The Concealed Steep Personal Cost of Being a Founder of a Professional Services Firm

The Concealed Steep Personal Cost of Being a Founder of a Professional Services Firm

According to the US Census Bureau, an average of 4.4 million companies are launched every year. Sixty-nine percent of them fall into the category of service businesses requiring a startup budget of under $25,000. In other words, these founders aren’t typically investing their life’s savings, hawking everything they own, or giving up equity to investors in exchange for capital. They’re running capital-light businesses. However, they’re still incurring some serious personal costs, and they need to understand what they are and how to navigate them.

For those of us who have founded professional services firms, “personal costs” aren’t just monetary. They can run the gamut from risking the loss of a partner to suffering from business owner burnout.

Beyond Finances: The Real Personal Costs of Running a Professional Services Firm

There are two primary personal costs a founder of any professional service firm incurs: relationship costs and opportunity costs.

Let’s start with relationship costs. A founder’s relationships with a spouse, kids, extended family members, and friends tend to take a beating during the development of a boutique professional service firm. This phenomenon has become so intense that new terms have entered our vocabulary to discuss it. For example, a wife who has not seen her founder husband much is frequently referred to as an “entrepreneur’s widow.”

This cost is completely understandable, of course. There are only so many hours in the day. Nevertheless, an hour spent working is an hour you did not spend with someone you care about. You can try to multitask: Plenty of founders come to their children’s athletic games with AirPods so they can stay tethered to a Zoom meeting. This is not being present, though, and kids quickly learn what their founder parent deems important. And it is work, not them. Founders have been known to be on a family vacation with grandpa and grandma, only to be late for the group activity because of an urgent email that needed to go out. Unfortunately, years pass quickly. That’s why so many founders wake up and realize they haven’t seen childhood friends or college roommates in a decade or longer.

What about the opportunity cost of running a boutique service firm? Opportunity cost is best described as the loss of the potential gain from a path not taken. Boutique owners are highly employable, but they often work years for below-market wages to build their firms when they could be working elsewhere for a substantial wage at a big corporation. The gap between what they could earn as an employee (including salary, raises, benefits, stock options, 401k matches, etc.) and what they pay themselves is the opportunity cost.

The opportunity cost of running your own business grows with each passing year. So does the gap. Since it takes approximately 15 years to start, scale, and sell a professional services firm, the end result can be pretty hefty. After all, the opportunity cost would be the gap times 15. Not exactly small change.

How to Limit the Effects of Relationship and Opportunity Costs

You can’t get away from the reality that being the founder of a professional service firm will mean incurring some personal costs. Still, you can mitigate the effects of these costs by taking two steps.

1. Build a firm, not a practice.

A firm is a business that is not dependent on the founder to be successful. In a firm, the founder deliberately surrounds himself or herself with an executive team. The founder then delegates key activities to those team members. Scaling a boutique professional service firm is too much work for one person. A team can get a lot more done faster and with less personal toll on the founder.

In contrast, a practice is over-dependent on the founder to be successful. Practices tend to be run by hero-style founders. They have a bunch of helpers running around carrying out orders, but those helpers don’t have authority or empowerment. Running a practice results in the founder paying a dear personal price as relationships crumble. Why? Because the founder has to do everything.

It’s not unusual for practice founders to work 70- or 100-hour weeks. A founder who runs a firm instead of a practice works hard, too. But only between 40-50 hours. That founder has time to spend time with the people who matter most. A firm founder can maintain meaningful, deep relationships rather than risk losing them.

2. Scale a firm beyond a lifestyle business.

A firm built using a lifestyle business does not produce enough rewards to compensate the founder for opportunity costs. In most cases, founders running lifestyle firms make less money than they would make working for someone else.

A founder took a risk when starting his firm. He should be compensated for this risk, and earn more than he would working for someone else.

The way to resolve this issue is to scale a firm beyond being just a lifestyle business. That way, the firm will be able to fairly compensate the founder far beyond any opportunity costs. This makes all the risks worth the founder’s time, effort, and energy.

You can’t get around the fact that you will always pay some personal costs as a founder. Just don’t let those personal costs get out of control. They’re very manageable as long as you take measures to mitigate their impact.

The Maturing Founder: How to Go From a State of Immaturity to a State of Maturity (Part 2)

9 Stages of founder

The Maturing Founder: How to Go From a State of Immaturity to a State of Maturity (Part 2)

If you’ve been keeping up with the Maturing Founder (and if you haven’t, check out the first installment discussing the Flirt through Childhood Stages here), you know that as a founder of a boutique pro serv firm, you’re very attached to your work. And rightly so. You dreamed up the idea of a business, made it a reality, and now, it is growing under your care. But as it has grown, new problems have come up as old ones were solved.

Thankfully, you can rewind your firm if you slip up by going too fast. In the early stages of the business life cycle, that might mean going back to the drawing board to get a strong idea for your ideal founder market fit or focusing only on sales to grow your firm before attempting to scale.

But if you want to reach the maturity stage in the business life cycle and eventually begin exit planning, you need to avoid the immature founder’s mistakes and look to the mature founder for guidance.

From Adolescence to Maturity: The Life Cycle of a Professional Services Firm

Stage 5 – Adolescence.

This is the most difficult life cycle stage for boutique professional services firms. This marks the first attempt at scale for the firm. It is when the firm installs repeatable processes and systems and when the old and the new meet on the battlefield. And it is when the firm and the founder separate.

    • Immature Founder Behavior: An immature founder half-commits to evolving in the adolescence stage. For example, the immature founder hires or promotes a CEO, which is the appropriate move in adolescence. The problems of the adolescence stage require an entirely different skill set with an emphasis on systems, processes, and policies to drive consistent performance at scale. Yet, the immature founder is insecure, so instead of hiring a real leader, he hires a puppet focused on carrying out the founder’s wishes. He doesn’t put the firm first and himself second. He prevents the new CEO from swapping out the old guard for the new blood and waits for too long to adjust to the adolescence stage. He feels he can grow into the new role and is having fun. The idea of passing the baton to someone else is unattractive. When morale falls, which it does during this stage, the immature founder attempts to save the defecting old guard with compensation and equity when he should let them leave. It is a natural progression as a firm moves along its life cycle.

    • Mature Founder Behavior: The mature founder considers selling the firm at this point. He is aware of his gifts as an entrepreneur and understands the firm needs a different leader going forward. If a sale cannot be completed, he hands the firm over to a successor who he has been grooming for years. This successor is given real authority and is empowered to transform the culture. He leads by example by following all new rules and procedures. The mature founder does not mettle in the new CEO’s business but rather thrives in the new role, whatever that may be. When morale dips during the transition, the duration of the dip is short because the founder squashes conflict when it comes up, and he is never pitted against the firm, the CEO, or himself in any way.

Stage 6 – Adulthood.

This is the firm’s prime, the optimum point in the life cycle. Sustained excellence is happening. Client satisfaction and employee satisfaction are high, and profitability is well above average.

    • Immature Founder Behavior: The immature founder doesn’t understand the difference between excellence and sustained excellence. She becomes complacent and thinks the good times will never end. Complacency must be kept at bay, but the founder is busy taking a victory lap. The leadership team is in place, but they need to be trained and developed continuously. The firm still needs to grow during adulthood. The immature founder wants to be recognized for her achievements and hires a PR firm to win awards and be featured in the press. This creates a problem as the firm appears to outsiders to be completely dependent on the founder.
    • Mature Founder Behavior: The mature founder understands it is harder to maintain success than it is to reach it the first time. She is never satisfied and deals with complacency by punching it in the mouth. Small services firms can go from hero to goat overnight. The mature founder understands this and takes nothing for granted. A leadership team is installed and led aggressively by the CEO. A spot on the leadership team is not an entitlement and must be earned every day. The firm continues to innovate and expand and accepts no limitations on its size. The mature founder, anticipating the need to exit someday, removes herself from the spotlight. She pushes the leadership team forward, establishing them as the keys to the firm’s success. This makes the founder irrelevant and replaceable, increasing the value of the professional services firm. Thus, giving her the opportunity to sell if she chooses to do so.

Stage 7 – Middle Age.

This is the first maturity stage in the business life cycle. The founder will want to move on someday and begins getting the firm ready for the next generation.

    • Immature Founder Behavior: The immature founder starts spending money on status symbols. These can be fancy offices, elaborate client entertainment, first-class travel accommodations, personal assistants, and many others. He does this because the firm is very stable. The P&L looks great, and heck, if it ain’t broke, don’t fix it. The immature founder is almost entirely focused on short-term profitability to fund these toys. He spends more time with the inner circle than he does with clients and prospects. The immature founder’s new favorite person is the finance leader. He clamps down on funding for growth and begins demanding large owner distributions. The immature founder begins to tell stories about the good old days. Past accomplishments become more important than the future vision for the firm. There is little risk-taking and rewards go to those who do what they are told to do. The immature founder wants the firm to become more professional, and the informality that once made it great gets replaced with rigidness. He is more concerned with how things are done than he is with what gets done and why things are getting done. The immature founder does not realize the core has begun to rot.

    • Mature Founder Behavior: The mature founder invests excess profit into the development of a world-class leadership team. He remains a scrappy entrepreneur and does not let success go to his head. The firm is still run like a bootstrapped early-stage firm. The founder and the team are hungry. There are no extravagancies unless they directly contribute to the creation of enterprise value. The balance sheet is more important to the mature founder than the income statement. He spends time with prospects, clients, recruits, competitors, and acquirers, constantly keeping a pulse on the market. The mature founder’s favorite people are the rainmakers. He never forgot that nothing happens until someone sells something. The mature founder understands the good old days were never that good. Lots of work and heartbreak is more like it. He is fixated on the future. The mature founder rewards those that develop new revenue streams and outsources those that maintain the old revenue sources. The mature founder obsesses over the culture and keeps it authentic. He shoots to kill when spotting an empty suit. The mature founder leaves the how and the what to the capable CEO and contributes by thinking about the how.

Stage 8 – Retiree.

This is the stage where a founder harvests the firm for profits and begins to wind down.

    • Immature Founder Behavior: The immature founder needs to ease into retirement, but she fights it. She feels working is going to keep her young. Her identity is wrapped up in the firm, and she can’t imagine a time when her name is not on the door. The team under her resents that she still draws a salary and is a drag on the financials. When she sees a problem, she does not have the energy to solve it, so instead, she blames someone. Who caused the problem is more important than what caused it. Around her, everyone lies low. The immature founder has been known to run hot, and everyone is paranoid. Out of touch with the market, the immature founder’s growth strategy is to raise prices. Eventually, clients push back on fees, and new competitors emerge, which leads to a decline in revenue and profits.
    • Mature Founder Behavior: The mature founder works out a deal with the next generation of leaders. The deal is fair for everyone, balancing the founder’s retirement needs with the next generation’s income requirements. The deal acknowledges the past contributions of the founder and the current contributions of the leadership team. The mature founder takes on a new role, maybe chairwoman emeritus. This allows her to feel significant but not hog the spotlight. The CEO, and her leadership team, are the new faces of the firm. The mature founder keeps her mouth shut until she is asked for an opinion. As a result, she is often asked for advice. She gets much fulfillment from helping where she can, and her advice is the best available. The mature founder is celebrated by the new generation. She is asked to welcome new employees to the firm and attend the company retreat. She is grateful to be included but mature enough to realize she is a participant, not a leader. The mature founder knows who she is, what she has accomplished, and is comfortable in her own skin.

Stage 9 – Death or Rebirth.

The firm shuts down, or it is sold to a new ownership group.

    • Immature Founder Behavior: The immature founder tries to hold off death or rebirth for as long as possible through artificial life support systems. He runs the firm as a government official runs a government agency; there are lots and lots of systems. Clients develop elaborate ways to work around the founder. The founder and the firm resent this and attempt to prevent the clients’ bypasses. The immature founder neglected succession planning and any kind of investment in the future. The firm never became more than a lifestyle business, so it dies when the immature founder dies.

    • Mature Founder Behavior: The mature founder makes sure his life’s work lives on after he is gone. This is accomplished through rebirth. A new ownership group, either from within or externally, takes over from the founder. With youth, energy, and enthusiasm, the mature founder’s firm is reborn. New employees enter, new clients arrive, and new markets are entered. The mature founder never neglected the firm. He always knew that someday he would pass, and he wanted his firm to live on. It is his legacy, and he treated it with respect always.

In conclusion, my hope with this article is to show immature first-time founders of boutique professional services firms how to go from a state of immaturity to a state of maturity. And in so doing, have a more enjoyable and successful entrepreneurial journey.

If you’re ready to stop going it alone and rely on the support of experienced pro serv founders, contact us. Or check out my book, the Amazon #1 bestseller, “The Boutique: How to Start, Scale, and Sell a Professional Services Firm.”