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Founding Lifestyle Businesses vs Scalable Businesses (w/Greg Alexander) [PODCAST]

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The first episode of SuccessKit’s B2B Founder Stories podcast features a conversation with Greg Alexander, founder of the professional services firm Collective 54. Listen as Greg and SuccessKit’s Julian Lumpkin discuss the life cycle of a professional services firm and the role of the founder through it all.

The purpose of the B2B Founder Stories podcast is to talk about the success strategies for small to medium-sized tech companies and professional service firms. The podcast aims to fill a void for those business owners who seek profitable growth opportunities and aren’t solo entrepreneurs nor running Fortune 500 companies.

Transcript of Podcast Episode 1: Founding Lifestyle Businesses vs Scalable Businesses (w/Greg Alexander of Collective 54)

Greg Alexander’s thirty-year professional career involved being an entrepreneur before becoming an investor in boutique professional services firms. Now, in this thirty-minute podcast, he touches upon the following topics:

  • Defines boutique professional services firm
  • Explains why now is a great time to be a professional services firm
  • Compares the ease of starting a services business to that of starting a tech company
  • Names the characteristics commonly seen in the best professional services firms, founders, and CEOs
  • Differentiates between the two necessary types of partners in a firm: the hacker and the hustler
  • Identifies how and when founders should start removing themselves from delivering their services
  • Describes the life cycle of the professional services firm
  • Compares lifestyle businesses to scalable businesses
  • Summarizes the acquisition trends for professional services
  • Classifies the three categories of professional services firm buyers

“I was a young successful executive at a Fortune 500 company… In my early thirties, I looked at my role models, which were men much older than me in that company, and I said, ‘Is that the life I want?’ That was an unattractive career path for me. I decided to go into business for myself, and…it was the greatest thing I ever did. So I would encourage all your listeners if they’re thinking about it, then just… go for it.”

Greg Alexander, Founder, Collective 54

Transcript

Julian Lumpkin: Welcome to the SuccessKit Podcast, we work with B2B clients to create case studies, white papers and video testimonials and this is our podcast about how small to medium tech companies and professional service firms like our own and our clients can grow. We interview successful entrepreneurs about strategies and best practices for growing strong, profitable B2B businesses. Today’s guest is Greg Alexander, as you will hear, he’s a successful entrepreneur having exited a professional service firm for nine figures, and he now works directly with hundreds of founders looking to do the same as the founder of Collective 54. Thanks for tuning in, and now let’s get right to my conversation with Greg.

Greg Alexander: It’s great to be here. Thank you for having me.

Julian Lumpkin: Cool. So to begin, since we’re talking about growing businesses, can you give our audience a quick background on your experience starting and selling the sales benchmarking index, and now what you’re doing at Collective 54?

Greg Alexander: Sure. And if you’ll allow me, I’ll go a little bit broader than that because some context might help. But I describe my professional career, which is 30 years now into three individual chapters. So chapter number one was as an employee and I worked for a young tech company called EMC that became a really big tech company. And that was a wonderful experience during the birthing of the internet and leading up to the dot com bubble and so on. The second chapter was starting a management consulting company, and this chapter was my time as an entrepreneur, somebody like yourself, Julian, and maybe someone similar to your audience members. And my management consulting company, I started scaled and sold it in 11 years, it was called Sales Benchmark Index or SBI. And the easiest way to describe that was we helped business to business companies improve the effectiveness of their sales team. After the sale of that, I entered the third chapter of my career and that is as an investor and I have an investment firm that invests in a very particular type of business, we call it a boutique professional services firm.

Greg Alexander: Now what is that? That is somebody that operates in industry code 54, so think consultants, IT, service providers, marketing agencies, et cetera, anybody that sells and delivers their expertise on some version of the billable hour. And a boutique for us is someone between five and 249 employees, and typically a revenue range of let’s say, as low as maybe a few hundred thousand dollars to as high as let’s say, maybe 50 or 60 million bucks. So that’s a rundown of me.

Julian Lumpkin: That’s great. And you answered my next question, so I’ll dive right into the next one. You told us what a professional service firm is, but tell our audience in your opinion, why is now a great time to be a professional services firm?

Greg Alexander: So we are in the golden era of professional services, why? So digital technology is disrupting every business, every industry. So historically, if you are a large company, you might have a product cycle as an example of three to four years, well now your product cycle is three to four months, maybe. So you used to be able to hire and keep all of the expertise you needed in a company for a long time period, because you had these long time windows. Well, because the time window was shrunk so dramatically now, it’s better for large corporations, more often than not to keep a much smaller group of core employees and then rent the expertise for lack of a better term, when needed. For example, social media hit the scene and everybody wanted to jump on LinkedIn and Facebook and they did that. They hired a bunch of people, next thing you know there was Twitter, next thing you know there was TikTok. So how do you operate an environment like that? Then came Instagram and so on and so on and so on.

Greg Alexander: So it’s better to have a general contractor view now so you have an employee that might manage a department and they farm out the work accordingly, depending on their individual need. And because of that dynamic, the way that large corporations that have the budgets, the way that they’re managing talent, it’s never been a better time to be in a professional services industry. To give you an idea, just in the United States alone, the professional services sector employs just under 10 million people. There’s $2 trillion spent per year in professional services with an organic growth rate of about 5%, so it’s a great place to be.

Julian Lumpkin: That’s really interesting. And I worked in tech before I got into professional services firms, starting my own that is, and I actually got here from a different angle that I’m curious to hear your perspective on. You described why it’s a great time from a market perspective to be a professional services firm but for me, what I found is that when most people in the B2B world are thinking about being an entrepreneur, they’re pushed towards creating a technology that is scalable. And especially if you’re not technical, that comes with a lot of challenges and there’s a ridiculously high failure rate on new B2B technologies. Services on the other hand are a lot more practical for someone to start, someone who doesn’t have millions of dollars of capital behind them. I’m curious to hear your opinion on why and how it’s easier, for a more realistic as a founder to create a professional services firm based on a skill you have rather than to create a SaaS product or a pure technology company.

Greg Alexander: Yeah. There’s a mythology around the Silicon Valley culture in the tech industry. They look at Mark Zuckerberg, who’s worth billions and billions of dollars and people think I can be the next him. Well, for every Mark Zuckerberg, as you well know, there’s probably a million Schmucks who tried it and failed, so it doesn’t work that well. Also, I would tell you that three quarters of the economy in the United States is in the services sector. So even though technology gets all the headlines, it’s very often the job creators are the founders of boutiques, the person that starts the firm, there’s one person and five years later, there’s 50 people. There’s 1.5 million pre-scale boutique professional services firms in the United States, so it’s such a huge part of our economy in growing and it’s very rich in terms of the economic opportunity that exists.

Greg Alexander: So that’s one thing, I would try to blow up the Silicon Valley myth, and remember I came from the tech industry, in my days at EMC, so I know that industry really well, and I have a different perspective on it now from the inside. I would also tell you that starting a services business is a lot easier than starting a tech company, why? You don’t have to write any code. This is the main reason why. Okay, so you can develop a niche for yourself and you can get to market super quickly with a service that’s easy for a customer to buy, that has real, tangible benefit. Whereas, if you start a software company, and even though they’ve made a ton of progress there, with things like AWS and no code or low code, et cetera, it’s still much more difficult to be in a tech company or any product company, we are selling a product as opposed to a service. So that’s probably the reason why there’s so many professional services firms and there’s so many professional services firms founders who are doing so well.

Julian Lumpkin: Yeah, that’s really interesting. I only wish I knew that five years ago when I tried to start a technology company and experienced so much more success when I stopped trying to build technology and started offering professional services. So Greg, you speak with, as the founder of Collective 54, which is a group of hundreds of professional services firms, you meet a lot of professional founders of professional service. I think, what do you think of as the characteristics that you see with the best professional services firms, founders and CEOs?

Greg Alexander: Okay. So let’s take a case, let’s say you’re a consultant company, just to make this easy, in that business, which is very similar to whether you’re a law firm, an accounting firm, marketing agency, what have you, first and foremost, the most successful firms, it’s a partnership, it’s not a single person. The data will tell you that a two person, three person firm outperforms a solopreneur, if you will, almost every day of the week. Now, if you look at the combination of the team, the steel from the software world that you came from, you usually have two types of individuals that are partners in the firm, there’s the hacker and there’s the hustler. So the hacker is the person who delivers the service for the client, the client hires them, there’s a scope of work, there’s a set of deliverables, a timeline, a payment schedule and the hacker is the person who’s doing that. The hustler is the person who brings in the business. They’re out meeting with the prospects and the clients and they’re securing the work.

Greg Alexander: And when you have a great partnership between hacker and hustler, you can go from a small lifestyle business to a scaled professional services firm worth millions of dollars. People that don’t do it that way, they suffer this, fill the lake drain the lake, fill the lake, drain the lake, this up and down. Because when you don’t have any business, you spend all your time generating business, making sales calls, then you sell a bunch of clients well, guess what? Now you got to go deliver all the work. And while you’re delivering all the work, those projects end, eventually now, you got to go sell some work, so you have this really lumpy cycle. So the first way that I would answer that question for you is it’s a team, it’s too much work for one person and partnerships go much further than single owners of professional services firms.

Greg Alexander: In terms of the personality characteristics, I would also say that the top personality characteristic of a successful founder of a pro serve firm is grit. And grit has a very specific definition in my mind, as we all learn from reading the book, Grit by the wonderful Angela Duckworth. And it’s a unique combination, equal parts, passion and perseverance. I know a lot of founders of pro serve firms that have a lot of passion, they come out of the shoot and they’re like, I’m going to go conquer the world and 18 months later, they quit. They don’t have the perseverance to push it through. So it’s a combination of the two things, it’s not easy. I mean, if everybody could do it, everybody would be doing it. So I would say that that’s probably the number one attribute that I would look for.

Julian Lumpkin: It’s a really interesting answer. And following onto the idea of having someone who’s really responsible for delivering the service versus someone developing business, putting aside the partnership aspect, an area I want to get your perspective on that I know, I think about a lot and I think a lot of my audience thinks about a lot is this dynamic for the founder of when to get out of the way of executing and delivering their service. On the one hand, you have people telling you in order, and there’s definitely validity in this, that people telling you, if you’re going to grow, you have to get out of delivering the service yourself, you have to just be a manager and hire a team to do it. On the other hand, if you try to do that too quickly, the service can degrade and if you’re an expert, you’re not going to be getting your expertise to your clients. So how do you advise, how, and when do you advise founders of professional services firms to start to remove themselves from the process of delivering their service?

Greg Alexander: So what I’ve learned from the members of Collective 54 is that there’s a life cycle of a professional services firm, cradle to grave on average, it’s 15 years, five years, and three phases. There’s a growth phase, the scale phase and the exit phase. So in that first five years, which is the growth phase, the founder is likely to be delivering their expertise during that period of time. Let’s say in the first couple years, probably a hundred percent of the time, maybe the next couple of years, maybe 50-50 split, and then maybe right around year four, year five, they start removing themselves from that responsibility. And it’s remarkably consistent that anniversary date of five years of when this transition happens. Now, why is that? Well, here’s why, much like products follow a product life cycle, they get birthed, they grow, they mature, they decline, they get sunset, so do services.

Greg Alexander: And what is super difficult to do right now, a problem that’s tough to solve so a company hires you to solve it might be tough today, but after you solve that problem a dozen times, it’s not as hard. So the founder can codify a delivery methodology that delivers the service with a certain level of capability or client satisfaction consistently. And once that’s codified, it can be taught and then you can teach it to other people and then they can do it as well as you can do it. Now, the wonderful thing about that moment, most founders are fiercely independent entrepreneurs who like to create new things. So the quicker they can codify the core offering, they can get onto the business of developing the new offering. And again, a similar parable to product companies, if you’re a single product company, you’re going to be a one hit wonder, and you’re not going to grow as much as you want. If you’re a single services company and you’re a one hit wonder, eventually you’re going to hit a roadblock, so you have to keep coming out with new services.

Greg Alexander: So then you can go back to your happy clients and take them the next service. And that’s when scale really kicks in, when the business development effort switches from, let’s say, 80% new business and 20% growth from existing clients. When you cross over to the scale stage, it flips, it goes to, let’s say 20% new business and 80% business from existing clients. That’s when you’re going back to people that you’ve known for a long time, you’ve delivered outstanding service to, and you say, “Hey, I’ve got this new thing, I think it might help you.” And that is when scale really kicks in. So I would look at it that way. To answer your question, think about a life cycle, 15 years, cradle to grave five, five, and five growth scale exit. About halfway through that growth stage you’re going to want to start codifying your service and teaching others to deliver it.

Julian Lumpkin: And it’s a really interesting concept that’s actually been very helpful for me in planning and thinking about SuccessKit’s growth, to think about it in those three stages. Quick question on transitioning, I want to talk about the transition from growth to scale. So I know I’ve asked you this before, and you don’t want to put an exact revenue figure on it, but can you give our audience some idea of around what a company looks like in your eyes in terms of employee count revenue? However you want to define it, of when they’re ready to start putting attention towards these scaling processes.

Greg Alexander: Yeah. And I have shared this with you, and I know you’re unsatisfied with my answer, but I’m going to be remarkably consistent and give you the same answer. So here’s the answer. So it comes down to the founder and the founders ambition, it’s not a number, revenue, employee account, it’s the founders ambition. What happens is, founder start a firm and they’re in those first five years and they’re running a lifestyle business and they’re very happy. Why are they happy? They no longer have to work for a faceless, soulless corporation, they can work for themselves and that’s a source of happiness. They’re meeting all these interesting people, clients that have interesting projects and they feel good that those clients are turning to them for help. And they start making a good living and they start making more than they would’ve made if they worked for XYZ corporation.

Greg Alexander: And they do that for a period of time and they think they got the system baked and then one day they wake up and they say, “Geez, I want more than just a life’s style business, my professional aspirations exceed running a lifestyle business and I really want to grow this thing because I want to create wealth for myself and my family.” And that’s when it happens. And that’s when they have to take a hard look in the mirror and say, “What do I want to do? Do I just want to milk this cash cow and live a nice life?” And there’s nothing wrong with that, there’s a lot of lifestyle business, that’s not a derogatory term by any, it’s just a preference. I mean, I like chocolate ice cream, you might like vanilla, they’re both great, they’re both ice cream, they’re just different flavors. But there is a group that wakes up one day and says, “Damn, I want more from life. I want to scale this thing.” And that’s when their whole mentality switches and then there’s a different playbook to run during that time.

Greg Alexander: On average, to try to do my best, to give you a number, it’s not employee counter revenue count, it’s how many years have you been in business? So if you’ve been in business for roughly five years, you’re going to wake up one day right around that period and say, maybe I should really do something with this. Then you’re in the scale stage, which by the way is very hard, it’s thrilling and you can do it, but it’s a lot of work. And then what ends up happening is you’re in that stage for about another five years, because your next question’s going to be, when should you sell your firm? So right around year 10, you wake up and you say, “I’m tired of the 70 hour work week, maybe I’d like to go do something else, I’ve been doing this for a decade, maybe I should sell this firm and pursue another interest.” And that’s when you transition into the exit stage. So it all comes down to the life’s ambitions and personal preferences of the founder or founders.

Julian Lumpkin: Awesome. Really appreciate that. And I want to go back to lifestyle businesses, that was one of the other questions I wanted to ask you about. Have you seen a lot of… I have seen quite a few examples or heard about a lot of examples of technology lifestyle businesses that are really successful for the founder, where the founder doesn’t have to work crazy hours and brings in an income that exceeds what you would get as a VP at a major corporation, which to me is a huge success, and I think to a lot of our audience. Can you think of, and tell us about some examples of successful companies that didn’t opt to go the real scale route and stayed successful lifestyle businesses?

Greg Alexander: Oh, there’s millions of them, I think it’s important here for us to provide a definition of a lifestyle business and contrast that with a definition of a scale business. So a lifestyle business is not an indication of size, a lifestyle business is a business that is meant to be owner operated from day one and forever. Okay. A scale business is meant to be no longer operated by the owner, somebody else is going to run the business. Many lifestyle businesses are lifestyle businesses because the founders love what they do and they would never want to turn over the responsibility of the business in total or in part to somebody else. They want to keep running the business because they love what they do, that’s a lifestyle business. It’s not built to be handed over to somebody else and it’s not built to ever be sold to anybody else.

Greg Alexander: A scalable business is just the opposite of that, it’s run as a lifestyle business for a period of time, but the owner of that business knows at some point, I’m going to hire somebody else to run this business or I’m going to sell it to somebody else, that’s the intent of the business. So their approach to their day, their week, their month, their year on how they plan and grow their business is very different. For example, in a lifestyle business you don’t have to worry about generational transfer, the original partner is the partner until he goes into the grave, he doesn’t have to worry about grooming the next partner. In a scale business, you’re going to say to yourself at some point, okay, I’m 63 years old, my kids don’t want this business, I’m going to have to transition it to somebody else, what’s my succession plan look like? So that work stream of building a talent pipeline and succession plan and handing the business from one generation to the next, that happens in a non lifestyle business, but in a lifestyle business, it doesn’t.

Greg Alexander: Let’s say you want to sell a business okay, well you’ve got to be able to prove to a potential buyer that the business is not dependent on you, that if I got hit by a truck tomorrow, the business would go on. A lifestyle business, it can never be sold because it is a business of the lifestyle, the business is dependent on that person and we can’t buy people, that slavery doesn’t exist anymore, so that doesn’t happen, so that’s the big distinction. There’s literally in this country, thank God, millions and millions of lifestyle businesses where people are doing this and some of them are huge. I mean, billion dollar corporations, but they own it and they run it and that’s the way it’s going to be. Then there’s the other group that the owners and the runners or the owners in management is split, that’s the big difference between the two.

Julian Lumpkin: That’s really helpful. And you’ve once again, led to my next set of questions and the last topic that I want to discuss with you, which is selling a professional services firm. Can you tell our audience a little bit about who buys professional services firms and what the acquisition market looks like in the world of professional services firms? Because in the news, the only acquisitions you hear about are tech acquisitions, so what’s going on in the acquisitions world for professional services?

Greg Alexander: Yes. Well, I mean just this month at Collective 54, we’ve had three members exit, so there’s lots of exits happening in the professional services industry and founders are making life changing wealth as a result of that, so it’s very doable. But it is still more rare and you certainly don’t read about them as you would in product businesses. So the question was who buys professional services? It’s three broad categories, so there’s a strategic buyer, so that’s, think of an Accenture as an example. And one of our members just sold their business to Accenture. Accenture wanted to get into this line of business and they had a decision to make, do I want to build it internally or do I just want to buy my way into it? That decision is made for strategic buyer on three dimensions. How much is it going to cost? How long is it going to take? And what’s the probability of success?

Greg Alexander: If I can build it cheaper, get there faster, with a higher probability success, then I’ll build the practice myself. If I can pay a little extra and get there a lot faster with a much higher degree of probability of success then I’m just going to buy the practice, so that’s one group, a strategic acquirer, and there’s lots of them. The other group is an institutional investor, most commonly private equity investors. And what they do is they buy a piece of the business, so they would go to a founder and they’d say, “Hey, you’re at 5 million, 10 million today, your business is worth X, we think that you can grow that business from 10 million to 50 million. So we’re going to give you X amount of money to go grow that business and we’re going to buy a piece of the business.”

Greg Alexander: And in that scenario, the founder usually takes some chips off the table, so to speak, to lock away their retirement income, but they stay in the business for the “second bite of the apple” and they take that investment capital from their investment partner and they go on a journey together and then they exit together down the road. Then there’s that group. And then the third group, which is the most common group we never hear of is this generational transfer where a founder sells the business to one of his employees or group of employees. So let’s say I’m a founder of business, I’ve been running it for 20 years and I’m 60 years old and I want to retire. And I go out and I shop my business to strategic acquirers and they’re not interested, I’m too small or whatever. I shop my business to private equity investors and there’s problems with my business that make it too risky for them. For example, maybe there’s no recurring revenue or my margins aren’t great, or maybe I have some client in revenue concentration that makes me risky so they don’t do it.

Greg Alexander: So when I run into that problem, I then go to my employees and I’d say, “Hey, you’ve been working here 10 years, we got two choices. I can either shut the business down and hand the keys back to the landlord or if you want to continue on here, I can sell the business to you.” They come up with a price and then the generation one sells to generation two over time, it’s typically like a five year transfer and then that new generation owns the business. And then they go on their journey and then at the end of their journey, they go through the same process, they try to sell it to a strategic, they try to sell it to a private equity firm or they sell it to generation three. So just to summarize there, and I’m massively oversimplifying, but it’s three broad categories, strategic buyer, an institutional buyer, or your employees.

Julian Lumpkin: That’s really helpful. Last question for you, Greg, what advice, a lot of our audience are people who are thinking about and want to start a professional services firm. Maybe they’re a solo entrepreneur that is thinking about trying to grow, maybe they’re a VP or a director at a company and thinking about starting their own firm. What advice do you have to someone who is thinking about starting a professional services firm now?

Greg Alexander: I would say go, start it right now, it’s a gold rush, we are in the golden era of professional services. It’s never been easier to go into business for yourself, it’s never had a greater probability of success. It’s far less risky than people realize, there’s proven methodologies out there I might add, pick up my book, The Boutique: How To Start, Scale, And Sell A Professional Services Firm, lays out a roadmap. There’s communities that you can join to help you with it, Collective 54 is one of many, there’s several, it’s a lot easier. Sometimes people who are thinking about quitting a corporate job and starting their own, they’re worried about their salary, et cetera and they think they can’t replicate it. You’re replicative a lot faster than you think and you’ll probably be a lot happier than you’ve ever been.

Greg Alexander: So I did it, I was a young successful executive at a Fortune 500 company with all the trappings that that comes with. And in my early thirties, I looked at my role models, which were men much older than me in that company and I said, is that the life I want? And that was an unattractive career path for me. And I decided to go into business for myself and I’ve never looked back and it was the greatest thing I ever did. So I would encourage all your listeners if they’re thinking about it then just grab your, you know what, and go for it.

Julian Lumpkin: That’s awesome. And yeah, one thing I’ll add to that, that was really exciting for me when I started is how, I mean, you obviously have to pay for them, but the amount of tools and softwares that are out there to help you start a business is incredible. You just don’t have to deal with so much of the things that people had to cobble together 10 and 20 years ago, there’re softwares to do everything. I was able to start so quickly and just focus on my core offering right away, because of the technology and that makes it so much easier in this day and age.

Greg Alexander: Oh, a hundred percent. I mean, just to make that point. I mean, when I had SBI, I mean, we were doing millions of dollars a year, we sold for 162 million, I never had a CFO ever. We ran the entire business with an outsourced QuickBook person. I never had an HR team, ever, we ran it on PeopleSoft back then and we outsourced to an HR team. I mean, to your point, that all of that stuff, I mean, it’s just a click of a button. I mean, it’s so easy now, the hard part is finding clients and doing a great job for them so they keep hiring you, that’s the hard part, but all the other stuff that used to be in the way. My God, I can run Collective 54 now, which is a multimillion dollar business with hundreds of members, could run the entire thing on my phone, literally. It’s crazy how easy it is now and getting easier.

Julian Lumpkin: That’s awesome. Well, Greg, once again, thank you for your time. And so everyone here knows I’m a member of Collective 54, highly recommended if you want to hear more from Greg and get more involved in learning about best practice for starting, scaling and selling a professional services firm. But hopefully this half an hour has been insightful for the audience. And Greg, once again, thanks for your time and expertise as always.

Greg Alexander: Okay. Thanks Julian. Go get them.

Julian Lumpkin: Thanks to Greg, I thought this was a really helpful conversation and thank you to listeners. You can subscribe wherever you’re listening to make sure you see future episodes. If you have a topic you’d like us to address, if you’d like to be a guest on the podcast, or if you want to discuss how we can help with your case studies, white papers or video testimonials, you can email us at [email protected]. Once again that’s [email protected]. Thanks for listening, we’ll see you next time.

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Stef Mates

Stef Mates, SuccessKit's Creative Director, has been writing, designing, editing, and managing a variety of content types for several different industries for more than 15 years. She started at the company as a freelancer in November 2019 and became an official part of the team in June 2021.

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