Financial strategies Category

Value Based Pricing for Professional Services

Wednesday, November 11th, 2015

Way in the back of the room, a young man in a crisp blue suit, raised his hand.

“Do you know how we make money?” he asked.

I was in the middle of one of my favorite topics, teaching attorneys how to increase their productivity by more effectively managing their time.

The crowd got real quiet because he was addressing the pink elephant in the room.

I responded with – “Thanks for having the courage to ask the question everyone in the room wants answered. Why would anyone want to get more work done in less time when most are incentived to bill for as much time as possible?”

This is an extremely important question – with no easy answer. However, we’ll discuss how to make this happen.

The Current State

Today, the majority of legal and accounting firms (referred to as “professionals” for the remainder of this piece) follow the same business model.

Get a new client, provide them with a billable rate, bill them as many hours as possible, and if they complain about your invoice, write down a portion of the charges.

Truth be told, no one likes this model.

Clients hate the idea of engaging with a $350 an hour professional who indicates that the fee will be “however long it takes.” In addition, these same clients are well aware that most professional’s compensation is tied directly to the amount of hours they bill.

NOTE: I’ve worked with hundreds of professionals over the years. To my knowledge, not one of them has intentionally delivered work in an inefficient manner just to increase their fees. However, this doesn’t mean that the current model is the most effective method for delivering these services.

Many professional services firms are frustrated by the fact that there are only two ways to grow revenue – Increase the amount of hours worked or the billable rate.

In 2015, the problem for these firms is made worse by 2 unrelated factors.

First, younger professionals (millennials) don’t typically have the same career goals as previous generations. They are very interested in work/life balance and are more likely to walk away from the big payday if it means a 70 hour work week.

Second, technology is commoditizing most professional service industries. By that I mean, it’s easier than ever to understand who delivers the exact service needed, compare prices and pit providers against one another in a bidding war. This competition depresses the average hourly rate and will only get worse as low cost providers (typically in foreign countries) get better at delivering their services in the US.

Shifting Paradigm

Maybe, it’s time to consider a different approach?

Instead of putting up with the status quo, I’d challenge you to consider the following question – What if I could charge for the value I create, rather than the number of hours I work?

I know what you’re thinking – Thanks for pointing out the obvious. What are you going to talk about next – how to eat whatever I want and lose weight?

In understand that charging for value instead of hours has been an elusive pipe dream for years.

However, the demographic/technological changes are forcing the industry to move beyond dreaming about value based pricing and work towards making it happen.

It’s Not Going to Be Easy

Let me state the obvious – this is not going to be easy. In fact, it’s going to be one of the biggest challenges your firm will face.

I’ve heard many of the standard objections…

It’s impossible to know how many hours a project will take. What if I guess low and end up losing a ton?
My clients haven’t even mentioned this idea. Why would I want to risk introducing a controversial new concept to a stable relationship?
Accountants/attorneys have been keeping track of their time in 6 minute increments for thousands of years – getting them to change behavior would be impossible.
What if my competition points out all that could go wrong with this approach and my clients agrees.
If I were running a large firm, I would look at these legitimate doubts and be very tempted to declare – “This challenge is simply too big.”

Your peers within the firm will push back the hardest. Next, many of your clients will be skeptical assuming this is simply another attempt to line your pockets.

As I mentioned, it’s not going to be easy.

Walk Before You Run

Because the challenge is so significant, I recommend you take a very careful and slow approach that follows these key fundamentals.

Customer First – If your motivation behind making this change is simply to increase the bottom line, you‘ll struggle. The goal of this (and just about any) effort should be to bring more value to the customer. This focus will ensure you have the right conversations both internally and externally.
Understand the Data – Before you do anything, take the time to carefully detail the services that are a good fit for value based pricing (e.g. – simple contract reviews) and those that aren’t (e.g. – complex M & A transaction). In addition, put together a list of the clients who would be a good or bad fit for the initial conversations about this new approach. Keep in mind some clients (those that use you sporadically for small projects) may never be a candidate for this change.
Be the Leader – In the professional services industry, you’re either a commoditized vendor sitting and waiting for the next “project” or a trusted advisor. Assuming the latter role will allow you to have meaningful conversations about a change in your approach. You can then advise the client that considering value based pricing could help them effectively budget for legal services and efficiently utilize resources.

Start Small – Pick a small project and see how it goes.
Reflect and Adjust – Once the project is completed analyze the effort to understand the profit margin, the effectiveness of your team and most importantly – the satisfaction of the client.

I am fully aware that there are thousands of details left to be addressed before you do anything.

Changing the way you value and bill for your services is one of the biggest challenges you’ll face as a firm. It

To paraphrase a former president – I feel your pain.

Before you push this conversation to next year’s partner meeting, remember that it’s not 1995.

Today, the marketplace evolves at a pace we couldn’t have even imagined 20 years ago. The organizations that grow will be those that embrace innovation in its many different forms.

Get out in front and lead.

Help your clients perceive your firm as a valuable provider of services that help you to grow.

C.J. McClanahan
317-576-8492
cj@cjmcclanahan.com

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Business Growth Mistakes

Tuesday, September 29th, 2015

Over the last 30 years I have worked with hundreds of businesses that wanted to grow revenue, make more money and have less stress. I find myself always pushing them to try something new for the sake of growth and (sometimes) survival. When you try something new, there are bound to be mistakes; smart companies learn from these mistakes and the mistakes of others; but some don’t pay attention and end up with the making the same mistakes over and over. In the spirit of saving you time, money, energy and stress; here are some common mistakes that seem to happen on a regular basis.

1.) Wait until your company is up and growing before you formalize it. Some business people like to ease into some of the simple decisions; simple in the beginning but more complicated as time goes on. For example, not clearing your businesses name in the beginning and finding out 10 years later someone has the same name and you have 40 trucks driving around town advertising the other company. Another big one, being in business for years and then not defining an exit strategy (85% of business owners don’t have a formal written exit strategy). Yes it is true that Jesus raised Lazarus from the dead, but I don’t think he is coming back to bail out a business person because they didn’t have a plan to exit their business. Prove fact – every business person will exit their business one way or another. You know the saying “death and taxes”. It’s still true.

2.) Rely on informal agreements with partners. Everything is rosy in the beginning but as the business begins to grow and you start to make money, disagreements rise rapidly. If you don’t have defined overall goals (revenue, profit, profit distribution, ownership, leverage or even management roles) defined upfront, it will create problems. I met a guy who spent 15 years growing his business and in a flash of brilliance gave 51% of his company to his wife so they could be seen as a woman owned business. It wasn’t completely documents so it was unclear if she really had it or not; then she decided he was unfaithful and got a restraining order to keep him away from the business.

3.) Quick to hire and slow to fire.If you are growing quickly and desperate for help, you many times skip the time proven principals and hire warm bodies. Hiring after one interview is like hopping a red-eye to Vegas to get married after one date. There are assessment tools out there today and can help the hiring manager evaluate the type of person they are getting, it is easy quick and very inexpensive. Then we fall in love with loyalty; time on the job; and act we are the government where the employee can stay forever just because of seniority (we all know how well that works). But the business has out grown the employee and the employee is actually unhappy in their current job and would rather be someplace else. We just don’t make the decision to upgrade the position because it is easier not to.

4.) Only hire people who are like you. We like people that are like us, that is just a fact of life. We should be happy we actually have dating in this culture because that gives us a little more time to figure things out. Sales people seem to hire sales type people and engineers hire engineering type people, no matter the type of job. We were all created differently and we each have a unique set of gifts which are different than other people. When we hire, we need to take the natural people strengths into consideration. For example, you are most comfortable with sales type people and you need to fill an accounting position. Do you want your sales people doing the accounting? Or you are a engineer and are most comfortable with people that are exact and careful and you need to hire a person to grow revenue. Who are you going to hire, someone like you or not like you?

5.) Too busy to plan the next step. It is a lot easier to get to your vacation destination when you plan the trip and follow the map. Most business owners (under $5 million in revenue) are too busy to plan where they are going; they think that working harder and putting in more hours will get us the results we want. It won’t. They are more comfortable fixing, installing or selling something than defining the goals and objectives for the next 6, 12 or even 36 months. But what is interesting, the business that grows, planning becomes a very important (critical) part of their growth strategy. So if you want to grow, set aside time to plan that growth. Once you start this process, it will become a best friend; because it tells up without much thought what is working and what isn’t. Planning for the future greatly reduces the stress with managing tomorrow because it is clearly defined. Most of my clients within a three-year window will see a 30%-60% improvement in revenue and a 100% to 300% in profit and cash flow by just doing this one simple step. We have developed a unique process to helping business plan for the next 12, 24 and 36 months. If you will invest 2 hours a month in our process, you will see dramatic improvement in top and bottom lines, guaranteed. It has worked for the last 25 years and it will work for the next 25 years.

6.) Let your accountants manage your money. The financial leg of the business has probably the least amount of focus/emphasis put on it than any other functions within the organization. Who wants to deal with the minutia when it is much more rewarding to go after the big deals? No business owner that I know of, so the accounting becomes a necessary evil and is delegated to someone else and not given much more thought. That is until there is a financial crisis. Most surveys and studies I have read reveal that the reason most businesses struggle (or even fail) is heavily weighted toward financial issues. Eight out of ten causes of business problems can be directly traced to financial issues.Your inside accountant and your tax accountant are good sources for telling you what has happened; but financial management is bigger than just looking at what has already happened. Financial management includes: 1) financing, 2) managing bank covenants 3) budgeting – setting standards for your management team to follow 4) evaluating predicted results with actual results and determine problems areas – trouble shooting, 5) cash flow forecasting , 6) tax strategies to insure that debt to worth and working capital is adequate to fund future growth, 7) compensation and bonus program for yourself and key employees, 8) best ways to fund growth, 9) managing daily cash flow and 10) historic financial statement review and analysis.

7.) Make all of the decisions yourself. There are a number of things that work against the CEO that tries to make all the decision themselves: 1) the business will stop growing because all of the decisions flow through one person, 2) the management team won’t grow because they are not allowed to think for themselves and make decisions, 3) the owner, over time will get burned out or his home life will suffer (or worse), 4) quality of the decisions will not be good because the knowledge level is too broad to be moderately knowledgeable in all areas of the business and 5) the owner/CEO won’t grow because there is no one mentoring or challenging the decisions that are being made.

8.) Letting daily activities keep you from the “most important” issues. To grow a business, it takes a lot of practice and effort to focus on the important things first. It means knowing when to delegate, when to rest and when to effectively communicate with your management team. If you allow yourself to be drive by daily activities or solving the latest crisis, you will lose your ability to set priorities and focus on goals. Discipline is the key word here. Most times an accountability partner will enable you to make gigantic steps forward that you could not make yourself. That is why Weight Watchers is so successful.

Dan Lacy
Growth & Profit Coach, Financial Strategist, Cash Flow Doctor, CEO Mentor
dan@dynastybuilder.com
p. 317-678-6310
f. 317-678-3615

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Why Owners Choose Not To Sell

Friday, July 31st, 2015

Presented by T. Ray Phillips

Some owners make a choice not to sell their companies for very legitimate reasons. Among them are:

They still have enough fire in the belly to fuel their investment of time and energy in the business. They are grooming interested family members or employees to one day assume the reins.

Some owners, however, have businesses that are prepared for sale, but hesitate. Why? These owners typically don’t sell when they should because: 1) they procrastinate; 2) they fear the unknown; or 3) they fear losing the known.

Procrastination
Procrastination on the part of an owner is not uncommon and has many causes.

First, some owners just don’t know where or how to start planning an exit. If you are one of those owners, then reading the remainder of this article is a good start. The next step is to contact our offices to begin the process of creating an Exit Plan that allows you to cash out of your business and leave in style when you are ready to do so.

Second, some owners think that they can always sell later. These owners overlook the demographic evidence indicating that when most Boomers reach retirement age, the glut of companies in the marketplace may drive prices down. Other owners in this group understand that the level of activity in the Mergers & Acquisition market can have a huge affect on the sale price of a company and their strategy is to wait until the market recovers.

In the third group of procrastinating owners are those who believe that because they have “good” businesses, their exits require no significant planning. When they think about selling, they assume that there isn’t much for them to do because when the time is right, the right buyers will appear and pay them great prices for their companies.It does happen, albeit quite rarely, that the right buyer appears and pays a great price for a great company. However, it makes more sense to prepare for the biggest financial transaction of your life than to entrust the success of your business exit to Lady Luck.

Fear of the Unknown
Owners who suffer from the fear of the unknown usually hold one (or more) of the following opinions:

I don’t think the business is worth enough to satisfy my financial needs and objectives.
If the employees discover I’m trying to sell, they will all quit.
Because I’m indispensable to the company, I’ll be required to work years for a new owner and I don’t like working for anyone!
The sale process will take too long and cost too much.

Fear of Losing the Known
On the other hand, the fear of losing the known is usually based on the following:

The business has been my life—or at least it has given my life a great deal of meaning and focus; without it I may feel lost.
The government will take too much in taxes. It is easier, less risky and more lucrative to stay, enjoy the cash flow and then leave getting paid over time.

What will I do after I sell and leave the business? I don’t know what my life will look like if I leave.

If one (or more) of these concerns resonates with you, let’s meet to assess them.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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Buy-Sell Agreements Should Protect You, Your Co-Owners And Your Company

Wednesday, November 5th, 2014

Presented by T. Ray Phillips

Imagine, on the eve of your wedding, that you plan to divorce, on a friendly basis of course, in 15 years or so. During those 15 years, you will work diligently, and quite successfully, to build a business.

On the preordained day that your marriage ends, you announce that you are willing to give your soon-to-be ex-spouse one-half of your company’s business value—in cash. And you let your “ex” value your company because those are the terms of the agreement the two of you signed a year after you were married.

Sounds ridiculous, no? Yet, you may have done something quite similar (and similarly ridiculous) in your business with your co-owners.

Few owners begin working together with an expectation of future acrimony, much less litigation. Fewer still give thought to one day leaving the business—even on friendly terms. Indeed most exits are not precipitated by a disagreement among co-owners; instead owners leave for a variety of reasons and simply want to do so with their share of business value.

And remember, one day you will leave your business.

Over time, in business as in marriage, partners can grow apart. We’ve all witnessed the resentments, discord, and wastefulness of a friend’s or acquaintance’s needless nasty divorce. Business divorces can be equally unpleasant—with an added twist: One may be unable to leave the business, or force a partner to leave, without appropriate tax and legal planning.

When you or a co-owner wants out, what will happen? Chances are that when you turn to your company’s buy-sell agreement, you will find that it is woefully out of date. You may also find that it controls the terms of your (or any owner’s) exit from the business not only upon death, but also during lifetime.

If you haven’t looked over your company’s buy-sell agreement since you signed it, dust it off and check out at least four key provisions:

Lifetime and death transfers of ownership:
When must an owner sell, or offer to sell?
When must an owner (or the company) buy and when does it have the option to buy?
How will the value of the company and the value of a departing owner’s interest be determined?
Does the agreement mandate the use of an independently determined Fair Market Value at the time of transfer? If not, the valuation will favor you or the other owner. It will not treat you even-handedly.
What are the terms (length, down payment, interest and guarantees) of the buyout?
We generally assume that buy-sell agreements control the transfer of an owner’s interest when he or she dies or becomes disabled. Indeed, they do that. But they usually do much more and if you don’t appreciate how much more, disaster looms.

At his annual physical, Steve Hughes complained that he was bone tired. After a battery of tests, Steve’s doctor observed that, while there was nothing physically amiss, Steve did seem depressed. After some introspection, Steve was able to articulate that he had no interest in continuing as a partner in a successful CPA firm. Like many owners, Steve had lost the passion and commitment to the business that still stoked his younger co-owners. He decided to sell out before his partners demanded it.

Steve broke the news of his departure to his two partners and noted that their buy-sell agreement controlled only a buyout at death and an option for the company to buy Steve’s stock if he were to sell it to a third party. Attempting to sell a partial interest in most businesses to a third party is always a difficult proposition, but current economic challenges made that course of action impossible.

Steve and his partners were left in a classic dilemma: remaining shareholders want to purchase the departing shareholder’s interest so that future stock appreciation—due solely to their efforts—would be fully available to them. Conversely, because the profits of a closely-held corporation are either accumulated by the company or distributed to the active shareholders in the form of salaries, bonuses and other perks, the departing shareholder (now an inactive owner) rarely receives significant income in the form of distributions or dividends.

Naturally, Steve wanted and needed maximum value for his interest while his co-owners were convinced that the company’s cash flow could not support Steve’s buyout.

So, look again at your business continuity agreement: If you are the one leaving, is it as fair as it is if you are the one left behind?

When you sit for the first time across the bargaining table from your partner, you will want that table set with a fair valuation method, a thoughtfully designed lifetime buyout provision (that may well reduce the cash flow required for a buyout by 20 to 30 percent), and manageable payment provisions. Since it is exceedingly difficult to design these provisions when buyer and seller are at the bargaining table, agree to and document the valuation, cash flow, tax, and payment provisions long before potential discord or differences of outlook arise.

Disclosure:
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor.

The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

Securities, investment advisory and financial planning services offered through MML Investors Services, LLC 317-469-9999 Member SIPC Supervisory offices: 900 E. 96th St, Ste 300, Indianapolis, IN 46240. The Family Business Legacy Company, LLC is not an affiliate or subsidiary of MML Investors Services, LLC.

Copyright © 2016 Business Enterprise Institute, Inc., All rights reserved.

T. Ray Phillips, CFBS, AEP, ChFC
trphillips@financialguide.com

The Family Business Legacy Co, LLC
900 E 96th Street
Suite 300
Indianapolis, IN 46240
http://www.familybusinesslegacies.com
317-208-6312

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