Getting Beyond a Band of Experts
Owners of professional services firms (engineering firms, consulting firms, etc.) have a critical choice: Decide what type of business they want to be in the future. Do they want to be a “band of experts” where most of the company value is in the expert? Or do they want to create a true collaborative firm with material value beyond the expert? This is not a trick question.
The band of experts model attributes most shareholder value to the expert engineer, consultant, architect, IT designer – called personal goodwill. This approach brings a great advantage. New owners typically join the band of experts at a low “book value” price. Some people call this the individual contributor model.
Many band of experts firms eventually reach the fork in the road. They can stay small (say under $25- $50M in annual revenue) or choose to scale. Scale means ramping up via collaboration, investment in people and repeatable processes with the goal of creating shareholder value and take on bigger, more complex projects.
Enhancing Shareholder Value
To reach its value potential, the expert business needs to shed its skin and choose growth. Here are four clues that your professional services firm is ready leave the expert model and adopt the scalable model:
- Third party acquirers approach to buy your organization for true value. You quickly realize that an acquirer does not pay for experts that can just walk right out the door. Rather acquirers pay for the assets and capabilities such as client relationships, unique processes and intellectual property.
- Your business potential is well beyond the sum of the individual experts. Many of our clients are leveraging technology to be catalyst for scale. This may require investment in talent, business development, process improvement and perhaps acquisitions.
- You experience a flight risk of your top performers to competitors. Why do top performers leave? Book value caps the value to scalable expert. On the other hand, your competitors give scalable experts a platform to earn their value in the business with strategic upside of stock options, restricted stock, synthetic equity, or profits interests.
- Your HUNKs do not leave (HUNKs are “High Unit, No Client” experts). Buy sell agreements based on book value do little to encourage less productive senior partners to leave. Trying to force senior partners out can be difficult when book value is the only incentive and the HUNKs are getting their ownership share of profits.
Avoiding the Liquidity Crunch
Going from the expert book value model to the scalable growth model takes a lot more than just changing the top-line revenue model. The equity model and shareholders agreement need to change.
Scalable companies are asking the following questions:
- What is the right choice of entity (C, S, LLC) especially if we may eventually merge or sell?
- What are the different triggers and values in our buy-sell agreement for early retirement, full retirement, and change in control?
- How do we manage the liquidity crunch of owner redemptions at strategic or fair market value?
- Is there a sinking fund for buyout and does that sinking fund benefit from tax deferral?
- How will our leaders afford to become owners?
- How will we reinforce a culture of merit and ownership? What tools will make the overall program effective and affordable including equity, synthetic equity, cash based plans or control privileges.
Want to explore moving beyond the expert model to the growth model? We can help.
Please contact us to learn more.