Determining the Right (and Wrong) Revenue for Your Firm

Determining the Right (and Wrong) Revenue for Your Firm

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If you have a single source of revenue, then you have a single point of failure. So a balanced revenue mix is essential for your business. But what does that look like for your firm?

In this video, we explore the impact a balanced revenue mix can have on the price of a firm, 3 types of revenue, and how to adjust depending on what stage you’re in.

In this video, you’ll learn about:

    • 3 types of revenue
    • Types of margins depending on the revenue type
    • The benefits of a balanced revenue mix
    • How to prepare for different types of revenue as you progress through your business journey

3 Metrics You Must Master If You Want to Sell Your Firm

3 Metrics You Must Master If You Want to Sell Your Firm

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So you want to sell your firm one day? Then there 3 metrics you have to pay close attention to. And when it comes time to sell, you can expect these metrics to come up.

This video explores each of the metrics and provides benchmarks to aim for before selling your firm.

In this video, you’ll learn:

    • 3 metrics you must master before you sell your firm
    • How to calculate for those metrics
    • Benchmarks to aim for based on these metrics

Merging vs. Selling: 10 Roadblocks Founders Face when Exiting

Merging vs. Selling: 10 Roadblocks Founders Face when Exiting

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Are you on the brink of a successful exit but can’t get over the hump? Merging with another firm may be your best exit strategy.

This video dissects 10 roadblocks founders face when exiting and demonstrates how merging with another business could help alleviate some of those challenges.

In this video, you’ll learn:
– 10 roadblocks founders face when exiting
– How merging with another business can help you achieve a successful exit
– How to analyze the best options for your firm

Tax Implications for Boutique Professional Service Firms During Acquisitions

Tax Implications for Boutique Professional Service Firms During Acquisitions

Acquiring or merging with other businesses is a strategic decision that requires careful financial and tax planning. For boutique professional service firms, the tax implications can be particularly nuanced given the nature of the assets and client relationships involved. In this article, we will delve into the tax treatment for three forms of acquisition often used in the professional services industry: asset purchase, equity acquisition, and mergers.

    1. Asset Purchase

Definition: In an asset purchase, the buyer acquires specific assets and potentially some liabilities of the selling business rather than its stock or business entity.

Tax Implications: In an asset purchase, the buyer gets a step-up in the tax basis of the acquired assets to their fair market value. This often results in higher future depreciation and amortization deductions for the buyer. Sellers, on the other hand, pay tax on the difference between the selling price of the assets and their tax basis, which could lead to capital gains or ordinary income, depending on the nature of the asset.

Illustrative Example: Imagine a managed service provider, MSP LLC, with assets valued at $1 million but a tax basis of $600,000. If another firm, Tech Ltd., buys these assets for $1.2 million, MSP LLC will pay taxes on the $600,000 gain ($1.2 million – $600,000). Tech Ltd., meanwhile, will now have a new tax basis of $1.2 million for the acquired assets.

    1. Equity Acquisition

Definition: In an equity acquisition, the buyer acquires the stock or the interest of the target firm, thus acquiring all its assets, liabilities, and potential undisclosed issues.

Tax Implications: The buying entity does not get a step-up in the basis of the acquired assets, and the target firm’s tax attributes (like net operating losses) may be limited in their usability. Sellers often prefer this method because the gains are usually treated as capital gains, which are taxed at a lower rate than ordinary income.

Illustrative Example: Consider a software development firm, SoftDev Inc., with a total stock value of $2 million. If another company, Code Masters, decides to buy all the stock for $2.5 million, the shareholders of SoftDev Inc. would pay capital gains tax on the $500,000 gain.

    1. Mergers

Definition: A merger is the fusion of two entities into a single entity. The three types of mergers are:

    • Direct Merger: The target firm merges into the buying firm.
    • Forward Merger: The buying firm merges into a subsidiary of the target firm.
    • Reverse Merger: The target firm merges into a subsidiary of the buying firm.

Tax Implications: Mergers can be structured to be tax-free if specific requirements are met, especially if they are considered a reorganization under the tax code. If not, they can have similar tax implications to an asset or equity sale.

Illustrative Example: A sustainability consulting firm, GreenAdvisors, merges with EcoConsultants in a forward merger. GreenAdvisors becomes a wholly-owned subsidiary of EcoConsultants. If structured correctly under the tax code’s reorganization provisions, this merger could potentially be tax-free. Otherwise, the tax implications for asset or equity sales may apply.

Decision Tool:

To decide the right acquisition structure when selling, consider:

    • Tax Impact: How will each structure affect your tax liabilities? Would you prefer capital gains over ordinary income?
    • Liabilities: Are there potential undisclosed liabilities or issues in the target firm? An asset purchase can help the buyer avoid these.
    • Strategic Fit: How do the companies fit together? A merger might be the right choice if both entities have complementary strengths and client bases.

In conclusion, understanding the tax implications of different acquisition structures is crucial for boutique professional service firms. Consulting with a tax professional before making any decisions is always recommended.

Choosing the Right Attorney When Selling Your Firm: A Guide from Collective 54

Choosing the Right Attorney When Selling Your Firm: A Guide from Collective 54

Selling a boutique professional service firm is a significant endeavor, and having the right attorney by your side can make all the difference in ensuring a smooth and successful transaction. But with so many attorneys and law firms out there, how do you choose the right one? In this article, we will present a top ten list to guide founders in selecting the ideal attorney for selling their firm.

    1. Large Firm vs. Small Firm: Making the Right Choice

One of the first decisions to make is whether to work with a large law firm or a smaller boutique firm. Each option has its advantages. Large firms often offer a wider array of resources, a broader network, and extensive industry expertise. On the other hand, smaller firms tend to offer more personalized attention, direct access to senior attorneys, and a potentially more cost-effective approach. Both large firms and small firms can get the job done. Which do you prefer?

    1. Interviewing Attorneys and Law Firms: Sample Questions

When interviewing potential attorneys, asking the right questions can help you assess their suitability for your needs. Some sample questions to consider:

    • What is your experience in handling mergers and acquisitions?
    • Can you provide examples of deals like mine that you’ve successfully completed?
    • How will you communicate with me throughout the process?
    • What is your approach to managing conflicts of interest?
    • How do you handle disagreements or challenges during negotiations?
    • Can you outline the general timeline for a deal like mine?

A common mistake made by founders of small service firms is hiring their personal attorney to negotiate the sale of their firm. Avoid making this mistake by hiring a separate attorney with the specific experience you need.

    1. Checking References: Ensuring Reliability

Checking references is crucial to gaining insights into an attorney’s track record and reputation. Reach out to references who have worked with the attorney on similar transactions. Ask about their experiences, communication style, and overall satisfaction. Aim to contact at least three references to ensure a well-rounded perspective. Perform reference checks after the initial interview phase.

    1. Understanding Relevant Transaction Experience

An attorney’s transaction experience is a critical factor in your decision-making process. Look for experience in deals similar in size, complexity, and industry. Focus on attorneys who understand the nuances of your industry and can anticipate potential challenges. They should have a proven track record of successfully navigating the intricacies of M&A transactions.

    1. Personality: Finding the Right Fit

Selling your firm is undoubtedly a stressful endeavor. Having an attorney who can ease that stress through effective communication and a compatible personality is essential. You’ll be working closely with your attorney throughout the process, so it’s crucial that you feel comfortable, understood, and confident in their abilities.

    1. Role of Junior Attorneys: Understanding the Team

Law firms operate in teams, and junior attorneys often play integral roles in transactions. Make sure you understand who will be on the team and what their responsibilities will be. While senior attorneys bring experience, junior attorneys may handle day-to-day tasks, research, and document preparation. Ensure there’s a clear line of communication with both senior and junior members.

    1. Cost: Navigating Financial Expectations

Discussing fees and billing practices upfront is essential. Ask for an estimate of the total cost before the project begins. Request a sample bill to understand how charges are structured. Insist on monthly billing to stay informed about ongoing expenses. To manage costs, set a threshold for telephone call charges and ask for detailed explanations for any charges exceeding a specific limit. Consider taking an active role in the drafting process to minimize costs.

    1. Embracing Legal Technology: Improving Efficiency

Legal technology has evolved significantly in recent years. Inquire about the law firm’s use of technology to streamline processes, enhance due diligence, and cut costs. A tech-savvy attorney can leverage tools for document management, contract analysis, and data security, leading to improved outcomes and a more efficient transaction.

    1. Industry Knowledge and Business Acumen

For founders of boutique professional services firms, having an attorney who understands your industry and demonstrates business acumen is vital. Look for an attorney who can act as a thought partner, offering strategic insights beyond legal matters. A deep understanding of your industry landscape can lead to more tailored advice and better decision-making.

    1. Setting Expectations for Timeliness

Clear communication about expectations for turnaround times, response times, and overall project milestones is crucial. Ensure your attorney can provide a realistic timeline for each phase of the transaction. Timeliness is essential for meeting deadlines, managing negotiations, and maintaining transparency throughout the process.

In conclusion, choosing the right attorney when selling your firm requires careful consideration of various factors. Deciding between a large or small firm, conducting thorough interviews, checking references, understanding experience, gauging personality fit, grasping the role of junior attorneys, discussing costs, embracing technology, evaluating industry knowledge, and setting expectations for timeliness are all key elements in making an informed decision. By following this top ten list, you’ll be well-equipped to select an attorney who will guide you through the complexities of selling your firm and ensure a successful transaction.

Preparing to Sell Your Firm and Make a Successful Exit

Preparing to Sell Your Firm and Make a Successful Exit

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Are you preparing to sell your firm but don’t know where to start? These 3 categories of relationships can help you make a successful exit, but they all require different approaches.

Find out how to build relationships with potential acquirers, when to build those relationships depending on the category they’re in, and how to efficiently prepare for when investors start calling.

In this video, you’ll learn:

    • 3 categories of relationships to pay attention to
    • The right questions to ask potential buyers
    • When to pursue a long-term relationship vs a performance-based relationship
    • A strategy to help keep you prepared for when investors call

Waiting too Long to Sell

Waiting too Long to Sell

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There’s a good time to sell your firm, and there’s a bad time. But how do you know when it’s the right time to exit?

Watch this video and discover the environmental factors that play into selling your firm, the value of knowing what’s happening in your niche, and how to prevent a situation where you’re forced to sell.

In this video, you’ll also learn:

    • 5 environmental factors that play into selling your firm
    • Why you need to understand deal activity in your industry
    • How to identify if your firm is sellable
    • The importance of landing your firm in an existing category

Knowing When to Leave: The Founder’s Role in a Professional Service Firm

Knowing When to Leave: The Founder’s Role in a Professional Service Firm

The early launch days of a professional service firm are often characterized by the visionary leadership of its founder. The founder’s dedication, expertise, and passion are instrumental in establishing the firm and shaping its culture. However, there comes a time when the founder must evaluate whether it is appropriate to continue in their current role or hand over management responsibility to a CEO. This decision can be challenging, as it involves considering what is lost when a founder leaves versus what is gained from new leadership.

During the early days, the founder plays a pivotal role in setting the direction, building relationships, and establishing the firm’s reputation. They possess deep industry knowledge and are often the driving force behind the firm’s initial success. The founder’s commitment and personal touch are instrumental in attracting clients, fostering a cohesive team, and navigating the challenges of starting a business.

However, as the firm grows, the demands and complexities increase exponentially. Scaling a professional service firm requires a different set of skills, including operational expertise, strategic vision, and leadership acumen. Recognizing these evolving needs is crucial in determining the right time for the founder to transition to a different role or bring in a CEO.

Several indicators can help assess if the founder should consider a change. One common sign is the adoption of “flavor of the week” strategies that cause employee whiplash. If the firm frequently changes its direction without a clear long-term vision, it can lead to confusion, disengagement, and reduced productivity among employees. Similarly, high turnover in the C-suite, growth stagnation at a certain size, excessive internal politics, and the founder becoming a bottleneck for decision-making are all signs that a founder may have overstayed their role.

When a founder leaves, there are various impacts on the firm. One of the immediate consequences is the morale issues that loyal employees may experience. The founder’s departure can create a sense of uncertainty and loss, especially if they were deeply involved in day-to-day operations. It becomes crucial for the new CEO or leadership team to step in and provide reassurance, transparency, and stability during this transition period.

The departure of a founder also necessitates a period of shakeout in the management team. With new leadership, there may be adjustments in roles and responsibilities, potentially resulting in some executives leaving or being replaced. This phase requires careful communication, clear expectations, and support for the team members who remain.

Maintaining positive relationships with clients is another vital aspect following a founder’s departure. Clients often develop strong ties with the founder, and it is crucial to reassure them that the firm’s values, quality, and commitment to excellence will continue under new leadership. Open and honest communication is key to retaining clients and ensuring a smooth transition.

In some cases, it may be possible for the founder to remain within the firm but in a different role. This arrangement allows the founder to continue contributing their expertise and industry knowledge while relieving them of operational and management responsibilities. However, the likelihood of a founder agreeing to such a new structure depends on individual circumstances, personal aspirations, and the founder’s ability to adapt to a different role within the organization.

Research studies have shed light on the percentage of founders who successfully make it to the exit. According to a reputable source, a study conducted by Harvard Business School found that only around 25% of founders are still at the helm when a professional service firm reaches the exit point. This statistic highlights the common occurrence of founders transitioning out of their leadership roles as firms evolve and grow.

Here is a specific tool designed exclusively for founders of professional service firms to assess if they have stayed at their firm too long. It is a SWOT analysis, which stands for Strengths, Weaknesses, Opportunities, and Threats. It has been adapted to help founders evaluate their position within the firm. Here’s how you can apply it:

    1. Strengths: Assess your personal strengths and skills as a founder. Are your core competencies aligned with the current needs and strategic direction of the firm? Evaluate if your expertise and leadership style are still relevant and effective in the evolving business landscape.
    2. Weaknesses: Reflect on your limitations and areas where you may have become a bottleneck or hindered the firm’s growth. Consider if there are aspects of the business that would benefit from new perspectives or different skill sets. Assess whether your weaknesses are impeding the firm’s progress and if they can be addressed through training, delegation, or restructuring.
    3. Opportunities: Identify opportunities for growth, innovation, and expansion that may require new leadership or different expertise. Consider emerging trends, market shifts, and evolving client needs. Assess if promoting someone to CEO or transitioning to a different role would enable the firm to seize these opportunities more effectively.
    4. Threats: Evaluate potential threats and challenges that could impact the firm’s long-term success. Assess if your continued involvement as the founder poses any risks, such as limited scalability, difficulty in attracting and retaining top talent, or being resistant to change. Consider whether new leadership would mitigate these threats and position the firm for sustained growth.

Additionally, seeking feedback from peers from a mastermind community, such as Collective 54, can provide valuable insights into your role and impact within the firm. Their perspectives can help you gain a more objective understanding of whether you have overstayed your position and if it’s time for a transition.

Remember, self-assessment tools are meant to guide your reflection and decision-making process, but ultimately the choice to stay or leave rests on your personal circumstances, aspirations, and the best interests of the firm.

Upselling and Cross-Selling: How to Sell More Services

Upselling and Cross-Selling: How to Sell More Services

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Generating expansion revenue from existing accounts is often neglected. So how can your team become more disciplined when it comes to upselling and cross-selling?

In this video, we discuss the value of upselling and cross-selling. We also offer ideas on how to get non-sales people within your organization to upsell and cross-sell, and why these functions are important if you want to sell your firm one day.

In this video, you’ll learn:

    • Why expansion revenue is critical for scaling your business
    • The power of the share of wallet exercise
    • The fundamentals of upselling and cross-selling
    • How to get non-sales people to upsell and cross-sell

How to Avoid Costly Mistakes When Selling a Business

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How to Avoid Costly Mistakes When Selling a Business

Selling a business is a high-risk, high-reward initiative. I want to spend some time on the common mistakes made when selling. I hope that by reading this, you can avoid these land mines. Every situation is different. Yet, these are the most common mistakes I see owners of professional services firms making.

Avoid These 7 Costly Mistakes When Selling a Business

When selling a business, you must do it on your own terms. You started a professional services firm that you built from the ground up. Trying to sell a boutique that is not worth buying or rushing into a fast sell without knowing the buyer can lead to failed business exit strategies. That’s why you need to avoid these costly mistakes.

1. Being Uncertain About Reasons Behind Sale

First, boutique owners are unclear about what they want from the sale. If you are unsure of who you are, you will be unhappy with the sale. If you do not know where your business is headed, you will be unhappy with the sale. No amount of money will change this. After the sale is complete, there is no going back. Be sure that you know what you are doing before you start down the path of selling a business.

2. Selling an Unsellable Business

Second, sometimes boutique owners try to sell an unsellable business. Most boutiques are unsellable. It is not enough to have a successful boutique. Your professional services firm needs to be attractive to a buyer. This requires you to look at your business as an investor would. 

An investor starts by listing all the reasons not to do a deal. The boutique owner starts with a list of all the reasons to do a deal. This gap often cannot be closed. Before trying to sell, be sure that you have something worth buying.

3. Looking For a Fast Sell

Third, it takes years to sell a business. Yet some owners try to sell their boutique in a matter of months. This tends to result in many failed attempts, or worse, a lot of forced sales. The process of selling a business takes about nine months. However, the process of preparing to sell takes two to three years.

A good business exit is a sale that happens on your terms. It takes time to stack every card in your favor. And, as they say, you have only one chance to make a first impression. It’s best to be ready.

4. Underinvesting in Succession Planning

Fourth, boutique owners underinvest in succession planning. This results in seller’s regret. After you sell, you will want to see your boutique do well without you. You will have many employees you care about who are still employed by the boutique. If you hand over your business to a stranger, they may destroy it. 

A large bank balance will not compensate you enough for this tragedy. Spend years grooming your successor. Make sure that your successor builds on what you have already created.

5. Pursuing a Business Exit Strategy Alone

Fifth, entrepreneurs think that they can sell their business on their own. Doing so can result in tactical execution errors that can cost the owner millions. Boutique owners are usually entrepreneur founders. They are very different from hired-gun CEOs. 

Founders have a high risk-tolerance level and supreme confidence in their abilities. They often approach the selling of their business as another problem that has to be solved. They assume that they can figure it out without expert advice. This is a mistake. 

Exit strategies are not an area to go cheap. Hire the best advisers that money can buy. Let these advisers guide you through the process.

6. Taking Feedback After the Sale Personally 

Sixth, boutique owners get attacked after the sale, and they take it personally. Those whom you are leaving behind will be jealous. They will feel cheated and underappreciated. They begin to tell a story that is not based on fact. Rather, it is a story they need to tell to make themselves look and feel good. Do not take it personally. 

This is just business. You created the wealth, and you are the one to realize it. Those who helped you do this have benefited and will continue to benefit in the long run. Remember to sleep peacefully at night. The only thing that matters is what you see in the mirror. 

7. Not Knowing Who is Buying the Business

Seventh, be sure to understand who the business is being sold to. And what their motives are. This is particularly important if you are on an earn-out or are rolling some equity. This prevents unwanted surprises from cropping up. Once you sell it, the buyers own the assets. They are entitled to do whatever they want with it. If you disagree with their plans, do not sell it to them.

Top 10 Business Exit Strategy Questions to Ask When Selling a Business

There are other mistakes to avoid. Every situation is different. However, these are the most common mistakes that boutique owners make. If you are considering selling a business, ask yourself these questions to make sure you are avoiding these exit strategy mistakes:

  1. Do you know what you want from selling your business?
  2. Do you know what you will do after your business is sold?
  3. Is your business attractive to a buyer?
  4. Do you have a sellable boutique?
  5. Do you have a handpicked successor?
  6. Is the successor ready to take over?
  7. Do you have an all-star team of advisers to help you?
  8. Are you prepared for the postsale criticism headed your way?
  9. Do you understand to whom you are selling your boutique to?
  10. Do you know their motives for buying?

How to Sell a Business: With Purpose and Patience

You are building a business you could run forever. You are also building a business you could sell tomorrow. If you decide to sell, you want to do so on your terms. Give yourself plenty of time to avoid these common mistakes when selling a business.

For more insights on how to develop a business exit strategy, join our mastermind community. Collective 54 is the first mastermind group for owners of professional services boutiques. Contact us today to learn more about how our community helps businesses like yours.