NO. 18: BUILDING A BUSINESS AROUND EQUITY (Part 1 of 2)

When I’m not writing books, I work as a mechanic. I fix things. One of the things I fix is how Professional Service Providers (i.e., tech consultants, engineers, accountants, health care providers, dentists, financial advisors, etc.) run the most valuable asset they own – their own books, practices, or sometimes a business.

In my books, I explain to Professional Service Providers, or PSPs, that taking control of the most valuable asset you own or will own requires that one build the proper foundation to support the process. For starters, a business must gradually move away from revolving around one person’s talent, drive, and personality, often that of the founder or founders – common traits of a book or a practice. This seismic shift in thinking is a big part of what we call building an equity-centric business. The term “equity-centric” refers to prioritizing equity as the basis for value and success, rather than focusing on individual ownership, client services, or revenue production. 

Professional services are all about people helping people. It should be no surprise that these same PSPs center the value of their books or practices around their client relationships and the related goodwill and cashflow (their capital assets). But a business is more than that, much more in fact. At some point, an individual service provider needs to shift the medium of value from a client to a share of stock (or a unit of ownership in an LLC) in order to attract and retain next generation talent at an ownership level.

Let’s start with the basics of moving from a practice to a business and shifting the medium of value to equity:  

1. Set up an entity structure (usually a tax conduit, with a single class of stock)
2. Have individual service providers or revenue producers exchange their capital assets for equity or stock in the entity
3. Focus on profitability, or profits, as the measure of business value and success
4. Generate consistent top-line growth year-over-year using professional marketing and sales tools

The result of taking these steps is that the business becomes investable and when next gen PSPs begin to acquire an equity interest from the founder(s), the business becomes sustainable. Such a business also becomes lendable. Next gen PSPs who buy in to ownership are investors who will require support from a capable money source for an equity acquisition, and a reliable banking partner plays a crucial role in this process. Founders are more likely to be open to selling a 10% to 20% stake in their business at fair market value when they receive a check, in full, in return.

Professional services may be all about people helping people, but it also needs to be more about one generation helping the next generation. That is the way to progress and ultimate success. (Part 2 of this blog to be issued next week.)

(Note that this equity-centric process builds on my prior blog post, No. 17: The Three-Basket Cash Flow System.)

Thanks for reading,

David Sr.