Scaling Service-Based Businesses: Private Equity Pathways with Jeffrey Reynolds

Lenny Murphy speaks with Jeffrey Reynolds about scaling service-based businesses through private equity. Reynolds, former LRW president and founder of the Professional Services Firm Accelerator program, shares insights from reviewing 350+ businesses.

Reynolds emphasizes that successful service businesses must balance value for employees, clients, and shareholders as a "three-legged stool where no leg can be longer than the rest."

Thanks again to Jeffrey Reynolds for being our guest. You can connect with him on LinkedIn

Transcript

Leonard Murphy: Hello everybody. It's Lenny Murphy with another edition of the CEO series. Thank you for taking time out of your day to spend it with myself and my guest and this is one we've been trying to get done for a while and it's just hasn't the stars not aligned but today they are and it's going to be a good one. So welcome Jeff Reynolds. Glad to have you here my friend.

Jeffrey Reynolds: Great to be here. Let's see if we can catch lightning in a bottle.

Leonard Murphy: Let's do it. So for the audience, we did we actually had started and it was really great and then the gods of the internet rain their wrath down upon us. so here we are. So a little bit of background the I've known Jeff for gosh 15 years at least when he was president at LRW. and we've caught up because he's doing some cool new stuff. So this is going to be a little bit different. we're going to talk about Jeff's focus now on private equity and consulting. I think that it's a topic that most of our listeners will appreciate and will be able to capture lots of good information as my lead in Jeff, give the quick bio overall to put all this in context.

Jeffrey Reynolds: Yeah, great. Thanks, Lenny. and I hate to tell you, it's probably 20 or 25 years we've known each other. time rolls fast,…

Leonard Murphy: Would you?

Jeffrey Reynolds: But we look young, so that's important. Our spirits are young. So I spent most of the last 25 years in the insight space.

Leonard Murphy: I...

Jeffrey Reynolds: Grew up at a firm called when it was 100 people, left when it was 1,200. helped be part of a management team that brought on private equity in 2015. that got the founder out of the business. We were about 400 employees so I had a really interesting run and learned a lot about how private equity investors work. Left LRW in 2020, started writing a book on how you scale people-based businesses, then got connected up with another private equity firm out of Texas called Trinity Hunt Partners. Spent most the last year doing what's called a buy and build in the digital marketing space. Transitioned out of that role about four months ago and now I'm really focused on I've looked at 350 businesses over the last 10 years all in this kind of 25 to 100 employee 5 million to20 million revenue space so many of them great value propositions great cultures but often they get a little stuck in their growth path and I think that's because the early stages of growth is all about the service the mid and latter stages are about a much more complex thing about really scaling a people-based business. And so I've launched what's called the PSF, professional services firm accelerator program that's designed to help founders and owners of maybe the target might be 25 to 75 employees who really want to grow but are kind of looking for some help. and so that's what I'm doing now.

Leonard Murphy: So you've just described the bulk of the market research industry. And hence listeners why I wanted to have Jeff on and talk about this because that is certainly in the industry not just in all of the marketing services category it's all about tech tech right and we see lots of companies at least wanting to become unicorns right this massive scaling through technology but the service businesses are still the heart and soul of so much of what we do across the board and even with the advent of AI that it is certainly putting a squeeze or transforming probably better way to say it how we spend our time from a task standpoint within a service organization there is still a core that will always be service driven so can I talk about your thesis and how you've looked at all these companies you've developed this incubator an accelerator what is the key learnings for leaders of service businesses that you can impart with without giving away the cow, right? Obviously. okay.

Jeffrey Reynolds: I'm pretty happy that it's a complicated cow. So, I don't mind sharing notwithstanding I've written a book so nobody wants to hear me do 40,000 words today. but what I basically believe is that service businesses and this really even extended across marketing services to other services and tech enabled services which is where you're leveraging technology not as the core element but to make your people better is really a great space to be from a business strategy standpoint. But what's the core to my thinking is that there's different stages of growth. My PhD was in human development, which is all about change over time. And what you need to do to go from 25 to 50 employees is different from at 100 to 250, 250 to 500. And I think that's part of the challenge of being an owner or founder in that space is that you're increasingly have to really transform the way you think about the business and you can grow pretty rapidly in those early days.  And so my basic thesis is that I look at businesses as human systems and that there's really seven different systems you've got to build inside of the business and you got to grow them differently at different stages. So that's the nexus of it. But I can tell you having looked at 350 the top problem is really around building a systematic revenue generation engine. That's more than we do great work, clients leave and move to another company or they talk about us at their big company. Really building a systematic revenue generation engine and then leadership and leadership capacity, next generation leadership and getting the owner out of running the business. Those two things are at the core of what I think ends up becoming the thing that gets a lot of people stuck. And by the way, some of the experiments they try are very expensive and so I see a lot of once bitt and twice shy.

Leonard Murphy: I'm thinking of my own experience, my clients. myself as a consultant in the service business, and all of that resonates is, yep, those things are true. so my experience in my dabbling with private equity mergers and acquisitions in this space has been that traditionally kind of the key companies I have dealt with want to see about 80% ARR and about 20% which primarily kind of technology driven or subscription etc etc and about 20% that is more ad hoc service driven and they tend to shy away from companies that are probably outside of that formula. it seems like based on your experience and what you're doing now that is not necessarily the case that there is maybe an appetite for businesses that are more people driven but to your point technology enabled. Is that right?

Jeffrey Reynolds: Yeah, I think it's changed a lot in the last 10 to 15 years. Even when we brought on our first outside investors now 10 years ago to LRW, I think we were really worried about the idea that we were at that time about a 60% project based business. Would that be And indeed it was at that time. But what I think has really proliferated is there's 26 times more private equity money than there was in 2000. 26 times. There are now 11,000 private equity firms. There were 2,000. So there's a lot more people out there hunting for opportunities to invest. And service businesses may not have been the first to that party but I think now the knowledge of the marketplace past examples where it's been really successful and tremendous opportunity in that space if you know how to build and run those businesses has really changed that game so there is a lot of opportunity in private equity to be a platform so if you are a larger business and I'd say that probably starts at 20 25 million in size and bigger is probably still  a little better. You can kind of be the original thesis with a platform and a PE investor or to be a part of a process where they're going to want to do some acquisitions as part of building out whatever their thesis is. You can be anywhere as small as, $4 million in revenue and 800,000 or a million in profitability. And I think that's news to a lot of people, but those folks are getting out there and the skills to manage in those environments. I would not say they're mature, but they're getting better. And so, private equity in the end is a service business itself, and there's 11,000 of them. And so, a bunch of them are getting experiences, probably making some mistakes, probably getting better, and some of them are getting more nicheified where they may specialize in business services. And I think that tends to be a pretty attractive place if that's what you're in. Find somebody with some good expertise there.

Leonard Murphy: How do you find those companies though? So yeah, I work closely with Oakland Silver Phillips investment bank and they're low to midcap player and there's other folks seam of assassin luck in our industry that also play in the M&A and investment banking and the challenge always seems to be that fi finding a fit for strategic investors.

Jeffrey Reynolds: Yeah.

Leonard Murphy: So let's say and we worked together with LRW at one point, right? You guys you already had the money, you had a thesis, and I helped for a little bit to try to identify potential companies to be part of that thesis. that's one thing. But if' my experience has been and I guess I'm talking to the wrong people is if you are at that smaller scale to find a private equity deal directly one the investment bankers don't particularly want to deal with it because it takes as much effort for a $10 million deal as it is a $100 million deal. So they tend to focus on the bigger stuff. so finding the right partner seems to be part of this challenge overall. So thoughts on that?

Jeffrey Reynolds: Yeah. What what I would say is there's been tremendous ecosystem development. Lenny, so I think part of your challenge may be the people you talk to see the world in a certain lens. So maybe today I'm giving you a different lens on this but I'll give you a few things.

Leonard Murphy: Right.

Jeffrey Reynolds: There buyside brokers which there's sellside and there's buyside in M&A. Sellside is the one people typically think about you you hire a banker to help you sell your company. But there are buyside advisors and buyside brokers whose job it is to go out and find companies. And the honest answer is, if you take all the services space, certainly marketing services, certainly consumer insights, finding a list of a thousand of them is not a hard thing. And so then you put some manpower against stirring up those conversations. And the answer is there's a million services businesses.  they represent 13% of GDP, but I've concluded there's probably a hundred,000 that are at least 25 employees. and so, again, in insights, I'm going to guess there's several hundred that would meet that standard. And so what we did in my last buy and we built,…

Leonard Murphy: Mhm.

Jeffrey Reynolds: A relatively resource intensive M&A engine, which meant we had brokers out there helping I had a two person team and out of that in three years, we looked at 250 different businesses. I always said I had a first date. Got to know them a little bit, learn about their business. I always enjoyed that because I love entrepreneurs. there were probably a hundred or 125 that we spent some time against. There were probably 50 that we got really serious with and…

Leonard Murphy: What? Yep.

Jeffrey Reynolds: There were 25 that we really wanted to bring onto our platform. And then there's some complexity that gets in at that point, but we ultimately wrote what are called LOIs, letters of intent on those and were able to ultimately buy seven businesses in that window. So 250 to seven. So, that's a lot of energy, but it's doable. and if I was trying to do it, huffing and puffing myself, but I had a team. and so we could go out and find folks. And part of what we had to do was help people with a $7 million business and a million profitability who'd been told the story you just described. There's no one who would invest in me. To say, no, there's something we're trying to do here, may not work. And that was something that would then stimulate a conversation.

Leonard Murphy: Yeah, it's good to hear that you've had that successful experience, I mean, I have tended to function more on the buy side. so I have a meeting after this interview with the private equity group that's reached out to me with thesis and doing all that and that's fine. Although they are playing in the big leagues right versus the smaller company yeah right  Yep. Yep.

Jeffrey Reynolds: Yeah, I classify PE funds into three buckets. I'll call huge, which is KKR and Black Rock. I mean, millions, billions. Bane would probably be probably in that top 10 list. Then I would call large, which they've got a billion dollars in each fund. They may have raised five funds. They've been around a while. and that's the group that probably you're spending time with and if you've got those kind of dollars to invest, it's hard to move the needle with small investments and so they tend to not look at them. But then there's a whole group that is often called micro cap. and again, there are several thousand of those that have a hundred million to a billion dollars to invest. And if you've got a $400 million fund, all of a sudden the thesis around something…

Leonard Murphy: All right.

Jeffrey Reynolds: Where you're adding on, businesses with one to four million in profitability to them looks really different than if you're, certainly KKR or Black Rockck or even some of these really big ones.

Leonard Murphy: So, for our listeners, this is not a sales pitch. but again the reason I wanted to have Jeff on is there is a gap here and when folks like myself and again Sema and Kristen and Ken and Elena ODP and Simon Chadwick etc etc to my knowledge none of us have been incredibly successful in helping to fill this niche this need of the support the consulting component as well as the kind of and connections to help smaller service businesses find paths to exits or to growth via private equity. So Jeff Yeah.

Jeffrey Reynolds: Yeah, by the way, one of the challenges is you can go at it alone and maybe just use some lawyers or some friendly advisors, and this is where now I've gotten so much experience, there's probably a dozen sell side investment bankers who work this market. but they tend to be small. They're not Gulahan Loki, with 4,000 employees. and so that's where you get this kind of product market fit match where they don't have a brand. Somebody in Kentucky wants to do a deal. They don't know how to find these guys. They're not even showing up in search. Is anyone in? And so that's one of the things that I've built a lot of knowledge on now. That part of what I do with the accelerator program can be to help people grow their business so they can be in a position if they would like an exit. Some of what I do is just support owners on their goals. And if somebody's got a business and it's ready to go, perhaps I can help fit them with the right sort of buyer, depending on their goals that would support those things. And that's,…

Leonard Murphy: All right,…

Jeffrey Reynolds: I guess that's one of the benefits of being a crusty somewhat gray-haired veteran is that I enjoy leveraging all of the nicks, cuts, bruises, scratches, and broken bones that I've assembled to help try to help others,…

Leonard Murphy: We got it for a reason.

Jeffrey Reynolds: Have success and achieve what they want to achieve.

Leonard Murphy: So, let's dig on that a little bit more because I think that's kind of the crux of what I was hoping we would get to for our listeners that what you're describing is the bulk of the industry overall. so let's say you're a $5 million quall shop, do great work, even have lots of retain contracts, etc. what could you do to help and the owner is looking for look I'm 60 I don't want to do this forever so kind of talk us through that hypothetical how would you would engage with somebody like that and what you could do to help and again listeners it's not a sales pitch but I do think that there's a gap in the market for this type of resource and hopefully Jeff could be a resource for you to help figure this out  No, talk that. Uh-oh.

Jeffrey Reynolds: Yeah. I think the first thing I do shockingly is an assessment to really understand the fundamentals of business. But I look at the business more like imagine a housing inspector that comes in to look at your house is going to look at different fundamentals than somebody that's wanting to do a photo shoot for architectural digest or a friend that walks through.

Leonard Murphy: Right. Right.

Jeffrey Reynolds: I have ways to look at the bones of a business that tell me about its strengths and its weaknesses. And let's be honest, some businesses wouldn't be investable. They just wouldn't.

Leonard Murphy: Right. If it's the lifestyle business,…

Jeffrey Reynolds: There isn't necessarily a problem with that…

Leonard Murphy: You're taking all the capital, all the profits, etc. That

Jeffrey Reynolds: But if the business is shrinking is losing clients has got a lack of a leadership team isn't demonstrating even great client retention and…

Leonard Murphy: Right?

Jeffrey Reynolds: And certainly one of the problems with insights now is that and it depends how you define the insight space but it's not a rapid rapidly growing category like some businesses so for example if you're a Salesforce implementation people business project based but of course Salesforce is going berserk at every level and that's there you've got industry tailwinds at your back so insights is definitely tougher these days but then the question is if you do have growth and if you do have clients what you're doing and you do have a good management team and there's a big question if you own the business and…

Leonard Murphy: It's

Jeffrey Reynolds: Are too central to the business. it's much harder to sell that business and get cash for it than if you are less central and you've built up a great management team and you're even, lightly involved. Maybe again the term is often if you've moved to chairman status, those things can be very impactful on how it is to sell a business. But then the answer is there are probably tens of thousands of potential investors and so you've got to get the word out because somebody may want to come to the US or somebody may want to go to Europe or a strategy firm may be looking to bring in some insight. there's a lot of where you've got to get out to a large number of people. and there are certain investment groups bankers that do a better job of that than others, particularly those leveraging technology. and so more bats and more swings at the plate is going to increase your chance that somebody's like, "That's the exact type of company that we've been looking to add." and I always bucket those into I'll put them in four buckets. Strategics which I think we usually think of as the big players the Ipsos and frankly LRW material is not probably one of those. then you've got the strategics that are adjacent which is it's really a European based hypothesis was recently acquired by a European strategy group that really wanted insights in its capability and…

Leonard Murphy: Yep. Mhm. Yep.

Jeffrey Reynolds: I've heard that's been a wonderful transaction. So strategic but I call adjacent strategic. Third would be a private equity platform where you're the first investment. And then fourth would it be a private equity on where you'd be added into something that's still private equity back and not huge but you're not the first one in

Leonard Murphy: Okay, that makes sense. that's about how I would describe it as well. and we'll be conscious of your time as well as our listeners. it seems as if obviously the private equity space is growing to your point the tons of new entrance and there's also been a little bit of I think a perception that private equity is just all about arbitrage and profitability. and they're going to squeeze every drop out to head towards that 5-year exit window. are you seeing changes in I guess the principle behind some of these private equity groups that they're a little more aligned to long-term growth. they're thinking more innovatively. They're thinking about a bigger vision rather than purely a financial mechanism of just profitability and…

Jeffrey Reynolds: Yeah. Yep.

Leonard Murphy: Exit. Okay. What?

Jeffrey Reynolds: And the answer is we're still in the early innings. And so, there's two places in this important market in the private equity space that are gaining knowledge quickly. But first of all, again, if there's 11,000 of them, there's some that are further along that curve, and there's other ones that are trying for the first time, like a bunch of entrepreneurs. And so, there's a lot more that are starting to understand how service businesses work. And if all you're going to do is use debt leverage and IBBA arbitrage and not create a company of value, the second part of this which are no matter what to have the exit for the private equity folks three, five, seven years later, somebody's got to want to invest in that with a new thesis.  those folks are getting wiser to what I'll call sometimes if I'm being porative I'll say a pumpkin village of value creation where it looks pretty on the outside but inside you haven't really created a great human performance organization tech enabled or not and so those investors are going to increasingly demand real value creation and increasingly the smaller shops that are investing in businesses lower in the market are recognizing they've got to do real value creation. So, that is happening and getting better and there are still many and so of course the stories of when that didn't really go well or there was just nothing but cost cutting or they didn't produce the value those stories tend to be the ones that have met their fruition but they started five or 10 years ago and so the results out of that market right have a delay of five or 10 years before you start seeing the benefits so I'm there on that front end more to know that there's a lot more folks but if I was advising anybody if private equity comes calling. First question is tell me about your experience in business services. If they exclusively do business services, if they've got a good track record of multiple business service investments, particularly ones that have already been realized because they did them seven years ago, those are great questions to ask. And if the answer is they don't have good answers on those things, you're playing with a little more fire in terms of hard to there will always be an entrepreneur where you're the first investment and it's wonderful. But there's also a greater risk or volatility to those kinds of decisions when you're talking about, getting into business with somebody and making a transaction. That's the most important one that you'll probably ever do in your life.

Leonard Murphy: Yeah. To kind of wrap up what is the one critical piece of information that you would want people to take away from this conversation that may lead to another conversation or not? but you if out of anything you need to know this and go from there.

Jeffrey Reynolds: I'm never good at one. I'll do three quick.

Leonard Murphy: Okay, good enough.

Jeffrey Reynolds: So, the first one would be there is probably more opportunity to do something a transaction of sort with your business earlier than most people think. And there's some advantages to that because you can derisk your entire net worth being in your business. You can actually get smart people from the outside to help you. so that's real. Secondly, if you're not interested in transacting, there are ways to burst through some of those challenges. And first of all, you're not alone. Most people that start service-based businesses are usually really good at the craft of whatever the service is, whether that's Salesforce implementation or consumer insights. And then you hit this spot with 50 people and it's like, man, you're running a business, sales, marketing, finance, systems, all this stuff. You're hiring your first CFO. Should I outsource all these questions?

Leonard Murphy: Yep.

Jeffrey Reynolds: And so there are people that can help you. And that is a little bit of what I'm doing these days. And the third thing is that I think people think of the sale as the end. And particularly with private equity, the sale can be really a middling way station where you're able to usually what happens is you roll some money into a private equity investment vehicle. And so you take some cash off the table, which is nice to create a floor when you've created a business of value. But if you still want to run the thing, that's often what those investors want. You then roll some of the proceeds of the business into the investment. And if it actually does well, you may end up doing better financially at the second one and have a really nice glide path for yourself,…

Leonard Murphy: Those are great.

Jeffrey Reynolds: But the leaders of your employees because a lot of service businesses, people care deeply about the people and the culture that they've built and they don't want to do just a financial transaction. So those would be my three things. So certainly on LinkedIn,…

Leonard Murphy: Three things, Jeff. How can people find you? again, here's the pitch.

Jeffrey Reynolds: Jeff Reynolds, and I'm putting out a decent amount of content. again, maybe sharing the bits of the cow over so I'm out there on LinkedIn. And then if you go to professional services firm accelerator com, that's my website. And maybe a last thing I'd say to anyone is there's a whole body of research out of Harvard. If you start to think about your marketing business, not as a manufacturing or a tech business, but as a professional services business, there's a whole flood of content that largely comes out of the Harvard Business Review guys that is super valuable to think differently about how you scale a people-based business because you ain't the first one that's had to do that. If I'm pointing anyone in a direction of where they can go try to learn a little bit more themselves, that's a great spot.

Leonard Murphy: That is good stuff. So, you've got my wheels spinning. I have a feeling this won't be the last time that you're a guest in some form or fashion in things that we're doing. So, I think what you're doing is really important and hopefully audience you would encourage you to reach out to Jeff if you are any of this has resonated with you then reach out to Jeff and I'm sure that he can help you and for the good of us all right a rising tide floats all boats

Jeffrey Reynolds: I mean, at the core of why I care about this mission is that I love founder businesses. I believe in the value proposition that I say this all the time. the only way to build a great service business has got to be great for employees. It's got to be great for clients. And it's got to be great for shareholders. people own businesses to grow value in them, but that's a three-legged stool and no leg gets to be longer than the rest. And so usually these founder-led businesses, employees love them, clients love them. And I hate it when they don't reach their potential or value is destroyed. And I'm sort of on a mission to deliver that thing because by the way, I got to be a part of one of those journeys and personally, what it meant for the organization, what it meant for our clients is meaningful. And so, that's why I love this space and want to be useful.

Leonard Murphy: That's the ultimate my kids ask me what I do for a living. I say I help people. because that's the ultimate driver. So I get that and I appreciate it very much. Jeeoff, thank you for your time.

Jeffrey Reynolds: Great to see you…

Leonard Murphy: Appreciate your...

Jeffrey Reynolds: Lenny. Appreciate the time and look forward to our next conversation maybe at IEEX in DC here in about 60 days.

Leonard Murphy: Yeah, absolutely. All Thank you to our listeners. without you, Jeff and I would just be, kind of BSing, but we wouldn't have put as much emphasis on making this probably. So, ships passing on the night, that type of thing. So, thank you. Thanks to our sponsors, our producers, and that's it for this edition of the CEO Series, everybody. Take care. Bye-bye.