Building a Business Advisory Practice

1. Building a Business Advisory Practice

2. Contents • Focus • Work Deliverables • Lead Generation • Compensation

3. Focus

4. Focus • Maintain a sharp focus for your practice • Leverage your core strengths and experiences • Focus on specific industry verticals • Focus on specific company stages • Focus on key needs of your prospective clients • Apply best practices • Grow into adjacent areas of advice • Get assistance when needed

5. Focus Next Steps • Quick survey: • What are your areas of focus? • Why? • What are some adjacent areas you’d like to focus on? • Why?

6. Work Deliverables

7. Work Deliverables • Concept of “Productized Services” • Working within frameworks and templates • Mapping out deliverables • Lay of the Land analysis • Key problems to avoid: • Overselling and under-delivering • Underselling and over-delivering

8. Productized Services Example • Example engagement agreement used with an actual client • Example PPT presentation to client • Example interview guide sent to client • Example consulting deliverables presented to client • Example progress billing invoice

9. Example Deliverables Map - Profitability • Core issue: lack of consistent profitability • Potential lay of the land analysis: • Opportunity IQ analysis • 36-month trend analysis • Product line profitability analysis • Potential follow up consulting: • Activity-based cost (ABC) analysis • Operating leverage analysis • Customer LTV analysis • Compensation analysis • Cash flow and working capital analysis

10. Real Situation: Email From a Prospective Client • I have a small owner/operator business where I offer five different services to my customer base: retail, rental, repair, onsite service work and storage. It is very difficult to manage my business month-to-month because it seems like its feast or famine with more “famine” months than “feast” months. I also feel unfocused and I am not sure what I should do to improve the bottom line. All of this has led to a lot of difficulty in our personal finances and home life as we struggle with bills and have had to declare bankruptcy a few years ago. Now we are struggling to make the trustee payment and keep up with our ongoing bills. Any suggestions?

11. Next Steps • Quick survey: • What questions do you want to ask him? • Why? • What are the core issues he is experiencing?

12. My Response • The situation you are in is common and is encountered by many small business owners. The good news is that there is clear and decisive action that you can take. Overall it is very difficult as a lone owner/operator to balance sales and delivery, so you will need to balance your time investment in sales and growth and focus on the most profitable part of your business in order to keep the revenue coming in and drive up profitability. You will also want to pay attention to your home budget to drive down those expenses to gain more cushion between the business income and the home expenses.

13. My Response • I would recommend the following steps to analyze the lack of profitability in your business: • Put together a historical trend analysis of the last 24 – 36 months as follows that includes revenue, all Direct Expenses and Gross Margin by product line (the phrase “product line” is used generically whether it is a product or a service that you offer) to help isolate which of the products are profitable and which are not. If there are expenses that would typically be allocated to overhead or indirect expenses, but clearly exist for only one product (such as the lease on the retail store front), go ahead and allocate it under direct expenses for the purposes of creating your product line profitability analysis. • Your analysis should look something like this when you are done (this is fictitious data):

14. Example Product Line Profitability Analysis - I

15. My Response • Analyze the results to figure out which of your product lines are unprofitable or less profitable than the others. This will help you focus your business on the most profitable part of your business. In the fictitious example above, I would shut down the retail part of the business because the sales are too inconsistent to cover the monthly lease expense. Do not be afraid to raise prices as needed to fix your margin problems or even shut down parts of your business if needed. • Analyze your Cash Cycle for each product line to make sure you are maximizing your cash flow, e.g. you will want to charge a large up-front deposit on repair work to help fund the purchase of the repair parts.

16. My Response • Keep track of the source of all of your customers by product line and then increase your marketing efforts on the best sources of your most profitable product lines. This will help you grow your most profitable product line via the most productive means of growth. Be sure to manage your sales pipeline to move your prospects turned up by your marketing efforts into paying customers as quickly as possible.

17. My Response • All of this analysis is at the Gross Margin level, but we are focusing on that to increase your gross margin enough to contribute to your Overhead and Indirect Expenses sufficiently to give you positive Net Income each month. You should also look at all of your overhead and indirect expenses, such as office rent, insurance, professional services fees, and other general businesses expenses for the entire business to see if you can lower any of those expenses. • Finally, scrub your home and personal budget to take out as much expense as possible to give yourself more margin and cushion each month. If you do not have a family budget, you need to create one. You should have a plan for your business and a budget for your family so you can sync up and manage your life with less stress.

18. Example Product Line Profitability Analysis - II

19. For Further Study • How to read a financial statement blog post: • https://crownbiz.com/finance-accouting/basic-accounting/29/4351/ • Venture Academy session on how to read and analyze financial statements>>>> • How to improve the profitability of a conference blog post: • https://crownbiz.com/running-a-business/business-improvements/08/how-to-improve-the-profitability-of-a-conference/

20. Example Deliverables Map - Growth • Core issue: lack of consistent growth • Potential lay of the land analysis: • Opportunity IQ analysis • Core capabilities analysis • Market positioning analysis • Wallet share analysis • Potential follow up consulting: • Customer LTV analysis • Opportunity matrix analysis • Competitive analysis • Cash flow and working capital analysis

21. Real Situation: Email From a Prospective Client • About 18 months ago my business partner and I started selling some left over parts from our repair shop on eBay. • Our company went from selling $6,000 gross in January 2013 to $35,000 at the end of the year. We have now seemed to stagnate a little and are hanging around the $30.000 gross per month range so we are profitable but we keep investing all our money back into infrastructure to help us grow. I am attaching our growth chart for you to view.

22. The problem is, we are not sure how to scale the company. We have almost no debt at this time, we do owe $7,000 on a no interest loan from a parent that we are paying back, but other than that, no debt.

24. So the question is, do we keep slowly going along with cash or is it better to borrow some money ($30-50k) get a bigger facility that we can grow into, hire some more people, and buy some more equipment so we can process more product and in turn, sell more product (in theory). It seems that every time we put more stuff online, we sell more so we believe that investing in getting more product online will equal more sales.

25. Problem 1, not enough man power. Right now, we have way more raw product than we know what to do with. Used products keep coming in the door but its takes us so long to process them and get them online that we can't get ahead. We have 4,000 parts online and that number stays the same because we sell as many as we put up in a day with the man power we have. We have thought about possibly adding a night shift but worried we won't be able to afford anyone qualified to run it.

26. Problem 2, not enough space. We have filled every nook and cranny of our shop, literally! We even have one persons office in a supply closet. If we did get more man power I am not sure where to put them unless we started a night shift and they used the same desks and work stations as the day time shift. But a night shift for 4 people seems like and odd plan, maybe just crazy enough to work? Also we are running out of warehouse space…..

27. So I am sure this is the classic problem that all growing companies face, not enough space, manpower or money and just don't know if best to slowly grow or take a risk and try to grow big by raising some capital. • I hope you had time to read this and may be able to give some advice or point in the right direction.

28. Next Steps • Quick survey: • What questions do you want to ask him? • Why? • What are the core issues he is experiencing?

29. My Response = I • A couple of thoughts on growth: • 1) What is your gross margin? • 2) What does your cash cycle look like? • 3) How scalable is your business model? • 4) What kind of operating leverage have you experience with your current growth? • 5) What is the ROI on your required growth investment? • 6) What is the payback timing on your required growth investment?

30. My Response - II • The answers to these questions will fill in the blanks and inform your strategy. If you can work on the analysis and send me the answers, I’d be happy to review. • As it turns out, I get a lot of similar questions, so I am putting together a “How to Grow a Business” seminar with Crown. What part of the country are you in? Once the seminar is rolled out, I can try to get you in touch with one of our Crown Business Advisors.

31. Lead Generation

32. Lead Generation • Social media • Crown Business Channel • Blog • LinkedIn • Facebook/Twitter • Quora • YouTube/Vimeo • SlideShare • Content type: • Video • Audio • Whitepapers • Speaking engagements

33. Compensation

34. Compensation • Billing Rates • Monthly Retainers • Cash vs. Equity • Expense Reimbursement • Employees and Sub-Contractors

35. Billing Rates • Quick survey • What are your current rates? • How did you set them? • Are you satisfied with your current rates? • Best practices • Set at market levels by type of deliverable and by professional (get what the market will bear) • Flat rate vs. hourly rate • Hourly rate – a good place to start • Flat rate – focused deliverables are best; be sure to add boundaries

36. Billing Rates Best Practices – Market Rates • Set at market levels • By type of deliverable • By professional and their skill set • By the client’s size and ability to pay • By location • Example: Financial analysis should be at a typical financial consultant rate or CPA billing rate and strategy consulting at a typical strategy consulting rate

37. Billing Rates Best Practices – Flat Rate vs. Hourly • Hourly rate – a good place to start, but puts an upper limit on your earnings • Example: 2,000 hours/year x 75% utilization x $100 per hour = $150,000/year • Typical issues: • Hard to both sell and deliver • Hard to get good utilization • Flat rate – focused deliverables are best; be sure to add boundaries • The key to margin enhancement if you have a repeatable, productized deliverable and if you are well down the experience curve

38. Billing Rates Example • Hourly rate example report (attached to a monthly invoice):

39. Monthly Retainers • Retainers work best for ongoing deliverables of a similar nature • Be sure to put boundaries in the number of hours

40. Cash vs. Equity • Cash only • + A more certain outcome • + No change in ownership for the client • + Easier and cleaner • - No upside • Equity only • + More potential upside • - More difficult to put in place • - May not have any value • Cash and equity • + Can achieve a good mix of current income and future upside • - More difficult to put in place

41. Cash vs. Equity Best Practices • Warrants have tax advantages vs. stock grants • Strike price • Vesting • Accelerated vests • Marching towards an exit • Minority investor issues • Control issues • Yoking issues • Example agreement • For further reading – sweat equity blog post

42. Expense Reimbursement • Actual expenses • Best for when expenses vary widely • More difficult to track • As a percent of professional fees • Best for when expenses are fairly stable • Best when fees are on a higher fee base • Much easier to implement and track • Recommend between five and 15% depending on fees and depending on amount of travel • Can be risky at a low fee rate and high travel expense Example flat rate percent on proposal: Example flat rate percent on invoice:

43. Employees and Sub-Contractors • Be sure to include any necessary employees or subcontractors in your proposals in terms of their compensation rates in the overall billing rate • As previously mentioned their billing rates may be lower than yours and appropriate for their skill set • Many professional services firms will exhibit billing and billing rates by individual professional on a project • Flat fee proposals of course don’t do this but just okay have a flat fee overall for the project

44. Building a Business Advisory Practice

45. Adding Value to Clients • Always quantify your work • “By implementing ________, your AR should shrink to only $_____, which should free up $_____ of Cash” • “By doing ____________, the bottom line impact to your Net Income should be $________” • Strive to add at least 20x the value of your fees • The work resulting from a $5k fee should have value of $100k+ • The work resulting from a $25k fee hopefully has value of at least $500k+

46. Example Pricing – Opportunity IQ • Sell the service for $2,500: • Client fills in as much as they can on the Opportunity IQ • CBA fills in the rest (est. 4 hours x $250/hour) • CBA prepares for follow up meeting by reviewing the analysis and developing recommendations (2 hours x $250/hour) • CBA meets with client to explain the Opportunity IQ score and what it means with a focus on the weaknesses in the analysis and explain some specific actions to take and quantify their impact (4 hours x $250/hour) • Recommendations may lead to additional work

47. More on Retainers • Ongoing deliverables • Weekly calls • Monthly meetings • To do list of action items

48. Gross Margin Improvement

49. Starting Points – Roadmap to Revenue

50. Starting Points – Roadmap to Revenue