The Financial Side of a Professional Services Firm: An Interview with Profitability Coach Bill McDermott
Profitability Coach Bill McDermott, who works with law firms, engineering firms, consulting firms, and other professional services practices, joined host John Ray to discuss the financial side of a professional services firm. Bill discussed why he started his practice and how it has developed, when to take on debt, the biggest financial mistakes he sees, buying hard assets such as real estate, planning for an exit, and much more.
The Price and Value Journey is presented by John Ray and produced by the North Fulton studio of Business RadioX®.
Bill McDermott, The Profitability Coach
Bill has worked with hundreds of business owners. They are good people with their hearts in the right place. What they don’t have is the perspective to see the blind spots in their business. Knowing which levers to pull and when to pull them can lead to a thriving and profitable business.
He loves to help business owners have the business they want by becoming better financial managers.
Bill McDermott graduated from Wake Forest University and launched a career in banking that spanned 32 years. He first started out as the “repo man” as part of Wachovia Bank’s management training program before locating to Atlanta to work for Peachtree Bank, which later became SunTrust. There, he distinguished himself as a great producer of loans and deposits for the bank, climbing the ranks to ultimately become a Group Vice President in the Commercial Banking division. In 2001, Bill’s group won the SunTrust Cup for being the highest performing commercial banking group in the company.
Over the next 8 years, Bill worked in community banking, becoming a top producer for IronStone Bank and later helping to double Embassy National Bank’s initial capital in loan production within 15 months. However, in early 2009 as the Great Recession was rapidly altering the economy, Bill’s position as Chief Commercial Lender was eliminated.
As Bill searched for what was “next”, he realized that he had a desire to share the treasure trove of knowledge of banking and financial acumen he had built. Bill combined his sales success from his banking/insurance experience with his deep financial/analytical skills and launched McDermott Financial Solutions in April 2009. His purpose quickly became “making business owners better financial managers”. Over the past 11 years, he has served over 200 clients by delivering results-oriented insights, helping to take them from financial confusion to financial clarity.
Bill currently sits on the board of directors for Pinnacle Bank. He also hosts a monthly podcast, ProfitSense, which features stories of successful business owners and the professionals that advise them. When Bill is not working, you can find him on the golf course, gardening, spending time with his family, and leading a small group at his local church.
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TRANSCRIPT
John Ray: [00:00:00] And hello again. I’m John Ray on the Price and Value Journey. And I want to welcome Bill McDermott to the show. Bill is here to chat about the financial side of a professional services firm.
John Ray: [00:00:13] Just a little background on Bill. Bill is the founder and CEO of McDermott Financial Solutions. He serves as a profitability coach to his clients, which include a lot of professional services firms. When business owners want to increase their profitability and they don’t have the expertise to know where to start or what to do, Bill leverages his talents, his knowledge, and his relationships from 32 years as a banker – somehow he made 32 years. I’m going to have to ask him how he did that – to identify the hurdles that get in the way, and create a plan to deliver profitability that his clients never thought possible.
John Ray: [00:00:57] Bill also serves as a treasurer for the Atlanta Executive Forum. He’s previously held positions as a board member for the Kennesaw State University Entrepreneurship Center and the Gwinnett Habitat for Humanity Chapter. And he has been treasurer for CEO Netweavers. He’s a graduate of Wake Forest University – go, Demon Deacons. And he and his wife, Martha, are just about to celebrate anniversary number 45. Congratulations on that, Bill. And I have to plug his podcast, ProfitSense with Bill McDermott, coming up on three years, right, Bill?
Bill McDermott: [00:01:36] It is. And it’s a pleasure to be here, John. Thanks so much for having me.
John Ray: [00:01:40] Absolutely. So, I want to give a little background on you. You spent three decades as a banker, how –
Bill McDermott: [00:01:54] How did I survive?
John Ray: [00:01:55] Well, you could certainly answer that question. But, I guess, how did you come to the choice of the practice that you started?
Bill McDermott: [00:02:05] Yeah. That’s a great question. I’ll give you the short version of a longer story. So, it was April of 2009, we had just entered The Great Recession, we were in a banking crisis. And the CEO of the bank that I was working for at the time walked in my office – it was actually on my wife’s birthday – and he said, “Bill, you’re doing a great job, but we’ve got to cut cost. You were the last one in, so you’re the first one out. We’re eliminating your position.” And I was done.
Bill McDermott: [00:02:36] And so, we had two daughters in college. I had to figure out a way to earn an income. So, first thing I did was pray. And I said, “Okay. You’ve closed the door. Open a window, and would you mind putting a little neon around it for me so I can see it?” But all kidding aside, in 32 years of banking, I saw that business owners were usually great salespeople or great operations people. Where they struggled was in the area of financial management. They didn’t learn it in school. And when you’re the owner of the business, there’s no on-the-job training because the buck stops with you.
Bill McDermott: [00:03:16] So, part of my why is, because I saw business owners struggle with financial management, I said, “Can I launch a business leveraging my expertise and knowledge in banking and help business owners become better financial managers?” So, the business started with that in mind. And my goal is to really, hopefully, leave a legacy of making business owners better financial managers in their business.
John Ray: [00:03:41] And you just celebrated a business anniversary, speaking of anniversary.
Bill McDermott: [00:03:45] Yeah. So, April was 13 years, and still going strong.
John Ray: [00:03:51] Congratulations.
Bill McDermott: [00:03:53] Yeah. Thank you so much.
John Ray: [00:03:54] That’s awesome. I think a lot of professional services practitioners, they get into business and then they pivot along the way, not pandemic related pivot, but their business morphs naturally. Yours has morphed along the way. Why don’t you explain that and kind of the decision points around that.
Bill McDermott: [00:04:17] Yeah. So, when you’re in the middle of a banking crisis, a lot of businesses are losing money. And so, I actually started negotiating workout plans on behalf of the business owner with their bank. You know, who better to negotiate a problem loan? A banker with another banker.
Bill McDermott: [00:04:37] And so, I successfully did that for several years. I had one client that I actually worked with for three years. We started with $16 million in debt, worked that down to a million. And, actually, the bank drew a line in the sand and said we’re not renewing anymore. Forced us into bankruptcy. And the bank eventually settled for $0.10 on the dollar, so we got $1,000,000 for $100,000 and, basically, negotiated out. So, that’s really how I started.
Bill McDermott: [00:05:10] When you negotiate a problem for a business owner, you become on the team because you two have been through it together. And so, what then happened is I had business owners asking me to come out and sit with them and go through their monthly financials. Well, I’m not the sharpest tool in the shed, but pretty soon I figured out, you know, a monthly meeting going over financial performance with the business owner, I’m coaching them how to be better.
Bill McDermott: [00:05:45] And so, what morphed is, is doing workout loans, actually became a practice where I’m coaching business owners on how to be better financial managers. And then, probably sandwiched between that is I have some of my clients want to leverage my banking expertise, and so I would help them find financing if they were buying a building, if they were getting a large piece of equipment, maybe that business owner who thinks they need a line of credit.
Bill McDermott: [00:06:12] By the way, best time to borrow money from a bank is when you don’t need it. Anyway, that’s maybe even another podcast for another day. We’ll go there.
John Ray: [00:06:20] When you don’t need to hire Bill McDermott, right? I mean, you get the folks that really need that financing, right?
Bill McDermott: [00:06:28] Yeah, exactly. And so, from workouts to financing, and then to the profitability coach. And that’s kind of been my path.
John Ray: [00:06:38] Wow. So, let’s describe for folks that don’t know what does a profitability coach do. You say you look at financials every month, but there’s more to it than that.
Bill McDermott: [00:06:47] Yeah. There really is. So, I’m going to start by saying that a profitability coach, first, speaks the language of business. Warren Buffett was quoted as saying, “Accounting is the language of business. And you, as a business owner, not only need to learn how to speak it, but how to become fluent.” And that language actually comes out in the form of reports, balance sheet, profit and loss statement, cash flow statement.
Bill McDermott: [00:07:17] Where I help a business owner is, most business owners understand their profit and loss statement. They generally don’t look at their balance sheet. And they hardly ever look at their cash flow statement. And so, what a profitability coach does is analyzes the trends in the business, helping that business owner see those trends, asking questions about what might be driving those trends, and then helping them make decisions.
Bill McDermott: [00:07:43] But probably the biggest thing, John, is, if you own your own business, you’re not accountable to anybody. And so, part of what a profitability coach really does, or any business coach for that matter, is holds that business owner accountable for, not only the dreams that they have, because those dreams usually convert to goals and those goals convert to plans, but somewhere along the way – it’s kind of like, you know, all of us want to lose weight January 1. And so, the gyms and the exercise places fill up for about two weeks. But after about the first two weeks they’re done. Well, nobody’s holding them accountable – part of what a profitability coach does is, not only help them become better financial managers, but holds them accountable to what their dreams and their plans and their goals are.
John Ray: [00:08:31] So, really, it sounds like your knowledge of the financials, how to read the financials, and the business owners knowledge of the business, and what’s going on day-to-day meet, essentially, right?
Bill McDermott: [00:08:44] That’s exactly right. Because, you know, part of that three decades in banking, I literally looked at thousands of financial statements because I had to look at financial statements to determine whether that business owner could borrow money or not. And so, the ability to interpret those financials helped me become trained in helping that business owner.
Bill McDermott: [00:09:05] So, you’re absolutely right. Generally, if a business wants to improve, there are really about five things that they need to look at. There’s either a people aspect of their business, there’s a strategy aspect, there’s an execution issue, there’s a process issue, or there’s a money issue. And so, people, process, strategy, execution, and cash are usually things that business owners need to pay attention to in order to be successful.
John Ray: [00:09:37] So, for those that don’t know, what’s the difference between a profitability coach and a fractional CFO? And when do you bring these different roles in? Or are they different?
Bill McDermott: [00:09:51] They’re absolutely different. So, right now, I have a very successful client who has basically managed the financial aspect of their business for 30 years. He still wants to keep me as a coach, but he doesn’t want to do financial management anymore, so he has hired a part time CFO to come in and run the business.
Bill McDermott: [00:10:15] Because having someone fulltime, first, it’s not that big a job and he doesn’t want to pay $200,000 a year, whatever a CFO gets these days. So, you want to hire a part time CFO if you just don’t want to have to be involved in the financial management of the business. You want a part-time CFO. Or if you want to do that yourself, you can. But, again, you better be able to speak the language.
Bill McDermott: [00:10:45] Now, actually, I will tell you, I coach a lot of business owners that have a part-time CFO and, primarily, a lot of that CFO role is about accounting. They make sure that they have all the debits and credits entered into QuickBooks or whatever accounting software is used. They’re able to generate the reports. But, generally, everything that that part-time CFO does is really about the past, because accounting is accounting for the past. It doesn’t really have much to do with the present or the future.
Bill McDermott: [00:11:18] So, kind of where they leave off is where I pick up. And we start talking about what are your goals for this year or this quarter, and where are you in relation to getting those goals accomplished. And, basically, working together with them, holding them accountable to what they want to do for the future, not necessarily focusing on the past.
Bill McDermott: [00:11:42] So, you can have both, but there is a difference. Most of the time, the part-time CFO is directly responsible, involved with financial management. But that CFO doesn’t really hold the business owner accountable to what their goals and dreams are. And so, that’s really what I’ve been doing as a profitability coach, helping them achieve their goals and dreams and become more profitable.
John Ray: [00:12:04] Do you find you can be in those cases a little more, maybe direct is the word, with the business owner, more of their mother-in-law -maybe that’s a bad metaphor – but you can be a little tougher when needed?
Bill McDermott: [00:12:20] I think part of it. And you said direct. I’ve had a few clients call me blunt, which I can be more than direct at times, and I’m working on that. But, no. I think, yeah, if someone is paying you to give advice then, by golly, they should take it.
Bill McDermott: [00:12:45] And I did give a lot of free advice when I was in banking because as I was looking at the financial statement, especially if I had to decline someone, I said, “Look, you, as the business owner, made $100,000 in profit, but you took out 75,000 in distributions. So, you only have a fourth of what you made available to handle the growth of the firm and pay back a loan if you choose to borrow.” And so, just little things like that are the things that I’ve done. But, yeah, sometimes you do have to be direct. And, again, if I’m holding someone accountable by being nice, I’m not really helping them.
John Ray: [00:13:28] Yeah, for sure. So, this show is designed for solo, small firm, to some degree, medium sized firm professional services providers, let’s talk about the needs here. I mean, at what point do you think a solo firm, a solopreneur, needs to hire a profitability coach?
Bill McDermott: [00:13:56] That’s a great question. And I want to be respectful, there are a lot of people out there that believe in doing it themselves. That is a totally valid way. But it’s interesting, there’s a guy by the name of Doug Tatum, Tatum CFO, who wrote a book titled No Man’s Land. And that book was really about his experience as being a CFO where growing companies fail. And he talks about the five M’s.
Bill McDermott: [00:14:27] John, so to your question, when do you feel like you should hire a profitability coach, one of the M’s that he mentioned is momentum. If your business has lost momentum, if your rate of sales is either decreasing, flat, or not increasing in proportion to what you’re expecting, you might want to hire a coach.
Bill McDermott: [00:14:47] Another thing is marketing. Marketing is the number one weakness in a growing firm. And so, if you’re not properly identifying your brand, to your point, about value, if you’re not sure of your value in the marketplace, you might need some help there. So, momentum marketing, management. Growing firms, growth, it makes businesses more complex. And so, you may have management issues that you need to address.
Bill McDermott: [00:15:21] Fourth, M is money. You know, when you’re growing, as you know, growth always requires cash. And if you have this big crazy number in accounts receivable and you’re complaining about a low bank account, well, by golly, then get on the phone and collect some of those past dues.
Bill McDermott: [00:15:38] So, marketing, momentum, management, money – I’m trying to remember what the fifth one was and it escapes me right now. But, in essence, I would think that you would hire a coach if you find yourself not hitting on all cylinders in some of those things.
John Ray: [00:15:54] Right. Right. So, I’m curious, it sounds like – you just answered the question I was about to ask – the biggest mistake solopreneurs make is not hiring outside help fast enough.
Bill McDermott: [00:16:12] Yeah. And so, part of my questions, because I want to be sure that the particular person that I’m talking to is really interested, and so I might ask them, “Look, if you’re in your car and you’re lost, do you keep driving or do you stop and ask for directions?” And the people that are probably going to keep driving kind of identify themselves as “I’m kind of a do it yourself-er. By golly, I don’t really need to stop and ask for help.” But those that ask for help, I want to help them.
Bill McDermott: [00:16:51] So, I worked with a professional services practice for about three years. When I started with that practice, a lot of their receivables were reimbursements from insurance companies. And what I saw was a huge amount of accounts receivable, and a lot of them were 60 or 90 days outstanding. Insurance companies are horrible at paying claims. You know, they’re paid to hold on to their money, not pay it back to the service providers. And so, we were able to devise a plan where she had a person in her practice that was accountable for making sure those receivables were collected.
Bill McDermott: [00:17:34] Well, then this practice also had a scheduler, and this firm had three locations, had 27 professional providers, but they weren’t maximizing their schedule. And so, there was a lot of holes, a lot of time that was billable time that was lost. And so, together we kind of crafted a scheme that, not only helped collections, but also helped increase appointments.
Bill McDermott: [00:18:03] And by the way, also talking about can we increase rates for reimbursements to the insurance companies, and the answer is yes, because a one percent increase in your price is about an eight to a ten percent increase in your bottom line. So, talking about Price Value Journey, a lot of that is just learning that raising prices is an immediate direct hit to your bottom line.
Bill McDermott: [00:18:29] But long story short, we were able to increase the revenue over a two year period of time in this professional practice 64 percent, so it’s about 32 percent a year. And we took about $100,000 out of the accounts receivable, put that into cash. So, not only did they have more profit, but they also had more cash to boot. So, this firm had been limping along for a year. I was introduced to them by their CPA. We were able to come in and help them. And they’re continuing to thrive to this day.
John Ray: [00:19:05] So, you brought up pricing, so forgive me but I can’t help going down that road. Let’s do that. I mean, my contention is, is that the biggest problem financial or professional services providers have is their pricing. Do you agree with that?
Bill McDermott: [00:19:27] A hundred percent. And I’ll tell a personal story. When I started my business 13 years ago, I’m figuring what do I charge. And, of course, when you first start, you’re not even sure you know what your value proposition is. And so, I said, “Okay. I’m going to start at this rate.” And by the way, it was an hourly rate. And so, by setting an hourly rate, I unintentionally got to the point where I was perceived as a commodity because I’m paid by the hour. There’s no value there.
Bill McDermott: [00:20:04] And by the way, my experience is, I, actually, in the first three years, tripled my hourly rate because the first rate that I thought it was worth was woefully low. And so, I had to work to the point where I had to find somebody to tell me that my rates were too high before I knew that I was right where I should be to begin with.
Bill McDermott: [00:20:31] But the other thing is, I read a really good book that, basically, introduced me to the concept of value-based pricing. So, to kind of use that example of the professional services practice I talked about, I mean, the amount of money that that firm paid me was probably about, I’m going to say, half of the profit that I delivered. So, essentially, if you think about it, they covered their cost and I gave them 100 percent return on their investment.
Bill McDermott: [00:21:15] So, the whole concept of value-based pricing was a total shift for me, John. And believe me, I have not arrived on this journey. I’m still learning. But switching from an hourly rate to a fixed fee, and doing that pricing in relation to the value that you’re delivering to your client makes sense. I can think of another story.
John Ray: [00:21:44] Yeah. Please.
Bill McDermott: [00:21:45] So, early on, I was involved in a loan negotiation with the bank, and it was a big loan. And so, I want to say the loan was about $2 million. And so, I said, “Okay. If I can deliver a discount of 20 percent, $400,000, what amount would you be willing to pay?” “Five percent.” So, $20,000. So, we got into the negotiation with the bank, it took me an-hour-and-a-half. And I successfully negotiated $20,000 of fees for 90 minutes worth of work. So, I don’t know what that comes out to for an hourly rate. But I delivered the value and got paid a percentage.
Bill McDermott: [00:22:41] And so, the concept in my practice that I’ve implemented, but I’m still figuring out is, price based on the value that you’re creating for your client. Don’t price on an hourly rate, if you can. Now, there are some practices that are comfortable with hourly pricing, and I’m not saying they shouldn’t do that, but they might be leaving money on the table that could be theirs instead of someone else’s.
John Ray: [00:23:11] You said when you were talking about that first example that when you were pricing hourly, you were regarded as a commodity. Explain more on that. Say more on that.
Bill McDermott: [00:23:26] Yeah. So, I think I’m going to use an analogy and, hopefully, explain in the meantime. Everybody shops at Walmart. Walmart struggles with customer service because they’re so big. But you know that you can go into Walmart and you can get the lowest price. And if there’s no supply chain disruption, they’ll have it in stock. But, still, Walmart doesn’t really add value because there’s no one there to help you. And if you wait in the checkout line, you’re probably going to wait a long time.
Bill McDermott: [00:24:09] Versus Ace Hardware. I go into Ace Hardware. Ace Hardware has everything. And when you walk in the front door, there’s someone there at the door that’s going to greet you and says, “Sir, what can I help you with?” And I say, “I need a 20 pound bag of birdseed.” Takes me right to the aisle right where the birdseed is and say, “Look. You got three choices. These are the prices. Clients ask for this one the most.” And I get service. There’s value. Because I don’t want to wander the aisles of Ace Hardware trying to find it. I want to be created by someone who knows where it is, knows what they’re talking about. And I can get through the checkout line quickly. So, there’s value in going to Ace Hardware that I don’t think you get at Walmart, in my personal opinion.
Bill McDermott: [00:25:00] So, what I had to figure out is if I couldn’t describe my value to someone – and believe me, describing my value, that’s on me – if I can’t accurately describe the value that I’m delivering to my clients, I default to a commodity. Because if I’m not Ace Hardware, they’re going to see me as Walmart. And they’re going to say, “Well, this is his price. Is it worth it to me to pay that?” It’s the difference between looking at it as a cost versus an investment, too, John.
John Ray: [00:25:35] Yeah. No, that makes sense. And just to be clear – and I probably should have let folks know this at the top of the show – so the professional services can be a big category, but you work with engineering firms, architectural firms, psychiatric related firms.
Bill McDermott: [00:25:59] Marketing agencies.
John Ray: [00:26:03] Attorneys, legal practices, what are some of the others? Have I mentioned most of them there?
Bill McDermott: [00:26:08] Most of them. I’ve got, certainly, a different aspects. I have, actually, three engineering firms. One is mechanical engineering, one of them is civil engineering, and then I also have one that’s environmental engineering. Several different attorney firms, some that work in the employee benefits arena, some of that are litigators. I’ve worked with a few CPA practices. I’ve worked with a couple of marketing agencies. I’ve done work with one of the top interior designers in the southeast. And so, yeah, professional services, generally, those professional services providers are great technicians at their craft, but they really struggle with the business aspect.
Bill McDermott: [00:27:03] But my practice is I’ve worked with solopreneur. I’ve worked with firms that are anywhere from ten people to, I’d say, 50 people. Probably, the largest firm I’ve worked with is a large contracting firm in Northwest Atlanta that has about 400 people. But, yeah, I really love professional services firms because, generally, they’re great technicians, they’re great at their craft. But when they were going to school, nobody taught them business. You know, business is not an undergraduate requirement to get your degree. And, certainly, if you don’t learn it in school, then you either got to learn it somewhere along the way or have a coach to come in and help you learn it.
John Ray: [00:27:55] Now, you’ve talked quite extensively here about the importance of pricing. And we both know that professional services firms, they don’t have inventory, they don’t have a lot of the same kind of capital expenditures, maybe any, that a lot of other firms have. When you talk to your clients, are you focused mostly around pricing or are there other aspects of the income statement that you hone in on?
Bill McDermott: [00:28:29] So, we’re focusing almost entirely on revenue because revenue is the largest number. And so, any percentage increase in revenue creates the biggest change. And so, one of the things that I would say, if you’re a solopreneur out there or look at what I call a revenue multiplier, some people call it a labor multiplier – so an architectural practice that I’m working with right now, they have a bill rate but then they also have a pay rate for engineering work that needs to be done.
Bill McDermott: [00:29:07] And so, that bill rate, of course, incorporates that engineering cost associated with it. But the gross profit is basically what’s left. And so, the higher that you can charge your bill rate against that pay rate that you’re paying out the engineering costs, the higher your gross profit is going to be.
Bill McDermott: [00:29:28] So, what we focus on, if you have an engineering cost for an architect that’s maybe $100, and you can bill that client $150, then your revenue or your labor multiplier is 1.5, if I’m doing the math right, because 150 divided by 100 is 1.5. And so, can you drive that multiplier up? Can you get it to 1.6 or can you get it to 2?
Bill McDermott: [00:29:55] And so, for this particular architectural firm, we’ve actually gone from about a 2.3 revenue multiplier in two years. Right now, we’re north of 3. And so, what that means in terms of gross profit is their gross profit was running probably in the mid-60s. It’s now up into the mid-80s, John. So, the incremental gross profit is falling right down to their bottom line. They’re well on their way through April of making probably two-thirds of the profit that they made last year.
John Ray: [00:30:32] Wow. Now, there’s some value right there that you deliver. Wow. What a great story. So, we talked about solopreneurs, now let’s talk about small, medium-sized professional services firms. They get to a certain size, what are some of the financial mistakes that you see that firms like this make that are common?
Bill McDermott: [00:30:58] Gosh. Let me think about that a minute. I think, first, customer concentrations can be a little bit risky. I do have a particular firm that I work with that is heavily concentrated in one particular client, makes up about 30 percent of their business. My rule of thumb, going back to my banking days, is probably to the extent that you can, limit your concentrations to maybe 15 percent of your total revenue to any one client. So, certainly, revenue concentrations.
Bill McDermott: [00:31:37] Other mistakes would be probably some mindset issues. A lot of business owners are willing to accept mediocre performance. When in reality, they have some self-limiting beliefs that are holding them back. And so, I can certainly expand on that.
Bill McDermott: [00:32:04] But, you know, a quick story is I had a client that I worked with who was in the engineering practice business. He didn’t really feel that he could deliver the value that he really did. And we got through that to the point where he was willing to, first, educate himself on the benefits of value-based pricing, implement it, and then reap the results. So, probably some of it is self-inflicted.
Bill McDermott: [00:32:39] You know, when I started my business, I didn’t know how much to charge. I had some self-limiting beliefs about what I was worth. And so, I would say that would be an item.
Bill McDermott: [00:32:49] And then, I would say, growing a business is really all about people and processes. And so, where I think some solopreneurs or small to medium-sized firms make some mistakes is they either have the wrong people. And when I say wrong, I’m talking about people that don’t really share the company’s core values or core focus, or that person is in the wrong seat. They’re not playing to that person’s strength.
Bill McDermott: [00:33:21] Probably the other thing, in addition to that wrong people, is documented processes. If you want to be an effective and an efficient organization, you’ve got to have documented processes. Because if you have 15 people in your billing department and each of those 15 people has a different way that they do billing, you got problems. And so, documented processes. And if they are documented, you need to inspect what you expect, which means making sure that the processes are being followed. So, those would be the three things that really stick out.
John Ray: [00:34:01] Let’s talk about debt. I mean, when should a firm as they grow start to take on debt? You say it’s when they don’t need it. Say more on that and what you counsel business owners.
Bill McDermott: [00:34:17] So, get a line of credit. There are people who basically believe that I don’t want to have any personal debt in my consumer, in my personal household, the way they run their household. But running a business and running a household are two different things. So, for a line of credit, I would say one month’s revenue is a good rule of thumb. So, if you’ve got a $3 million company that’s a $250,000 line of credit. Don’t base it based on last year’s revenue. Base it on this year’s revenue. So, that would be one thing.
Bill McDermott: [00:35:00] And, generally, year-end financials are in by January or February. Most banks are going to want to see a full fiscal year and then the most recent interim in order to approve a line.
Bill McDermott: [00:35:16] But I would say that I have another business that I work with that does steel fabrication for construction. They have done a great job of purchasing equipment that has technology associated with it that reduces their overall labor costs. They still have people working in their plant, but they have invested in equipment and technology to improve their operating performance. And so, borrowing for a piece of equipment where you find that you can increase your profit margin because of efficiency doing that.
Bill McDermott: [00:35:58] Right now, I’ve got three clients that are either building a building or buying a building. Rent is pretty expensive. A lot of times, depending on the requirements that you have on your building, you might need special electrical requirements. You might have special ceiling requirements, zoning requirements, things like that. But, you know, borrowing money to buy your own building versus paying rent every month is valid.
Bill McDermott: [00:36:31] Probably the most interesting thing right now is us, baby boomers, we’re getting ready to retire. And I’ve got three clients that I’m working with right now that are in various stages of exiting. And, of course, on my last podcast, we had a gentleman who is in the process of ownership transition. We had a banker who came on and spoke about financing those transactions. So, finding a financing source for your business to sell it or buy it is something that is very much top of mind for business owners right now, especially if you’re a baby boomer.
John Ray: [00:37:13] Yeah, for sure. So, if you’re a professional services firm, does having hard assets, like real estate, owning your own building, the building you’re operating in, or any other building for that matter, that’s maybe an investment, I mean, is that a good way to use excess cash flow?
Bill McDermott: [00:37:34] So, that’s a great question. I’ll try to answer it in a concise way. So, I have a client who, just on the operating performance of his business alone, earns a 22 percent net income. I’m going to say that real estate on an annual basis does not increase 22 percent. So, does it make sense for him to invest in an asset that is maybe going to appreciate even though he’s building equity in it versus investing in his business?
Bill McDermott: [00:38:09] So, investing in real estate might be a good diversification play because that way he or she doesn’t have all of their eggs in their company basket. So, it’s a little bit personal choice in my view, John. And I’m a big believer in diversifying your assets. And, generally, the stock of the closely held business that that solopreneur or small to medium-sized business owner has is the 800 pound gorilla on their personal financial statement. So, diversifying away from that and buying a building certainly makes sense.
Bill McDermott: [00:38:49] But if you’re looking at it strictly from numbers, rates of return, providing cash flow, you know, we went through a real estate crisis in 2009, real estate values dropped 30 percent. But on the flip side, real estate has been a great asset to own for a long, long period of time.
John Ray: [00:39:09] So, as we wind down here – Bill, this has been great – I want to get to exit planning, because you’ve started to do some exit planning work for clients. And we could do a whole show on exit planning for professional services firms. But give us the CliffsNotes version, if you will. I mean, folks that are thinking about exiting their firm, what are some of the things that they need to do to prepare their professional services practice for a change, for an exit?
Bill McDermott: [00:39:44] Yeah. So, for the solopreneur, it is a challenge primarily because, generally, a business owner buyer is not willing to pay for what is between that solopreneur’s ears. And so, it is commonly said that in exit planning, the value of a business is the value minus the business owner’s contribution to that value. So, if I were a solopreneur and, basically, all of the intellectual property was in my head, it’s going to be very, very hard to transfer that value to a potential purchaser. It can be done but there are some challenges.
Bill McDermott: [00:40:31] But building transferable value is important. That transferable value is basically having a solid management team that can take the business after the business owner exits. Having reliable financial statements because they’re paying a multiple of what the value of the business is based on those financial statements. So, having reliable financial statements is important.
Bill McDermott: [00:40:58] Back to an earlier comment, making sure that your revenue is not concentrated in any one or two places. So, frankly, it’s all about building transferable value. It’s also about having a growth plan that a business owner purchaser could buy into. So, those would be the aspects, primarily.
John Ray: [00:41:19] Got it. Well, Bill, this has been great. And I can’t imagine there aren’t some folks listening to this conversation wouldn’t want to get in touch, so let’s tell them how they can do that.
Bill McDermott: [00:41:32] Yeah. Well, first, it’s been a delight to be with you. This has been a great opportunity for me as well. And so, thanks for having me. They can reach me at bill@theprofitabilitycoach.net. Or they can call me on my mobile number, which is 770-597-3136. And our website is theprofitabilitycoach.net.
John Ray: [00:41:55] That’s easy to remember, folks. Terrific. Bill McDermott, thanks so much again for coming on the show.
Bill McDermott: [00:42:01] Thanks for having me, John.
John Ray: [00:42:02] Absolutely. Hey, folks, just a quick reminder, if you want to see past episodes of this series or check them out, you can go to pricevaluejourney.com. We would be honored – I’d be honored – if you would subscribe to the show on your favorite podcast app and you won’t miss an episode that way. If you’d like to get in touch with me directly, ask questions, or give some suggestions on topics that we ought to cover here, feel free. My email is john@johnray.co. Thank you for joining us.
About The Price and Value Journey
The title of this show describes the journey all professional services providers are on: building a services practice by seeking to convince the world of the value we offer, helping clients achieve the outcomes they desire, and trying to do all that at pricing which reflects the value we deliver.
If you feel like you’re working too hard for too little money in your solo or small firm practice, this show is for you. Even if you’re reasonably happy with your practice, you’ll hear ways to improve both your bottom line as well as the mindset you bring to your business.
The show is produced by the North Fulton studio of Business RadioX® and can be found on all the major podcast apps. The complete show archive is here.
John Ray, Host of The Price and Value Journey
John Ray is the host of The Price and Value Journey.
John owns Ray Business Advisors, a business advisory practice. John’s services include advising solopreneur and small professional services firms on their pricing. John is passionate about the power of pricing for business owners, as changing pricing is the fastest way to change the profitability of a business. His clients are professionals who are selling their “grey matter,” such as attorneys, CPAs, accountants and bookkeepers, consultants, marketing professionals, and other professional services practitioners.
In his other business, John a Studio Owner, Producer, and Show Host with Business RadioX®, and works with business owners who want to do their own podcast. As a veteran B2B services provider, John’s special sauce is coaching B2B professionals to use a podcast to build relationships in a non-salesy way which translate into revenue.
John is the host of North Fulton Business Radio, Minneapolis-St. Paul Business Radio, Nashville Business Radio, Alpharetta Tech Talk, and Business Leaders Radio. house shows that feature a wide range of business leaders and companies. John has hosted and/or produced over 1,100 podcast episodes.
