Your growth rate is important than the size of your firm. It is more important than your client roster, and it is more important than your service offerings. On this episode, we interview Darren Isaacs, Co-Founder and CEO, and Paul Emery, Co-Founder at Makosi.
Transcript
Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. Our goal with this show is to help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis Collective 54 Advisory Board member and your host. On this episode, I will make the case that your rate of growth is your most important number. It’s more important than the size of your firm. It is more important than your client roster, and it’s more important than your service offerings. Potential acquirers want to see strong growth in both top line revenue and bottom line profits. I’ll try to prove this theory by interviewing Darren Isaacs, co-founder and CEO, and Paul Emery, co-founder at Makosi. Makosi helps audit firms drive growth, improve profitability and pursue important strategic goals by delivering an on demand audit workforce backed by their technology and their proven process. You can find them at Makosi M-A-K-O-S-I dot com. So Darren and Paul, great to see you both and welcome.
Darren Isaacs [00:01:33] Sean, appreciate it.
Paul Emery [00:01:35] Thank you.
Sean Magennis [00:01:36] So let’s start with an overview, Darren, I’m going to call on you. So can you briefly share with the audience an example of why the rate of growth is such an important number?
Darren Isaacs [00:01:47] Sure, I think you know, the saying used to be that if you’re not growing you, you’re dying? And so it’s really important to understand what market dynamics might actually be driving growth and also to ensure that your growth exceeds that of your competitors because of a long enough period of time. If you’re growing slower than your competitors. You are really slowly having your lunch eaten, so you know they pay attention to how your competitors are faring in that equivalent market. Yup. And it’s also important to consider not only your rates of growth against your competitors, but also what that growth means for cash flow, infrastructure compliance and other things that go along with that growth.
Sean Magennis [00:02:30] Fantastic. And we’re going to dove into those questions, but that’s a really good distinction. So making sure that your growth exceeds the growth of your competitors. So I’d like to get your both of your thoughts on some of the best ways to demonstrate growth in the context of a potential investor. The five specific things I’ll walk you through and get your thoughts on each. I’ll ask one of you to tackle an item and then I’ll rotate to the other. So the first one is the first thing to understand is what does good growth look like from the perspective of the investor? Darren, what are your thoughts on this concept?
Darren Isaacs [00:03:09] I think an investor really wants to see a long track record of consistent and sustainable growth of revenue, but they’ll also pay very careful attention to how gross margins have fared over those years as well. There are also various inflection points along that path of growth that come into play again, particularly with respect to two to non-revenue generating infrastructure and people, so revenues and net margins should be growing together. Yes, and they should also be clear, defined as of the scalable expenses you know, as as as growth is, is ensuing.
Sean Magennis [00:03:50] Excellent. Thank you. So the second one is we advocate a five to 10 year track record of consistent revenue and profit growth. And you’ve alluded to some of that. Paul, what’s your opinion on this concept of sustainability?
Paul Emery [00:04:05] Yeah, I think from the perspective of Makosi, we’ve gone through like hyper growth over the last three years and and it’s something that we’re like very, very conscious about in terms of because we’ve gone through four digit growth numbers over the last 12 months, which is a lovely tagline. I think when you speak to investors, and it gets a lot of grins, a lot of big eyes, kind of rubbing of the hands into it. That’s great. But you know, from when you get to the stage of due diligence and you’re looking back, you’re like, all hang on a minute. Is this sustainable? Yes. So I think for us, we understand that, and I think that that’s kind of like our transition or an inflection point where we remain right now is that we’ve been focused on grabbing as much market share as possible over the last three years. And now we need to kind of transition from revenue growth to just really focusing on that profitability piece. So we have a consistent record over time. Yes. And especially for firms that are in hyper growth, I think you need to be hyper vigilant around that service offering. And at what point is it going to start slowing down? And do you have other strategies in play in order to kind of continue growth into the future over a five, 10, 15 or 20 year period? So you know what? That’s exactly where we’re at right now. It’s like, Okay, it’s great. We’ve had an awesome ride over the next three years, but is this just transition now to really say, OK, this part of the business is growing really fast, but how are we setting up three or four others under that umbrella to continue that growth into the future and make it sustainable? And I think for the founders, you like that rocket ship, you like that uncertainty. You like that chaos that comes along with all of it. But to transition the company from the grow to scale stage, yes, it needs that next level of professionalization. And that’s something that we’ve been working very, very hard on. And so transitioning from five to a track record of consistent revenue growth, I think it’s something that we’re looking at is like, OK, maybe we don’t have the skills internally to have that set building up management team really kind of doing some self-reflection on things of that. So it’s. It seems very simple, right, to say, OK, we need to get five to 10 years worth of consistent growth, but it always comes a little bit trippy because you are having to do a lot of internal reflection to speak. Speaking of profound is what our unique ability to do that sort of stuff.
Sean Magennis [00:06:43] Fine tuning, building your team, you know, tweaking all the elements that an investor is going to look at. Yeah, you’ve hit the nail on the head there. So when our firm Capital 54, is considering making an investment or we’re doing advisory, we look at the following and I acknowledge these are incredibly high bars. And you know, not all. It’s not an apples to apples, but we look at a 20 to 30 percent top line growth, a 70-80 percent gross margin and a 30 to 40 percent net margin. Darren, what are your thoughts on these benchmarks and be open, you know, I mean, this is real talk that we’re having now.
Darren Isaacs [00:07:23] So, I mean, pretty, pretty extreme numbers there, and I guess I agree with your thesis on top line growth and in fact, that that might even be a bit conservative in this COVID world. Yes. You know, I also agree on the net margin front, but maybe where I differ is on the gross margin front. So the first and I really generalize, I think that margins at those levels are potentially unsustainable in this new gig world. Mm-Hmm. You know, with access to global to, you know, to skills on a global scale. And then secondly, I’d be more interested in firms who are strategically positioned to grow those, those gross margins. So over time, this. Yeah, exactly. And know, unfortunately, I have this curse of being an accountant. So, you know, those opportunities aren’t always, you know, visible in the actual numbers. Right. It’s really important to kind of dig into the strategy of that business and understand what the opportunities of the growing gross margins think. Things like automation to tech enable your service delivery. And so, you know, how are investors looking at strategy and seeing how this firm is going to grow out, you know? Rev Yes, grow gross margins even faster. And it’s really a kind of a multiple from a strategy point of view.
Sean Magennis [00:08:50] I like that and you know, my view is these are targets. You know, these are nice to have. It may not be real. And your example of the impact of the new gig economy businesses is very accurate. I think the important thing and Paul said it earlier, is to have some comparisons. Look at what your competitors are doing because that will give you a leading indicator, at least a benchmark. So thank you. That’s really great. The fourth one we recommend, including profit growth in our list of due diligence requirements. Many young firms don’t focus on profit growth. They spend their time focusing on and obsessing over top line revenue, and they haven’t decoupled their revenue growth from their headcount headcount growth. Paul, any thoughts or opinions on that?
Paul Emery [00:09:43] Yeah, I mean, this question strikes very close to home.
Sean Magennis [00:09:47] It’s your business.
Paul Emery [00:09:48] In that gross stage where we were very, just focused on revenue. And so we built on what we call our advisory board, but it’s essentially we monetize a kind of ex-partners Rolodexes. And it was and it was great to kind of grab market share in a very rapid way. But as we kind of transition from revenue focused to profit focus with our growth, it’s that transition and making sure you have having those kind of big conversations and your kind of bolstering the organization to kind of address those issues because if you cut it, don’t get ahead of that and you kind of keep operating in that grow operation, that kind of growth mindset. It can kind of really, really hurt you because we’ve been going through such a rate of growth that, like a lot of our support functions, like our finance functions, operations functions have really struggled to keep up with the sales in the business development of the business. And so we’ve lacked a lot of transparency into those numbers to be able to say actually what we’re looking at and then, you know, you do catch your breath for five minutes and you look at those numbers not, oh, well, we should probably adjust this. And so I would very much advocate that you, you know, be proactive on that, making sure that you do have a solid finance function set up. So you’ve got visibility into the numbers, especially if you’re kind of an operator in the business now and you’re transitioning to the true owner. Yes, you need that top down view. It’s really, really important that you’re able to kind of dig into those numbers and have that clarity to make sure that the business is going to be profitable in the long term.
Sean Magennis [00:11:37] Fantastic well-said. And then the fifth one, and we’ve touched on this a little bit of best practices to actively go out into the market. Seek accurate apples to apples comparatives. How do you do this, Darren? What’s your opinion on this?
Darren Isaacs [00:11:52] I think it’s yeah, I mean, it’s a good practice. You know, I think it’s mostly practical if you’re in a fairly vanilla category, you know those metrics might be quite easily attainable. Mm hmm. I think it’s been harder for us because we’ve created an entirely new category. COVID has also blown the doors off in so many ways. So to you looking in the COVID world, this is so fresh, which is really, really challenging. And so, you know, things, things just move so much quicker now. Mm hmm. So our view at the moment is quite simple. You know, just keep our eyes on the road and keep our competitors in our peripheral vision, you know? Yes. You know, and so just to kind of be aware of them, but don’t don’t be too focused on them. I think what’s more interesting for us is actually how our clients are benchmarked against their peers. Mm hmm. And so if we’re able to benchmark how our clients are doing against each other, then it just enables us to add so much more, more value to them. So, you know, really enabling us to drive much more meaningful outcomes for them and thereby commanding higher margins and an overall satisfaction from their client.
Sean Magennis [00:13:13] I really like that. That’s nuanced and it’s smart. Thank you. That’s great. So, you know, there’s so many variables on making sure you put your best foot forward in terms of, you know, the value of affirm, the value of the work that you’re doing. And I loved your comment. Darren, you’re an accountant, probably a recovering accountant, right? And facts always win out. 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. Our listeners ask yourself these 10 questions, and if you answer yes to eight or more of these, you have an excellent growth story that will attract investors. Darren and Paul have graciously agreed to be our peer examples today. I’ll ask Darren five of the Yes No Questions and Paul five, so we can learn from this example. So Darren, you’re first up.
Sean Magennis [00:14:19] Question number one, are you growing revenue faster than your boutique competitors?
Darren Isaacs [00:14:25] Yes.
Sean Magennis [00:14:27] Number two, have you been doing so for a few years?
Darren Isaacs [00:14:31] Yes.
Sean Magennis [00:14:32] Number three, are you growing your profits faster than your boutique competitors?
Darren Isaacs [00:14:38] Oh, yes.
Sean Magennis [00:14:40] Number four, have you been doing so for a few years?
Darren Isaacs [00:14:44] Yes.
Sean Magennis [00:14:45] And number five, are you growing your revenue faster than the practice inside the large market leaders if you have a comparative practice?
Darren Isaacs [00:14:54] So this is a tricky question. We are the market leaders. So yes.
Sean Magennis [00:14:58] Fantastic. Paul, I’m going to switch to you. Number six, have you been doing so for a few years? In the context, well, you’re a first mover, so that’s a trick question, will give you a pass on that one.
Sean Magennis [00:15:10] Number seven, while you’re growing your profits faster than the practice inside the lodge market leaders or do you think, given that you’re a market leader, that you’re growing your profits faster?
Paul Emery [00:15:23] Yes.
Sean Magennis [00:15:24] And you’ve been doing so for a few years.
Paul Emery [00:15:26] Yes, we’ve been doing so for a few years.
Sean Magennis [00:15:27] Yeah. And then number nine. Are you growing your cash balance to cover payroll for 12 months?
Paul Emery [00:15:35] Hopefully.
Sean Magennis [00:15:37] This is why we’re working on the business is key, right? But to me, you’re smiling.
Paul Emery [00:15:44] I think so.
Sean Magennis [00:15:45] It’s good. And then finally, number ten, do you have at least 12 months of forward visibility?
Paul Emery [00:15:52] I would say somewhat.
Sean Magennis [00:15:53] Okay.
Sean Magennis [00:15:55] That’s that’s great. Listen, these are important things for you and our listeners to to think through and then to go back and answer for yourselves. Do you have them? And if you don’t have them or if you think you have them to double check. So growth matters a lot and relative growth matters even more. So a year or two of great results doesn’t mean that you’ve got a sellable boutique. A decade of market beating growth will command an outstanding price and excellent terms, and profit growth is as important as revenue growth. This indicates that you’ve cracked the code. You are one of the few who broke the link between revenue and headcount growth. Be sure to run a tight ship. And we’ve heard that from Darren and Paul. Be prepared to demonstrate reliable forward visibility and plenty of working capital. So Darren and Paul, a huge thank you to both of you today. I’m so excited for you and your business. It’s got to be thrilling to be a first mover, market leader.
And if our listeners have enjoyed the show and want to learn more, pick up a copy of the book The Boutique How to Start, Scale and Sell the Professional Services Firm. Written by Collective 54 founder Greg Alexander.
And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms. Collective 54 will help you grow, scale and exit your firm bigger and faster.
Go to Collective54.com to learn more.
Thank you for listening.
