As private equity continues to be more and more involved in accounting, Jennifer Wilson of ConvergenceCoaching looks into what it takes for firms to maintain their independence.
Transcript:
Dan Hood (00:03):
Welcome On the Air with accounting today. I'm editor-in-chief Dan Hood. With PE snapping up so many firms left and right and more and more of all sizes, there's a strong countercurrent of firms saying, "Nope, I'm going to remain independent." And they're usually described as being "fiercely" independent. And one of the things that people don't recognize when they think about that fierce independence is that independence is no longer just saying no to PE. As PE changes the landscape, it raises valuations for firm mergers, it changes expectations in hiring and from staff and from potential partners and so on. As it changes the landscape, it requires responses from firms that want to remain independent. So staying independent isn't just a question of saying no; it's got to be accompanied with a strategy for remaining independence and a clear-eyed look at what's going on. That's not to say it's not possible.
(00:51):
It certainly is, but it does require a different strategy than what you may have been pursuing. Here to talk a little bit about that, about the opportunities involved in staying independent as well as the things that go along with it to maintain independence, is Jennifer Wilson. She's the founder and partner at consultancy ConvergenceCoaching. Jen, thanks for joining us.
Jennifer Wilson (01:08):
Thank you, Dan. Glad to be here today.
Dan Hood (01:11):
A lot of firms, as we say, have just declared themselves fiercely independent. And I'm sure many of them have been making plans and strategies for it, but how do you know if independence is even possible? When you look at your firm, you say, "I see all my peer firms getting snapped up either by private equity directly or by firms that are backed by private equity." It can be a little disconcerting, I think, for firms that haven't made the commitment to be fiercely independent. How do they know if it's possible?
Jennifer Wilson (01:38):
Well, they've got to be pretty healthy, Dan. They don't have to be perfect, but they have to be healthy. And there's some sort of signals of health that include functional leadership, unified leadership. They've got a vision for the future. For the most part, their leadership is unified around that vision. They can picture this fierce independence. They can picture where we're heading together. They have a sense of what do we want to be known for out there in the future? And they have a bench, they have a succession picture. So they feel like we've done the job of investing in talent, or we believe that we have most of the talent bench and that we can fill in the rest of the pieces, especially now that talent might be more readily available to come out of some of these firms that are PE backed or engaged in sort of merger mania.
(02:30):
And so they feel like most of the talent picture is in place. Those are signals. They may not be the reasons though. Those are like, what sort of health signals do I have to have? Those are a few of them. They also, by the way, have to believe in the markets they serve, believe that their clients need them, that they have plenty of opportunity there. Those are all signals. The reasons that they would remain independent though may be different.
Dan Hood (03:03):
Well, let's dive into those. And that's a great distinction. The reasons to remain independent are different from the qualifications you need to actually successfully be independent. And I know you talked to firms that are on the independence road. What are their main reasons for doing that?
Jennifer Wilson (03:18):
Well, you and I have talked about this before in other conversations on the record and off the record. I think one of the biggest reasons is because their culture has been one of conscious capitalism, one of investment in clients, talent, one of investment in their local communities and in the accounting community and one of investment trying to make shareholders successful. And that they've been running this organization with shareholders as one quarter of the equation. They have not put selfish interests ahead of the rest of those other three pillars. They have invested in those pillars feeling like that's how they would be successful. That's how they would make money. They weren't thinking, "How can we make money and then we'll do what we have to do in these other areas to do that? " And so I think sort of the degree of generosity or selfishness has a big play in this.
(04:18):
Obviously, if you want to remain independent, you have some sort of commitment to the future for the legacy of the entity. Some people will tell me that they feel that they made partnership and that in doing that, they were made stewards of the entity. They didn't really own it. They got the stewardship key is like you would get to a lighthouse or something and you take care of it for the time that you're doing it and then you pass the keys to someone else. And they view that they're stewards and that they're not supposed to be trying to maximize this thing for themselves, but instead pass it to that next generation, pay it forward, if you will, give the next group of human beings the same opportunities or even better opportunities than they were given. And so that's another sort of motivator or driver. I think it would be nuts for me not to acknowledge that one of the big benefits of remaining independent is you maintain a control to some degree of your destiny, your decisions, the vision, who we're going to serve, what we're going to deliver, who I have to work with every day, what sort of policies we're going to implement and processes.
(05:33):
Independent firms get to maintain that say that they've had. And when you merge up or when you transact to sell equity to someone else, you lose a lot of that independence or that say. And it really doesn't matter what the entity that's buying it says. They all say, "We won't change anything and we'll let you make your own decisions." And they just do. If anything, we're just going to enhance you, they all say sort of the same thing. And some maybe are more lasi-fair, but in truth, you will comply and you will submit and you will sometimes experience court ordered change on a timeline that's faster than you would've executed it. And anyway, independence, it includes independent decision making.
Dan Hood (06:26):
Right, right. And we know at all firms, a lot of accountants are dedicated to that. Even within their firm, lots and lots of partners are dedicated to independent thinking regardless
(06:37):
Of what their partner, other partners saying. So I want to dive a little bit into take it a step further. Well, you talked about some of the qualities that a firm would need to have to be sure or more sure of its independence, right? A bunch of younger talent, probably a bunch of younger clients as well. If all your clients are retiring at the same time as your oldest partners, that's probably not a good sign. But then a clear vision, a clear agreement and alignment along that with staff. Obviously, your first step if you're determined to be independent is to look at all those and say, "Yeah, are we actually on track with all that sort of stuff?" And if not, wherever we need to tighten things up or strengthen things, we'll do that. Assuming you've done all that, you got all your ducks in a row on those sort of basic qualifications, what do you need to start doing?
(07:22):
Are there things you need to start thinking about to remain independent when you say, "All right, listen, we're looking at the universe and we're saying, we don't want to go with PE or we don't want to go, we don't want to merge up with a larger firm." What do you need to start thinking about to make sure that you can maintain that independence?
Jennifer Wilson (07:36):
Yeah. Well, it's interesting because if there's anything that maybe we could say to the positive related to the influx of PE dollars, it would be that there's more pressure to innovate and grow. But I would say that there's more pressure to innovate and grow, especially innovate because of AI. That really doesn't have anything to do with outside investment per se. It's just the reality that it's going to drive so much change to so many things that go way beyond service delivery. They go to operational process, they go to how we bill, how we price. So many things are going to be affected. And I'm excited about it, by the way. I'm in no way scared of that. I think it's amazing. So I would say that those are the two got to dos, got to haves is an innovation, commitment to innovation, but also like real innovation leadership, real innovation process, and a commitment to sort of be willing to fail forward.
(08:41):
We have to let go of some of our perfectionistic tendencies as a profession where we want to have five committees and study it and build nine grids and take lots of time to pick one tool that we're going to implement in tax this busy season or peak season. And we can't run like that. And I'm not saying we're going to be sloppy in the way we change, but we have to be willing to fail forward. We have to recognize that we're going to have to run sprints on change management and really also unify our leadership team around there can't be as much resistance to change. In the past, we've sort of accepted this resistance and we keep trying to push it along and cajole it into acceptance. We might have to change our cast of characters if we have too many change blockers. They might not be able to continue the journey with us because we have to ... There's so much potential in all the change that's coming right this minute, so many cool possible opportunities for us that we've got to take hold of that.
(09:44):
And then the growth piece, which we've always emphasized growth as one of the key cultural attributes of a healthy firm, the intention to grow and grow strategically. I think that's super critical. And I am worried about that for those firms that are kind of rolling up or taking PE backing and getting lots of pressure on percentage growth and layering dollars of growth, we start to be like, so sell anything, sell to any abandoned ideal target client, let's go to more opportunistic selling and we don't want to do that. Healthy independent firms are going to grow strategically. They're going to grow to by selling more work to ideal target clients, selling more work into specialty service areas and specialty industry areas where they can make a name for themselves, where they can become expert, they can be thought leaders, they can advise at a higher level and command max rates because they can add so much value for doing that.
Dan Hood (10:47):
It's interesting you talk about that resistance to change. And I think for a lot of accountants, it feels like professional caution, right? It feels like we're being careful with our change, we're managing it carefully. In many cases, that's just an excuse to not change, but there's also, I think, there's a certain degree to which you could at least give yourself cover by saying, "Well, we're just being careful and cautious and conservative, small Conservative to make sure that whatever we do works out the best for everybody." I won't say abandoning that caution, but tempering that caution with an understanding that speed is really of the essence these days is obviously something firms are going to need to start doing or to stop doing. They need to stop feeling comfortable with a very slow pace of change because the pace of change is no longer dictated inside the firm.
(11:30):
It's dictated by the world outside the firm. What are some other ... And I think you talked a little bit on this one way to put ... I'm going to translate something you said into the concept of firms need to stop trying to be a one-stop shop trying to serve everybody. They need to focus more on a narrower range of clients that they can serve extraordinarily well. Are there any other areas where you see firms, things the firms do now that they should stop doing that in some cases it may have been things that were positives in the past, but now that don't work in the current environment or the environment we expect to see over the next several years.
Jennifer Wilson (12:07):
Yes. Well, first I want to talk about change for a quick second.
Dan Hood (12:11):
Sure.
Jennifer Wilson (12:11):
I'm going to go to your stop there, other stops, but my head just almost like snaps when I hear somebody use the phrase change for change sake, we don't need to change for change sake, and that's the classic resistor. And that thinking, I don't think anybody's trying to change for change sake. I think everybody's trying to drive change because the market is moving at a rapid clip. And so one of the things we have to change, Dan, is we can't allow change resistors or people that are toxic or aren't successful in our organization to persist like we have in the past. We have had a lot of tolerance, Gandhi level tolerance or something for poor performers or for people who just aren't culturally aligned. And firm leaders, I wrote a blog, I don't know, 20 years ago or 15 years ago called "You're Better Off Without Them."
(13:19):
And it was all about firing a partner. And it was a story about a real live firm that needed to fire a partner so bad and they put it off so long, but when we finally got it done, man, what a difference it made for them. And so that's one thing. You got to stop that. We got to stop being so stinking nice. There's Minnesota nice. Well, there's also accounting firm nice, and we got to stop that. We have to stop that. Another thing we have to stop is we have to stop, and this is Ron Baker, this is for you, we have to stop the fixation with time. We have to stop being so time focused. AI's going to strip time from our work, folks. And when it strips time, if we're honest about our time and our time entry, it will strip our whip, our work in process will not reflect value.
(14:12):
It will reflect time and time will be reduced because of this wonderful tools that are available to us, all this automation that's possible and that is being implemented right now. And as a result of that, we can't price on time anymore and we can't bill on time anymore. If we do, we will have a leaky bucket of revenue that will break our hearts and we will also no longer capture value because we're billing based on time instead of the value of our expertise or the value of the service, the value of this deliverable in the marketplace, the difference it makes for the client. Those are things we should think about for price. It no longer will protect and recover for risk if we have reduced fees because we're billing off time incurred. And then we can't price off time for new prospects based on old jobs because the jobs are leaky.
(15:10):
They're not real reflections anymore on time. And the other thing is when we bill less because it took us less time, we don't recover the investment in the technology. And license fees are real and the training is real and the learning and frankly, the increased risk of relying on automation in the early days of automation all have to be recovered in pricing and in billing. And so that sounds like we've been talking about that for a thousand years. It's almost embarrassing for me to bring it up in this podcast because it's so talked about, but not done, but we don't have a choice. I mean, AI is taking away the choice. So if you want to remain independent as a firm, that's the first thing you should be doing in 2026 is figuring out how we're not going to have this peak busy season, this peak period this spring, be a leaky bucket of revenue because most firms have some significant automation happening on the AI side for research, for reading client documents and summarizing them for integrating apps.
(16:15):
And man, we can't afford to give that money away.
Dan Hood (16:19):
Right. Well, that's true whether you're independent or not, right? Yeah, sure. Whatever kind of firm you are, you need to do all that. So yeah, that makes a ton of sense. I want to talk a little bit more about all this, but we're going to take a quick break first.
(16:36):
All right. And we're back and we're talking with Jen Wilson of ConvergenceCoaching about what it takes to be independent, what you need to do to be an independent. Interestingly, a lot of the things the firms need to do to remain independent are the things they should be doing anyways just to be profitable and successful and better run businesses. But I don't think it's crazy to suggest the margin for error is perhaps less than it was before private equity came into the field and before AI started to come into the field and create competition/a changed landscape. So the margin for, I don't want to call it sloppiness, but for not running your firm in the most efficient manner has diminished. With all that in mind, I want to talk a little bit about the overall strategy and maybe just sum it up. I think you've talked a lot about the individual pieces that go into it in terms of picking your clients and how you manage your staff and so on.
(17:25):
But maybe a quick summary of what's a solid strategy for a firm that wants to stay independent as they look forward all in one place?
Jennifer Wilson (17:33):
There are still a number of starts, if you will, Dan, this solid strategy to remain independent. And one of them is like, I've got to figure out what will be the future of accounting's buy-sell model, if you will, or how will I receive a fair value for my contribution as an owner in the business? And as valuations have become almost irrational, in my opinion, I would never try to get my independent firms to try to get those sorts of buyouts. Those probably aren't going to be ever affordable or really tenable for the next generation. But looking at whether or not there are ways of altering the ownership structure, looking at phantom stock or looking at an ESOP, we're recommending all of our independent firms go through that process of evaluating different ownership structures to make it feel fair for those who are remaining independent and swallowing that hook, let's say right now, and make it reasonable for the next generation to take this thing forward and have the same sort of potential, entrepreneurial potential ownership and compensation potential, same or better than they would've had under the traditional model.
(18:58):
And so that's something that has to happen. Certainly, almost every firm we know has to look at governance, and that helps us, by the way, with this speed of change, moving away from sort of the flatter governance structures to a more corporate governance structure, you do that naturally with growth as you add and layer on revenue, the natural growth bubbles have caused firms to become more corporate as they get bigger. You are not making decisions the way you used to when you're a thousand people the way you did when you were a hundred. It just doesn't happen that way, right? But really evaluating governance and making sure that we don't have too much drag on the system, that we have the right people making the right decisions and enough forward movement fast enough. Those are some things that I would just add that I wanted to make sure that we put on the start list.
(19:51):
And they're natural hygiene things in ownership of a business that you've always got to be thinking about, but we think those are super important too.
Dan Hood (20:01):
Right. I want to take a second to talk. You talked about the money that's being available to partners, potentially retiring partners to this moment, big, big, big buckets of money and valuations, as you said, may well be a little crazy or depending on your perspective. It's going to be a tough sell to go to a group of people and say, "I know you all want to be independent and all, but there's all this money over here. This huge mountain of money over here." Why give up all that money? Do people want to be that fiercely independent, that they're willing to give up that huge amount of money? And how do you sell that to a group of people?
Jennifer Wilson (20:40):
I think it's a challenge. It's sort of a moral and ethical dilemma, I think, for a lot of people. And the ones that remain independent feel like, again, I'm a steward of this thing, I'm supposed to pay it forward to the next generation. I promise these people that someday they would own this firm. I have developed them under that promise. I have made a great living. That's the thing that I don't think we're really talking about is that a lot of the firms that have transacted and taken these truckloads of money or whatever you want to call it, they were already taking pretty good truckloads of money in partner comp. And if they had been saving that and putting it away, how much money do you need? At some point, you start to ask yourself that question like, "What is it that you're storing up?" And it is a philosophical thing, Dan, or I don't know how exactly to say it.
(21:39):
I guess I have to call it values-based. I think that's where I'll go with it is that the firms that are remaining independent, it doesn't feel like the right thing to stick to their values for them to take that money. There are too many trade-offs and the trades aren't worth it and they aren't poor now. And if they were poor, PE doesn't want to buy them. So they're already, they figured out how to turn this thing into a pretty good cash producer. And most partners and CPA firms around this country have been making more money than they ever thought was possible every year in their career for many years now. So for me, I think that they know that and they feel that and they feel like they want to pass that to the next generation. Now, they're not trying to say, "How can I take the least amount of money for my contributions?" They want to figure out how to make it fair.
(22:42):
And I think that's admirable. And I believe that there are many, many firm leaders who feel this way. Now, they could have contention in their ranks on that. Not all the partners in a CPA firm think exactly alike. I don't know if you knew that, Dan.
Dan Hood (23:01):
This is a surprise to me. I'm shocked and stunned by
Jennifer Wilson (23:04):
This- I know, we do.
Dan Hood (23:04):
... this revelation.
Jennifer Wilson (23:06):
I know. I just found out myself. And anyway, and as a result of that, sure, there's a little bit of push and pull. And I have spent the last 18 months visiting with partner groups. They invite me in to come and talk about my perspective of this, which has been developing as I go because I meet more people that are being affected in different ways. And I can share more of that perspective, but also just the study I've done so far on different industries and the options. And all the cool firms that are remaining independent, fiercely, as you said earlier, I can bring that forward to reflect for these firms that are sort of split or divisive about this issue. And it's usually a couple of people who are like, "Hey, man, I want that money." And the rest who are like, "Hey, we've been making a great living and we don't want to sell." And so sometimes there has to be a split.
(24:03):
And again, the sad news for the minority, if you will, of the partners that want to leave or that want to sell, if that's what it is, they're probably going to be able to sell their thing to a PE firm directly, but they may be able to roll it up into one if they wanted to leave. And that's the risk to those who are fiercely independent with that kind of divisiveness, they're going to face a reckoning, if you will, that could include a split.
Dan Hood (24:32):
Yeah. Yeah. Well, two things. One, it is always worth reinforcing that point that this is not a choice between buckets of money and poverty. This is a choice between a really spectacular living,
(24:44):
And insanely spectacular living. No one's wandering around with a barrel and straps over their shoulders. So that's always worth pointing out, but it's also worth pointing that this is, in some cases, can be a test case of a firm's culture and particularly of its values, right? If all the sort of things you were talking about in terms of control and independence and conscious capitalism, trying to make a four-way win, win, win, win, win for stakeholders and clients and community and staff, if those were all values, this is the thing that really tests them in a way that I don't think much else ever would have really makes you think about, "Hey, are we willing to literally push away this amount of money to help reinforce those values and keep those values going? " And again, as you said, to have a great living, really spectacular living, but pushing away this extra bundle of cash.
(25:38):
So I wonder how many firms are discovering, "Yeah, actually, you know what our values were not necessarily all we thought they were. I wouldn't have thought we would sell off for that, but here we are with our bundles of cash."
Jennifer Wilson (25:49):
Yeah. Well, I think it is a values-based decision at the end of the day. And it also is a little bit sort of like, am I a long-range person or am I a short-range person? Am I in this for the short run? And I think for those partners that feel like the door is closer and they may not have shared the values of the firm and not buy into conscious capitalism and all of that, they may think, "Hey, man, I'm out of here in three years or four years, and this sounds like a good idea to me. " So I think some of its values, some of it's how close I am to the door. And yet, we had this wonderful summit of independent firms the end of September. We had 19 firms come together and we handpicked or invited them special because we know these people and we know them well.
(26:41):
They're longtime friends and clients and they're really wonderful quality firms, values-based, conscious capitalism, more generous than selfish, investing in talent all the way along. And we got them all together and talked about these very things that we're talking about today on this podcast. And it was so encouraging to hear first how sort of certain they were. And then second, how committed they were to drive the change necessary and how excited they were about the change. And they weren't pretending they don't have issues or problems and they weren't pretending that their partnerships were perfect or any of that. They were super transparent and vulnerable and they shared openly and compared notes with each other, but it was encouraging to know that really great firms in this country are going to remain independent and they're going to make hay with it, man. They can recruit talent that is not happy with the transactions that have been happening in their organization.
(27:49):
That talent is sitting quiet but willing to leave. So it's a great time to trade up your bench. It's a super time to do that, to make important trades or also place people like I always tell ... I use the example of a real estate tax manager. Experienced quality real estate tax manager often talked about never seen. Well, there are some to go get potentially, and I just use that as an example. But if I needed somebody in transfer pricing or somebody in international tax with a specialty in a certain country, I promise they're probably teetering if they were a director, a senior manager or a partner, a non-equity partner in one of these firms that transacted and they didn't vote for it, and now they don't feel like they're going to be an owner. So there's all this opportunity, clients who don't want to be served by the behemoth or by a bank owned firm that are willing to move.
(28:48):
So it was exciting to talk about all that opportunity with these independent firms and we're continuing that conversation and more joining that Conga line. And when people say, "Can you remain independent?" I'm like, "I think so because convergence coaching and other firms like mine have been helping firms remain independent. We just celebrated 25 years of that. " You know what I mean? Remaining independent isn't like a new idea. You can do it. It's called being entrepreneurial and maximizing with the market.
Dan Hood (29:20):
Well, I love those opportunities in terms of staffing, disaffected staff from PE-owned or other owned firms, and also in terms of clients who maybe want to move. I think that's a great point to end on. A little positive note, there's genuine reward. It's not all just hard work and giving up money. There's lots and lots of upside and new opportunities that came along. As you said, people remained independent forever since the dawn of the original profession, but rarely has there been these opportunities to go along with being a firm that can hold itself out as being independent. You can say, "Hey, we're not that. " So it's a good positive note to end on. Jen Wilson of ConvergenceCoaching, thank you. Thank you so much for walking us through all this.
Jennifer Wilson (30:02):
Thanks, Dan, for giving us the time.
Dan Hood (30:05):
And thank you all for listening. This episode of On the Air was produced by Accounting Today with audio production by Adnan Khan. Rate to review us on your favorite podcast platform and see the rest of our content on