Episode 73 – How a 63-Year-Old Ad Agency Stays Relevant by Launching New Service Offerings – Member Case with Marc Cooper

As professional services firms scale, developing new service offerings is critical to staying relevant with your clients. In this episode, we hear from Marc Cooper, President and Partner at Junction59, to learn how his firm uncovers new client needs and develops new service offerings as part of a business scaling strategy.

TRANSCRIPT

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 don’t know us, Collective 54 is the first mastermind community to help you grow, scale, and exit your firm bigger and faster. I’m the founder. My name’s Greg Alexander, and I’m also your host today. And on this episode, I’m going to talk to Mark Cooper, and we’re going to talk about designing new services. So, Marc, welcome to the show. 

Marc Cooper [00:00:47] Thanks for having me today. 

Greg Alexander [00:00:49] Would you mind properly introducing yourself to the audience, please? 

Marc Cooper [00:00:53] Absolutely. I’m Marc Cooper, and I’m the president of Junction 59. We’re a Canadian integrated ad agency based out of Toronto. We like to say that we work at the intersection of people and points of view where ideas meet to make a better tomorrow. 

Greg Alexander [00:01:10] Okay, very good. And what types of clients do you serve, Marc? 

Marc Cooper [00:01:15] So we’ve a broad range of clients actually that reflect, I would say, the Canadian landscape. But for the most part, we divide up into three different categories: B2B clients and B2C clients who are interested in reaching their clients throughout the journey. So a lot of direct marketing and journey marketing. And then not-for-profit  clients. 

Greg Alexander [00:01:41] Okay. 

Marc Cooper [00:01:42] All about fundraising. 

Greg Alexander [00:01:43] Very good. Okay. So the topic today is about designing new service lines as a way to scale your firm in the common-sense explanation. It’s pretty basic. And it says if you have one thing to sell and deliver, scaling a business  is going to be hard. So at some point in the journey, you know, firms invest in additional service lines so that they can go back to their happy client base with new things to talk to them about and potentially earn expansion revenue. 

So let me start with kind of a 30,000-foot  question, which is, how many service lines do you have today? And how has that evolved since the founding of the firm many years ago? 

Marc Cooper [00:02:25] Well, it’s an interesting question because in a marketing and communications business, you know, you could bucket all of our services under marketing communications and say we have one service. Yeah, but of course, you know, as the industry has evolved and different platforms have come to life, you know, there are lots of agencies that specialize just in digital, just in traditional print or television or out of home. 

And then across that, you’ve got some that have a strategy and some that don’t. So if you start to look at all of the different service offerings that we have at a much more sort of focused level, I would say we have upwards of 30 to 40 different services that we’re able to offer. 

Greg Alexander [00:03:14] And you’ve been around for how long? 

Marc Cooper [00:03:17] We’ve been in business since 1959, which is where the 59 and Junction  59 comes from. 

Business Scaling Strategy: How to Identify the Need for Additional Services

Greg Alexander [00:03:21] No kidding. My goodness. Well, okay, so 30 to 40 different offerings, I guess, unique services. And I understand bundled together into a solution that you might sell a client. 

So since your firm has been around so long and developed so many services, what advice would you give those listening that might have one or two things that they sell and deliver? How would they go about identifying the need for additional services? And then how would they go about developing those into something that could be sold and executed against? 

Marc Cooper [00:03:56] Sure. Well, we have a number of different ways that we do it. One of them is quarterly business reviews. At the end of every quarter, we sit down, and we look at the work we’ve done for a client over that past quarter. Then we look at the work that their competitors might have in the market, and we look for opportunities, including any trends that are happening in the marketplace with their customers. 

Then we sit down and talk to the client about what we’ve done, you know, all under the guise of how could we get better at what we’re doing for them, but also to point out opportunities where they might do things a little different when going to talk to their customers. And it’s usually at that point that a service offering that we have that we may not have been offering to them comes up in discussion. 

And I think for us, over the years, what would happen is the same service offerings were coming up over and over again with particular clients. You know, we do group our clients into like-minded  sort of buckets across those three buckets we serve. So it’s not surprising to learn that, you know, a high-tech company and a telecommunications company might start to see the need to do a particular type of marketing. 

And when we didn’t offer those services, we would always find a partner we could work with to offer them a service. But as they came up over and over again, we decided it was time to bring those services in-house and offer those services directly to our clients. So it created a whole new service offering. 

Greg Alexander [00:05:33] Interesting. So the quarterly business review, the QBR, so that’s done between your team and the client. And it’s a review. It’s always a best practice to do such a thing, and it naturally comes up during those QBRs  where the client would express new needs. Is it my understanding that correctly? 

Marc Cooper [00:05:52] That’s right, yeah. Or we would suggest new needs based on what we see their competitors or the market doing. 

How to Develop Additional Services Internally When Scaling a Business?

Greg Alexander [00:06:00] Okay, very good. Now, let’s say that you spot a trend, you know, and you’re hearing the same thing enough times where you say, “Jesus, there’s something here.” At first, you service that need by partnering with others, and that makes total sense. But then it’s a substantial enough business that it might be worth investing in that capability in-house. 

Let’s for the purposes of education today, let’s assume we’re at that point. So you’ve made the decision to bring this service in-house, and you’re going to develop it internally. How do you do it? 

Marc Cooper [00:06:33] Well, you know, being an entrepreneur, there’s always that leap of faith. Right. But you go out, and you’re hiring  for the role. And honestly, instead of working with the third-party  service provider that you were bringing in, you work with your internal team. 

Our clients tend to care more about the partners in the agency that are delivering their service than they do about the individuals that are actually working on all the different components. So they gladly accept a new name on a call or in a meeting that’s going to be helping to build out their solution. 

Greg Alexander [00:07:18] Yep. And the focus at that point of the new service line that you’ve developed, is it to bring it to the existing client base and therefore expand the revenue stream from the current clients? Or are you also taking it out to new pursuits? 

Marc Cooper [00:07:35] Yeah, I think it’s like everything we do, right. About 70% of the business is servicing the existing clients. But then you’re always thinking, you know, maybe you hit that break-even  point where it makes sense to bring them in and sell them off to your existing clients. 

But now how do you make that incremental revenue and use  it as a way to go out, reach new clients and new prospects, you know. Ss maybe a new foot in the door to build a bigger relationship with those new clients is always sort of top of mind. Yeah. 

Greg Alexander [00:08:04] What I love about this approach is it’s outward in, you know, you’re listening to the client and then responding. Sometimes, owners of professional service firm boutiques that are trying to scale, they do the opposite. 

You know, they’re educating themselves in their domain, and they get excited about the new hot thing. And they put forward all this effort to hire some people and design methodologies and automate with tech, etc. And then they go, and they take it to their customers, and it doesn’t sell. And they can’t understand why. I’ve made that mistake myself in the past, and it’s painful when it happens. Have you been able to avoid that, or from time to time, does that happen to you as well? 

Marc Cooper [00:08:44] No, I think like everybody we’re human that we think we know better and we try a few things. But I would say the majority of the time, it’s because we’re listening to our clients. We’ve heard them ask for something, and we do it. Yeah, you know, but every once in a while, you try to also be ahead of the curve. And if you’re going to be ahead of the curve, that’s when you have to try 

I think an experiment. Maybe even if you haven’t heard as many clients say they want something. Yeah. But you know, most of the time, it’s listening to your clients and delivering on what they’re looking for. Okay. Biggest payoff. 

Tactics for Developing New Service Lines for Your Professional Services Firm

1. Client Advisory Board

Greg Alexander [00:09:22] You know, there are  a few other tactics that members are using to develop new service lines, to listen to the clients, to see what the need is. We talked about your example of the quarterly business review. Another one that I’m seeing gaining traction is the Client Advisory Board. 

And just to simply explain that you collect a few clients of yours, you meet with them maybe twice a year for a day and a half or so. And in this particular case, a client is saying, you know, here are the challenges that I’m having in my business right now, now and in the future. And they’re giving feedback into kind of what your roadmap may or may not be. What are your thoughts on a client advisory board? 

Marc Cooper [00:10:00] You know, I love the idea, and it’s something that we’ve talked a little bit about but haven’t really pursued as much as we should. But, you know, one of the things that we do like to do is bring clients together for social events. 

And when you see each, you know, your clients actually interacting with each other and talking about what they’ve learned, you know, outside what’s necessary of the agency relationship, you can see that there’s something really powerful happening there where those clients are sharing their own experiences with each other. So to tap into that and get them to focus on how we could get better delivering against their needs, I think it would be well worth exploring even deeper. 

Greg Alexander [00:10:46] Yeah, it’s something that I’ve done in my past and in what I would suggest is it’s a way to formalize it. You know, the informal way of getting clients together and socializing is very beneficial for sure. And I’m glad you’re doing that. This would be the next logical step. You know, you would formalize it. 

What I always liked about it is, you know, it’s one of the only times where the client’s presenting to you. So imagine yourself in a conference room, and you’re sitting there, and the clients walk you through their deck, which is a really, really cool thing. Okay. 

2. Client Satisfaction Reviews

Greg Alexander [00:11:12] Another thing that we hear is client satisfaction reviews, or sometimes people use NPS as an example, and there’s a way to structure those survey tools to collect ideas for new service lines. Do you do any type of client satisfaction reporting? 

Marc Cooper [00:11:31] So we have a scorecard that we make available to clients after every project and now after every significant project. We have a lot of projects as an ad agency where we might be changing an offer in a banner ad, and we don’t necessarily seek big feedback on that. But on the more significant projects we seek feedback, and the feedback is really a lot of it’s about process and creativity, making sure we’re bringing the right ideas to the table. 

So there are a few times, especially when it comes down to were we being proactive for their business, where we bring in the latest and greatest ideas to the table. That’s where some of those new service opportunities pop up when they think they indicate maybe that, you know, we did a seven out of ten on something. 

It  inspires a conversation, but we don’t have a formal spot to actually ask, was there anything else that we could have delivered that we didn’t or anything like that? And I think as I’ve been researching this more, I think that’s an area where I want to spend more time. Yeah. 

Greg Alexander [00:12:39] You know, it’s a pretty easy fix. You know, you add a sentence or two or a question or two to a survey and send it out. And and when I’ve used that before in the past, it was, it was the origination of some really good ideas. And what I love about it, it’s easy to execute. So that’s a good idea for the audience to kick around. 

3. Win-Loss Reviews

Greg Alexander [00:12:56] Okay. Kind of a kissing cousin to that would be win-loss  reviews. And what this is is that for new pursuits, you mentioned 30% of your business comes from new clients. You know, after the sales campaign for those that you’ve won and for those of you lost. You know, some type of feedback mechanism with the prospect that went through the sales campaign to understand why you won and why you lost. And sometimes, that can be a fantastic way to identify new opportunities for service line extension. Have you experimented with that at all? 

Marc Cooper [00:13:24] Yeah, we have. You know, every time we do a pitch, especially in a formal RFP, we ask for a debrief afterwards, win or lose, and we sit down. Sometimes it’s with the procurement manager. Sometimes it’s with one of the review panel. But we’re always looking to figure out why did we win and why did we lose. 

There was one instance where we actually won a very large client. They’ve been with us now for 12 years. Fantastic relationship. And we discovered that we won for a reason we had never anticipated. It was because, during our pitch presentation, we put an emphasis on the great quality we put into the production of the end product. 

And we’re a creative agency, but we still talked a little bit about the production that goes into the end product, and that was what differentiated us from the others in that particular pitch. So since then, we’ve been actually able to monetize the fact that we have better standards or put a bigger emphasis on the production there. And so it actually helped us make that a bit more of a service offering than just a table stake  that we thought it was. 

Greg Alexander [00:14:41] That’s a great story. I appreciate you sharing that. That’s a real pragmatic implementation of that technique, and it’s working really well for you. So now inspire many others to do the same. Okay. 

4. Conferences

Greg Alexander [00:14:51] And the last idea I want to get your opinion on is, I guess before the pandemic, we would all go to some conferences. There’s lots of industry conferences, and I always found those very interesting to go to stimulate creativity or new things. 

We could bring up everything from just the agenda to see what the topics are, because normally whoever’s putting on the conference surveyed the audience to see what should be discussed. I also liked walking the trade show floor to see what all the other vendors are doing. Did you use conferences as a way to stimulate ideas for new services? 

Marc Cooper [00:15:25] Yeah, we still do to a certain extent in the virtual conferences. You know what we like to do. I mean, we attend all the marketing and advertising conferences that we should that are, you know, in the marketing and advertising field. But we also like to attend conferences that are in our clients’ industry. 

Yeah, a lot of them have an industry association that  put on an annual conference. So not only do we attend, but where we can, we try to present, we try to get a speaking role, whether it’s on the main stage or in a side room. And it gives us an opportunity to explain to our clients that not only do we care about their business, we care about their industry. And we want to learn as much as we can so that we can be a true extension of their team. And while we’re doing that, of course, we open ourselves up to a whole new audience because we come across as experts within that particular niche. 

Greg Alexander [00:16:23] It’s a great idea. I mean, it’s such a subtle thing, but if you’re going like in your case as a marketing agency, if you go into just the shows for agencies, it’s a little bit of, you know, everybody talking about the same thing, right? It’s a little of an echo chamber. 

But if you go to the conferences of your clients, it’s now a step beyond that, and you’re hearing how other people in that industry might need your services. And that can be a great source of inspiration for new service lines. Awesome. 

Marc Cooper [00:16:54] Absolutely. We also have in the past acted as judges for those industry associations when they have their own marketing awards. And so that opens us up to other, you know, our clients and their competitors even at those associations ceremonies. 

Greg Alexander [00:17:13] That’s a great idea for sure. Plus, it has lots of credibility. If you’re judging American Idol, you know, you’ve become a celebrity, right? Alight, Marc. Well, listen fantastic input today. Thank you very much for that. If the audience members would like to get a hold of you to continue the conversation, what’s the best, best way to reach you. 

Marc Cooper [00:17:33] If they can head over to Junction59.com,and there’s a lot of information there about us and including all my contact information. 

Greg Alexander [00:17:42] Okay, fantastic. And for those listening, if you want to learn more about this subject, how to develop new service lines, how to develop a business scaling strategy, and many others, you can pick up a copy of our book called “The Boutique: How to Start, Scale, and Sell A Professional Services Firm,” which I’m proud to say just became an Amazon number one bestseller in our little niche. 

And then also, if you’re interested in meeting great people like Marc, you might consider joining our mastermind community. And you can find us at Collective54.com. But Marc, thanks again. It was great to say hello to you and to listen to how you’re implementing this particular business scaling technique. 

Marc Cooper [00:18:18] Great. Thanks for having me on today, Greg. Really appreciate it. 

Episode 72 – How an E-commerce Consulting Firm Developed Multi-Year Client Relationships – Member Case with Bart Mroz

Firms that focus on delivering a great client experience along with their high-quality work reach scale. In this podcast episode, we interview Bart Mroz, CEO at SUMO Heavy Industries, to discuss the client experience and trust-building to develop long-term client relationships.If you wish to grow your consulting business, you must understand how to navigate client relationships.

TRANSCRIPT

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 don’t know us, Collective 54 is the first mastermind community to help you grow, scale, and exit your firm bigger and faster. I’m the founder, Greg Alexander, and I’ll also be your host today. And on this episode, we’re going to talk about client experience, and our guest today is member Bart Mroz. Bart, good to see you. 

Bart Mroz [00:00:45] Hello there. How are you? 

Greg Alexander [00:00:46] Pretty good. Would you mind properly introducing yourself to the audience? 

Bart Mroz [00:00:51] Sure. I am the CEO of SUMO Heavy Industries. We are an e-commerce consulting firm. We’ve been around for almost 12 years and started as a web development shop. Grew into a lot more consulting work then than just, you know, development. 

Greg Alexander [00:01:09] I’m looking at these sumo wrestlers behind your shoulder, and I can see the name of your company. So I have to ask, where did that originate from? 

Bart Mroz [00:01:19] I wish therewas a crazier story, but it’s actually our Director of Marketing and myself have known each other for almost 20 years now, and the SU is actually him in it. And the MO is me. And then we didn’t want to have a company name that’s like web development or anything like that and everything in Japan is heavy and industries. 

And ironically, our little tagline sometimes says surprisingly agile, which sumo wrestlers are. So we build a work on big things, but we’re also a really small team, and we’re surprisingly agile. Very cool. So it kind of fit. 

Greg Alexander [00:01:54] Yeah, it does fit . Yeah. Excellent. All right. So today, we’re going to talk about client experience, and I’m going to set this up a little bit. So it’s my opinion that when boutiques are trying to scale, they need to get more sophisticated in the client experience and understand the difference between quality and service. 

And most of our members are true domain experts as you are Bart , and they focus entirely sometimes on the quality, meaning I delivered what I said I was going to do. But the experience of the client goes through along the way is equally important because usually, clients are doing this for maybe for the first time, and they’re engaging with you and building a relationship. 

And there are all kinds of emotional feelings that are happening as we go through the engagement. And clients can become long-term  clients if they literally feel good about the relationship, and that feel good is in addition to the results that you produce. 

Sometimes professional service firms don’t scale because they just produce great results, and they wonder why they don’t have longstanding client relationships. They’ll hear things like, “Greg, I’m doing a great job, and I got fired.” Or, “Hey, I’m clearly the best service provider, but I didn’t get hired.” And that’s because sometimes clients can’t tell. They can’t recognize your brilliance. And what separates the fast-growing firms from the average firm is  this dimension of client experience. 

So, I guess, let me start with my first question Bart,  and  that is just maybe a broad overview of what your thoughts are regarding client experience. And you know, have you documented it or how do you think about that with your firm? 

How to Grow Your Consulting Business: Pay Attention to the Client Experience

Bart Mroz [00:03:39] It’s a huge part of our firm. So in our almost 12 years, we switched to a full retainer kind of company. So it’s a long-term sort of process. I think our longest client has been with us for 11 years now. So our shortest is two months, but we just signed a few new clients. 

So there’s that average like five years right now, which is yeah. So it’s a long term. We are there all the time. We happened to be in an industry that’s e-commerce that’s longer. But it’s all about…For us, sure, we produce awesome work and work with clients, but it’s helping them understand it. 

So I know this is like a long round about thing, but it sets up the whole course of this. It is like half our clients are about 25 million dollars and under online sales, and half of them are one hundred and over. Two different versions and two different things you have to do with them, right? 

The smaller client needs the hand-holding and being them with them at all times. And it could be anything right, they are  like we’re trying to get a new vendor, and we have nothing to do with it. We’re not going to make money off of that, but we’re helping a client get through that process. And it makes it simple for us too. Um, because then we know what the vendor is. 

We can help them with that on the largest client. It’s having those relationships where they’re just longer for us. And the way I can kind of describe that, if it is ever a technical sort of engagement you always have the internal technical team come to the table, right? Oh my God, they’re bringing you consultants and what’s going to happen. And it eventually becomes where they tell most of the senior staff to leave and let the developers talk because it’s the idea of like making relationships that way. 

So for us, to grow your consulting business, it’s about the relationship. It’s about being friendly and just kind of hand-holding a lot of times at the beginning of the relationship, and eventually, it becomes a long-term type thing for us. 

Navigating Client Relationships: How to Work With a Client and Their Team

Greg Alexander [00:05:39] You know, that example you just gave us about the internal team coming to the table, and they’re like, “Oh gosh, how come the consultants are here?” You know, it’s a great story for us to maybe pick on a little bit because I think sometimes we forget that external consultants, whatever type you are, it’s a threat to the internal team. 

The internal team might think, “Hey, this is my job, I know what I’m doing. What do we need these guys for?” So when you’ve dealt with that, and clearly you have multiyear relationships with your clients, how do you overcome that particular concept of they’re threatened by you? 

Bart Mroz [00:06:16] We don’t sit in that meeting, but for us, it’s always been understanding that our job is to walk in the client and make them better than we left them. But that means most of those answers are going to be with the people that been there forever. So, in reality, as a consultant, our job is to take those people’s  sort of answers and present them to the management and go, “Hey, this is what’s had to happen.” 

By the way, we’ll work with your team because they know better how to implement them. So that’s kind of like a weird way of looking at it, but it gets us on the same page with the people actually doing the work. 

Greg Alexander [00:06:52] Yeah. So we’re talking about client experience and how emotionally charged client relationships can be. We just discussed one of the emotions, which is threatened. Another one that I run into all the time is clients can be worried. And what I mean that is they can be worried that you’re going to make them look bad in the process. 

So in that example that you just gave us, you’re working with the team, and you uncover an answer to a problem. You present it up to management. Does the team ever feel like you’re going to make them look bad? And how do you get around that? 

Bart Mroz [00:07:20] I think it’s more of they might. But we don’t feel that just because we tried to make that relationship with that team very solid and the knowledge between the two. I don’t. It’s a weird way of looking at it, but the teams kind of jive really well within the first few weeks. We go through a we call it… We have what we call our discovery process, a weight-in, and it’s a longer process, but it’s that whole relationship building at the same time while we’re actually learning the client’s business. 

It’s a part of that and I think just being in the trenches of with people and going, we can help you. That’s where it doesn’t. It’s the trust factor. Eventually, I think that from many years of doing this, we have this weird knack of being very friendly and making sure those guys are together because we know where some of that work comes from. 

Greg Alexander [00:08:22] Yeah. So this process you just mentioned the weight-in which obviously works very nicely with the name of your firm. Is this like a formal process to try to overcome some of these trust issues? 

Bart Mroz [00:08:35] Yes, it is what we start our relationships with every time or our projects. It’s a two-month  process. It’s very structured, with a lot of phone calls and a lot of Zoom calls, and it’s spread out between, it depends on the client. We work in e-commerce. The ferocity they’re looking at includes, what the client needs, what the business looks like, what the tools are, and code reviews. Those kinds  of things are very important. It’s very structured on purpose. It’s also very long. It’s not your typical discovery. 

Greg Alexander [00:09:03] Yeah, I love it. I think it’s a great idea. And what I like about it is that it’s built for scale, meaning every client goes through the way. And so all of your employees, after a while, are going to get really good at conducting the weigh-in, and you’re hardwiring the client experience right into the delivery of the work. 

And that’s probably one of the reasons why your client relationships are so long and tenure. Okay, let’s talk about another emotion, which is ignorance. You know, you’re clearly an expert, and you go into your clients, and they might not know as much as you know about this particular thing. And you know, they might feel stupid at times. So during the weigh-in  process, how do you help them open up and not feel dumb? 

Bart Mroz [00:09:43] It’s asking those questions and making sure my sort of employees, my staff, all the management understand it’s not. It’s asking questions, right? And no question is wrong. It’s about their business. So, in reality, the way we walk in is like, “Sure. We know how to solve a problem.” But, the client knows their business, right? 

They might not know what kind of tools they need to solve that problem. But our job is to kind of get that from them. So I feel like that’s the weird reverse. Like, that’s where it kind of reversed that is that we’re just curious basically about the business itself. And then we work through, “All right. Hey, listen, you know, you have an old system, you’ve been in the business for a while. Let’s help you go through that.” And that’s asking questions. 

How to Earn Client Trust When Growing Your Consulting Business

Greg Alexander [00:10:28] Yeah, OK. All right. Then one more emotion that I’d like to share with you and see if the weigh-in process, which is your client experience journey, addresses this, and that is this issue of suspicion. You know, sometimes relationships get destroyed because people are suspicious, like, who are these guys? And can I trust them? You know, it takes time to earn trust. And even though the weigh-in process is long, by most standards, it’s still short. It’s only a couple of months. So how do you earn trust that quickly? 

Bart Mroz [00:11:01] So a lot of the clients we have now are coming from people who left and went to other places. And some of them, I think, would just find a client that the guy that the person that brought us in, he’s on his fourth. So you just bring us in. But this is just over the years working through sort of the process of learning people, understanding them. And then, in reality, it’s having a good reference network. 

I mean, that’s you know, and I know that’s may be a cop-out , but it isn’t. If it’s a brand new, we’ve never seen a person before, that is just making sure that we are  making them comfortable, making sure they are comfortable. And we had sort of one. I think we’ve had weigh-ins  where we do for just two months, and we get to a point where it’s like, “Guys, this product is not going to go anywhere. Or, you can take it. It’s too small for us to actually execute. You can take this whole plan with you and go ahead. And people had come back to us or went somewhere else. So that’s our trust, but that’s the trust we built. 

Greg Alexander [00:12:06] Yeah, that’s fantastic. All right. Well, I love it. I mean, this is a best practice here. So for those listening to this, challenge yourself to do what Bart does, which is document your client experience, not just the quality of your work. Think about the emotional context of your client and how you build trust quickly. 

Maybe come up with your version of the weigh-in , and it will go a long way as you try to scale a business. And Bart’s an example because his client relationships are measured in years, not weeks and months, which most of us are. 

Well, Bart, thanks again, man. I appreciate you being here and dropping mad wisdom on us. And for those that want to learn more about this subject or others like it, you can find our book called “The Boutique: How to Start, Scale, and Sell A Professional Services Firm” on Amazon. I’m proud to say I just became a bestseller in our niche, and if those of you who are interested in meeting bright, capable people like Bart, consider joining our mastermind  community, and you can find us at Collective54.com. Bart, thanks again. I appreciate it. 

Bart Mroz [00:13:09] Thank you so much. This was great. Greg Alexander [00:13:10] OK, take care.

Episode 57 – Life Cycle: A Smart Strategy to Make Scaling Easier – Member Case with Chris Rozum

Boutiques often suffer from an identity crisis. This makes scaling harder than it needs to be. On this episode, we discuss business life cycle strategy with Chris Rozum, Founder & CEO, of Insite Managed Solutions, LLC.  

Transcript

Sean Magennis [00:00:17] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis, Collective 54 Advisory Board Member and your host. On this episode, I will make the case, boutiques often suffer from an identity crisis, and this makes scaling harder than it needs to be. I’ll try to prove this theory by interviewing Chris Rozum, founder and CEO of Insight Managed Solutions. Insight was founded in 2007, and it was established to provide a truly unique experience that marries together deep contact center expertise, enthusiasm for achieving unprecedented results and a culture of transferring knowledge. Insight then incorporates these characteristics into their suite of professional services, which are a site benchmarking, training, implementation workshops, process building, transfer staff, augmentation transformations and consulting. And you can find Chris at getinsight.io. Chris, great to see you and welcome. 

Chris Rozum [00:01:40] Welcome. Pleasure to be here, Sean. 

Sean Magennis [00:01:42] Thank you. Let’s start with an overview, Chris, can you briefly share with the audience an example of why it is critical to truly know what your firm is uniquely qualified to deliver in order to scale? 

Chris Rozum [00:01:57] Yeah, if I had to just put it into one specific example for us, it’s really about the human capital. Once we really know and are starting to lock in a bit of what our firm does, it really helps us zero in on the  hiring profile. What is the recruiting and testing approach we do to vet the people as they come in? How do we onboard and train them, which we’re not fantastic at today and we’re getting better at who gets into what is the organization Sure even kind of look like a little bit to include even roles and responsibilities on an engagement of who actually does what. And all these things are kind of different depending on what a firm is trying to do. But we found that we’re putting a lot of time and effort around those things. 

Sean Magennis [00:02:38] Fantastic. And you know, that human capital focus is, I think, vital not only in the context of the professional services firm, but your clients. Human capital, you know, is vital as well. So, Chris, they have five specific things that I’ll walk you through that we have found make it easier for a firm to scale. So the first one is sometimes a boutique suffers from an identity crisis. They’re unsure of the type of firm they are and the types of clients and projects they should pursue. This makes the challenge of scaling a boutique harder than it needs to be. What are your thoughts on this concept? 

Chris Rozum [00:03:21] You know, it was interesting when I first heard of the concept, I actually thought in my earlier days that I disagreed with it, and what I found was that I had not only myself, but I had two team members. Yes, that had the unique skill set and capability that they could basically take on any project they could because they were quick studies could could help solve problems that hadn’t been solved before, or they could provide industry expertise because we will learn really, really fast. And as you started to grow the business, though, I found it near impossible to be able to at the pace we wanted to grow to be able to find individuals that have that issue. It’s not smarts or talent, right? But that question to be able to announce any intensity. And there’s also a work ethic that is OK, working extreme hours to be able to run at that pace and love that energy around it. And so I’ve actually found as we’ve grown, I’ve not been able to replicate it. It held us back, created some less than desirable client experiences along the way because we signed up for some stuff that we didn’t want to do or couldn’t do. And we’re finding now that we’re having a lot more success in focusing on specific industries and getting deeper there, as well as focusing on services, even making hard choices around which ones we maybe don’t want to market and sell anymore. 

Sean Magennis [00:04:42] You know, and that’s probably, you know, half the battle is deciding, you know, when to say, no, you know, and we talk about that a lot. So we’ve also categorized three types of firms. First, we have what’s called an intellect firm and an intellect firm is typically hired by clients to solve difficult never before seen one of a kind problems. Second, we have a firm that we call a wisdom firm and a wisdom firm in our definition is hired by clients because they have been there and done that. The client problems new to that client, but it’s not a new problem. And third, we have what we call a method firm and a method firm is hired by clients because of their unique methodologies. The problem is well understood by the client, but by hiring a method firm, it can be sold faster and likely a lot cheaper. So, Chris, why, in your opinion, is it key to differentiate that time or what type of firm you are? 

Chris Rozum [00:05:45] Yeah. You know, it goes a little bit back to the human capital piece a bit and that there’s really kind of two things and I think you hit on it is if you go more using every candidate intellect. Yes, I have found that requires a talent that has had certain background, timeline, experiences, exposures, reference points, kind of. All these things kind of come together across somebody’s journey that allows them to take intellect and and be able to solve problems that have never been solved before, which are kind of exciting to go do. But that comes, those individuals come at a certain compensation level. Yes, then also drive a certain rate level. Yes. And if you go to the other end of the spectrum, methods are where on that you can get consistent. You can put tools, templates, processes in place, look to have different type of talent. Tell them again, you can bring people and I’ll use my personal example. We hire folks into our firm that are not traditionally part of professional services consulting firm, and they are operators that have been working in contact centers, in operations, and then we bring them into this environment. And then what I attempted to do was put them on intellect, type work, and they may have not had enough reference points or experiences to have been effective there. Yes, we’re finding, though, by taking hands on operators and bringing them in in the methods world, we’re having a lot more success. So some of that is getting the right people in the right slots and all of that. But there’s someone helps figure out what your pricing is, what you’re looking at. And then from the sales perspective, how do you go sell to a message and set expectations with your clients that align with kind of these three different types of firms. 

Sean Magennis [00:07:28] That’s really good insight and great examples. I can see in your context how, you know, the nuances are very clear and then the difficulties of trying to teach somebody, you know, who’s not being an intellect, you know, that has its challenges. Some could rise to the occasion, but you make an excellent point. Number three, we recommend that owners and many of them or our listeners connect the type of client and project to the type of firm they are. You know, we recommend they only go off to work that the firm is staffed to handle based on skill level. What are your thoughts on this and you have touched on it? 

Chris Rozum [00:08:08] Yeah. You know, I think. It might depend on where somebody is at in their their life cycle. I know even our early stage it was. It was kind of exciting to go try some different things and see where we are good and capable, what actually resonated with our clients and and also what were some of the activities that we also enjoy. So there’s a little bit of that in the early stage. I think I know where my firm is is right now as we are in the scale high growth phase. Yes. Yeah. The it the governor for me to go do that now is if I’m having too many bumpiness with our clients and not the experiences that I’m wanting or my staff, attrition is too high because we’re over stressing and we’re pushing them beyond their skill sets, too fast. When we’re hitting those moments, it really causes me to govern back and say, No, we’re just going to focus. Yes, and those are kind of the two metrics that I’m looking at. And then as I find those get to kind of stable points, I will then look to venture on things that I think are close enough tangents that do push us a little outside, and it does allow us to be a little innovative. But I find myself, I have to balance this dance and assess and retract back a little bit. So it’s it’s maybe not so hard, fast in any given moment in time, but I tend to use those indicators to drive me towards when I want to be a little exploratory versus when when I really should be more disciplined. 

Sean Magennis [00:09:38] That’s really well put, and that dovetails nicely into our next question. You know, we see owners lacking discipline and thinking that all revenue is good revenue and they take any deal that comes their way. So can you unpack that for us? 

Chris Rozum [00:09:54] Yeah, I am totally guilty of that. I even still today will get into these moments. And it’s being opportunistic. We want to keep growing at the pace we’ve been growing. And and what I have realized, though, is is early on when we were smaller, I could look at something and say, You know what, I can do that I can figure it out. It’s a little outside the lane, but I can see a path on how we can get there to be successful. Yes, and timing as we grow. That’s not always the case. And so we are getting, if you will, kind of more governance around how to do that and how some of those names, some of those negative impacts that can hit in that type of situation. 

Sean Magennis [00:10:37] That’s well articulated. And I think clearly understanding the risk reward of taking on projects that may not be be good in in the face of your scaling opportunity. And it also brings up the reality of sustainability and making sure that you can replicate what you indicated, you know, you alluded to earlier. So the final yeah, sure jump in. 

Chris Rozum [00:10:58] I think your viewers listeners would also appreciate this. So I have done this for a long enough period of time. Now that I’m getting more disciplined this year, it is much harder to unwind now that I am of this size and scale to to be more disciplined. And it’s a couple of one of the biggest things is how do you now unwind trying to take on every single project that’s out there? Yes, but not have a gap in revenue. So and slow down. And that’s what I’m dealing with right now is I’m trying to be more disciplined. How do I not just flip the light switch and now I lose 20 percent revenue and I got to then climb my way back up? So a bit of my learning along the way is how you make that shift early enough. Yes. You at least get to the size we are today. 

Sean Magennis [00:11:44] And then also, you know which which we see a lot of our members in collective 54 and I’m sure in a lot of our listeners is looking at the profitability of every client project because some projects, even though you may have this culture of taking them on, maybe at break breakeven or you may actually if you really do the math, you may be losing money on them. So that discipline, even though it’s tough to do if you’re looking at your numbers, you can prove out with facts that there’s maybe a good reason to do it right. 

Chris Rozum [00:12:15] Yeah, yeah, you’re exactly right. I actually had a conversation with the client next week where it’s it’s a loss to break even and we’re we either got to fix it or we’ll have to step away from it. 

Sean Magennis [00:12:26] Yeah, well, that’s exactly right. And then the final one is, you know, the firm’s just like us, as human beings are different based on where on the on the lifecycle curve they are. So, for example, it’s very common for boutique professional services firms when they first start to be an intellect. But the partners have some secret sauce, you know, they have a solution to a brand new problem. Then as time passes, that IP gets out. Others have it, and eventually it becomes a commodity and owner manages a firm very differently. When it’s an intellect firm than a wisdom or a method for everything is different. So, for example, pricing, staffing, utilization, salaries. So lifecycle management to us refers to the active management by the owner of the boutique as it scales through these lifestyle stages. What’s your opinion on adopting this life cycle management philosophy? 

Chris Rozum [00:13:26] Yeah, it’s I wish I knew about it years ago when I started through the firm, right? I think I think too. Yeah. You know, it’s as I look back, and for me, there were actually very clear markers. And whether you tie it to revenue or you tied to headcount in our my firm, they all correlate together. Yes, by the way, and even what my job was from from one to 15 folks, right at 15 was this really clear marker that I had to do some things different and where I even spent my time and where you were. Now I have a manager, Reverse admits, managing some of the work engagements and how do I sell and do some of these things that you talked about? And and how do you do that in a profitable way that you don’t make over invest in the organization? So I found that one to 15 was kind of a band for me. Yes, that 15 to 50 was the next band that I could do it away. Yeah. And and and when we crossed the 50, I spent a whole bunch of time to say now, how do I go from 50 to five hundred? Yes. Put that structure and roles and responsibilities and who does what. And even my job and where I’m spending my time and what I’m doing in a different way. And and those are kind of the markers for me that happen to be there. I think some other firms might have some different markers based on bill rates and stuff like that, but it was they were really like… 

Sean Magennis [00:14:44] Crisp, really clear. No, that’s really well said. So in your case, one to 15 was a band 15 to 50 and then 50 plus as you’re getting to five hundred. I mean, that is exactly the way we want our listeners to think and to really be highly present in in acknowledging and looking for those signals because it does it, to your point, require a very different set of skills, a different orientation to your time. I’m sure you’re working much more on your business now than you’ve ever done before. 

Chris Rozum [00:15:15] And as of today, yes, we’re working to change that a little bit. Yeah. And, you know, in their spots throughout the journey where I have drifted around a little bit and you know, I go back to some of the indicators that I gave before, which were also really got sensitive around these markers. Where where did I have some client experiences and we have high expectations? There’s a lot of times our clients don’t feel it, but were they not what we wanted to deliver? Got it. And what’s going on with our employee culture stress? Is it turning into attrition? Those are the two things that I saw at 15 started to really break. A 50 really started to break. So we’ll continue to monitor those. 

Sean Magennis [00:15:53] Outstanding Chris, this has been this has been great. Getting your perspective on this is fantastic. So, you know, again, it’s this is an illustration as to why there are only about 4000 firms of about the 1.5 million that truly reach scale. You’ve done that. It’s hard to do and you’re still scaling. It takes an exceptionally skilled owner like yourself to pull it off. 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 you are listening to the app to apply these lessons to your firm. Our preferred tool is a checklist, and our style of checklist is a yes no questionnaire. We aim to keep it simple by asking only 10 questions. So in this instance, if you answer yes to questions one through three, you’re an intellect firm. If you answer questions, if you answered yes to questions four to six, you’re a wisdom firm. And if you answer yes to seven to nine, you are a method firm. And lastly, if you answer yes to question 10, lifecycle management should be a top priority. So, Chris, thank you for graciously agreeing to be our peer example today. I’ll ask you the yes, no question so we can all learn from this example. So let’s begin. 

Sean Magennis [00:17:14] Number one, do your clients hire you for never before seen problems? 

Chris Rozum [00:17:20] Not so much today. 

Sean Magennis [00:17:23] Number two, do you employ leading experts in the field? 

Chris Rozum [00:17:29] Yes, we do. 

Sean Magennis [00:17:30] Three. Do you have legally protected intellectual property? 

Chris Rozum [00:17:36] We do, we have a pattern as well as a bunch of copyrights. 

Sean Magennis [00:17:39] Number four, do your clients hire you because you have solved their problems before? 

Chris Rozum [00:17:46] Yes. 

Sean Magennis [00:17:47] Number five, do your clients hire you because you have direct relevant case studies? 

Chris Rozum [00:17:54] Yes, they do. 

Sean Magennis [00:17:56] Do your clients hire you because you help them avoid common mistakes? 

Chris Rozum [00:18:03] Yes, but less today. 

Sean Magennis [00:18:06] OK, got it. Do your clients hire you because they’re busy and need an extra pair of hands? 

Chris Rozum [00:18:12] Yeah, absolutely. That’s much more dominant today. 

Sean Magennis [00:18:15] Yes. Number eight, do your clients hire you because you can get the work done quickly? 

Chris Rozum [00:18:21] Yep, more of that today than before. 

Sean Magennis [00:18:23] Number nine. Do your clients hire you because you have an army of trained people to deploy immediately? 

Chris Rozum [00:18:30] Yes, they do. 

Sean Magennis [00:18:31] Yup, that’s your that’s your bread and butter. And number ten, does your service offerings start out as leading edge and over time become commoditized? 

Chris Rozum [00:18:43] Not so much as of yet. It’s interesting, we’re somewhat we’re solving some same problems we were solving 14 years ago. See, things have maybe matured, but so this one surprised me when I said no. 

Sean Magennis [00:18:55] Great. Great. That’s what it’s designed to do. So in summary, a lack of a life cycle awareness can make scaling more difficult than it needs to be. It can lead to poor cash flow. Unhappy clients and employees Chris, a huge thank you to you for sharing your expertize today if you enjoyed the show and want to learn more. Pick up a copy of the book The Boutique How to Start, Scale and Sell the professional services firm written by Collective 54 founder Greg Alexander.

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

Go to Collective54.com to learn more.

Thank you for listening.

Episode 51: Scale Capital: A DIY Approach to Raising Growth Capital – Member Case with Josh Miramant

Scaling a boutique professional services firm requires raising capital, and not all capital is the same. On this episode, we interview Josh Miramant, Founder and CEO at Blue Orange Digital, to learn about the three sources of scale capital. When scaling a business, these are the sources of scale capital to be mindful of:

Transcript

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

In this episode, I will make the case that to scale your professional services firm requires capital and that not all capital is the same. I’ll try to prove this theory by interviewing Josh Miramant, Founder and CEO at Blue Orange Digital. 

Blue Orange is a data science and machine learning, consulting and development firm. They build modern data warehousing to support machine learning, and A.I. Blue Orange helps companies integrate these insights to drive data driven decisions. And the decision making. You can find Josh atBlueOrange.digital. Josh, great to  be with you. Welcome.

Josh Miramant [00:01:24] Thanks Sean, it’s great to be here, thanks for having me.

Sean Magennis [00:01:26] Hopefully, I did justice to that explanation of all the great things you do.

Josh Miramant [00:01:30] Or how many buzzwords in our space. You couldn’t have nailed it better, Sure.

Member Case: How to Raise Capital When Scaling a Business

Sean Magennis [00:01:35] So, Josh, let’s start with an overview. So why do professional services firms need capital when trying to scale is the big question. Scaling a business usually means entering new markets, launching new service lines, adding more headcount and many other strategic initiatives. These things all take money. 

So can you briefly share with the audience an example of how you raise capital to scale your firm or how you think about raising capital when scaling a business ?

Josh Miramant [00:02:05] Sure. Yeah, so I’ve spent a lot of time thinking about this and just a little background. I’ve actually started to venture back companies prior, so I actually came out of SAS product and a large equity-reduced  background. And this is my first professional services firm, and it’s quite a different beast. 

And in many great ways, like high profit generating types of business initiatives that you can use things like cash flow to reinvest in growth all the way over to, you know, the challenging pieces that they’re very cash hungry business models. 

To be honest, they’re going to take a lot of efforts like investing and resourcing and staffing and having a bench and resource allocation and all these things that are very, quite expensive. And these have to be very well forecasted when you’re thinking about a financial backing. So we’ve taken a pretty holistic approach to our financial backing for this, and actually luckily enough, I sold my last company, and so I was able to, fortunately, do some self investing. 

But we quickly wanted to move to more institutional as we’ve grown along. So, I opened up and started with friends and family debt around the world who lived in debt for our organization. And in the early days, I was able to personally back just under a half million dollars of the total, personally backed notes through successive orders of friends and family. 

It’s more institutional, the different tiers of raise. And then we even looked at some other side of… We had discussions with investment banks and private equity firms about potential acquisitions or investments based on the equity side. And that starts to move seats around equity raise and even some interesting partnership model equity raises that we’re even currently talking about. So it’s a pretty interesting range of options that we’ve explored in total so far.

The Three Different Sources of DIY Capital to Consider When Scaling a Business

Sean Magennis [00:03:54] You know, I love that, and your experience is so uniquebecause you’ve come to me to share with our listeners from the perspective of having, youknow, started to venture back more tech firms. This is your first professional servicesfirm, so you bring all of the knowledge there and then you know you’re in this sort of

reinvention mode, and yet you’re still leveraging these unique sources of finance. 

So this is going to be great for our listeners to get your insights. So Josh, what I thought I’d do is, you know, at the top of the show, I suggested that not all capital is the same. And these days now, and I don’t know if you’re finding this, but certainly I am, that capital is abundant in the market, and there are very, very many different kinds. So I’d like to get your thoughts on what we call a do-it-yourself  approach. 

I’ll illustrate three types of capital. And yes, I know they are more so if you want to throw out some others that you’ve got personal experience in, that would be great too. So the first one I’d like your input on is free cash flow from operations. 

So this comes from increasing revenue, driving down costs, using the spread between those to scale a business. And scaling with free cash flow preserves the owner’s equity and does not add a debt service burden to the PNL. What are your thoughts on this, Josh?

1. Free Cash Flow From Operations

Josh Miramant [00:05:21] And this is one of the absolute magic parts about

professional services agencies that you’re able to have a lot of control and a lot. It puts youin an interesting position. I love that. That’s the name of a professional services agency. 

I mean, you summarized that I think is an absolutely beautiful part about cash flow, which is owner equity and not having to dilute too early in your growth phase. And my philosophy on when I entered into professional services, my philosophy was that our profit, our dividend would be the measure of our success, and that’s controlled. But I would show how successful we were in the market. 

And I think that was something that allowed us to think about our growth planning based on our cash flow. And that was truly as we got in and developed more client base and showed more market adoption and how to sell  better. We were able to expand our growth, and I think that was a nice guardrail-controlled mechanism. And once we got our sea legs under us and take over 10 million topline this year, we will be able to start thinking about taking on more debt burden, or now you’re in the other options at the top. 

And a bit about that growth, that controlled growth to getting that point with a lot of capital reinvestment was incredibly helpful for planning, aka not growing too quickly. Yes, having some of the scale constraints, but also being very thoughtful with where you’re making a capital investment. 

One thing I would say that we’ve learned and learned late and  became a major challenge for us in the early days because our monthly invoices were pretty modest and so we can afford to cover a lot of how we’re doing. And so you have your cash flow is usually not like a 60-day window, we do a month at work. We would bill and have a net 30 payment. And I’ve heard a lot of different firms and colleagues do it differently, but that was a 60-day  cycle. If everyone pays on time and at end of  billing.

Sean Magennis [00:07:13] Yes.

Josh Miramant [00:07:13] We have started moving heavily into reducing down that cash flow cycle, going into lower net 15 or even upfront invoicing on net 30. So you’re really reducing under 30 days and quite candidly with very little pushback. And from a cash flow perspective, we shipped about 80 percent of our current clients, which we have a pretty long client lifecycle in almost every new one onto that with very little exclusion, and that movement to that shorter revenue cycle is actually massively increased the amount of cash flow we’ve had. 

It’s amazing to even grow quicker and have to take on less your interest for equity release or dilution really steps of an option. So it’s, I think, controlling your cash, obviously just goal to get cash in and spend it, not to think about that later and then planning. But I would say even more thoughtful ways of having a discussion with our client upfront. 

We’re pretty candid. “We’re a small boutique, and we want to get to cash flow so we can invest in your team to make sure we have good management.” And they were right alongside us, supporting us on some tighter cash flow cycle. So love cash flow, and obviously like to keep and reserve  equity. So at the end of the day, that’s the cheapest money you’re going to get out there.

Sean Magennis [00:08:22] You know, I love what you’ve said and everything you’ve

said, you know, I totally agree with. One of the interesting things you said, and I don’t want

this to be lost on our listeners, is that you were surprised at the ability to get paid upfront or

get a shorter payment cycle on your AR. That is fantastic. And I think a lot of owners of

boutique firms don’t have the courage, or they fear asking for that. 

So give me a little bit more on that as to how you went about it, because I think our listeners if all they do is get from this the shortening of the AR or getting prepayments upfront that will leapfrog

their ability to use free cash flow for other things.

Josh Miramant [00:09:05] Yeah. This is easily one of  the most important thing that’s happened. We’re really still growing this year. Our  growth was big, and so every dime counts right now. For us, we’re doing multiple types of financing plus we’re hiring like crazy . 

We have larger amounts of, you know, resource allocation like unallocated resource between projects, all the things you expect from the management of our company. But the thing that’s amazing was when we tried these conversations. First off, understanding what’s right for your business, how is it logical for your clients to pay you appropriately. You want to make sure you consider, but not every conversation was about what the risk was the company taking for giving us money.

And I think that was important to have that conversation. So our business. We actually had a message that was thinking about how they would consider it. So saying, you know, “Hey, we’re going to invoice the upfront, we’re going to keep it at net 30. So we’ll be completing all of the work that we’re offering this revenue for. It’s a really it’s not payment upfront, it’s invoicing upfront and you just align the end of payment to work the most recently completed.” And everybody love that we’re asking for payment upfront. 

Accounting teams freak out. They’re like, “Oh, we don’t want to put risk of giving you our cash and not sure how the work would be done.” None of that risk was there. It’s like, “Hey, if we’re doing such a terrible job on delivery, your cash is still sitting in.” The bank knew all the leverage, and we stand by our great work. There is zero risk here, and you’re just helping us with keeping control of our cycle. 

The narrative thinking about what our clients worried about completely changed our messaging. And so the second thing that once there was any pushback, and we did have a couple of clients, you know, very friendly, say, “Oh, we don’t like it, it’s kind of like a retainer site or deposit. We never talked about that, right?” 

We can then say, “Hey, let’s get rid of this. It’s no problem. But could you help us out instead of a net 30, which is pretty industry-standard,  let’s do a net 15 or net 10. And they are like, “Oh, of course, that’s no problem.” So now we’re in  this discussion where we just decreased our AR by twenty-five  percent.

Sean Magennis [00:11:03] Twenty-five .

Josh Miramant [00:11:04] Yeah, yeah. We started that conversation, yeah, 20 percent, excuse

me, but we started the conversation instead of just being like, “Oh, it’s 60, and hopefully

they pay on time,” and now I’m scrambling cash three payroll cycles later. And so it’s just

having a conversation with them and thinking of the messaging. 

You’re bringing it out to clients the way that safely risks their position and ultimately, deliver good work and have no problem with the payments close to cycle. That’s the kind of the cardinal rule here.

Sean Magennis [00:11:30] It’s so smart and it’s so good and you’re both at the same time. What you’re doing is you’re educating your team to operate on that basis and you’re educating your client, you know, so it’s a really good and it and if it’s positioned, as you’ve said and messaged, well, it’s a win win for both. 

And I know that’s a trade statement, but thank you for sharing that because underneath your original comments were these two very specific tactics which if a boutique firm can do that, it’s going to be golden. 

2. Debt

So let’s get to number two. So the second aspect is debt. So debt typically would come from a bank. It would come from a private lender. It may not be cheap, but it is reasonable as lenders charge modest rates on loans and it’s also readily available in the two to three times EBITDA range is what we would typically see. What’s your opinion on debt?

Josh Miramant [00:12:23] Yes, I loved it. Personally, I always like to start with my best and the worst but, I would love to help you frame this. And there is this spectrum of a professional service founder. That’s the greed fear spectrum. And I love how he thinks about this. 

On the greed side, you don’t want to give up your equity. This is the thing you’re building. That’s the compounding value. And candidly, particularly with when you’re investing cash flow, investing your earnings back into the business. These are cash-hungry machines that take a lot of it, and it’s part of your investment can be tied up pretty heavily in the ownership of a firm. 

That’s always a concern of the owner of not being too tied into a single, you know, having some diversity in a portfolio, not just a company. And so I think it’s an interesting on the greed side you want to keep that compounding engine because they can take out your salary and whatever disbursements are that you choose. 

But the angle  there is just coming down to the fear side, which is not making payroll. It’s not being able to hire. It’s not being able to grow quick enough. And I think that’s always this dichotomy that exists that I always take this metric on. Debt is this wonderful piece that’s kind of, you know, stepping partially into the equity, I think will get a chance to talk about my thoughts there in a minute.

Sean Magennis [00:13:39] Yes.

Josh Miramant [00:13:40] The debt is a wonderful play.. I think there’s a couple of things to consider. What you’re spending it on is crucial. So I think it’s always focusing on, you know, it’s like, I think that debt should be considered on the opex experience. Never capex, I think that’s a little later in my rules. 

There’s other thoughts there, but like on there is that you can service and keep revenue coming when you’re looking at that. I think there’s angles of debt being made notes two to three, but I think that’s a reasonable starting point, depending on personal liquidity or other factors that you have for backup. 

But I think I also think taking on debt with consideration of a repayment calendar like based on your projections and knowing what worst case is and best case is, and keeping it modest until you have a pretty confident projection into your repayment calendar. And then surely just I think you’re right, like apples pretty cheap right now in general has been more expensive. Some pretty, really very, very favorable interest rates, but very tangibly looking how much that money’s costing you.

Sean Magennis [00:14:37] Yes.

Josh Miramant [00:14:37] And I think that’s a big piece of how much are you are losing out on future revenue and is that is it smarter to keep cash flow and grow slower or smarter to take that, capture that revenue and turn it into more accountability. And I think that at the right point that is absolutely something you should do. 

We’ve raised our friends, and family around. I took out a line of credit from the traditional bank, Chase is our banking partner in a quarter-million line of  credit, which was really friendly to, you know, have this beautiful, beautiful debt option there. Because it’s only paying and you’re using it, which is lovely. It’s right at your fingertips. 

And then we’ve gone and got another $400000 debt financing round, which is pretty good for our books right now. On a more traditional note and still pretty favorable interest rates and the interest on it is pretty modest. So it’s a very nice opportunity for us to have, you know, feel very comfortable on our AR cycle and tied with upfront billing amount in a really strong cash position, even with this large growth factor, which is so nice to see.

Sean Magennis [00:15:45] And I would assume that you’ve also got some good forward visibility on contracting that’s coming forward because that helps you manage your greed fear component that you just spoke to, right?

Josh Miramant [00:15:58] Couldn’t be more apt there, and I think honestly, the

amount I would be sensitive to take out as much debt as I have unless we had contracts in place. We have even things that I was sensitive to. I’m not taking extending my debt financing options until we had a diverse set of contracts that were pretty far. 

I don’t want just one big client, or a couple, a few small ones that are kind of tailing in cycle with low visibility. It was, you know, we could lose a good chunk of our, you know, any individual client has no impact on our financial stability. That took a while to build, for sure. Toyour point of forecasting and de-risking alone actually was less about being able to service, you know, a few thousand dollars a month of interest, which is not in…the percentages are tiny. Yeah, but it’s actually coupled with a repayment schedule and projections against that with their contracts, we can stick to that calendar. Either way, it just means other future growth constraints, but still better offer market opportunity with clients, which took off.

Sean Magennis [00:17:00] You know, brilliant, and you’ve also hit on a couple of additional key things like client quality. So the ability of the client to pay, which is critical. Diversification of your client group, so you’re not anchored. You know you don’t have all your eggs in one basket, and then you’ve got your backlog in the quality of your contracting. So fantastic. 

I mean, this is exactly what we want listeners to really get a handle on because when using a debt instrument, all those factors should be in place, and you need to be able to feel comfortable and go to sleep at night. You know that you’re not going to wake up one morning and not be able to service the debt, right?

Josh Miramant [00:17:40] Yeah. So just a note to add. I think that in the early days, and I’m getting some questions that are on, fortunate enough to have some pretty decent-sized loans, personal back loans. And I think that’s best. I think what is also very exciting when we can move beyond me not having personal back loans, that was great money. 

And that’s where certainly takes a lot more to build a business to that point. But I do think that was a healthy risk appetite that I was willing to a smaller scale to then show repeated receivables and show a consistent client base. But that transition from I would certainly say that if debt is where you’re looking to go as you’re building a company up to 100 employees, which is our top line, but the size that we’re building on. 

I certainly get meaningful amounts of money or large enough amounts of money just on the business alone until we got a little bigger. And then it became something where that was because of the combination of cash flow and this just being not as much of covering the percentage of our MR. And it’s interesting how that became a really good solution on the company’s books.

Sean Magennis [00:18:44] I love that, and you know, it works right in the early stages. You

take the personal guarantee in the middle. I saw you don’t need to do it. You know there’s an appropriate time to take on personal risk, and then there’s a time, as you’ve just illustrated, where the company can take on that risk on the balance sheet. 

3. Equity Partners

So let’s flip to the third aspect, which is equity partners. So this is when an investor puts cash in exchange for a piece of the business, and then the owner’s stake is diluted as a result. What do you think about equity for a boutique professional services firm?

Josh Miramant [00:19:24] Yes, I got a little more sensitive when it comes to equity with a company like a professional services firm. First off, as I mentioned in my background, I think equity raises are really important. I think it’s just when and what you’re looking to build your firm. I think those are two questions that you need to understand here. 

So let me share my thinking around that. So unlike a SaaS product, where you just think high multipliers. High multiples and valuation are the expectation. If you are successful on strategy, whatever X your thinking about right, your projection on a professional service  depends on a little variability of your space. 

And how much tech work or how much automation is inside of the way that you do what you do, when is or what the product is understood, what you’re building,you’re looking at 2.5 to 4.5 range multiplier. Those are rough numbers that are going to be different for every one of your listeners here. But that’s kind of where our sector fell, our cutting edge buzzword tech stocks, or a little bit more depending on how strong your sales team and all these factors are not getting the details.

Sean Magennis [00:20:29] Yes.

Josh Miramant [00:20:30] So it’s interesting to think about when you look at those multiples, what are you looking to build? You’re really looking to scale a business. You need a lot more money. You need to invest in bigger sales organizations, but that comes once you make it to the next stage. Like, I always look at our objective and goals as a company is to move into that 25 to 30 million top-line revenue company as we scale-out.

And I look at that is what my investment team talks about is the platform layer of a professional services agency. That’s their terms. I like it. If you’re looking to scale a business, it’s like when you become a platform that things like taking on, you know,an equity raise and acquiring other companies you can actually absorb into you. 

If there is an option, there would be not typically a lot of business selling you to other firms, which I’ve actually done some other interesting areas around equity partnership equity, which is an interesting area that we’ve been talking about with a few of our partners lately. 

Yes, it’s very compelling because it actually reduces some of the equity dilution or my owner dilution along with the and while still getting pretty good terms, some capital. But the biggest factor is you are trading control, and it’s usually in a very good way. If you’ve got a good partner and you take on a good relationship with the firm because that’s expertise and all the things that come with a high or higher opportunity in addition to cash. 

So lots of good. But that control factor is important when you start thinking about what you’re looking to execute. So I think that equity when a founder and how I feel about it, when a founder feels really confident in their business model and can sell it well and they should know how much equity they’re going to give up for capital.

Sean Magennis [00:22:09] Exactly.

Josh Miramant [00:22:09] We did a full two-term sheet equity raise and I didn’t feel comfortable of the evolution at the time. And they were generous terms, that I think, appropriately valued our company. But it just the dilution meant was more of a control consideration on one side. And candidly, if it was done now, I think it might be below a margin where my control factor would be given up. 

So it’s a little bit to the founders role, like we’re looking to scale quite large and leaving up 50 percent of our equity right now. So when we’re being raised too much dilution down the road, but it can get a little bigger, have more receivables, are valued more competition or have more staff, the value of the company starts giving you competitive options. It’s a little individual, but I love equity. I just think the time, and the goals are crucial to be considered.

Sean Magennis [00:22:52] I love that. So the time and the goals are crucial for consideration. This is excellent, Josh. Really. So I can’t think of a more important, high-stakes strategic decision for our listeners to get right. As we’ve gone through these three, there are others. So this takes us to the end of this episode. 

Scaling a Business: Questions to Ask When Raising Growth Capital

And by the way, we’re going to have plenty of opportunities to discuss this, particularly in Collective 54 going forward. So this has been extraordinarily valuable. 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. 

Our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. So in this instance, if you answer yes to eight or more of these questions all three of these capital sources are available to you. 

If you answer no to questions one to three, don’t pursue funding to scale with free cash flow. If you answer no to four to nine, don’t rely on debt. And if you answer no to question 10, don’t take on an equity partner. Josh as graciously agreed to be our peer example today. So,Josh, I’ll just ask you these 10 questions. Give us a simple yes or no.

Sean Magennis [00:24:08] And here we go. So number one, are you generating enough

free cash flow to fund scale?

Josh Miramant [00:24:17] Yes.

Sean Magennis [00:24:19] Number two, do you know where to deploy this extra free cash

Flow?

Josh Miramant [00:24:25] Oh, yes.

Sean Magennis [00:24:26] I love it. Number three, are you willing to go without today for

scale tomorrow?

Josh Miramant [00:24:34] Yes.

Sean Magennis [00:24:36] Number four, have you been in business for at least five

years?

Josh Miramant [00:24:41] Yes, we have.

Sean Magennis [00:24:42] Number five, are you generating stable EBITDA every year?

Josh Miramant [00:24:51] Beside COVID, yes.

Sean Magennis [00:24:52] OK. Oh, that’s good, I mean that listen, that’s real, right? You’re being honest.

Josh Miramant [00:24:55] It’s exciting years.

Sean Magennis [00:24:57] Exciting years. Number six, would two to three times EBITA be enough to fund scaling your firm?

Josh Miramant [00:25:04] Yes.

Sean Magennis [00:25:05] Yeah. Number seven, can your PNL handle the debt serviceburden of a loan?

Josh Miramant [00:25:11] Yes.

Sean Magennis [00:25:12] Number eight, are you willing to personally guarantee a loan?

Josh Miramant [00:25:18] Yes.

Sean Magennis [00:25:18] Yeah. You’ve done it.

Josh Miramant [00:25:20] Done it in the trenches on that one.

Sean Magennis [00:25:21] Absolutely. Number nine, do you have enough personal assets to secure the loan if open to a guarantee?

Josh Miramant [00:25:29] Yes.

Sean Magennis [00:25:30] And number ten. Are you willing to dilute your ownership, take for

the right equity partner?

Josh Miramant [00:25:37] Yes.

Sean Magennis [00:25:38] Outstanding, so in summary, it takes money to make money, scaling a boutique takes money. There are different funding sources, each with its own pros and cons. All can work well, which is best for you is highly situational. And Josh, you’ve said that. 

So take your time, listeners, to consider this very important strategic decision. Josh, a huge thank you today for sharing all of the real-life examples. I love your enthusiasm. I love the fact that you’re in Manhattan. I could hear the traffic, which we haven’t heard a lot in the last six months. It’s brilliant and makes me feel as if we’re in the real world.

And for our listeners, if you enjoyed the show and want to learn more, pick up a copy of the book “The Boutique: How to Start, Scale and Sell a Professional Services Firm”, written by Collective 54 founder Greg Alexander

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

Go to Collective54.com to learn more.

Thank you for listening.

Episode 51: Scale Capital: A DIY Approach to Raising Growth Capital – Member Case with Josh Miramant

Episode 49: The Boutique: WHAT TO DO IF TRAPPED INSIDE A LIFESTYLE BUSINESS?

The opportunity cost of spending your prime in a lifestyle business is too large. On this episode, we discuss a 3-part framework to address this issue and demonstrate how to use it.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to The Boutique case study series 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 you do not want to be trapped inside a lifestyle business. The opportunity cost of spending your prime in a lifestyle business is too large. I’ll try to prove this theory by interviewing Greg Alexander, chief investment officer and founder of Capital 54. Greg has developed a three part framework to address this issue, and today he’ll demonstrate how to use it. Hey, Greg, welcome. 

Greg Alexander [00:01:13] Hey Sean, good to be with you, big, big topic today, let’s see if we can help some folks escape the trap of a lifestyle business. 

Sean Magennis [00:01:18] Fantastic. You know, it reminds me of Harry Houdini, right? We’ve got to give you that capability. So Greg, can you provide a brief overview of your three-part framework? 

Greg Alexander [00:01:31] Sure, let’s start by identifying the signs of this trap. Listeners are wondering if they are trapped or will they become trapped. Our listeners tend to be people who do not want a lifestyle business. They want to scale to something more substantial. Here’s some thoughts help diagnose if you are trapped. And Sean, allow me little leeway here, because… 

Sean Magennis [00:01:55] Absolutely. 

Greg Alexander [00:01:56] Sure, please. A lifestyle business is an average business. It’s not a bad business, it’s not a good business. It’s certainly not a great business. It’s OK. It provides a decent living, does not require an unreasonable level of effort. It fits nicely into one’s lifestyle with a wonderful work life balance. It’s better than working for a soulless big corporation. Owners of a lifestyle business are never going to get rich. And for some, that’s OK. Lifestyle firms are never going to quote put a dent in the universe, as the great Steve Jobs used to say. 

Sean Magennis [00:02:33] Yes. 

Greg Alexander [00:02:35] They’re not going to attract the most interesting clients with the most fascinating problems. A lifestyle business will be filled with really nice people, but maybe not top talent. Top talent avoids lifestyle businesses they want to grow, to be stretched and to really go for it. And there’s nothing wrong with the lifestyle business at all. For many, this is perfect. However, many who are operating a lifestyle business today wish they were not. They launched their firms with higher ambitions and with different intentions, but they fell into a trap unknowingly trap is if it ain’t broke, don’t fix it. When things are quote unquote fine, there was no reason to break glass rock the boat. The bills are getting paid. The grief factor is low. The founder is happy. Life is all right. The problem is complacency sets in year after year passes by, the founder has been lulled to sleep. Then one day he or she wakes up and says, I want something more from life, my life’s work should mean something. Someday I’m going to want to retire. I’m going to need to sell my firm. I do not want to keep doing this. It’s my 60s, 70s and God forbid, belong beyond that. I got to turn this into more than a lifestyle business, or I’m never going to be financially secure. This trap carries a huge cost. Cost I’m referring to is the opportunity cost. This cost can be quantified. Let me give you an example. A boutique life cycle is approximately 15 years from cradle to grave. Ask yourself at the end of the 15 years, what do you have to show for your efforts? Compare this to what you might have had if you took a different path, whatever that different path may be. And in my experience, this produces a gap and the gap is big. Let me share some data to make my point. And then we can jump into the three part framework. 

Sean Magennis [00:04:47] Excellent. 

Greg Alexander [00:04:49] A lifestyle business in pro serve has about 20 employees doing about four million in revenue, and approximately eight are in the province. An owner of this type of business will pay him herself about a half million dollars. After taxes this is about, let’s say, 250k 300000, depending on where you live and after you satisfy your living expenses, maybe you can save about $100000 per year. So over a 15 year period, that’s 1.5 million, or maybe a little more due to investment returns that’s rounded up to a goal to make. This is not enough to be financially secure, given inflation and life expectancy increases. In reality, it’s not enough for much of anything. The cost of living 15 years from now is going to be much higher, especially in key areas such as health care. Yeah, under this hypothetical approach, you’re going to work yourself right into the cemetery. If I compare this outcome to the alternatives doesn’t compare, well, heck, you might be better off with a civil service job and 40 hours a week, three weeks vacation and a pension. There are other ways to spend your prime your career that will produce a lot more, and you, the brave founder the person who creates jobs for people. You just you’re worth more than that. And I feel the saddest thing in life is a wasted prime. So I wanted to come and speak to you today and urge you not to waste your prime and avoid the trap of a lifestyle business. That makes sense Sean? 

Sean Magennis [00:06:25] Greg, it makes 100 percent sense. I mean, this is strictly I mean, this is so important, it’s a wake up call for many. I see it all the time, and I know you do. The good news is we are making our listeners aware of it, so hopefully they can avoid this trap. So, Greg, if I’m someone who is concerned with this, what would I do? 

Greg Alexander [00:06:48] OK, good question. So this is where the three part framework comes in. So a founder of a boutique has three options trapped in a lifestyle business. Option number one is to shut the business down and do something else. Option number two is the pivot, this means course correct before it’s too late. An auction number three is to persevere in this means to stay the course. 

Sean Magennis [00:07:10] OK, Greg. So three options shutdown, pivot or persevere. You provided me three checklists, one for each option to help listeners determine which option is best for them, and I’d like to have you demonstrate each checklist for the audience. I’ll take you through each option and get your recommendations on each. So option one is shut the business down and there are four questions to answer. Number one, are we out of moves? 

Greg Alexander [00:07:41] So if you’re contemplating shutting the business down, it’s a tough thing to think about. So are we out of moves? What does that mean? Well, have you tried everything you can? Have you studied all the best practices? Try to get them implemented? Have you sourced all the best advice if you’ve already done all that and you’re still a lifestyle business, shut it down. The opportunity cost is too great. If you haven’t exhausted all of the best practices and the advice it’s available to you, we keep going but make a commitment to yourself that you’re going to implement some of the things that you want. 

Sean Magennis [00:08:12] Excellent. So number two is, are we miserable? Do we hate the clients, our coworkers, et cetera? 

Greg Alexander [00:08:19] Yes. So you’re contemplating shutting the business down? That’s the section where one right now that’s option one. 

Sean Magennis [00:08:24] Yup. 

Greg Alexander [00:08:25] You know, if you’re miserable, you hate coming to work every day. If you find yourself daydreaming about something else to do and your heart’s not in it. So if that if you find yourself in that situation, then you’re better off to shut the business down if you’re not in that situation, if you still love what you’re doing. Then stick with it, because you probably can crack the code. 

Sean Magennis [00:08:45] Excellent. So again, in the context of shutting the business down, this question is do you still believe in the vision for your business? 

Greg Alexander [00:08:55] Yeah. So one thing I learned on my journey is a vision changes over time. You know, I look back at the original vision I had for myself. My ambition was modest as time went on and I had some success. My my ambition kept expanding. So periodically, it’s a wise move to take a pause and say to yourself, Hey, if I realize my current vision, am I going to fulfill my dreams? The answer to that question is yes, don’t shut the business down. Keep going for it. The answer a question is no. Then what do you do when you’re running in place? You’re pursuing a vision that, even if you’re successful, isn’t worth it? 

Sean Magennis [00:09:30] Yep. And then the fourth one and this is is the window of opportunity closing? 

Greg Alexander [00:09:36] Yeah. And this is the one that’s outside the control of the of the founder. So are you running out of time? Are your competitors beating you? Are there lots more competitors coming into the market today? So this window of opportunity, all businesses have, you got to make sure. You know, is that window open? How long is it going to be open for? And that’s a critical thing to consider if you’re contemplating shutting the business down. 

Sean Magennis [00:09:58] Yeah. Excellent. Thank you, Greg. So the next option is to pivot pivot. It’s an overused term. You feel there are seven types of pivots specifically for boutique professional services firms. Let’s see if we can get through these efficiently. So the first one is what you term a zoom in pivot where a single feature becomes the whole service offering. What are your thoughts on this? 

Greg Alexander [00:10:26] So if you’re going to pivot, you’re not going to shut the business down. You want to get out of a lifestyle business. One of the pivots to consider is to zoom into it. This means sometimes founders over engineer their service offerings. So this type of pivot would result in a much simpler service to deliver, which will mean much higher profits. And with those profits, you can fund your expansion plan. And if successful, you’ll get yourself out of a lifestyle business. So if the answer yes to this question, then execute a service offering pivot. If you answer no, then the solution to a lifestyle business trap is not associated with assuming to the excellent Greg. 

Sean Magennis [00:11:07] The next one is a zoom out pivot. The current service becomes only a feature. What are your thoughts on this? 

Greg Alexander [00:11:15] So this is the flip side of that coin. So sometimes a service line is not compelling enough. There are things that need to be added to it to compel clients to buy it. So ask yourself that question. You know the problem that my client is having, can I truly solve? If you can’t, then you’re going to have to add things to your service line, so if you find yourself in that situation, then you might want to execute the zoom out pivot. If you don’t, you probably. You probably should not. 

Sean Magennis [00:11:43] Excellent, Greg. The third is client segment pivot, a shift to a new set of target clients. Unpack that for us. 

Greg Alexander [00:11:54] Yeah, so oftentimes owners of lifestyle businesses are unclear as to who their ideal client really is. And this results in wasting resources, pursuing the wrong business and lifestyle businesses. A resource constraint is there’s only so much time going, so much money going, so many staff members. So you can’t waste these resources. So getting really tight. I knew that client is an ideal client is super important. And ask yourself the client to serve, and today they’re going to get you out of the trap of a lifestyle business. If the answer is no, then execute a client segment. Go after different client with a different set of problems. 

Sean Magennis [00:12:34] Very important. Greg Number four, a client problem pivot. So the current problem of the focus is not urgent enough. This is critical. Greg, what is your what are your thoughts on this? 

Greg Alexander [00:12:47] Yeah. So this is the kissing cousin of the client segment. Right? So sometimes lifestyle boutique partners, they’re selling vitamins, not painkillers. So this pivot would be going after only urgent problems that are clients are willing to pay to solve. I see this all the time somebody launches a firm. It’s a nice to have is a small number of clients that are willing to hire you for that nice to have. And then you stall up because the problem isn’t urgent. It’s not pervasive. So by definition, you’re trapped in a lifestyle business. 

Sean Magennis [00:13:23] Yep, makes total sense. Number five is a business architecture pivot, and there are two types of business architectures. One High margin, low volume we call elephant hunting. Number two low margin, high volume rabbit hunting. What are your thoughts on this? 

Greg Alexander [00:13:43] This is a big one. Problem is trapped in a lifestyle boutique. Try to run two business models at the same time. There’s never enough money. There’s never enough talent to pull that off. This pivot would be to focus on one business architecture and be good at it. The added commentary I’d give you here is we tend to lie to ourselves on this. We like to say we have we apply discretion to the type of business we take. It’s really not true. Sometimes in the early stages, especially if your lifestyle, business or revenue is good revenue. But that’s the trap. That’s the trap that puts you in a lifestyle trap. So avoid that pick the business architecture. You’re going to fall with elephants or rabbits and stick to it. 

Sean Magennis [00:14:27] I like that, Greg very much. Number six is value capture pivot. This is a monetization model change. For example, should you switch from hourly billings to retainers, fixed beds, performance based contracts, licensing subscriptions, events or royalties? What are your thoughts on this? 

Greg Alexander [00:14:49] Yeah. So this is where all the breakouts are happening right now. So we try to roll role model ourselves after companies that have escaped the trap of a lifestyle business. What do they share in common? Well, services firms are prioritizing their services. Which allows them to switch their pricing strategy or their monetization strategy. And because they’re able to do that, they can go from one time fees to recurring revenue. And there’s probably nothing more powerful than escaping a lifestyle business in recurring revenue. So this is what everybody should be thinking about is value capture, pivot and the ingredient to execute that is the ability to prioritize your services. 

Sean Magennis [00:15:28] Greg, I couldn’t agree with you more. And if you and I look at our members within collective 54, those that are truly scaling have recognized the value of this capture pivot. You know, they monetizing their expanding their service line and their revenue sources. It’s remarkable what some of them are doing. And for our listeners, you know, consider looking at collective 54 from that standpoint because it’ll add tremendous value to your enterprise value when you decide to sell one day. Yup. So Greg, number seven, go to market pivot the three types of go to market approaches of a boutique. One is viral. So word of mouth and referrals to what we call sticky landing and expanding in the client, and three paid outbound cold outreach and marketing support to drive inbound. What are your thoughts on this? 

Greg Alexander [00:16:24] Yeah. So historically, the most common cause of being trapped in a lifestyle business is the lack of a commercial sales engine. Founders rely solely on word of mouth referrals. Well, this eventually runs dry as a personal network is finite. So if your only source of leads is word of mouth, you are trapped and you’re going to stay trapped. So if you find yourself in a lifestyle business, are you worried that that might happen to you in the future? You’ve got to build this commercial sales engine that can allow you to scale beyond the benefits of word of mouth. 

Sean Magennis [00:16:56] Greg, that was incredibly thorough. We now know what the term pivot really means to a boutique professional services firm. And this brings us to the final option, which is to persevere. This option would be sticking with the current plan, but executing it better. Give us your thoughts on this, Greg. 

Greg Alexander [00:17:19] Sure, well, executing the current plan better as opposed to pivoting usually means three things. It can mean swapping out the team. It can mean training the team, or it can mean giving the team more time. A word of caution here. Kicking the can down the road and taking no action is not persevering. That’s procrastinating. To prevent yourself from procrastinating. Remind yourself of your opportunity cost. The cost of inaction for a founder trapped in a lifestyle business is very large, and it’s growing every day. Your prime is X number of years. If you think you have the right strategy. And the key to escaping is better execution, take a very hard look at the team. Sean, one of the things that I would like to mention here is that the material that I shared with the audience today is not original material of Greg Alexander. I’m standing on the shoulders of giants people like. Stephen Blank, Eric Rice from the lean startup, etc.. Yes. And and I just wanted to make sure that I gave them proper credit. What I’ve done is I’ve curated it and edited it to make it uniquely applicable to the boutique professional services firm. But there’s a huge body of knowledge behind this topic. Should I shut the business down? Should I pivot or should I persevere? 

Sean Magennis [00:18:48] Outstanding, Greg, and thank you for that acknowledgment because that body of knowledge is accessible to our listeners. I love the way you synthesized it. I love the way you’ve simplified it. And that’s a huge, huge benefit to our listeners. So it’s super clear that answering these three questions do we shut the business down? Should we pivot and course correct? Or do we persevere? Are the keys to getting out of the trap of a lifestyle business? This brings us to the end of this episode.

A huge thank you to you, Greg, for sharing this today.

If you enjoyed the show and want to learn more. Pick up a copy of Greg’s book, titled The Boutique How to Start, Scale and Sell a professional services firm. I’m Sean Magennis.

Thank you for listening. 

Episode 48: The Boutique: What to Do If Trapped Inside a Lifestyle Business

How you manage unsolicited interest in buying your boutique will impact your ability to exit.  On this episode, we discuss how firm owners can capitalize on inbound interest.   

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that to scale the boutique requires a strategy and that a collection of tactics is not a strategy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is considered by some as a master strategist and has a lot to share on this topic. Greg, great to see you. Welcome.

Greg Alexander [00:01:08] Thanks, Sean. This is very timely. I was looking at it from the other day who was trying to raise capital, and I asked them for their strategy doc. They sent me a spreadsheet populated with business plan assumptions. And as you know, that’s not a strategy. And this reminded me of how much work we must do in this area.

Sean Magennis [00:01:24] Yes. You know, for some reasons, there’s a knowledge gap in this area. Why do you think that is?

Greg Alexander [00:01:30] I think founders of boutiques know they need a strategy, and I feel as if they want one, yet when they look for help, all they run into is how to materials for product companies. And this leads them down the wrong path. Strategy for a professional services firm is very different. And unfortunately, there’s just not a lot out there on this topic.

Sean Magennis [00:01:50] Well, Greg, that’s what we are here for. And maybe this podcast will help. Heck, maybe there’s a new book in this for you.

Greg Alexander [00:01:57] I’m still recovering from the heavy lift of writing my last one, so maybe someone else can take that on.

Sean Magennis [00:02:03] Well, the boutique is fantastic, so let’s hope. OK, pick up on the thread on how strategy for product companies is different than strategies for services firms.

Greg Alexander [00:02:14] Sure. So here’s our strategy. And a product company gets built. The executive team builds a list of attributes that make a market attractive. These are items such as organic growth rates, number of companies, target trends and so on. This produces a list of vertical industries to pursue. This list of industries gets further segmented into a list of companies to pursue. And ultimately the data gets cut to names and accounts who might want to buy the products, including an estimate on spend potential. A debt gets created that says some version of the following. Our strategy is to target this list of clients in these industries. With these products, everybody nods in agreement. The Excel formulas are double checked and the and the goals get cascaded down to the department heads. This is a what exercise as in what are we going to do? This does not work for a professional services firm.

Sean Magennis [00:03:08] Why not Greg?

Greg Alexander [00:03:10] A strategy for professional services firms must be a how exercise. It starts with, how are we going to become more valuable to clients? Pro serve firms are better served with a how based strategy because of the nature of competition. Pro serve firms do not have the advantages present in product businesses which allow product businesses to get away with what based strategies. For instance, does Google have to ask how questions? No. How come? They have huge barriers to entry by controlling 60 percent of the search traffic. Pro serve firms do not have these types of advantages. For example, McKinsey is a top consulting firm in the world and they only have three percent market share. If they stop becoming more valuable to their clients, they are easily replaced. They do not have an install base locked into their firm. Does this make sense?

Greg Alexander [00:04:02] It does. Professional services firms need a different strategy development process built on how questions with the ultimate how question being how do I become more valuable to my clients? Can you give me some other How strategy questions that should be addressed in a boutique strategy?

Greg Alexander [00:04:23] So here are a few big ones that probably you could really think through and write many sophisticated answers to. So, for example, how do I raise client satisfaction? That’s a big macro question, huh? How can I elevate the skills in my team so I can raise prices? You know, oftentimes boutique owners don’t realize is a relationship between skill and price. Next, how can I redesign the work to improve utilization rates, you know, when’s the last time you broke out your work breakdown structure and reengineered the way you deliver the service?

Sean Magennis [00:04:57] Yes.

Greg Alexander [00:04:59] Or let’s say, how can I specialize in new ways of further differentiating us from the competitors? Because if you’re a boutique, you’re competing with generalist. So the more specialized you are, the more likely you’re going to win. So these are just a few. And they link back to the key macro question. How do I become more valuable to my clients?

Sean Magennis [00:05:19] Greg, is that it? Just switch from what to how?

Greg Alexander [00:05:25] I wish it were that easy. Each how question needs an answer and the answer must include another how. This is the how to part of the strategy, the action plans. This means a goal timeline, budget project team and accountability owners, deliverables and key milestones. This cuts through all the bullshit and gets to the action to be taken. And it is this style of strategy that that takes a pretty scale firm and scales them to a dominant player and their niche.

Sean Magennis [00:05:58] Greg, this is so different and and so clear. This is not a budgeting exercise. I love it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

GQ Fu [00:06:33] Hi, my name is GQ co-founder and CEO of LTV Plus, we serve E Commerce and SAS businesses mainly based in North America and Europe, with some based in other parts of the world. When e-commerce and customer experience executives and directors have issues recruiting agents, training agents and expanding their coverage to meet the demands of their customers, they turn to LTV Plus to help them scale their customer service teams through world class customer service outsourcing. We solve this problem by providing highly trained, dedicated customer service agents that are selected based on the brands and industries they serve. We also provide recovery services to help generate more sales and full payment recovery services to recover lost revenue for subscriptions based online businesses. If you need help with scaling your customer service team to meet the demands of your customers, reach out to me at [email protected] or check out our website at ltvplus.com.

Sean Magennis [00:07:34] 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. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your strategy is working for you. If you answer no, too many times, your strategy is more than likely getting in the way of your attempts to scale. So let’s begin.

Sean Magennis [00:08:36] Number one, does your strategy outline how the firm will develop new capabilities that the competitors do not have?

Greg Alexander [00:08:45] And of course, this assumes, you know, what the competitors have.

Sean Magennis [00:08:48] Precisely. Number two, does your strategy detail why the competitors cannot match them?

Greg Alexander [00:08:55] Yeah, an often overlooked is because you develop something. If it’s easily copied, that’s a tactic. It’s not a strategy.

Sean Magennis [00:09:01] Right. Number three, does your strategy specify how these capabilities will be pushed into the market? Number four, does the strategy, explain how your resources are going to be deployed? For example, money, people and time. Number five, does the strategy specify how this resource deployment is different than your competitors? Number six is the strategy supported by enough clients sourced evidence?

Greg Alexander [00:09:36] This is a big one. So oftentimes, you know, our founders who we love envision themselves as master strategists and they say the clients don’t know what they need. Let me tell them. That’s a big mistake.

Sean Magennis [00:09:49] Number seven, does the strategy specify who oversees each program?

Greg Alexander [00:09:54] Got to have an owner for everything.

Sean Magennis [00:09:56] Number eight, has the team been properly incented to execute the plan? Number nine, does the strategy detail how the competitors plan to beat you?

Greg Alexander [00:10:07] Yeah, so a good tool there is a SWAT. Understand, where you’re weak and how you might get attacked.

Sean Magennis [00:10:15] And number 10, does the strategy specify how to respond to competitor attacks? So in summary, a collection of tactics is not a strategy, nor is a financial model or an annual budget, a strategy outlining what is not as useful as a strategy that outlines how. Scaling does require a strategy, and it should be focused on making you more valuable to your clients. 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. Thank you, Greg. I’m Sean Magennis and thank you to our audience for listening.

Episode 47: The Boutique: THE DOS AND DON’TS OF STRATEGY DEVELOPMENT FOR BOUTIQUES

Scaling a boutique professional services firm requires a strategy. Yet many owners have a collection of tactics and call it a strategy. Learn about how firms should approach creating their strategy.   

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that to scale the boutique requires a strategy and that a collection of tactics is not a strategy. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg is considered by some as a master strategist and has a lot to share on this topic. Greg, great to see you. Welcome.

Greg Alexander [00:01:08] Thanks, Sean. This is very timely. I was looking at it from the other day who was trying to raise capital, and I asked them for their strategy doc. They sent me a spreadsheet populated with business plan assumptions. And as you know, that’s not a strategy. And this reminded me of how much work we must do in this area.

Sean Magennis [00:01:24] Yes. You know, for some reasons, there’s a knowledge gap in this area. Why do you think that is?

Greg Alexander [00:01:30] I think founders of boutiques know they need a strategy, and I feel as if they want one, yet when they look for help, all they run into is how to materials for product companies. And this leads them down the wrong path. Strategy for a professional services firm is very different. And unfortunately, there’s just not a lot out there on this topic.

Sean Magennis [00:01:50] Well, Greg, that’s what we are here for. And maybe this podcast will help. Heck, maybe there’s a new book in this for you.

Greg Alexander [00:01:57] I’m still recovering from the heavy lift of writing my last one, so maybe someone else can take that on.

Sean Magennis [00:02:03] Well, the boutique is fantastic, so let’s hope. OK, pick up on the thread on how strategy for product companies is different than strategies for services firms.

Greg Alexander [00:02:14] Sure. So here’s our strategy. And a product company gets built. The executive team builds a list of attributes that make a market attractive. These are items such as organic growth rates, number of companies, target trends and so on. This produces a list of vertical industries to pursue. This list of industries gets further segmented into a list of companies to pursue. And ultimately the data gets cut to names and accounts who might want to buy the products, including an estimate on spend potential. A debt gets created that says some version of the following. Our strategy is to target this list of clients in these industries. With these products, everybody nods in agreement. The Excel formulas are double checked and the and the goals get cascaded down to the department heads. This is a what exercise as in what are we going to do? This does not work for a professional services firm.

Sean Magennis [00:03:08] Why not Greg?

Greg Alexander [00:03:10] A strategy for professional services firms must be a how exercise. It starts with, how are we going to become more valuable to clients? Pro serve firms are better served with a how based strategy because of the nature of competition. Pro serve firms do not have the advantages present in product businesses which allow product businesses to get away with what based strategies. For instance, does Google have to ask how questions? No. How come? They have huge barriers to entry by controlling 60 percent of the search traffic. Pro serve firms do not have these types of advantages. For example, McKinsey is a top consulting firm in the world and they only have three percent market share. If they stop becoming more valuable to their clients, they are easily replaced. They do not have an install base locked into their firm. Does this make sense?

Greg Alexander [00:04:02] It does. Professional services firms need a different strategy development process built on how questions with the ultimate how question being how do I become more valuable to my clients? Can you give me some other How strategy questions that should be addressed in a boutique strategy?

Greg Alexander [00:04:23] So here are a few big ones that probably you could really think through and write many sophisticated answers to. So, for example, how do I raise client satisfaction? That’s a big macro question, huh? How can I elevate the skills in my team so I can raise prices? You know, oftentimes boutique owners don’t realize is a relationship between skill and price. Next, how can I redesign the work to improve utilization rates, you know, when’s the last time you broke out your work breakdown structure and reengineered the way you deliver the service?

Sean Magennis [00:04:57] Yes.

Greg Alexander [00:04:59] Or let’s say, how can I specialize in new ways of further differentiating us from the competitors? Because if you’re a boutique, you’re competing with generalist. So the more specialized you are, the more likely you’re going to win. So these are just a few. And they link back to the key macro question. How do I become more valuable to my clients?

Sean Magennis [00:05:19] Greg, is that it? Just switch from what to how?

Greg Alexander [00:05:25] I wish it were that easy. Each how question needs an answer and the answer must include another how. This is the how to part of the strategy, the action plans. This means a goal timeline, budget project team and accountability owners, deliverables and key milestones. This cuts through all the bullshit and gets to the action to be taken. And it is this style of strategy that that takes a pretty scale firm and scales them to a dominant player and their niche.

Sean Magennis [00:05:58] Greg, this is so different and and so clear. This is not a budgeting exercise. I love it. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

GQ Fu [00:06:33] Hi, my name is GQ co-founder and CEO of LTV Plus, we serve E Commerce and SAS businesses mainly based in North America and Europe, with some based in other parts of the world. When e-commerce and customer experience executives and directors have issues recruiting agents, training agents and expanding their coverage to meet the demands of their customers, they turn to LTV Plus to help them scale their customer service teams through world class customer service outsourcing. We solve this problem by providing highly trained, dedicated customer service agents that are selected based on the brands and industries they serve. We also provide recovery services to help generate more sales and full payment recovery services to recover lost revenue for subscriptions based online businesses. If you need help with scaling your customer service team to meet the demands of your customers, reach out to me at [email protected] or check out our website at ltvplus.com.

Sean Magennis [00:07:34] 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. OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your strategy is working for you. If you answer no, too many times, your strategy is more than likely getting in the way of your attempts to scale. So let’s begin.

Sean Magennis [00:08:36] Number one, does your strategy outline how the firm will develop new capabilities that the competitors do not have?

Greg Alexander [00:08:45] And of course, this assumes, you know, what the competitors have.

Sean Magennis [00:08:48] Precisely. Number two, does your strategy detail why the competitors cannot match them?

Greg Alexander [00:08:55] Yeah, an often overlooked is because you develop something. If it’s easily copied, that’s a tactic. It’s not a strategy.

Sean Magennis [00:09:01] Right. Number three, does your strategy specify how these capabilities will be pushed into the market? Number four, does the strategy, explain how your resources are going to be deployed? For example, money, people and time. Number five, does the strategy specify how this resource deployment is different than your competitors? Number six is the strategy supported by enough clients sourced evidence?

Greg Alexander [00:09:36] This is a big one. So oftentimes, you know, our founders who we love envision themselves as master strategists and they say the clients don’t know what they need. Let me tell them. That’s a big mistake.

Sean Magennis [00:09:49] Number seven, does the strategy specify who oversees each program?

Greg Alexander [00:09:54] Got to have an owner for everything.

Sean Magennis [00:09:56] Number eight, has the team been properly incented to execute the plan? Number nine, does the strategy detail how the competitors plan to beat you?

Greg Alexander [00:10:07] Yeah, so a good tool there is a SWAT. Understand, where you’re weak and how you might get attacked.

Sean Magennis [00:10:15] And number 10, does the strategy specify how to respond to competitor attacks? So in summary, a collection of tactics is not a strategy, nor is a financial model or an annual budget, a strategy outlining what is not as useful as a strategy that outlines how. Scaling does require a strategy, and it should be focused on making you more valuable to your clients.

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. Thank you, Greg.

I’m Sean Magennis and thank you to our audience for listening.

Episode 46: The Boutique: What Founders Ought to Know about Team Composition

The composition of the founding team must be carefully considered. Boutiques are often formed by a group with overlapping skills which makes it hard to scale. Learn about how the team may need to change over time if a boutique is to reach its full potential.

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 the composition of the founding team must be carefully considered. Unfortunately, many boutiques are formed by a group of friends with lots of skills overlap, which makes it very hard to scale beyond a lifestyle business. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has a point of view on how our founding teams should be put together, and he will share it with us today. Greg, great to see you. Welcome.

Greg Alexander [00:01:16] Hey, Sean, good to be here today.

Sean Magennis [00:01:18] OK, Greg. So today we’re going to talk about the composition of the founding team and how it might need to change over time if a boutique is truly to reach its full potential. Why is this worth the listeners attention?

Greg Alexander [00:01:32] Hmm, that’s a good question. Let me see. How about I answer that with a cautionary tale?

Sean Magennis [00:01:39] Please do. I love your stories.

Greg Alexander [00:01:42] OK, so a buddy of mine a few years back was a leading provider of jury consulting services. He is a social scientist and helps clients with jury selection, a brilliant guy in a fascinating field. Anyway, he and four of his coworkers quit working for the man and opened up their own shop. They went belly up at the end of year two. He took me out for ribs to ask me for some career advice. I waited for a few beers to be in him and then asked what the heck happened? I mean, he is a bona fide expert in a well defined niche with lots of demand for services.

Sean Magennis [00:02:15] What did he tell you, Greg?

Greg Alexander [00:02:17] So it turns out he made a rookie mistake, a mistake lots and lots of founders make. He founded the company with his coworkers who were all alike. For example, these guys all love doing the work. They were geeks of a sort and kicked out about the technical aspects of the job. In this case, this meant they loved trial strategy, pretrial research and especially witness preparation. However, none of them, and I mean not even one, enjoyed selling the work. The word sales was beneath them. And for the first year or so, they did not need to sell their personal networks, generated enough referrals to make a go at it. However, this eventually dried up, a low hanging fruit had been picked and soon there was not enough work to survive

Sean Magennis [00:03:00] Geez, yikes. I’m sure that made for a bad dinner date. What advice did you give him now?

Greg Alexander [00:03:05] A night eating dry rubbed ribs at the smoke and roast is never a bad evening.

Sean Magennis [00:03:09] Love it.

Greg Alexander [00:03:11] The advice I gave him is the advice I will give our listeners. First, he had too many founding partners. Five is just too many. The perfect founding team to take you through the first ten million or so in revenue is three. Second, the three need to be very different people with very different skills. No overlap. In the early days, resources are constrained. You cannot afford to be suboptimized with redundant skills. You need a partner who is a true rainmaker, a person who can bring in clients consistently and professionally, meaning beyond harvesting a referral network. Next, you need a partner who is excellent at service delivery. This partner could not sell weed to a Jamaican on holiday, but boy, he can deliver on time, on spec and on budget every time he or she can move around a project plan like Travolta moves around a dance floor and the third partner needs to be a process engineer who can quickly turn snowflake projects into standardized offerings, which can be sold and delivered repeatedly and profitably. So in other words, one plus one plus one equals ten.

Sean Magennis [00:04:14] This is a great reminder. I think the mistake made by this jury consultant is made by a lot of funders in the opening. I told the listeners that the founding team also morphs over time. Can you elaborate on this a bit?

Greg Alexander [00:04:29] Sure. My commentary here is directed at our listeners who are between one and 10 million in revenue to break out and get beyond 10 million often requires that reassignment of the founder, reassignment of the founding partners, or in some cases the termination of a founding partner or two. So why is this? Sometimes mistakes we have discussed on this show have been made, but it is a few years into the journey and there is a reluctance to change relationships run deep. However, if this poorly constructed team is allowed to continue, it will become a true obstacle for growth. A roadmap to consider as one possible solution to this can be described as follows. Over time, the biggest department will be the delivery team. This is where the largest number of employees will set. Assign the leadership of the delivery team to the partner who is the best people manager. Even if this partner is not a master project manager, that is OK at this stage because the critical competency is people management. Assign the responsibility for creating services to the partner who is most like a lone wolf. This department will be a one man shop for some time. The partner who likes to work alone could lead this part of the business well. His or her job is that of individual contributor creating things for others to use. Assign the responsibility for marketing and sales to the partner who can manage egos the best, this department will be smaller than the delivery team in terms of number of employees. However, salespeople are your biggest pain in the butt, these guys and gals are divas and require lots of care and feeding. It is best to not be in the position of having to fit a square peg in a round hole. Prevention is preferred. However, if you’re living with a legacy structure, this is a framework to find a compromise.

Sean Magennis [00:06:22] Perfect, Greg. So my hunches, many of our listeners will find themselves in this pickle. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

Darrell McDaniel [00:06:56] Hello, my name is Darrell McDaniel and I own NStar Global Services. We serve high tech manufacturing companies in semiconductor, solar and pharmaceutical industries by providing a comprehensive asset lifecycle management and critical technical services, both domestic and globally. Our clients turned to us to assist them with equipment moves providing operation and maintenance services for their equipment facilities and their talent acquisition needs. NStar strives to deliver insightful and flexible services that efficiently solve our customer equipment service issues. So whether you need help moving equipment or operation and maintenance services or finding that right talent for your manufacturing needs, please reach out to our global services and [email protected] Thank you.

Sean Magennis [00:07:50] 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. OK, this takes us to the end of the episode. We’re going to try and help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist, and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your team composition is working for you. If you want to know too many times your team composition is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:08:51] Number one, does your founding team consist of three or more partners? Number two, is there no overlap in skills among the founding partners?

Greg Alexander [00:09:04] and remember the three big skills to start as someone who sells the work, someone who delivers the work and somebody who builds a service offering.

Sean Magennis [00:09:11] Got it. Number three, is there a loss in capacity due to confusion over who is doing what?

Greg Alexander [00:09:18] Yeah, all hands on deck is actually a bad thing.

Sean Magennis [00:09:21] Yeah. Number four, do you have a partner responsible for acquiring clients? Number five, do you have a partner responsible for servicing clients? Number six, do you have a partner responsible for developing service lines?

Greg Alexander [00:09:39] Bright line distinctions.

Sean Magennis [00:09:41] Number seven, can the partner who owns the service department scale to dozens of employees? Number eight, can the partner who owns the marketing and sales department handle big egos? Number nine, is the partner who owns the service development effort, comfortable being a lone wolf? And number ten, do the partners complement rather than compete with one another?

Greg Alexander [00:10:11] Now some listeners might be saying, well, I don’t want any partners, I just want to do it myself. Well, you still need to have those skills. They got to fill the void. Right. But you can’t do it all yourself. Right. Right.

Sean Magennis [00:10:23] Greg, thank you again. And in summary, it takes a team to realize the dream. The composition of the founding team must be carefully considered and it will morph over time. Pick your partners very carefully.

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 the Professional Services Firm. I’m Sean Magennis.

Thank you for listening.

Episode 45: The Boutique: Leadership – Dictator vs. Democracy: Which is Best for You?

As boutiques scale the way decisions are made must change. Collective 54 Founder Greg Alexander shares why the decision-making leadership of the founder is diminished as boutiques scale.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that as boutique scale, the way decisions get made must change. A start up benefits from the speed of a single decision maker, however, during scale, the decision making ability of the central figure gets diminished. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has helped many boutiques transition their power structures. Greg, great to see you. Welcome.

Greg Alexander [00:01:14] It’s nice to be here, Sean. Transitioning the governance system as a firm scale’s is a very important topic. So I’m glad we’re speaking about that today.

Sean Magennis [00:01:21] Yeah, I can’t agree more. Greg, can you set this up for the audience? Why should a founder of a scaling boutique really care about power structure.

Greg Alexander [00:01:30] Sure. So early stage growth firms require a dictator to be successful. These firms do not have time to build consensus. They must rapidly iterate and move very quickly. And the scope of the decisions that need to be made is small at this stage. The personal willpower of the founder dictator is a key reason these types of firms succeed. Strong leadership is crucial, and the skills needed in a dictator type of leader are easily defined and readily available am my making sense?

Sean Magennis [00:02:04] Yes, yes, you are correct. Please continue.

Greg Alexander [00:02:07] So when a firm starts to scale, it needs to implement a democracy. The boutique is larger and leadership must represent the team. More people need to have a say the dictator is removed from the front lines, his or her proximity to clients becomes more distant. As a result, his or her decision making ability becomes diminished. This person’s once prophetic instincts become dulled.

Sean Magennis [00:02:34] I completely understand that now. So owners of firms, when attempting to scale, need to make more and more complicated decisions. And the best people to make those decisions are those closest to the clients. A somewhat removed dictator is no longer the person uniquely qualified to steer the ship.

Greg Alexander [00:02:55] And you are correct.

Sean Magennis [00:02:56] So how does a boutique transition from the powerful dictator to a democracy?

Greg Alexander [00:03:01] Well, very carefully, as some foreigners do not want to go quietly, the strong willpower that made them successful in the first place now becomes a liability.

Sean Magennis [00:03:12] So, Greg, surely there must be some best practices to handle this transition smoothly?

Greg Alexander [00:03:17] Yeah, there are all firms go through this, at least the ones who scale beyond a nice lifestyle business.

Sean Magennis [00:03:22] So share some of these best practices with our listeners.

Greg Alexander [00:03:25] OK, so I’m going to try to simplify. So bear with me. All right. So the transition typically involves the election of a board. The board is comprised of the equity partners and at least one external independent board member. I play and have played this role. The board meets quarterly and it is mandated to make policy decisions. It is important to note that the board does not run the firm they have focused entirely on long term reporting to the board is a managing partner. The managing partner acts like a CEO does in a corporation. He or she is the boss and is accountable to the results. The managing partner has an executive leadership team that reports to him or her. Normally, the executive leadership team is comprised of the department heads. For example, the leader of the delivery staff is almost always on the ELT. This way the employees from each department are represented. These three bodies, the board, the managing partner and the Executive Leadership Team Act much like the checks and balances system in our government. For instance, the board is the legislative branch. The managing partner is the executive branch. In the executive leadership team is the judicial branch. The ultimate power sits with the owner or owners. The board answers to the owner. Think of the owner or owners, much like you would think about the shareholders of a public company. They own the company, but they do not run it. They elect a board to represent them and the board, selects a managing partner to run the firm. I’m dramatically oversimplifying, but does this basic structure make sense?

Sean Magennis [00:05:06] It certainly does in simplicity is preferred, makes it makes total sense. And I can clearly see how this power structure enables a firm to scale. And I do recognize how different this is than a small firm with all roads leading to a one shot caller.

Sean Magennis [00:05:26] And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined 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.

Russ Perry [00:05:52] Hey there, my name is Russ Perry and I’m the founder and CEO of Design Pickle. Design Pickle offers, flat rate graphic design and custom illustrations to fit any team’s needs. We work with marketing teams, agencies and entrepreneurs across the world. Turn to us to help level up and scale your creative content. Find out more at designpickle.com.

Sean Magennis [00:06:12] 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 [00:06:30] OK, this takes us to the end of the episode, let’s try to help listeners apply this, Greg. 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 that we aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your decision making is working for you. If you answer no too many times your decision making is more than likely getting in the way of your attempts to scale. Let’s begin with the questions.

Sean Magennis [00:07:14] Number one, have you transitioned from a growth stage boutique to a scale stage firm?

Greg Alexander [00:07:21] So the way that you would know that is when your aspirations change. So are you moving from aspiring to make more money. To building a firm that’s bigger than you, you know, moving beyond a lifestyle business. So that’s how you would answer that question.

Sean Magennis [00:07:37] That’s a good distinction. Number two, are you attempting to become a market leader? For example, one of the 4100 firms who have reached scale.

Greg Alexander [00:07:47] And if you are so now, if you’re going from scale to market leadership, then you absolutely need to embrace democracy over dictator.

Sean Magennis [00:07:55] Number three, do you have a dictator in place today?

Greg Alexander [00:07:58] If you do try to try to handle a a peaceful transition of power, a coup d’etat is not a good idea.

Sean Magennis [00:08:07] Number four, have the dictators once great instincts begun to deteriorate? Number five, have the number of decisions to be made gone up considerably? Number six, has the complexity of the decisions to be made increased substantially? Number seven, does it make sense to distribute authority closer to the client?

Greg Alexander [00:08:31] Right, so if you answered yes to five and six, the number of decisions in the complex decisions has increased, then it does make sense to distribute authority close to the client. However, if you’re running a very simple business with very few decisions to make in the ones, you do have to make a simple that. Maybe not.

Sean Magennis [00:08:48] Yep, got it. Number eight, do the employees want a greater say in policy making? Number nine, do the owners want to delegate decision making more?

[00:08:59] So this is what’s in it for the owners. You know, if if they have to make every decision every day, they’re probably working more than they want to make, more than they want to work. So by distributing decision making down to trusted lieutenants who can do it for them, they actually reduce their workload.

Sean Magennis [00:09:13] And work smarter, not harder.

Greg Alexander [00:09:14] It’s exactly right.

Sean Magennis [00:09:15] And number ten, do you have a person capable of serving as a managing partner?

Greg Alexander [00:09:20] So this is the biggest issue. Dictators, right. Those that are the founders that drive their firms to certain level of success, they oftentimes don’t want to relinquish power. So the way to do it, at least the way that that I did it and those that I’ve seen, pull this off, do it as they grow their own. Yes, risk is really high when you’re bringing somebody in from the outside. But if you’re if you’re grooming a successor over a number of years, this becomes easier.

Sean Magennis [00:09:45] I love it. The institutional knowledge. Yes, the culture knowledge is so key. So in summary, we do love our founders. They had the guts to start the firm and the skill to grow it. However, growing a boutique and scaling it are two very different things. Scaling does not mean doing more of what you are doing. It means doing what you would doing differently. This is the point whereby dictators plateau and a new governance system is needed.

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. Greg, thank you.

I’m Sean Magennis and thank you, our audience for listening.

Episode 44: The Boutique: How to Split Up the Pie in a Professional Service Firm

Splitting the equity in a partnership is difficult. However, there is a proper way to do it that results in lots of wealth being created. Learn how to fix broken legacy partnership agreements as you grow, scale, and exit.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host on this episode. I’ll make the case that splitting up the equity in a partnership is difficult. However, there is a proper way to do it and it results in lots of wealth being created. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s Chief Investment Officer, Greg has helped many boutique owners fix broken legacy partnership agreements. Greg, good to see you and welcome.

Greg Alexander [00:01:09] It’s good to be here, Sean and you are correct, I was just helping an owner unravel a one sided agreement. Splitting up the pie is very tricky.

Sean Magennis [00:01:16] OK, let’s start there. Share the story with us.

Greg Alexander [00:01:19] OK, so a husband and wife team started a marketing agency and early on they promoted a key employee to partner and gave them 20 percent of the equity. This was in response to the employee receiving an attractive job offer from another agency. In the beginning, everyone was happy and it seemed to be working. As time went on, the husband and wife started resenting the new partner. The new partner was not delivering the expected revenue, yet he was getting distributions from their efforts.

Greg Alexander [00:01:52] Also, the husband and wife wanted to take the agency in a new direction, but the new partner did not. He resisted and the way the operating agreement was written as he was able to stop it. The situation deteriorated and got hostile, with lawyers and others coming in, a valuation firm was hired to figure out a buyout price. Of course, no one could agree on what his 20 percent was worth and how the buyout would be paid over time. It got ugly and it looks like 20 percent of the equity is now dead equity.

Sean Magennis [00:02:26] So, Greg, what’s going to happen in this situation?

Greg Alexander [00:02:28] Well, they are still fighting and a resolution has not been agreed to yet. However, I’m glad, you know, we let off with this story because there’s a big lesson to be learned here from this example.

Sean Magennis [00:02:39] Greg, what is that lesson?

Greg Alexander [00:02:41] So equity arrangements need to be flexible. So for our listeners, the evolutionary path is a startup that becomes a growth firm, that becomes a firm at scale and then eventually becomes a firm an exit. And equity splits need to change as they move along this life cycle, for example, it is almost impossible to split equity as a startup. There are no clients, there’s no revenue, no profits. It’s also almost impossible post startup in the growth stage. Yes, there are clients and revenue, but there’s no intellectual property or intellectual capital to be valued at that time. The firm is still not worth anything because nobody would buy it. 100 percent of zero is zero. This changes in the scale stage as the firm is now worth something and it changes again in the exit stage because after exit, some partners are leaving and some are staying on. That dictates the need for a new equity split.

Sean Magennis [00:03:38] Greg, this is so key. And before we move on to scale and exit, how should a boutique owner split equity at a startup or in the growth stage?

Greg Alexander [00:03:46] So when starting the firm, I recommend valuing the equity solely based on contributed capital. So, for example, let us say it takes a startup boutique a million dollars to launch. So if you put up 300K and I put up 700K then the equity split is 30 percent you and 70 percent me. A lot of boutique owners split up equity based on sweat equity instead of contributing capital. And this is a big mistake and it leads to hardship down the road. So why is that? Well, it’s impossible to accurately assign a value to sweat equity. So, for example, what percentage of equity should go to a great rainmaker versus an average rainmaker? The questions too difficult to answer instead. Sweat equity is accounted for in salaries, not in equity. For instance, if a partner was responsible for project management, they get paid a salary that reflects the going rate for a project manager. That is the value of the role and it is set objectively in the open market. Does that make sense?

Sean Magennis [00:04:45] Yes, it does. But what happens when a partner does not have any capital to put into a firm at launch, but over time ends up contributing a lot to the firm as it scales? OK, so now you’re talking and this happens all the time and therefore equity splits need to be dynamic, not static.

Sean Magennis [00:05:02] Yes.

Greg Alexander [00:05:02] So in this case, the partners use a tool called the Buy-Sell Agreement. This is a contract that stipulates how a partners share of a business can be bought and sold. It defines that equity splits can happen under certain conditions and it defines exactly how it will happen. For example, it is common that the buy sell agreement establishes how shares in the firm will be priced, who they can be sold to, how they would be paid for, etc.. So having a buy sell agreement in place provides the needed flexibility to dynamically adjust equity splits at as circumstances change.

Sean Magennis [00:05:37] Greg, is this common?

Greg Alexander [00:05:39] Well, yes and no. Buy-Sell agreements are well-worn territory and are an established best practice. A boutique owner could hire an attorney and get one in place very quickly and inexpensively. However, many boutique owners do not have one in place. And you might ask why? Well, this is because founders think they do not need them. They cannot imagine a scenario where the need for one would arise. This is foolish. If you scale your firm in one day, go to sell it. There is a better than average chance someone other than the founder has equity. Founders want to keep all the equity, but I remind them that 100 percent of zero is zero. Sharing the wealth with those who earn it is a very good idea. In my experience. When the founders shares the wealth, more wealth is created for everyone. Magical things happen when employees become owners.

Sean Magennis [00:06:26] That’s excellent advice, Greg, and great examples. Thank you. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Tad McIntosh [00:06:59] Hello, my name is Tad MCIntosh, I own HumCap, a human resources consulting and recruitment forum. We help small businesses with their growth, human resources and recruitment needs. We get asked very often about how we can help you have strategic value in human resources in your growing company. We also get ask what are the risks in H.R. as I grow my company? We solve these problems by building customized H.R. and recruiting solutions for each and every one of our clients. If we can help you with your needs, with our experience and recruiting professionals, please call me at 469-484-6023 or email me at [email protected] Thank you and have a great day.

[00:07:51] 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. So, OK, this takes us to the end of the episode, let’s try to help listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool as a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your equity splits are working for you. If you answer no too many times, your equity split is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:08:52] Number one, is your firm owned by more than one person? Number two, do the owners contribute to wealth creation in different proportions? Number three, are the owners at different stages in life?

Greg Alexander [00:09:09] Yes, so we should talk about that. So if you start your firm and someone’s in their 50s and someone’s in their 20s, you know, over time that person in their 50s is going to want to exit before the person in their 20s. So that’s the reason. That’s just an obvious example of why dynamic splits as opposed to static splits.

Sean Magennis [00:09:28] That makes a lot of sense. Number four, do the owners have different financial needs?

Greg Alexander [00:09:33] Some might need more cash, so therefore they get a higher salary. Some might be more interested in long term wealth creation. So they take a lower salary to get a higher equity split.

Sean Magennis [00:09:42] Again, makes total sense. Number five, do the owners have different visions of the future? Hence your example. Number six, have the partner contributions fluctuated over the years?

Greg Alexander [00:09:55] And again, this is another good governance seal of approval here. If the equity split is dynamic, then somebody can’t rest on their laurels just because they got, let’s say, 20 percent of the firm, you know, at year three and year ten if they’re not contributing, then they should not hold on to the 20 percent in perpetuity forever.

Sean Magennis [00:10:14] Yep. Number seven, has resentment crept into the relationships?

Greg Alexander [00:10:19] Its all the time. Business partnerships are like marriages.

Sean Magennis [00:10:22] Yep. Number eight, are you living with a legacy ownership structure that is now outdated?

Greg Alexander [00:10:28] Yep.

Sean Magennis [00:10:29] Number nine, will rising stars require equity to be retained?

Greg Alexander [00:10:34] Yeah. And the foolish owner here says, well, fine, I’m not going to give him equity. Well, those rising stars will quit. They’ll go start their own firms and now you’ll have new competitors and you’ll have a talent drain. So, you know, don’t be penny wise and pound foolish.

Sean Magennis [00:10:52] Great advice, Greg. And then to wrap us up, number ten, has the ownership structure distorted policymaking?

Greg Alexander [00:10:59] Yeah, and that’s a separate issue. Governance is separate than ownership. So you could have different classes of shares with different voting rights, but that’s a whole nother topic for another day.

Sean Magennis [00:11:07] Yep. Thank you, Greg. In summary, during the start up and growth stage of a firm development, split up the equity based on contributed capital. However, as the firm scales put a buy sell agreement in place, this converts dysfunctional static equity arrangements into healthy, dynamic ones. This will result in more wealth for everyone involved. 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.