Tag: sell

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

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

TRANSCRIPT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sean Magennis [00:08:34] Yep.

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

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

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

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

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

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

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

TRANSCRIPT

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

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

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

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

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

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

Sean Magennis [00:02:03] Great.

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

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

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

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

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

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

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

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

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

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

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

Sean Magennis [00:07:30] Yes.

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

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

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

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

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

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

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

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

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

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

TRANSCRIPT

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

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

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

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

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

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

Why is Cash Flow So Important When Scaling a Business?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sean Magennis [00:09:16]: If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled “The Boutique: How to Start Scale and Sell a Professional Services Firm.” Greg, thanks for being here. I’m Sean Magennis, and thank you, our listeners.