank you, Greg. 

Sean Magennis [00:16:24] Question number nine: Can you fund your growth from free cash flow. And finally, question number 10: Can you pay your bills without using debt? Very key. 

Greg Alexander [00:16:37] Yeah. You know, a lot of times, growing professional services firms have a hard time hitting payroll every month. 

Sean Magennis [00:16:43] Yes, indeed. 

Greg Alexander [00:16:44] The reason why that is, is that their clients are delaying their payment, but yet, payroll can’t be delayed. So they go to short-term lenders to bridge the gap on payroll, and obviously, that is expensive and risky. So you want to get away from that, and the way you get away from that is you get paid in advance. 

Sean Magennis [00:17:01] Thank you for that, Greg. So as we’ve learned from today’s podcast, all revenue is not necessarily good revenue. There are good fees and then there are bad fees. Good fees attract buyers. They increase the value of your firm and they improve the odds of exiting. Bad fees push buyers away. They decrease the value of your firm and they will likely prevent you from selling your business. 

Sean Magennis [00:17:31] 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. We thank Greg again, and thank you for listening. 

 

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Episode 4: Rate of Growth – The Ultimate BS Detector

Your rate of growth is your most important number. Learn why it is more important than your size, client roster, and service offerings.

In Episode 4 of The Boutique, Sean and Greg talk your rate of growth being your most important number. Learn why it is more important than your size, client roster, and service offerings.

 

After listening to the Podcast, you are invited to join a Q&A session on Friday, October 9th facilitated by Greg Alexander, Chief Investment Officer of Capital 54. Register Here

TRANSCRIPT

Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in on 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 will make the case that your rate of growth is your most important number. It is much more important than the size of your firm. It is more important than your client roster, and it is more important than your service offerings. Potential acquirers want to see strong growth in top line revenue and bottom line profits. I’ll try to prove this by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg really is a true expert when it comes to growing revenues and profits in the professional services sector. Greg, what advice do you have for the audience with regards demonstrating growth to a potential investor? 

Greg Alexander [00:01:28] Yeah, so the first thing to understand is, is what does good growth look like from the perspective of an investor? So as the chief investment officer of Capital 54, you know, when I consider making an investment into a firm, I’m looking for the following… So roughly a five to ten year track record of consistent revenue and profit growth and also, you know, within those five to ten years, that means revenue growth roughly 20, 20 to 30 percent top line. Shoot for gross margins in the 70 to 80 percent range and look for net margins in the 30, the 30 to 40 percent range is probably a good number to shoot for. 

Sean Magennis [00:02:08] Mm hmm. So, Greg, these are those are really high bars to to leap over. So I’m curious, tell me why the five to ten year requirement firstly. 

Greg Alexander [00:02:18] Yeah. You know, I tell you a recent story that might illustrate why sustainability of growth is key and that’s really the word here. \. 

Sean Magennis [00:02:27] Yes. 

Greg Alexander [00:02:27] And that’s the reasons for the five to ten years. So I was recently involved in an auction run by an investment bank for an I.T. services company. This firm had a strategic relationship with a software provider in a very hot area called data analytics, and they helped clients use the data to make better decisions through data visualization and the bank running the auction touted the boutique as a high growth firm. When I met with the management team, they were very proud of what they had accomplished and I was presented with slide after slide of steep revenue and profit growth, and the growth was accelerating. Now, see, I had looked at a few firms in this space and I had a somewhat uncommon and maybe unfair information advantage. This firm was growing revenue at roughly 22 percent per year and had done so for about three years. Problem was that their boutique competitors, other firms I had looked like it, looked at, excuse me, were growing their top lines at twice the rate. You see that the data visualization space was hot and kind of high water was raising all ships. When I dropped out of the bidding process, this firm, unfortunately, was insulted and when I explained my rationale and provided my evidence, they claimed that my comparisons were not apples to apples and that the firms I compared them to would not, quote, pure place. 

Greg Alexander [00:03:55] This firm ultimately was unable to find an acquirer. So it appears that I was not the only one who felt this way and had seen other firms at the command of the facts and unfortunately, the story gets worse and this is why the requirement of five to ten years is so important. You see, the data visualization space cooled off a bit. The software provider, the golden goose, so to speak, stopped laying the eggs. And as the rate of growth slowed, so did the growth rate of its service partners. So it’s not enough to ride a wave so to speak you know. You have got to have a real business that can make it through let’s say it’s a decade. 

Sean Magennis [00:04:35] So, Greg, I assume the moral of the story is growth is relative and most importantly, know your facts. Know your data if you’re doing the comparisons. Is that accurate? 

Greg Alexander [00:04:46] It is. You know, sometimes I get pitches and they say, you know, hey, you know, I’m a large firm. A number of employees of big revenue and you look at the growth and it’s five, seven, ten percent, you know and so the size of the firm is less important to the investor. It’s the rate of growth and the relative rate of growth that really matters. 

Sean Magennis [00:05:05] Yes, it makes total sense and additionally, I’m curious why you include profit growth in your list of requirements. Many young firms focus on profit and we see that coming out of Silicon Valley and other places around the world. They don’t focus on profit growth. They spend their time obsessing over top line revenue growth. 

Greg Alexander [00:05:27] Yeah. You know, unfortunately, a lot of firms have great top line growth, but no profit growth. And that’s a deal killer for most especially for me. The key thing to think about as it relates to a services business, and this is different than a product business, and maybe this is the most significant difference between selling a product firm and a services firm. Yes, a services firm has to figure out how to decouple revenue growth from headcount growth and until they can do that, they’re not going to generate any profits. You can grow from 20 million to 40 million, but if you’re doubling headcount in the process, you’re not making any more money. So until they really figure this out and there’s a lot of ways to do that, that go beyond the scope of today’s podcast, but until they figure that out, they shouldn’t try to sell the firm. When they do, gross margins and EBITDA margins will jump and that’s the time to sell. You know, you open in your podcast, you want to sell at the right time for the right price on the right terms. That’s the right time when you figure that out because you’ll see lots of growth and EBITDA and that will prove that you have a sustainable, scalable business model and that’s when you have lots of firms interested in making an investment in your firm. 

Sean Magennis [00:06:47] Thank you, Greg. So top line growth for our listeners, bottom line profitability. Those two have to be done the right way in order for you to get the right price and an effective sale. 

Greg Alexander [00:07:00] Correct. 

Sean Magennis [00:07:01] Outstanding. 

Sean Magennis [00:07:05] We will be right back after a word from our sponsor. Now let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field. Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling and maximizing business valuation. Today, we have the pleasure of introducing you to my dear friend Sanjay Jupudi. He’s president and founder of Qentelli, a firm focused on business transformation through digital innovation. 

Sanjay Jupudi [00:07:45] As the president and founder of Qentelli. I offer more than 18 years of experience leading global teams, working with Fortune 500 organizations, building companies and heading operations, sales and delivery. Being in leadership roles at enterprises, nurturing startups and as an entrepreneur, I provide hands on experience and product development, implementation and I.T. consulting spanning across Europe, Americas and Asia. Qentelli empowers their clients to build right operational models and to deliver a great digital experiences and Qentelli worked with clients from various industry domains and leading geographically distributed teams that provide a broad range of services, including customer experience management, customer experience testing, enterprise mobility, dev ops and quality. 

Sean Magennis [00:08:31] Please get to know Sanjay and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about our collective 54 can help you accelerate your success. 

Sean Magennis [00:08:50] So here we go again. Greg, in an effort to provide immediate takeaway value for you, our audience. I prepared a 10 question. Yes, no checklist. Listeners, please ask yourself these 10 questions. If you answer yes to eight or more of these questions, you have an excellent growth story that will attract investors. Number one, are you growing revenue faster than your boutique competitors? Number two, have you been doing so for more than a few years? Number three, are you growing your profits faster than your boutique competitors? Number four, have you been doing so for more than a few years? Number five, you’re growing your revenue faster than the practice inside the lodge market leaders. 

Greg Alexander [00:09:56] Let me. Let me interrupt you there just for one moment, because we didn’t talk about this. But this is important. 

Sean Magennis [00:10:00] Yes, please. 

Greg Alexander [00:10:02] When you go to sell your firm, there’s really two types of buyers. There’s the private equity buyer and there’s a strategic buyer. The strategic buyer can be defined as another firm that wants to buy your practice to expand their offerings. So when they when they consider that it’s a buy versus build conversation, I can build the practice myself by hiring people and trying to sell the same service or I can buy a boutique and bring that into my firm. Those are two ways to do it. So this question number five, how you’re growing your revenue faster than are you growing your revenue faster than the practice inside the the large market leaders is really important, because if you’re not, those strategic buyers are not going to be interested in your firm. They can do what you do better than what you’re doing. So why bother you?

Sean Magennis [00:10:50] Precisely. 

Greg Alexander [00:10:51] Right. On the flip side, if they identify your practice area as strategically relevant for them and they’ve been trying to get it done, but they can’t. You’re going to become more attractive to them because they can buy you throw some money at it and solve a strategic problem. So that’s why that question is in here. 

Sean Magennis [00:11:07] Excellent, Greg. So very much a creative to their market, which will which will give them an opportunity to buy versus doing it themselves. And then the follow on to number five was, again, have you been growing your revenue for more than a few years? 

Greg Alexander [00:11:22] Right. And that’s a sustainability factor. 

Sean Magennis [00:11:24] Excellent. 

Sean Magennis [00:11:25] Number seven, are you growing your profits faster than the practice inside your largest marketing competitor’s? Very much like your previous point. And then number eight, have you been doing so for more than a few years? Number nine, are you growing your cash balance to cover payroll for at least 12 months? And number 10, do you have at least 12 months of forward visibility? 

Greg Alexander [00:11:57] Yeah. So let’s talk about nine in 10 a bit. There’s a difference between cash flow and income. And boutique businesses run on cash flow so it’s one thing to grow your revenues and it’s one thing to grow your profits but you also want to be growing your cash balance. 

Sean Magennis [00:12:14] Yes. 

Greg Alexander [00:12:14] So that you can use that free cash flow, so to speak, to fund growth initiatives, whether that be bringing out new services, investing in marketing, hiring new people, whatever it may be, so that the look at cash is different than the look at revenue and different than look at profits. 

Sean Magennis [00:12:32] Outstanding, thank you. Greg. So what we’ve learned today is growth matters a lot and relative growth matters even more. A year or two of great results doesn’t mean that you have a sellable, sustainable boutique. A decade of market beating growth will command an excellent price and excellent terms and profit growth. Greg, as we’ve discovered and experienced, is as important as revenue growth. This indicates that you have cracked the code. You were one of the few who broke the link between revenue and headcount growth. Please be sure to run a tight ship. Be prepared to demonstrate reliable forward visibility and plenty of working capital. 

Sean Magennis [00:13:27] Again, thank you, Greg. And 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 your host, Sean Magennis. Thank you for listening. 

 

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Episode 3: How to Prove Your Firm is Not a Body Shop

How to position your firm in its marketplace is strategically important. Learn how to position yourself well in your market which is a critical way to determine the strength of your value proposition.

In Episode 3 of The Boutique, Sean and Greg talk how to position your firm in its marketplace is strategically important. Learn how to position yourself well in your market which is a critical way to determine the strength of your value proposition.

 

TRANSCRIPT

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

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, our podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that the position of your firm in its marketplace is strategically important.

I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert in identifying a market position and in helping firms take actions to achieve this position. An acquirer of your firm will find your boutique attractive if you are positioned well in your market. Market position is a way to determine the strength of your own value proposition. A strong market position can indicate excellent competitive positioning. So, Greg, what is
the first step in establishing the most attractive marketing position one can get for your firm?

Greg Alexander [00:01:36] You know, I think it’s important to underline something that you said there, which is market position is a way to determine the strength of your value prop. So that’s what we’re really after here is the strength of your value proposition. So with that as a grounding. Right. The first step is to think like an investor and ask this
question. How will a potential, potential buyer of my firm measure the strength of our value proposition otherwise said measure our position in the market? So there are some obvious ways to measure the strength of your value problem. So, for instance, fee level in fee volume are two basics in any due diligence process. A fee level below, let’s say 250 bucks an hour, will suggest that your body shop. Body shops, if they sell, typically do so for a very low price and on very unattractive terms, you don’t want to be a body shop. A fee level, let’s say 500 bucks an hour will suggest that you have monetize real intellectual property. You’re not selling time. You’re not selling arms and legs. Instead, you’re selling knowledge and skills. So firms such as this are capable of selling and when they do sell, they do so at a premium price. Fee volume, on the other hand, indicates market position by suggesting the size of the overall market. So, for example let’s say you’re doing 50 million dollars a year. So that’s fee volume is 50 million a year, suggests a large market opportunity. Now, why is that? It’s understood that boutiques are not the market leaders. They’re the emerging market leaders and they typically penetrate their markets at, let’s say, somewhere between one and ten percent. So in this example, if you’re doing 50 million dollars a year in fee volume, that suggests that you’re working in a market opportunity that’s greater than five hundred million dollars and could be quite a bit larger than that and buyers of firms want to buy firms that are high growth, but that also still have a lot of runway in front of them. So when they’re thinking about their position that you’re boutique has in its market relative to the competitors and they’re trying to understand the strength of your value proposition. Some of these basics, like fee level and fee volume, are ways to prove that you’re not a body shop.

 

 

Sean Magennis [00:04:07] Got it, Greg. And obviously that runway comment is vitally important to have lots of runway ahead of you. So how about some suggestions beyond the basics, such as fee level and fee volume? What else what else is there, Greg?

Greg Alexander [00:04:20] Sure. So savvy acquirers are going to consider more precise indicators of your market position. So an example that might be client return on investment and this is often overlooked in it’s absolutely critical. You know, the slang term for this is client ROI. So boutiques that can scale to market leaders can prove their worth to clients. So what’s a simple way to illustrate this? Let’s say a client buys a service for half a million dollars and the realized benefit from that project is, let’s say, five million. So this is a 10 times return on fee. That’s a clear client ROI and if you’re a firm that can prove that you’re gonna be very attractive to a buyer. That’s a savvy buyer looking at the strength of your value proposition. Is there a clear before and after result? In contrast, let’s say that a client buys a service for half a million and it’s realized benefit is something subjective, such as
well trained employees. That’s poor client ROI. Well trained employees are at benefit from the project for sure, but it’s not quantified and it’s not in relation to the cost of the project. So these boutiques are likely not to become market leaders and a savvy acquirer is gonna know that. Another way that investors measure a boutiques market position is call point.

So what does that mean? So call point refers to the title of the person buying your service. For instance, if board members are buying your service, that’s a high call point. If the CEO or the CEO’s direct reports of buying your service, that’s a high call point. However, if your call if your call point title is like a director or manager, that’s considered by investors to be a low call point and firms with low call points have a hard time scaling. This is, that’s because they’re really selling a service that’s not worthy of an executive’s time to solving a problem an executive has delegated to junior staff and this indicates that the boutiques
service is not as, not that important to clients and that’s going to make it very hard for a boutique to scale. And investors are looking for high growth firms that have lots of runway in front of them and they can scale and one way to assess that is who do you call on? Who buys your service? And maybe one more just off the top of my mind is cycle resiliency. This is particularly important as we record this. The world is suffering from COVID-19.

Sean Magennis [00:07:00] Yes.

Greg Alexander [00:07:01] And a cycle resiliency is often considered by acquirer’s as an indicator of market position or the strength of your value prop and this cycle resiliency refers to having a boutique perform in periods of recession. Recessionary periods cause clients to cut most all non-essential budgets and unfortunately, this can include discretionary budgets that many boutiques rely on. Firms that see steep declines in financial performance during recession, that have poor market position and those that do well and maybe even expand during a recession have very strong valued propositions and it’s those boutiques and have the best chance of selling their firm’s.

Sean Magennis [00:07:48] Outstanding points Greg, and lot to unpack and think about here. So client ROI call point and cycle resiliency. These are all great market proof points. Greg, when you sold your firm SBI, how did you demonstrate to the buyer that you had a really strong market position?

Greg Alexander [00:08:12] Yeah, so in my case, the strength of our value proposition and our position in the market was obvious. Our acquirer evaluated us through the lens of each of those attributes and we we happen to show really well in each category. However, we probably shined brightest when it came to cycle resiliency and in fact, I can I can tell you with clarity that that actually drove the purchase price. In fact, our purchaser paid more for our firm because of how well we did during recessions and just some quick history for those that don’t know my personal story. I found in my firm sales benchmark index in 2006
and many fragile young firms were wiped out during the great financial crisis of 2008 through, let’s say, 2010. Yet we pushed right through this period with no problems and looking back, it’s really remarkable to say that and it’s in it’s a testament to the great employees that we had there and the loyal clients that we had. You know, SBI was only three years old when the world fell apart and we were selling a discretionary item that was easily cut by clients during those brutal times but our clients didn’t cut our services. In fact, just the opposite. They added to that and our revenue and profit growth really accelerated during the Great Recession and on a peer to peer comparison basis, we were growing at roughly twice the rate of our peers during that part, period and after the deal closed, you know, the acquirer’s mentioned to us that, you know, that really struck them as to how strong our market position was and it gave them great confidence to pay a premium for our service because they felt that if we made it through the Great Recession, if another recession hit, we were likely to make it through it again and as I understand it, the firm is
doing really well during COVID-19 so that that, you know, proved out. So cycle resiliency was a big deal for us.

Sean Magennis [00:10:14] Thank you Greg, and what a great set of examples and a testament to you and your team and obviously what I’m hearing too is your loyal customers really profound. So listeners, as you can see, market position is really important to potential acquirers. It tells them whether you have a compelling value proposition. It also tells them are you a position relative to your competitors.

Sean Magennis [00:10:43] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field, Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling and maximizing business valuation. Today, we have the pleasure of introducing you to an exceptional person. Joe Gagnon, he’s CEO of Performance Tea, where his mission is to help people achieve their potential.

Joe Gagnon [00:11:23] Hi, I’m Joe Gagnon, the CEO and co-founder of Performance Tea. I see myself as an adventurer, entrepreneur and innovator. I’m the author of Living the High-Performance Life, an Ordinary Joe’s Guide to the Extraordinary. I’m a multi-time turnaround CEO and founder of the High Performance Life, a philosophy regarding techniques for mental toughness, Creative Problem-Solving leadership and personal effectiveness. As an advisory board member, I provide expertise in growth strategies to emerging companies. I’m an avid blogger and passionate endurance athlete, having completed 75 marathons and ultra races and in 2017 I ran a marathon on six continents on six consecutive days.

Sean Magennis [00:12:11] Get to know Joe and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success.

Sean Magennis [00:12:31] Greg, here we go again with our top 10 checklist. Greg Alexander [00:12:34] Drumrolls.

Sean Magennis [00:12:35] Drumroll. In an effort to provide you immediate value, I prepared again 10 questions on a yes no checklist. Please ask yourself these 10 questions.

Sean Magennis [00:12:48] Number one. Is your average fee level above five hundred dollars per hour? Question number two, if not, can you prove that you are not a body shop. Number three, is your fee volume big enough to prove that you are in a large market? Number four, if not, can you prove that you are in a large and growing market with a lot of runway ahead of you. Number five, do you have a clear client return on investment? Number six, if not, can you prove that your clients realize a good cost benefit tradeoff? Number seven, do you call on the board of directors of your target client? Number eight, do you call on the CEO of your target client? Number nine, did your financial performance hold up well during the last recession? And number 10, can you prove to a potential acquirer that your boutique is cycle resilient? If you answered yes to eight or more of these questions, you occupy a really strong position in your market. If you answered no to eight or more of these questions, you have a weak market position. It would be wise to hold off on your sales process until this is addressed. Acquirer’s want to buy firms with validated market positions. This reduces their risk and increases their upside. There are many ways for a market position to be evaluated. Please be sure that your case is bulletproof.

Sean Magennis [00:15:00] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book entitled, The Boutique How to Start Scale and Sell the Professional Services Firm.

Sean Magennis [00:15:14] I’m Sean Magennis. Thank you for listening.

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