What you'll learn:
- Building a business plan for IT Advisory
- Running this part of the business "Not like a CPA firm"
- Finding and recruiting the right talent for leadership, technical ability, and business development
Tom Angelo (00:11):
We'll get started. It's a little intimate gathering so feel free not to wait till the end to just blurt out and ask questions. I want this to be as interactive as possible. I hate just professing, so feel free to interact, dialogue, ask me silly questions or if I miss something. My name's Tom Angelo. I'm a partner at HBK. We are a top 50 accounting firm. We have several offices in Pennsylvania, New Jersey, Ohio, Florida, Colorado. I have been a CPA for 27 years in the business. I basically have one of those kind of stories where how many people work for or are part of a really small firm. So I started my career at a firm that had three partners and a secretary and they were trying to hire their first accountant and then I never left, so I haven't really been on any job interviews in quite a long time. So part of my opportunity was one of the partners left to go become the CFO of one of our largest clients. The other partners had told me he is like, go pass your c p a exam and you know, could become a partner. So I was like, oh, okay. So I got to be a partner at a pretty young age 28 and we then grew that firm over several years to about 40 people. We had two offices in New Jersey and it was about the end of 2018. We merged our firm into HBK. It's been a good ride for sure. My current role at HBK is I'm the regional managing partner for the Mid-Atlantic. So I cover Philadelphia and the New Jersey and the New York markets. I'm also going to be the CEO of HBK starting next year. So when I say that I've had an awesome, incredible career ride I have and I'm very grateful for that. So I currently sit on the executive committee of the firm as well. I've always been a student of the industry. I've always been very curious about how to do things better, how to make our firms better. I'm also a big guy on culture and how to keep teams engaged and how we continue to just keep growing and changing and evolving.
(02:57)
And again, about HBK, we got about 650 team members across Ohio, Pennsylvania, Florida, New Jersey. We actually operate several different brands. So we've got our CPA firm, which is HBK We're probably one of the distinguishing factors about our firm is our wealth advisory practice. So I know a lot of you might have been sitting in sessions about how to do that. Chris, our current managing partner started the wealth advisory business back in 2002 and that has now grown to be, we have 6 billion under management and we probably have more than a hundred of those 650 people are dedicated in our wealth management practice. And it's been an incredible complimentary business to our CPA firm and we all work together collectively for the good of our clients. We also have HBK valuation, litigation and forensics, which is our dedicated group that does business valuations and litigation support work. And we have about 20 people there in velocity, which is really what I'm here to talk to you guys about today is our IT advisory practice. And we'll get more into that. High performance is we have a group that does leadership and culture development. So we not only do we whoever watched billions, so we have our own Wendy, kind of like a in-house leadership culture psychologists, but also we provide culture development to our clients leadership, executive coaching. And then level three, which is basically we have, it's a family office light. So we have our high net, we're able to package together our CAS practice, our wealth management and our CPA firm and our IT to serve family high net worth individuals. So we're not doing the super high family office stuff, but we call it family office light.
(05:03)
So today we're just going to talk what is exactly an IT advisory practice, what does that entail, what incorporates under that? And there's a lot to it and it continues to evolve. We'll talk a little bit about building buying or renting and we'll get into that as well as just different ways that you can get into this business. And I'll talk about the way we got into it. We'll go through some business planning tips. It is a different business in the CPA firm. Those of you who are doing CAS work, you're going to see how some of this mirrors CAS work in a lot of ways, different technical skills but somewhat similar business models, some issues around talent and recruiting and then of course managing KPIs. And I'm going to stress in a lot that don't try to run your IT business like a CPA firm different.
(06:03)
So the things we've, the historical things we've talked about in CPA world billable hours and things like that, you know, got to put that aside when we're talking about the KPIs for IT advisory. We're also going to get into building for enterprise value. Meaning my philosophy about any type of, I'm a pretty entrepreneurial guy and I'm sure a lot of you are, if you're in your own firms and doing your own thing, everything that we want to do, every business line that we start, everything you should be building it as if you're going to sell it even though you're not. So you always want to be increasing whether you have partners, I view it as we're always trying to build the balance sheet for our partners. You should be looking at it as building the balance sheet for yourselves and then some Q and A.
(06:54)
And obviously I want you to just interact. So what is an IT advisory practice? Is anybody doing any IT services at all? Okay, so we'll kind of talk about it. A big one you hear about now is cybersecurity. And this can extend a lot of different areas. So you've got companies now that, or clients that are now doing business with larger companies and those larger companies have come to them and said, well we need your cybersecurity response plan. And they're like, oh, okay, what's that? And then they need an actual policy on how they're going to respond to breaches. What is their protocols? Part of what we do is we actually develop those procedures and processes. So we have a dedicated person in our group that will draft these kinds of policies. He's familiar with the NIST framework and all of the up-to-date standards. So we're able to do that and that's sort of the theoretical cybersecurity. Let's make the policies, let's do the planning around what would happen if a disaster would happen or a cyber event. But then there's the actual breach response. Does anybody have any clients that have actually been breached or issues? Yeah, it happens. And this could be anything from a full ransomware issue all the way down to email spoofing and people sending emails to get wire transfers. It happens.
(08:35)
So we actually have a managed service around protecting clients for this, whether it be their email protection, their network, their cloud infrastructure. Actually we actually have monitoring systems that are protecting those clients. So we kind of hit cyber on two sides, both the upfront and the response, I call it congress setting the laws around the cybersecurity policies, but we also have the police and the fire departments that will roll out when something actually happens for a client. And it's never doing this side of if you were to go into this side of the business, it's not always fun because if you're charging a client to protect them and it still happens, you now have to explain, well why did it still happen? So we always tell people like there's never a hundred percent guarantees. So a lot of these services as you couple them together with longtime clients, so we will get into a whole cross referrals. And I know it's always scary when you say, I do this really well and now I'm about to do this and if I screw this up I'm going to lose the accounting client.
Audience Member 1 (09:53):
Question, let's say for example that you recommend a client now terms insurance require such necessarily. (Inaudible)
Tom Angelo (10:22):
Audience Good question. And so we obviously being of the enterprise size, we are right, we're a large C firm, we're doing a lot of different activities. So we actually have malpractice insurance for our IT group in the event that we just didn't do what we were supposed to do. So we know anything else. If you were an audit firm and we issued an audit and we screwed up, somebody could sue. So while we can put caveats in our engagement letters and our contracts, I mean people will just sue you anyway, but we try not to let it get that far. And we always tell people, for example, in a cyber security instance you described like, oh you know, implemented this and it still happened. Well, but I can't take responsibility for your administrative receptionist that clicked open an email that she shouldn't have. There's certain human factors that still go into it, but anything else just you have to couple good people, good policies and always back it up with insurance for sure.
Audience Member 2 (11:30):
Just trying to understand the business case for building an IT practice for buying one, especially as a CPA firm. Why would you want to do it that we're going?
Tom Angelo (11:50):
Sure. Well, I mean think it all goes back to this historical, we still think of ourselves as the trusted advisor. And I'll get a little bit into why we did it, how we did it, but I think that the compliance side of the CPA a firm is everybody keeps talking about we need to move more to advisory, more to advisory. What technology is probably one of the biggest challenges. If you have, listen, I mean we're a bigger firm but we still have, I mean we're in the smaller to mid-size market. If you guys are in smaller firms, I mean technology's still a challenge for the clients. So they're going to seek this from someone and what better not, why not capitalize on another service that we can provide with recurring revenue and couple it into like, hey, we're going to help you grow your business using technology.
(12:46)
We're going to give you the best recommendations for the applications you should be on, but we also want to be there. So it's another sticky service like CAS wealth management. And I always feel the more that the client buys from you, the better. Now I'm not saying I'm not advocating, we should also offer janitorial services with CAS, but I do feel that technology is closely aligned with other services around their finance. Yeah, and again, I'm trying to point out different services everyone has to assess what I would call the operational maturity of your practice. I would not, and I'll get into when we started ours, it was before I merged into HBK, but you can't just take one of the people that say you have a four person firm, you probably can't take the one person who does 10 forties and say you're now the IT guy. You got to go into this creating another business and creating another service line and really staffing it appropriately.
(13:56)
But again, you have to also pick what you might be good at. Get into, maybe I should just be an ERP, maybe I should just be doing QuickBooks consulting. Like QuickBooks Consulting falls in there, just you guys are probably, most accountants are doing it as part of their practice and not even realizing that they're actually implementing a small ERP, right? Another area is this buzzword digital transformation. We keep talking about it, we keep talking about our clients wanting to become more paperless, more electronic, more in the cloud. So we will do actual strategy with them. So we have some folks that will actually help let go in and assess what systems they're using, what are our recommendations around streamlining that, integrating that, whether they be manufacturers in construction, we do a lot of healthcare, so we do a lot of the strategy conversations.
(14:56)
So we try to package that into a virtual, we talk about CAS that we have this virtual CFO, we call it the virtual CIO. So we're getting your own little CIO service as a service managed it. This happens to be a bigger one for us. This is probably our largest component of the business. So just like in CAS, a client might be paying you a couple thousand dollars a month to do their back office, their virtual CFO, they don't have anybody in house doing that. So they've packaged it and you've sold it. We are doing the exact same thing their. So we are going into certain size companies and we're saying you don't need anybody internally to do your it. We're going to charge you this subscription amount every month and we are your help desk. We are the guys that come out on site if necessary. We're doing your protection, your security, all of your upgrades and we're selling you your hardware. We do it all right? And we do that on a monthly subscription and that's actually the larger component of what we're doing. Our second really biggest area that we're in right now is ERP applications. So who does QuickBooks or Zero or one of those kinds? So we focus, our model is we focus on what happens after the client grows out of QuickBooks and Zero. So we are playing in Sage, Intacct, Acumatica and the Microsoft business central applications. So these are lower middle market cloud first applications. We do a lot of work around clients that have grown and we'll get them and they're 25, 30, $50 million and they're still on QuickBooks and it's just not working. So we will actually, so we resell those applications. We are value added resellers for those three companies. We're about to add the CRM component because we're doing an acquisition in the Microsoft CRM space where we're going to be able to offer CRM as well.
(17:18)
But there's a lot of different products out there that you could can offer and we'll get into the revenue model there because once you sell cloud software to a client, you get that commission for as long as that client continues to pay the software company and you're not necessarily doing any more work to get that commission. So you're building up this recurring revenue cycle, which as you know, if you're in a practice that you know have to make revenue for the work you do, it's awfully nice to make some revenue for work that you're not necessarily doing. Which is why a lot of people like wealth management, those fees continue to come just while the assets sit out there. Does anybody know what fp and a solutions are? Again, these are bigger for a little bit bigger companies, but as companies are starting to really want to do their own projections and their own budgeting and their own cash flow modeling, these applications kind of sit over the ERP and allow the CFO to do their projections, their forecasting, their MDNAs and there's a lot of software around that.
(18:29)
Anybody have any experience with Power BI? So you've seen, if anybody doesn't know what Power BI is, think about a dashboard that you can custom create for anything and you can have data sources coming into this dashboard from a whole bunch of different applications. So internally in our firm we're able to, we pull practice management data into Power BI and that's how we manipulate where we're profitable, where we're not, things like that. But we do a lot of work for clients who want to feed in different pieces of information. You could have for example, a nursing home and they want to feed in both financial data and they want to feed in their census information and the number of patients and things like that. And they want to see what their revenue per patient is, they want to see what their availability of their beds are and they want to be able to refresh that every couple seconds.
(19:28)
So those are the kind of things you can do with Power BI and again that's another service that you can offer that on a lighter scale. It's really not that hard to get into because if you know can use Excel, you can learn Power BI is pretty simple that way. I mean I'm not a super, I'm tech, I understand it. I'm not saying I can do the programming but I could build a basic Power BI. So you guys could do that too and you'd be shocked at what your smaller clients could do with that information because they're probably pulling things from three different places right now to come up with, am I making money, am I not making money? It's not always in the p and l, the modern office around Microsoft. So anybody have Microsoft 365 for your email? So part of the whole package around that is this modern office and they're giving you not all, there's Power BI in there, there's Microsoft Flow where you can create these workflows. So there's SharePoint, there's all of this, these cloud products that you can potentially offer for your clients and these are things we're doing now for clients as they're saying we have legacy clients that might have still had servers in their building and they're like just want to go everything in the cloud. So we're able to offer these kinds of things.
(20:53)
Automation with robotics, process automation, we're not really there yet. I mean this is on our radar. Our client base is just not thinking about it and not funding it. So my guess is the smaller clients are probably not either. We're just keeping our eye on what we can do with this for our clients and create what are the repetitive tasks that they're doing that we can use some level of automation to do. I look at it in our firms and we're a bigger firm so it actually takes us longer than a smaller firm to implement and get these kind of stuff done. But if you think process of doing tax extensions and how manual that could be and doing them and getting them in where they're supposed to be. Like this could all be done with robotics process automation but think about what your clients would pay for somebody to help them with that.
(21:47)
And then of course custom applications. This is not for everybody, we just happen to have developers on our team. What we really do mostly is we integrate their applications. So we often find a client is in a legacy business, let's say they're manufacturing, they're using this specific system that's got to be used for their manufacturing and then we layer in a new ERP system but we don't want them to have to manually put the information in the ERP system. We want all the data to feed over from the other system. So we build integrations between all of their applications so that there's one master record for everything and it kind of feeds in and do that. So those are some of the services, but these are some of the services that you could offer And obviously when we first started we didn't offer all of them. We kind of had to ease into it because you can only go with what the skill sets you have and we'll get into how does a smaller firm do this and get into it. But I think this list is continually changing so new things are coming out and you'll find areas where clients just need help. And even if you wanted to get into it on a very, very light scale, you could just charge for the advisory and bring in experts but you're quarterbacking that the relationship client comes to you. It could be a veterinary practice and they're like hey, we just know we need to automate more and what do we need to do? And you know, could quarterback that charge them to be the advisor and project manage the whole thing and you just bring in experts where you need to. So that's part of it.
Audience Member 3 (23:31):
Tom, I'm sorry I missed the introduction so I'm not sure, you may have already HBK in this business has a separate silo that you guys, so how does a small, like you mentioned in your example or person firm get into this business and you don't take the 10, 99 guy and say you're not going to be the expert cyber, I know firms that are setting up a separate organization within their county firm or technology offering that out to other accounting firms. Do you guys provide that and are you seeing that as a way that larger companies like yourself, larger firms can offer that kind of service to other accounts knowing the sensitivity of clients, understanding the protection that these firms want?
Tom Angelo (24:19):
Yeah, So good question. When I was showing the slide earlier about the different divisions our firm has, so we have this in a separate arm, it's called Velocity it, it's got a somewhat different logo, it says Velocity and HBK company. We branded it a little bit differently because we do believe that the brand needs to reflect that we are a tech company but we absolutely don't hide that we're part of a C firm. As a matter of fact, we provide IT services for about 15 CPA firms as well that are smaller that don't have their own IT practice. And believe me, in my early years when I started I would be sitting there trying to sell this service to a partner in a small firm and they're like, well how are you not going to steal my clients? And I'm like, yeah, look it guys aren't give a crap about your 10, 40 client. This is an ethical thing so we're just not going to do that. And they realized that we actually had more functional knowledge of the CPA business than other IT firms. So that's kept it in there, but yeah.
Audience Member 4 (25:28):
More do it more from across efficiency internally employee type labor cost as a service.
Tom Angelo (25:55):
Okay, so when you say you're using it, using it to help your company or you're doing it for the client client?
Audience Member 4 (26:04):
So solutions financial, the right and implementing it for the client. So sometimes we even absorb subscription costs and we assume that it's part of our monthly reclaim client.
Tom Angelo (26:26):
Well I mean one of my suggestions there, it is probably more of a question for one of the folks that does CAS, but I like if you are providing that service to the client, I wouldn't be charging them separately and showing them like that you're charging. Maybe that's a different package price, giving them the FP and A services, but you've bundled that in. But maybe at some point you have a higher level service for a client that is sophisticated but you're like look, you're big enough that we can implement this FP and A for you and we don't have to do your analysis but we're going to be the folks that help you and you could then say, you know, can have an implementation fee and then say a monthly consulting fee that gives them unlimited that you know now have you on a subscription to provide those kinds of consulting services. Yeah, well that's why, I mean even in our business on the IT side, we'll take on an IT client, but we charge them a pretty decent sized upfront onboarding fee to do all of that and absorb some of that cost because it's a subscription. So we do want to get some professional service time to get in there.
Audience Member 1 (27:43):
All the tasks engage operational activities, opportunities to automate.
Tom Angelo (28:03):
Yeah, I mean especially if you have some of those skill sets by going to do some sort of client debriefings and understand where they have some pain points. What if your team can then say, yeah, we could create this and then you could either sell it to them as a project or create a subscription around maintaining it for them. But I mean if you have the in-house ability, that's a good way to start it. And then if it builds up then you can hire somebody just to do that, to build it.
(28:39)
So basically our story, and I'll kind of run through it kind of quick, but it was before we started an HBK, our CPA firm was probably only about, I don't know, 20 people at in 2010. The reason we started it, I had a lot of clients coming to me really struggling with I can't came to find good IT help in my business and they keep running through different IT guys and then I said, you know what, we should be able to offer this service. So I actually hired the 21 year old kid that was working for the IT company that was serving me is probably not a cool move to steal him, but he wasn't happy where he was. I will, I'm very proud to say that that 21 year old kid is now a married father of one and he's still with our company, he's in our leadership position. But he was doing everything when we started this. But I didn't try to start the business with me just running around trying to do figure out how to do it work. Actually we had to make a commitment. We hired one person, we also made him be the IT guy for the firm. So he was doing the IT in our internal practice, but he was also, which got real messy. So those first couple years were a little dicey for sure. We were able to grow to 10 employees in that company before we merged into HBK and then once we came to HBK, they were not offering this service even though they were a top 100 firm at the time, they were not offering this. When I told them, I said, Hey do we want to keep going? And they did. And so I said well we need to get a little bit bigger.
(30:15)
So we completed three acquisitions in 2019, 2021 and again in 22 have since I merged in, we've actually had seven figures of organic growth on top of the acquisitions, which I will tell you COVID was a big accelerator of our growth. I can't tell you that March of 2020 the phones were ringing off the hook. We had small and mid-sized clients that never had people working at home and they're like what do we do? And we couldn't get IT equipment fast enough, we couldn't get their remote access mean it was like the cash register was open and they just were buy it, just buy it. Just get us this stuff we need to work. And I was like, okay, no problem. So covid was a big accelerator, but now that line of business for HBK is a $17 million in revenue, we got 70 employees dedicated in there. And this is a key thing. So you guys are CPAs, so you know that if you bring in a tax client pretty much unless you're doing special projects, okay, my annuity business for next year is I have that tax client and that's how you build it. So we're looking at it the same way more than 75% of our revenue is recurring and that's what we want. We want to maintain that we're charging people monthly and then basically for every dollar of monthly recurring revenue we're making about a dollar 25 because we know every year we can sell them. Let's say we had a hundred thousand dollars client, a $10,000 client, we're going to sell them at least another 25% of projects or add-ons during the year. So that's how we get to that 75% and we keep investing in growth, hiring different people and now we've got this nice platform group of ERP managed IT, we're kind of building out our cyber.
(32:17)
So we we've got to a nice organization and we're starting to elevate the types of clients. I still am very proud that we have a lot of these little clients still hanging around that I started my first couple sales because the first seven years of business, every client that came on I personally sold. So it was kind of a fun ride. But this whole concept of build by rent, people have heard that before. So the build by rent is if you were to start service in your business, now it doesn't have to be it, but we're talking about it, you could build it from the ground up, you could do what I just described. I hired a guy, told him, okay it we're going to do this service, you're dedicated to this. But I had to go to my partners at the time, we still had to commit to the investment ourselves. We had zero revenue and we basically didn't, we had zero clients, zero revenue, one employee or you know have to fund. The firm has to fund that. So building from the ground up and then you have to have a methodology of getting the sales, the customers getting to profitability isn't like tomorrow. So you have to be willing to do the scrappy startup kind of feel to get this business going. So that's one way of doing it. And being in a bigger firm, we actually have, I mean obviously the ability to do more acquisitions. However, if I was in a smaller firm and obviously I was a little bit younger then too, but you could to put that kind of time in, it takes some time. But I'll be honest with you, it was the most enjoyable part of it was building it from the ground up just culturally and adding new employees every year. We actually have the first three employees that I hired are all still with us. So they've made nice homes in HBK, they all have leadership positions and they're just a wonderful group and it building it from the ground up was a lot of fun. It was just hard and you have to be willing to commit to that, obviously buying an existing business.
Audience Member 5 (34:30):
(Inaudible)
Tom Angelo (34:30):
I knew enough to be dangerous. So I was good at selling it. I understood every technology we had. I couldn't go fix it and I probably wasn't, I could not quality control it. So sometimes we joke around when we were only three, four people, I'm like we're running this business, we're Somali pirates but it's working. Let's just keep it. It's got a little chaotic. But now we have a structure where there's people doing quality control and making sure, but early on I had to depend on, Dave was the first employee. I had to depend on his knowledge and thankfully he was one of those dedicated individuals who ended up just spending whatever amount of time regardless of whether we could charge for it to get to the right answer. And I mean I was lucky to have somebody that was willing to do that who wasn't an owner, but I knew enough to know what were we selling, should we be doing this? But I also learned a lot of hard mistakes about saying yes to too many things. We would be like, we'd look at a project and we'd be like, well we could could make this kind of money and then we didn't really never did it before and that was the dangerous part, doing something that you've never done before and then it not always turning out. And we had a fair amount of those occasions that we took some spills because of it.
(36:24)
Buying an existing business, this obviously is a little easier. It requires the capital, but it allows you to go to an existing IT business and purchase it. And maybe this is a one, two person, three person business and they see the value in aligning with a CPA firm because they feel like they're now feeding into an existing client base. So for them, every time they want to sell a new client, they need an opportunity. You plug into a CPA firm and now they have this open client book. So that requires some capital, but it is a much easier way to get started. And then of course what I call rent, and that's your strategic partnership. This is where you're, hey, I don't have the capacity, the knowledge, like you said, I'm worried about the quality control, I need to have this done, but I want to be able to monetize the opportunity for me or my firm. This is where you can create a partnership with an IT company in your market and say, look, I'm going to refer you this business, I want some type of referral fee every single month for all the subscriptions. And all you are is feeding them, you're feeding them the relationships, you're building a relationship with them obviously on trust, but you're annuitizing those referrals for yourselves and then you're not hiring your own people, you're not getting involved in the necessary risks and this is a good way to get started in that on a very, very lighter scale.
(38:14)
So again, building your own, not a very quick return on investment. You got to be patient, you have to have talent on day one. Now 2010 was a different time. I probably wasn't afraid of Dave quitting and going somewhere else as much as I'd be afraid right now if my entire business was relied on one guy with what just happened with the great resignation and all that. So there's risk. You have one employee and he leaves, what am I supposed to do? Go out and try to fix things. I mean that's where we're at. So it's not easy. You do need a strong cross selling culture. So if you're going to build this, you have to feed the top line. So if you have a small firm and let's just say there was a 10 person firm of two partners, three partners are your partners. If you had the idea to do this, are your partners going to feed you the referrals and be comfortable enough to say, I'm going to talk to my client about selling these IT services. Because if not, then you're going to the outside. So we had built up that about 60% of the clients inside the IT firm were also CPA clients. The other 40% were we sold them on our own, weren't using us for accounting. They could have been the local municipality, the library, they just weren't accounting clients or they were using somebody else. We had certain instances where we sold them IT services, we weren't their CPA firm. They liked us for it. And then they said, can you be our CPA firm? And it got a little DIC because depending on the size of the clients, and we'll talk about the independence issues, but you got to be careful if you're doing any kind of test work, you know need your own buy-in internally.
(40:02)
So if it's just you got to be willing to suck up some of your profits to fund this service as you're starting. But if you have partners, they got to be willing to absorb that as well. You have to not only have the talent, but you need the tool sets, the software you have to be able to continually provide education. So there's an investment buying, obviously it's the quickest way to get started. However, buying an IT firm is not buying a CPA firm and you can't go into IT thinking that way. So you need a fairly strong leadership team and ability to do the deal making process. You got to remember some of the, if you're thinking about buying an IT firm, their market is being bought by other IT firms and IT firms are not buying you them with a typical CPA deal. So a typical CPA deal, small firm could be percentage of collections paid over a number of years on retention, all of that, throw that out the window, it's not going to work. They don't even know what you're talking about.
(41:08)
These are valued differently because if you think about it, an IT service firm has different components of revenue. So how much of it is monthly recurring revenue that is services? How much of it is, for example, we sell how many thousands of email addresses through Microsoft's 365, I mean thousands we have that we get paid every single month from Microsoft. Well you're only getting a percentage of that revenue. So it's a very really charge, have a multiple of revenue in this kind of business. So the deal structure works more around EBITDA and that number is adjusted depending on the level of the company and it's usually with some level of cash and no seller note equity, especially if you buy a firm and you've got a young enough person in there who can run it. Obviously you're going to buy it, but you're going to give some equity back to them because you want them to have a stake in it and then some type of earn out.
(42:13)
You want them to have some upside as well as protect you guys on the downside, certainly you could do it yourself, but there's a couple of buy-side folks out there that specialize in this. So you don't have to try to navigate this yourself. It obviously gives you the new client base for cross-selling and vice versa. You have to be careful of independence. If you're a taxon firm, that's the best. You don't even have to deal with this. But if you are doing A and A work, I mean we navigate this all the time. Our IT sales people will say that, oh, we we're going to sell this, we got this new account and they go to do a conflict check and it turns out we're doing a reviewed financial statement for them and now we have to make a decision. So sometimes we actually put the reviewed financial statement at another firm because the IT work is actually more valuable. So we make those choices all the time.
(43:07)
Rent, obviously you can align with the existing IT firm, you can get a strategic revenue share, it's a slow play, two or three accounts and you're getting a few, you can end up with a few hundred dollars a month thousand, whatever. But if you do this long term sustainably, you could actually generate some real income for it. It keeps it simple, minimizes your risk. The problem with that is how do you transition out to builder or buy, right? You've spent five years referring your clients into this relationship, but now you're like, hey, I could do this on my own. Well you may not be able to take those clients, you referred into that other IT firm. So depending on how the deal you structure, you got to be careful when we talk about business planning just in other, a lot of what you've heard over the course of this conference, it's better to stick in niches, don't try to be the IT company for everybody. We obviously made that mistake. We would do anything. We didn't really care. YMCAs, police departments, libraries, I mean we just did it all. I will say right now we are much more focused on, although we still have some generalist kind of clients, we are much more focused. We are 100, we are very high in healthcare. We are doing a lot of private equity roll-ups for surgical centers and physician practices because it's every time they just do another acquisition, we get another practice somewhere and it's forced us to have to put remote employees in other states like Texas and things like that. But we understand the healthcare business, we understand the HIPAA, we understand the rules. So that's been a big niche for us. Distribution, trucking and logistics also one. So we have a couple that we kind of really know in our wheelhouse, but we'll always look at an opportunity.
(45:07)
This is a sales organization, so you really got to treat it that way. So I know most of us that are CPAs, we've always just looked at this as, hey, we're a CPA, we do the work, we get some new clients. The mindset needs to change that. This is a sales organization. So we're always trying to, we focus a lot on sales, we focus a lot on what is our pipeline, what's our opportunities? Because we know that recurring revenue is the biggest driver of our growth. So we always want to have a number of deals in our pipeline to know that we're going to close X percentage. We're lucky with 70 people on that team. We have a sales team that's not selling CPA services. So we have a chief revenue officer, there's two or three salespeople and they're separate from the account managers.
(45:59)
So they're focused on finding new clients and new opportunities. And then we have an account manager who, when a new client comes on, we actually assign them an account manager and that person's job is to just keep digging and making sure that that client is getting serviced properly and on sales. I mean there's just so many things we can keep doing for that client. So we actually have two people dedicated to just managing those relationships. You can't run the IT firm on the same software platform as your CPA firm, so you can't use a time and billing practice manager, it just doesn't work. So you really got to go out and get the right kind of software that has all of the right features, including ticketing, the kind of password protections, the connecting when you're our help desk guys are actually logging into people's systems. There's security issues. So we use a comprehensive professional services automation tool that's designed for this business. It's all integrated. So when we merged into HBK and we told them that we had this tool, they were like, well just get rid of it and just come into our practice management system. It doesn't work. We have to keep it separate. So realistically, because this is a separate business line, we use a different software for it and we treat it differently.
Audience Member 6 (47:26):
Question Inaudible.
Tom Angelo (47:26):
So we use a company called ConnectWise. ConnectWise, yeah. And they're probably, So early on I met somebody who was in this business and he was kind enough to help me. He was in a non-competing market. He was actually doing some work for our CPA firm on our network security. But he was far enough away and we got friendly and I said, Hey, I'm going to start this business, tell me everything. And he's like, you got to get this software ConnectWise. I mean otherwise I don't think I would've known, I probably would've done it on QuickBooks. And again, the independence rules, I think that they're annoying, but I understand why we have them.
(48:19)
Again, our target initiatives were in healthcare, logistics, manufacturing, which actually very much aligns with our CPA firm. We're trying to really integrate our go-to-market strategy amongst all of our business lines in our firm. This hasn't been easy. So I'm just admitting it's been a, it's, it's not always as easy as it looks. It everybody's out doing their own thing. But we're really trying to go deep where if we're going to go target the healthcare industry, we want to understand that we do their tax, we do their audit, we can understand Medicaid cost reporting, we understand their HIPAA compliance, we can do their security, all of it. So that's how we're our go go-to-market strategy. You really need a sales engine at some point. And I understand I was doing it scrappy, so I understood that I didn't get a new client unless I went out and sold it. And that was just hard. We now have a dedicated sales team. Obviously that's the benefit of growth. You get to continue to get bigger and hire people to do other things for you who are just spending every single day on business development.
(49:32)
And we're obviously in HBK, we have a marketing team, so we're able to plug all that in. You really want to do, and I'm sure this is preached in all the CAS sessions, you want to do as much fixed contracts as possible where people are paying a monthly price. We do some hourly billing when things are really out of scope or a one-off situation. But for the most part, fixed fee projects or this is your monthly subscription, you want to be born in the cloud and everything, all your platform you're going to use is in the cloud and you really want to make sure that you go to market as Azure firm. Not despite the fact that we have a separate brand for our IT. We still really try to go as if we're HBK, always try to understand what the client needs. You got to do a discovery process and realize that technology is always changing.
(50:33)
So talent acquisition, this is always a big one. You're not the same people you have doing the work in your firm for tax is not, as I said, isn't, isn't going to be the same people who can do IT services. So you obviously need to go where they're swimming. So you might have to use a recruiter, you might have to, and you have to be willing to pay for that talent. It's not going to come cheap. Build for redundancy. I probably wouldn't recommend doing what I did, having one person and all my eggs were in one basket with that person. That's what we did when we were startups. But this one doesn't even have to be for it just to hire for culture first made, especially in the IT world. I have several people who are absolutely super technical people, but they are just really good cultural fits, good personality clients love them. Clients don't love super technical people that are not friendly, so don't make those mistakes. I was very lucky.
Audience Member 7 (51:44):
About professional versus corporate. What was that about? Psychology professional services, is that comment about the culture?
Tom Angelo (52:09):
It meant are you hiring right now? There's a lot of layoffs happening in the tech world, but they're happening at big companies. Those folks might not necessarily be a good fit if they've not been on a client facing side. So in other words, they're really good technically, internally on their team, but they're not used to doing things for clients with a level of customer service and trying to do it in a predetermined amount of time. So you have to be careful when you're doing that as you're building the revenue. You want to start with your client base. Always. We call them platinum clients. Those are our top clients. These are the areas where we try to dig in and find opportunities first, always market internally, right before you spend any money on the outside, you want to be able to have that client base internally go through it.
(53:02)
You want to develop a referral network. As you start to offer these kinds of services, figure out who in your marketplace would refer you to this kind of business. Whether they be attorneys or other CPAs that you know are you're friendly enough with and you won't compete with them and know your market and your ideal customer. If I was starting a company, and I can only do you focus on small companies first, don't try to do a 50 person company. When you have one person, it's going to be hard pricing and packaging. I'm from New Jersey. If you've ever been to a Jersey Diner, there's 175 items on the menu. 173 of them aren't very good.
(53:45)
So you want to offer the most simplistic version of whatever your offering is. So basically we're probably down to two different offerings within, occasionally we have an offshoot that we have to do. And that's not our pricing by the way. That's just a kind of to illustrate that, you know, want to be able to have a fixed price with these levels of services. Take away the ambiguity for the customer. Fixed pricing and monthly recurring revenue is the king. This is the driver of growth. Make it easy to order, implement, invoice. We, we have invoices go out at first of every month, automatically charge that client's credit card. We try to keep it as automated as possible. I think I'm running, I have five minutes. KPIs are different from a CPA firm. This is a subscription business, so you got to treat it that way. You got to be concerned about customer churn. You're not going to keep everybody. So you got to make sure that, how many customers am I losing every year? So I need to know how much do I need to not only replace, but be able to grow as well. You want to know what your gross margin by category is, right? We make the most money on managed services. We make a very small margin on products. We make okay margin on selling software, but we have a different gross margin and we track it on our P and L's very differently. But it's all comes in. It's all part of our different revenue streams. We IT team has a sales pipeline meeting every single week where we're talking about all the opportunities and how we're going to get them closed.
(55:36)
We don't focus on necessarily realization sometimes on projects we do, but we really look at our labor percentage, our EBITDA margin, our net income. If this was a separate business, 15% are greater on EBITDA is considered good. And that's after partner salary, owner salary or whatever. But that, that's where you want to be. 15, 20, you can get over 20, you're really doing good. We do NPS scores and monthly surveys. So every time one of our help desk guys closes a ticket with a client, a user at a client, they get a survey and then all of that flows in and there's a whole gamification system we use to reward those help desk guys, who's getting the most stars? That kind of thing. And then we try to go after those people for success stories as well.
(56:33)
And again, build enterprise value. We're trying to grow our EBITDA. We're not selling this business, but these are valuable companies. Mean depending, they could be four to 10 X EBITDA. When you have EBITDA greater than a million dollars, that even goes up higher. You go up over 5 million, it even gets higher than that. You want to keep that recurring revenue over 70%. Nobody project-based businesses are harder to sell and they're less value. So having this monthly subscription is where you want to be. Listen, when we go out to the market to buy other IT firms, as we're continuing to expand, our competitors aren't other CPA firms. They're PE firms. So this is kind of like the market we're in. PE wants to do the same thing we're doing. And again, it doesn't mean you have to sell, it just means you should always be building the cell. You're building a whole separate line of business. Be entrepreneurial about it and keep going. And that's it. I wanted to make sure I finished.
Audience Member 1 (57:33):
You mentioned that be created as a separate meeting or for example, is it set up where you wanted to, you could sell?
Tom Angelo (57:51):
It is it's packaged in a separate, I mean just full disclosure or it's owned by our CPA firm, but we've carved out pieces because we give equity to people within the IT business and not necessarily the CPA firm. So in our case, X percent is owned by the partners in the CPA firm and X percent could be just the partners in the IT business.
Audience Member 1 (58:14):
So you percentage to the partner within?
Tom Angelo (58:18):
Yeah, we don't give it to them. We sell it to them, but yeah. Yeah. I mean they have, yeah, there's a couple with equity.
Audience Member 1 (58:28):
You mentioned that initially create migration businesses that were higher level. Now, which program or application did you (Inaudibel).
Tom Angelo (58:49):
Well, I started with, I went to say when I was, before we merged into HBK. I went down the road to Sage Intacct. We were using Sage Intacct in our CAS practice. So I really liked the software so I chose to go down that path as the, so that was the one application I was reselling. And then when we merged into HBK and we did some further acquisitions, we're now doing Intacct. Acumatica because it's good for construction and manufacturing and we're doing Business Central. Anything else?
Audience Member 3 (59:27):
Percentages that referral share (Inaudible).
Tom Angelo (59:34):
Well no, I mean Microsoft, we're probably making on Office 365, around 20% on those ERP vendors, 30 to 35%. And it's every single year that the client is with you. And even if the client isn't buying any more, they can go to the good thing about locking up these contracts with those, they can get upset with you and say, I'm going to use a different consultant for my assistance. You still own those subscriptions. Alright, well thank you. Appreciate it.