Tag: founder

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How Founder Compensation Changes as a Professional Service Firm Grows Up

How Founder Compensation Changes as a Professional Service Firm Grows Up

As the founder of a boutique professional service firm, you’ve embarked on a unique journey filled with challenges and opportunities. In my book, “The Boutique: How to Start, Scale, and Sell a Professional Service Firm,” I introduced a framework that outlines the three key stages in the lifecycle of a small service firm: Grow, Scale, and Exit. Today, we’ll explore how your compensation as the Founder changes as your firm evolves through these stages.

    1. The Growth Stage: Founders with a Job, Not a Firm

In the early days of your firm, you’re in the Grow stage. During this phase, you’re the primary driver of your firm’s success. You’re not just the founder; you’re also the chief salesperson, project manager, and service provider. In essence, you have a job within your firm.

At this stage, it’s common for founders to pay themselves a salary. Why? Because your primary focus is on selling and delivering work for clients. Your role as an operator is critical, and the salary compensates you for your time and expertise. It ensures your livelihood as you lay the foundation for your firm’s future growth.

The correct amount of salary is best determined by the market. In other words, if you hired someone to perform your duties, what would you have to pay him? The free market determines salary levels. The Founder should pay himself the equivalent.

    1. The Scale Stage: Juggling Two Roles as Founder

As your service firm progresses into the Scale stage, things start to change. You’ve grown beyond being just a service provider; you’re now also an owner who’s actively working on building the firm. This phase is marked by a dual role: operator and owner.

In addition to your salary, you may begin to receive shareholder distributions. These distributions represent the second part of your compensation. While your salary compensates you for your role as an operator, shareholder distributions compensates you for your role as an owner. They reward you for your efforts in growing the firm as a business entity, not just as a practitioner.

The correct amount of distributions is best determined by your working capital needs. Distributions are paid to shareholders out of excess profit. Excess profit is profit more than the working capital needed to run the firm. For example, your working capital requirement might be 6 months of payroll in cash in the bank. Anything cash generated beyond that is considered excess and should be distributed to the Founder in the form of owner distributions.

    1. The Exit Stage: Transitioning to Full Ownership

As your firm matures, it eventually reaches the Exit stage. During this phase, you’ve successfully transitioned from being a hands-on operator to a full-fledged owner. You’ve replaced yourself in the day-to-day operations and are now focusing solely on strategic initiatives that increase the enterprise value of the firm. 

At this point, your compensation structure undergoes a significant change. You no longer pay yourself a salary for your operational role because you’ve delegated those responsibilities to others. Instead, your compensation solely relies on shareholder distributions. This reflects your position as an owner who benefits directly from the firm’s financial success. The salary you once paid yourself can now be redirected to support the new team members who have taken over your operational responsibilities.

And at this stage, the Founder has a critical decision to make. Should he sell the firm, or should he continue to own it? A Founder should sell the firm if there is a buyer willing to pay him a premium for the future distribution stream. The Founder should continue to own the firm if the future distribution stream is larger than what a buyer is willing to pay for it. For example, let’s say your firm is paying you $5 million in annual distributions, and a buyer offers you $20 million to buy your firm. You would accept, or decline, this offer based on whether you feel collecting 4 years of distributions upfront today is a good decision.

Join the Collective 54 Mastermind Community

As you navigate these stages of your service firm’s lifecycle, it’s crucial to have access to a supportive community that understands the unique challenges you face as a founder. That’s why I invite you to consider becoming a member of the Collective 54 Mastermind Community.

In our community, you’ll connect with fellow founders who have walked the same path, gain access to invaluable resources, and receive expert guidance to help you successfully navigate each stage of your firm’s journey. You’ll have the opportunity to learn from experienced professionals and accelerate your firm’s growth and success.

Join us at Collective 54 and take your professional service firm to new heights. Together, we’ll help you master the art of growing, scaling, and ultimately exiting your boutique firm, all while optimizing your compensation along the way.

To learn more about Collective 54 and how we can support you on your journey, visit our website or reach out to our team today. Your fellow founders are waiting to welcome you into our thriving community.

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What NOT to do when building a Commercial Sales Engine for your firm

What NOT to do when building a Commercial Sales Engine for your firm

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Building a commercial sales engine doesn’t happen overnight. You need some sort of business development strategy.

Join us as we explore the reality of building a sales function, why it’s important to start today and trust in future results, and perceptions that prevent you from getting it right.

In this video, you’ll learn:
– Why every founder needs to be prepared to go through the experimentation period
– The lag effect that’s present in everything you’re doing now
– Why many founders never make a business development plan
– Strategy vs tactics

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Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

As a founder of a boutique professional services firm, you may be contemplating your exit strategy. Understanding the M&A landscape is crucial to identifying who is most likely interested in acquiring your firm. In my experience, the most suitable buyers are typically firms that are substantially larger than yours, generally by a factor of 5-20 times the size of your firm. Here’s why:

The concept of “moving the needle” is central in M&A. For an acquisition to be worthwhile for a buyer, it must have a meaningful impact on their business. However, if the acquisition is too large, the risk and effort involved in closing the deal can become prohibitive. Therefore, a sweet spot exists where the deal is significant enough to be compelling yet manageable in terms of integration and financing.

To identify potential buyers in this sweet spot, we employ a simple yet effective back-of-the-envelope valuation method. By multiplying the number of employees a firm has by $200,000 (a figure that roughly estimates the revenue per employee for professional service firms), we can gauge the size and suitability of a potential acquirer.

Let’s walk through an illustrative example:

Imagine your firm has 10 employees and generates $2 million in revenue. You’re eyeing a sale, and you want to find a buyer for whom your firm would be an attractive proposition without being overwhelming to absorb.

If we apply our method, we’re looking for a firm that has between 50 and 200 employees. Here’s the math for the lower end:

50 employees x $200,000/employee = $10 million in revenue

And for the upper end:

200 employees x $200,000/employee = $40 million in revenue

These figures suggest that companies within this range would find an acquisition of your firm substantial enough to “move the needle” but still be a feasible transaction to complete.

Your next step? Start researching firms that fit this employee count and approximate revenue scale. Industry databases, networking events, and even LinkedIn can serve as starting points. Keep in mind that cultural fit, strategic alignment, and the specific services your firm offers will also play critical roles in attracting the right buyer.

By focusing your search on firms that fall within the 5-20x size range of your own, you increase the likelihood of finding a genuinely interested buyer—one for whom the acquisition of your firm represents a significant, but manageable, opportunity for growth.

Remember, while the revenue-per-employee method is a guide, it’s not a substitute for a thorough valuation and strategic fit analysis. Engaging with a knowledgeable M&A advisor early in the process can help refine your approach and identify the right targets, setting the stage for a successful transaction that delivers value for both you and the buyer.

If you are trying to figure out how much your firm is worth, who to sell it to, and on what terms, consider joining Collective 54 by applying here.  These questions, and many others, get answered by your peers and a curated set of advisors.

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How to Engage With Investor Email Inquiries if You are a Founder of a Services Firm

How to Engage With Investor Email Inquiries if You are a Founder of a Services Firm

Firm owners who have achieved scale and made a name for themselves are all too familiar with the inbound solicitation email from investors expressing an interest in their company.  We don’t envy the inbox of such founders of service firms, nor the exercise of winnowing the field down to those with whom they might engage further…but we can help.   

To start, you should know how investors find you in the first place, because if you want to be found, then you should make sure you are well represented across the most common sources of private company information:

    • Subscription databases (e.g. SourceScrub, Pitchbook)
    • Fast growth or other accolade-driven lists
    • Industry conference attendance lists
    • Articles featuring your business
    • LinkedIn

Because your company is private, an investor must rely on context clues to reveal whether your business is of sufficient scale/sophistication to merit outreach.  Such clues include details like (i) how you describe your service offering and practice areas, (ii) industry verticalization, (iii) employee headcount & growth, (iv) schools from which your company recruits, (v) the prevalence of advanced degrees and/or certifications within your team, (vi) trade association leadership positions, or (vii) third-party validated content authorship.  We also know whether you have received capital from other sources and whether that capital purchased a controlling stake.

When you receive the inevitable inbound – and many founders of service firms report receiving dozens per week – you need to first understand the type of investors you are dealing with. To start, are they a generalist or a specialist?  Generalist investors are those who have yet to declare a major, so to speak. They go broad across the sectors that they consider and may even know enough to be dangerous in your industry. It’s best to think of them like you would a general practitioner doctor.  

Specialists are those who focus very narrowly on a small subset of industries and are highly attuned to the trends, KPIs, competitive landscape, and vocabulary of their chosen areas.  Using the healthcare analogy, compare these investors to specialist surgeons who do one or two things very well. A specialist will speak fluently in the language of your industry and will be able to readily point to other deals they’ve done that look like your business. It’s typically a better use of time to interface with specialists who are already up to speed.  

Ok, let’s now examine the anatomy of an inbound email which can be broken into 4 parts:

    1. Salutation.  If any of the following things occur, you can delete, disregard, or deliberate on whether to respond to the email:
    • They haven’t taken the time to research your (or your company’s) name and include it in the greeting.  Or, even worse, they use the wrong name!
    • The name field is of a different color, font, font size or otherwise gives away the fact that you are (i) being emailed from a list, and (ii) they aren’t savvy enough to use proper marketing technology.
    • They use the long-form version of your name when you never go by the long-form version of your name (e.g. Michael / Mike).

2. Firm Overview / Credentials. This is where the suitor will describe their firm and present the case for you to engage with them.  Here’s what you want to see here:

    • A succinct firm description that avoids, at all costs, any insider private equity speak.  Is there anything more nauseating than when a stranger drops terms like “capital structure” or “multiple arbitrage” in an intro email?
    • Reference to other companies in which they’ve invested with which you are familiar and/or respect
    • More sophisticated investors will take the time to enumerate why they reached out to you, specifically. The extra time required to craft this rationale demonstrates that they are interested.  Remember the words of Peter Drucker, “The most important thing in communication is hearing what isn’t said.”

3. The Ask.  All inbounds are requesting your time, and this is where you get to decide if or how to engage.  Your options are:

    • Accept
    • Decline
    • *Ignore*
    • Qualify

4. *Follow-Up*. From experience, we know that founders don’t often respond to the first inquiry (or the second).  So, the follow-up email is an essential component of generating a response.  When the follow-up email arrives, if you see anything that references “unsubscribing”, then it might be wise to be skeptical.  Likewise, if any of the follow-up email content is something that could have been cut/pasted many times over, then it probably has been. 

If you’re not sure about how to proceed, then simply cut / paste the following questions into a reply email:

    • What are your upper / lower Revenue and EBITDA thresholds for a new platform investment?
    • Do you prefer organic growth or growth via M&A?
    • What is your current fund size and when was it raised?
    • How much equity do you invest per deal?
    • How much debt do you use in your transactions in terms of a multiple of EBITDA?
    • How much retained ownership (“rollover equity”) do you like to see from a founder / management team?
    • What is your typical investment horizon?
    • What investments (former / current) have you made in my industry?

These “knockout” questions are designed to push suitors towards greater disclosure, so that you can eliminate any wasted time from tire kickers or those whose criteria or approach diverges from your needs.

If, and only if, an investor makes it through your filter, the next step is almost always an introductory Zoom call of varying length, though typically 30-45 minutes. Just remember, a pre-requisite to agreeing to a Zoom conversation is not that you need capital.  If you are within 24 months of a transaction, it can be a very good use of time to begin developing relationships with credibly interested parties so that you are not meeting investors for the first time when you do need capital.  Taking on a partner is almost guaranteed to be a stressful exercise, and working with familiar faces can make for a more transparent, informed, trusting, and successful experience. As important, you need repeat interactions and relationship longevity to determine whether an investor is likely to add value to your business.

We hope this guide can help you to screen inquiries from interested parties. Please reach out if you want to chat through questions that you might ask to qualify investors seeking introductory conversations.  We’re also happy, on a 1×1 basis, to provide a peek behind the curtain with the data surrounding private equity email campaigns.

About RLH Equity Partners

RLH is a private equity firm with over 40 years of experience investing in high-growth, founder-owned services firms.  Our strategy is marked by a heightened focus on culture, founder leadership continuity, an emphasis on organic growth and a conservative approach to the use of debt.  In seeking to build relationships with founders of distinctive services firms we employ a proactive, email driven strategy as part of our new investment sourcing strategy.  This effort is rooted in data to relentlessly identify best practices for driving new connections and informs the commentary above.  Get in touch if you’ve received an inbound investor inquiry and want to be further armed with some questions to ask!     

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3 Metrics You Must Master If You Want to Sell Your Firm

3 Metrics You Must Master If You Want to Sell Your Firm

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So you want to sell your firm one day? Then there 3 metrics you have to pay close attention to. And when it comes time to sell, you can expect these metrics to come up.

This video explores each of the metrics and provides benchmarks to aim for before selling your firm.

In this video, you’ll learn:

    • 3 metrics you must master before you sell your firm
    • How to calculate for those metrics
    • Benchmarks to aim for based on these metrics
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The Seven Blind Spots of Boutique Professional Service Firm Founders

The Seven Blind Spots of Boutique Professional Service Firm Founders

In the world of boutique professional service firms, the role of the founder is pivotal. However, even the most astute founders are susceptible to certain blind spots that can hinder their firm’s growth and success. Here, we discuss the seven critical blind spots that founders often overlook, their implications, and how addressing these can lead to a more prosperous future for their firms.

    1. Filtering: The Distorted Lens

Filtering refers to how founders process information when making decisions. In small service firms, there’s a tendency to distort facts, often unconsciously. This selective absorption of information leads to decisions based on partial data, overlooking crucial aspects that might be critical for the firm’s wellbeing. For example, making a key hiring decision because the recruit has a similar background to yours.

    1. Relying on Hunches: The Trap of Self-Fulfilling Prophecies

Many founders fill gaps in information with their own assumptions or hunches. While intuition can be a powerful tool, over-reliance on it can lead founders into the trap of self-fulfilling prophecies. These hunches, unchecked by factual data, can steer the firm in a direction based more on belief than reality. For example, investing in launching a new service offering without validating the market will buy it.

    1. Soothsaying: The Arrogance of Prediction

Soothsaying involves attempting to predict the future with little concrete evidence. This blind spot is particularly dangerous as it can lead founders to commit resources to strategies based on shaky forecasts, often fueled by arrogance rather than practical analysis. For example, hiring more capacity based on a rosy sales forecast.

    1. Retrospection: The Fictionalized Past

Founders often use selective memory to guide future decisions, converting the actual past into a more palatable, often fictionalized version. This retrospection can lead to repeated mistakes or missed opportunities, as the true lessons from the past are obscured. For example, making yourself feel better about a lost client by telling yourself “They just don’t get it.”

    1. Categorizing: The Shortcut to Decision Making

In the time-starved world of boutique service firms, founders often resort to categorizing – labeling and judging situations quickly to save time. While this can be efficient, it often leads to poor snap judgments and oversimplifications of complex situations. For example, dismissing a best practice at first glance.

    1. Emotions: The Clouding of Judgement

Emotions play a significant role in decision-making, but they can also cloud judgment, blocking out logic. Founders, driven by passion, can sometimes let their emotions override rational decision-making, leading to choices that aren’t in the best interest of their firm. For example, carrying a bloated payroll because laying employees off is painful.

    1. Magnifications: The Extremes of Perception

Magnification involves blowing things out of proportion, making the highs too high and the lows too low. This distortion can lead to overreactions, either overly optimistic or pessimistic, which can destabilize the firm’s strategic direction. For example, when your firm hits a tough patch, and you implement draconian cost cutting because you think the sky is falling.

Conclusion: Overcoming Blind Spots for Success

For boutique professional service firms to grow, scale, and reach a successful exit, they require leadership from a capable founder. A founder suffering from these seven blind spots is not operating at full capacity. Recognizing and addressing these blind spots is essential. Founders who identify with one or more of these pitfalls should invest in personal development efforts to mitigate their effects. This is not just about individual improvement but about ensuring the health and future success of the firm. Remember, overcoming these blind spots is not just a personal victory; it’s a triumph for the entire firm.

A membership in a peer group is an effective way to address these blind spots. And Collective 54 might be the right group for you to join. If you are interested, apply here.

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boutique professional services firms.

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