The Gift & The Curse: Non-Billable Time

The Gift & The Curse: Non-Billable Time

Most firms have hours, days, weeks even – of non-billable time unceremoniously dumped into “admin” every month… or worse, not even recorded at all (but we’ve talked about that before!).

That could be $100’s of thousands of dollars of time on genuine, useful & essential “admin”… or not. Mostly likely “not” to be honest.

Don’t get me wrong – tracking non-billable time as “admin” is a useful starting point on your journey to superior $margins, but a common curse is it often becomes the final destination…

Imagine: You’ve sold in the value of time management across the firm, so your team diligently record everything billable to projects, but then stick the remaining 10-50% (junior > senior) of their week in the “admin” dustbin… you still feel positive, because you can start to analyze utilization, project margin & staff availability (to a degree) …

Not bad.

By doing that though, the curse is cast, because you tell yourself you’ll get on top of the “admin” bucket later… once time-tracking has been fully adopted, when your team grows, or whenever the next excuse you want to tell yourself occurs… and it never, ever, happens.

If you break-down non-billable time from this day forwards, it’ll be the gift that keeps on giving… 

There are, at least, 5 game-changing insights you will gain:

    1. Sales and new business are often a big suck of your most senior (& expensive) people’s time… so many firms commit resource & expense to building relationships, proposals, proof of concepts… ‘Cost of sale’ is often a huge hidden expense in PS firms, who are constantly working on RFPs or bids… so get a handle on which opportunities drive revenue & high margin work, are a sunken cost, or just a complete waste of time.
    1. Continued learning & development is crucial to your key employees, so ensure they track every internal & external training, mentoring session, company insights… so when it comes to their performance review, the hours of education your firm has provided, is well-documented… & given you know their hourly rate, you can put a $dollar value on what you’ve committed to their personal development. 
    1. Intellectual Capital (IC) is huge in PS firms – it’s the secret sauce in your delivery methodology, it’s the value creating documentation, a framework that delivers client results… find out how much $investment is being made into your IC, which feeds your pricing, your value proposition, or reveals it’s under-invested & needs TLC.
    1. Marketing & personal brand will help drive referrals, inbound & your lead-gen machine… and for most PS firms that doesn’t mean huge $spend on Ad campaigns, but getting their people to tell client stories, share industry insight & therefore use their non-billable time in a productive way. Insight into the true cost of your webinar series, eBook or in-person events is often startling.
    1. Admin! After you’ve run a Work Breakdown Structure, you’ll be able to determine what “admin” actually constitutes (pro tip: changes for different people) … updating spreadsheets, creating reports, filling in CRM records… this gives you a clear picture of which “admin” you should automate, outsource, rationalize etc.

Every PS firm is different, but the non-billable time gift is present for all firms to maximize. Avoiding the curse doesn’t have to be Founder-led – whoever wears your “Operations” hat in your firm should be tasked with driving this… but the benefits are huge for founders & your team.

Feel free to reach out to me if you have any questions.

How Founder Compensation Changes as a Professional Service Firm Grows Up

How Founder Compensation Changes as a Professional Service Firm Grows Up

As the founder of a boutique professional service firm, you’ve embarked on a unique journey filled with challenges and opportunities. In my book, “The Boutique: How to Start, Scale, and Sell a Professional Service Firm,” I introduced a framework that outlines the three key stages in the lifecycle of a small service firm: Grow, Scale, and Exit. Today, we’ll explore how your compensation as the Founder changes as your firm evolves through these stages.

    1. The Growth Stage: Founders with a Job, Not a Firm

In the early days of your firm, you’re in the Grow stage. During this phase, you’re the primary driver of your firm’s success. You’re not just the founder; you’re also the chief salesperson, project manager, and service provider. In essence, you have a job within your firm.

At this stage, it’s common for founders to pay themselves a salary. Why? Because your primary focus is on selling and delivering work for clients. Your role as an operator is critical, and the salary compensates you for your time and expertise. It ensures your livelihood as you lay the foundation for your firm’s future growth.

The correct amount of salary is best determined by the market. In other words, if you hired someone to perform your duties, what would you have to pay him? The free market determines salary levels. The Founder should pay himself the equivalent.

    1. The Scale Stage: Juggling Two Roles as Founder

As your service firm progresses into the Scale stage, things start to change. You’ve grown beyond being just a service provider; you’re now also an owner who’s actively working on building the firm. This phase is marked by a dual role: operator and owner.

In addition to your salary, you may begin to receive shareholder distributions. These distributions represent the second part of your compensation. While your salary compensates you for your role as an operator, shareholder distributions compensates you for your role as an owner. They reward you for your efforts in growing the firm as a business entity, not just as a practitioner.

The correct amount of distributions is best determined by your working capital needs. Distributions are paid to shareholders out of excess profit. Excess profit is profit more than the working capital needed to run the firm. For example, your working capital requirement might be 6 months of payroll in cash in the bank. Anything cash generated beyond that is considered excess and should be distributed to the Founder in the form of owner distributions.

    1. The Exit Stage: Transitioning to Full Ownership

As your firm matures, it eventually reaches the Exit stage. During this phase, you’ve successfully transitioned from being a hands-on operator to a full-fledged owner. You’ve replaced yourself in the day-to-day operations and are now focusing solely on strategic initiatives that increase the enterprise value of the firm. 

At this point, your compensation structure undergoes a significant change. You no longer pay yourself a salary for your operational role because you’ve delegated those responsibilities to others. Instead, your compensation solely relies on shareholder distributions. This reflects your position as an owner who benefits directly from the firm’s financial success. The salary you once paid yourself can now be redirected to support the new team members who have taken over your operational responsibilities.

And at this stage, the Founder has a critical decision to make. Should he sell the firm, or should he continue to own it? A Founder should sell the firm if there is a buyer willing to pay him a premium for the future distribution stream. The Founder should continue to own the firm if the future distribution stream is larger than what a buyer is willing to pay for it. For example, let’s say your firm is paying you $5 million in annual distributions, and a buyer offers you $20 million to buy your firm. You would accept, or decline, this offer based on whether you feel collecting 4 years of distributions upfront today is a good decision.

Join the Collective 54 Mastermind Community

As you navigate these stages of your service firm’s lifecycle, it’s crucial to have access to a supportive community that understands the unique challenges you face as a founder. That’s why I invite you to consider becoming a member of the Collective 54 Mastermind Community.

In our community, you’ll connect with fellow founders who have walked the same path, gain access to invaluable resources, and receive expert guidance to help you successfully navigate each stage of your firm’s journey. You’ll have the opportunity to learn from experienced professionals and accelerate your firm’s growth and success.

Join us at Collective 54 and take your professional service firm to new heights. Together, we’ll help you master the art of growing, scaling, and ultimately exiting your boutique firm, all while optimizing your compensation along the way.

To learn more about Collective 54 and how we can support you on your journey, visit our website or reach out to our team today. Your fellow founders are waiting to welcome you into our thriving community.

Tips for Preventing Founder Burnout in a Services Firm

Tips for Preventing Founder Burnout in a Services Firm

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Starting your firm takes a lot of courage, and it can feel like starting it is enough, but once you start scaling ambitions expand tremendously. And once you start asking yourself how big you can grow your business, burnout becomes a real threat.

That’s why we’re highlighting tips to prevent burnout. This video will help you explore options for intentionally scaling your firm without spreading yourself too thin.

In this video, you’ll learn:
– The true value of time tracking in professional services
– The benefits of building a task force
– The difference between growth of revenue and growth of headcount

The Art of Silence: 6 Reasons Not to Tell Your Employees About the Pending Sale of Your Firm

The Art of Silence: 6 Reasons Not to Tell Your Employees About the Pending Sale of Your Firm

Hey there, fellow founders of boutique professional service firms. If you’re contemplating selling your firm, you’re undoubtedly entering into a complex and potentially game-changing process. It’s a decision that requires careful planning and execution, and one of the crucial questions on your mind might be whether or not to inform your employees about the pending sale. In this blog post, we’re exploring the six compelling reasons why you should consider keeping your cards close to your chest when it comes to sharing this news with your team.

    1. Deals Often Fall Apart During Due Diligence

Let’s face it, folks – deals in the world of business can be as unpredictable as a roll of the dice. Many a promising transaction has crumbled during the due diligence phase for various reasons. Telling your employees about a sale that might not even go through can create unnecessary stress and anxiety. It’s better to maintain business as usual until you have a signed agreement in hand.

2. Employee Distraction Can Lead to a Dip in Results

When the word gets out about a pending sale, employees may start to wonder about their job security. This uncertainty can lead to a dip in their performance and focus, which is the last thing you need during a critical phase like a sale. Such distractions can also undermine the confidence of potential acquirers, making them question the stability and viability of your firm.

3. Loose Lips Can Sink Ships

Employees are a talkative bunch, and news of a pending sale can easily leak into the industry grapevine. Competitors might seize this information to their advantage, and even your clients might pause their relationships with you, uncertain about the firm’s future. Keeping the sale under wraps can protect your business from unnecessary turbulence.

4. Deals Morph During Due Diligence

During the due diligence process, deals often undergo significant changes. These changes can affect who stays, who goes, and the overall structure of the transaction. Until the final details are ironed out, it’s prudent to maintain confidentiality to avoid unnecessary confusion and anxiety among your employees.

5. You’ll Need Everyone On Board to Hit Your Earn Out

If your sale includes an earn-out clause, it’s crucial to keep your team motivated and engaged. Prematurely disclosing the sale can lead to a spike in turnover, with key employees potentially leaving before the deal is finalized. It’s essential to maintain a cohesive and committed team to meet your earn-out goals.

6. You Might Decide Not to Sell

Finally, and importantly, founders have a tendency to change their minds at the eleventh hour. The allure of selling might wane as the details become clearer, or unforeseen circumstances might arise. If you’ve already told your employees about the sale, you’ll face a difficult and potentially disruptive situation if you decide to back out.

In Conclusion: Maintain the Art of Silence

In the world of business, discretion is often your best ally. While transparency with your employees is generally commendable, when it comes to pending sales, it’s often wise to err on the side of caution. Keep these six compelling reasons in mind before prematurely sharing the news with your team.

Remember, a successful sale requires careful planning, strategic thinking, and a well-executed process. Maintain the confidentiality necessary to navigate the complexities of the transaction smoothly. When the time is right, and the deal is firm, you can share the news with your employees, providing them with the stability and reassurance they need to thrive in the transition.

So, dear founders, as you venture into the exciting world of selling your boutique professional service firm, keep these reasons in mind and play your cards close to your chest until the right moment arrives. Your employees will thank you for it, and your potential acquirers will respect your professionalism and discretion.

If you are contemplating a sale of your firm, consider joining Collective 54 by applying here. You can learn a lot from a community of peers going through the same process as you.

The Hidden Language of LOIs: How to Avoid Traps and Decode Buyer Intentions

The Hidden Language of LOIs: How to Avoid Traps and Decode Buyer Intentions

In the dynamic world of business transactions, understanding the nuances of Letters of Intent (LOIs) can be the difference between a successful sale and a negotiation that falls short of expectations. LOIs serve as a beacon of interest from potential buyers, signaling their readiness to acquire your business. Yet, it’s crucial to recognize that the issuance of an LOI often places the buyer in a position of advantage. With a team of advisors at their disposal, buyers craft LOIs that subtly favor their stance in upcoming negotiations. This initial step, while seemingly straightforward, is laden with strategic implications that require careful consideration. For entrepreneurs contemplating the sale of their business, this post sheds light on the strategic considerations surrounding LOIs, offering insights to navigate these waters with confidence.

A. The Binding Nature of Non-Binding Agreements

 A common misconception about LOIs is their non-binding nature. While it’s true that LOIs are generally not considered final agreements, their terms significantly influence the negotiation landscape. Both explicit and implicit provisions within an LOI set the stage for purchase agreement discussions, making it challenging to renegotiate terms without substantial leverage. Moreover, legal precedents show that courts may interpret LOIs as binding under certain conditions, emphasizing the importance of approaching these documents with the same diligence as definitive agreements.

B. Deciphering Key Terms: Beyond the Surface

Structure – The structure of your transaction—whether an asset sale or a stock sale—carries profound commercial and tax implications. It’s essential to delve into the buyer’s assumptions and expectations, as these can reveal hidden requirements that impact the deal’s structure and financial outcomes. For instance, a buyer’s expectation for a step-up in the cost basis of assets can significantly influence the purchase price, even if not explicitly stated in the LOI.

Imagine you’re selling your business, and your LOI mentions that the buyer expects to receive the benefit from a “step-up” in cost basis when they buy your assets. This means they’re hoping to increase the value of the assets for tax purposes, which will allow the buyer to take depreciation and amortization deductions with respect to their future income taxes. Even if this tax advantage isn’t clearly stated in your initial agreement, the buyer might still expect it to be part of the deal based on the type of purchase they’re making. For example, if your company is an LLC taxed as a partnership or disregarded entity, generally a purchase of your equity in the company will be treated as a sale of assets. If your LOI mentions that the buyer is purchasing your LLC equity, they could argue that a “step-up” in cost basis should be presumed under the LOI. If for some reason the purchase is not able to deliver that “step-up” (say, because your company is actually taxed as a corporation), the buyer may seek a purchase price reduction. We have seen buyers successfully argue for such reductions on these facts in other transactions.

Funding – How your purchase price is funded can have profound implications on your tax liability and your ability to receive the price at all. You should consult with your tax advisor when evaluating the terms of any seller financing or earn-out. These items can be structured advantageously to the buyer while, for tax purposes, leaving you with disadvantageous tax treatment on portions of your purchase price. If your buyer offers equity interests as a part of the purchase price, ensure that your counsel and tax advisors have reviewed those portions of the LOI. Ask for a summary of terms and pro forma cap table with respect to those interests and discuss with your tax advisor if there are tax-efficient means of obtaining the interests.

Price Protections. When a buyer talks about wanting “customary” or “appropriate” protections for the purchase price in the LOI, it can be a bit confusing. Usually, when they say “customary,” they’re looking for a few specific things to protect the price they’re paying. This includes setting aside cash from the purchase price in an escrow account to cover losses that the buyer suffers from taking on undisclosed liabilities of your business or deficiencies in your business’s working capital. Buyers often want insurance from you (called “indemnities”) against any losses they may suffer for promises you made about the business that turned out to be untrue (representations and warranties). Sometimes, buyers might not spell out all their desired protections in detail in the LOI, saying they need to do more due diligence first. It’s a good idea to ask the buyer what they typically expect in terms of these protections. If your deal is big enough, it might be worth talking about getting third-party insurance coverages for the representations and warranties you make. You shouldn’t have to guess what the buyer wants for price protections in your LOI.

Closing Conditions. Closing conditions are the things your buyer need to happen, and are either done by you, or your buyer, to put your buyer in position to close the deal. The closing conditions in the LOI should be reviewed carefully both to ensure that the conditions are attainable if both parties act in good faith and to set expectations in case a buyer communicates new conditions pre-closing. Be mindful of any closing conditions requiring the action or approval of a third party. For example, many LOIs contain financing contingencies, which make the closing of the transaction dependent upon the Buyer securing acceptable financing. Closing conditions should be reviewed carefully with your counsel, who can help you understand what closing conditions are reasonable, and when to ask your buyer to revise or even remove conditions.

C. Don’t React to Your LOI, Be Proactive

In my experience, the most effective sellers have already marshalled their resources by the time their LOI arrives. If you are anticipating receipt of an LOI, you should have your team of advisors and internal experts assembled and ready to review it prior to it crossing your inbox. That core team should be composed of, at a minimum, your trusted financial advisor, tax advisor or accountant, and an experienced M&A attorney. You may need other internal experts (HR, IT, regulatory, facilities management, etc.) or stakeholders to participate in the LOI review process, and you should consider, with the counsel of your core team, involving them, subject to appropriate confidentiality agreements. Once you have an LOI to review, be prepared to review it and accept the commentary and guidance of your team. Collectively, by leveraging your knowledge of the business and the experience of your team, you can optimize your LOI negotiations with a buyer and set your deal on a path towards a successful closing. If you are evaluating an LOI, or would like to discuss how to prepare to receive one and build your LOI team, my office would be delighted to help you. I can be reached at [email protected]; tel: 704-916-1521.