Episode 34: The Boutique: What to Do When Clients Do Not Recognize Your Brilliance

Firms that add a great client experience to high-quality work reach scale, and those who do not, stay small lifestyle businesses. On this episode, we discuss the importance of the client experience to driving client satisfaction.


Sean Magennis [00:00:15] Welcome to The Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean McGuiness, CEO of Capital 54 and your host. On this episode, I will make the case that there is a difference between quality work and a great client experience. Firms that add a great client experience to high quality work reach scale and those who do not stay small lifestyle businesses. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer, Greg has helped many firms see the importance of the client experience. Greg, great to see you. Welcome.

Greg Alexander [00:01:19] Hey, Sean, good to be with you today.

Sean Magennis [00:01:20] Greg, I’d like to start by asking you, what is the difference between quality and client experience?

Greg Alexander [00:01:28] OK, so quality is measured by the finished product. So, for example, the quality of this podcast is determined by the quality of the recording. If the audience could not hear us clearly, this would be a low quality product. Client experience is measured by how a client feels when working with you. For example, I drive an old Cadillac which requires service. I love my dealership because when I show up, they remember my name. They greet me with a hot chocolate chip cookie.

Sean Magennis [00:02:01] Nice.

Greg Alexander [00:02:03] They have the vehicle history in front of them and they get me on my way quickly. They don’t just fix the car. Does this make sense?

Sean Magennis [00:02:11] Yes, it absolutely does. So why should a boutique professional services firm care about this?

Greg Alexander [00:02:19] Well, some should not care. So, for instance, firms who are not trying to scale can get away with ignoring this. However, for those listeners who are trying to scale, this is a must have not a nice to have. And here’s why. The reason is as you scale, you will attract more sophisticated clients. This is wonderful because they have bigger budgets and these clients are very profitable. However, they also have higher expectations. Chances are they have hired many professional services firms before and some of the best in the world. Their idea of what good looks like is very different. And if you don’t rise to the occasion, you will not be able to do work for these top companies. And if you cannot serve the top clients, you will never scale.

Sean Magennis [00:03:14] That makes complete sense. I would also add that one of the best things of scaling a firm is the opportunity to work with the best clients. The work is much more stimulating. So, Greg, what is a firm trying to scale really need to do?

Greg Alexander [00:03:31] So, they need to implement a client experience program.

Sean Magennis [00:03:35] Greg, what’s a client experience program?

Greg Alexander [00:03:37] Yeah, so that’s a big question. So I would ask you in the audience to bear with me as I attempt to answer this.

Sean Magennis [00:03:43] Got it. I know you’re going to do a great job.

Greg Alexander [00:03:45] OK. So a client experience program can be described as understanding the client journey and acting on it. So an illustration of a typical client journey is going to be helpful here. Usually a client journey starts when sales hands off the client to an engagement manager after a contract is signed. This is a delicate situation as the client will be leaving someone they have grown to know and are now being introduced to a stranger. Approaching the client at this moment takes skill as there is a heightened level of stress. Next, this handoff usually leads to some kind of project kickoff or a client onboarding process. It is critical the engagement team starts to build trust and credibility. This is done by keeping the effort level from the client very, very low. For example, the engagement manager should demonstrate that she has been fully briefed by sales and knows exactly what has transpired up to this point. Clients hate having to repeat themselves as they are very busy people. The project kickoff or client onboarding process lays out the goals and what’s going to transpire over the next few weeks or months. A great client experience always sets expectations and keeps the focus on outcomes and milestones. Clients hate uncertainty. After the onboarding or kickoff, the client begins adopting the early parts of the project. This is a great moment of stress as a client will be on a steep learning curve and no one likes to feel stupid. Be sure to recognize this insecurity and take action to replace their feelings of ignorance with some quick wins. The next part of a typical journey moves from early adoption to an expansion phase. This is where the client begins to use more advanced pieces of your solution. At this moment, clients are dealing with the fear of change. Getting a client to push beyond the basics and get more advanced is like trying to get someone to lose the last five pounds after losing the first one. Complacency sets in. Yet if you do not get the client to push through this, the full benefit of the project will not be realized. And lastly, the client enters the final stage of the journey. And this is project completion. It is important for the boutique to quantify the benefits of the project and to congratulate the client for a great job. This will result in a new client journey kicking off as another project starts up. Or if the project did not go well. This results in the parting of ways between the client and the boutique. Sean, that was a lot. But did you get the essence of it?

Sean Magennis [00:06:55] Yes, Greg, I did. And what struck me about this example is the emotional swings a client goes through along the way. This is a good reminder that how a client feels during the project is as important as what the client gets at the end,\.

Greg Alexander [00:07:13] You got it and notice in this example, I never once mentioned deliverables.

Sean Magennis [00:07:18] Yep didn’t.

Greg Alexander [00:07:19] You know, the quality of the work. And this is very typical. The client experience has nothing to do with the quality of the work.

Sean Magennis [00:07:26] Yes, I noticed that, Greg. And in my experience, many clients cannot tell the difference between average work and great work, but they sure can tell the difference between a bad experience and a great experience. Heck, they can feel it in the depth of their soul.

Greg Alexander [00:07:42] Yes, they can. And sophisticated clients demand a great client experience. As our listeners scale, they will be dealing with clients with higher expectations. So this becomes very important.

Sean Magennis [00:07:55] Absolutely. And now a word from our sponsor, Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members joined to work with their industry peers to grow scale and someday sell their firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Denise Lambertson [00:08:24] Hello, my name is Denise Lambertson and I own an agency called LMS. We serve the consumer packaged goods industry in the US that are distributing the brick and mortar retail as well as direct to consumer and e-commerce. These cries turn to ask for help with connecting with the consumer, whether it’s sales, community building, like social media growth or education and awareness. We solve this problem by the most effective celebrity and influencer marketing solutions. If you need help with building your influencer marketing program, reach out to me through www.wearelms.com. That is w-w-w-.-w-a-r-e-l-m-s.com.

Sean Magennis [00:09:06] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com. OK, this takes us to the end of the episode, let’s try to help the listeners apply this. We end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist and our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 questions. In this instance, if you answer yes to eight or more of these questions, your client experience is working for you. If you answer no too many times a poor client experience is likely getting in the way of your attempts to scale. Let’s begin.

Sean Magennis [00:10:12] Number one, have you documented the client experience journey for your firm? Number two, do each of your clients feel that they are important to you? Number three, do you understand the emotional context of the client during the engagement

Greg Alexander [00:10:35] most often overlooked.

Sean Magennis [00:10:37] Yep. Number four, do clients know why you were doing what you were doing? Number five, do clients feel they are part of the engagement team?

Greg Alexander [00:10:51] Super important, the client needs to feel like you’re on their team and you’re pursuing their goals.

Sean Magennis [00:10:58] Number six, do clients know what is going to happen next before it happens?

Greg Alexander [00:11:03] Again, they hate uncertainty. Yeah, tell them what you’re going to do before you do it.

Sean Magennis [00:11:06] Communicate and overcommunicate. Number seven, do you research meeting attendees prior to each meeting? Number eight, do you send prereading material to clients with enough lead time?

Greg Alexander [00:11:22] This drives me crazy. You know, I hire service runners myself and they’ll send me a deck five minutes before the meeting. I want to strangle them.

Sean Magennis [00:11:29] Absolutely. Number nine, do you make it easy for clients to use your materials internally?

Greg Alexander [00:11:36] That’s the other thing. You know, sometimes people are proud of their work. So they they, you know, put their logo everywhere and they want to take credit. This isn’t about you. It’s about the client. So allow your client to plagiarize your work.

Sean Magennis [00:11:48] And they paid for it.

Greg Alexander [00:11:48] Yes.

Sean Magennis [00:11:49] Number ten, do you call the client after every meeting to confirm the goals were met?

Greg Alexander [00:11:55] Just good hygiene.

Sean Magennis [00:11:58] So in summary, quality work is a commodity that’s tough I know, for a lot of you to hear you are proud of what you produce and you should be. It took years to develop your expertize. However, some clients are not capable of recognizing your brilliance. And you are not the only firm, by the way, providing quality work boutiques that scale understand the client experience is much more important for fewer firms can deliver outstanding experience in addition to quality work. This is the unique differentiator to develop in the scale stage. 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, Greg. And thank you to our audience for listening.

Episode 21: The Boutique: The Ultimate Measure of Productivity

Yield is the ultimate measure of productivity. In this episode, we discuss how professional services firms scale faster by thinking about different ways to improve yield. 


Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that yield is the ultimate measure of productivity. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has helped owner’s scale faster by thinking about different ways to improve yield. Greg, good to see you and welcome.

Greg Alexander [00:01:03] Hey, pal. Good to be with you. Appears today we are going to discuss the most often looked at metric in all of professional services.

Sean Magennis [00:01:11] Yes, we are. Yes, we are. To begin. How about you provide us a working definition of yield?

Greg Alexander [00:01:18] Sure. So yield is simply the average fee per hour times the average utilization rate of the team. For example, if a boutiques average fee per hour is 400 dollars and the average utilization rate is 75 percent, then the yield is three hundred dollars per hour.

Sean Magennis [00:01:37] OK. That is really easy to understand. And why is it relevant to our audience, which consists of owners of professional services firms who are trying to scale beyond the lifestyle business?

Greg Alexander [00:01:49] Huh. So it is mission critical to those trying to scale. And here’s why. The typical boutique runs off an assumption of a 40 hour workweek and a 48 week year. This equates to 1972 hours per employee using our earlier example at 300 dollars per hour. The boutique will do five hundred seventy thousand dollars in revenue per employee. So a 100 person firm, let’s say, with this year will do fifty seven point six million in annual revenue. Understanding yield means you understand how much you can scale to. It establishes a ceiling and therefore it is so important for our listeners to understand.

Sean Magennis [00:02:32] Got it. So the suggestion to listeners then is to do the math and determine the scale ceiling. Let’s suppose we don’t like the answer. Greg, we want to scale past the ceiling. What can they do then?

Greg Alexander [00:02:45] Good question. And that is how we want all of our listeners to be thinking, how big can I get? Most boutiques can quote you their utilization rate from memory. This is a well tracked metric and it should be boutiques that have made it past the startup stage, have already optimized for the utilization rate. They would not have survived otherwise. Therefore, an improvement in utilization rate does not lead to scale. The point of diminishing returns has occurred unless, of course, you’re going to ask employees to work on Christmas Day. The scale owners need to turn to fees.

Sean Magennis [00:03:23] So, Greg, just before we jump to fees, let me make sure I recap what was just said. You contend that most firms, when trying to scale, have reached the point of diminishing returns on utilization rates. And you feel this way because there’s only so much juice to squeeze out of the 40 hour workweek and the 48 week year, is that correct?

Greg Alexander [00:03:43] Yes, it is. So have a look at the U.S. business calendar. It is tough to get more than forty eight weeks. Employees need a couple weeks vacation. There are sick days and there are dead periods, such as the week between Christmas and New Year’s and Thanksgiving week, etc.. It is easier to get more than a 40 hour week, especially in the work from home setting as a line between work and life had blurred. Many people routinely work 50 plus hours a week. But in my experience, most of these extra hours are non billable. So they did not move the revenue line that much.

Sean Magennis [00:04:18] Okay, so let’s assume the 1920 hours per employee assumption holds as there’s not much one can do to improve it. Now you say it’s time to turn to fees. Why is that?

Greg Alexander [00:04:31] Yes. So remember, this is an equation with only two variables utilization rate and dollars per hour. Owners of boutiques have more juice to squeeze out of the dollars per hour variable and impacting the dollars per hour variable is not as easy as raising prices.

Greg Alexander [00:04:48] Most boutiques are in competitive markets. The intense competition drives downward pressure on fees. So if this is true for our listeners, what can they do to impact dollars per hour? So key to scaling in this context is to figure out how to become more valuable to clients. Clients will pay more for boutiques that bring more value to them. This is because clients turn to boutiques for specialization. These clients have moved away from the huge generalist firms. They are willing to pay more for highly specialized expertise.

Sean Magennis [00:05:27] That makes total sense, Greg. So it appears the key to higher prices is more specialization. Can you give the audience some ideas on how to increase their specialization?

Greg Alexander [00:05:38] Sure. In my experience, there are five forms of specialization that translate to higher fees, and they are, so number one specializing by industry vertical. Number two, specializing by function. So I serve the CFO or I serve the CTO. Number three is specialize in by segment. So I call on large enterprises or I call on consumers or I call on small business owners, etc. Number four is specializing on problem. So cyber security risk is a problem and I specialize around that. Number five, I specialize in geography. So here we are in Dallas, Texas, and I serve clients in Dallas, Texas. So let me give you a hypothetical example of a highly specialized firm. Clients would pay a premium for a consulting firm that helps product managers and enterprise software companies in Silicon Valley move to the cloud. To notice the five forms of specialization, we had the industry software companies, we had the function product managers, we had the segment enterprise, we had the problem moved to the cloud and we had the geography Silicon Valley. This firm’s yield, if it existed, would be high because it could charge a lot more.

Sean Magennis [00:06:56] That’s an excellent illustrative example. Thank you, Greg. 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.

Tony Mirchandani [00:07:30] Hello. My name is Tony Mirchandani. I’m the owner of RTM engineering consultants. We’re a national engineering firm focused on the built environment. We provide civil, mechanical, electrical, plumbing and specialty services around the country. Our growth has come 50 percent through acquisitive growth and 50 percent through organic growth, as well as partnering with architects and developers. If there’s anything we can do for you, please feel free to reach out to me. I can be reached at [email protected].

Sean Magennis [00:08:04] 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. 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 questions. In this instance, if you answer yes to eight or more of these questions, you are running a tight ship with excellent yield. If you said no too many times, you have a yield problem. And this will be an impediment to scaling.

Sean Magennis [00:08:59] Let’s begin. Number one, are your average utilization rates above 85 percent? Number two, senior staff above 70 percent? Number three, mid-level staff above 80 percent? Number four, junior staff above 90 percent? Number five, are you average fees above 400 dollars per hour? Number six, senior staff above seven hundred and fifty dollars an hour? Mid-level staff above 500 dollars an hour? And number eight, junior staff above 250 dollars an hour? Number nine, are you assuming a forty eight week year and 40 hours per week? And number ten, are you distinguished from the generalist, with three to five forms of specialization?

Sean Magennis [00:10:19] In summary, yield is the ultimate measure of productivity for professional services firms. Watch out for the trap of over rotating to utilization rates and under-indexing the second variable in the equation, which is dollars per hour. Drive up your fees by becoming more valuable to your clients, by becoming hyper specialized. If you do so, the limit on your scale is the sky.

Sean Magennis [00:10:52] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a professional services firm. I’m Sean Magennis. Thank you for listening.

Episode 5: Create Wealth by Converting Client Relationships into Balance Sheet Assets

A key to attracting a buyer to purchase your firm is your ability to prove you have healthy client relationships. Learn how to convert client relationships into appreciating assets on a balance sheet.

Episode 5: A key to attracting a buyer to purchase your firm is your ability to prove you have
healthy client relationships. Learn how to convert client relationships into appreciating
assets on a balance sheet.



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

Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that a key to attracting a buyer to purchase your firm is your ability to prove that you have healthy client relationships. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has helped many firm and their leaders convert client relationships into appreciating assets on a balance sheet. Greg, great to have you today. How would you frame up this critical topic? 

Greg Alexander [00:01:18] Yeah. You know, the key here is the balance sheet. So if you’re if you’re an owner of a professional services firm right now, you probably get your monthly reports from your accounting firm and the one you pay most attention to is cash flow and the next one you probably pay most attention to is income and maybe you look at the balance sheet once in a while. However, as an owner, not an employee, as an owner the balance sheet is the most important of all the financial reports and the client relationships are actually assets on the balance sheet. So that’s my advice. First, as a way to frame this up, is that, I would you know, think about your balance sheet first, focus on that. So the balance sheet calculates the net worth of a firm, you know, i.e. what a firm is worth and it does so by listing the firm’s assets and then it subtracts its liabilities. So for those of you who are not financial wizards out there, let me just give you a real simple quick analogy to illustrate and maybe I’ll use your your home as my example here of your balance sheet. So let’s say the assets of your home are the land it sits on in the house itself and let’s say these two assets, the land and the structure worth half a million dollars and the liabilities of your home are primarily the mortgage and for this, let’s assume your mortgage is 300 grand. So by simply subtracting the liabilities from the assets in this example, I can see that your net worth of your home is two hundred thousand of the equity of your home is two and a thousand. So a firm’s client relationships are its assets and like all assets, they should be proactively managed and cared for so that they appreciate in value. And unfortunately, many firms turn their clients into depreciating assets and this happens when they treat their clients as transactions. Clients are viewed as deals. So the framing of this conversation today, Sean, is to think of your clients as balance sheet assets, much like your home. You know, you get a new roof…

Sean Magennis [00:03:23] Yes. 

Greg Alexander [00:03:23] …Install a new air conditioner, you paint the house, you take care of it so it goes up in value. And the same thing has to happen with the client relationships. 

Sean Magennis [00:03:31] That’s a beautiful analogy and and very understandable. So, Greg, when you when you are considering a firm to invest in, how do you go about assessing the health of their client relationships? Because this is this is key. 

Greg Alexander [00:03:45] If it is so, there are many ways. Where do I get started? Here, let me let me try to share maybe a few simple ones for the audience. So one area that will be placed under the microscope is revenue concentration. So many boutiques have really sexy looking financial statements. But when you peel the cover off, you can see that they really are house of cards. They generate most of their revenue profits from a very small number of clients and if one of these clients was to leave, the financials completely fall apart. And unfortunately, this is very common, especially with project based boutiques. These firms live and die by the big deal in their operating model is very unreliable and therefore not sellable. So be sure not to have a single client equal to more than, let’s say, 10 percent of your billings so that would be kind of one thing to consider, revenue concentration. 

Sean Magennis [00:04:37] Yes. 

Greg Alexander [00:04:38] Another simple one to get started with is the tenure of relationships. So firms that generate billings from clients for years are very attractive. This suggests that the client relationships are very strong. If the firm did not deliver value than the clients would go elsewhere. So as it relates to tenure of relationships, a rule of thumb is that the average client tenure should be three years or more. Okay, another one to consider as it relates to client relationships and whether or not they’re appreciating or depreciating assets on your balance sheet could be client quality as a measure of the strength of relationship. So, for instance, let’s say your firm generates billings from startups. That’s going to discourage buyers. Startups have a very high failure rate in revenue from this segment can be unreliable. In contrast, if your boutique generates its billings from the Fortune 500. This will encourage buyers. Large enterprises are unlikely to disappear overnight. So revenue from this segment is going to be really valuable. So those are some ways to think about measuring the strength of your client relationships. 

Sean Magennis [00:05:54] Outstanding, Greg and resonates strongly with me because in my experience, particularly when I was running my boutique for 14 years, I had many clients for the entire 14 year duration. In fact, some of my strongest relationships were those that we sold in the early days and went with us and through the cycle and we learned so much from that and that was a key to us unlocking the value that we received when we sold that business. So really important. So revenue concentration, client tenure and client quality. These are really fantastic, Greg. So there are three easy to understand items and hopefully you are audience members will absolutely spend time making sure you get these three right. So, Greg, an additional item is what should a professional services firm leader do to improve these three, these three areas? 

Greg Alexander [00:06:52] So investors are going to steer away from boutiques that do not institutionalize their relationships. So evidence of this can be found in kind of well documented client account plans. Buyers will want to see that these critical client relationships are housed inside of a customer relationship management system that’s used by all. 

Sean Magennis [00:07:13] Yes. 

Greg Alexander [00:07:13] A risk that a buyer takes from buying a boutique is key employee turnover and sometimes these key client relationships sit with key employees, and when the key employee leaves, they take the clients with them. And buyers are not going to acquire your firm if that potential potential exists, even even if it’s a slight potential of happening, they’re going to run away. The acquire will want to know that these relationships are with the firm, the institution, not with the employee. So that if the employee quits the billings, don’t go away and this requires the institutionalization of your client relationship. So that’s the key thing. So make sure that your clients are clients of the firm. They’re not clients of a single person and if you can prove that by having tools like this, CRM systems, account plans, et cetera, that’ll give great confidence to a potential buyer that these clients are likely to stay with you over time. 

Sean Magennis [00:08:13] Wonderful point, Greg and again, resonates with me because as an owner of a professional services firm, institutionalizing the ownership of your key clients, in fact all your clients has got to be one of the top five priorities. 

Sean Magennis [00:08:32] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on Collective 54 members who are making an impact in the professional services field, Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling and maximizing business valuation. Today, we have the pleasure of introducing you to an extraordinary individual. Pete Lerma, who’s principle owner and founder of Lerma, a full service branding, creative and interactive agency dedicated to crafting insightful, relevant communications primarily for the Hispanic market. 

Pete Lerma [00:09:18] We’re a next generation full service branding agency. We’re in the business of connecting brands and their customers. Increasingly, that engagement happens through digital. We pride ourselves on being one of the most digitally savvy ad agencies in the country and it’s the kind of knowhow that’s allowed us to take avocados from Mexico to the Super Bowl five times in a row as their digital and social agency and we’ve consistently made them the most talked about brand in digital and social media in and around the Super Bowl. I lead a team with operations in Dallas and Mexico City, and a few of the other brands on our roster include the American Red Cross, Bud Light, Rita’s, Ocean Spray and the Home Depot. 

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

Sean Magennis [00:10:19] So, again, in an effort to provide you immediate takeaway value, I have again prepared a ten question, yes or no checklist. Please ask yourself these 10 questions. And if you answer yes to eight or more of these questions, you can prove you have a healthy client relationship. 

Sean Magennis [00:10:40] Number one, Are your client relationships an asset on your balance sheet? 

Greg Alexander [00:10:43] So let me dove in here a minute. 

Sean Magennis [00:10:45] Please. 

Greg Alexander [00:10:46] So when you get your balance sheet, this is an easy question and I love the fact that you set it up as yes, no. When you look at your balance sheet, are your clients on the balance sheet? Probably not. Right. So right away… 

Sean Magennis [00:10:56] Great point redo your your balance sheet. 

Greg Alexander [00:10:59] Redo your balance sheet, right and then when you read through your balance sheet and you’re going to place a client relationship on the balance sheet, what do you have to do? You have to value it. 

Sean Magennis [00:11:06] Yes. 

Sean Magennis [00:11:06] What’s that relationship worth? 

Sean Magennis [00:11:08] Yes. 

Greg Alexander [00:11:08] Well, you can do a simple understanding as to what the profitability of that client is. How much EBITDA does that client produce? You probably have a good feel for what your multiple of EBITDA is between five and ten, let’s say. So if a client is generating one hundred thousand dollars in annual profits, you know, that client’s worth 500000 to a million.

Sean Magennis [00:11:29] At exit. 

Greg Alexander [00:11:30] You can value it right on your balance sheet. Right. So that’s a that’s a very easy thing for an owner to do, is just to take out your balance sheet. Yes. No, my clients on their if they’re not, I got to get them on there. And how do I value them? 

Sean Magennis [00:11:43] Excellent. Number two, is this client asset appreciating in value? 

Greg Alexander [00:11:50] Yes. So here’s an easy way to do that, right? Put multiple annual balance sheets next to each other and maybe maybe you can project into the future, even go back in time. So, for example, if I’m doing business with X, Y, Z company when they first become a client four years ago. OK. So each year for the last four years. What were they worth? Were they going up in value or not? Yes. And if they weren’t going up in value, how come? 

Sean Magennis [00:12:13] Right. Great question to ask and ensure to the extent you can, an appreciating client value. 

Sean Magennis [00:12:20] So question number three, do you have a diversified client base with no one client worth more than 10 percent of your total revenue? Number four, does the tenure of your client relationship exceed three years? Number five, are your client businesses stable? Number six, are your clients and relationships stable? What is that, Greg? =

Greg Alexander [00:12:56] Yes. So here’s what that means. So you can be doing business with a company and at that moment in time, that company is doing well. But when you peer into your client’s customers, those are end customers. How are they doing? So, for example, for many, many years we thought General Electric was the very definition of a rock solid customer and all of us would be honored if they were on our client roster. Not anymore. Why? They were overexposed to the oil industry, the oil industry became very unstable and took G, GE right into the tank. I don’t even think they’re part of the Dow Industrial Average anymore. So peek into…

Sean Magennis [00:13:40] Yes. 

Greg Alexander [00:13:41] …The customers of your clients and try to get a feel for how stable is their business. 

Sean Magennis [00:13:46] Outstanding, and that goes to truly knowing your customer. It’s not a trite it’s not a trite saying, is it? 

Greg Alexander [00:13:52] Right. 

Sean Magennis [00:13:54] So question number seven, do you have account plans? Number eight, have you institutionalize your client relationships into a customer relationship management system. Isn’t that key, Greg? 

Greg Alexander [00:14:11] It is, a couple of things on seven and eight, account plans and CRM. So if I’m doing due diligence, OK, and part of my due diligence is understanding healthy client relationships and in my information request, I asked for log in credentials to your CRM system. You tell me we don’t have one. The conversation doesn’t proceed. 

Greg Alexander [00:14:30] If I ask… 

Sean Magennis [00:14:31] No doubt. 

Greg Alexander [00:14:31] Right. If I ask you for access to your account plants, which ideally would be in your CRM system, but if they’re not and I say, hey, here you you tell me that your top 10 clients are these and I ask you for acount plans for each and you don’t have them and your answer is, well, all that we have all in information, but it’s in the salesperson’s head. That’s a major red flag because again, if that key employee walked out the front door, is all that tribal knowledge goes with him or her. So these have to be documented and that’s a sign of institutionalizing the relationships. 

Sean Magennis [00:15:03] Outstanding, and a follow on number nine. Very, very important is are the client relationships with the firm and not with your key employees? 

Greg Alexander [00:15:13] Yes and one quick trick there that we look for when we’re doing diligence is executive sponsored program. So most professional services firms have partners and they’re the highest up in the organizational chart and to all of those partners make, you know, fairly regular client visits with the key clients. 

Sean Magennis [00:15:33] Yes. 

Greg Alexander [00:15:33] And do they own those? So that, again, because partners are less likely to leave the firm because they have ownership. So if the relationships are held by the partners, at least partially, then that’s an indication that the client relationships have been institutionalized. 

Sean Magennis [00:15:49] Outstanding, and then finally, question number ten, will the billings from your client relationships stay when the key employee quits? 

Greg Alexander [00:15:58] Yes. Obviously, that’s what this is all about. 

Sean Magennis [00:16:00] Yep. And if you follow our sponsor, Collective 54, we have a concept called the strategy defense, which is all part and parcel of maintaining and ensuring that you have your revenue concentration, your client tenure and most importantly, your client quality. So if you answered yes to eight or more of these questions, you have excellent client relationships. This will make you very attractive to potential buyers. Client relationships are an asset. Like other assets, some relationships appreciate in value and others depreciate, appreciating client relationships will increase the value of your firm. Depreciating client relationships will decrease the value of your firm. 

Sean Magennis [00:16:49] When trying to exit for a great price, bullet proof your client relationships. If you enjoyed the show and want to learn more, please pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell the Professional Services Firm. 

Sean Magennis [00:17:08] I’m Sean Magennis. Thank you for listening.