Here's something worth knowing. The gap between being a good consultant and building a great consulting business is enormous. Most coaching programs are run by people who've never actually closed that gap themselves. At consulting success, every one of our coaches has built a high 6, 7, or 8-figure consulting business. And inside of our clarity coaching program, you get private 101 coaching tailored to your business, plus access to a global community of consultants operating at a high level to help you attract and land ideal clients with consistency and streamline your business to free up your time, not consume it. If you're at 6 or 7 figures and ready to grow, book a call now to learn more at consultingsuccess.com/clarity. That's consultingsuccess.com/clarity. What is your consulting firm and need to look like for someone to actually want to buy it? Well, that's exactly what we're going to be unpacking in this episode with David Mann, an investor focused on acquiring and scaling professional services firms. What's powerful here is his perspective. David doesn't just talk theory. He's evaluating hundreds of firms, looking for the few that are actually built to last and built to scale. In this episode, you're going to discover out of structure your business so that it's not dependent on you, how to build a repeatable sales engine that increases enterprise value and why understanding your market at a deep practical level is one of the most overlooked drivers of growth and valuation. We also dive into how AI is changing what makes the firm attractive and what you should be doing now to stay ahead of that shift. If you're not just trying to grow your firm but you're building something truly valuable, this episode will give you a completely different lens. Welcome David. Yeah, thank you. Glad to be here. Yeah, I've been looking forward to this conversation. It's a different type than we typically have on the consulting success podcast given that your firm actually acquires professional services firms and consulting firms and so forth. So really looking forward to diving into the conversation so that everyone can better understand and what they should be thinking about if they ever want to sell their firm and how they can increase a value. So I thought we could start our conversation really around what revenue level does a professional services firm need to hit before acquires will even kind of pay attention to them. Is there a magic number? Yeah, it's a great question. They come in all shapes and sizes for us. We kind of think that minimum threshold is around $10 million. That's where it gets us interesting because it has enough scale to that it has some infrastructure and scale to it and it probably less dependent on one or two people. And so we want to have that as a minimum. And then we'll look at companies up typically 10 million to 100 million revenues where we look at. I mean, there's a lot of great smaller companies than that. Let's don't get that wrong. But they're a little bit too small for us. Yeah, are you of the opinion that let's say if a company is doing 3 million or 5 million in top line revenue that the chance of them selling their business is like slim to none or the different type of buyer. What are your thoughts on that? All businesses can be bought. It's just done the valuation. It's gone for right. So I think every business has a potential buyer in most cases, but that $3 million, $5 million business is a little more challenge, right? Because it can be dependent on one person, maybe in smaller market. There's more risk. And so you're trying to balance that riskly reward profile. Gotcha. So if a company is doing, let's just call it 10 million, is there a level of profit, like the profit margin that you would be looking forward to think, okay, this is a healthy business or how do you view profit margins in relation to top line revenue? We think an EBITDA margin. So when we think about EBITDA, normally for a professional service business, you want it to be an minimum of 20%. Oftentimes you see professional services business up 50% per 6, 60, 70, 80% right? And some of these businesses, but if it's less than 20% that's problematic, but 20% is kind of a minimum threshold before we even take a look. Gotcha. And is there a mix? I'm just wondering your view on recurring revenue versus project-based work inside of the business. You lean more towards one or the other. How do you kind of think about that if a business is charging, let's say hourly fees or if they have a project-based rates or if it's recurring revenue? As you know, in professional services, it can come in lots of shapes and sizes. Everybody's always chasing recurring revenue, but we know in professional services there may be some things that aren't recurring revenue. So we look first, is there recurring revenue? If there's not, is there re-occurring revenue? So they can look back and say, okay, I don't have recurring revenues with this client, but I've worked with this client for 10 years. And so if we're okay, well that's a good data point. Now I look at, is there one person on your team who's had that relationship for 10 years and is that relationship all tied in one person? So then I look at that. So recurring revenue, re-occurring revenue, and looking at the mix of that, because what you don't want is the majority of your revenue is being one-off project-based revenue. So beyond top-on revenue and margins, what are some of the other key metrics that you look for in evaluating professional services for a man? I recognize there's likely quite a few, but where are the top ones that really come to mind for you? Sure, obviously the team, people talk a lot about the team. Who is the team? Who makes this up? Are these the eight players that you're looking for? Is all the revenue tied up in one or two people in that firm? Or is it pretty spread out? And you have a, you have a good mix so that reduces ricks. What's the market they're playing into? Is it a market that's interesting and compelling and growing? Or is it a market that's that's too small and nichey? A lot of people say, hey, we go after everybody. Well, who do you really go after each start getting to that real market? And then what is the business model? How do they make money? Is it recurring revenue? As we talked about before, some other mix. So that the team, the market, and then the business model or the top three? I want to go a little bit deeper into the market. There's often that mindset challenge that people have around what we should go made broader because we can help a lot more people we can work with and we can serve many. And then the other side's, no, we should really specialize and we should niche down. You mentioned new is the market large enough or is it sustainable? How do you view that? Like is there a number of potential clients or what are kind of the metrics of the ways that you think about? Is this a big enough market or is this the kind of, you know, the market that we want to be in? Yes. So I think we think about it in terms of can you own a niche? So if you can first own a niche, then you can have a concentric circle spread out from that niche. But we have to own something first. If we're just all things to all people from the get go, we just have a smattering of stuff. We don't want to smattering of stuff. We want, okay, it may be a small niche. It just is, you can come and say, Hey, this market that we're going in right now, it's $250 million total market. But we're the leader in that. Okay, well, that's interesting. Okay, if you did that and we're serving radiologists, but now we can expand to what's adjacent to radiologists. Now we can take the net and now that makes us a $400 million market. And we have another next concentric circle. So that's how we kind of look at that. So there's not a magic number of how big the market is. Some people say it needs to be a billion dollar market. Well, that's great. But what's the real market? Okay, we own this niche. Now we're going to keep growing from there. Of the different metrics or areas of focus that you just kind of went through, are there certain ones that you tend to see founders neglecting more often than others? Neglecting markets, which are understanding questions. Not neglecting like any aspect of just key metrics, whether it's their profit margins or certain metrics around their team, market size, any area that you tend to see founders not spending enough time on that is in your mind very important to the business being valuable. We look at maybe 500 businesses a year to invest in one. So when we look at these when we look at these business plans or these that come across our desk, the weakest part is always their understanding of the market. They don't truly understand the market from the bottoms up. There's a lot of people say, Hey, we're a $500 million market. We're going to capture 3% we're huge. But if you can you build that from if I have one consultant, one salesperson, what's realistic that they can go get in this market and what timeframe and they can truly build it from the ground up and understand how that builds, how you go get a client every step of the way and have done it before and can demonstrate that. That makes it scalable and repeatable, which is meaningful. And most people don't it's just a guessing work or a smattering. Now we'll put some stuff on LinkedIn, we'll put some stuff on Facebook and it's a smattering of stuff and hopefully something hits. Let's talk about concentration. What client or revenue concentration numbers concern you? Are there specific thresholds you kind of watch for any thoughts on that? Yeah, I think one client being more than 20% of your business is challenging. If you can show some trend that that's coming down and you're new, that's okay. But when you get one client, 20, 25% of your business that starts to raise a red flag. It's not a definite no. It starts to red raise a red flag. We need to dig deeper on. How do you think about and what is your kind of perspective when you look at a business that is doing well. The numbers are there, right? The metrics are there. Growth is there. But the founder is still the primary rainmaker. Do you view that as, well, okay, we can just replace them. We'll bring in a sales team or we know we need to do to kind of plug that sales gap and we can go off to the races or is that a real red flag? Is that a concern?
if the founder is still a primary rainmaker inside of the business. Other firms may have a different view. We view that as a problem. Because if we go and buy this business, maybe this person's less motivated. Now they got a big check in their pocket. Now we still want them to be that rainmaker. How easy is it to replace that person? And as we know, it's not necessarily the skillset we're replacing. It's those relationships that they built for 10, 20, 30 years that we're trying to replace. And it's hard to build trust overnight with a new person. I trusted Bob and now you put in Susie. Well, I don't know. I don't know Susie. So we might go in a different direction. And that's a, you just wrote somebody a multi-billion dollar check. Now you're going to have potential your business walking out the door. That's that's problematic. So in a situation like that, what should a founder do? If they're recognizing that, you know, 60, 70, 80 percent of the business is coming in right now through the relationships that they have. And they're thinking, you know, yeah, I'd like to be in a position of five years from now to be able to sell my business. What should they start doing today so that they don't have that issue come up when they look to sell? Yeah, I think putting in that, if you said using your example of five years, starting putting in that five year plan, if how I'm going to build out the quality accountability chart, build out the accountability chart to start plugging that in. So that 60 or 70 percent's turned over time and become 50 percent, 30 percent. And you get that person by the year five, they're down under 20 percent. And you need a pathway to have that happen. And it can take three to five years. So I think people often tell you, well, put this together in six months. Well, as we know, it's not a six-month plan. You need to allow that three to five years. How do you view if, let's say, the founder is now shifted to their lines on sales to another sales person. So they have a full-time business development or sales person. They're bringing the vast majority of new revenue into the business. The founder is no longer relied on for that. But if the revenue is still now the concentration of that is coming from a sales person, is that a positive thing? Does it show that this company has gone through and they've trained somebody else and they're successful in that role? Therefore, there shouldn't be an issue training someone else, another sales person. Or is that still a red flag or a concern for you if the majority of the revenue is coming from a sales person that is not the, or it's the development person that is not the actual founder? It's at least a positive trend. We know that this founder could do it. Now here she has taught someone else to do it. So it wasn't just one person who could do it. Now we know two people can do it. But now can that two become four people and can four become eight. And so that's where we need is to see a little more data that it's more than one or two people that it's concentrated in. The personal brand, a lot of professional services, businesses and business owners build their brand or rebuild their personal brand. They write books, different things. And that supports the growth of their business. Taking example, Gina Wickman of EOS, I know that your company acquired EOS. In your view, does a personal brand hurt or does it help in an acquisition? Because sometimes consultants are wondering, should I put my name, like is it the right thing for me to have my business name as my personal name or my last name in it? And the other part is if I'm the one up there speaking as a founder and I'm running the podcast and I'm doing this and that is that a positive thing? Or do you look at it as a negative? How do you kind of think through that? And what would your counsel be for any business owner where they're still maybe the face of the business? Sure. If you mentioned Gina Wickman and our investment in that company, it's a wonderful company. And Gina was a dynamic, powerful personality. But from day one, he said, I want this company to build, built to last a minimum of 100 years. So if you notice the company is called EOS entrepreneurial operating system. The primary book is called traction. He's the author of traction, but it's not called the Gina Wickman company. And that was purposeful. And so brands are important. EOS has a strong brand. It's become more and more recognized around the world. But if it was just called the Gina Wickman company and he's no longer the day-to-day person, I don't know how that would play out. So there's lots of nuances. But my initial reaction is stay away from your personal name in this. You can still be the spaker. You can still be on stage. You can still be promoting it. But over time, as that company grows, you don't want it just to be about you. Yeah. I mean, essentially, I think about companies like McKinsey or Bane, these were companies started using the name of the founder. So clear, there's lots of examples of successful companies that have founders naming them. But I think I really get your point, which is that the business needs to be focused a lot more than just about one person or the founder in order for it to be sustainable for the long term. How do you think about the difference between a lifestyle business and a business built for acquisition? What's your take on that, David? I mean, is there what's the line that Sandit separates somebody who's just building and running a lifestyle business compared to one that's actually going to really create a lot more value for a future potential exit? Let's be clear. These are right or wrong. I don't think about it necessarily as a lifestyle business or building a business for acquisition. You wouldn't build a great company for the long term in the acquisition should take care of itself, which is if it's meant to happen. If I'm a small business and I have a family and I'm happy bringing home $500,000 a year and I don't want to grow beyond that because it just gives me headaches. Great. Go out there and do that. Love that. But just know if someday I want to sell the business, the value may not be there that you want. So we do have to put some things in place if we want to build a great business. And that may be instead of that end of the year when there's could take home $500,000, I'm taking home $100,000 because I'm reinvesting the money to grow that business. And I'm making the shorter, shorter term trade off for an income so that I can have a bigger upside potentially later. So it's just that trade off we make in our life for lots of reasons. What do most founders think that acquires terrible, but actually doesn't really matter to you much? Yeah, that's because you're stomping me on that when I'm not sure that I have I don't know if I have a good answer. Okay, I mean, we can come out and say like so founders often, you know, they're consuming information. They read books, they listen to podcasts, they have this idea in their mind of these things are what I need to do to get my business in a position where it can be sold. And I'm wondering are there certain things that you see that founders spend a lot of time on and put a lot of attention to, but you as an acquire really don't care much about? Yeah, I think there's things that come to mind, I guess oftentimes people tell them, hey, when you're pitching to a investor or an acquire, they need to see that five years you're going to be a $500 million company and they put together all these numbers and they try to back it up and they spend a lot of money with the countenance to help them. We know that numbers aren't 90% of the time are inaccurate. You're wasting a lot of time and money. Just tell us the real story and you spend a lot of time on window dressing like, oh, I hired this marketing person because they're going to care about that. What we really care about when I think back at all the companies we've worked with over the years, the best CEOs we've ever had versus the ones that weren't as good, if they had $10 of things they wanted or needed, but they only had $3 to spend. They knew exactly where to spend those $3 and the worst CEOs always spent the $3 in the wrong place. So they knew how to focus and find the right three versus those who didn't were always in the wrong spot at the wrong time. What kills deals in due diligence that founders often don't see coming or are there a couple of things that tend to come up that you've seen D-rail deals more than anything else? If you're not, if the numbers you posted in your initial pitch aren't the actual numbers if we get into diligence and the numbers are off from what you said, as we always had, when you read the book, we got the ad backs. Can you describe what an ad back is for even case people aren't familiar? Yeah, an ad back might be cared or profit or bottom line is a million dollars. It's our money net income, million dollars, but we have our EBITDA. Now we've added back to that because hey, when you buy a company, you're no longer going to meet me as the CEO. So I'm adding back my salary of 500 that, well, who's going to run the company now? But they've added back. So there's this million dollar EBITDA. They made it look like two million, but it's not truly it, two million dollar EBITDA. So the numbers just have to make sense. The concentration issue we talked about, Michael, jumps out at us. If you're out spending money on lots of things and you have a light, lifestyle, spending that's, we've got to be through frugal. And if you're out spending money on lots of stuff, oh, okay, we have a suite at the Toronto Raptors or we have a whatever we do, that's probably for a small business. That may be great if you're Goldman Sachs, but as a small business, that's a problem and how we're spending our money. So making sure we're spending money wisely, the customer concentration, our numbers are accurate. Oftentimes we get in there and they haven't given anybody a raise in five years. And so when we a car, the company, they'll come into us and say, hey, we need a raise. So what I thought was going to be the salaries for in total is now a different number in salaries. So making sure that they were taking care of the team and they have a culture that people want to work there and they're proud to work there because a lot of times the cultures, you got to dig into that culture piece and see where people truly taking care of. Michael going on and on. Those are several. Okay. I mean, I'm smiling because you said the Raptors and not the culture, the Pacers are. Yeah, I figured it was a Canadian. You know, I didn't make something to you back here. You're an Indian. Yeah. So, um, that's true. Her number is very popular in professional services, acquisitions and so forth. What should found
founders know about earnouts. I mean, is there a typical length that you look for and that you feel people should expect? Is there a situation ever where you don't actually want a founder to stay and to be part of an earnout? - Yeah, each one is case-specific. So we do want some in these types of businesses, smaller business in particular, you're gonna have an earnout typically. And so people need to accept that and get their mind around it. I know when people haven't been educated on this, they often think, hey, somebody's gonna come in to write me a check and I leave and I'm gone forever. Well, that's typically not the case in earnout. It's gonna be two to three years. The smallest I've seen is maybe one, but we'll say one to three years and they're gonna expect that person to stay around and contribute if that still makes sense for everybody. And they need to hit certain numbers to be able to make that happen. So people need to understand that's part of it. It's not somebody trying to pull us fast one on year, trying to, that's just the nature of how these deals are typically structured. - How do you think about the percentage of the acquisition or the sale that the founder would receive, right? As opposed to how much is held as part of the earnout. What impacts that and what would be a typical range that people should be thinking about? - Yeah, I've seen a founder of Rollover as much as 50%. So if they get bought, the company gets bought for 10 million, the expectation could have that founder Rollover 5 million of that. That's probably on the high side. But on the low side is somewhere between 20% and 50% that you would expect that that founder to roll over into the new acquisition. - What would make you as an acquire comfortable or more comfortable to have that at the 20% as opposed to the 50%? What are the things that the founder could do in advance so that they would be able to collect more on the actual sale? - Proof to us that the team around them is carrying the most of the weight and they're not as reliant on that founder. That certainly helps. You've built up a team around you who's doing a great job, who's handling the day to day. It's less dependent on you to make that happen. But we wanna know, we're doing due diligence, but this person's lived in the business for years and years and years and they're getting out for some reason. We know the reason they told us, but there's usually some other reasons going on as well. And we may not figure that out and due diligence. So when they're pushing back on handy and the number to be lower need to be number. So I started asking, what do they know that I don't know? Because if I was foolish about the future of the business would not want a piece of that at some level? - I've talked to a lot of consulting business owners recently, called in the last six, eight months or so, who have felt, and I'm sure that you've seen this as well, David, that the world that we're living in today, that there's a lot of uncertainty. There's just a lot of change. A lot of people are feeling overwhelmed. There's, you know, depending the data shows an increase in people saying that they're feeling burnt out. If you're talking to a founder who has a successful business, let's just say, you know, they're doing 10 million or even whatever, six, eight million, it's a stall of business, good people in place, it's doing well, maybe it's not growing as quickly as it was in the past, but the founder has been in it for 10 years and they're just feeling like they're tired. They're burnt out. In a situation like that, how do you view that? Is that like a business that you would still potentially want to invest in an acquire, or if a founder is feeling some burnout, and they just don't have the same level of passion or excitement for the business that they used to, is that a really big negative and red flag in your mind? - Well, we understand businesses have been flows and people can get tired. On first blush, you'd say, hmm, maybe that's a pass, but if you took the next look, you'd say, maybe that's an opportunity. Maybe that's an opportunity, right? Because this person hasn't had their foot on the gas pedal, they've been coasting, but we know this market, if somebody did these three things, we could capture a lot more. So I think it's worth opinion on it, it's worth taking this next step, digging further to say, hey, there's something here, there's this not capturing it because they're tired. But then that leads to, well, who's gonna lead the business going forward? Is it gonna be this tired person, or do we have a plan in place to rejuvenate them? - That makes sense. - So we talked about just briefly, you've made significant acquisitions, including EOS, sales acceleration, others. When you acquire a business, what's the playbook? What are the first few things, let's call them like the initial 90 to 180 days that you tend to repeat? And you just, you know, these are the things that are gonna create more value or help to create growth in that first kind of three to six month period. What's the playbook look like? - Yeah, so as you might imagine, we get companies running on EOS. If they're not already, we believe that's the right tool. We used to not mandate that, but over time, we've come to believe it's the right step forward. So we want them running on EOS, so they're having an efficient, how are we planning? Because oftentimes the board and the investors can get sideways with the leadership team. But if you have the EOS VTO, the vision traction organizer as the tool, that becomes what we talked about. We all agreed, here's the three year plan. We all agreed, this is a one year plan. We all agreed, this is the 90 day plan. So there's no question, if I as a board member and come and say to you as CEO, hey, how about this thing? All you should have to say to me is, this is what we agreed on, what you want me to not do to do your new thing. So he gets everybody in alignment and speaking the same language, which I think is important. And you start to see a lot more things get done. The second thing we focus on is sales. How do we get a repeatable, clear, documented sales process? We know it's truly scalable. And then if we hired another person, we know that person can go do it too. So too often it's just some kind of magical thing that happens and one person can do it. But how do we get that? So those in the 90 days or so is, get them running on EOS, get a repeatable documented sales process. And then we spent a lot of time with that team. We want to meet every member of that team. So we don't truly understand that culture and what things are going well and what aren't. So EOS sales and trying to lock down a great culture. How has AI changed the way that you evaluate professional services companies in terms of, it does this make sense for us to make an investment or not? I mean, I've talked to a few people who look at different businesses in terms of making acquisitions. And they've said, yeah, we've passed on a lot more opportunities than we used to because of what's happening with AI. And I'm just wondering what's your experience been with that? I guess similar. We always, a question Mark that didn't used to be in our due diligence list is, now what's the AI risk? Does AI enhance this business or does AI take away from this business? So we look at it carefully. And I think oftentimes it can be an enhancement other times it can take away or it could be a replacement in some way. And so is some way to watch for. People often say documentation, SOPs, playbooks, are critical to have to make the business saleable. And I'm wondering how much does that actually matter to you as an acquireer? Does the businesses need to have everything documented in some kind of system or is that not as critical for you as an acquireer? I think showing that you have a system in process is important. Is that do I need to have a book that shows here's the button you push to turn on your computer? So there's taking it too far. But having some systems and processes and knowing that people throughout the organization have to follow them or follow in the system. They're doing things that are repeatable. They're doing things that are scalable. We're doing it. If you're in a manufacturing environment, that people are doing things that stay safe and everybody's doing that versus not having that in place. So it doesn't have to be too excruciating detail, but it needs to be at a level that people are following it. They're doing something that's repeatable over and over again. All right. One more question for you then, David. For a consulting business owner who's thinking about selling their business in the next three to five years or four beyond, what's one thing that we haven't talked about today? Do you feel they should start working on or really giving intentional thought to? Yeah, I think the future-- we just brought it up here. How does AI play into my business? Because it's going to be a-- and how do I use AI to help my business to enhance my business? And there's their places I need to tweak or pivot my business model to make AI an important tool versus something that destroys value. So that's where I'd spend a lot of time. And then I would try to make sure that I have on my team the best people I can possibly have around me. And so it's not just me. And it's not just as bunch of C players. It's me and a bunch of C players, because they'd come work for me for cheap. But you have a full robust team that's pulling this off. Because that'll be impressive to an inquire. They thought through AI, they have a high quality team around them. They have some systems and processes in place that they're actually following. That shows well. David, thank you again so much for coming on. I want to make sure the people can learn more about you and everything that your company is doing. Where's the best place for them to go to learn more and to connect? Yeah, great. Always on LinkedIn. You can find me, David Mann on LinkedIn. Our firm is the Firefly Group. And our website is thefireflygrp.com. And my email is
[email protected]. All right, well, I'm sure you don't get many emails these days. So, adding a few more from people. Right. Exactly. David, thank you again so much. I really appreciate you coming on. For sure. [MUSIC PLAYING] Before we end our show, let me leave you with a question. What would it feel like to finally have
steady pipeline of clients who are ready and willing to pay your premium fees. If that sounds like the consulting business you've always wanted, stick with me for just another minute. Too many consultants, yes, even a highly successful six and seven figure ones, find themselves stuck in the same cycle. They're juggling client work and trying to grow their business at the same time, but their pipeline is unpredictable and scaling feels like an uphill battle. Sound familiar? You've worked hard to get where you are, but staying stuck in this cycle isn't sustainable and is costing you time, energy, and future growth. The good news? You don't have to figure this out all alone. That's why we offer you the opportunity to schedule a free growth session. There's no obligation, no pressure call, is your chance to explore whether our clarity coaching program is the right fit for you. Clarity coaching has helped thousands of consultants like you to scale their businesses, build predictable systems, and attract premium clients consistently, all while freeing up more time to focus on what you love most. When you schedule your growth session, here's what you'll get, a personalized conversation with an expert clarity advisor who has seen first hand with hundreds of consultants what it takes to break through barriers and achieve sustainable growth. The opportunity to see how clarity coaching can help you refine your business strategy and scale with confidence and actionable insights tailored to your unique goals so that you can start moving toward the consulting business you've always envisioned. If you're ready to stop spinning your wheels and start building the consulting business you truly deserve, here's what to do next. Visit consulting success dot com forward slash grow and book your free growth session today. That's consulting success dot com forward slash grow. Don't wait your next big breakthrough might just be one conversation away. Thanks for listening to today's episode. I can't wait to hear about your success. Until next time, this is Michael Zeperski wishing you clarity, growth, and success in your consulting journey.
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