Tag: Income

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Episode 62 – Fee Quality: Transform Income into Wealth – Member Case with Tony Mirchandani

All revenue is not good revenue. Some types of revenue create more wealth for owners than others. On this episode, we interview Tony Mirchandani, CEO at RTM Engineering Consultants to discuss his approach to consultation fee quality.

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 all revenue is not good revenue. Some types of revenue create more wealth for owners than others. I’ll try to prove this theory by interviewing Tony Mirchandani, CEO at RTM Engineering Consultants. RTM serves architects, developers and owners to produce sustainability, construction quality and streamline schedules on each project. An extensive set of capabilities has allowed RTM to deliver superior work on industrial, commercial and retail builds, as well as well as other complex building types such as health care and laboratory facilities. You can find Tony rtmec.com. Tony, great to see you and welcome. 

Tony Mirchandani [00:01:34] Thank you. It’s great to be here. 

Sean Magennis [00:01:36] And it sounds like you’ve had an extraordinary busy four days with your in-person team meeting, so we’ll run through this. So Tony, let’s start with an overview. Can you briefly share with the audience an example of how all revenue is not good revenue? 

Tony Mirchandani [00:01:53] Absolutely. Earlier in my career, I would have thought a $100000 cell would be equal to another $100000 cell and think the real differentiator between the two is what’s the profit margin on that going to be? But the reality of it is being in professional services. We have to have a continuous backlog of projects and want to have the opportunity to be able to improve the actual product that we’re pushing out. Mm-Hmm. So having revenue that is driven by surfaced, in our case, sophisticated buyers, buyers that are willing to start at the $100000 mark and then continuously increase that amount as time’s going on. If we’re able to produce have the desire and the need based on the product that we’re pushing out. Actually allows them to continue to build their business if their business does not require the services we have on a multitude of years, that revenue that we’re driving really becomes it becomes a one trick pony ride and we have to go out and sell again. 

Sean Magennis [00:03:03] Right. So that becomes bad revenue. 

Tony Mirchandani [00:03:06] Exactly, exactly. And then the cost to go out and win that next hundred thousand dollar job takes away from that first one versus one, that’s going to be basically having a recurring revenue stream as best we can. 

Sean Magennis [00:03:20] That is such a great example to kick us off. And what I’d like to do is get your thoughts on some of the best practices we recommend in this area. Now there are many I’ve selected for specific things that I’ll walk you through and then get your thoughts on each. So the first one is high fee quality comes from a proper balance of fees from new and existing clients. A rough rule of thumb that we use as a 60:40 split. So 60 per cent of fees hopefully sourced from existing clients and 40 per cent fees source from new clients. What is your experience and thoughts in this area, Tony? 

Tony Mirchandani [00:03:59] I completely agree with that. I think every year we should be turning over some of our clients and being able to rank those and whatever that internal ranking is, as long as it’s tied to whatever your end game is. Yeah. So internally, we see it more around an 80 20 rule. But our clients take a six to 12 month onboarding period before we actually receive true revenue from them. And it takes about 24 months to unwind a client that we don’t want to work for anymore. So that slow cycle, we have to be very selective in who we want to have as our next client. 

Sean Magennis [00:04:33] That’s an that’s an outstanding example. And you know, again, each firm is going to have slightly differences. So your 80:20 works in your scenario and with your 24 hour, you know, move off cycle that requires that requires some careful management, I would imagine. 

Tony Mirchandani [00:04:54] Yeah, absolutely. Because we’re in the construction business, right? And anything that we design, it’s going to it’s going to take another 12 to 24 months to unwind and that can actually drag us down during that time period. But also as we’re as we’re building the internal team and we’re evolving in the marketplaces that we operate in, we’re becoming more and more sophisticated in the kind of clients that we can drive true value from. I see it is there’s there’s two kinds of real revenue out there. There’s revenue that we add value to and then there’s revenue that is just the client is required. It’s like being attacked, things permit documents. They have to hire someone to do it. Yeah, we try to avoid that type. We try to find clients that need to partner with us. 

Sean Magennis [00:05:41] And that’s the key driver is finding those partners that you can truly add value to. And it’s not commoditized stuff that anybody could do what they could do internally, right? Exactly, exactly. So the next question is potential buyers want to see long term contracts with clients. For instance, the management consulting firm that performs 30 day strategy assessments. Arguably has poor fee quality. However, the boutique that performs assessments, solution development and implementation and can do 12 24 months 36 months contracts. These firms have high fee quality. What do you what are your thoughts on that? 

Tony Mirchandani [00:06:22] I absolutely agree with that, and I just think in certain industries such as ours and a lot of our colleagues, it’s hard to get a consistent 36 month type contract. But by identifying the right client with the right revenue cycle, you’re able to get a project that might take 12 months, but the next project is going to start in six months. So suddenly you get these overlapping projects and the better job we do, the more dependent our client actually becomes on us, the more dependent we can become on our client. And one of the great things that Greg Alexander’s talked about is how do you reduce your internal cost as you become more of an expert with a particular client? We’re able to do that on the third, fourth, fifth engagement, especially if they have overlapping cycles. 

Sean Magennis [00:07:10] That that is a brilliant point. And I’m presuming that you can train lower cost experts in order to take on that work because you’ve actually you’ve gotten yourself an expertize and then have your higher order. You know, start with clients fresh that need that additional expertize. Is that the right way to look at it? 

Tony Mirchandani [00:07:29] That absolutely is the right way to look at it. And there’s another side benefit to that is we’re always looking to bring on new staff and our senior staff may get bored on the third or fourth projects. That becomes a new opportunity to train and retain new great talent, while giving the senior talent some new opportunities to pursue new challenges. 

Sean Magennis [00:07:49] Yeah. Outstanding. Again, you’ve hit the nail on the head. Number three is after analyzing new versus existing clients, as well as length of contracts. Typically, when a person values a firm, they’ll look at fee predictability and a boutique who services build on one another is very attractive. And you’ve just said that in your in your previous remarks. So these boutiques often produce high fee quality due to better predictability. Is that something you’d agree with as well? 

Tony Mirchandani [00:08:20] Yeah, I would I would definitely agree with that. And another piece of that is the predictability and the the avenues that you were able to actually receive that revenue. So it’s there’s the normal linear cycle. Yes. And as we’re adding a new services, we’re able to go downstream. So we’re getting engaged earlier, for instance, with civil engineering and then commissioning services, we’re on the job another six months. And that longevity with the client not only is tying into the same sales cycle, but it’s creating more opportunities for overlap and without needing to go out and have another cold sale. 

Sean Magennis [00:08:59] It’s brilliant. It’s almost like going back to go forward, to go long. Right? I mean, that’s the way that exactly. Yeah, it’s it’s really smart. So number four, buyers often examine fee quality based on cash collections. So boutiques that have aging accounts receivables and they’re not collecting quickly enough. Typically, you would say that that’s pure fee quality. In contrast, boutiques that are paid up front or have really good cash collection, they have high fee quality. So free cash flow is a big positive. What do you think on this subject? I know that you have an opinion here. 

Tony Mirchandani [00:09:36] Unfortunately, I do, and this is where we have really struggle and we’ve definitely not excelled as well as we have a very large collection cycle. Yeah. So as a buyer of companies also, we’ve found that anyone that we’re looking to buy that has a shorter collection cycle than us will pay a higher premium than we will if they’ve got the same or a longer cycle. And we’ve spent a lot of effort internally looking for ways to be able to shorten that collection cycle. And it’s a very hard thing to do just because of the space that we happen to be in. So I would advise anyone out there if you have the opportunity to look at revenue and pick revenue based on how long it’s going to take for the collection space or an upfront retainer, that revenue is definitely worth more. And sometimes it’s worth a slightly smaller margin. If you’re highly assured of the collection piece or you get paid part of it upfront because that’s that’s really your fuel for growth. Otherwise, you have to go out and borrow and 

Sean Magennis [00:10:35] borrow and take on equity expense of capital. 

Tony Mirchandani [00:10:38] Exactly. 

Sean Magennis [00:10:38] Yeah. So and really a brilliant point, and I hope our listeners are taking this as a fine point because Tony also buys companies. And so, you know, please listeners, cash flow and your ability to prove your cash flow. You know, when presenting yourself to a potential buyer is critical because Tony’s just said, you know, he’ll seek out shorter collection cycle businesses and pay a premium to get those business because they’ve got their cash flow acts together. So, Tony, thank you that for our listeners, is really important to hear. So we’ve done these four things one balance four years from new and existing clients to develop long term contracts. Three Build fee predictability with add on services. And I liked your point. But going back to go forward, start, you know, and then and build it through the cycle and four critically manage your air to create key free cash flow. This will increase feed quality and as a result, convert income into wealth. Anything else, Tony, that we missed out that you’d like to bring to the attention of our listeners? 

Tony Mirchandani [00:11:52] There’s one new thing that I’ve discovered lately that actually came through Collective 54, which is pricing strategy. Yes, and about 10 years ago, pricing in most industries, law, accounting, engineering, architecture was really based on your cost of goods sold and what the marketplace would bear. And that seemed like normal MBA approach to pricing. But currently we have started to see a much deeper level of sophistication and actual experts in the end in industries consulting to us on pricing strategy and different ways to approach different market verticals with the exact same service. And suddenly that that is opened up a number of new opportunities for us and a different perspective of thinking about pricing strategy. I really see that as the next true frontier for professional services. And I would say it’s it’s probably one of the most inefficient components of our business and most service businesses. 

Sean Magennis [00:12:55] You know, I couldn’t agree with you more and thank you for for saying that and for bringing that to the listener’s attention. I was on a on a podcast recently where one of our members has actually adopted a pricing console within their business that they have that an internal team that gets together on a very regular basis, and then they invite a client into the council to talk to them about, you know, the ROI that they’re receiving and and they do that on a consistent basis because every client relationship is nuanced, it’s different. And then they do the cross comparison, but because they doing it and they formalized this pricing counsel, I thought that was a genius move. And it and it and it literally aligns well to your comment about this new learning. So thank you. That’s that’s really great additional input. 

Tony Mirchandani [00:13:43] It’s great to hear about that other client, too. 

Sean Magennis [00:13:44] Isn’t it good? 

Tony Mirchandani [00:13:46] Yeah, that’s awesome. 

Sean Magennis [00:13:47] So listen and I’d be happy to put you in touch with him because he’s developed it and it sounds like it’s working really well for them. So, Tony, this takes us to the end of the episode. Let’s try to help our listeners apply this. We end each show with a tool. We do so because this allows the listener to apply the lessons to his or her firm, and our preferred tool is a checklist style of checklist is a yes, no question. We aim to keep it simple by asking only 10 questions, so listeners ask yourself these 10 questions. If you answer yes to eight or more, you have high fee quality. Tony has graciously agreed to be our peer example today. And Tony, I’ll simply ask you these questions and say yes or no. If you feel like you need to add to a question, go ahead and do it. So let’s kick it off. 

Sean Magennis [00:14:40] Number one, do you generate about 60 percent of your fees from existing clients? 

Tony Mirchandani [00:14:48] Yes. 

Sean Magennis [00:14:49] Number two, do you generate approximately 40 per cent of your fees from new clients? 

Tony Mirchandani [00:14:56] No. Slightly less. 

Sean Magennis [00:14:58] Yours is the 8-20 right now. 

Tony Mirchandani [00:15:00] Exactly, exactly. I think the important thing is you set an amount. 

Sean Magennis [00:15:04] Exactly. Number three, is the average client contract longer than 12 months? 

Tony Mirchandani [00:15:12] Yes. Absolutely. 

Sean Magennis [00:15:14] Number four, do your projects naturally build on one another? 

Tony Mirchandani [00:15:21] Yes, they do. 

Sean Magennis [00:15:23] Number five, is your service built to pull through upsell? 

Tony Mirchandani [00:15:30] It is and that I’d like to put some color around. He started as a single discipline engineering firm. And as we grew both organically and through acquisition, we found that instead of adding to that single discipline, adding other disciplines that we can pull up or we can put in after our contracts are in place have become exceptionally advantageous and increase the stickiness and the repetition of client interaction. 

Sean Magennis [00:15:58] Excellent, Tony. And this dovetails into the next question is your service designed to pull through cross-sell? 

Tony Mirchandani [00:16:06] Yes. 

Sean Magennis [00:16:08] You’ve got your upsell and you’ve got your cross-sell. Great number seven. Are your fees predictable? 

Tony Mirchandani [00:16:16] No bathroom far from. 

Sean Magennis [00:16:17] Hmm. OK. Number eight. Do you collect your fee in advance of performing the work? 

Tony Mirchandani [00:16:25] No, this is our biggest challenge. We it’s traditional and our competitors always bill after the fact. Yeah, and that’s that’s one of the biggest downsides to the business. I mean we need to break that mold. 

Sean Magennis [00:16:37] Well, we’re here to help you break that mold because that would change the game for you, right? 

Tony Mirchandani [00:16:42] Oh, 100 percent, our business would be scaling three times faster if we were paid up front instead of on the back end. 

Sean Magennis [00:16:49] Excellent. Number nine, can you fund your growth from free cash flow? 

Tony Mirchandani [00:16:57] We have historically funded our growth, so yes, we can, but we could. Our growth is limited because of cash flow nonetheless. 

Sean Magennis [00:17:05] Right. And this historical problem you have on the payment side of your business. 

Tony Mirchandani [00:17:10] Absolutely. OK. 

Sean Magennis [00:17:12] Number ten, can you pay the bills without using debt? 

Tony Mirchandani [00:17:18] Yes. Yes, we do. We have a healthy margins where we can do that. 

Sean Magennis [00:17:22] Brilliant. Tony, thank you. I mean, this is exactly it, just extraordinary. So in summary, all revenue is not good revenue. There are good fees and there are bad fees. Good fees attract buyers. When you go to sell your business, they increase the value of your firm and they improve your odds of exiting should you decide to do that. Bad fees could push buyers away. They do decrease the value of your firm, and they’ll likely prevent you from selling at a price that you would like. Tony, a huge thank you. And I know that you’ve been extraordinarily busy for sharing your wisdom and experiences today.

If you enjoyed the show and want to learn more, pick up a copy of the book The Boutique How to Start, Scale and Sell the professional services firm written by Collective 54 founder Greg Alexander.

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

Go to Collective54.com to learn more.

Thank you for listening. 

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How Can Professional Services Firms Transform Revenue Into Wealth

Episode 6: The Boutique: Transform Income into Wealth

All revenue is not good revenue. In this podcast episode, Sean Magennis and Greg Alexander discuss the different types of revenue and which create more wealth for owners of professional services firms. You will learn what good fees are and why they increase the value of your firm and improve your business exit strategy. 

Episode 6: Transform Income into Wealth

All revenue is not good revenue. You will learn that some types of revenue create more wealth for owners than others.

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 into 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’ll make the case that all revenue is not good revenue. Some types of revenue create more wealth for owners than others. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg is an expert in converting income into wealth. Greg, hi. What types of fees are considered high-quality fees? 

How Can Professional Services Firms Increase Fee Quality?

Greg Alexander [00:01:09] Yeah, and that’s really important because we’re trying to convert income into wealth, and the way that you do that is by having high fee quality. OK. So what does this really mean? So it’s a very deep topic. 

Greg Alexander [00:01:22] I know lots of professional service firms, leaders, and owners who make a great income, but very few are wealthy. This is disappointing and unfortunate because they’ve built great firms, and they should have their cake and eat it, too. 

Sean Magennis [00:01:41] Yes, indeed. 

Greg Alexander [00:01:42] They should have a big balance sheet and lots of net worth, and they should also have a great annual income, but unfortunately, that’s not happening. I’m reminded of the phrase, “it’s not what you make that matters, but what you keep that counts.” 

Sean Magennis [00:01:55] Great phrase. 

1. New Versus Existing Client Revenue

Greg Alexander [00:01:56] Yeah. So there are lots of ways to convert annual income into personal net worth, and it’s worth this time here to talk about that. So let me share four easy-to-understand ideas. 

So the first analysis of fee quality, which is the active ingredient in wealth creation, will focus on new versus existing client revenue. Boutiques that depend heavily on new client acquisition have poor fee quality. Yes, all firms need a steady stream of new clients, and I’m not suggesting otherwise. 

However, this type of revenue, new client revenue, is very expensive to generate, and it’s usually not very stable. It requires heavy investment in business development in the BD dollars, and the non-billable hours could be deployed elsewhere, generating a high return. 

Also, boutiques are addicted, and that’s a keyword, addicted, which I think many are to new client fees often are hit and run specialists. Or some call them churn and burn boutiques. They perform well for a period of time, but eventually, they stop growing because word gets out that the sales pitch is better than the product delivery, and this hurts new client acquisition, which is the very thing that they are dependent on. 

Professional services firm boutiques that depend heavily on revenue from existing clients also have poor equality. It is true that firms generate fees from existing clients. However, this type of revenue eventually disappears. The nature of boutique work is that it is temporary. Clients are renting your expertise. At some point, they stop paying the rent. They no longer need the work to be reformed, or they take it in-house. 

So boutiques that are over-indexed to existing client fees forget how to hunt. They wake up one day needing new clients, and they cannot generate them. These boutiques often devolve into lazy lifestyle businesses. So we’re talking about converting income into wealth. 

The key to making that happen is high fee quality, and that comes from a proper balance of fees generated from new clients and existing clients. To give the audience a rough rule of thumb, I would shoot for about a 60/40 split: 60 percent of fees sourced from existing clients and 40 percent of fees sourced from new clients, and that’s a healthy balance. 

Sean Magennis [00:04:39] Got it, Greg. So a 60/40 split: 60 percent from existing and 40 percent sourced from new clients. So you mentioned you have four ideas to share. We’ve gone through one. What is number two? 

2. Length of Contracts

Greg Alexander [00:04:55] OK, so the next analysis of fee quality is the length of your contracts. Potential investors want to see long-term contracts with clients. So, for example, a management consulting firm that performs a 30-day strategy assessment would be labeled a firm that has poor fee quality because it’s only a 30-day contract. 

However, the professional services boutique that performs the strategy assessment, then engages in solution development, and then engages in the implementation might have a contract length of, let’s say, 12 months. That type of firm has very high fee quality because of the length of the contract. 

Sean Magennis [00:05:37] Got it so simple. The longer the contract, the higher the fee call. 

Greg Alexander [00:05:41] Yes. 

Sean Magennis [00:05:43] Very, very good. What is number three? 

3. Fee Predictability

Greg Alexander [00:05:47] OK. So after analyzing new versus existing clients and taking a look at the length of a contract, investors will look at fee predictability. So a boutique whose services build on one another is very attractive. These boutiques often produce high feed quality due to the predictability of their future feed. So let me give an example. 

Greg Alexander [00:06:11] An estate planning attorney is going to have very high fee predictability. Why is that? State plans often need updating. The attorney, the professional service provider who writes your estate plan, is very likely going to update it for you. The future fee is highly predictable.

 An estate plan written, let’s say, for a 50-year-old changes when the parents pass away or when grandkids arrive on the scene. Therefore, that estate plan attorney has a very high fee quality. He can see how his service is going to be consumed well into the future, and you can see in that example how fee predictability is built right into the service offering. 

Sean Magennis [00:06:55] Yeah that makes complete sense. Really interesting. So I understand the predictability of the fee that is made is more or less valuable. However, I didn’t consider increasing predictability through service offering design. So will you address that in number four? 

Greg Alexander [00:07:17] No. Number four is going to be around cash collections. But let me address it here, if that’s OK. 

Sean Magennis [00:07:21] Yeah, absolutely. 

Greg Alexander [00:07:21] So very often, you know, it’s an obvious thing that you want to follow on fees from your current clients. But the way that most boutique owners address that is through their business development process, you know. They modify their sales… a marketing campaign, and I define that as a push approach, and that’s more difficult. 

A pole approach is if you design the service offering so that when someone consumes the service, they’re going to want to consume more of it for a logical reason. So I gave you the example of the estate planning attorney. 

Sean Magennis [00:08:03] Yes. 

Greg Alexander [00:08:04] I also gave you the example of the management strategy consulting firm. So let’s think about that. Let’s say I’m a strategy consulting firm, and I start off every project with an assessment. Well, my assessment should be delivered back to the client in such a way that encourages them to ask me to develop solutions to the problems that were identified, and then so that’s project number two. 

Sean Magennis [00:08:25] Yes. 

Greg Alexander [00:08:26] And then when I deliver those solution recommendations, it should be obvious to the client that I would be helpful in executing or implementing those solution recommendations – that’s project number three. And if you add all three of those up, that’s probably a 12-month gig, right? 

Sean Magennis [00:08:42] Yes. 

Greg Alexander [00:08:43] And it wasn’t me selling the client. It wasn’t push. 

Sean Magennis [00:08:46] Got it. 

Greg Alexander [00:08:47] It was all pull. 

Sean Magennis [00:08:48] All pull. 

Greg Alexander [00:08:48] Yeah. 

Sean Magennis [00:08:49] Makes a lot of sense. So let’s now go to number four. What is number four, Greg? 

4. Cash Collections

Greg Alexander [00:08:53] OK. So investors often examine for quality, also based on cash collections. So boutiques that have aging accounts receivables have poor quality, and obviously, in contrast, firms that are paid upfront have high fee quality. Investors love firms that can use free cash flow to grow. 

Sean Magennis [00:09:13] Yes. 

Greg Alexander [00:09:14] If your boutique gets paid in advance, you’re unlikely to need cash infusions down the road to fund your growth initiatives, and that’s very attractive to financial buyers, people like private equity firms. 

So, as a rule of thumb, firms that rely on short-term debt to run are not attractive. So the way that you might action that is even if you’re a project-based firm, the way that you write your contracts and the way you handle your payments, you should be trying to collect payment in advance of doing the work. 

So let’s say you’re writing a  one hundred thousand dollar contract that’s going to take three months to complete. Ask the client to pay 50 percent upfront, 25 percent at the midpoint, and twenty-five percent of that at the conclusion. And just by doing that… 

Sean Magennis [00:10:00] Yes. 

Greg Alexander [00:10:01] As opposed to sending the traditional invoice with Net 30, it improves cash collections substantially and solves your AR problem. 

Sean Magennis [00:10:09] Outstanding advice, Greg. From experience, listeners. So excellent. Greg, thank you for unpacking four things that we can do to increase fee quality and, as a result, convert income truly into wealth. 

Sean Magennis [00:10:27] 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 Jeffrey Pruitt, who is the CEO and chairman of Tallwave, a business design and innovation company that helps organizations build, bring to market and scale great products. 

Jeffrey Pruitt [00:11:10] Thanks, Sean. It’s great to be part of such a strong organization. I founded Tallwave with partners in 2009 with the mission to help clients transform ideas and businesses in the digital age. I also serve as a general manager of Tallwave Capital, which raised $13.2 million in seed funding in 2014, earmarked for the technology sector. 

It’s been the most active Arizona Fund, funding 28 companies in the western region who raised over 56 million in total capital. As an Arizona native, I bring nearly 20 years of technology-focused leadership to the post. Over the past eight years, we have led Tallwave to exponential growth or exchange acquisitions, which has helped earn Tallwave a spot in the INC 5000 list of fastest-growing companies over the last three years. 

I recently was named… Business Leader of the Year by the Arizona Technology Council and a most admired leader and tech titan finalist from the Business Journal. This is a testament to the great leaders, employees, and client partners of Tallwave. I also serve as an executive leader of the IDEA Enterprise, a program developed by Arizona State University that connects leading-edge teams with senior business leaders. Thank you. 

Sean Magennis [00:12:25] Please get to know Jeffrey and other business owners who are leading innovation in the professional services industry by visiting us at Collective54.com. Learn more about how Collective 54 can help you accelerate your success. 

Sean Magennis [00:12:43] In an effort to provide immediate takeaway value for you, the audience, I’ve prepared again a ten question  checklist. Please ask yourself these ten questions. If you answer yes to eight or more of these, you have high fee quality. 

Number one: Did you generate about 60 percent of your fees from existing clients? 

Number two: Do you generate approximately 40 percent of your fees from new clients? 

Number three: Is the average client contract longer than 12 months? 

Number four: Do your projects naturally build on top of one another? 

Number five: Is your service built to pull through on the upsell? 

Number six: Is your service designed to pull through cross-selling? 

Greg Alexander [00:13:49] So let’s distinguish between those two. 

Sean Magennis [00:13:51] Yes, please. 

Greg Alexander [00:13:52] So upsell means selling more of what somebody has already bought. So instead of them buying three, they buy ten. Cross-sell is to get them to buy something different than what they’ve already bought. So the greatest cross-sell question of all time was, do you want fries with that? 

Sean Magennis [00:14:09] Love it, yes, and you know who makes the best fries in the world, by the way? 

Greg Alexander [00:14:14] Who’s that? 

Sean Magennis [00:14:15] McD. 

Greg Alexander [00:14:15] Yeah, I agree. 

Greg Alexander [00:14:17] So at the moment of purchase, someone’s buying a Big Mac, and somebody says you want fries with that. You know, the conversion rate there is really, really high, and they obviously designed their product offering in that case in such a way, and then they came up with the bundle and the coke and all that. 

Sean Magennis [00:14:34] Yes. 

Greg Alexander [00:14:35] So that’s a difference between upsell and cross-sell. I just wanted to clarify that. 

Sean Magennis [00:14:38] Thank you, Greg. So number seven: Are your fees predictable? Number eight: Do you collect your fee in advance of performing the work? 

Greg Alexander [00:14:52] You know, just a comment on number seven, if I can. In terms of fee predictability, another way to think through that- and I’ll use the accounting industry as an example – we all have to file our taxes on April 15th. Okay. So if you’re somebody who’s going to invest in a accounting firm, you know that there is this kind of natural, compelling event, right? 

Sean Magennis [00:15:11] Yes. 

Greg Alexander [00:15:12] So now that was dictated by the federal government mandating when your taxes were due, so there’s a natural advantage there. So if you’re an owner of a professional services firm right now and you’re saying, “Well, I don’t have the law on my side, you know, how can I establish dates upon which business has to be completed?” 

Well, one way to think about it is your client’s fiscal year, and in most fiscal years, there’s the planning process. And if you’re on a calendar fiscal year, meaning January through December, most companies start their planning process, let’s say, in late Q3, early Q4. So let’s say August to October, and many times during that planning process, there is a need for external assistance and this is just one example of many. 

The way you can increase your fee predictability is you can build service offers in  in packages that are relevant to clients at certain moments of their fiscal year. So, when you start getting people used to buying from you, especially existing clients that way, then you have some fee predictability which will make yourself very attractive to a potential buyer. 

Sean Magennis [00:16:20] Excellent. Thank you, Greg. 

Sean Magennis [00:16:24] Question number nine: Can you fund your growth from free cash flow. And finally, question number 10: Can you pay your bills without using debt? Very key. 

Greg Alexander [00:16:37] Yeah. You know, a lot of times, growing professional services firms have a hard time hitting payroll every month. 

Sean Magennis [00:16:43] Yes, indeed. 

Greg Alexander [00:16:44] The reason why that is, is that their clients are delaying their payment, but yet, payroll can’t be delayed. So they go to short-term lenders to bridge the gap on payroll, and obviously, that is expensive and risky. So you want to get away from that, and the way you get away from that is you get paid in advance. 

Sean Magennis [00:17:01] Thank you for that, Greg. So as we’ve learned from today’s podcast, all revenue is not necessarily good revenue. There are good fees and then there are bad fees. Good fees attract buyers. They increase the value of your firm and they improve the odds of exiting. Bad fees push buyers away. They decrease the value of your firm and they will likely prevent you from selling your business. 

Sean Magennis [00:17:31] 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. We thank Greg again, and thank you for listening.