Episode 161 – Behind the Numbers: Decoding the Finances of a Boutique Service Firm – Member Case by William Lieberman

In this session, we simplify the financial jargon surrounding a boutique professional service firm’s Profit and Loss (P&L) statement. Join us as we decode revenue, expenses, EBITDA, and net income, offering insights applicable to any member, regardless of their financial expertise. Whether you’re a consulting firm, marketing agency, systems integrator, or another type of small service firm curious about financial matters, this exploration into the world of P&L statements provides valuable insights into understanding and interpreting financial health.


Greg Alexander [00:00:15] Hey, everybody, this is Greg Alexander, the host of the Pro Serv podcast, brought to you by Collective 54, the first mastermind community dedicated to serving the unique needs of a unique set of people. Founders and leaders of boutique professional services firms. On today’s episode, we’re going to walk down memory lane and get into some finance one on one. Many of our members are not finance experts, and a reminder of the fundamentals is warranted. And we’re going to talk about how to deconstruct a PNL or profit and loss statement. And we have a long standing, well-liked, well respected member. His name is William Lieberman. This is what he does for a living, and he’s going to help us, guide us through this conversation today. So, William, it’s good to see you. Please introduce yourself. 

William Lieberman [00:01:06] Thanks, Greg. William Lieberman Company is the CEO’s right hand, and we provide outsourced finance and HR services to small and medium businesses throughout the US. 

Greg Alexander [00:01:18] Okay, so let’s talk about the profit and loss statement. So first, what is it? 

William Lieberman [00:01:25] So the PNL profit and loss Damien or income statement represents how your company makes money, spends money and generates profit. So it shows you all the money that’s coming in and the money that’s going out and at the bottom, how much profit you are making at the end of the day over a period of time could be a day, a week, a month, a year. Typically it’s a month or a quarter or a year. 

Greg Alexander [00:01:48] Okay, perfect. And for what it’s worth, listeners, to me, it’s the most important of all the financial documents. It’s the thing that you should be reviewing regularly. It, it is the health checker of the business. Okay. So I’m going to ask you some directed questions. These questions come from members who I’ve talked to that have struggling with this. So the top line of a panel is revenue of course. And I think that’s self-explanatory. However, people are running into an issue of revenue recognition. So for somebody who might not be familiar with that term, what is revenue recognition and how is it relevant to the founder of a services firm? 

William Lieberman [00:02:25] When you earn money. When you generate business, you need to recognize that revenue over the period that that money is earned. So if you deliver a service over a period of three months and you charge a flat rate for that service. One way to recognize is divided equally over that three month period. So that that revenue matches over the time period when you’re delivering that service. 

Greg Alexander [00:02:53] Right. I had a member who sells an annual subscription. For $50,000 and collects all the money at the beginning, and then spends it all and thinks that, you know, everything looks great. And I had to remind him, I’m like, you realize you have a liability here, right? Like that really wasn’t your money that was paid in advance, but you’re on the hook to provide the service for the next 12 months. So that’s an example of where revenue recognition can get, get out of whack. All right. So the next one, which is probably the biggest issue and this is what’s most often called Cogs cost of goods sold. We refer to it as cost to serve, and we define it as the direct labor expense associated with delivering the service. And the way you calculate a gross margin number is revenue minus cost to serve equals gross margin. And I raise this issue, William, because so many people struggle with what goes into cost to serve a Cogs like the contractors go in yes or no, do IT services go into it, yes or no. So help the audience think through what you believe should be in that Cogs number. 

William Lieberman [00:04:02] Sure. So let’s start with some obvious ones. So if you have a consultant who’s providing a service to a client and you’re billing out for that consultants work, that would be in cost of revenue. If that consultant is an FTE full time employee or a contractor, that person stays in that cost of revenue bucket. It gets a little trickier when you have other types of expenses that may or may not be directly attributable to generating revenue, and it gets a little gray. So for example, customer service, customer success. There are a variety of ways that people think about customer success in a professional services business. So for example, there are customer success folks that focus in on upselling, right? They’re account management and they’re trying to generate more revenues through your client base. Well, that’s really sales and marketing. So that’s not cost of revenue. But there are other companies where customer success is more about, doing maybe technical work or delivering subtype of service that is, being billed to the client. And, but they call it customer success because they’re not necessarily hourly billable people, but they’re still responsible for delivering some body of work. And in those cases, those customer success folks belong in Cogs or cost of revenue. 

Greg Alexander [00:05:27] Yeah. Okay. Very good. How about allocating, overhead. So let’s go there so that we’re now we just walk through revenue. Revenue recognition cost of revenue. In Williams terms we call that cost to serve in a product company that because a good sold that gives you a gross margin line. Then what gets subtracted from the gross margin line is a series of things that gets you to an even a number. One of those is overhead, and there’s an awful lot of confusion as to what is considered overhead and how overhead gets allocated, etc. so help the audience think through that. 

William Lieberman [00:06:03] Well, you have a variety of buckets of what’s called operating expenses or, you know, let’s say overhead things like general and administrative expenses. That could be your insurance or bank fees or internet fees and things like that. There’s selling expenses, sales and marketing. So the cost to actually pay a sales person a commission would be, a sales expense. There could be marketing materials or flying to a conference, things like that, all in the sales and marketing bucket. And you could have customer success. Like we mentioned before, customer success is another big bucket that’s under operating expenses. And in some cases, you might even have product development like or service developing. If you’re creating a new service, you need to generate work and spend money to develop that service that would be under operating expenses. So those are the four main ones that you typically see in a professional services business. 

Greg Alexander [00:07:02] And the slang here is that what you would call opex. 

William Lieberman [00:07:06] Opex operating expenses? 

Greg Alexander [00:07:08] Yep. Yes. And opex is different from CapEx. Oh. 

William Lieberman [00:07:12] Yes. So CapEx and capital expenditures are when you’re buying typically a piece of equipment or you’re spending money on a large purchase that’s amortized over years. Maybe you’re buying a company and you’re going to capitalize that company. There’s goodwill and there’s other types of things there. But CapEx typically is referred to in, equipment, hard things that you can kick and touch in, in feel, like a manufacturing business has a big piece of machinery and that’s capital expenditures. In professional services, you don’t really see it too often. Sometimes you have a lot of computer equipment and you might, put that under CapEx, but not often. 

Greg Alexander [00:07:52] Right. And in terms of the owner’s expenses, maybe things that the owner is running through the business like, automobile lease or Plane tickets or what have you. Where would they sit and what advice do you have? People around add backs. 

William Lieberman [00:08:12] So, I’ll tell you how I do it. Okay. So what I do is I have all the owner’s expenses, what I call below the line. So under other expenses. So you have all your operating expenses. And so you have, backing up revenue minus cost of goods sold gives you gross margin. Gross margin minus operating expenses gives you operating income. And then below that, you can have other expenses in there. You’ll have things like interest expense if you borrow money. You’ll have interest expense to the bank or a lender. I also the way I do it is I put any owner’s expenses under there so that I can easily separate out. How much am my is it truly take to operate the business, versus how much am I running through the business for tax benefit only? And that way I can easily say, okay, month by month, here’s how much I’m spending on my plane tickets or, you know, dinner for my wife. 

Greg Alexander [00:09:11] Yep. Very practical way to handle that. I like the other category. I hope all of our members that are listening to us embrace that. So someday when you’re presenting your financials in a potential exit, it’s pretty easy to calculate the add backs. It’s pretty easy to do a Q of equality of earnings. And you know, you have good records. Okay. One thing that I see over and over again. 

William Lieberman [00:09:35] I think I want to I want to just clarify one thing or add one thing on the owner’s expenses. Owner’s compensation is a really important number, and it can be very large and can be very significant piece to what goes under, your PNL. So you want to have in your, income statement, you want to show owner’s compensation, how much it really, you know, you would need to get paid, or you would have to pay somebody to do your job for you. That would be an operating expense under op X. Any additional compensation that you pay yourself would be under other expenses. As you say, Greg, it would be an add back. So it’s really that’s a really important thing because when you get to adjusted EBITDA or EBITDA as a and you’re trying to figure out how much your company’s worth or can sell, that’s the sum number you’re really gonna want to hone in. 

Greg Alexander [00:10:27] Yeah, that’s a good call out because the buyer of your firm is saying, what is the cost to operate this business going forward? So if you’re leaving after the sale, they’re going to have to replace you. And there’s going to be real costs associated with that. So distinguishing between those is really good. All right. So just we try to keep these podcasts short I have one more question for you. And then we’ll save all the rest of this good stuff for the member Q&A. 

William Lieberman [00:10:47] Yep. 

Greg Alexander [00:10:48] The difference between accrual and cash accounting. And when does somebody need to make the switch? 

William Lieberman [00:10:56] So my opinion is that you should always be unapproachable. You should never be on cash base unless you’re operating a small bricks and mortar business. You know, you’re dry cleaner, where you’re paying. Your customers are paying you cash for business, and it’s just widgets that are going in and out the door. Everybody else really should be on accrual basis. And the reason being accrual basis accurately matches the revenues with the expenses on a monthly basis, so that you can easily measure the health of your business if you do it on a cash basis. You’re just measuring when does cash come in. Versus when does it go out? And to your point, earlier when somebody gets a $50,000 check at the beginning of the year for a year subscription, that’s not all recognizable revenue, when you get the money, it’s recognizable over that 12 month period. So if you do it on a cash basis, you would say, oh, I made $50,000 this month, but that’s not true. 

Greg Alexander [00:11:50] So I hear you, but the reality is, is most people start off not knowing that. And they they know cash is king and they’re worried about paying the bills. So they run their books on cash and then something happens. Like, for example, they hire you and you say, hey, you need to switch to accrual. And here’s why. And they have an oh shit moment. Right. So how painful is the conversion from cash to accrual? 

William Lieberman [00:12:14] Well, we’re doing this for a few different clients currently and it can be very painful depending upon how far back you go. And in some cases you have to go back several years. If you receive cash and you still haven’t delivered the service and you’re still, you know, keeping it on the books or it’s still a liability because you owe somebody that service. It can be very painful to switch that over. And so you want to do it as soon as possible because, you know, as you say, when somebody something comes along, you have that oh shit moment like a lender. Let’s say you want to go get funding from a bank. They’re not going to look at you if you have cash based books. 

Greg Alexander [00:12:47] Right. And when you have cash based books and you present them to a lender or a potential acquirer, what you’re saying to them is you’re not very sophisticated. You don’t know what you’re doing. So it’s got to be really careful there. So if you’re not on accrual basis right now, get there. If you need help to go from cash to accrual, call William who can help you do that. And, you know, you probably need to pull it off. All right. So on the private member Q&A, which will be an hour long Q&A session with members, we can talk about a lot of other things. Let me let me tease the audience with a bit of though. So for example, there’s this whole debate between what’s recurring, what’s reoccurring, what’s repeat in terms of revenue. We’re going to have a whole debate around that. We’re going to talk about the balance sheet and how you can calculate what the real worth of your firm is when you talk about the mental model shift, to go from thinking in income terms to thinking about enterprise value, we can talk about the cash flow statement and how that’s different than the PNL, etc.. So lots of things we’re going to talk about. So if you’re interested in that, please, tune in. But William, it’s always wonderful to see you. I know this stuff for you is, you know, very, very fundamental. But for entrepreneurs who are really domain experts in other areas, this is, very valuable. So thanks for being here. 

William Lieberman [00:14:01] Absolutely. Thanks, Greg. 

Greg Alexander [00:14:04] Okay, so with that, that’s the end of the show. If you want to learn more, go to Collective 54.com. If you want to read about this kind of stuff, check out my book, The Boutique How to Start Scale and Sell a Professional Services Firm. You can find that on Amazon. But until next time, I wish you the best of luck as you try to grow, scale, and exit your firm.

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

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


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

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

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

Michael Daoud [00:01:40] Correct. 

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

Michael Daoud [00:01:43] Problem. 

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

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

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

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

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

Michael Daoud [00:07:05] Sure. 

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

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

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

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

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

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

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

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

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

Episode 85 – Why Waiting Too Long to Sell Your Firm Could Be Very Costly – Member Case with Craig Dickens

The ability to sell your firm will be impacted by the environment. There is a good time to sell and a not so good time to sell. On this episode, Craig Dickens, CEO at JD Merit & Co., will shed light on the financial market trends and how it influences your exit strategy. 


Greg Alexander [00:00:15] Welcome to the boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that aren’t familiar with us, Collective 54 is the first mastermind community to help you grow, scale and exit your firm bigger and faster. My name’s Greg Alexander. I’m the founder, and I’ll be your host today. And today we’re going to have a conversation around some financial market trends. And the reason why we’re talking about this is because there’s a good time to sell your firm and there’s a bad time to sell your firm. Sometimes the sun is shining and sometimes it’s a little cloudy. It’s always good to know kind of what the trends are. And the best way to do that is to speak to people that are actively in the market managing these types of things. And we’ve got a great role model example today. His name is Craig Dickens. Craig is with JD American Company, which is a boutique investment bank. And he probably has his pulse or have the pulse of the market and his finger on the market better than most. So we’ve invited Craig to come speak to us today and share with us kind of what’s going on. So with that, Craig, if you wouldn’t mind, please introduce yourself to the group. 

Craig Dickens [00:01:35] Yeah, terrific. Craig Dickens, I’m the CEO of JD Merritt. We’re a middle market investment bank. We focus on four areas, predominantly technology, consumer products as well as infrastructure and the built environment, as we call it. And obviously, pro serve is a market that we’re involved in as well. 

Greg Alexander [00:01:57] Okay, great. So we’re talking in May of 2022 and let’s start at 30,000 feet. So it seems like if you pay attention to the public markets anyways, it’s a different world we’re in right now. So what’s your perspective on things? 

Craig Dickens [00:02:15] Yeah, I guess I got to put a little bit of a backdrop on that because we came off of a record 2021, a lot of transact transactions. M&A activity was unprecedented, capital gains taxes were looming. So I’m still reflecting back to that wonderful time. And then we have, you know, a Ukraine war situation, inflation that’s somewhat out of control and stock market getting pummeled pretty hard. So I guess the keyword here right now is uncertainty. Yeah. And, you know, markets never react favorably to uncertainty. And I think we around here called quarter one the big horns. Yeah. Everybody was waiting to see how the dust settled a little bit. So really an interesting time in the market. Yeah. 

Greg Alexander [00:03:04] You know, for whatever reason, I don’t know how this happened to me, but the times of the greatest prosperity for me were times like this. So I’m old enough to remember the meltdown of the dot com. And I was in the tech industry at the time that I started my boutique just before the financial crisis of 0809, and then I launched Collective 54 and three months later covered it. So my timing hasn’t always been great, but what I found during those time periods is it’s a great shakeout, if you will. Firms that maybe aren’t for real kind of go away. So if you can build a great firm in those conditions, supply and demand actually goes to your favor because there’s far fewer firms, quality firms anyways available for purchase and you can really stand out. And Craig, one thing that I like about you is that you advise your clients to focus on what you can control and to prepare for this. And you talk about reverse engineering your exit, which is just such a catchy way of describing this. So could you expand upon that a little bit? 

Craig Dickens [00:04:14] Yeah, I think, you know, each one of us that’s running a business in these times, right. You know, we need to focus on the things we can control because we can get overwhelmed by what’s going on around us in the process. So again, just to maybe bucket the good news, right, especially thinking about boutique owners, we’ve got rapid rise in digitization. We’ve got a distributed workforce that needs training, I.T. consulting, etc.. And then ultimately the consumer or the customer has been trained to engage our services without us necessarily being in the room. Yeah. And then you have the great resignation, right? So in many ways it’s so hard to hire talent that you have to rent it so pro serve. You know, there’s to your point among the disruption, among the uncertainty, there’s plenty of opportunities and plenty of good news, if you will. But then we’re hit with some of the bad news that we tend to. Right. Interest rates, inflation, I mentioned a few of them. And the inverse of of the great resignation is that many of us are having trouble scaling because we can’t hire the execution and delivery teams that we need to. So, you know, I can only focus on those things that that I can control. And in this case and in this environment, we really have to go back to the best offense is a good defense. We need to prepare ourselves for good times or bad times. And to your point earlier, Gregg, be that standout, right? Be that leader or not that neutral or that laggard to whatever industry or vertical we’re serving so that they see us as head and shoulders above. And again, not to overused the sports analogies, but, you know, we’ve got to be prepared. Those folks that prepare are going to win and those folks that prepare are actually going to get a deal done. Those accidental tourists that have an ally show up on their desk and say, you know, you know, fortune, whatever is going to buy me, you know, that is the rare the rare situation. It’s truly that prepared that that get to a deal. 

Greg Alexander [00:06:27] You know I’ve heard you say on our member calls this term post-transaction economics and for those that might be hearing that term for the first time to find that term force or terms, I should say yes. 

Craig Dickens [00:06:42] So most of us have spent a career operating in our giftedness, in our in our in our specialty. Then we learn as we go how to grow companies. And, you know, exiting a company is a very different exercise and requires some different skills. And we always think about us, right? The marketplace is going to want us. Microsoft is going to buy us. Right. It’s it’s very me centric. But really, I think the most effective and the highest priced deals are where the team gets together and says, okay, what is different about our company? What is the leverage of Bill about our company? And most importantly, who will buy us? And that’s a deep exercise. Right. And you almost want to really strategically analyze those people in what we call the buyer universe, because, of course, everyone wants to sell to Microsoft or Accenture or whomever is their, you know, their ideal, but reverse engineering that and really analyzing the value and showing your buyer the inherent value of when they buy you and they pour water on you, how you will grow in their ecosystem, then you become much more valuable in their eyes. And if we can do that with ten or 12 different acquirers, now we have a rodeo, and that’s where the true outlier multiples come from. 

Greg Alexander [00:08:04] Yeah, it’s a great example. It’s it’s value based selling in many ways. I mean, when you own me, Mr. Acquirer, you know, you can triple me or quadruple me, whatever. And then what’s that worth today? That’s an interesting thing to think about. 

Craig Dickens [00:08:18] What I would add to that Greg, just real quick, I would almost on that omni account based selling side of it, almost treat your acquirer as if you’re analyzing like you’re going to sell them something and then plug you in as the product. Right. And so then you’re highly focused on what you can do under their umbrella with their sales team, with their capital resources, with their technology. And even though you might be a puzzle piece, you know, I’ll give you an example. We we sold a company. It was a small $8 million company, but they had a puzzle piece to an email distribution issue that a big player needed to compete with Brand X. And that puzzle piece became so valuable that, you know, they went up into the double digit multiples to buy that company. So that’s the kind of reverse engineering, if you can get into their kitchen, so to speak, and find out their pain points or the aspirin that they need, that’s that’s huge to value. 

Greg Alexander [00:09:13] So when I speak to members during office hours, which is an opportunity for members to speak to me, those that want to anyways on a 1 to 1 basis. And we’re having the conversation regarding exit. There’s three questions that come up every time. So first is what’s my firm worth? Second is who’s going to buy it? And the third one is, when should I sell it? And I want to spend a moment on that because there’s usually some type of life event that get somebody to think about selling their firm. The most common one is age. They get up, you know, in the 50, 6070s, they want to retire. Most of their net worth is wrapped up in their firm and they need to sell that, generate the capital to retire. And unfortunately, sometimes they don’t think about it until it’s too late and they say, okay, I want to sell my firm in a year. Meanwhile, it’s a non sellable asset because there really isn’t a firm. There’s a brilliant founder with a bunch of helpers and there’s nothing there for. Somebody to buy. So you mentioned that sometimes our timing can be off. So there’s this issue about trying to time a sell around. Retirement is a is a puzzle to me. What advice would you give our listeners around retirement and exiting and and trying to thread that very difficult needle? 

Craig Dickens [00:10:38] Yeah, I think, you know, there’s some fundamental ideas and concepts that people should, should think about as they look at the age question. You know, the facts would tell you and I’ll give credit where credit is due. John Warrillow, who wrote the book Built to Sell, did a survey, and 75% of entrepreneurs equate the sale of their business with retirement. Hmm. So and then they have a number, right? 65 or whatever their retirement number. But what if the market’s not going to favor you at that point? You know, the advice we give entrepreneurs and entrepreneurs by nature, you know, we wouldn’t be doing the things we do and running process of companies and building and growing and scaling companies if we weren’t optimists. But I think many times entrepreneurs wait too long, wait too long to sell and wait too long to adjust their business in a downturn or a slowing growth environment. And that’s really while it’s it’s pretty boring, right. But, you know, 3 to 5 years out from your desired event, you should be getting some advice, some counseling to say, okay, you know, when’s the right time? And just like, you know, I’ve got some friends who bought Apple stock and sold it at at a decent number and then it went up another $100 and they were all upset. You kind of need to leave a little juice in the orange, so to speak, when you’re selling your company. So waiting too long really spells a discounted value. But selling early, as long as you know your number, for what it’s worth, and who the buyers might be. And you run a good process, you know, ultimately, I think you’ll be happy with that outcome even if you have to retire a couple of years early. 

Greg Alexander [00:12:16] Yeah. You know, I was on John Morello’s show and I’ve read his books and I think he’s great and he contributes so much to all of us. One thing that he says often is what what the business is worth to you and what the business is worth are two different things. And if you know what the business is worth to you, you have a number, as you just mentioned, and somebody comes along and they’re willing to offer you more than that. Then you sell it. If the business if you know what the business is worth to you and the offers are below that, then you don’t sell it or you adjust your expectations. So this idea of knowing what your number is, it’s a hard thing there to really calculate. And at least and I think I’m similar to many of our members and that I’m an eternal optimist and an entrepreneur in my blood as well. My number keeps moving all the time. So how do you how do you get a first time founder going through an exit for the first time to get to a number that they’d be willing to accept? 

Craig Dickens [00:13:23] Yeah, that’s the great you know, the number one deal killer is seller expectations. Right. And we see it all the time. You know, we have people put it on a piece of paper, the old envelope test write, you know, my number is 30 million. And when we’re haggling, when we’re up around 60 million, and it’s still tough to make that decision. Right? Well, wait a minute. You said 30. Yeah. You know, so it’s tough and it’s an emotional decision. And I would say that I guess if I go back to the fundamental playbook, right. You got to get a valuation. If you’re serious about knowing what you’re worth, you have to get a valuation and bake that into your budget. And really, that will also give you not only the fundamental value, but it’ll give you those market indices. And if you do it for three or four years, right, you can you can begin to see how the market is is valuing your type of company or your sector or, you know, the various anomalies in the market over time. So that’s that’s number one. Got to do it. Number two, having a conversation with your investment banker and then in particular your CPA and saying, okay, I’ve got the tax man, right. He’s always in every transaction. So knowing your net after tax proceeds is huge. Everybody says, oh, the top line number is 60 million. We’ll have half that as an earn out and all sorts of structure. Right. It’s a very different equation. And if Uncle Sam is going to take, you know, up to half of it, you need to know the net number. And then really the third piece that we have, everybody go through is you have to sit down with your wealth manager. They’re going to run something called a monte Carlo, which is going to tell you under certain conditions in the market, if we plan on taking that wealth and you plan on living to 87.3 years old. Right. Here’s what you’ll have to live on. Yeah. Those fundamental decisions and those kind of things that owners need to do. You’d be surprised how many? Don’t really do that. Yeah. They get into a transaction and then they become confused as to what to do when really these are things that you don’t even need an ally. You don’t even need to be in process. You just need to go out and know your worth, know how much you’ll need, and then how much on an after tax basis you’ll need. Then you can start to deal with the emotional issues of, you know, yeah, I might be a little married to my team, I might be doing too much. I don’t have a strong management team, right, to really start to engineer your exit and think like an investor. Yeah. Versus just a lifestyle. Yeah. 

Greg Alexander [00:15:55] Well, listen, I could talk to you about this forever, but and I look forward to our member Q&A coming up. But we’re out of time. So, listen, your commentary on market trends. You know, I think you said the key word here is uncertainty. And that’s the market that we’re in. However, you know, if you adhere to Craig’s advice and I’d advise all of you to do that, it’s a 3 to 5 year look. And in three or five years, things will be very, very different. So taking some of these best practices and implementing some of them now makes a lot of sense. So so Craig, on behalf of the membership, appreciate you contributing today. 

Craig Dickens [00:16:31] Thanks so much, Greg. Enjoyed it. 

Greg Alexander [00:16:33] Okay. All right. And for those that are interested in this topic and others like it, pick up a copy of the book, The Boutique, How to Start Scaling, sell a professional services firm and for those that might see value and meeting people like Craig and being part of a community of preserve, boutique founders and leaders consider joining our mastermind community and you can find it at collective54.com. Thanks again. Take care.