Episode 23: The Boutique: EXIT HACK: BUILDING A LARGE UNIVERSE OF POTENTIAL BUYERS

A key to selling your professional services firm is building a wide and deep universe of potential buyers. On this episode, we discuss how to develop broad interest with potential acquirers.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with the show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that the key to selling your firm is to build a wide and deep universe of potential buyers. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg, maybe more than any other thought leader understands how to develop broad interest in a boutique from potential acquirers. Greg, great to see you and welcome.

Greg Alexander [00:01:06] Thanks, pal. Great topic today. By the end of this show, I hope our listeners learn how to tilt the supply and demand equation in their favor.

Sean Magennis [00:01:13] Amen. So maybe we should start out with that very thing. Supply and demand. How does this economic theory apply to selling a professional services firm?

Greg Alexander [00:01:25] OK. It might not be obvious, so let me explain. Supply and demand will impact one’s ability to sell the firm. Let’s consider first the supply side. If there are many boutiques like yours available for sale, valuations are going down and the opposite is true. If you are the only firm in your niche willing to sell, valuations are going up. And if we flip the coin, and considered the demand side. If the universe of buyers is wide and deep, the chances of a successful exit increase. If the number of potential buyers is small, exiting will be difficult.

Sean Magennis [00:01:58] Excellent. I can see how supply and demand effect valuations and the probability of exiting. This begs the question, how does an owner of a boutique manipulate supply and demand?

Greg Alexander [00:02:10] So this is where the investment banker earns his feet. It is their job to generate lots of demand for your firm. They are skilled at doing this using a variety of methods, starting with market maps, adjacencies, segmenting the private equity investors and many others. They are experts at throwing a wide net.

Sean Magennis [00:02:31] Greg, it’s one thing to build a list and yet quite another to generate real interest from firms on this list. How is this done in your experience?

Greg Alexander [00:02:42] This is where the owner and the banker need to partner. The investment banker will build an exhaustive list of potential buyers. But he or she will need the owner’s help preparing the pitch. An owner can contribute at this stage, by given the banker compelling strategic rationale to buy your boutique and I advocate for developing this deal, rationale for each buyer, for customizing it for that specific buyer. This will increase the positive response rates the investment banker generates.

Sean Magennis [00:03:14] Excellent Greg. So let’s save our listeners some time by giving them some examples of what might go into such a customized pitch.

Greg Alexander [00:03:24] There are many, but here are a few since our show is meant to be short. Maybe buying a boutique opens up a new market for a strategic acquire. Or maybe if I buy your boutique, it will strengthen my value proposition and help me sell more of my core services. At times I must acquire because I’m at a competitive disadvantage in buying new fixes that a common one these days is firms buy boutiques to diversify revenue streams. For example, my firm has too much client concentration and I can buy you. Which brings a whole new set of clients. These are but a few, do you get the picture?

Sean Magennis [00:04:03] I do Greg, so simple and practical examples listeners can use as a starting point. Really excellent.

Sean Magennis [00:04:13] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Brenda Hurtado [00:04:39] Thank you, Sean. Hi, my name is Brenda Hurtado. I’m president of The Point Group. The Point Group is a marketing communications firm built from a different model. We’re an integrated full service agency with strategists from both the agency side and the client side. Our unique combination of business acumen and marketing expertize brings a fresh perspective and approach to find creative solutions that truly make a difference and drive business results. For more than 25 five years, we’ve worked with startups, the Fortune 50 brands to help them enter new markets, position them for growth and improve their customer engagement strategies. At the Point Group, we create work that works to learn more about the company. See us at thepointgroup.com.

Sean Magennis [00:05:23] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the Collective54.com.

Sean Magennis [00:05:40] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple. By asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, you have a large universe of buyers. If you answer no too many times your buyer pool is too small, which means you might not be able to exit. Let’s begin.

Sean Magennis [00:06:21] Do you know how many firms like yours are for sale?

Greg Alexander [00:06:25] Quickest way to find that out is play the role of an acquirer. Pick up the phone, call people and say, hey, you want to sell your firm? I’m interested in buying. And you can get a really quick gauge for how many firms like yours are for sale.

Sean Magennis [00:06:36] Excellent. Number two, have you completed a market map?

Greg Alexander [00:06:42] For those in our family with that term, does Google market map, and there’s lots and lots of how to step by step guides to create one.

Sean Magennis [00:06:49] Correct. Number three, has this market map produced an exhaustive list, exhaustive list of potential buyers? Number four, does this map include adjacent markets?

Greg Alexander [00:07:02] Yeah, and this is important. Don’t think too narrowly. You know, there’s markets to the left and right, a view that also contain possible acquirers.

Sean Magennis [00:07:10] Number five, does the map include private equity firms with a known interest in firms like yours? Number six, have you developed the strategic rationale to buy your firm? Number seven, have you customized this deal rationale for each potential buyer? Number eight, do you know the leading investment banker in your niche? Number nine, have you approached them about representing? And number ten, has this investment banker creatively enlarged the universe of potential buyers for you?

Sean Magennis [00:07:56] In summary, keep in mind that supply and demand will impact your exit. Take the time to strategically approach the market. The goal is to build a wide and deep universe of buyers. There are many more buyers than you likely realize, some of them just might respond well to what you have built. And one of them might be willing to pay you a lot for your firm.

Sean Magennis [00:08:24] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 22: The Boutique: The Quickest Way to Scale

A change to your pricing strategy is perhaps the quickest way to scale. It does not require an investment to implement and the benefits are immediate.

TRANSCRIPT

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host on this episode. I will make the case a change to your pricing strategy is the quickest way to scale. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is truly an expert in the pricing of professional services. Greg, great to see you and welcome.

Greg Alexander [00:01:03] Sean, it’s good to be with you. I look forward to helping our listeners pick some low hanging fruit today.

Sean Magennis [00:01:08] Excellent. And in this instance, I would say the fruit is not low hanging. It’s on the ground. So our listeners just need to bend over and pick it up. Greg, why is a change in pricing strategy the quickest way to scale?

Greg Alexander [00:01:24] Because it does not require an investment to implement. There is not staff to add or service offering to develop, and the benefits are immediate. Charge more today than you did yesterday.

Sean Magennis [00:01:34] And you feel most owners of boutiques mess up their pricing strategy and get this wrong. Why do you feel this way?

Greg Alexander [00:01:41] So there are several reasons. So boutiques often do not know what their services are worth to their clients, and they are often unaware of what clients are willing to pay for the services. Many firms cannot even logically explain to prospects why they charge what they charge. And worse, they cannot quantify the amount of value the prospect receives from an engagement. Too often, the pricing strategy is in without it’s based on intent, internal costs, worse boutiques rely too heavily on what their competitors charge for similar services. And lastly, the BD team are often awful at overcoming sales objections, and they come up in the sales campaigns.

Sean Magennis [00:02:25] You know, wow Greg, I counted seven mistakes firms are making in your response. It appears pricing strategy is a real obstacle, preventing boutiques from scaling. Is there a solution to this problem?

Greg Alexander [00:02:38] Yes. The good news is, is that this problem is simply salt. It takes some sound judgment, but the pricing best practices are readily available.

Sean Magennis [00:02:48] Can you give our listeners a few to get them going?

Greg Alexander [00:02:51] Sure. So the first recommendation is to develop a pricing strategy that matches your business strategy. So, for example, if a firm sells to small businesses, the high volume, low price model makes sense. If you sell complex solutions to large companies, a high cost, low volume approach is best. Another recommendation is to focus on price positioning as it affects perception. And in this context, perception is reality. The price you charge sends a signal to the client. If you price too low, your work will be considered low quality. If you price too high, you will be perceived as being difficult to engage. If you price the same as your competitors, you’ll be perceived as undifferentiated. And one more might be to understand what clients value at the attribute level. A mistake owners of pro serve firms make is they think in the aggregate. When it comes to pricing, be sure to understand what attributes of your offering are valued most in influence to perception of your performance in this specific area. This will result in the ability to charge more. There is more perceived value here.

Sean Magennis [00:04:12] Greg, that’s really fantastic advice. So three specific takeaways that I’m seeing is match the pricing strategy to the business strategy, your price positioning and price at the attribute level, not in the aggregate. Greg, you have an incredible track record and the story of SBI’s  pricing strategy has become legendary in some circles. Can you briefly share it with the audience as a way to bring these ideas to life?

Greg Alexander [00:04:43] Yeah, I think calling it legendary is a bit much, but I can say it was a key to our scaling quickly. So my firm was a management consulting firm and the management consulting industry is structured into three tiers. Tier one of the mega firms think McKinsey and Bain, etc. Tier two are the midsized boutiques and tier three other small startups. So my firm, SBI, was a Tier two management consulting firm, a mid-sized boutique highly specialized in the niche of B2B sales effectiveness.

Greg Alexander [00:05:22] My price positioning approach was to price below tier one, but above tier two. And what signal does this send? It sent the signal that we were the best of the tier two boutiques and this had the good fortune of being true. Thank goodness. The practical impact this had on us was a top one percent profitability. Our prices were compared to the mega firms. They were not compared to the Tier two firms.

Greg Alexander [00:05:54] In essence, we created a new tier like a Tier 1A and the scale benefits of this were huge. We threw off loads of free cash flow, which we plowed right back into the business. And this resulted in scaling much faster than otherwise would have been accomplished.

Sean Magennis [00:06:14] Greg, that’s a great real life example. Thank you.

Sean Magennis [00:06:20] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Lauren Davenport [00:06:46] Hi, my name is Lauren Davenport and I own the Symphony Agency, a health care communications firm. We serve U.S. based health care provider organizations with multiple doctors and multiple locations. Our clients turn to us for help when they hit a stage of stagnant growth and need more patients or more staff to reach their projected goals. We solve this problem by developing messaging strategies that connect with their audience and implement outreach programs that extend past their current network to attain the resources needed to reinvigorate their growth. If you’re struggling with stagnant growth and need more patients or staff to reach your 2021 goals, connect with me online at SymphonyAgency.com or by email at [email protected]

Sean Magennis [00:07:39] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com.

Sean Magennis [00:07:56] This takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her for our preferred tools, 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 pricing strategy is working for you. If you answer no too many times, pricing is more than likely getting in the way of your attempts to scale. So let’s begin.

Sean Magennis [00:08:36] Question number one, do you know what your offering is worth to clients? Number two, can you quantify the value of your work in hard dollars? Number three, do you know what clients are willing to pay for your services? Number four, can you explain the logic of your pricing in a way that makes sense to clients? Number five, does your price illustrate to the client the link between price and value? Number six, do you charge the most for the service features that your clients want the most? Number seven, do you charge the least for the service features that your clients do not care much about? Number eight, do you allow for clients to choose their price by presenting options? Number nine, is your sales team skilled at overcoming price objections? And number ten, have you built into your system an annual price increase?

Sean Magennis [00:10:03] In summary, know your worth. Do not undervalue yourself. What you do is exceptional. Price accordingly and scale quickly.

Sean Magennis [00:10:15] 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.

Episode 21: The Boutique: The Ultimate Measure of Productivity

Yield is the ultimate measure of productivity. In this episode, we discuss how professional services firms scale faster by thinking about different ways to improve yield. 

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 yield is the ultimate measure of productivity. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has helped owner’s scale faster by thinking about different ways to improve yield. Greg, good to see you and welcome.

Greg Alexander [00:01:03] Hey, pal. Good to be with you. Appears today we are going to discuss the most often looked at metric in all of professional services.

Sean Magennis [00:01:11] Yes, we are. Yes, we are. To begin. How about you provide us a working definition of yield?

Greg Alexander [00:01:18] Sure. So yield is simply the average fee per hour times the average utilization rate of the team. For example, if a boutiques average fee per hour is 400 dollars and the average utilization rate is 75 percent, then the yield is three hundred dollars per hour.

Sean Magennis [00:01:37] OK. That is really easy to understand. And why is it relevant to our audience, which consists of owners of professional services firms who are trying to scale beyond the lifestyle business?

Greg Alexander [00:01:49] Huh. So it is mission critical to those trying to scale. And here’s why. The typical boutique runs off an assumption of a 40 hour workweek and a 48 week year. This equates to 1972 hours per employee using our earlier example at 300 dollars per hour. The boutique will do five hundred seventy thousand dollars in revenue per employee. So a 100 person firm, let’s say, with this year will do fifty seven point six million in annual revenue. Understanding yield means you understand how much you can scale to. It establishes a ceiling and therefore it is so important for our listeners to understand.

Sean Magennis [00:02:32] Got it. So the suggestion to listeners then is to do the math and determine the scale ceiling. Let’s suppose we don’t like the answer. Greg, we want to scale past the ceiling. What can they do then?

Greg Alexander [00:02:45] Good question. And that is how we want all of our listeners to be thinking, how big can I get? Most boutiques can quote you their utilization rate from memory. This is a well tracked metric and it should be boutiques that have made it past the startup stage, have already optimized for the utilization rate. They would not have survived otherwise. Therefore, an improvement in utilization rate does not lead to scale. The point of diminishing returns has occurred unless, of course, you’re going to ask employees to work on Christmas Day. The scale owners need to turn to fees.

Sean Magennis [00:03:23] So, Greg, just before we jump to fees, let me make sure I recap what was just said. You contend that most firms, when trying to scale, have reached the point of diminishing returns on utilization rates. And you feel this way because there’s only so much juice to squeeze out of the 40 hour workweek and the 48 week year, is that correct?

Greg Alexander [00:03:43] Yes, it is. So have a look at the U.S. business calendar. It is tough to get more than forty eight weeks. Employees need a couple weeks vacation. There are sick days and there are dead periods, such as the week between Christmas and New Year’s and Thanksgiving week, etc.. It is easier to get more than a 40 hour week, especially in the work from home setting as a line between work and life had blurred. Many people routinely work 50 plus hours a week. But in my experience, most of these extra hours are non billable. So they did not move the revenue line that much.

Sean Magennis [00:04:18] Okay, so let’s assume the 1920 hours per employee assumption holds as there’s not much one can do to improve it. Now you say it’s time to turn to fees. Why is that?

Greg Alexander [00:04:31] Yes. So remember, this is an equation with only two variables utilization rate and dollars per hour. Owners of boutiques have more juice to squeeze out of the dollars per hour variable and impacting the dollars per hour variable is not as easy as raising prices.

Greg Alexander [00:04:48] Most boutiques are in competitive markets. The intense competition drives downward pressure on fees. So if this is true for our listeners, what can they do to impact dollars per hour? So key to scaling in this context is to figure out how to become more valuable to clients. Clients will pay more for boutiques that bring more value to them. This is because clients turn to boutiques for specialization. These clients have moved away from the huge generalist firms. They are willing to pay more for highly specialized expertise.

Sean Magennis [00:05:27] That makes total sense, Greg. So it appears the key to higher prices is more specialization. Can you give the audience some ideas on how to increase their specialization?

Greg Alexander [00:05:38] Sure. In my experience, there are five forms of specialization that translate to higher fees, and they are, so number one specializing by industry vertical. Number two, specializing by function. So I serve the CFO or I serve the CTO. Number three is specialize in by segment. So I call on large enterprises or I call on consumers or I call on small business owners, etc. Number four is specializing on problem. So cyber security risk is a problem and I specialize around that. Number five, I specialize in geography. So here we are in Dallas, Texas, and I serve clients in Dallas, Texas. So let me give you a hypothetical example of a highly specialized firm. Clients would pay a premium for a consulting firm that helps product managers and enterprise software companies in Silicon Valley move to the cloud. To notice the five forms of specialization, we had the industry software companies, we had the function product managers, we had the segment enterprise, we had the problem moved to the cloud and we had the geography Silicon Valley. This firm’s yield, if it existed, would be high because it could charge a lot more.

Sean Magennis [00:06:56] That’s an excellent illustrative example. Thank you, Greg. And now a word from our sponsor Collective 54. Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Tony Mirchandani [00:07:30] Hello. My name is Tony Mirchandani. I’m the owner of RTM engineering consultants. We’re a national engineering firm focused on the built environment. We provide civil, mechanical, electrical, plumbing and specialty services around the country. Our growth has come 50 percent through acquisitive growth and 50 percent through organic growth, as well as partnering with architects and developers. If there’s anything we can do for you, please feel free to reach out to me. I can be reached at [email protected]

Sean Magennis [00:08:04] 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 this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, you are running a tight ship with excellent yield. If you said no too many times, you have a yield problem. And this will be an impediment to scaling.

Sean Magennis [00:08:59] Let’s begin. Number one, are your average utilization rates above 85 percent? Number two, senior staff above 70 percent? Number three, mid-level staff above 80 percent? Number four, junior staff above 90 percent? Number five, are you average fees above 400 dollars per hour? Number six, senior staff above seven hundred and fifty dollars an hour? Mid-level staff above 500 dollars an hour? And number eight, junior staff above 250 dollars an hour? Number nine, are you assuming a forty eight week year and 40 hours per week? And number ten, are you distinguished from the generalist, with three to five forms of specialization?

Sean Magennis [00:10:19] In summary, yield is the ultimate measure of productivity for professional services firms. Watch out for the trap of over rotating to utilization rates and under-indexing the second variable in the equation, which is dollars per hour. Drive up your fees by becoming more valuable to your clients, by becoming hyper specialized. If you do so, the limit on your scale is the sky.

Sean Magennis [00:10:52] 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.

Episode 20: The Boutique: The Best Way to Get the Highest Price

The best way to get the highest price for your firm at exit is to get the comps right. In this episode, we discuss how to drive up valuations through the proper positioning of professional services firms.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal for this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I’ll make the case that the best way to get the highest price for your firm at exit is to get the comps right. I’ll try to prove this by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is a master of driving up valuations through the proper positioning of professional services firms. Greg, good to see you and welcome.

Greg Alexander [00:01:06] Thanks, Sean. I’m looking forward to making our listeners some money today.

Sean Magennis [00:01:09] I love it. Let’s begin by grounding the audience in a definition of a comp. What does that mean?

Greg Alexander [00:01:17] So the term comp, comps, is short for the word comparables and the word comparables is meant to define the valuations in the terms, firms like yours get when they sell. For instance, the last time you sold your home, the price you sold for was determined by the price of similar homes in your neighborhood. By looking at comps, a buyer can get a feel for the fair market value of a firm.

Sean Magennis [00:01:44] Got it. So the last time we bought a home, our real estate agent provided me the cost per square foot of homes in our neighborhood and how they were selling. In essence, these were comps. So when selling a firm, does it work the same way?

Greg Alexander [00:02:00] It does. But in this case, there is no real estate agent. Instead, there is an investment banker who performs similar duties. Also, in this case, there is no cost per square foot. Instead, there is a multiple of EBITDA, which determines how much a firm is worth. Am I making sense here?

Sean Magennis [00:02:18] Yes, you are. So owners of firms hire typically an investment banker who markets the firm to potential buyers. And the price of the firm is determined by the multiple of EBITDA. Can you help the listeners understand how comps play a role in this?

Greg Alexander [00:02:36] Sure. It’s pretty straightforward. So when I sold my firm, I hired M.H.T. as my investment banker. I chose them because they had represented firms in my niche before and had firsthand knowledge as to how much firms like mine were sold for. This established our comps in practical terms when the price I was seeking from buyers was challenged. They justified our asking price by referencing the comps.

Sean Magennis [00:03:02] Got it. So I think it would be great. Greg, if if you could share with the audience how category positioning affects the comps.

Greg Alexander [00:03:10] Sure. So I’ll use my personal story as the use case here. So my firm, SBI, was originally placed in the sales training category and this was not correct. We did not train sales teams. We were a management consulting firm specializing in sales effectiveness. The correct comps for us were other management consulting firms. This distinction was a big deal as it affects EBITDA multiples greatly. At the time, sales training firms were being bought for five and a half times EBITDA. Management consulting firms were being bought for nine times EBITDA. In addition, sales training firms were not perceived to be high growth firms. Yet my firm had a 10 year compounded growth rate of 30 percent when we were correctly positioned. As a high growth firm in the management consulting space, our multiple went to 11 times EBITDA. These two modifications to how our firm was positioned resulted in a multi-million dollar increase in the purchase price.

Sean Magennis [00:04:18] Greg, that’s that is a great story and it solidifies the mission critical nature of really getting the comps right. So this aspect of exit readiness is literally worth millions.

Greg Alexander [00:04:31] It truly is.

Sean Magennis [00:04:35] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Brandon Hernandez [00:05:01] Hello. My name is Brandon Hernandez. I am the owner of Wholegrain Consulting. We service clients in the USDA, FDA and CPG food landscape. These clients turn to us for help in supply chain, Q8, QC, regulatory compliance, command source and selection and negotiation, and a small research and development arm. We solve this problem by being an outsourced, hourly, customizable solution for your company. If you need help with any of these areas, please reach out to www.whole-grain-consulting.com or you can reach out to me directly at [email protected] Thank you.

Sean Magennis [00:05:42] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:05:59] OK, so this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 yes-no questions. In this instance, if you answer yes to eight or more of these questions, you have your comps right. If you answer no too many times, you might lose millions because your comps are not accurate. So let’s begin.

Sean Magennis [00:06:38] Number one, do you have a list of boutiques in your category that recently sold? Number two, do you know the price paid for each of them? Number three, do you know the deal terms for each?

Greg Alexander [00:06:57] You know, right now our listeners are saying no, no and no to the first three questions, and that’s followed up with. I get why you want this data. How do you get it? Let me tell you how I did it. I just picked up the phone and I called the owners of these boutiques. And an interesting thing happened, which is worthy for the listeners right now. People love to brag about their deals.

Sean Magennis [00:07:16] Yes, they do.

Greg Alexander [00:07:17] So when you ask him, what did your firm sell for? They stick their chest out and they give you their big number. We ask him, you know what, the terms of the deal, where they express it to you. So don’t be bashful. Just pick up the phone. You’d be surprised what you find out.

Sean Magennis [00:07:31] Great advice, Greg. Number four, do you know the investment banker who represented each? Number five, do you know the names of the investors who bid on each of these deals? Number six, do you know who won the deal for each? Number seven, do you know exactly why the winner won?

Greg Alexander [00:07:56] And the right investment banker can help you answer all of these questions.

Sean Magennis [00:08:00] Precisely. Number eight, is your boutique in the correct category? Number nine, is the correct category for your boutique, obvious to potential buyers?

Greg Alexander [00:08:13] You know, that’s an interesting question, because I learned from my personal experience. I just assumed that people that were looking at my business knew that we were a management consulting firm. And what I realized was, is they had no idea, you know, who we were, what we did. And they defaulted us to the wrong category. And if I didn’t correct them…

Sean Magennis [00:08:34] Yep.

Greg Alexander [00:08:35] It would have cost millions.

Sean Magennis [00:08:37] Excellent point, Greg. And finally, number ten, you trying to sell your boutique to the right group of buyers?

Greg Alexander [00:08:45] There’s people out there that are looking for your type of business. And there’s people out there that would never buy your type of business. So make sure that you don’t waste any time talking to the wrong buyer group.

Sean Magennis [00:08:57] Excellent, thank you, Greg. And in summary, comps are very important. They can add and subtract a huge amount to the purchase price and they can significantly alter deal terms. Be sure you are positioned in the correct category and be sure to pursue the correct buyer group.

Sean Magennis [00:09:19] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thanks for listening.

Episode 19: The Boutique: A Smart Strategy to Make Scaling Easier

A lack of lifecycle awareness and management prevents scale. It results in expensive senior people doing junior work. Boutiques with poor cash flow and low client satisfaction do not 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’ll 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 Gregg Alexander, Capital 54’s founder and chief investment officer. Greg has developed an approach to solving this problem. It’s called lifecycle management. And I’d like him to share that with you. Greg, great to see you. Welcome.

Greg Alexander [00:01:09] Hey pal, good to be with you. I think it was Aristotle that once said when asked the key to happiness, know thyself. Today I’m going to modify this quote in state when asked the key to scaling know thy firm.

Sean Magennis [00:01:24] Excellent. So why do you feel boutiques need to know thyself when trying to scale?

Greg Alexander [00:01:31] Sometimes boutiques suffer from an identity crisis. They are 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. You see, conflicting client needs drive, confusing staffing models, and this leads to overly complex financials. For instance, one month there is not enough work and employees are underutilized. And yet the next month the firm is at 120 percent capacity. These violent swings between boom and bust make it very hard to scale.

Sean Magennis [00:02:09] Yeah, I can see how this can make managing the boutique difficult and frustrating. So what advice do you have for listeners who might be suffering from this?

Greg Alexander [00:02:19] So the first step is to understand what type of firm you are, in my opinion. There are three types of firms. First, we have what we call an intellect firm. Intellect firm is hired by clients to solve difficult never before seen one of a kind problems. These firms are staffed by brilliant people, very senior, with lots of experience. An example might be a think tank or something like that where there’s P.H.D.’s everywhere. Second, we have what we call a wisdom firm, a wisdom firm decided by clients because they are a been there and done that style of firm. The client problem is new to that client, but is not a new problem. Others have had it and wisdom firms have accumulated the wisdom to solve this problem. These firms are staffed in a traditional sense. Partners, mid-level managers and some junior staff examples to think about from the consulting industry are firms like Bain and McKinsey and Boston Consulting Group. Third, we have what we call a method firm, a method firm hit hard by clients because of their unique methodologies. The problem is well understood by the client, but by hiring a method firm. It can be solved faster and a lot cheaper. These firms are staffed with lots and lots of junior staff who have been trained on this highly procedurized method. Examples are the BPO firms such as Accenture and the like.

Sean Magennis [00:03:59] Got it, Greg. So three types of firms, intellect, wisdom and method. But I’m I’m not connecting the dots as to how this understanding helps firms scale.

Greg Alexander [00:04:13] OK, so let me explain. So imagine you are in Method’s firm in one of your BD people sell an intellect like Project, a never before seen one of a kind problem. How will this project be staffed?

Greg Alexander [00:04:27] Well, it cannot be because a method firm does not have a bunch of gray haired P.H.D.’s lying around. This forces them to go outside the firm and either rent some contractors or hire some new talent. Both approaches come with different salaries and utilization rates, and this will blow up staffing in the financial models. Or let’s say imagine you are a wisdom firm and one of your BD guys goes after a method style project, one where the work can be off-shored or completed with junior staff. Well, in this instance, there will not be enough junior staff to do the work. So what happens? Senior expensive staff now must perform cheap junior level work. This destroys margins in the financial model.

Sean Magennis [00:05:10] Okay, now I get it. So the advice is to collect the type of client and the project to the type of firm you are. Only go off to work that the firm is staffed to handle based on skill level. By doing so, an owner, one of our listeners can predict the skills needed to perform the work. And with this understanding of required skills, the owner can forecast labor costs and utilization rates. And then, with precision on labor costs and utilization rates, the owner can more easily scale the firm. He or she can match the demand coming in with the supply on the org chart. Did I get this correct?

Greg Alexander [00:05:53] Yes, you did. You are about to ask me why owners do not do this. And the answer is because they lack discipline. They think all revenue is good revenue and they take any deal that comes their way when in fact some deals, if taken, can destroy a firm’s ability to scale. Adopting lifecycle management, which is what this is called, requires prudence to go without today for the promise of a better future. Greg, I get the concept, but I’m struggling a little to get the name. The lifecycle management. Can you explain it? Sure. So boutiques like humans have a lifecycle. For instance. They are born. They grow. They scale an exit much like a human is born. Comes of age, matures and dies.

Greg Alexander [00:06:50] And firms like humans are different based on where they are on the life curve. For example, is very common at birth, a firm is an intellect firm. The partners have some secret sauce to a brand new problem. Then as time passes, the secret sauce gets out.

Greg Alexander [00:07:10] Others have it and eventually it becomes a commodity. Well, an owner manages a firm very differently when it is an intellect firm than a wisdom or method firm. Everything is different from the pricing of deals to staffing, utilization, salaries, etc. So lifecycle management refers to the active management by the owner of the boutique as it scales through the lifecycle stages.

Sean Magennis [00:07:36] Okay, now I get it. And it does make a lot of sense. So this is an illustration as to why there are only about 4000 firms out of about one point five million that have actually reached scale. It’s hard to do. And it takes an exceptionally skilled owner to pull it off. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Rich Campe [00:08:24] Hello. My name is Rich Campe. I’m the CEO of Pro Advisor Coach. We serve executive and leadership teams. We partner with organizations to create high performance team cultures of ownership and radical honesty. Our key is gamification. It’s about leverage versus effort. What if every player in your team knew if they were winning or losing both personally and as a team in 10 seconds or less? If you’re part of the collective 54 family, please reach out to me directly at 704-752-7760. Check us out at proadvisorcoach.com or [email protected]

Sean Magennis [00:09:05] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the collective54.com. 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 the 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 questions one through three. You are an intellect firm. If you answer to questions, four to six, you are wisdom firm. And if you answer yes to seven to nine, you are a method firm. And lastly, if you answer yes to question, ten lifecycle management should be a top priority.

Sean Magennis [00:10:10] Let’s begin. Number one, do your clients hire you for never before seen problems? Number two, do you employ leading experts in the field? Number three, do you have legally protected intellectual property? Number four, do your clients hire you because you have solved their problem before? Number five, do your clients hire you because you have direct, relevant case studies? Number six, do your clients hire you because you help them avoid common mistakes? Number seven, do your clients hire you because they are busy and need an extra pair of hands? Number eight, do your clients hire you because you can get the work done quickly? Number nine, do your clients hire you because you have an army of trained people to deploy immediately? And number ten, does your service offering start out as leading edge and over time become a commodity?

Greg Alexander [00:11:26] OK, so just a quick recap there. So yes, to one through three, your intellect. Yes to four to six, you’re wisdom. Yes to seven and nine, your method. And then obviously, number ten is regarding lifestyle management. So does your service offering start out as leading edge and over time become a commodity? If you answer the questions that answer, that question is yes, then you should prioritize lifecycle management.

Sean Magennis [00:11:48] Great. Thank you, Greg. So in summary, a lack of lifecycle awareness can make scaling more difficult than it needs to be. It can lead to poor cash flow and unhappy clients and employees.

Sean Magennis [00:12:01] 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.

Episode 18: The Boutique: How to Determine if Now is The Time to Exit

There is a good time to sell. And there is a bad time to sell. Unfortunately, this is largely out of your control. Focus on building a highly desirable boutique and be patient. Wait for the sun to be shining.

TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that there is a good time to sell your boutique and a bad time to sell your boutique. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has developed a set of indicators that firm owners can use to help time an exit. Greg, great to see you. Welcome.

Greg Alexander [00:01:07] Thanks, Sean. Good to be here. And what a great topic we have today.

Sean Magennis [00:01:09] Yeah, let’s jump right into it. So how can an owner of a boutique professional services firm determine if the time is right to exit?

Greg Alexander [00:01:17] The first point I’d like to make is that timing does really matter. Often firm owners do not appreciate this fact. They are compelled to sell for some personal or operational reason. And they put themselves up for sale regardless of the macro environment. And when they are unable to find a buyer, they get frustrated.

Sean Magennis [00:01:36] Greg. So true. And forecasting the future can be extraordinarily difficult. So how can a listener understand when the time is right?

Greg Alexander [00:01:48] So I’ve developed a list of indicators that can point to optimal timing. You’re right. Forecasting with precision is tough here, but there are some indicators that can maybe get you 80 percent of the way there. Things to pay attention to, allow me to share a few.

Sean Magennis [00:02:03] Great.

Greg Alexander [00:02:04] First. Pay attention to the deal activity in your niche. Niches get hot and they get cold. If firms like yours are being bought, this would suggest that it’s a good time to sell. Second, analyze the transactions and try to determine the drivers behind the recent activity. Why are firms like yours being purchased at this particular moment in time? This will indicate the strength of the trend. And if it is likely to continue, if it is, then it might be a good time to sell. And then third, it is wise to consider the point in the economic cycle. One finds themselves in, for example, during times of economic expansion, the ability to exit goes up. And in contrast, during times of recession, the ability to exit goes down. Are these making sense?

Sean Magennis [00:02:57] Yes. Greg, they they are. So really pay attention to deal activity in the niche, the drivers behind the activity as a trend predictor, and then the economic cycle. Those are reliable indicators one can use to time an owner’s exit. Are there any others?

Greg Alexander [00:03:18] There are some others. I would encourage our listeners to look at multi-year trends of their particular niche. Investors want exposure to growing markets. If your niche has a healthy organic growth growth rate and has for some time, this is an indicator. The timing is right.

Greg Alexander [00:03:38] I’d also point to the debt markets as they play a big role in the timing of an exit. If the banks are lending and are lending in a deals like yours, the ability to exit goes up a lot. If the banks are tightening, this restricts the funding available for your deal. And this will hurt your ability to close. And the last idea off the top of my head, expanding on the last comment is the pool of available capital in general. Are there large pools of available capital being deployed in your niche? For example, has your niche attracted private equity investors or private lenders or lots of strategic acquirers cetera? The larger the pool of available capital, the more likely you will be able to exit. Now, if the funds are not there, it will be very hard to pull off an exit.

Sean Magennis [00:04:32] Excellent additions to the list of indicators, Greg. So a multi-year organic growth rates, the state of the debt markets and the size of the available pools of capital. All these, our listeners can watch out for.

Sean Magennis [00:04:49] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Bob Dianetti [00:05:15] Hello, my name is Bob Dianetti. I own BrainSpark Talent Development. We serve H.R. and learning and development leaders in the manufacturing and professional services industries. These clients turn to us for help with employee engagement issues. We solve this problem by workforce assessments, followed by pinpoint training interventions. If you need help with disengaged employees, reach out to us at www.brainsparktalent.com or [email protected]lent.com. Thank you very much.

Sean Magennis [00:05:48] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:06:05] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no question. We aim to keep it simple. By asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, it is time to sell. If you answer no too many times, the timing may not be right. Let’s begin.

Sean Magennis [00:06:40] Number one, are they large pools of available capital in your niche? Number two, are the multi year industry trends in your niche favorable? Number three, are banks lending in your niche? Number four, are private lending institutions lending into your niche? Number five, are interest rates low, allowing for deals to get done? Number six, can your boutique handle a decent amount of debt on the balance sheet?

Greg Alexander [00:07:21] So that’s maybe a non obvious one and that’s related to interest rates. So most of these deals will be funded with both equity and debt.

Sean Magennis [00:07:30] Yes.

Greg Alexander [00:07:31] And when somebody is considering how much debt they can put on a deal, they’re thinking about the strain it would put on the PNL. So make sure you understand, you know, how much debt you can handle on your balance sheet and given the interest rate environment, what the debt service requirements would be on the business.

Sean Magennis [00:07:50] Excellent point, Greg. Number seven, are deals happening in your space? And Greg, a quick question on this one. Where does a boutique owner go to find out if deals are being done in the space?

Greg Alexander [00:08:03] Yeah, it’s difficult because most of these businesses are private. So they’re not publicly reported, you know, and required by law. But there’s all kinds of specialty data sources out there that track deal activity, particularly in the private equity world. So, I mean, simply just a Google search.

Sean Magennis [00:08:26] Yes. Then investment bankers who specialize in the space are…

Greg Alexander [00:08:30] That’s another great source for sure.

Sean Magennis [00:08:31] Excellent. Eight, do you know the drivers of this deal activity? Number nine, are you at the right point in the economic cycle? And number ten, if they had to, would a buyer make an all cash offer?

Sean Magennis [00:08:51] So in summary, there is a good time and a bad time to attempt an exit. Unfortunately, this is largely out of your control. However, there are indicators that can help you time your exit. Know what they are. Watch out for them. Listen to what the market is telling you. Be patient. Wait for the sun to be shining bright, then exit.

Sean Magennis [00:09:17] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 17: The Boutique: Where to Find the Cash to Scale

Boutiques run on cash. They do not run on net income nor EBITDA. Some boutiques neglect the management of cash flow. Take a moment to understand how you can improve the flow in and out. In this podcast episode, we look at where you can find cash flow when scaling a business.

TRANSCRIPT

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

I’m Sean Magennis, CEO of Capital 54 and your host on this episode. I will make the case that boutiques run on cash-flow. They do not run on net income or EBITA. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert at helping firm owners boost cash flow. Greg, good to see you. Welcome.

Greg Alexander [00:01:03]: Hey. Good to be with you. Do you remember the movie Jerry Maguire and the famous line, show me the money? Let’s start with that. So on the count of three, let me hear your best “Show me the money.” Are you ready?. One, two, three.

Sean Magennis [00:01:19]: Show me the money.

Greg Alexander [00:01:24]: Awesome, you’re a great sport. I think we’re ready to begin.

Sean Magennis [00:01:27]: Yes, we are, funny enough. I just watched that again recently. It’s a great movie.

Why is Cash Flow So Important When Scaling a Business?

Sean Magennis [00:01:32]: Okay. So why is cash flow more important than net income and EBITDA for a firm trying to scale.

Greg Alexander [00:01:41]: Sure. And when I say casual, I mean simply cash coming in and going out of a professional services firm. And it is different than net income. Net income is a profit a firm makes for a period and is often calculated for tax purposes. Whereas cash flow comes from daily activities, and cash flow is also different from  EBITDA because EBITDA does not consider capital expenditures, which are most definitely cash outflows.

Greg Alexander [00:02:06]: As to why it is more important to boutiques trying to scale, its firms run on cash. They are scaling a business, which means they are pouring the cash back into the business. They would rather invest it than give it to the government or a potential acquirer.

Sean Magennis [00:02:22]: Completely understood. And it’s often said entrepreneurs often seriously mismanage cash flow. Do you agree with the statement? And if so, is it relevant to our listeners?

Greg Alexander [00:02:34]: Yes and yes. In my capacity as Chief Investment Officer at Capital 54, I see our listeners, a.k.a. owners of boutique service firms, trying to raise capital when they don’t need it. They think they need X amount of capital to scale when in fact, they’re often generating enough cash from operations to fund scaling.

Sean Magennis [00:02:57]: And Greg, why does this happen?

Greg Alexander [00:02:59]: This happens because sometimes owners do not know how to boost cash flow because they are not measuring it properly.

Sean Magennis [00:03:06]: Please explain that to our listeners.

How to Scale a Service Business: Ways to Boost Cash Flow

Greg Alexander [00:03:08]: The best way to find ways to boost cash flow is to measure it correctly, and  the best way to measure it is at the project level. Measuring cash flow in the aggregate hides waste. Here’s a recent example. My team recently performed due diligence on a public relations firm seeking to raise growth capital, and they used the following formula. I wish I was on a whiteboard but bear with me here audio audience. 

So cash flow per project equals cash flow divided by fees times fees divided by staff times, and staff divided by project. This revealed a healthy six hundred and fifty thousand dollars per project in this instance. This told me the firm was generating plenty of cash to fund it’s  aggressive expansion plan. Yet they were on a Zoom with me looking to raise money, claiming they did not have enough cash. I’m not sure where the cash was leaking, but it was leaking like an old faucet.

Sean Magennis [00:04:14]: And Greg, the point is to measure cash flow at the project level, not at the firm level.

Greg Alexander [00:04:19]: Yes, exactly.

Sean Magennis [00:04:23]: And now a word from our sponsor. Collective 54 is a membership organization for owners of professional services firms. Members join our mastermind group to work with their industry peers to grow, scale, and someday sell live firms at the right time, for the right price, and on the right terms. Let us meet one of the Collective 54 members.

Nish Parikh [00:04:49]: Hello. My name is Nish Parikh. I owned Rangam Consultants, where empathy drives innovation every single day. We serve Fortune Global 500 companies for their I.T. and all business professional leads. We serve customers in the United States, Canada, Ireland, UK, and India. 

These customers turn to us for help with their disability and autism hiring programs. Every one of us is connected to someone on the autism spectrum or with a disability. The challenge is finding autism-friendly  jobs and matching them to the right candidate where they can be successful. We solve this problem by building a connected community in the workplace through technology. 

We build a formal, structured, and scalable program that seamlessly integrates with our clients’ existing hiring practices. If you need help with your disability and autism hiring program, reach out to me at [email protected] or visit sourceabled.com.

Sean Magennis [00:05:53]: If you are trying to grow, scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the Collective 54 community page. .

Sean Magennis [00:06:10]: So this takes us to the end of this episode, and as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her professional services firm. 

Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only ten questions. In this instance, if you answer yes to eight or more of these questions, your cash flow is not your obstacle to scaling a business. If you answered no a lot, you are not generating enough cash to scale.

Sean Magennis [00:06:48]: So let’s begin. Question number one, will you run out of working capital if you double the size of your firm?

Greg Alexander [00:06:56]: So this happens all the time. You go sign up a bunch of work. You got net 30 terms, which means they pay net 60, and you’re literally growing yourself out of business.

Sean Magennis [00:07:07]: Yep. Got it. Number two, will you need short-term debt if you double your firm?

Greg Alexander [00:07:12]: So, in that instance, now you’re borrowing money just to make payroll.

Sean Magennis [00:07:18]: Number three, will you develop a collections problem if you double your firm.

Greg Alexander [00:07:24]: Here we go.

Sean Magennis [00:07:24]: You said it, right?

Greg Alexander [00:07:24]: Right. So all of a sudden, now you’re, instead of selling projects, you are  chasing bills.

Sean Magennis [00:07:28]: Yep. Number four, will your cash payments exceed your cash income if you double your firm?

Greg Alexander [00:07:36]: Payroll is going to kill you there. Right.

Sean Magennis [00:07:38]: Right. Number five, will you have a hard time getting enough cash on the balance sheet to double your firm?

Greg Alexander [00:07:45]: Right. So the way to handle that, if you’re going to have this cash flow problem, meaning you get paid after you do the work instead of before the work, is you get to build up cash reserves on your balance sheet to carry you through those times.

Sean Magennis [00:07:58]: Number six, when growth has spiked in the past, did your cash flow ever turn negative?

Greg Alexander [00:08:05]: Yep.

Sean Magennis [00:08:06]: Number seven, will payroll growth exceed accounts receivable growth when you double your boutique? 

Greg Alexander [00:08:13]: Yep.

Sean Magennis [00:08:14]: Number eight, will cash flow problems be hidden due to lack of forward visibility?

Greg Alexander [00:08:20]: That happens all the time.

Sean Magennis [00:08:22]: Number nine, will it be hard to generate yield on your cash deposits? Specifically in today’s day and age.

Greg Alexander [00:08:30]: Yes, exactly.

Sean Magennis [00:08:31]: And number ten, will you be at risk of paying your future obligations if you double your firm?

Greg Alexander [00:08:37]: Right. So, I mean, literally, if you think about it, if you’re one of these high growth businesses, which is our listeners, you can grow yourself into a lot of cash flow problems. So you got to be aware of that by asking yourself these ten questions. And there’s so many easy fixes here.

Sean Magennis [00:08:54]: Yes.

Greg Alexander [00:08:54]: And that’s probably content for another episode. But the easiest one just to give you the silver bullet is to get paid in advance. If you get paid in advance, you don’t have these issues.

Sean Magennis [00:09:04]: Love it. So, in summary, boutiques run on cash. They do not run on net income or EBITDA. Do not run out of cash as you try to scale.

Sean Magennis [00:09:16]: 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, thanks for being here. I’m Sean Magennis, and thank you, our listeners.

Episode 16: The Boutique: Tomorrow is More Important than Today.

What have you done for me lately? Buyers of your boutique are purchasing who you are becoming. They are not buying who you have been. Yesterday is worthless to them. They are looking forward. And need to be excited about your potential to improve. 

TRANSCRIPT

 

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

 

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and 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 ability to sell your firm for the right price is more about your future and less about your past. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his perspective on how to prove to investors that your future is very bright. Greg, today’s show will focus on helping owners paint a bright picture for their future. How should our audience begin that process? 

 

Greg Alexander [00:01:14] The big idea for today is continuous improvement. Investors and potential acquirers do not want to buy a development project. They want to invest in a firm that is accretive immediately and whose contribution increases over time. When considering an investment, they will need to understand how a firm continuously improves. 

 

Sean Magennis [00:01:33] Excellent. And how will they do that? 

 

Greg Alexander [00:01:36] Well, there are many ways. Let me share a few just to get the audience thinking a bit. Investors will want to see how and how often a boutique upgrades their methodologies. They do not want to buy firms with aging methods that are no longer attractive to clients. So, for instance, years ago, if you recall, Six Sigma was all the rage. Today, not so much. It is important that boutiques stay on the leading edge. Another way, potential buyers consider firms continuous improvement ability is to plot client satisfaction scores over time. So, for example, if client sat has flatlined, this would suggest a future might not be very exciting. Boutique owners should have a keen eye on the trend line associated with client satisfaction. And here’s one more to consider, technology adoption is often viewed as a sign of a firm’s progressiveness. For example, small management consulting firms are still producing PowerPoint decks as deliverables, whereas the larger firms produce custom apps instead. Today, there seems to be an app for everything. If a firm is still producing decks, it is a sign that they might not make it through this digital transformation wave that is upon us. 

 

Sean Magennis [00:02:58] I get that, Greg. So updating one’s methodologies consistently, improving client sat over time and technology adoption are three ways to prove to an investor that a firm can continuously improve. These are three excellent practical examples, and I’m sure there are others. Greg, are there any others? 

 

Greg Alexander [00:03:21] Sure. There’s hundreds. So since we try to keep our shows short, let me just share a few more. So profit growth is probably the purest way to demonstrate continuous improvement. Profit growth proves to an investor that the firm has decoupled revenue growth with headcount growth. And as our listeners know at this point, that’s the silver bullet. This is how a firm scales. A firm whose revenue and headcount growth are the same does not have a bright future. Investors are unlikely to bet on that type of firm. Pricing improvement is also another excellent way to prove continuous improvement. If a boutique can raise prices with existing clients, they have a very bright future. The same client willing to pay more for the same service says the quality of the work has gone up. And lastly, let me conclude with the ultimate sign. A firm is continuously improving. The ultimate sign is the firm’s client roster. For example, if a boutique client roster goes from no names to brand name clients or from struggling clients to thriving clients, that says a lot about the firm’s future. 

 

Greg Alexander [00:04:42] The logo sheet looks a lot better with Amazon on it than it did with Kmart. 

 

Sean Magennis [00:04:48] Fantastic. So profit growth, price improvement and declined roster as three additional signs a firm is continuously improving, all pointing to a very bright tomorrow. I can see why this would attract potential investors and acquirers. 

 

Sean Magennis [00:05:10] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members. 

 

Jerome Redmond [00:05:36] Hello. My name is Jerome Redmond. I own American Truck Training. We serve the Oklahoma City metro, in other areas around Oklahoma and soon the entire United States. These clients turn to us for help with obtaining a commercial driver’s license and job placement. We’ve solved this problem by addressing the vast shortage of CDO drivers across the country. The country needs over 60000 CDO drivers. So we’re training individuals through private and government agency funding to obtain a commercial driver’s license and training. If you need help with training your professional drivers, reach out to me at AmericaLovesTrucking.com and Jay Redmond, that’s [email protected] 

 

Sean Magennis [00:06:18] 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 [00:06:35] OK. So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows the 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 checklist. We aim to keep it simple by asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove your future is really bright. If you answer no too many times, you’ve got some work to do. Let’s begin. 

 

Sean Magennis [00:07:14] Number one, do you version control your methodologies? 

 

Greg Alexander [00:07:18] So V1, V2, V3 thats what that means. 

 

Sean Magennis [00:07:20] Yes. Number two, do you progressively certify your employees? 

 

Greg Alexander [00:07:26] One oh one, two oh one, three oh one. 

 

Sean Magennis [00:07:29] Number three, are you charging existing clients more for the same service? Number four, are your client satisfaction scores trending up over time? Number five, are your employee engagement scores trending up over time? 

 

Greg Alexander [00:07:50] Often overlooked. 

 

Sean Magennis [00:07:51] Yes. 

 

Greg Alexander [00:07:51] But employees want to be intrigued by the work they’re doing and if they’re just doing the same thing over and over and over again, they’re going to get bored. 

 

Sean Magennis [00:08:04] Yep. It kills their passion. 

 

Sean Magennis [00:08:07] Number six, all your profit margins trending up? Number seven, have you replaced onsite delivery with virtual delivery? 

 

Greg Alexander [00:08:17] This is a great point. Yeah. I mean, we’re right in the middle of this global pandemic and this was once once optional. Now it’s mandatory and firms that can make it from onsite to virtual are gonna make it. 

 

Sean Magennis [00:08:32] Yes. Number eight, have you digitized your client deliverables? 

 

Greg Alexander [00:08:37] Yeah, this is gonna wipe out, I guess, half the firms. I mean, if you don’t have the ability to write code going forward, it’s game over. 

 

Sean Magennis [00:08:45] Yep, agreed. Number nine, have your price levels trended up over time? And number ten, and the ultimate proof point, has the quality of your client roster improved over time? 

 

Sean Magennis [00:09:01] So in summary, buyers are interested in who you are becoming. They are less interested in who you have been. Tomorrow is much more important than yesterday. They need to be excited about your ability to continuously improve. 

 

Sean Magennis [00:09:19] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening. 

 

Episode 15: The Boutique: How to Work Less and Make More!

Boutique firms often grow but do not scale. Growth means more projects delivered with the same type of staff. If nothing changes, then the growth rate is proportional to the number of partner/owners required.

TRANSCRIPT

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

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host on this episode. I will make the case that sometimes boutiques grow but do not scale. I’ll try to prove this counter-intuitive theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is an expert at helping boutique owners avoid the growth trap. Greg, great to see you as always, and welcome.

Greg Alexander [00:01:03] Hey, pal. Good to be with you. Let’s kick some “you know what” today. Too many boutique owners are growing but are not making more money in the process and I’m tired of this crap. These entrepreneurs should be properly rewarded. So let’s put an end to this nonsense.

Sean Magennis [00:01:14] Absolutely. I can see. Greg, you’re ready to go, you’re passionate about this topic. I love it. So where do you want to dive in?

Greg Alexander [00:01:21] Sorry, I can get carried away because I truly give a shit about our tribe.

Sean Magennis [00:01:25] Absolutely. I know you do as I do and how about we start with why this is happening?

Greg Alexander [00:01:31] Okay. So understand why this is happening is easy. If revenue growth and headcount growth are proportional, the owner does not increase his or her income with growth. It’s not until headcount growth is decoupled from revenue growth, does an owner grow his income.

Sean Magennis [00:01:45] You know, this makes sense as the top expense by a wide margin for a professional services firm, as you and I and our listeners know, is labor. So more headcount means more expense and less income. But as a firm takes on more work, don’t they need more heads to complete it?

Greg Alexander [00:02:03] Yes, but what type of heads and at what cost? So lazy boutique owners just do more of the same. However, the owners capable of scale do not. They re-engineer how they deliver the service so that it takes a few heads to deliver or less expensive heads to deliver. This is known as creating leverage.

Sean Magennis [00:02:26] So what is leverage in this context? And is there in fact a way to measure it?

Greg Alexander [00:02:32] There is a definition in a metric that measures it well called the leverage ratio. So allow me to explain the definition of leverage. Is the number of employees to owners. An example of how to calculate their leverage ratio as a firm with 30 employees and three owners has a leverage ratio of 10 to one. The higher the leverage ratio, the more money the owner makes. Why is this? A profit pool divided up by three people is better than a profit pool divided up by 10 people. This makes sense, Greg, but it begs the question, how does an owner increase the leverage ratio? This is the million dollar question. So it comes down to the type of work the boutique performs as this drives the type of employees they need to hire and how many of them they need. For instance, if the work requires a high skill level, the leverage ratio will be small. It is very difficult to proceduralize this type of work, which means junior staff cannot handle it. This type of firm is likely to have lots of senior people who all want to be partners with ownership stakes. In contrast, if the work is routine, junior staff can perform it. In this instance, leverage will be very high as the org will be filled with an army of junior staff and few partners.

Greg Alexander [00:03:57] This brings us to the root cause of the big issue. Owners often have expensive senior staff performing junior grade work. This destroys profitability and the owner’s income.

Sean Magennis [00:04:11] This is an aha moment for many. So what is the fix for this Greg?

Greg Alexander [00:04:17] So the fix is to proceduralize as much of the work as possible and then to have the discipline to only go after that type of work. Revenue outside of this scope gets turned away. This allows owners to push out expensive senior staff and their owners compensation requirements and replace them with junior staff capable of doing the work at a fraction of the cost. This is what pushes up the leverage ratio. And this is what allows an owner to make more money and more money as the firm grows.

Sean Magennis [00:04:55] So, Greg, this idea of leverage. It’s not new. It’s been around for a long time. This means the solution to this problem is readily available. Why is it owners keep making this mistake?

Greg Alexander [00:05:08] Human nature. Us Americans in particular pride ourselves on working hard. We equate long hours with strong character, and this mentality needs to be replaced with a work smarter, not harder mentality. If our listeners adopt the concept of leverage, they will work less and make more.

Sean Magennis [00:05:32] But that is a spectacular goal. So achieve our financial goals and have a life as well.

Sean Magennis [00:05:42] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday cell phones at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Mike Snyder [00:06:08] Hey there. My name is Mike Snyder. I own RSM Marketing Services in Kansas City and Wichita. We serve marketing frustrated, growth oriented principles for middle market firms across all categories nationally. These clients turn to us when they feel the need to pivot, do something remarkably different to get their company moving in strategic marketing with great online execution. We solve this problem by providing an outsourced marketing department where clients receive a fractional marketing director and all the marketing services they need for a flat monthly subscription. If you want to please the robot’s impact humans and delight your CFO, reach out to me at rsmconnect.com or email [email protected]

Sean Magennis [00:06:58] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:07:16] Excellent. So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions on leverage or lack thereof is not preventing you from scale.

Sean Magennis [00:07:48] If you answer no, too often, poor leverage might be the reason growth is not equating to personal income. Let’s begin. Question number one, is your leverage of employee to owner at least 10 to one? Number two, is the proper mix of junior, middle and senior staff clear to you? Number three, do you understand the skills mix of a project before you sign it? Number four, do you understand which revenue is good and which is bad? Number five, do you have a zero tolerance policy for one off projects? Number six, do the owners work on the business instead of in the business? Number seven, do your service offerings come with procedure manuals for the staff? Number eight, do you assign work to teams strategically versus reactionary? Number nine, does your hiring plan forecast demand for a specific leverage ratio? And number ten, do your financial goals match up with the leverage ratio assumptions in your business plan?

Sean Magennis [00:09:23] In summary, scaling means working less and making more. It does not mean just growing. If you want to earn what you are worth, decouple revenue growth and headcount growth, the definition of success is not the number of employees you have, but rather it is how much net income you produce.

Sean Magennis [00:09:48] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you for listening.

 

 

Episode 14: The Boutique: Are You a True Expert in Your Field?

The “wow” factor matters. Like it, or not, you are in show business. You are an expert. And your firm is made up of experts. No one wants to buy the boutique that regurgitates other people’s innovations. They want to buy the song writers, aka The Rolling Stones.

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TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that when selling your firm, the wow factor matters. And when I say the wow factor, I’m referring to the innovation you’re generating in your field of expertise. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is considered to be one of the most innovative thinkers in the professional services industry. And, in fact, don’t take my word for it. Adam Prager of Korn Ferry was recently quoted as saying, and I quote, Greg is a world class visionary in our industry. End quote. Greg, great to see you. Welcome to the show today.

Greg Alexander [00:01:22] Thanks, Sean. Good to be here. And thanks for the kind introduction.

Sean Magennis [00:01:25] Let’s begin with a simple definition of innovation specific to the professional services industry. How would you define it, Greg?

Greg Alexander [00:01:35] So innovation is a new idea, a new service, a new business model, maybe a new way of solving a problem. It matters to professional service firms more than other types of businesses because pro-serve firms position themselves as experts and experts innovate. Clients do not pay firms to regurgitate other people’s innovations. And investors surely do not buy firms that are copy cat body shops. They buy firms who are true experts today and will continue to be excellent.

Sean Magennis [00:02:10] Excellent, Greg. So when I think of innovation, I, I think mostly of products. For example, Elon Musk innovated in the auto industry and brought us the Tesla. Reed Hastings innovated in the entertainment industry incredibly and brought us Netflix. I do not think of professional services firms in this way, so can you share some examples in the pro-serve of industry?

Greg Alexander [00:02:34] I’d be happy to. In fact, I am somewhat of a amateur historian in the professional services industry, and I have found many great examples of innovation in our space throughout history. So here are a few fun ones to think about.

Greg Alexander [00:02:50] I admire greatly, Boston Consulting Group. They have built a private partnership with thousands of employees and billions in revenue. But it all started with their founder, Bruce Henderson, and one of his early innovations called the experience curve. This proved that a company’s costs fell as their experience increased. Today, this is widely understood. Back in the 1960s, this was a real innovation. Let’s turn to the law profession. The law profession has pioneered the use of technology for centuries. For example, in the 1920s, the recorded deposition changed the litigator’s relationship to witness testimony forever. Law firms that embraced this scaled rapidly. Imagine the law today without recorded depositions. Very scary. Well, how about the great Italian innovator Luca Bartolomes Pacioli. Say that 20 times in a row. Around fifteen hundred, he invented a system of record keeping that used a ledger and later he wrote the first accounting books that explained the use of journals. This earned him the title of the father of bookkeeping, bookkeeping. And Sean, if the accounting industry can innovate, anyone can.

Sean Magennis [00:04:13] These are really great, Greg, and super interesting. These pioneers were truly the Zuckerberg’s of their day. Are there any others that come to mind for you?

Greg Alexander [00:04:24] Sure, there are dozens and I enjoy speaking about this. Let me share a few more. So I have recently studied the innovations in the marketing and advertising industry. Sean, did you remember these campaigns? When it rains, it pours and a diamond is forever.

Sean Magennis [00:04:37] Yes. And the second one, to my chagrin, because I had to buy a big one once.

Greg Alexander [00:04:43] Well, these were created by an agency led by a gentleman, by the name of N.W. Ayer in the 19th century. He convinced the likes of AT&T, the U.S. Army, [inaudible] to hire a new kind of firm called the Full Service Agency. Rather than just selling advertising space in publication, he offered planning creative and campaign execution. Mr. Ayer innovated at the firm level, creating an entirely new kind of marketing agency. He was a giant. I wish I had the chance to know him. How about I share a few recent examples because we are living in the golden era of boutique innovation. In 2008, the distributed ledger, known as Block Chain, was invented by Satoshi Nakamoto. Transactions will never be the same. An architect by the name of Daniel Cuzzi has turned shipping containers into working farms, producing the equivalent of five acres per container. And I love Wix. They have injected artificial intelligence into website design. What used to take months now takes nanoseconds. A brilliant example of tech enabled services. You get the point. I could go on and on forever.

Sean Magennis [00:06:09] Wow, these these are inspiring examples of innovative pioneers and the professional services industry from yesterday and today and this is a standard all of us should aspire to. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Abbie Jones [00:06:49] Hello. My name is Abbie Jones and I own Abbie Jones Consulting. We serve business owners and facility managers in energy, aviation and industrial spaces. Our current footprint is Kentucky, Tennessee, West Virginia, Virginia, Georgia and we’re expanding. These industrial and commercial clients like you turn to us for many services, including campus utility as builds. Our private utility locators, professional land surveyors, professional engineers and drafting staff can upgrade your random paper as built into a single as filled with critical items like shutoffs. Learned how we can make facility managers happy at Abbie-Jones.com. That’s a-b-b-i-e hyphen j-o-n-e-s.com.

Sean Magennis [00:07:37] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the collective.54.com. 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 the listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove you were a true expert and you are innovating. If you answer no too many times, you have some work to do. Let’s begin.

Sean Magennis [00:08:33] Number one, have you pioneered a new approach in your niche? Number two, are you more than a one hit wonder? Number three, has your industry adopted your way of doing things? Number four, does your industry use your language as its own? Number five, do the smartest in your niche come to you with the most challenging issues? Number six, as an ecosystem of boutiques formed around your innovation? Number seven, do you mainstage the keynote for the most important industry conference? Number eight, do you get more than fifty thousand dollars for a speech?

Greg Alexander [00:09:34] That’s a real sign that you’re in high demand and a true innovator.

Sean Magennis [00:09:38] Absolutely. Number nine, do employees join your firm for the opportunity to learn from you? And number ten, have you created a legacy that will live on in your niche after you leave?

Greg Alexander [00:09:55] Yeah. I just walked the audience through history and I cited all these examples. Imagine how fortunate we would be if people are speaking about us 500 years from now.

Sean Magennis [00:10:04] That that is part of our goal.

Greg Alexander [00:10:06] Yes, I love that.

Sean Magennis [00:10:08] So in summary, the wow factor really matters. Like it or not, you are in show business. You are an expert. And your firm is made up of experts, investors and acquirers want to invest in and or buy the true experts. The innovators challenge yourself to be one every day.

Sean Magennis [00:10:33] If you enjoy 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 Professional Services Firm. I’m Sean Magennis. Thank you for listening.