Valuing Professional Services in the AI Age
For decades, people have been saying that the Internet would change everything and
more recently that ChatGPT will mean a revolution in professional services . It may be a
stretch to say “everything” has changed, but the way we utilize a variety of goods and
services is definitely different. Those of us who are professionals have seen some
change, which for now remains at the margins of our practices. However, bit by bit,
being a professional service provider in the age of Google, smartphones, and ChatGPT
is changing the fundamental rules of our professions.
It used to be that one of the advantages professionals enjoyed was access to
information not generally available to the public. Whether a lawyer, financial advisor,
stock broker, accountant or doctor, each of us had information that customers did not.
As professionals, we offer expertise and experience, but in many cases, our clients
simply saw us as the gatekeepers to information and our fees were merely the price of
admission.
Ready access to information and computer generated text changes things. Each one of
our clients now carries the ability to have documents drafted by AI and essentially a
complete library of human knowledge that fits in our client’s pockets. If our profession is
simply about access to information, we are in trouble.
However, we can compete because information and words are only two pieces of the
puzzle.
Once you have the information and words, what do you do with it?
Do those words adequately and correctly address your situation?
What are the risks of your proposed transaction?
Is any information missing?
What is the best way to utilize the information you do have?
What documents are needed for the transaction?
How are people reacting to what you propose?
Level of Acceptable Risk- Risk assessment involves not just an objective analysis of
probable outcomes (something a computer can do if provided with enough data) but
also the more subjective analysis of how much risk is acceptable based on the situation.
The Human Element- How will other parties react to something? Does what you are
asking for seem fair or reasonable in this particular instance? What subjective criteria
might cause a change in the future? As most of us know, the reactions of real people
can be inconsistent, illogical and sometimes unpredictable. Smartphones might be great
for checking email or facebook or looking up basic information and AI may be able to
generate some text, but they don’t anticipate the actions of a disgruntled or unhappy
human nor do they handle surprises very well.
Identifying omissions- As anyone with spellcheck knows, computers can be brutally
effective at spotting errors on the printed page. What they can’t do is evaluate a
document and recognize the absence of important terms. Spellcheck can tell that you
misspelled “eggs” on your shopping list; but it has no idea that you also wanted bacon.
Individualized Solutions- Clients are paying for solutions to their problems, not just
information and text. A prescription is a tiny piece of paper with the name of a drug
which the patient takes to the pharmacy; what the patient is actually buying is the
medicine prescribed by the healthcare professional to treat that patient’s current health
issue.
An agreement drafted by a knowledgeable attorney will be much more expensive than a
computer generated form. If the client is looking for a piece of paper, AI will always win.
But if the client wants a thoughtful and appropriate document that weighs risks,
considers situation specific issues, and accurately reflects their needs, a human being is
best able to provide that.
Professional services have never really been about control of information but rather
determining what to do with the information once you have it and how best to use it to fit
the client’s particular needs.
Know The Deal
Business is about deal-making. Buy, sell, lease, rent . . . it doesn’t really matter what the
exchange of goods and services is, basic rules apply. Often people are so caught up in the deal,
they forget the seemingly tedious details. They know what they think they agreed to, but do they
know the deal?
Are the deal terms in writing? If not, why not? With no written agreement how do you
know if the contracting parties are really in agreement? Will you remember the details a month
from now? What about a year from now? What if something happens to you and someone else
is trying to figure out what was agreed to?
The more complicated the transaction and the longer an agreement’s duration, the more
certain you must be that the terms are understood. With respect to my friends in the insurance
industry, the written word is the best insurance there is. (Of course, they already know this,
which is why their policies are so long and detailed.)
In some cases, you’ll enter into a deal with someone and a pre-written contract already
exists. Read it. Ask questions. If you still don’t understand, then ask more questions. Hire
advisors that can help you understand what the agreement means and what the risks are.
All too often people feel that once they have negotiated the deal verbally, it’s done and
the contract is just a formality. And it might be, but only IF the contract says what you think it
says. Does it? Read it and ask your advisors what they think it means. Sometimes what is NOT
in the contract is more important than what is written down. Often the other party (usually the
one providing the document) will explain to you what the contract means. Consider the
following: Does this person have your best interest in mind? Are they as invested in this deal as
you are? Have they read it themselves? Do they understand what it says?
Read the contract may sound like basic advice rather than high-powered legal wisdom.
But from my Silicon Valley practice during the dot.com era to my practice here in Ventura
County today, I’ve seen the failure to read and understand the deal has cost clients many
thousands of dollars. Sadly, I’ve been called in too late in many cases and the damage is already
done.
So before you move forward, ask yourself: Do you know the deal?
Seller Carryback
Financing the sale of your business can be a gamble. Most business owners reach a point when they are ready to retire or explore new challenges, but find that much of their net worth is tied up in their existing business.
Selling the business might be the obvious answer, but at what cost? Owner financing is a common alternative to a traditional cash sale and the buyer’s need to obtain financing. Rather than accepting only cash, the seller allows the buyer to pay some or all of the purchase price in the form of a promissory note to the owner. But is it a good idea? The owner may believe that he or she is selling the existing business; but in truth they are actually investing in the business’s future operated with new management and ownership.
We all know that small businesses can be risky. The failure rates for businesses can be high whether a new entity, an existing business under new ownership, or a franchise. Depending on the industry sector, location, proficiency of management and prevailing economic conditions, failure rates can be significant. According to the Bureau of Labor and Statistics, less than fifty percent (50%) of startup businesses survive through year five and only about a third of businesses make it ten years. If you are expecting the promissory note on your former business to finance your golden years, you might be setting yourself up for an unpleasant surprise.
Some questions to consider in deciding whether to personally finance the sale of your business:
Would you be willing or able to retake control of the business in the event of default? Could you regain customers lost because of mismanagement by the new owner?
Why are you considering owner financing? Is the valuation of your business preventing a third-party lender from making the loan to the buyer? Would it be worth accepting a lower valuation to have all the cash in your pocket now and know that you could walk away?
Can the business support the payments on the owner financed note? If you cleared $3,000 a month while running the company, you cannot expect the new owner to service a note with payments of $5,000 a month, particularly while he or she is still getting familiar with running the business.
It is not enough for a new owner to be creditworthy; he or she needs to be “business-worthy.” He or she needs to have the knowledge and business experience to successfully run your company after you sell. If the business fails, you will be saddled with an unpleasant decision: Come out of retirement to save the business or let your investment die. Unfortunately, I have seen this scenario play out many times in my practice. For a few clients who were not actually ready to retire, the comeback has been a joy. But for the vast majority, an owner-financed note in default has been an expensive and aggravating ordeal.
Don’t gamble more than you are prepared to lose. That’s good advice in Las Vegas, but it also holds true in the world of owner financing, where the odds might be even worse.
Strength is good; Wisdom is better
Everyone in business gets involved in disagreements from time to time. Most are small, but
some are serious enough that they lead to litigation, and in very rare cases even violence. High
levels of conflict are destructive for businesses. Relationships suffer, management is distracted
from running the business, and resources are diverted to non-productive uses. Here are four
things to consider before you lace up your gloves and take that first punch.
Be realistic. Do you have any support for your position? Do you have a contract or anything
else in writing? Does it address the issue? Do you have any form of leverage? Remember that
whether you attempt to resolve the issue through negotiation, mediation, or litigation, what you
are entitled to is not always the same as what you want. Pick battles that you can win.
Define your objective. What is it that you really need? What allows you to resolve the issue
and move forward? Define “winning” as getting what you need and getting back to work.
Forget about “Payback.” Often people use a dispute as a chance to exact retribution for past
wrongs. Being confrontational feels great in the moment, but that moment is short-lived. I have
seen many cases where someone decides to “get tough” because the other guy “had it coming.”
After all the confrontation and drama are over, they usually don’t feel any better and have spent
scarce resources that would have been better used for business operations.
Plan for “After.” So now that some form of settlement has been reached, what happens? Do
you still need to work with this person? Are they still a customer? In the midst of a dispute, it
feels like the most important thing in the world. But each dispute is only one chapter in a very
long book. Make sure your “victory” is one you can live with.
Nobody likes to be taken advantage of. When you combine that with the very real frustration
and anger that can arise during a dispute, it is tempting to focus on the fight, rather than the
solution. But remember what you are after.
When it comes to business disputes strength is good, but wisdom is better.
Simple is Complicated
Everybody likes things to be simple. I know I do. But I’m part of a profession that is
often accused of willfully complicating things. Sometimes that accusation has merit. But
sometimes lawyers make things complicated because they have to be . . . if they’re going to be
simple.
Let me explain.
Odds are pretty good that if you are reading this, you have operated a smartphone or
driven a car with an automatic transmission. These are both fairly simple to operate. But both
are only simple because the engineering inside is tremendously complicated.
Legal agreements work the same way. I often see people go into business with each
other who want to keep their agreements simple. “We trust each other, so let’s just keep it
simple” they say. The business prospers and with growth comes new challenges and
opportunities. The business may need to expand, bring on more owners, or raise additional
capital. How are these handled? Who has the authority to decide? I’m continually surprised at
how often companies stall just when they are getting successful because the owners can’t agree
on how to proceed. Many times they can’t move forward precisely because they did not want to
“complicate” things by thinking through the inevitable changes a growing company faces.
Other times a company struggles and fails to launch or one of the owners wants to move
on. Unfortunately, this happens more than we would like. A company that works through what
happens when the business dissolves may at least be able to get its principals out cleanly and on
speaking terms with each other. Sadly, a “simple” company may go out in a blaze of litigation
and broken relationships. Complicated isn’t always best, but leaving things “simple” can end up
being complicated.