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

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

TRANSCRIPT

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

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

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

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

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

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

Why is Cash Flow So Important When Scaling a Business?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

These customers turn to us for help with their disability and autism hiring programs. Every one of us is connected to someone on the autism spectrum or with a disability. The challenge is finding autism-friendly  jobs and matching them to the right candidate where they can be successful. We solve this problem by building a connected community in the workplace through technology. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Episode 16: The Boutique: Tomorrow is More Important than Today.

What have you done for me lately? Buyers of your boutique are purchasing who you are becoming. They are not buying who you have been. Yesterday is worthless to them. They are looking forward. And need to be excited about your potential to improve. 

TRANSCRIPT

 

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 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 the ability to sell your firm for the right price is more about your future and less about your past. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his perspective on how to prove to investors that your future is very bright. Greg, today’s show will focus on helping owners paint a bright picture for their future. How should our audience begin that process? 

 

Greg Alexander [00:01:14] The big idea for today is continuous improvement. Investors and potential acquirers do not want to buy a development project. They want to invest in a firm that is accretive immediately and whose contribution increases over time. When considering an investment, they will need to understand how a firm continuously improves. 

 

Sean Magennis [00:01:33] Excellent. And how will they do that? 

 

Greg Alexander [00:01:36] Well, there are many ways. Let me share a few just to get the audience thinking a bit. Investors will want to see how and how often a boutique upgrades their methodologies. They do not want to buy firms with aging methods that are no longer attractive to clients. So, for instance, years ago, if you recall, Six Sigma was all the rage. Today, not so much. It is important that boutiques stay on the leading edge. Another way, potential buyers consider firms continuous improvement ability is to plot client satisfaction scores over time. So, for example, if client sat has flatlined, this would suggest a future might not be very exciting. Boutique owners should have a keen eye on the trend line associated with client satisfaction. And here’s one more to consider, technology adoption is often viewed as a sign of a firm’s progressiveness. For example, small management consulting firms are still producing PowerPoint decks as deliverables, whereas the larger firms produce custom apps instead. Today, there seems to be an app for everything. If a firm is still producing decks, it is a sign that they might not make it through this digital transformation wave that is upon us. 

 

Sean Magennis [00:02:58] I get that, Greg. So updating one’s methodologies consistently, improving client sat over time and technology adoption are three ways to prove to an investor that a firm can continuously improve. These are three excellent practical examples, and I’m sure there are others. Greg, are there any others? 

 

Greg Alexander [00:03:21] Sure. There’s hundreds. So since we try to keep our shows short, let me just share a few more. So profit growth is probably the purest way to demonstrate continuous improvement. Profit growth proves to an investor that the firm has decoupled revenue growth with headcount growth. And as our listeners know at this point, that’s the silver bullet. This is how a firm scales. A firm whose revenue and headcount growth are the same does not have a bright future. Investors are unlikely to bet on that type of firm. Pricing improvement is also another excellent way to prove continuous improvement. If a boutique can raise prices with existing clients, they have a very bright future. The same client willing to pay more for the same service says the quality of the work has gone up. And lastly, let me conclude with the ultimate sign. A firm is continuously improving. The ultimate sign is the firm’s client roster. For example, if a boutique client roster goes from no names to brand name clients or from struggling clients to thriving clients, that says a lot about the firm’s future. 

 

Greg Alexander [00:04:42] The logo sheet looks a lot better with Amazon on it than it did with Kmart. 

 

Sean Magennis [00:04:48] Fantastic. So profit growth, price improvement and declined roster as three additional signs a firm is continuously improving, all pointing to a very bright tomorrow. I can see why this would attract potential investors and acquirers. 

 

Sean Magennis [00:05:10] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members. 

 

Jerome Redmond [00:05:36] Hello. My name is Jerome Redmond. I own American Truck Training. We serve the Oklahoma City metro, in other areas around Oklahoma and soon the entire United States. These clients turn to us for help with obtaining a commercial driver’s license and job placement. We’ve solved this problem by addressing the vast shortage of CDO drivers across the country. The country needs over 60000 CDO drivers. So we’re training individuals through private and government agency funding to obtain a commercial driver’s license and training. If you need help with training your professional drivers, reach out to me at AmericaLovesTrucking.com and Jay Redmond, that’s [email protected] 

 

Sean Magennis [00:06:18] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit collective54.com. 

 

Sean Magennis [00:06:35] OK. So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows the 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 checklist. We aim to keep it simple by asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove your future is really bright. If you answer no too many times, you’ve got some work to do. Let’s begin. 

 

Sean Magennis [00:07:14] Number one, do you version control your methodologies? 

 

Greg Alexander [00:07:18] So V1, V2, V3 thats what that means. 

 

Sean Magennis [00:07:20] Yes. Number two, do you progressively certify your employees? 

 

Greg Alexander [00:07:26] One oh one, two oh one, three oh one. 

 

Sean Magennis [00:07:29] Number three, are you charging existing clients more for the same service? Number four, are your client satisfaction scores trending up over time? Number five, are your employee engagement scores trending up over time? 

 

Greg Alexander [00:07:50] Often overlooked. 

 

Sean Magennis [00:07:51] Yes. 

 

Greg Alexander [00:07:51] But employees want to be intrigued by the work they’re doing and if they’re just doing the same thing over and over and over again, they’re going to get bored. 

 

Sean Magennis [00:08:04] Yep. It kills their passion. 

 

Sean Magennis [00:08:07] Number six, all your profit margins trending up? Number seven, have you replaced onsite delivery with virtual delivery? 

 

Greg Alexander [00:08:17] This is a great point. Yeah. I mean, we’re right in the middle of this global pandemic and this was once once optional. Now it’s mandatory and firms that can make it from onsite to virtual are gonna make it. 

 

Sean Magennis [00:08:32] Yes. Number eight, have you digitized your client deliverables? 

 

Greg Alexander [00:08:37] Yeah, this is gonna wipe out, I guess, half the firms. I mean, if you don’t have the ability to write code going forward, it’s game over. 

 

Sean Magennis [00:08:45] Yep, agreed. Number nine, have your price levels trended up over time? And number ten, and the ultimate proof point, has the quality of your client roster improved over time? 

 

Sean Magennis [00:09:01] So in summary, buyers are interested in who you are becoming. They are less interested in who you have been. Tomorrow is much more important than yesterday. They need to be excited about your ability to continuously improve. 

 

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

 

Episode 15: The Boutique: How to Work Less and Make More!

Boutique firms often grow but do not scale. Growth means more projects delivered with the same type of staff. If nothing changes, then the growth rate is proportional to the number of partner/owners required.

TRANSCRIPT

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 in life.

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host on this episode. I will make the case that sometimes boutiques grow but do not scale. I’ll try to prove this counter-intuitive theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is an expert at helping boutique owners avoid the growth trap. Greg, great to see you as always, and welcome.

Greg Alexander [00:01:03] Hey, pal. Good to be with you. Let’s kick some “you know what” today. Too many boutique owners are growing but are not making more money in the process and I’m tired of this crap. These entrepreneurs should be properly rewarded. So let’s put an end to this nonsense.

Sean Magennis [00:01:14] Absolutely. I can see. Greg, you’re ready to go, you’re passionate about this topic. I love it. So where do you want to dive in?

Greg Alexander [00:01:21] Sorry, I can get carried away because I truly give a shit about our tribe.

Sean Magennis [00:01:25] Absolutely. I know you do as I do and how about we start with why this is happening?

Greg Alexander [00:01:31] Okay. So understand why this is happening is easy. If revenue growth and headcount growth are proportional, the owner does not increase his or her income with growth. It’s not until headcount growth is decoupled from revenue growth, does an owner grow his income.

Sean Magennis [00:01:45] You know, this makes sense as the top expense by a wide margin for a professional services firm, as you and I and our listeners know, is labor. So more headcount means more expense and less income. But as a firm takes on more work, don’t they need more heads to complete it?

Greg Alexander [00:02:03] Yes, but what type of heads and at what cost? So lazy boutique owners just do more of the same. However, the owners capable of scale do not. They re-engineer how they deliver the service so that it takes a few heads to deliver or less expensive heads to deliver. This is known as creating leverage.

Sean Magennis [00:02:26] So what is leverage in this context? And is there in fact a way to measure it?

Greg Alexander [00:02:32] There is a definition in a metric that measures it well called the leverage ratio. So allow me to explain the definition of leverage. Is the number of employees to owners. An example of how to calculate their leverage ratio as a firm with 30 employees and three owners has a leverage ratio of 10 to one. The higher the leverage ratio, the more money the owner makes. Why is this? A profit pool divided up by three people is better than a profit pool divided up by 10 people. This makes sense, Greg, but it begs the question, how does an owner increase the leverage ratio? This is the million dollar question. So it comes down to the type of work the boutique performs as this drives the type of employees they need to hire and how many of them they need. For instance, if the work requires a high skill level, the leverage ratio will be small. It is very difficult to proceduralize this type of work, which means junior staff cannot handle it. This type of firm is likely to have lots of senior people who all want to be partners with ownership stakes. In contrast, if the work is routine, junior staff can perform it. In this instance, leverage will be very high as the org will be filled with an army of junior staff and few partners.

Greg Alexander [00:03:57] This brings us to the root cause of the big issue. Owners often have expensive senior staff performing junior grade work. This destroys profitability and the owner’s income.

Sean Magennis [00:04:11] This is an aha moment for many. So what is the fix for this Greg?

Greg Alexander [00:04:17] So the fix is to proceduralize as much of the work as possible and then to have the discipline to only go after that type of work. Revenue outside of this scope gets turned away. This allows owners to push out expensive senior staff and their owners compensation requirements and replace them with junior staff capable of doing the work at a fraction of the cost. This is what pushes up the leverage ratio. And this is what allows an owner to make more money and more money as the firm grows.

Sean Magennis [00:04:55] So, Greg, this idea of leverage. It’s not new. It’s been around for a long time. This means the solution to this problem is readily available. Why is it owners keep making this mistake?

Greg Alexander [00:05:08] Human nature. Us Americans in particular pride ourselves on working hard. We equate long hours with strong character, and this mentality needs to be replaced with a work smarter, not harder mentality. If our listeners adopt the concept of leverage, they will work less and make more.

Sean Magennis [00:05:32] But that is a spectacular goal. So achieve our financial goals and have a life as well.

Sean Magennis [00:05:42] 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 cell phones at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Mike Snyder [00:06:08] Hey there. My name is Mike Snyder. I own RSM Marketing Services in Kansas City and Wichita. We serve marketing frustrated, growth oriented principles for middle market firms across all categories nationally. These clients turn to us when they feel the need to pivot, do something remarkably different to get their company moving in strategic marketing with great online execution. We solve this problem by providing an outsourced marketing department where clients receive a fractional marketing director and all the marketing services they need for a flat monthly subscription. If you want to please the robot’s impact humans and delight your CFO, reach out to me at rsmconnect.com or email [email protected]

Sean Magennis [00:06:58] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:07:16] Excellent. 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 on leverage or lack thereof is not preventing you from scale.

Sean Magennis [00:07:48] If you answer no, too often, poor leverage might be the reason growth is not equating to personal income. Let’s begin. Question number one, is your leverage of employee to owner at least 10 to one? Number two, is the proper mix of junior, middle and senior staff clear to you? Number three, do you understand the skills mix of a project before you sign it? Number four, do you understand which revenue is good and which is bad? Number five, do you have a zero tolerance policy for one off projects? Number six, do the owners work on the business instead of in the business? Number seven, do your service offerings come with procedure manuals for the staff? Number eight, do you assign work to teams strategically versus reactionary? Number nine, does your hiring plan forecast demand for a specific leverage ratio? And number ten, do your financial goals match up with the leverage ratio assumptions in your business plan?

Sean Magennis [00:09:23] In summary, scaling means working less and making more. It does not mean just growing. If you want to earn what you are worth, decouple revenue growth and headcount growth, the definition of success is not the number of employees you have, but rather it is how much net income you produce.

Sean Magennis [00:09:48] 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 14: The Boutique: Are You a True Expert in Your Field?

The “wow” factor matters. Like it, or not, you are in show business. You are an expert. And your firm is made up of experts. No one wants to buy the boutique that regurgitates other people’s innovations. They want to buy the song writers, aka The Rolling Stones.

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TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that when selling your firm, the wow factor matters. And when I say the wow factor, I’m referring to the innovation you’re generating in your field of expertise. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg is considered to be one of the most innovative thinkers in the professional services industry. And, in fact, don’t take my word for it. Adam Prager of Korn Ferry was recently quoted as saying, and I quote, Greg is a world class visionary in our industry. End quote. Greg, great to see you. Welcome to the show today.

Greg Alexander [00:01:22] Thanks, Sean. Good to be here. And thanks for the kind introduction.

Sean Magennis [00:01:25] Let’s begin with a simple definition of innovation specific to the professional services industry. How would you define it, Greg?

Greg Alexander [00:01:35] So innovation is a new idea, a new service, a new business model, maybe a new way of solving a problem. It matters to professional service firms more than other types of businesses because pro-serve firms position themselves as experts and experts innovate. Clients do not pay firms to regurgitate other people’s innovations. And investors surely do not buy firms that are copy cat body shops. They buy firms who are true experts today and will continue to be excellent.

Sean Magennis [00:02:10] Excellent, Greg. So when I think of innovation, I, I think mostly of products. For example, Elon Musk innovated in the auto industry and brought us the Tesla. Reed Hastings innovated in the entertainment industry incredibly and brought us Netflix. I do not think of professional services firms in this way, so can you share some examples in the pro-serve of industry?

Greg Alexander [00:02:34] I’d be happy to. In fact, I am somewhat of a amateur historian in the professional services industry, and I have found many great examples of innovation in our space throughout history. So here are a few fun ones to think about.

Greg Alexander [00:02:50] I admire greatly, Boston Consulting Group. They have built a private partnership with thousands of employees and billions in revenue. But it all started with their founder, Bruce Henderson, and one of his early innovations called the experience curve. This proved that a company’s costs fell as their experience increased. Today, this is widely understood. Back in the 1960s, this was a real innovation. Let’s turn to the law profession. The law profession has pioneered the use of technology for centuries. For example, in the 1920s, the recorded deposition changed the litigator’s relationship to witness testimony forever. Law firms that embraced this scaled rapidly. Imagine the law today without recorded depositions. Very scary. Well, how about the great Italian innovator Luca Bartolomes Pacioli. Say that 20 times in a row. Around fifteen hundred, he invented a system of record keeping that used a ledger and later he wrote the first accounting books that explained the use of journals. This earned him the title of the father of bookkeeping, bookkeeping. And Sean, if the accounting industry can innovate, anyone can.

Sean Magennis [00:04:13] These are really great, Greg, and super interesting. These pioneers were truly the Zuckerberg’s of their day. Are there any others that come to mind for you?

Greg Alexander [00:04:24] Sure, there are dozens and I enjoy speaking about this. Let me share a few more. So I have recently studied the innovations in the marketing and advertising industry. Sean, did you remember these campaigns? When it rains, it pours and a diamond is forever.

Sean Magennis [00:04:37] Yes. And the second one, to my chagrin, because I had to buy a big one once.

Greg Alexander [00:04:43] Well, these were created by an agency led by a gentleman, by the name of N.W. Ayer in the 19th century. He convinced the likes of AT&T, the U.S. Army, [inaudible] to hire a new kind of firm called the Full Service Agency. Rather than just selling advertising space in publication, he offered planning creative and campaign execution. Mr. Ayer innovated at the firm level, creating an entirely new kind of marketing agency. He was a giant. I wish I had the chance to know him. How about I share a few recent examples because we are living in the golden era of boutique innovation. In 2008, the distributed ledger, known as Block Chain, was invented by Satoshi Nakamoto. Transactions will never be the same. An architect by the name of Daniel Cuzzi has turned shipping containers into working farms, producing the equivalent of five acres per container. And I love Wix. They have injected artificial intelligence into website design. What used to take months now takes nanoseconds. A brilliant example of tech enabled services. You get the point. I could go on and on forever.

Sean Magennis [00:06:09] Wow, these these are inspiring examples of innovative pioneers and the professional services industry from yesterday and today and this is a standard all of us should aspire to. And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Abbie Jones [00:06:49] Hello. My name is Abbie Jones and I own Abbie Jones Consulting. We serve business owners and facility managers in energy, aviation and industrial spaces. Our current footprint is Kentucky, Tennessee, West Virginia, Virginia, Georgia and we’re expanding. These industrial and commercial clients like you turn to us for many services, including campus utility as builds. Our private utility locators, professional land surveyors, professional engineers and drafting staff can upgrade your random paper as built into a single as filled with critical items like shutoffs. Learned how we can make facility managers happy at Abbie-Jones.com. That’s a-b-b-i-e hyphen j-o-n-e-s.com.

Sean Magennis [00:07:37] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the collective.54.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 the listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no questionnaire. We aim to keep it simple by asking only 10 yes-no questions. In this instance, if you answer yes to eight or more of these questions, you can prove you were a true expert and you are innovating. If you answer no too many times, you have some work to do. Let’s begin.

Sean Magennis [00:08:33] Number one, have you pioneered a new approach in your niche? Number two, are you more than a one hit wonder? Number three, has your industry adopted your way of doing things? Number four, does your industry use your language as its own? Number five, do the smartest in your niche come to you with the most challenging issues? Number six, as an ecosystem of boutiques formed around your innovation? Number seven, do you mainstage the keynote for the most important industry conference? Number eight, do you get more than fifty thousand dollars for a speech?

Greg Alexander [00:09:34] That’s a real sign that you’re in high demand and a true innovator.

Sean Magennis [00:09:38] Absolutely. Number nine, do employees join your firm for the opportunity to learn from you? And number ten, have you created a legacy that will live on in your niche after you leave?

Greg Alexander [00:09:55] Yeah. I just walked the audience through history and I cited all these examples. Imagine how fortunate we would be if people are speaking about us 500 years from now.

Sean Magennis [00:10:04] That that is part of our goal.

Greg Alexander [00:10:06] Yes, I love that.

Sean Magennis [00:10:08] So in summary, the wow factor really matters. Like it or not, you are in show business. You are an expert. And your firm is made up of experts, investors and acquirers want to invest in and or buy the true experts. The innovators challenge yourself to be one every day.

Sean Magennis [00:10:33] If you enjoy 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 Professional Services Firm. I’m Sean Magennis. Thank you for listening.

Episode 13: The Boutique: A DIY Approach to Raising Growth Capital

Scaling a boutique takes money. This type of money is called scale capital. There are three primary sources of scale capital. Each has a set of advantages and disadvantages. Which is best for you is highly situational.

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TRANSCRIPT

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 to scale your firm requires capital, and that not all capital is the same. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s founder and chief investment officer. Greg has been on both sides of this. While the owner-operator of consulting firm SBI, he raised capital and as chief investment officer of Capital 54, he invest capital into boutiques like yours. This makes him uniquely qualified to help boutique owners think through the need for capital during your scale stage. Greg, great to see you, and welcome.

Greg Alexander [00:01:25] Hey, pal. Good to be with you. I’m looking forward to our discussion today. By the end of the show, we will be reminded that it takes money to make money.

Sean Magennis [00:01:34] It sure does Greg, why don’t we start right there? Why do firms need capital when trying to scale?

Greg Alexander [00:01:41] So scaling usually means entering new markets, launching new service lines, adding more headcount and many other strategic initiatives. And these things take money.

Sean Magennis [00:01:52] Yes, I agree. And at the top of the show, I suggested that not all capital is the same. What sources of capital are available to boutique owners during the scale stage?

Greg Alexander [00:02:05] These days, capital is abundant and there are many kinds. You only have 10 minutes or so, therefore I would focus on a do it yourself approach, which has three types of capital. First, there is free cash flow from operations. This comes from increasing revenue and driving down costs using the spread to scale. I mean, why give it to the government in taxes. Number two is debt. It comes from banks and private lenders. There is a way to do this without mortgaging your soul. And third, we have equity partners. This is when an investor puts in cash in exchange for a piece of the action. Watch out for predators. But the right equity partner can add a lot in addition to capital.

Sean Magennis [00:02:52] This is simple enough. But what are the pros and cons of each of those?

Greg Alexander [00:02:58] Well, free cash flow from operations is the best. The reason this is the best is because it’s cheap and in unlimited supply for well-run boutiques scaling with free cash flow. Preserve the preserves the owners equity. It does not add a debt service burden to the peno in the best of the best boutiques. Know how to allocate intelligently, which acts as a flywheel throwing off more and more of this free cash flow. There are some disadvantages to relying on free cash flow to scale.

Greg Alexander [00:03:34] For instance, instead of putting the free cash back into the business to fund scale, many owners pull it out of the business and pay themselves. This retards growth and adds years to the firm’s timeline toward an eventual exit. This is a difficult temptation to resist. Debt is the next best alternative to free cash flow. In my view, it is not cheap, but it is reasonable as lenders charge modest rates and loans to boutiques and it is also readily available in the two to three times, even arrange the negatives to debt are obvious. But let me quickly point them out. It does add an expense to the PNL as a loan payments need to be made. This will reduce the owner’s income. However, it does preserve the owner’s equity. So this can balance out over time. Unfortunately, young firms cannot secure it unless they personally guaranteed a loan. In some cases, this still does not work because the owner’s personal assets are not enough to act as collateral. Lastly, there is taking on an equity partner. This is cheap in the short term, but expensive in the long term. There is no loan payment to be made, meaning more cash is available. However, the owners stake in the firm is diluted as the equity partner is taking a piece of the business. And when an owner of a boutique sells, the equity partner gets his piece of the pie.

Greg Alexander [00:05:08] And one more thing. It is difficult for a processor firm to attract an equity investor. Many equity investors simply do not invest in people driven businesses. So it is in short supply. But that was a lot. Let me stop talking here.

Sean Magennis [00:05:24] Greg, this is excellent. How about sharing a little from your personal journey to to make sense of this?

Greg Alexander [00:05:31] Sure. So my firm, SBI, used free cash flow from operations as its source of scale capital. In retrospect, this was a mistake. It took 11 years to start scale and sell my firm. If I had taken on some debt, I think I could have cut this time in half. We were able to deploy capital effectively. Each investment resulted in more clients and each initiative resulted in lower costs. More capital would have resulted in even more clients and even lower costs. During my run, the cost of debt was much lower than the return we were generating. I will say, however, I am grateful I did not take on an equity partner. We were able to sell for nine figures. If I had taken on an equity partner, my share of the price would have been much less and I would have had sellers regret.

Sean Magennis [00:06:26] That’s a great personal example Greg. Thank you for bringing this to life. Well, I can’t think of a more important strategic decision for our listeners to get right. This one comes with very high stakes.

Sean Magennis [00:06:43] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

Matt Rosen [00:07:09] Hello. My name is Matt Rosen and I’m the founder and CEO of Allata. Allata serves large enterprise clients in the financial services, healthcare, retail distribution and professional services spaces. Our clients are centered around our offices in Dallas, Phoenix, Provo and Boise. Clients like the Frieman companies and brinks some security turn to us for help with strategic initiatives in the business and digital transformation space, typically creating new revenue streams, building seamless customer experiences and streamlining operations. We help with these initiatives by building digital strategies and roadmaps, assisting with enterprise architecture and design, working with data as an asset and customer, developing solutions which help our clients reach their strategic objectives. If you ever need help with digital strategy data and customer development initiatives, please reach out to me at www.allata.com Or [email protected] Thank you.

Sean Magennis [00:07:57] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:08:13] 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 the listener to apply the lessons to his or her firm, our preferred tool as 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, all three of these capital sources are available to you. If you want to know to questions one to three, do not pursue funding scale with free cash flow. If you answer no to questions, four through nine do not rely on debt to fund scale. If you answer no question, 10 do not take on an equity partner. Get it, Greg?

Greg Alexander [00:09:06] I got it.

Sean Magennis [00:09:07] So let’s begin. Number one, are you generating enough free cash flow to fund scale? Number two, do you know where to deploy this extra free cash flow? Number three, are you willing to go without today for scale, tomorrow? Number four, have you been in business for at least five years? Number five, are you generating stable EBITDA every year? Number six, Would two to three times EBITDA be enough to fund scaling your firm? Number seven, can your PNL handled a debt service burden of a loan? Number eight, are you willing to personally guarantee a loan? Number nine, do you have enough personal assets to secure the loan, if you’re open to a guarantee? And number ten, are you willing to dilute your ownership take for the right equity partner?

Sean Magennis [00:10:26] In summary, it takes money to make money. Scaling a boutique takes money. There are different funding sources, each with their own pros and cons, all work well. Which is best for you is highly situational. Take your time to consider this very important strategic decision.

Sean Magennis [00:10:51] 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 12: The Boutique: Designing Your Organization to Enable Your Exit

The perceived difficulty, or ease, of integrating your boutique will affect your sale. Understand the org model of the type of firms who might buy you. Redesign your model to be seamlessly integrated if bought. This will increase the chances of exiting.

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The Boutique with Capital 54-Episode 12.mp3

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 the next chapter of your life.

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I’ll make the case that your ability to exit is impacted by your org chart. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his experience helping owners design their organization with an exit in mind. Greg, let’s begin by establishing a working definition of organizational design for the purposes of this episode. How should we think about this for the duration of our call? 

Greg Alexander [00:01:12] Traditionally, org design is simply what type of people do I need? How many of them do I need? And how should I deploy them? I would tweak this a bit for our listeners who are owners of boutique preserve firms. I would add leverage ratio in cost to the org design leverage ratio simply means how many employees for each owner. So for example, if my firm has three owners and 30 employees, I have a leverage ratio of ten to one. This is relevant because it impacts wealth creation greatly. More owners means less wealth for each owner due to the equity dilution that happens when adding owners slash partners. Costs, the second tweak is simply what do I pay for each role? This is a required tweak for our listeners because labor costs is the single biggest expense. Designing an org chart without considering costs could destroy a PNL if not done carefully. 

Sean Magennis [00:02:08] Excellent. Greg, I’ve been taking notes, so let me read this back to you to make sure I got it. Org design means five things. Number one, the type of people I need. Two, the number of people I need, three, the way I should deploy them, for instance, by geography or industry, vertical, et cetera. Number four, the leverage ratio. And number five, the labor cost of the of the org model that I get this correct? 

Greg Alexander [00:02:38] You did, those five things, if you keep them top of mind and you will design an excellent organizational model. 

Sean Magennis [00:02:44] Outstanding. So with this understanding, help me and the audience understand how this impacts an exit. 

Greg Alexander [00:02:52] Sure the connection is not obvious, but let’s be sure it’s there and it’s very strong. So the entity that buys you a firm must figure out how to integrate it into their firm. Org design is front and center during this integration thought process. Potential buyers will not buy your firm if they feel the integration will be difficult. Difficult integrations are costly. They took a long time and they result in bad deals. In contrast, simple integrations are very attractive to buyers. They’re cheap, quick, and they lead to excellent returns. This means the design of your organization can aid or hurt your ability to sell your firm. Your org model will be heavily scrutinized during diligence. 

Sean Magennis [00:03:43] Yes, I can see the connection. And to summarize, the easier an organizational model is to digest, the more likely it is your firm will be bought. This begs the question, Greg, how can our listeners design their organizations now to enable them to get purchased? 

Greg Alexander [00:04:01] OK, so let’s start with some things to avoid. So here are three things to consider. First, eliminate all complexity. The design principle should be simplicity. Unfortunately, in my work advising boutiques, I often see overly complex org models tried to avoid making this mistake. Second, stay away from the Matrix. At times, owners of process firms struggle to make the hard decision of who reports to who. So to please everybody they let some report to more than one person. This is called the Matrix. Integrating a matrix is very hard. Stay away from it. I see deals fall apart during the diligence stage simply because the matrix exists. And then third, organize around either geography, industry or function. Organizational models built around one of these dimensions are clean and they’re very easy to understand and very easy to absorb. 

Sean Magennis [00:05:06] This is so right on. This is excellent. Keep it simple. Avoid the matrix. And I’m going to just say that fifteen times with a huge number of exclamation marks because I lived there for seven years. Running a global… 

Greg Alexander [00:05:19] It sounds great, but it’s a nightmare. 

Sean Magennis [00:05:20] The complexity is so difficult for people to understand and grasp internally. And you can imagine what it’s like externally. If you’re trying to sell. So stick with the geography industry, vertical or job function. That makes total sense. Any other org model design ideas? 

Greg Alexander [00:05:37] Yeah. Let me share one more and it’s a little counterintuitive. So that would be stay small enough to be bought. Which I know right now, our listeners are probably cringing because their growth businesses. So what do I mean by this? Acquirers tend to shy away from buying boutiques with hundreds of employees. They are too difficult to integrate. The more people, the greater level of integration difficulty, some owners are insecure. And to establish credibility, they like to talk about how many employees I have. They believe the more employees they have, the more legit they are in the eyes of clients or investors. This is a flawed thinking. Investors are going to calculate your revenue per employee. They use this metric to determine the quality of your firm. The higher revenue per employee, the more desirable you are as an acquisition candidate. The formula for revenue per employee is very simple. Revenue is the numerator and employee count is the denominator. If you have a large number of employees, your revenue per employee is going to be small. So this last piece of counter-intuitive advice is stay small enough to be bought. 

Sean Magennis [00:06:53] Greg, I love this. I think you’re absolutely correct. It is counter-intuitive. Fewer employees are a good thing. It’s really interesting. 

Sean Magennis [00:07:05] And now a word from our sponsor. Collective 54, Collective 54 is a membership organization for owners of professional services firms. Members join to work with their industry peers to grow scale and someday sell live firms at the right time for the right price and on the right terms. Let us meet one of the collective 54 members. 

Jamie Shanks [00:07:31] Hello, my name is Jamie Shanks. I’m the CEO of Sales for Life. And we focus on increasing self-generated sales pipeline at scale, focusing on helping mid-market and enterprise sales organizations meet and exceed their quota. Our pervasive challenge that we’re solving is that companies continue to hire sellers rather than focusing on increasing the yield per seller. On average, we help these organizations increase their yield per seller by 20 percent more pipeline coverage within six to twelve months. If you need to reach us, you can reach us at salesforlife.com, which is www.salesforlife.com. You can reach me on LinkedIn. Jamie Shank’s or my email is [email protected]

Sean Magennis [00:08:25] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit the collective54.com. 

Sean Magennis [00:08:41] OK, so this takes us to the end of this episode. And as is customary, we’ll end with a 10 question yes-no checklist. We conclude each episode in this fashion to help you, our listeners apply the learnings directly to your business. This creates your take-home value. Let’s jump into the checklist. Ask yourself these 10 questions. If you answer yes to eight or more of these questions, you’re likely to get all of your earn-out. If you answer no too many times, you’re likely to leave a lot of money on the table. 

Sean Magennis [00:09:17] Question number one, will your organizational model be easy to absorb? Number two, are you organized around either geography, industry or function? Question number three, you stayed away from The Matrix? Question number four, are you large enough to be interesting, but small enough to integrate easily? Number five, does your org model reflect the niche you serve? Number six, does your org model reflect your business model? 

Greg Alexander [00:10:00] So a little something on that. Generally speaking, two types of business models. The first is high margin, low volume. The second is low margin. High volume. And your org model needs to reflect that. Right. So in the high margin, low volume business, you probably have few employees. A lot more senior and a lot more expensive. On the flip side, if you have a low margin, high volume business, you probably have lots and lots of juniors right around. 

Sean Magennis [00:10:36] Excellent, Greg. So number seven, is the organizational model a good starting point for an easy integration? Number eight, is your organizational model flexible enough to morph into somebody else’s? 

Greg Alexander [00:10:49] For example, stay away from labor unions. 

Sean Magennis [00:10:51] …and Matrix organizations. Number nine, does the organizational model reflect the true cost to operate your boutique? And number 10, will it be obvious to a potential acquirer where the synergies will come from? In summary, the perceived difficulty or ease of integrating your boutique will affect your ability to exit. Your org model directly impacts your ability to exit. 

Sean Magennis [00:11:25] 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 11: The Boutique: Earn Your Earn Out

Most acquisitions fail. The primary reason for failure is poor culture fit. Do not hide your culture. Lead with it. You want your sale to be successful. Therefore, you need to find a buyer who fits your culture.

 

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TRANSCRIPT

Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that many do not earn their earn out post sale. And the primary reason is a poor culture fit with the new ownership team. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg will share his experience helping owners earn 100 percent of their earn out. Greg, let’s begin by establishing a working definition of culture for the purpose of this episode. How should we think about culture for the next fifteen minutes?

Greg Alexander [00:01:19] Good question. So if we limit it to 15 minutes, boy, we could talk for days about culture. But for today, let’s establish a simple definition. So and this is to say culture, I would suggest, is a common set of beliefs and behaviors. So when someone says this is the way things get done around here, they are talking about the culture.

Sean Magennis [00:01:42] Got it. I recently read an article published in the Harvard Business Review. It was written by a McKinsey consultant, and he claimed that 70 to 90 percent of acquisitions fail. And the root cause of all this failure is poor culture fit. Our listeners are owners of boutique professional services firms. They all will eventually want to sell their business. A good majority of them will have an earn out as part of their deal. Greg, if 70 to 90 percent of these deals fail, this means that most of our listeners will never see the money tied to their earn out. How can we help them avoid this very costly era?

Greg Alexander [00:02:23] Yeah, I hate it when I see this because it’s very likely that you’re going to have an earn out when you sell and you deserve those dollars you built a great farm and it makes sense for the purchaser of your firm to include an earn out as part of the deal that gives them kind of downside protection. So let’s make sure that that the listeners earn their earn out and they avoid this mistake. So the key to realizing the earn out is to make the deal successful for the acquirer. And that’s a new way of thinking. Most times when you’re selling your firm. You want to make it successful for yourself. And of course, that’s important. But you’re going to earn your earn out if you make it successful for the acquirer and the key to that is merging the culture of the acquired firm with the culture of the new ownership team. So how the heck does someone do this? So let’s begin with some context before we get to our recommendations to the audience. So boutiques have cultures, most of which are very strong. Usually the culture of the boutique originates from the founder. The founder designed a culture that he or she wanted to work in. In fact, job satisfaction is one of the primary reasons founders start their firms. There were frustrating working inside a big corporation and somebody else’s culture. So as the firm grows, the founder recruits the early employees. And guess what? They are hired because they fit the founders culture. They are people he or she wants to work with. The firm continues to grow in these early employees perpetuate the culture by recruiting the next set of employees who also get along with the founder and sync well with the culture and on and on it goes until one day the boutique has hardened around, quote unquote, its culture. This culture gets so strong that employees to not fit with it, are rejected almost like an organ transplant is rejected by its host. Clients are affected by this culture as well. Clients who view the world the way the founder does become the boutiques best clients. I share this with the audience to demonstrate how a culture of a boutique comes to be. This culture emerges over the years. The founder, early employees and the most loyal clients are heavily invested in it. They love the culture. In any attempt to change it is viewed as an attack. So you can see how emerging this type of culture is. So very hard.

Sean Magennis [00:04:55] Exactly, Greg. This context is very, very helpful. I can’t help but think that what makes a boutique successful is its culture. It’s also the thing that eventually becomes its biggest problem. Is that. Is that accurate?

Greg Alexander [00:05:10] Yes, this is correct. And the reason your statement is correct is when one firm buys another firm, these two distinct cultures collide. If the two firms see the world the same way, they become one bigger and better and happier firm. If the two firms see the world differently, the integration is a mess. And this results in the opposite outcome. Separate fiefdoms inside the firm fighting each other. Turf battles emerge over client ownership. Budget power structures, et cetera. Key employees quit and important clients take their business elsewhere. This results in numbers getting missed and missed. Revenue and profit goals result in earn outs not getting paid out. This can even in some cases, digress into nasty lawsuits and an eventual divestiture.

Sean Magennis [00:05:59] Exactly, Greg. And no one wants lawsuits or messy disputes. And our listeners want to realize the full amount of their earn out. If culture fit is what causes this mess. How can a listener determine culture fit before selling their firm?

Greg Alexander [00:06:15] It’s hard to do. It’s a little squishy, but I would suggest that prevention is the best course of action. So here’s a few things to consider when trying to determine culture fit prior to selling. So first, consider the origin stories of both firms. Do the founders have similar backgrounds? Are the founders, still the dominant cultural force inside the firm? Do the early employees resemble the founder, are the founder or founders and early employees still involved in the business? Have they become the legends? And what does this mythology tell you about the culture? Next, examine the cross functional collaboration inside the firm. If there is a lot of it, this suggests a cooperative environment. This indicates an open culture willing to partner. If there is a little of it, this would suggest fiefdoms already exists and will likely get worse. Post sale. I would also look for cultural artifacts. For example, if there are celebrations on significant dates, this would suggest a fun group. If there are contests with leaderboards, this would suggest a competitive group. If employees are acknowledged for years of service, this would suggest a loyal group. If there are a lot of legal documents and rules, this would suggest a cautious group. If there is a relaxed dress code, this might suggest a laid back group, or if people stay at budget motels when on the road. This would suggest a frugal group and on and on it goes. There are many clues, just pick your head up and look for them.

Sean Magennis [00:08:03] This is very helpful, Greg. It illustrates to me that there is no right or wrong culture. Rather, the question remains, will the cultures fit with each other?

Sean Magennis [00:08:17] 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 cell phones at the right time for the right price and on the right terms. Let us meet one of the collective 54 members.

David Aspinall [00:08:43] Hello. My name is David Aspinall. I am the CEO of Autocon, a global technology services company. We serve clients by supplementing that technology teams with consultants who are all on the autism spectrum. Our clients are small, medium and large brands such as AT&T, Ella Kaede and Cover My Meds, who understand the value and diversity that high performance autistic talent brings to their team. These clients turn to us for help with data or engineering, software development, quality assurance and more. We solve these problems by providing high performing autistic consultants, along with a managed services approach to neurodiversity in the workplace that ensures success. If you need help with your technology, teams are reaching your diversity inclusion goals through neurodiversity. Please reach out to me at autocon.us or search Google for Autocon.

Sean Magennis [00:09:41] If you are trying to grow scale or sell your firm and feel you would benefit from being a part of a community of peers, visit Collective54.com.

Sean Magennis [00:09:57] Okay, this takes us to the end of this episode. And as is customary, we will end with a 10 question yes, no checklist. We conclude each episode in this fashion to help listeners apply the learnings directly to their business. This creates for you your take home value. Let’s jump into the checklist. Ask yourself these 10 questions. If you answer yes to eight or more of these questions, you are likely to get all of your earn out. If you answer no too many times, you’re likely to leave a lot of money on the table.

Sean Magennis [00:10:32] Question number one, is the founder still involved in the business? Number two, does the founder’s origin story shed a light on the boutiques culture? Number three, are the firms legends still involved in the business? Number four, do they personify the culture? Number five, does the firm work well across functions? Number six, do the artifacts indicate the firm’s culture? Number seven, do employees who are cultural mismatches get rejected by the firm?

Greg Alexander [00:11:19] You know, I would suggest on number seven, cultural mismatches getting rejected by the firm, that’s a positive. Sometimes my people might look at that as a negative and say when we hire somebody who’s not like us, they don’t fit in. And as in the case of investing in a boutique, that’s a positive. You want the culture to be so strong that those that take to it stay with the firm for 10, 15, 20 years.

Sean Magennis [00:11:45] Excellent point. Number eight, do the firm’s best clients share a set of common beliefs with the firm? Number nine, are their deep relationships between the legends and your best clients? And number ten, is it crystal clear to potential acquirer how your boutique behaves?

Greg Alexander [00:12:08] Yeah. And lastly, on number ten, when someone’s doing diligence and they’re assessing your culture, which is a difficult thing to assess, and hopefully this episode makes that less difficult. If someone’s critical of your culture, don’t sell your firm to them.

Sean Magennis [00:12:21] Yep.

Greg Alexander [00:12:21] Right. Because you’re going to run into this mismatch.

Sean Magennis [00:12:23] Agreed.

Greg Alexander [00:12:24] And to your earlier point, there’s not a right culture or a wrong culture. It’s just a culture. And do these cultures, can they coexist well? If somebody is doing diligence on you and they’re suggesting that there’s a cultural problem, runaway. On the flip side, if you feel like even though you’ve just met these people, you feel like you’ve known them for years and years and years. That’s a good sign that you guys will, well, your cultures will merge well together post sale.

Sean Magennis [00:12:48] Totally agree Greg and taking the time is a critical characteristic as well. So in summary, remember that most acquisitions fail and this prevents owners from earning their earn out. The primary reason for this is poor culture fit. Don’t hide your culture. Lead with it. You want your sale to be successful. Therefore, you need to find a buyer who fits your culture.

Sean Magennis [00:13:14] 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 10: The Boutique: Do You have a Bankable Team?

Acquirers buy teams first, and firms second. The quality of the management team is of major importance to the buyer. It can take years to develop a bankable team. Think like an investor. Would you bet the farm on your team?

The Boutique with Capital 54-Episode 10.mp3

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 [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners
of professional services firms. My goal with this show is to help you grow scale and sell
your firm at the right time for the right price and on the right terms. I’m Sean Magennis,
CEO of Capital 54, and your host on this episode. I will make the case that a choir is by
bankable teams first and firms second. That the quality of your management team is of
major importance to the potential buyer of your boutique. I’ll try to prove this theory by
interviewing Greg Alexander, Capital 54’s chief investment officer. Greg, many would say
you were the nation’s leading expert in evaluating management teams in the professional
services industry. Let’s start with some basics. What are investors looking for primarily in
management teams?
Greg Alexander [00:01:20] OK. The basics are what you might expect before I invest in a
boutque, I start by looking at the biographies of the leadership team. I try to determine if
they have the proper level of experience to scale the firm. I have found that the team that
got the firm to this point is often not the team to get the firm to the next level. I also try to
locate any holes in the management team. Sometimes owners run very lean to keep
payroll low and EBITA high. This is a mistake because the true scale of firm to a few
hundred million a firm requires a fully staffed executive leadership team. So those are
some of the basics.
Greg Alexander [00:01:54] Yeah, this makes sense, Greg. So the biographies,
biographies of the team and a fully staffed team, these are the basics. But how about
beyond the basics, what else do you look for when assessing the quality of the
management team?
Greg Alexander [00:02:09] Yeah, beyond the basics I tend to gravitate to the following. So
first, is the management team staying with the business post sale? If they are not, I’m not
going to invest. Their desire to depart at closing tells me they’re not committed to the
business. I understand the wish to take some chips off the table and I’m okay with
rewarding management teams with some liquidity. But I’m buying the future. I’m not buying
the past. And I want to see them double down with me and get after it. Next, I look for an
industrial strength strategy. This means do they know where to play and how to win? Does
each employee understand how their role in the execution of the strategy impacts results?
I want to see a data supported strategy that cascades targets that align each employee
with the boutiques strategy. The existence of such a strategy would indicate a quality
management team, and one of my favorites is the growth story. I want to see from the
management team the size of the market, its rate of growth, the share of the market that
they have today, and how this share will grow over time. I want them to tell me where is
the growth going to come from? Will it be high water raising all ships? Will it come from,
let’s say, the launch of new services or entrance into new markets? Will it come from
simple price increases? The list is long of possible growth elements of the strategy, and I
want to see the operating leverage they will deliver. And this means how much of the
revenue growth is going to drop to the bottom line. So, for example, will profits increase
due to digitization, labor arbitrage or other means? So these are all examples of investible
management team or what some might call a bankable team.

Sean Magennis [00:04:11] These are outstanding examples. Greg, you often talk about a
bankable team, the term bankable. What does this mean?
Greg Alexander [00:04:21] Yeah, a bankable team. So this phrase can summarize, really
this entire episode. So in my opinion, here’s what it means. A bankable team is a team I
would bet the farm on. When an investor invests in a boutique professional services firm,
he or she is making a bet and he is betting on the team’s ability to pull off the growth story.
It’s where the rubber meets the road and where the men are separated from the boys, or in
some cases where the women are separated from the girls. So, for example, Sean, I bet
on you and your team when I backed Capital 54, I was and continue to be convicted in my
belief that you will build the most successful investment firm in the professional services
space. Did I love the idea? Yes, of course I did. But the idea without you was worthless to
me. The team matters more than the idea.
Sean Magennis [00:05:16] The bankable team. I love the idea, Greg, and so appreciate
this opportunity we are on.
Sean Magennis [00:05:25] 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.
Dan Stevens [00:05:51] Hello. My name is Dan Stevens. I own WorkerBee.tv. We serve
local, national and global organizations and associations by helping them leverage the
power of video and multimedia. These clients turned to us for help with content
development and distribution so that they can truly measure the impact and ROI of their
communications, marketing and education investments. We solve this problem by
providing both platform and video and multimedia services in a turnkey manner. If you
need help with video, online platforms or content strategy, please reach out to me at
[email protected]
Sean Magennis [00:06:32] If you are trying to grow scale or sell your firm and feel you
would benefit from being a part of a community of peers, visit Collective54.com.
Sean Magennis [00:06:49] So, OK, this takes us to the end of this episode. And as is
customary, we end with a 10 question, yes, no checklist. We do this to reward you, the
listener, with some immediate take home value. Ask yourself these 10 questions. If you
answer yes to eight or more of these questions, you have a bankable team. If you answer
no too many times, you don’t. And this will prevent you from selling your firm effectively.
Sean Magennis [00:07:18] Question number one, is the management team staying with
the business post sale? Number two, is there an industrial strength strategy developed
that an investor can bet on? Number three, does the management quality go at least one
layer deep on the [inaudible]?
Greg Alexander [00:07:43] Often overlooked.
Sean Magennis [00:07:44] Yes.
Greg Alexander [00:07:45] You know, the partners or the founders present themselves to
the investors and then the person doing diligence goes one level below that and they run
into the junior varsity.

Sean Magennis [00:07:56] Yes.
Greg Alexander [00:07:56] Right. So a bankable team means beyond just the founders
and the owners.
Sean Magennis [00:08:02] Really good point.
Sean Magennis [00:08:03] Question number four, does the management team drive the
strategy deep into the organization? Number five, are there cascading targets that reach
all the way to the frontline employees? Number six. is there a believable growth story?
Number seven, is the management team capable of getting the boutique to this future
state?
Greg Alexander [00:08:33] Let’s talk about that for a moment. Sometimes the
management team can spell out a growth story but they’re not the team to get them there.
Or maybe they’re part of the team to get them there and they need to go recruit some new
talent to get them there. And, you know, if we would have flipped this for a moment. So if I
was somebody selling a firm and I was evaluating investors, that would be one of my
questions. How are you going to help me recruit exceptional talent? It’s not just about the
money they give you. It’s about the.
Sean Magennis [00:09:04] It’s the how.
Greg Alexander [00:09:04] Exactly right.
Sean Magennis [00:09:06] Great. Question number eight, is the management team
excited and passionate about attempting to get this growth story done?
Greg Alexander [00:09:14] Another one, very often tired people try to sell their firms. I’ve
been doing this for 30 years. It’s time to leave. That’s not a very exciting story.
Sean Magennis [00:09:24] Absolutely. Question number nine, have all the holes or gaps
in the team been addressed? And question number ten, do the forward projections reflect
the true costs to operate the firm in the future?
Sean Magennis [00:09:42] In summary, remember that acquirers by teams first and firms
second. The quality of the management team is of major importance to a potential buyer. It
can take years to build a bankable team. Get started today.
Sean Magennis [00:09:59] 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 9: The Boutique: A Little Known Secret: How Employee Loyalty Drives Up Valuation

You compete in two markets. The market for clients. And the market for employees. As much effort needs to be put into employees as into clients. Owners of boutiques work for the employees, not the other way around. Would you want to work for you?

The Boutique with Capital 54-Episode 9.mp3
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 [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners
of professional services firms. My goal with this show is to help you grow scale and sell
your firm at the right time for the right price and on the right terms. I’m Sean Magennis,
CEO of Capital 54 and your host. On this episode, I will make the case there is a direct
correlation between your employee loyalty and your firm’s valuation. I’ll try to prove this
theory by interviewing Greg Alexander, Capital 54’s chief investment officer. Greg has
developed a proprietary approach to measure the employee loyalty of a professional
services firm. Greg, to begin, can you help the audience connect employee loyalty to firm
valuation?
Greg Alexander [00:01:12] Sure. So traditionally, investors have shied away from
investing in pro serve firms. When asked why, they are fond of saying, quote, all the
assets of a pro serve firm walk out the door each night, end quote. And this is meant to
illustrate that assets of a firm are its employees. And if the employees or assets can walk
out the door, the business has no value. Therefore, if you can demonstrate that the assets
your employees stick around, the business does have real value in the best way to prove
the assets do stick around, it’s demonstrating outstanding employee loyalty. High loyalty
equates to high valuation.
Sean Magennis [00:01:52] I see. Excellent employee loyalty can then de-risk an
acquisition for an investor. So how can an owner of a firm prove excellent employee
loyalty?
Greg Alexander [00:02:04] There are several ways. Let me share just a few that the
listeners can try immediately.
Greg Alexander [00:02:11] So the obvious one is employee turnover rate and that’s an
excellent metric to prove employee loyalty. The average turnover rate across all pro serve
firms is approximately 30 percent. Best in class is about 15 percent. If an owner has a low
turnover rate and he can prove high employee loyalty. So that’s a easy one to go after.
The next one would be tenure. And employee tenure is another excellent proof point. The
listeners should challenge themselves to have average employee tenure of, let’s say,
greater than five years. This would prove to investor that the employees do indeed stick
around. And one of my favorite ways to de-risk an investment, and prove employee loyalty
is to show how many positions get filled internally. You see, boutiques are growth
businesses and growth creates lots of promotion opportunities for employees. If these
promotions are filled internally, this suggests outstanding employee loyalty. In fact, a well-
run firm should fill all of its promotions with homegrown talent.
Sean Magennis [00:03:16] So 15 percent employee turnover, five years or more of
employee tenure and to the extent possible, 100 percent of promotions filled internally.
These are three excellent goals to shoot for. Are there any other ways a listener could
prove to an investor that his or her firm is worth more due to his outstanding employee
loyalty?

Greg Alexander [00:03:41] There are a few more. Here are a few others to think about.
One of my favorites is Discretionary Effort. So what is discretionary effort? Discretionary
effort are the hours an employee puts in above and beyond the job requirements. So, for
example, let’s say the job calls for 40 hours per week on the submitted time sheet and
most employees log 44 hours not because they are asked to, but because they want to.
This is a 10 percent discretionary effort. Some like to say, quote, My people give it 100,
110 percent effort, end quote. And this is what they mean when they say this. An investor
who sees this when reviewing the timesheets during diligence will determine you have
high employee loyalty and will likely pay more for your firm. And here’s one more to just
get the juices flowing. What are former employee is going to say about your firm when they
are contacted? If they say they loved working at the firm and for the owner, investors will
be very pleased. If, however, former employees say they hated working for the firm and
even worse, hated working for you, the owner, the investor will run away. That’s a major
red flag. You know, it cracks me up. But boutique owners think that they can hide their
skeletons when you try to sell your firm. Investors are going to find all the skeletons. That’s
their job. If the former employees do not have nice things to say, the valuation of your firm
is going down.
Sean Magennis [00:05:06] So discretionary effort and the former employee reference
checks are key. This makes sense, Greg. And when added to employee turnover, tenure
and promotion fill rate. This makes for an excellent list for our readers.
Sean Magennis [00:05:23] 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.
Irit Elzips [00:05:50] Hello, my name is Irit Elzips I own CSM Practice, a customer
success strategy consulting firm. We serve technology and services organizations from
around the world. These clients turn to us to accelerate their profitable growth rate by
improving their customer retention, increasing their up sell and cross-sell revenues, and
creating a strong differentiation in their market through a better customer experience and
maximizing values for their clients. We achieve these kind of results by designing an
optimal customer success strategy. We then develop processes, protocols and policies to
ensure that our strategy recommendations are adopted and we implement those in a
scalable manner using both training and technologies. If you need help with accelerating
your profitable growth and increasing revenues from your existing customer, install base or
reach out to me at csmpractice.com.
Sean Magennis [00:07:00] If you are trying to grow scale or sell your firm and feel you
would benefit from being a part of a community of peers, visit Collective54.com.
Sean Magennis [00:07:16] So this takes us to the end of this episode and as is
customary, we end with a ten question, yes, no checklist. We do this to reward you, our
listeners with some immediate take home value. Ask yourself these 10 questions. If you
answer yes to eight or more of these questions, you can prove you have loyal employees.
If you answer no too many times, you have an employee loyalty problem and this is going
to hurt you when you try to sell your firm.
Sean Magennis [00:07:45] Question number one. Is your turnover rate fifteen percent or
lower? Number two, is the average tenure of your employees greater than five years?
Number three, do most of your promotions get filled internally? Number four, do you get

rewarded by your employees with lots of discretionary effort? Number five, will your former
employees sing your praises when contacted? Number six, does your firm have a purpose
that the employees believe in? Number seven, does your boutique have a vision of the
future that employees want to be a part of? Number eight, does your firm have a set of
values and are they actually lived by? Number nine, are you paying your employees what
they are worth? And number 10, do you have an in-house recruiting engine that provides
you with a stream of quality people?
Greg Alexander [00:09:04] Just one quick thing on number nine, are you paying your
employees what they’re worth? You know, sometimes small business owners, owners of
boutique professional services firms, because labor is their biggest expense, they try to
underpay because they’re trying to contain costs. That’s an example of being, as they say,
penny wise and pound foolish, because if you’re underpaying and as a result of that, your
turnover is, let’s say, 30 percent instead of 50 percent, you’re actually hurting yourself
there. Just pay a little bit more. Keep the turnover rate down and you’ll benefit not only in
the short term, but someday when you go to sell your firm, it’ll be easier to do so.
Sean Magennis [00:09:39] It’s a great example, Greg. So in summary, remember, you
compete in two markets, the market for clients and the market for employees. As much
effort needs to be put into employees as into clients. Owners of boutiques work for their
employees, not the other way round. Consider this question. Would you want to work for
you?
Greg Alexander [00:10:04] That’s a tough one to answer.
Sean Magennis [00:10:07] 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.

Why Revenue Growth Flatlines in Professional Services Firms

Episode 8: The Boutique: The Real Reason Revenue Growth Flatlines inside of Professional Services Firms

Transitioning away from a partner-led sales model to a commercial sales engine is  key to creating wealth for owners of professional services firms. In this episode, Sean Magennis and Greg Alexander discuss why boutiques find themselves in this position and how they can overcome this inflection point. 

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 [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners

of professional services firms. My goal with this show is to help you grow, scale and sell

your firm at the right time, for the right price, and on the right terms. 

 

I’m Sean Magennis,CEO of Capital 54 and your host. In this episode, I will make the case that transitioning

away from a partner-led sales model to a scalable commercial sales engine is key to

creating wealth for professional services firm owners. I’ll try to prove this theory byinterviewing Greg Alexander, Capital 54’s chief investment officer. Greg is truly one of the

world’s leading experts in sales effectiveness. Greg, a pleasure to have you again today.

Why is this transition point a key milestone for professional services firms?

Why is Transitioning Away From a Partner-Led Model a Milestone?

Greg Alexander [00:01:14] It is a key milestone. You know, kind of the natural

progression of a professional services firm is a startup that becomes a growth firm then becomes a scalable firm and eventually sells. 

This transition point usually happens in between that growth and scale stage, and let me kind of walk the audience through this, and I point out that kind of evolutionary track, if you will, to really highlight the word here milestone. So this is something to shoot for, and it’s something that has to happen if you truly want to create an investable asset. 

Startups become boutiques by having the partners generate referrals, and boutiquesbecome market leaders by building a commercial sales engine. That’s the difference.

Sean Magennis [00:02:00] Yes.

Greg Alexander [00:02:01] You know, when you’re kind of a lifestyle boutique, you’ve got

some partners. They have great personal networks, and they’re able through positive word

of mouth, to generate business. So what’s different between them and a high-growth professional services firm that can become a market leader? It is somebody who builds the commercial sales engine.

And investors like Capital 54 and others want to see a maturing commercial capability before they make a buying decision and the sales and marketing process has to be proven capable of scaling. Otherwise, you’ll be a natural kind of limitation on the size of the market. 

So there’s an inflection point that all professional services firms run into head-on and this is when sales generation happens by employees and not by the partners. These kind of young pre-scale firms did not invest in building a professional commercial sales engine. They don’t have to. 

The partners are experts. They have very large personal networks, and these networks expand as they gain exposure to their niche. Then partners harvest these networks with businesses, and successful projects lead to more happy clients, and happy clients lead to positive word of mouth. 

And on and on it goes… You know, and the partner can really, with a group of partners, can really kind of carry the firm. I’d say for good five years, and then all of a sudden, it flatlines.

Why Does Revenue Flatline For Professional Services Firm Owners?

Sean Magennis [00:03:35] So why does it flatline, Greg?

Greg Alexander [00:03:38] So there are 52 weeks in a year, and each of those weeks has five business days and a hardworking partner is going to put in roughly a twelve hour day. Folks in professional services, particularly the partner level, work their tails off.

Sean Magennis [00:03:53] Yep.

Greg Alexander [00:03:54] This means that each partner has about three thousand one hundred and twenty hours to produce. If you subtract some holidays, a few sick days, a vacation or two, it’s more like, let’s say, twenty five hundred hours. And these twenty five hundred hours are not spent entirely on sales activity. After all, the partners are running the boutique, and as the firm scales, partners have only about half their time available for business development. So, therefore, once each partner is tapped out, sales flatline.

Sean Magennis [00:04:30] The obvious question is: Why not just add more partners?

Greg Alexander [00:04:34] Well, most professional services boutiques are very reluctant to do this, as I was, and I don’t blame those that are reluctant to do this. This is a for-profit business. We’re here to make money. 

So the profit pool is distributed to the partners. Dividing the pie by, let’s say, three partners are better than dividing the pie between ten partners. So if the sales engine requires adding more partners, it doesn’t scale. The current owners and partners end up making less, and even worse, their equity gets diluted. That’s why it doesn’t happen. That’s why they don’t just add more partners.

Sean Magennis [00:05:14] Yes, I can see how this is an inflection point, Greg. So follow-up question, what options are then available to the owners?

How Can Professional Services Firm Improve Revenue Growth Decline?

Greg Alexander [00:05:23] Yep, so the owners have to ask themselves. They’ve got to

choose between really two approaches to sales. Let’s call them option A and option B.

Option A is a partner-led model, and this means more sales but less wealth for the owners. It requires more partners to scale, as I previously discussed. 

Option B, which is my recommendation, is a professional sales model. This means more sales and more wealth for the owners. It does require investment, but it does not eat into the equity, and that is the most important piece.

Sean Magennis [00:05:58] Critical piece.

Greg Alexander [00:05:59] Yep. The partners/owners invest budget dollars in hiring a professional sales force. The partners no longer sell; the sales team does the selling. Now, investors typically want to buy boutiques that have made it through this inflection point. It indicates to them that this boutique actually has the sales capability to scale.

It’s important for the listeners to keep in mind that acquirers are buying the future growth of the boutique. They’re not buying the past – they are buying the future. So the more likely a boutique is to grow, the more they will want to buy it. Boutiques that can generate sales without the owner’s involvement are simply more likely to grow, and boutiques that take this approach can grow sales cost-effectively. A commercial sales team is less expensive than adding partners.

Greg Alexander [00:06:58] When I look at firms, and I see them either just completing this transition or in the process of this transition, I get very excited, and it makes me want to invest in the firm. 

Why is this? Number one, they become aware of the need, which is not obvious to many. Number two, they had the guts to pursue it, which is the type of people that I’d like to invest in.

Sean Magennis [00:07:22] Me too, Greg.

Greg Alexander [00:07:23] Now, I should point out that building a commercial sales team inside a boutique is not easy to do, and this is one reason why so few owners become market leaders and fail to pivot away from the partner-led sales model results in many lifestyle businesses. And as a result of that, potential acquirers are not interested in these lifestyle businesses. And I might add just one more thing if I can. 

You know, I’m making a comment that it’s not easy to do, and here’s why. When a client meets with a partner and the partner is selling the work, they say to the partner that “you’re going to be involved in the project.” And when the partner says, “yes, I’m going to be involved in the project, he or she says that because they’re trying to close the deal. 

Now, that’s the worst thing you could do because now you’re stuck. You can’t tell the client you got to be involved in the project and then be MIA for every key meeting. But partners are very reluctant to say “no, I’m not going to be involved in the project, and that’s a mistake.” 

And what I recommend, they say, is, “Mr. Client, no, I’m not going to be involved in the project and oh, by the way, that’s a good thing for you. My ability is not in delivering client work. I’m the worst project manager in the firm. My knowledge is in creating the methodology, hiring the staff, training the staff, and running the firm. I’m going to introduce you to my team who are about ten times better than delivering this work than I am.” 

And then you bring the delivery team into the sales call and then the client gets to experience your exceptional engagement manager and your analyst, et cetera, and they say, “yeah, I agree, you don’t have to be involved” and then the client, the partner, can move away. So that’s the key thing that stands in the way. Most owners of boutiques feel they have to remain committed to the project after selling it.

Sean Magennis [00:09:13] Outstanding advice. This is a big milestone, and I can also see why so few make it through this transition. That’s a challenge for businesses and for partners that are so hands-on.

Greg Alexander [00:09:24] Yes.

Sean Magennis [00:09:25] But to scale, it makes total sense, and I can see why why those professional services firm owners that are successful at doing that really become wealthy.

Greg Alexander [00:09:33] Yep.

Sean Magennis [00:09:37] 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. 

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Jon Jones [00:10:20] I’m Jon Jones, CEO of Anthroware.Anthroware makes beautiful digital products. We do this by studying people, your customers. We put them in the center of our process to make tools that they both need and love to use. 

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Questions to Ask When Transitioning Away From the Partner-Led Sales Model

Sean Magennis [00:11:09] So, in an effort to provide immediate take-home value for you, I prepared a ten-question, yes or no checklist. Ask yourself these ten questions. If you answer yes to eight or more of these questions, you’ve made it through this inflection point. 

Number one: Are the owners removed from the sales process?

Greg Alexander [00:11:31] So let’s talk about that. So with diligence, when I pull the sales report.

Sean Magennis [00:11:36] Yes.

Greg Alexander [00:11:38] Typically, from a CRM system, every opportunity of business has a name associated with it. If that name associated with that client record is one of the owners, I’m not in. I become less interested in making an investment in that business because that tells me the owners are driving the business. 

If their name is nowhere near any of those records and there’s somebody else in the firm who doesn’t have an equity stake in the firm who’s the person that owns that client, has sold the work, and is delivering new work – that’s a real positive. Now, if you lined up ten owners of professional services firms right now and you asked them what their forecast was for the next 90 days, they could recite it. 

And if I told them all that they could not go in the next sales call, the next five sales calls, the close of business, what would they tell you? We’ll lose the business as a result. So they have to have the courage to step away.

Sean Magennis [00:12:33] Absolutely.

Greg Alexander [00:12:34] And trust your employees that they can get the deal done.

Sean Magennis [00:12:37] Brilliantly, said Greg. So question number two: Are there are employees generating all the sales? Number three: Is business being generated from scalable sources in addition to referrals? Number four: Have sales increased consistently without adding partners or new owners? Number five: Are your financials able to handle the expense of a commercial sales team?

Greg Alexander [00:13:12] Yes. So let’s talk about that. This is another obstacle. The cost of building a commercial sales team goes into the overhead bucket. Those aren’t billable resources. So partners have to be willing to make the investment, and very often boutiques come to us at that moment in time because they don’t have enough free cash flow to do this. So they need an outside investor to help them.

Sean Magennis [00:13:33] Excellent. And that’s where we provide the growth capital, the stimulus. And by the way, your extraordinary experience in building these commercial sales teams.

Greg Alexander [00:13:42] Correct.

Sean Magennis [00:13:43] Question number six: Have the sales results from the commercial sales team been consistent over time? Number seven: Have the win rates with the commercial sales team been on par, and I’m going to throw in or exceed the partners?

Greg Alexander [00:14:00] Yep. So some advice to the owners out there. The first time you do this, the win rates will drop substantially. Just hang in there.

Sean Magennis [00:14:09] Hang in.

Greg Alexander [00:14:09] You got to go through that period. You got to give the employees a chance to improve. Eventually, their win rates will be as good as yours, but there’ll be a difficult transition there. So just buckle up for that transition.

Sean Magennis [00:14:21] Well said, Greg. Number eight: Have the deal sizes with the commercial sales team been on par with the partners?

Greg Alexander [00:14:28] Same thing. Originally, the non-partners are going to sell smaller deals, or they may cave under price objections, et cetera. You just got to hang in there and get through that period.

Sean Magennis [00:14:39] Great. And number nine:Have the sales cycle links with the commercial sales team been on a par with the partners again?

Greg Alexander [00:14:46] Correct.

Sean Magennis [00:14:47] Good. And then finally, number ten: Can the commercial sales team be expanded significantly without breaking the boutique?

Greg Alexander [00:14:55] Yeah. So this is a really interesting component. In fact, this one can be a show in and of itself. So for every quote, sales head you have you’re going to have an assumption for the amount of revenue that they can bring in. And that’s going to be impacted by a lot of things linked to the sale cycle, win rate, the size of the deal, is the salesperson generating their own leads or the leads coming from another source. 

There’s a lot of factors that go into that. But in the end, you’ll get to a point where you’ll know plus or minus 10 percent with the revenue production, per sale said is. Now, you’ve got to think through how that impacts your service deliver, because, in theory, if you go out and hire ten salespeople, you’re going to generate a lot more business. Can the back end handle it?

Sean Magennis [00:15:42] Exactly.

Greg Alexander [00:15:43] So, figuring out how to tie the delivery engine of the back of the house to the front of the house is really important. And this question number 10 is really important because sometimes that’s overlooked. They hire all the salespeople, they generate all the new business. Everybody’s excited, and next thing you know, the delivery team is 120 percent capacity.

Sean Magennis [00:16:04] And you can’t deliver the business.

Greg Alexander [00:16:05] Can’t deliver it, and then clients sat falls, employee sat falls and you actually create a problem for yourself.

Sean Magennis [00:16:10] Yep.

Greg Alexander [00:16:10] So don’t forget the downstream impact of this.

Sean Magennis [00:16:13] Outstanding, Greg. Outstanding. So the path from a boutique to market leader results in creating a viable, superb commercial sales engine. Potential buyers would rather wait until you have made it through this inflection point. Jumping in prior to this is simply too risky for many. 

If you want to sell your firm, invest resources into developing a scalable sales and marketing engine. 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.