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.

Why Revenue Growth Flatlines in Professional Services Firms

Episode 8: The Boutique: The Real Reason Revenue Growth Flatlines inside of Professional Services Firms

Transitioning away from a partner-led sales model to a commercial sales engine is  key to creating wealth for owners of professional services firms. In this episode, Sean Magennis and Greg Alexander discuss why boutiques find themselves in this position and how they can overcome this inflection point. 

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

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners

of professional services firms. My goal with this show is to help you grow, scale and sell

your firm at the right time, for the right price, and on the right terms. 

 

I’m Sean Magennis,CEO of Capital 54 and your host. In this episode, I will make the case that transitioning

away from a partner-led sales model to a scalable commercial sales engine is key to

creating wealth for professional services firm owners. I’ll try to prove this theory byinterviewing Greg Alexander, Capital 54’s chief investment officer. Greg is truly one of the

world’s leading experts in sales effectiveness. Greg, a pleasure to have you again today.

Why is this transition point a key milestone for professional services firms?

Why is Transitioning Away From a Partner-Led Model a Milestone?

Greg Alexander [00:01:14] It is a key milestone. You know, kind of the natural

progression of a professional services firm is a startup that becomes a growth firm then becomes a scalable firm and eventually sells. 

This transition point usually happens in between that growth and scale stage, and let me kind of walk the audience through this, and I point out that kind of evolutionary track, if you will, to really highlight the word here milestone. So this is something to shoot for, and it’s something that has to happen if you truly want to create an investable asset. 

Startups become boutiques by having the partners generate referrals, and boutiquesbecome market leaders by building a commercial sales engine. That’s the difference.

Sean Magennis [00:02:00] Yes.

Greg Alexander [00:02:01] You know, when you’re kind of a lifestyle boutique, you’ve got

some partners. They have great personal networks, and they’re able through positive word

of mouth, to generate business. So what’s different between them and a high-growth professional services firm that can become a market leader? It is somebody who builds the commercial sales engine.

And investors like Capital 54 and others want to see a maturing commercial capability before they make a buying decision and the sales and marketing process has to be proven capable of scaling. Otherwise, you’ll be a natural kind of limitation on the size of the market. 

So there’s an inflection point that all professional services firms run into head-on and this is when sales generation happens by employees and not by the partners. These kind of young pre-scale firms did not invest in building a professional commercial sales engine. They don’t have to. 

The partners are experts. They have very large personal networks, and these networks expand as they gain exposure to their niche. Then partners harvest these networks with businesses, and successful projects lead to more happy clients, and happy clients lead to positive word of mouth. 

And on and on it goes… You know, and the partner can really, with a group of partners, can really kind of carry the firm. I’d say for good five years, and then all of a sudden, it flatlines.

Why Does Revenue Flatline For Professional Services Firm Owners?

Sean Magennis [00:03:35] So why does it flatline, Greg?

Greg Alexander [00:03:38] So there are 52 weeks in a year, and each of those weeks has five business days and a hardworking partner is going to put in roughly a twelve hour day. Folks in professional services, particularly the partner level, work their tails off.

Sean Magennis [00:03:53] Yep.

Greg Alexander [00:03:54] This means that each partner has about three thousand one hundred and twenty hours to produce. If you subtract some holidays, a few sick days, a vacation or two, it’s more like, let’s say, twenty five hundred hours. And these twenty five hundred hours are not spent entirely on sales activity. After all, the partners are running the boutique, and as the firm scales, partners have only about half their time available for business development. So, therefore, once each partner is tapped out, sales flatline.

Sean Magennis [00:04:30] The obvious question is: Why not just add more partners?

Greg Alexander [00:04:34] Well, most professional services boutiques are very reluctant to do this, as I was, and I don’t blame those that are reluctant to do this. This is a for-profit business. We’re here to make money. 

So the profit pool is distributed to the partners. Dividing the pie by, let’s say, three partners are better than dividing the pie between ten partners. So if the sales engine requires adding more partners, it doesn’t scale. The current owners and partners end up making less, and even worse, their equity gets diluted. That’s why it doesn’t happen. That’s why they don’t just add more partners.

Sean Magennis [00:05:14] Yes, I can see how this is an inflection point, Greg. So follow-up question, what options are then available to the owners?

How Can Professional Services Firm Improve Revenue Growth Decline?

Greg Alexander [00:05:23] Yep, so the owners have to ask themselves. They’ve got to

choose between really two approaches to sales. Let’s call them option A and option B.

Option A is a partner-led model, and this means more sales but less wealth for the owners. It requires more partners to scale, as I previously discussed. 

Option B, which is my recommendation, is a professional sales model. This means more sales and more wealth for the owners. It does require investment, but it does not eat into the equity, and that is the most important piece.

Sean Magennis [00:05:58] Critical piece.

Greg Alexander [00:05:59] Yep. The partners/owners invest budget dollars in hiring a professional sales force. The partners no longer sell; the sales team does the selling. Now, investors typically want to buy boutiques that have made it through this inflection point. It indicates to them that this boutique actually has the sales capability to scale.

It’s important for the listeners to keep in mind that acquirers are buying the future growth of the boutique. They’re not buying the past – they are buying the future. So the more likely a boutique is to grow, the more they will want to buy it. Boutiques that can generate sales without the owner’s involvement are simply more likely to grow, and boutiques that take this approach can grow sales cost-effectively. A commercial sales team is less expensive than adding partners.

Greg Alexander [00:06:58] When I look at firms, and I see them either just completing this transition or in the process of this transition, I get very excited, and it makes me want to invest in the firm. 

Why is this? Number one, they become aware of the need, which is not obvious to many. Number two, they had the guts to pursue it, which is the type of people that I’d like to invest in.

Sean Magennis [00:07:22] Me too, Greg.

Greg Alexander [00:07:23] Now, I should point out that building a commercial sales team inside a boutique is not easy to do, and this is one reason why so few owners become market leaders and fail to pivot away from the partner-led sales model results in many lifestyle businesses. And as a result of that, potential acquirers are not interested in these lifestyle businesses. And I might add just one more thing if I can. 

You know, I’m making a comment that it’s not easy to do, and here’s why. When a client meets with a partner and the partner is selling the work, they say to the partner that “you’re going to be involved in the project.” And when the partner says, “yes, I’m going to be involved in the project, he or she says that because they’re trying to close the deal. 

Now, that’s the worst thing you could do because now you’re stuck. You can’t tell the client you got to be involved in the project and then be MIA for every key meeting. But partners are very reluctant to say “no, I’m not going to be involved in the project, and that’s a mistake.” 

And what I recommend, they say, is, “Mr. Client, no, I’m not going to be involved in the project and oh, by the way, that’s a good thing for you. My ability is not in delivering client work. I’m the worst project manager in the firm. My knowledge is in creating the methodology, hiring the staff, training the staff, and running the firm. I’m going to introduce you to my team who are about ten times better than delivering this work than I am.” 

And then you bring the delivery team into the sales call and then the client gets to experience your exceptional engagement manager and your analyst, et cetera, and they say, “yeah, I agree, you don’t have to be involved” and then the client, the partner, can move away. So that’s the key thing that stands in the way. Most owners of boutiques feel they have to remain committed to the project after selling it.

Sean Magennis [00:09:13] Outstanding advice. This is a big milestone, and I can also see why so few make it through this transition. That’s a challenge for businesses and for partners that are so hands-on.

Greg Alexander [00:09:24] Yes.

Sean Magennis [00:09:25] But to scale, it makes total sense, and I can see why why those professional services firm owners that are successful at doing that really become wealthy.

Greg Alexander [00:09:33] Yep.

Sean Magennis [00:09:37] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field. 

Collective 54 is the only national peer-to-peer advisory network for owners of professional services firms who have focused exclusively on growing, scaling, and maximizing business valuation. Today, we have the pleasure of introducing you to Jon Jones, president, CEO, and co-founder at Anthroware, an On-Demand Innovation Force creating high impact digital solutions firm.

Jon Jones [00:10:20] I’m Jon Jones, CEO of Anthroware.Anthroware makes beautiful digital products. We do this by studying people, your customers. We put them in the center of our process to make tools that they both need and love to use. 

Our work ranges from MBP apps for funded startups to big HIPAA compliant platforms for large established companies. We’re smart, a little rebellious, and we love working on hard problems.

Sean Magennis [00:10:49] Please get to know Jon and other business owners who are leading innovation in the professional services industry by visiting Collective54.com. Learn more about how Collective 54 can help you accelerate your success.

Questions to Ask When Transitioning Away From the Partner-Led Sales Model

Sean Magennis [00:11:09] So, in an effort to provide immediate take-home value for you, I prepared a ten-question, yes or no checklist. Ask yourself these ten questions. If you answer yes to eight or more of these questions, you’ve made it through this inflection point. 

Number one: Are the owners removed from the sales process?

Greg Alexander [00:11:31] So let’s talk about that. So with diligence, when I pull the sales report.

Sean Magennis [00:11:36] Yes.

Greg Alexander [00:11:38] Typically, from a CRM system, every opportunity of business has a name associated with it. If that name associated with that client record is one of the owners, I’m not in. I become less interested in making an investment in that business because that tells me the owners are driving the business. 

If their name is nowhere near any of those records and there’s somebody else in the firm who doesn’t have an equity stake in the firm who’s the person that owns that client, has sold the work, and is delivering new work – that’s a real positive. Now, if you lined up ten owners of professional services firms right now and you asked them what their forecast was for the next 90 days, they could recite it. 

And if I told them all that they could not go in the next sales call, the next five sales calls, the close of business, what would they tell you? We’ll lose the business as a result. So they have to have the courage to step away.

Sean Magennis [00:12:33] Absolutely.

Greg Alexander [00:12:34] And trust your employees that they can get the deal done.

Sean Magennis [00:12:37] Brilliantly, said Greg. So question number two: Are there are employees generating all the sales? Number three: Is business being generated from scalable sources in addition to referrals? Number four: Have sales increased consistently without adding partners or new owners? Number five: Are your financials able to handle the expense of a commercial sales team?

Greg Alexander [00:13:12] Yes. So let’s talk about that. This is another obstacle. The cost of building a commercial sales team goes into the overhead bucket. Those aren’t billable resources. So partners have to be willing to make the investment, and very often boutiques come to us at that moment in time because they don’t have enough free cash flow to do this. So they need an outside investor to help them.

Sean Magennis [00:13:33] Excellent. And that’s where we provide the growth capital, the stimulus. And by the way, your extraordinary experience in building these commercial sales teams.

Greg Alexander [00:13:42] Correct.

Sean Magennis [00:13:43] Question number six: Have the sales results from the commercial sales team been consistent over time? Number seven: Have the win rates with the commercial sales team been on par, and I’m going to throw in or exceed the partners?

Greg Alexander [00:14:00] Yep. So some advice to the owners out there. The first time you do this, the win rates will drop substantially. Just hang in there.

Sean Magennis [00:14:09] Hang in.

Greg Alexander [00:14:09] You got to go through that period. You got to give the employees a chance to improve. Eventually, their win rates will be as good as yours, but there’ll be a difficult transition there. So just buckle up for that transition.

Sean Magennis [00:14:21] Well said, Greg. Number eight: Have the deal sizes with the commercial sales team been on par with the partners?

Greg Alexander [00:14:28] Same thing. Originally, the non-partners are going to sell smaller deals, or they may cave under price objections, et cetera. You just got to hang in there and get through that period.

Sean Magennis [00:14:39] Great. And number nine:Have the sales cycle links with the commercial sales team been on a par with the partners again?

Greg Alexander [00:14:46] Correct.

Sean Magennis [00:14:47] Good. And then finally, number ten: Can the commercial sales team be expanded significantly without breaking the boutique?

Greg Alexander [00:14:55] Yeah. So this is a really interesting component. In fact, this one can be a show in and of itself. So for every quote, sales head you have you’re going to have an assumption for the amount of revenue that they can bring in. And that’s going to be impacted by a lot of things linked to the sale cycle, win rate, the size of the deal, is the salesperson generating their own leads or the leads coming from another source. 

There’s a lot of factors that go into that. But in the end, you’ll get to a point where you’ll know plus or minus 10 percent with the revenue production, per sale said is. Now, you’ve got to think through how that impacts your service deliver, because, in theory, if you go out and hire ten salespeople, you’re going to generate a lot more business. Can the back end handle it?

Sean Magennis [00:15:42] Exactly.

Greg Alexander [00:15:43] So, figuring out how to tie the delivery engine of the back of the house to the front of the house is really important. And this question number 10 is really important because sometimes that’s overlooked. They hire all the salespeople, they generate all the new business. Everybody’s excited, and next thing you know, the delivery team is 120 percent capacity.

Sean Magennis [00:16:04] And you can’t deliver the business.

Greg Alexander [00:16:05] Can’t deliver it, and then clients sat falls, employee sat falls and you actually create a problem for yourself.

Sean Magennis [00:16:10] Yep.

Greg Alexander [00:16:10] So don’t forget the downstream impact of this.

Sean Magennis [00:16:13] Outstanding, Greg. Outstanding. So the path from a boutique to market leader results in creating a viable, superb commercial sales engine. Potential buyers would rather wait until you have made it through this inflection point. Jumping in prior to this is simply too risky for many. 

If you want to sell your firm, invest resources into developing a scalable sales and marketing engine. 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 3: How to Prove Your Firm is Not a Body Shop

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

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

 

TRANSCRIPT

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

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

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

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

 

 

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

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

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

Sean Magennis [00:07:00] Yes.

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

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

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

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

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

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

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

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

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

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

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

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