Chapter 1: Chaos

Alex Stapleton wheeled the Range Rover into the parking lot of First National Bank. He grabbed his portfolio from the back seat and sprinted to the doors. A quick check of his watch made it official: 9:06 am. He was late. Again.

As a regular visitor, Alex’s name was on the list at reception and the security guard waved him in. He found an open elevator and hit the button for the18th floor. As the doors closed, he took his first full breath of air since leaving his office.

John Stevens was a typical client. Stevens had worked at the bank for seven years. He had landed a job as business account manager straight out of business school. He spent a few years lending money to small businesses and then got a job at the bank’s head office in marketing. Prematurely bald and rail thin, he seemed angry at life for dealing him a bum set of physical cards. Stevens had no formal training in marketing, yet he insisted on directing every detail of Alex’s work.

“Sorry I’m late John. Traffic was…

“Did you bring the mock ups” Stevens asked Alex impatiently.

Alex unzipped his portfolio, wiped his brow and settled in for the long hall. Alex unveiled the first design and John Stevens didn’t flinch. No reaction. Alex began to explain the designer’s vision for the piece and Stevens waved him off.

“Let’s see the next one”

Alex presented all eight concepts while Stevens looked on with an intense scowl. After some long, silent minutes, Stevens selected the design that was least offensive to him and started to offer his instructions. He wanted the picture smaller, the font changed, the red to be more of an ‘orange red’ instead of the ‘pink red’ Alex’s designer had offered. Stevens’ feedback droned on. Alex felt as if he was back in primary school. Despite being woefully unqualified, Stevens seemed to be relishing his new role as art critic.

Alex left the meeting room promising Stevens another round of mock-ups on Monday morning. He pulled out of the parking lot feeling broken.

****

If Stevens were the exception, Alex could have lived with that but unfortunately, Stevens was a good representation of the bulk of Alex’s clients: marketing managers with crappy jobs who seemed to like pushing around their marketing agency.

Alex had started The Stapleton Agency eight years ago after a career at a blue chip agency. He started doing logos and brochures for small businesses and gradually moved up to being an “Approved Vendor” for First National Bank. Having Approved Vendor status meant the bank paid their bills and kept The Stapleton Agency on a short list of alternative suppliers to their Agency Of Record. When small jobs came up that First National’s main marketing agency turned their nose up at, The Stapleton Agency would be summoned.

When Alex started the agency he dreamed of working on important campaigns and big TV budgets. He imagined directing models and actors between booze-soaked lunches with Chief Marketing Officers. He wanted to be part of the scene.

Instead, he was trying to figure out how to explain to his designer that she would need to work the weekend because the client, a man who had never taken a design course, and was essentially a middle manager doing a job he was completely unqualified for, wanted the red changed to ‘Orange red’.

****

The Stapleton Agency was located in a funky part of the city just west of downtown. Alex paid $4,000 a month for more space than he needed with the hopes it would impress clients. The office had all of the requisite touches befitting of a creative shop: exposed brick walls, glass encased boardroom, twelve foot board room table with Polycom phone centered and permanently mounted projector overhead.  Sadly, it rarely served its purpose — First National Bank insisted Alex come to them.

Alex tried to slip into his office without Sarah noticing but she heard his keys jangle. She looked up from her computer and inquired:  “How did it go?.”

Alex stalled, “Pretty good, he had a few changes but nothing major. I’ll come see you in a few minutes.” With that, Alex went into his office and shut the door. He needed caffeine. The day’s mail was on his desk and he quickly scanned it for the familiar blue and gold logo of First National Bank. He was expecting a check. Nothing.

Alex collected his thoughts and prioritized the next few hours. He needed to get Sarah working on the First National changes, he had to get across town for lunch, get back to write a proposal and find time to call his banker.

Sarah rolled her eyes as Alex delivered the news. He was desperately trying to deliver the verdict without squashing Sarah’s motivation and further amplifying the hatred she already felt towards John Stevens and the bank he worked for. She accepted her sentence, dawned her sound canceling earphones as if to shut out the sorry world she found herself in, and set about finding an Orange-red that would appease Lord Stevens.

Alex hated himself for not standing up to John Stevens. He felt weak but the reality was, The Stapleton Agency could not afford to lose First National as a client. Last month, the bank amounted to $48,000 of The Stapleton Agency’s $120,000 in total billings. Alex, Sarah and the other seven employees of The Stapleton Agency needed First National.

****

Traffic was tight on the way across town and Alex was late for his second meeting of the day. Sandy Garmalo sat at the table sipping San Pellegrino. Sandy had been a client for five years. She headed up marketing for a law firm in town. Sandy and her firm never generated any huge billings for The Stapleton Agency but they were steady which required that Alex spring for lunch once a quarter.

For Sandy, Alex’s lunches were a nice little escape from the over bearing lawyers she served. The waiter arrived and asked if they would like a drink. Alex was about to ask for a Diet Coke when Sandy preempted him:

“I’ll have a glass of your house white”

Alex had too much to do that afternoon but knew letting Sandy drink on her own would make lunch awkward.

“I’ll have the same,” Alex said promising himself he would nurse one glass.

Sandy was a divorced forty something women ten years Alex’s senior. She enjoyed flirting with him and Alex obliged knowing that a little harmless flirting would keep the projects flowing to The Stapleton Agency.

Appetizers were picked at. More wine arrived. Sandy droned on about the lawyers she worked for over an interminably long lunch that Sandy seemed determined to prolong. Alex sat increasingly less interested in Sandy’s prattle. Eventually, the waiter cleared the plates. Dessert was offered and refused. Coffee was offered and Sandy accepted. Alex, resigning himself to another ten minutes of meaningless banter, ordered an espresso.

The bill came and Alex produced his Platinum card. One of the perks of owning The Stapleton Agency was the ability to charge $8,000 worth of expenses per month on his Amex generating a nice stash of travel points he promised himself he would use this year for a vacation with his family. Alex sat nervously as the waiter went away to ask the Amex gods for a little bit of understanding. Alex had been late paying off his balance last month and been cut off until his account was back in good standing. He knew his bill was due again some time this week and he only hoped the date had not passed.

The waiter returned and the card had snuck under the watchful eyes of the Amex credit department. Alex smiled, took the card and got on with the business of extracting himself from lunch. Sandy made some vague overtures about upcoming projects she would need The Stapleton Agency’s help with. Alex looked interested and finally escaped.

He stopped at Starbucks on the way home for a second coffee that he hope would sober him up enough to write the proposal he desperately wanted to be accepted.

****

The Request For Proposal had come in from a local Sporting goods retailer called SportsMax.  They had grown tired of their agency and were looking for a new marketing shop to handle all of their work which included newspaper ads, local radio spots, store banners and an e-commerce enabled website.

Alex knew his team could handle the print ads and in store signage. He had a friend at a radio production house who could help with the radio work. Most of the website would be outsourced, but SportsMax did not need to know that.

After pasting the requisite drivel about the history of his agency, its creative credentials and awards, Alex started to estimate his fees. There would be hard costs for studio time, proofs, freelance web designers. Then he tried to estimate the time of his staff. He billed his designers at $200 per hour and his own time was billed at $300 per hour. These were largely arbitrary rates established over time by gleaning insight about how competitors charged.

Alex hated the process of estimating hours. He knew is was an inexact science and that his actual hours invested would have no resemblance to what he was estimating. Creating marketing material was such an iterative process that there was no way to estimate his time accurately.

After four hours of writing and fuzzy math, the proposal was done. It was 6:30pm and he had missed the FedEx guy for the day so he dropped the proposal off at the depot himself on the way home. He handed it over to the clerk and hoped SportsMax would be the client that would finally make him less reliant on First National Bank and the likes of John Stevens.

Given the late hour, it was probably safe to call Mary’s office. Mary was his account manager at First National Bank where he was required to move his banking relationship in recognition of making it onto the approved vendor list. Mary had kids so she usually left by 5:30pm. Alex was bumping up against the $150,000 line of credit Mary had granted him. Ironically he was expecting a check from Mary’s employer today but it had not arrived.

“Hi, you’ve reached the confidential voice mail of Mary Pradham. Please leave a message”

“Hi Mary, its Alex Stapleton…listen, I meant to call you earlier but the day got away from me. I’m on my way home and wanted to leave you a message to let you know everything is fine. I know I’m getting close to my limit.  We should be getting some checks in on Monday. Give me a call if you have any concerns.”

Alex hoped his voice mail would buy him a few days reprieve. The Stapleton Agency provided Alex with a decent living for his family and a great vehicle for tax write offs. He ran the Range Rover through the business and whenever he eat out with friends, he was sure to keep the bill. He had been able to bonus himself $150,000 last year which, when added to his $100,000 per year salary, meant his total compensation was $250,000 last year. Not bad, but the cash flow was lumpy and this was not his first late night call to Mary Pradham.

Quick!  Grab a napkin and calculate how many unique companies accounted for your revenue last month. If you’re like most traditional service firms, your largest customer accounted for at least 25% of your revenue. We need to fix that.

When you go to sell your company, an acquirer is going to try and understand how predictable your revenue stream is. One swing factor will be how exposed you are to any one client. If you rely on one customer for 25% + of your revenue, an acquirer is going to take a steep discount on your market price at best, or walk away at worst. Your goal should be to ensure none of your clients make up more than 5% – 10% of your revenue. That way the impact of losing any one customer is minimized.

It’s natural for service firms to have a couple of big clients

Don’t panic if you have a couple of key clients driving most of your business. It’s natural: you’ve been taught to focus on your best customers (80/20 rule), listen to their needs, build deep, long-last relationships and tailor your solution based on their needs. You’re an inch wide in terms of number of clients and a mile deep.

That’s fine if you want to run a lifestyle business, but if you’re building a company to sell it, you need to become a mile wide in terms of customers and an inch deep in terms of what you do for them. Follow these steps:

• Start by creating a Standard Service Offering and a corresponding pitch deck (or brochure)
• Develop a rank ordered list of your top 100 prospects for your Standard Service Offering with your best prospect ranked #1.
• Draw a line through your list at the number 50 and try and get an appointment with prospects 50-100 (you want to save your top 50 prospects for after you have honed your pitch)

Keep track of the following:

• Number of appointments
• Number of sales

You’ll need these ratios for building a sales engine and projecting your results across sales team.

You have a hammer and you’re on the hunt for a nail. Your conversation rate will go down so you need to compensate with more prospects. Your role in the sales process needs to evolve from chief rain maker for your firm to sales and marketing manager for a business. You need to focus your personal attention on making sure your sales people (yes, you need to hire some) have enough leads to call on.

If you choose to engage someone (boutique M&A firm, business broker etc.) to sell your business, they have a consistent formula for finding you a buyer. Some brokers will have variations to their approach, but most will follow some form of the following path (I’ve presented a time line below to give you a sense of the total elapse time from the day you engage a broker to the final day you close the sale. The time line is presented as a rough guide and will vary considerably from one deal to the next):

Weeks 1 – 8 Creating “The Book”

This is a package that describes your business in detail. It typically includes a summary of your business, and historical financials along with a plan for the future. It is your brochure, so a good broker will spend a lot of time making sure it looks good and that the financials (both historical and future) are presented professionally.

Weeks 8 – 12: Create and distribute an anonymous “teaser” about your business

This is a short one or two page document that is used to attract the attention of a potential buyer. It is typically written in a way as to excite a potential buyer while disguising your company name, because the recipients will not have signed a Non Disclosure Agreement (NDA) yet.

Brokers will then push out the teaser to their contacts. Some brokers do this surgically, providing it first to some of their best relationships. However, most brokers will distribute the teaser to the widest possible list of potential buyers for your company.

If a company reads the teasers and is interested in learning more, they usually need to sign an NDA in return for “The Book”

Weeks 13 – 20 Management presentations

Once potential buyers have read the book, some will decline interest while others will want to continue with the process. For those still interested in potentially buying your company, they will request a management presentation. This is simply a meeting (typically face-to-face) where you describe your business and they have a chance to get to know you and the senior members of your team.

Weeks 21 –  24 Reviewing Letters Of Intent

Once Management Presentations are complete, you will hopefully receive one or more Letters of Intent. These letters typically make a conditional, non-binding offer which is contingent on the due diligence process. If you like one of the offers, you will typically be required to provide that potential acquirer exclusivity in the negotiation while they perform their due diligence.

Weeks 25 – 32 Due Diligence

Sometimes referred to as their proctology examination, Due Diligence is the stage where the acquirer will validate the assumptions they made about your business while reviewing The Book and interviewing you in the Management Presentations. They are looking for inconsistencies and trying to be sure about what they are buying.

Week 33 – 34 Closing

Assuming you get through Due Diligence without major hurdles, a date will be picked to close the deal. The Closing is a meeting, usually run by the lawyers from both sides, where you will be required to sign a number of documents. Once you sign the final document, funds will be wired to your bank account, and glasses will be raised because you will have just sold your business.

As the old saying goes – nine women can’t have a baby in one month. Some things just take time and selling your business is one of them. Your deal may take more or less time, or veer off this neat path at times, but you should expect the process to include some variation of these steps and to take 6-8 months.

If you want to sell your service business, you need to replace yourself as your company’s top sales person.

If you’re like the founders of most service firms, you started your business because you are really good at something. You are credible with clients because you are a subject matter expert. People want to buy services from experts. Hence, you’re probably your company’s best sales person.

Being your company’s top sales person is problematic for two reasons:

1. Your company is dependent on you so there is not much to buy after you’re out of the picture;
2. The type of sales you make render projects that are too technically challenging to be repeat-able and scalable.

For this post, let’s focus on the second problem.

You’re probably good at “consultative selling”. You visit with your prospect and try to understand their needs. You ask deep, open-ended questions and follow them up with more probing. The prospect feels like he/she is being interviewed for the 6 o’clock news.

At the end of the first meeting, you walk away with a very rich understanding of your client’s challenge. This knowledge comes with an expectation from your client that you will use their information to solve their problem. Obviously you need to custom-tailor both a proposal and a corresponding solution to help them. Your deep subject matter expertise makes you want to whip out all of the arrows in your quiver to concoct a complex solution because you’re smart, experienced and you like the mental stimulation of solving a client’s problem in a fresh way.

Variety is the spice of life you tell yourself. Well, go eat a chili pepper instead. Customization is our enemy. Standardization is our friend. And as long as you’re doing the selling, you’re going to be tempted to create a new solution each time.

On your journey from service firm to sell-able company, you need to rethink the words you use to describe your company and its business.  Take for example the way a company called “The Ad Agency” describes themselves on their website:

Since 1982, The Ad Agency has been recognized as one of the pre-eminent full service marketing, advertising, design, and public relations firms serving a regional, national, and international client base. As an aggressive and agile firm, we believe in the fundamentals of communication strategies and have developed a reputation for effective, on-target marketing. We are known for building and positioning brands and maximizing the exposure and response to our clients’ marketing efforts.

Words like “full service”, “firm” “client” telegraph that The Ad Agency is a service firm. There is nothing wrong with that, but ad agencies and similar service businesses are notoriously tough to sell for anything other than an earn out.

Potential acquirers will look carefully at how you describe your business to the public. You need to project that you are a business and not just a collection of temperamental service providers. Here’s a list of the top 9 words to erase from your vocabulary:

1. “client” (change to “customer”)
2. “our firm” (change to “our company”)
3. We aspire to be the “trusted advisor” of our clients (anything other than this over-used cliché )
4. “practice area” (change to “area of expertise”)
5. “professionals” (change to “employees” “people” “management”)
6. “proposal” (change to “price list” once you have created your Standard Service Offering)
7. “alumni” (change to “former employee”)
8. “per diem” (stop charging for your time and start charging for you Standard Service Offering)
9. “engaged by” (change to “have a contract with”)

If you want an acquirer to see your business as worth buying, stop using the tribal language of the service provider and start using the language of a sell-able business.

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