Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

As a founder of a boutique professional services firm, you may be contemplating your exit strategy. Understanding the M&A landscape is crucial to identifying who is most likely interested in acquiring your firm. In my experience, the most suitable buyers are typically firms that are substantially larger than yours, generally by a factor of 5-20 times the size of your firm. Here’s why:

The concept of “moving the needle” is central in M&A. For an acquisition to be worthwhile for a buyer, it must have a meaningful impact on their business. However, if the acquisition is too large, the risk and effort involved in closing the deal can become prohibitive. Therefore, a sweet spot exists where the deal is significant enough to be compelling yet manageable in terms of integration and financing.

To identify potential buyers in this sweet spot, we employ a simple yet effective back-of-the-envelope valuation method. By multiplying the number of employees a firm has by $200,000 (a figure that roughly estimates the revenue per employee for professional service firms), we can gauge the size and suitability of a potential acquirer.

Let’s walk through an illustrative example:

Imagine your firm has 10 employees and generates $2 million in revenue. You’re eyeing a sale, and you want to find a buyer for whom your firm would be an attractive proposition without being overwhelming to absorb.

If we apply our method, we’re looking for a firm that has between 50 and 200 employees. Here’s the math for the lower end:

50 employees x $200,000/employee = $10 million in revenue

And for the upper end:

200 employees x $200,000/employee = $40 million in revenue

These figures suggest that companies within this range would find an acquisition of your firm substantial enough to “move the needle” but still be a feasible transaction to complete.

Your next step? Start researching firms that fit this employee count and approximate revenue scale. Industry databases, networking events, and even LinkedIn can serve as starting points. Keep in mind that cultural fit, strategic alignment, and the specific services your firm offers will also play critical roles in attracting the right buyer.

By focusing your search on firms that fall within the 5-20x size range of your own, you increase the likelihood of finding a genuinely interested buyer—one for whom the acquisition of your firm represents a significant, but manageable, opportunity for growth.

Remember, while the revenue-per-employee method is a guide, it’s not a substitute for a thorough valuation and strategic fit analysis. Engaging with a knowledgeable M&A advisor early in the process can help refine your approach and identify the right targets, setting the stage for a successful transaction that delivers value for both you and the buyer.

If you are trying to figure out how much your firm is worth, who to sell it to, and on what terms, consider joining Collective 54 by applying here.  These questions, and many others, get answered by your peers and a curated set of advisors.

Selling with Content Before the Sale

Selling with Content Before the Sale

Play Video

The ultimate scale activity for a founder is when you produce top-notch content and know how to distribute it.

In this video, we’ll uncover how to master inbound content marketing. We’ll also reveal 3 reasons why you should care about content delivery, specific tactics for books, podcasts, and blogs, plus common mistakes to avoid.

In this video, you’ll learn:
– The difference between selling products vs selling services
– The impact of transforming work environments on referrals
– How to position your content to sell more services

How to Know the Right Time to Recap or Sell Your Business: An Investor’s Perspective

How to Know the Right Time to Recap or Sell Your Business: An Investor’s Perspective

Imagine you’re in a game where your character has a treasure of immense value, attained through years of sacrifice, risk taking and toil.  The objective of the game is simple – find a buyer for the item and transact at a mutually acceptable price.  Easy, right?  Well, there’s a twist[1]:

    • The buyer’s identity and location are a mystery
    • You can only transact once (i.e. no do-overs)
    • The item’s value fluctuates, and
    • A poorly-timed trade may sentence you to a lifetime of regret and self-loathing

Yikes.  Who would want to play that game?  Well, this mirrors the journey that founders embark upon when contemplating either a recapitalization of their business with a private equity firm partner (a ‘recap’) or the full sale of their business  (an ‘exit’).  Not to worry, there are people and insights that can help across all of the anxiety-laden dimensions of planning a recap or exit.  While the ultimate decision is yours, you are not alone.

Indicators That It’s Time

This piece will focus on timing and is informed by my nearly 20 years of experience as an investor in and seller of businesses.  Interestingly, across the matrix of decisions that a business owner has to make, timing of a recap / exit is one of the more straightforward exercises.  The trick is knowing what indicators to look for.  So, without further ado, here are some signs that the timing might be right:

    1. A comparable business in your industry achieved an appealing valuation. If you see another founder deciding to engage in a recap or exit transaction, it may merit introspection on your own transaction timing.  What’s good about another founder “going first” is that the multiple they sold for will eventually become known in the circles that care about these things[2].  We suggest reaching out to the investment banker(s) that worked on the transaction to learn about what attributes of the other business buyers focused on the most (i.e. the “value drivers”).  If you would like an introduction to one or more investment bankers who have strong qualifications and successful transaction experience working with owners of B2B professional services firms, please email me, and I’ll connect you
    1. Proceeds from a transaction will allow you to “hit your number”.  Admit it, you have a magic number in mind (after tax) that you would like to achieve from all of your efforts to develop your business.  This number is typically informed by various objectives for life in retirement such as estate planning goals,  philanthropy, or simply enjoying the well-earned fruits of your labors.  The reason for defining this number before you consider a transaction is to prevent clouded judgment during negotiations.  Therefore, if a transaction is likely to meet or exceed your target, then the timing could be right.  Remember the adage, “Pigs get fat, hogs get slaughtered.”   As importantly, when considering a recap vs. an exit transaction, keep in mind that the recap will provide you with two opportunities to monetize the value created by your team’s efforts while the exit transaction is a one-shot payout.  So the total proceeds and likelihood of reaching your target amount may be substantially greater in the recap scenario.  I’ll share more on this very important topic of recap vs. exit transaction in an upcoming blog post.  
    1. You’ve experienced multi-year growth in revenue and profits. In the words of Bruce Lee, “Long-term consistency trumps short-term intensity.”  This certainly applies to how investors will assess the quality, sustainability, and growth potential of your revenues and profitability.  For instance, if you have an abnormally great year with outsized profitability, you might conclude that you should exit to capitalize on your inflated earnings.  However, if your surge in EBITDA is attributed to one-time revenue wins or other unsustainable factors, a buyer is not likely to give you anywhere near full credit for it. Further, if your financials have been volatile such that there are a lot of ups and downs one year to the next, you’re not going to garner the same multiple as a business that elicits more confidence in the predictability of future financial metrics.  Consistent growth creates a reassuring storyline that will attract more interest.
    1. Value remains for a new investor. Sometimes looming headwinds can drive an owner’s decision to exit.  Conceptually, getting out before these challenges arrive makes sense, but it’s likely that investors are already, or will be, attuned to those same issues, and it may then be too late to drive an optimal outcome from a sale.  Would you purchase an orange with all of the juice squeezed out of it?  Clearly not.  At a minimum, investors are going to need to know that the prospects for growth will remain strong for the next 5-10 years.  Otherwise, they may encounter challenges when they ultimately seek an exit.  Think of it this way, reflect on whether you would want to invest in your business today.
    1. Bringing on a partner could help address the strategic needs of the business. For first-time founders of growing businesses, it’s a truism that their company is the largest entity they’ve ever managed.  For a time, managing growth can be fun and present an array of “high class problems” whose solutions can be fulfilling to solve.  However, growth can transform manageable hills into formidable mountains whose successful summit requires the support of someone that has climbed them before.  A good partner, like a sherpa on Everest, will see the opportunity that these mountains present and be able to help you develop a path forward.  Common strategic challenges that get a founder thinking about bringing on a financial partner include (i) their industry’s transformational change, (ii) investing in and building a formal and scalable sales and marketing system / organization, (iii) a sizable add-on acquisition, or (iv) professionalizing / incentivizing a management team.  

While these signs can guide your decision, the ultimate choice is personal and nuanced, and I wish you well in making it with the full support of your trusted advisors.  Get in touch any time if you ever want to talk through where you are in your journey.

About RLH Equity Partners

RLH is a private equity firm with over 40 years of experience investing in rapidly growing, founder-owned, knowledge-based B2B services firms.  Our value creation strategy is defined by a heightened focus on culture, continuity of founder leadership, an emphasis on organic growth, and a conservative approach to the use of debt.  In our long history, we’ve invested in and divested dozens of businesses and made many decisions about the optimal time to sell the companies in which we are investors.

[1] There are certainly exceptions to all of these items, so simply accept them here for the sake of example.

[2] Two other advantages of allowing a peer company to go first are (i) the number of viable targets for the interested investor/buyer universe has been reduced by one which improves the scarcity value of the remaining peers and (ii) the prospective investors/buyers who finished second, third, and fourth in the process to acquire the peer company probably still want to acquire a business similar to yours and are logical targets for your transaction process.

Competing on Price: A Boutique Professional Service Firm’s Dilemma

Competing on Price: A Boutique Professional Service Firm’s Dilemma

Understanding the Low-Cost Provider Landscape

As a founder of a boutique professional service firm, you might find yourself at a crossroads, pondering if competing on price is the right strategy for your business. To navigate this critical decision, it’s essential to understand what being a low-cost provider entails and the nuances of price-based competition.

What It Means to Be a Low-Cost Provider

Being a low-cost provider is more than just slashing prices. It’s a strategic choice that involves positioning your firm as the most economical option in the market. This doesn’t necessarily mean being the cheapest, but rather offering the best value for money. For example, you might charge the same, or more, per hour but you get the work done in half the time as the competitors. To the client, you are the low-cost provider. However, internally, you manage to exceptional gross margins.

The Role of the Economizer

In this context, becoming an ‘economizer’ is key. This means not only setting competitive prices but also ensuring your operational model supports this strategy. As an economizer, your goal is to help clients save time and money, thus delivering value that goes beyond just the monetary aspect. Small service firms are well suited to play the role of economizer as they are easier to do business with, and can simplify for clients.

The Big Vs. Small Firm Conundrum

Large firms often have the upper hand in being low-cost providers due to their ability to squeeze costs out of inefficiencies at scale. They leverage volume, streamlined processes, and economies of scale to reduce costs, passing some of these savings to their clients.

For boutique firms, competing head-on with larger rivals on price can be a risky strategy. Smaller firms typically lack the scale to absorb cost reductions without impacting profitability. But does this mean you should abandon the idea of competing on price? Not necessarily.

Reengineering Service Delivery: The Smart Approach

For boutique firms, a smarter approach lies in reengineering how services are delivered. This involves innovating and finding unique ways to provide services more efficiently. By doing so, you can reduce costs while simultaneously enhancing service quality.

This approach requires a deep understanding of your clients’ needs and a willingness to challenge the status quo. It’s about being agile, adapting quickly to changes, and leveraging technology to streamline processes. For example, large firms often overengineer their service offering to justify a high price. The more complex and difficult a project the more people it requires and the longer the work will take to complete. Small service firms can show a client that this complexity is not required, that there is a simpler way to solve a problem. And, therefore, it requires fewer people and less time, thus it costs less.

Can You Compete on Price?

So, can a boutique professional service firm compete on price? Yes, but with a caveat. It’s not about being the cheapest option, but rather about providing exceptional value. Your strategy should focus on reengineering your service delivery to lower costs while maintaining, or even improving, service quality.

In Conclusion

Competing on price as a boutique firm is feasible, but it demands a strategic approach focused on operational efficiencies and innovative service delivery. Remember, in the world of professional services, value often trumps price. Your goal should be to provide unmatched service at a price point that reflects the value you offer, not just the cost to deliver it.

Are you wondering if you can win on price? Are you charging too much, or too little, for your services? If so, consider joining Collective 54. Members ask, and answer questions like this for each other, based on their first hand personal experiences. Apply here.

Episode 137 – How a Fast Growth Service Firm Formalized Goal Setting to Get Focused – Member Case by Jason Mills

A strategy defines who you serve, what you do, how you do it, and how you do it differently. And a strategy begins with a clear set of goals. In this session, learn how a boutique adopted a formal goal setting methodology, called OKRs, to get focused on what matters most.

TRANSCRIPT

Greg Alexander [00:00:10] Welcome to the Pro Serv podcast, a podcast for leaders of thriving boutique professional services firms. For those that aren’t familiar with us, Collective 54 is the first mastermind community focused entirely on the unique needs of the boutique processor firm. My name is Greg Alexander. I’m the founder and today I’ll be your host. And in this episode we’re going to talk about a popular management methodology, goal setting methodology called Okay Hours. And the reason why I’m going to talk about this is several of our members are attempting to implement them and we’re learning a lot and we want to share some of those learnings. And if you’re not using OKRs, you might be using something similar, such as the boutique framework from collective 54 or iOS or scaling up. There’s a lot of kind of techniques out there and it’s important to have one. Today we’re going to talk about OKRs and we’ve got a role model with us. It’s a member of Collective 54 from a company called Tribal Scale. His name is Jason Mills. Jason, it’s good to see you. Thanks for being here. And please introduce yourself and your firm. 

Jason Mills [00:01:25] Thanks, Greg. My name is Jason Mills. I had engineering a tribal scale. We’re a boutique services firm specializing in platform and software development, using extreme programing, which is essentially test driven development coupled with peer programing. We also use this to provide a unique approach to digital transformation. 

Greg Alexander [00:01:45] Very good. So let’s start with the basics. What is your definition of OKRs? 

Jason Mills [00:01:53] So Oscars are basically, I guess, essentially company goals. The acronym ACRONYM stands for Objectives and key results. The objective portion be more of a loosely defined company goal and the key results, more of the how to get there. So yeah, but it’s kind of like a quick overview. 

Greg Alexander [00:02:15] Yeah. And for those that might be interested, they really became famous when John Daw introduced them to Google back in the late nineties. And many in the tech world, such as tribal scale, you know, have embraced them as a result and to much great success. So, Jason, now we understand what they are. Let me ask you, why did you and your firm start using them? 

Jason Mills [00:02:40] So we’ve we’ve done goal setting exercises for several years to drive personal growth and company initiatives. But in the past, it was really just the manager collaborating with the with a report. And we came to the realization that, yeah, it’s great if someone wants to get a certification to support their growth, but what if that doesn’t align with the company’s goals? So what can we do to eliminate this gap? And as we as we look to really align the company vision in the organization, OKRs became the model to try out for us. 

Greg Alexander [00:03:15] Okay, great. And when did you begin your. Okay, our implementation. 

Jason Mills [00:03:21] So we started end of last year really trying to get the framework in place and for preparation to really launch this in Q1 of this year. So we are about two quarters in almost at the end of the second quarter right now and definitely iterated a little bit on the process. But that’s that’s where we are at this point. 

Greg Alexander [00:03:43] Which is great. I mean, we caught you at exactly the right time. If you already had everything fully baked, the the conversation wouldn’t be as fruitful because I think there’s many that are in the middle of an implementation. So to hear your your story is going to be helpful to them. So tell us a little bit about, you know, what the journey has been so far. You know, how are you using them, What’s gone well, what hasn’t gone well, etc.? 

Jason Mills [00:04:06] Yeah, sure. So we’ve gone ahead and we created for essentially for company OKRs to help line the teams. The first one was lined with white glove service. That was like an example of one of the ones we use trying to provide that ten X value to our clients. The second was service offerings kind of like complements the first OKRs, and the third was thought leadership in the form of content generation through blogs. Speaking of speaking out on podcasts or attending meetups, and the fourth one was meaningful bench work. So we were in a situation last year where a lot of times people were on bench and we wanted to make sure that it aligned with its valuable time. We wanted to make sure aligned with like with what would benefit our clients and our business the best. So those were some of the the OKRs we choose to use. And then each department really gets their own. They can add a couple of extra OKRs if they like, based on what the department needs might be. 

Greg Alexander [00:05:13] Okay, so let’s double click into into one of them and I’m going to choose meaningful bench work because I think that’s a rich topic for our audience. You know, most of our members, sometimes they’re a little lumpy in their businesses and they can find, you know, talented people on the bench for a period of time. And then unfortunately, sometimes it goes the other way your 120% capacity and everyone’s burning the midnight oil. So so what is some examples of meaningful bench work? 

Jason Mills [00:05:42] So a lot of times like the default for us just was like, okay, we’re gonna we’re going to certification certifications always help our, you know, our company in regards to Azure or things like that. But we took it a step further and we we said, you know, whatever we’re working on, it should benefit either a client that we’re going to have in the future or a client that we have currently. And we took it a step further and said, you know, how do we know we’re succeeding in this? So we put together like a metric saying that, you know, we want to we want to use whatever knowledge they’ve gained within two months of of learning it. And that’s how we know if we succeeded with that. So so that’s an example. 

Greg Alexander [00:06:27] That is a great example. So you want to use whatever you learned within two months. I can’t help myself. Two months is a very precise number. How did you pick that? 

Jason Mills [00:06:39] Oh, I it’s like it felt right. Okay. It seems like, you know, when you’re when there’s a little bit of leeway before the next client starts up, it seems like a good amount of time to prep before you actually get deep into the project. So that’s just landed there. 

Greg Alexander [00:06:58] Yeah. Okay. Well, that makes sense. All right. And you know, at the top, I mentioned that OKRs is there’s other similar systems. A lot of our members use iOS. Some use scaling up, some use the boutique. I mean, there’s a lot of them out there. And I advocate for everyone. To me, there’s not a ton of difference between them. The important thing is to have one and be committed to it and implement it. Right? So. So was there any reason why you picked OKRs over the alternatives? 

Jason Mills [00:07:27] Well, they you know, they were naturally a good starting place if you haven’t done organizational goals before. There they were from what we the research we did, they were loose, flexible to change, interpreted in different ways which which, you know, some might think that’s not you you want to make sure they’re not interpreting the phrase, but it actually allows to generate some creativity among the teams to solve different problems. And they’re not tied to compensation, which alleviate some of the pressure as well. So they were basically very forgiving if we screw this up, which we were going to screw it up. Yeah. So anyway, U.S. has its value, too, but I know that’s more of an operating system. And now that we’re two quarters in, we’re actually experimenting a bit, but laying us on top of that to kind of like help us drive and execute a lot of the a lot of the things we want to do. 

Greg Alexander [00:08:19] So that’s fantastic. So the reasons why you chose it, one of the reasons anyways, was the flexibility. And since this was the first attempt at this, that was obviously valuable, I also, I did not know that OKRs were divorced from compensation. So that’s a valuable add right there and I can see the benefits of that. Some might argue against that, but I can see if you’re early in this process that that might make it more, I guess, less stress in getting it implemented and maybe less of a shock to the system. So that’s interesting. Okay. And then in terms of the six months that you’ve been at it, you know, if you were to do it over again right now, if you had a clean sheet of paper, is there any any gotchas, any failures that happened along the way that you wish you would have known? 

Jason Mills [00:09:06] I think overall it went pretty well. We implemented this using just basic spreadsheets. Seems I think you can kind of run the world on spreadsheets and and just set up the spreadsheets, you know, kind of like doing weekly check ins, whether our our OKRs were on track, off track, or if they were done. Kind of provides that simple, simple implementation as we get into it. I think one of the challenges for the engineering team in a lot of times engineering is that one of the larger sizes is that multiple parking levels. So not having that visibility into, you know, what are the managers, the managers, you know, kind of trying to deliver. So are we all in one bucket of thought leadership and no one’s putting any any knowledge into or any time into white glove service. So that was a challenge that, you know, we are kind of working through and evolving on. Hmm. 

Greg Alexander [00:10:03] And what what are your early hypotheses as to how you might overcome that challenge? 

Jason Mills [00:10:09] So we had, I would say like long term, maybe just finding like a tool that can kind of work through and manage it and provide that hierarchal visibility. When I was working at a former Life, I built performance management systems and, you know, clients created goals from very simple to very complicated scorecards, you know, tracking metrics on time and dollar delivery. But end of the day, they all wanted to see a one page dashboard with visibility all the way down the line. So right now we are using a tool that actually integrates with our Google calendar and allows us to kind of tag each meeting that everyone has with an Oscar. And that month we can see how much time was spent across the organization and on the on the specific. Okay. So it kind of provides that visibility to Head Start, right? 

Greg Alexander [00:11:04] Yeah, very cool. Any other, you know, tools that you all leveraged or, you know, quick hacks that people might take advantage of when you got going on this? 

Jason Mills [00:11:15] And we’re we’re piloting a couple of different things, like from the iOS standpoint. There’s there’s a couple different tools that just manage that whole process. So it’s like we’re using 90 right now, which is something that we’re that we’re trying out, which is a good. 

Greg Alexander [00:11:33] Thing about like learning tools around OKRs. Were there any books that you read, any videos you watched, anything like that that you can recall that jump to mind that were particularly helpful? 

Jason Mills [00:11:43] Yeah, there were some there’s a lot of great information on some websites. Definitely read the book Traction, which was a good one on iOS, trying to think of some other ones that come to mind, but those are kind of amazing. 

Greg Alexander [00:11:57] Okay, Got it. And then my last question before we wrap up is, you know, the implementation of OKRs. Is there one person who kind of owns the the whole thing or is it distributed? You know, who’s in charge on it? 

Jason Mills [00:12:11] Yeah. So the for us we have the our chief of staff and she owns the process, kind of like owns the master spreadsheet. And then we have the department leads that kind of like manage the okay for each department, everything kind of rolls up, and that’s kind of a bogey structure. 

Greg Alexander [00:12:28] Got it. Very good. Okay, Well, so for the listeners that are members, let me draw your attention to making sure you accept the meeting invite that will come out here shortly with Jason Mill’s name on it from tribal school. And if you attend that member only private Q&A session on Friday, which is when we have a role model sessions, you can double click on any of these items and ask your questions directly of Jason. So I encourage you to do that. If you’re not a member and you think you might want to consider it, go to collective 54 dot com. You can fill out a form and one of our reps will get in contact with you. And if you want to read about other things that we do or the topics we cover. In addition to this, I pointed towards the book The Boutique How to Start the Scale and Sell a professional services firm in a video is your thing on YouTube. We have a channel called Profiting in Professional Services and you can see some videos on that. But Jason, I appreciate you accepting my invitation when I reached out to you and sharing your journey so far. And congratulations on the progress that you’ve made and we learned a lot from you today. So thanks for being here. 

Jason Mills [00:13:35] Great. Thank you, Greg. 

Greg Alexander [00:13:36] All right. Okay. And for the rest of us, you know, I wish you the best of luck as you try to grow, scale and exit your firm in the future. We’ll talk to you on the next episode.

Master the Art of Forecasting Revenue, Profit, and Headcount in Your Boutique Service Firm: A Strategic Guide

Master the Art of Forecasting Revenue, Profit, and Headcount in Your Boutique Service Firm: A Strategic Guide

Ever wondered how to create a bulletproof forecast for your revenue, profit, and staffing needs in your professional service firm? It’s a critical task that can make or break your business growth, sale potential, and overall scalability. In the world of boutique firms, precision is everything. This post presents a hands-on guide to nailing these forecasts, with steps tailored to different scenarios: quarterly, annually, and multi-year.

Here is a guide to forecast revenue, profit, and headcount. 

Forecasting Revenue:

    1. Data Roundup: Your past can predict your future. Collate your historical revenue data, zeroing in on overall revenue and specific client or project revenue. For example: in 2020 the firm did $8 million, in 2021 $9 million and in 2022 $10 million.
       
    2. Identifying Revenue Influencers: What moves the needle in your firm? Client contracts, project pipelines, retention rates, market demand, and pricing strategies can all be key players. For example, in 2022 client #1 extended the contract by six months, but in 2023 the contract ended. 

    3. Reading Market Signals: Stay attuned to market conditions and trends. Wallet share, macro-economic indicators, and emerging opportunities can impact your revenue significantly. For example, the share of wallet inside your top 10 clients is 80% but you just invested in sales so new client acquisition should be up. 

    4. Revenue Modeling: Shape your data into something that speaks. Use techniques like trend analysis, regression analysis, or time series forecasting. For example, descriptive analytics describes what happened, diagnostic analytics tells you why it happened, predictive analytics will tell you what is about to happen, and prescriptive analytics tells you what to do to alter the future outcome. 

    5. Testing Your Assumptions: No forecast is complete without a sanity check. Engage your team, peers, mentors, and Collective 54 members to validate your assumptions. Pro tip: bounce your forecasts by your Collective 54 Leadership Board.

    6. Risk Assessment: Risk is a reality. Consider potential challenges like win rates, project delays, or employee turnover in your revenue forecast. For example, you are running at 100% utilization and time to fill an open req is 90 days.

    7. Refining Your Forecast: Stay nimble. Adjust your forecast to accommodate seasonality, cyclical patterns, or one-time events, and keep updating it as new information emerges. For example, the week between Christmas and New Years is dead.

Profit Forecasting:

    1. Counting the Cost: Your services come at a price. Calculate both direct and indirect costs associated with service delivery. For example, $20,000 to acquire a new client, ~20% of project fees go to cost to serve, 10% of firm revenue on overhead etc.
       
    2. The Drivers Behind Costs: Identify what’s causing your costs. The relationship between revenue growth, costs, and scaling can reveal a lot about your firm’s efficiencies. For example, the leverage ratio of senior to junior staff’s impact on labor costs. More seniors and less profit.

    3. Crafting Profit Models: Subtract your projected costs from revenue forecasts to build profit models, track profitability trends over time. For example, Collective 54’s benchmark data says best-in-class margins are 80% gross margin, and 50% EBITDA margin. How does your forecast stack up? 

    4. Sensitivity Analysis: Revenues and costs can change. So, how will this affect your profit? Test the waters with sensitivity analysis. For example, margins from your ideal clients are 65% but from non-ideal clients is 35%, and yet half your clients are outside your ideal client profile. What would happen to the profit forecast if you stopped selling shitty work?

    5. Financial Goals Alignment: Your profit forecast should match your financial ambitions. Pro tip: see what your firm is worth by using Collective 54’s Firm Estimator tool here.

Headcount Forecasting:

    1. Productivity Ratio Analysis: Profit and headcount are closely tied. Compute productivity ratios to better understand this relationship. For example, revenue per head in 2022 was $400k. 

    2. Staffing Need Assessment: Identify your staffing requirements based on projected revenue growth. For example, with 20% revenue growth, we need 4 juniors for every senior to keep our leverage ratio at 4:1. 

    3. Turnover Rate Consideration: Employee attrition can be a pain point. Use historical turnover rates to estimate future staff changes. For example, your historical turnover rate is 15% per 100 employees so to stay headcount neutral you need to recruit 15 people per year.

    4. Hiring Plan Development: Align your hiring plans with your revenue and profit forecasts. For example, you need 75% of the headcount expansion in the first half of the year if you are to hit the full year revenue goals.

    5. Monitoring and Adjustment: Always keep an eye on your actual headcount and adjust hiring plans when necessary. For example, revenue is softer than expected so reduce the hiring plan by x%.

Time Horizons and Their Impact on Forecasting

The forecasting processes outlined above may vary based on the time horizon involved.

    • Quarterly forecasts: Focus on short-term revenue and profit projections, considering specific sales pipelines, ongoing projects, and immediate market conditions. Headcount forecasts should align with the short-term workload. 

    • Annual forecasts: Incorporate a broader view of the market and consider long-term trends. Revenue and profit forecasts should account for annual cycles, market fluctuations, and strategic initiatives. Headcount forecasts should align with the anticipated workload for the year. 

    • Multi-year forecasts: Consider long-term market trends, industry developments, and strategic goals. Revenue and profit forecasts should reflect growth objectives, market expansion plans, and potential risks. Headcount forecasts should align with the long-term growth trajectory and strategic initiatives.

Conclusion

For any boutique professional service firm, forecasting revenue, profit, and headcount can be a make-or-break endeavor. With the above guide and by regularly updating your forecasts, you can make strides towards your wealth, income, and workload goals. Start your forecasting journey today and steer your firm towards continuous growth and prosperity.

Narrowing Your Ideal Client Profile: How to Sell More Services Easily

Narrowing Your Ideal Client Profile: How to Sell More Services Easily

Play Video

You can’t afford to have unhappy clients at your professional services firm. So how do you ensure you’re working with the right people at the right time?

Spreading your resources too thin prevents your business from dominating your niche. And the inability to say no to the wrong client can prevent you from having resources available when the right client comes around.

In this video, Greg explains how to nail down your ideal client profile, concentrate your scarce resources correctly and accelerate the pace of scale.

In this video, you’ll learn:

    • How to tighten up your ideal client profile
    • When to say no to sales to create room for better sales
    • Sales strategies and client types based on your ideal client profile

Pricing Strategy: How Much Should You Charge?

Pricing Strategy: How Much Should You Charge?

Play Video

How much should you charge for professional services? It’s not always as clear as you’d think, but you need to have a pricing strategy to scale your business. And coming up with a price is just the beginning. You also need to understand what your clients are willing to pay and how to explain why you charge the rate you do.

This video provides tips for identifying how much you should charge and demonstrates how to explain your rate to a client. 

In this video, you’ll learn:

    • How to use surveys to determine a clients willingness to pay
    • The benefits of experimenting with a variety of pricing strategies
    • How to navigate reference pricing in your pricing strategy
    • How to effectively differentiate your rate vs your competitors
    • Negotiation strategies within your pricing strategy
    • 3 strategic decisions to consider when determining how much you should charge

A Strategy for Growth: How to Create Value for Clients

A Strategy for Growth: How to Create Value for Clients

Play Video

How do you make your firm more valuable for your clients? That’s the ultimate question. But what it comes down to isn’t as simple as X’s and O’s. Your business strategy needs to cover all the bases.

That means everyone understands the allocation of resources, your staff has a clear understanding of what’s required for customer satisfaction, and leadership knows what it takes to raise the skill level of the entire team.

In this video, we walk through the do’s and don’ts of an efficient business strategy to create more value for clients. 

In this video, you’ll learn:

    • The 3 resources a business strategy is built around
    • 4 data inputs that can help make your business more valuable to clients
    • How to create a business strategy that makes your business more valuable to clients

Episode 115 – How a Software Consulting Firm Succeeded by Planting a Flag in Middle America – Member Case by Ashok Sivanand

In a post-Covid world, does geography still matter? Should you pursue clients, and employees, based on where they reside? It used to signal to clients that you were legit when your name was on a building downtown. Is this still true?  On this episode, Ashok Sivanand, CEO at Integral, shares how he thinks geography is still a mission critical element of strategy, but not for the reasons you might think. He moved to Detroit and is building a firm based on mid-western values. And it is these values, concentrated in this geography, which is contributing to his success. Hear from Ashok his remarkable story which started with him driving a forklift in a factory during the graveyard shift. 

TRANSCRIPT

Greg Alexander [00:00:15] Welcome to the Pro Surf Podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. For those that are not familiar with us, Collective 54 is the first mastermind community dedicated exclusively to the needs of leaders of thriving boutique producer firms. My name’s Greg Alexander. I’m the founder and I’ll be your host. Today on in this episode, we’re going to talk about geography. I know that’s a weird subject. Probably weren’t anticipating that. However, strategy and a boutique processor firm is where to play and how to win. And since our community is made up of boutiques, many of them choose geographies that they can dominate. And it’s a very effective strategy. And we’ve got a great example of that today. Middle America, if you will. And we’ve got a great role model to discuss with us how he is factoring geography into his strategy and how he is trying to dominate middle America, if you will. His name is and I’m going to do my best here. My man. A shook, son of honored. How do I do? 

Ashok Sivanand [00:01:28] Cos that’s probably a six out of ten. 

Greg Alexander [00:01:30] Oh, sorry about that. 

Ashok Sivanand [00:01:32] It’s a showcase debate and a shock. Savannah. 

Greg Alexander [00:01:37] Savannah. Okay. Sorry about that. I tell you what, I gave you permission to call me Joe Smith for the rest of the call. We can. We can get even that way. So please introduce yourself to the audience and tell us a little bit about your firm. 

Ashok Sivanand [00:01:51] Yeah, sure thing. So I started in a girl about five years ago, and what we do is help companies with transforming into technology companies. And we do that by building software products with them and using techniques like pair programing, where it’s very much like an apprentice style of teaching, learning almost like a pilot and copilot. Where are the companies that are looking to really transition their operations to being more tech enabled? Can do it at a very grassroots level in service of a strategy that most companies have today of wanting to become more like technology companies. The Fords of the world trying to go after the Teslas of the world, if you will. 

Greg Alexander [00:02:34] Yep. Okay, very good. So I was drawn to your story because to simplify strategy, which I’m dramatically oversimplifying where to play and how to win, where to play can be many things market segments, industry verticals, etc.. But one of the components is geography. And you have an interesting story on your take and geography and and how your focus on the automobile industry and as I understand it, middle America. And we’ll talk about what that means and in particular smaller cities. So just by way of introduction, would you mind explaining that part of your strategic approach? 

Ashok Sivanand [00:03:14] Yeah, sure thing. So we’re based out of Detroit, Michigan, and that’s where I founded the company. A little short history here. I moved to Detroit for what was meant to be a six month engagement with my last employer, and I was supposed to start their local practice here and go back to my hometown of Toronto. There was some reading between the lines about a promotion and everything that was waiting for me at a company that was going public. One thing that I did not factor into my spreadsheet was that I would really like living here. And I remember moving into this apartment in downtown Detroit, opening the windows all the way and looking out at the street and realizing this was never part of the spreadsheet. And we’re going to have to go back and address that. And this was in 2016, and Detroit is in you hear this in the news a lot about the revival story. And I think it’s true of not just Detroit and the auto industry, but can be said about a lot about middle America in many ways. It’s folks that you don’t see a lot in the news when it comes to up and coming technologies or up and coming services and a butt of jokes in some cases. And moving here, I realize that there’s a lot of myth busting for myself and a lot of invalidation of assumptions that I had coming in here and that there’s a lot of smart people here trying to do a lot of cool things with much more of a strong sense of community compared to a sense of competitiveness. But I was used to in the big cities and that’s something that stood out to me and I’ve got a little bit more of a history in the auto industry as well that made these really strong personal reasons for me to jump in and try doing this. 

Greg Alexander [00:04:56] If you wouldn’t mind, I’d love to hear of those personal reasons and your history in the automobile industry. 

Ashok Sivanand [00:05:01] Yeah, sure. I think so. One of my first real jobs was as a forklift driver in a manufacturing plant, and it was nightshift in East Hamilton in Canada. And Hamilton is a manufacturing town. Not too dissimilar from Detroit, was growing faster than Toronto was at a time when Detroit was growing faster than New York. And as manufacturing got outsourced and offshored, the city is kind of gone. The different towns that we know about now. And so the east side of the city is like many cities, the rougher part. And I was an international student. And so let’s just say I learned a lot that summer. And one of the things when it comes to that sort of my professional career was just getting to apply the systems, thinking that most electrical engineers have to do kind of watching electrons move through a circuit. I was able to see kind of how production was happening here and got to learn things like lean principles in terms of I was a forklift driver where I could really bring the most customer value by making sure that all the different parts of the lines were not blocked or starved and so forth, and then went on to work at GM at a plants in southern Ontario where they make the Chevrolet Equinox and now the GMC terrain. I believe it was actually a half Japanese half American plant. So Suzuki owned half the plant from General Motors, the other half. And we had like the movie Mr. Mom, we had like white shirts, blue pants. I had my name embroidered, and it was very different from most car factories that you’d see. And there was definitely a very strong Japanese influence to do how the production was done. I have in fact just this, but I’ve been told by a few people that it was the most efficient GM plant and a lot of folks kind of chalk that up or rationalize it to the the kind of Japanese influence. I, I shut the line down for 8 minutes one time. And at the time, gas prices are really high and these activities are selling like hotcakes. And I thought that I was going to lose my job the next day. And I called in. The general manager kind of conducted what I now know is a five rise exercise, and they made the process improvement right there. And then with all the right people in the room, understood the root cause of how this was allowed to happen. Where we’re burning turned to shut the line on for 8 minutes. And he, instead of firing me and thanked me for my transparency and I got much more confidence and got to learn a lot more about the mean. And so a couple of things that have happened since then. Number one, this was led to thousands. I was really bummed that all the software engineering talent was put on the building and manufacturing the cars more efficiently, and I couldn’t work on the vehicle itself and make it a more compelling vehicle to the consumer. And then flash forward, about ten years, I was working at a company called Pivotal Labs, and number one, they had taken a lot of these leading principles that had originated for building factories more efficiently and to running software teams with more humanity and ultimately getting more value for their customers. So a lot of it clicked for me. I didn’t understand a lot of the jargon, but the first principles were very obvious because it was all borrowed directly from from the Toyota production system and Lean. And the second thing is around 2015 was when that thing changed, where Consumer Reports said that more people were buying cars based on the technology in their compared to horsepower and torque, which were the the traditional selling factors. Right. And that was also the time that I was doing this little thing in Detroit. So the third part of the story was that I had I had I had, you know, be careful what you wish for type of thing, where I wanted to really be part of a compelling value proposition of the vehicle versus being hidden in the back room. And that was a time when when Detroit was really investing and becoming more of a technology town, companies like Ford were making big investments. And and I was at the you know, you could call it right place, right time for something that I’d hoped for ten years prior, understanding a lot of those first principles that somewhat ironically, the auto industry wanted to move their technology teams to working more like their manufacturing teams, believe it or not, in terms of getting the most efficiency and the best customer value out. But looking to Silicon Valley to teach them, even though a lot of it had originated in middle America the first place. 

Greg Alexander [00:09:23] Man, I tell you what, that is an incredible story From driving a forklift on the midnight shift to founding a software company and embracing a new small city, hats off to you mad. Respect for your courage and enjoying it journey. And thanks for sharing it. All right. Well, let’s talk about this concept of geography. So you just laid out what you’re focused on and why does the opportunity exist and how have you been able to, I guess, walk away from the temptation of being the next hot shot in Silicon Valley? 

Ashok Sivanand [00:10:00] Yeah, I think some of it is really values driven. And I know that you talk about iOS. I was lucky to have found iOS multiple years ago and we always knew we had what we had read the Netflix Culture Deck and said, Hey, we got it. We got to build one of our own decks this way. And I’d show up to the office on a Sunday and say, Okay, today we’re going to do culture and I’m going to write the culture down today. And I’d go home with an empty whiteboard. And just having ordered a lot of Uber eats iOS really helped us. Yeah, use a framework to arrive at the values and I think the values that are really important here, how we build software, our values work and melody, accountability and kindness and kindness is the one that stands out a lot to both our talent base as well as our customer base, because they both talk about, Hey, this is something that’s often forgotten. It’s something that’s often overlooked because we need to make a quarterly deadline where we need to hit a milestone, and that’s the first one to get out the door. Accountability is oftentimes kind of front and center. And I think the values that what kept me here in Detroit very much aligned with how I think software should be built. We’re building these code bases not to get one big launch out, but a long term iterative process. And we’ve got to think of the long term and we got to think of the team that we’re building it in the long term, the people that we’re building it for. And so taking the humanness out of it, taking the kindness out of it, really makes it a very short term prerogatives. And I think I haven’t fully understood the causation around it, but there’s definitely a huge correlation between finding folks who can act with those kind of values at the same time, deliver, show up, hold each other accountable. Kindness isn’t the same thing as niceness. Doesn’t mean we’re we’re not. We’re not we’re shying away from having difficult conversations. It means we’re really understanding that the other person I’m trying to problem solve with here is a human, too. And whether it’s a customer or whether it’s an end user that we’re trying to build for and have that rooted back in. And for some reason it’s been a lot easier to find. To find that kind of talent in middle America compared to the cities on the coasts or big cities like Toronto. And I think the customers also start to see that. Where when they engage with us, they see that come through in the engagement and every interaction in the meetings and the weekly cadence where as much as we want to be service oriented, that we do show up and we push back and we do point out some potential flaws in the way they’re thinking and offer them better opportunities as opposed to falling in line just because they’re the customer and the customer’s always right. And and I think that’s that’s something that, you know, exists both on the supply and demand side around here. And and interestingly, there’s folks, especially since the pandemic, is that us folks have kind of moved all over the place and we’ve become more of a hybrid company hybrid in the sense that we hire folks across the country and we come together or very specific in-person engagements or in-person workshops or conferences and folks on the coast to tend to want to come and work in this kind of Midwestern vibe, as you call it. And, you know, more objectively, the values that are that are listed on their careers page despite being based out of California or New York City, because they find that the employment opportunities that they have available to them there don’t necessarily align with who they have. And I think, as you know, I’m not the first one to say it on here. I’m sure that if you can find a value alignment with your colleagues and with your clients, a lot of the other stuff, like salaries and stuff, no longer are top of mind. You just have to pay market, make sure you’re not ripping anyone off. And folks feel like a stronger sense of purpose and community and working together and building is building these products together, solving these problems together. So I think that’s something that I haven’t fully been able to get into a spreadsheet, but it’s it’s a hypothesis that seems to keep paying off. Yeah. 

Greg Alexander [00:14:08] So you answer one of my questions, which was, you know, COVID now makes everybody remote or hybrid. So is geography still as relevant as it once was? It seems like it still is being applied slightly differently. The other side of the geography question and back to strategy, where to play, how to win in geography is part of where to play is. Back in the day, not too long ago, the clients at times would prefer local providers for a whole variety of reasons. You know, and I have read about what Ford Motor Company and the other great companies in Detroit are trying to do to revitalize Detroit. And I admire them for doing that. But now it’s post-COVID, you know, is that does it do the clients still want to do business with local providers or is it now geographically agnostic? 

Ashok Sivanand [00:14:53] I think geographically you still have to be willing to show up. Okay. And we’re seeing different companies come back to the office in different ways. GM is doing it a slightly different way than maybe I would where they’re saying, hey, twice a week, three times a week, we’ve got to come into the office. And that’s one way to go about it. I’ve noticed at Ford they seem to be a little bit more specific about what type of interactions they prescribe for in-person interactions. So they’re like, Hey, we do quarterly plannings, we do workshops. I’d like for you to come in so we can do that on a whiteboard versus trying to figure out how to do it over Zoom. But once you know what the work is and when it’s due and who your stakeholders are and why we’re doing it and everything else, the strategy part is all understand we’re lying and we feel like there’s trust between the team. Then go do it wherever you need to do it. When you put your heads down and get the execution done. And so we were always huge proponents of in-person. The the fact that we were one of the catch 22 is about being in a city like Detroit, is that we there’s a lot of opportunity, but there isn’t necessarily the talent base that you move to meet the demands of that opportunity. And so going hybrid allowed us to expand to a larger power base. At the same time, we set expectations pretty early with our folks that, hey, you’re going to be commuting way less than your last job or you’re going to be traveling a little bit more. And we make sure that every time we start a new engagement that we we go out of our way and make sure that the client’s willing to come in person and do it as well. And we fly in from wherever. So I think in terms of your question, I notice that there are some other firms who are still maybe stuck in that convenient space of just after the pandemic hit where no one had to travel. Travel costs were lower. There was a lot more convenience to it. And I don’t necessarily think that convenience outweighs the community that you can build with those in-person interactions, especially when you try to build trust with a new to meet or with a new client where that trust goes a long way six weeks later, and inevitably you’re going to have some friction. Do you earn the benefit of doubt with the client where they will get into problem solving mode versus people solving mode? Those are all things that we’ve noticed. Go right away when when we spend that time to show up in person. And again, I don’t want to speak for Midwesterner as being somewhat of an impact here, but I do sense that there’s a little bit more of a midwestern value of showing up to someone’s house, breaking bread with someone and building those trusted relationships before really getting down to our own and the bottom line. And so it’s maybe a little bit more metaphorical in terms of does the geography still matter? I think the the Midwest, the Midwestern values are still very much valid, whether you’re local or not. Yeah. 

Greg Alexander [00:17:42] Well said. Well, listen, we’re at our time window here. I could talk to you about this forever. But, you know, just to put an exclamation point on that last statement, we’re in the service business, so relationships matter. And relationships happen when they get face to face. It maybe it’s happening differently now. Maybe it’s not every day, but it does matter. So I think for the folks that are listening to this boutique service rooms, you have an opportunity to differentiate there, you know, and because sometimes big companies like the big auto companies, they do business with smaller firms because of that relationship factor. I mean, who wants to be just another client of Accenture, whereas they can be, you know, your most important client kind of concept. So try to take advantage of geography when you can. Well, listen, on behalf of the membership, just wanted to thank you publicly for being here. I’m really looking forward to the Friday Q&A session with the members. I know they’re going to have a ton of questions on how you learned learned the Toyota production system and the five whys off of a forklift and how that made its way to Detroit. You often don’t hear people say, I live in Detroit and love it, and that’s contrarian by itself. But and we’d love to hear all about that. And, you know, we’re now that it’s post-COVID, we collectively are starting to do some event events. So when the weather gets warmer, I’m going to call you and say, hey, I’m going to get 1012 collective 54 is going to come see you in Detroit. Want to show us around the city. So like fun. 

Ashok Sivanand [00:19:08] Okay, that sounds great. I look forward to it. 

Greg Alexander [00:19:10] Awesome. All right. All right, listeners, let me give you a couple of calls to action. So if you’re a member, be sure to attend the Friday Q&A session regarding geography here and with The Shook. Couple of tools I want to draw your attention to. So in the Boutique companion course, that’s the e-learning modules built around the boutique framework, There’s a strategy template that you can download and it talks a little bit more about geography. We also just wrote an EO slash collective 54 integration plan, got a lot of members that run the U.S. We run our firm in the U.S. We love it. We think it does need to be customized to be relevant to professional service. So if you’re in your iOS shop and want to learn more about that, go to the resource center and download that. If you’re not a member and you want to be because you want to meet really cool people like you did today, go to collective 54 dot com, fill out the contact us form and somebody will get in contact with you. If you’re not ready to be a member but you want you want some more outstanding content like this podcast. Subscribe to collective 54 insights and you’ll get three things. Monday, a blog, Wednesday, a podcast, and Friday a chart. Okay with that. Thanks for listening. And until next time. Best of luck.