Everything you need to know about succession planning, M&A, PE and more

Transcription:

Dan Hood (00:11):

So maybe we'll just kick in, keep eating. Don't let us interrupt, but we're just going to talk while a little background. Music for your meal, this is a pretty panel on a pretty important, well I say topic, but important set of topics. It's sort of everything you need to know about succession planning, M and A PE and more. There's a lot of issues around all these people who have been mentioning it throughout the course of the conference. Starting with Alan, kicking us off, talking about a lot of these PE issues, M and a, that sort of stuff. And we've been mentioning them all through. Both David and Bob have referred to them in their sessions I've spent, so I should probably introduce both of them just in case. Bob Lewis at The Visionary Group. Bob, thanks for joining us.

Bob Lewis (00:51):

Hello, of those who have just sat in the last session, my apologies for hearing this again. We just work with CPA firms and accounting firms nationwide 27 years now. A lot of mergers and acquisitions, succession planning, helping them increase the capacity, offshoring value pricing, client culling, and then really setting up advisory departments inside firms on how to get them going. David

Dan Hood (01:12):

And David Wolfe Scale of Whitman Transition Advisors and C-Suite Impact I should say. Maybe tell us a little about yourself and the groups.

David Wolfscale (01:18):

David wolfscale, Thank you for coming. Whitman Transition Advisors, lots of M and A, we've done over a thousand transactions, 20 people on our team. C-Suite was really designed to bring advisory services to CPA firms so that they can instantly start having a bigger impact on their clients.

Dan Hood (01:39):

Excellent. Alright, so we brought you both together because you work a lot with firms in transition. You work with a lot of firms that are facing the issues that all touch on all of these, everything in the title of the session, which is over there so you can see it. I'm realizing you can't see what I can see here, but it's up there as well. And I want to sort of kick this off with an obnoxious question, which is how dead is the traditional partner succession model? How dead is Bob?

Bob Lewis (02:02):

The partner succession model? Yeah. Now since I get to go first, you could just basically have to agree with what I say. Probably. So yes, we have a lot of similar thoughts on this. So look it's dying rapidly because the succession teams do not want to necessarily buy in at the value that's expected. Many of them do not want to own anymore. They prefer a different lifestyle option. And really when you get down to it, part of the services that are inside the firms, I'll use the example of, I know David, you love $500, 10, 40 clients. He just loves it. If you have a $500, 10, 40 client, give them all to David, he's going to counter that in a minute. We see a lot of that and that's where the succession people don't want to buy in. They don't think that the services are going the right direction. The investment's been made in technology firm's going the right direction and they're also looking at the capacity shortage and going, I'm buying into an area where the capacity shortage may get worse, will I be able to support and make those payments? The other part of it is the exiting partners are concerned that the succession team will be able to continue to make the sales needed to support the buyouts.

David Wolfscale (03:11):

The only thing I would add is for a younger partner, I think the succession as it currently is dying, but for a younger partner, the opportunities are immense because the demographics are, there's more older partners than there are younger partners. And if you're a younger partner, I believe the opportunities are great for you and it's a great place to be.

Bob Lewis (03:33):

And David, look at the income, I mean look at your clients, they're making clients. CPAs are making more money than they've ever made owners and firms. So think about it, if that herd starts to thin a little bit more and you're a progressive young entrepreneurial want to be partner or existing young partner, you, you'll make a lot more. I don't see how that wouldn't happen.

David Wolfscale (03:56):

Right. I agree with that and totally.

Dan Hood (03:58):

Excellent. Well let's talk about I, because there's a lot of different models for that could replace the current model and because there aren't going to be that many, it seems like the issue is that there aren't that many young accountants, young potential partners who want to become partners. They look at and say, well, if I really wanted to be a partner in accounting firm, I'll start my own barriers. Barriers to entry there have been declining forever for a long time. It's a lot easier to set up your own shingle. We talked about the fact that there's no longer a weird thing to be working from home. You can set up a whole firm that's entirely virtual. No one blinks at it, no one says you don't have an office and a bunch of other issues that make that it's going to be fewer and fewer of those kind of partners. What kind of model is going to replace that, the potential, the current traditional partnership model?

David Wolfscale (04:39):

Well, I think we've been talking a lot about models and so I think there'll be more stock ownership, more incentivized programs and less necessarily I'm a partner. I think you'll be a different definition of being a partner and that will also provide additional opportunities. So to me, I'm very optimistic about the future.

Bob Lewis (05:02):

Yeah, I think when the model's kind of breaking is you work 30 years to get a deferred compensation payout and people don't want to work 30 years. They want to be able to be to go in and out of opportunities and be more flexible. And I think that's where these models are going to begin to transform. And as we add more and more advisory into the mix, that'll make it easier to adapt. You were talking Dan, about a firm in the New York area who created an alternative practice structure just so they could grow the advisory arm out and admit non CPA owners into that entity,

Dan Hood (05:35):

Right? Yeah, no, we heard about it and we were like, oh, they, they're splitting themselves into sort of the way a lot of PE acquired firms have done, right? You're a test in one unit and then everything else in the other. And we said, we just assumed, wow, this is interesting. They're a small firm, maybe they got PE money. We called them up to talk about it and they were like, Nope, as you said, this is a way to give more value to non CPAs and non-accountants to make their partners and bring them up and them help them get some of that, the taste of what it's like to be a partner.

David Wolfscale (06:02):

And if you look at PWC, even though it didn't go through, it was really the attempt to split into two different firms, the advisory and the non advisory firms.

Dan Hood (06:11):

Alright, we could talk forever about that and we'll probably come back to it I'm sure because we'll probably get questions about it. But because we've got so many things in the title of the session, I want to touch on m and a mergers, the fact that a lot of firms write as they approach, they're not seeing the younger partners come up. So they look to say, how do we solve this problem, the unfunded partner compensation mandate? How do we solve that? We merge up and that sort of thing. So let's talk about the first question, and I know every time I talk to you say, Hey, people are always asking what's the multiple? And that's a sort of proxy for I'm treating as a proxy. You may treat it in a different way, but as a proxy for what's the value of an accounting firm now?

Bob Lewis (06:49):

This is going to be interesting could David is sitting in for Phil, which is a great substitution. Phil had a family emergency, but Phil and I had already talked through the valuation multiple, so I'm curious to see what he says after I'm done. Look, we see multiples going at about 0.75, maybe 0.7 to one times. We start all conversations at one times to get everybody just their head clear. The reality is if I have two 10 million firms dropping 30% of the bottom line, those do not necessarily have the same value on a multiple. Most of the transactions we're seeing, in fact we think we're closing one hopefully tomorrow at 0.85, which is an agreed upon price that seemed to make sense for everybody. We have seen them a little bit higher and you get into the PE world, we're seeing multiples now that quite frankly, I'm not sure if I can control and answer properly. David, what are your thoughts on some of the multiples in the PE driven?

David Wolfscale (07:47):

Well, so first with the PE model, I think there's so many differences that the first step before asking about multiples is to decide what you want. Are you looking to take chips off the table? Are you looking to keep the name? Are you looking for all cash on the table? And all those things have a huge impact. We are seeing anywhere from a five to seven multiple on the smaller side and some of the bigger firms are in that 10 plus on the very large firms, which equates to oftentimes a little bit greater than one. And then oftentimes with the PE firms, you have a second bite at the apple and that second bite of the apple if they accomplish your growth goals can double in many ways that valuation. So you're still retain some equity, but that smaller equity turns into a much bigger number over time.

Bob Lewis (08:41):

And for clarity, when we talk about a multiple one times of revenue versus a five to seven or eight, not five to seven or eight. I tell you what, if anybody could get a deal if five to times your revenue, you should grab that immediately, just take it and run. So there are the conversion right now between multiple of revenue, which is something in this industry really plays with a lot versus getting it to an EBITDA, which is a more traditional method, is a little bit more complex in our profession because sometimes the ownership compensation's too high to really equalize that to a good EBITDA conversion. It's a difficult, it's a delicate balance probably.

David Wolfscale (09:24):

And one thing that also makes it difficult is I think a lot of partners look at their compensation as one bucket. And really that compensation is two buckets. One is you're doing work and you should be compensated for the work you're doing. The second bucket is you're an owner of a firm and you should be getting dividends and not dividends, distributions from being an owner. And if you look at it that we have two buckets, oftentimes that EBITDA answer becomes much easier.

Bob Lewis (09:53):

Yeah, good point.

Dan Hood (09:55):

And that becomes a particularly crucial differentiation when you're talking about PE because they're going to be playing with a lot more than maybe a traditional merger would or am I wrong about that?

Bob Lewis (10:04):

No. Well, let's also talk about expand the PE a little bit more. PE is friendly newly industry. There's been a couple transactions done, there's going to be more coming, they'll continue to trail out. But right now I think the market is hot on the PE side because they're going to overpay to buy into the industry. And as it becomes a little more stable, those prices will begin to drop. If you're going to merge or sell your firm upward into a more traditional firm, you're not going to get the same potential buy you get from a private equity. But then you have to look at the cultural fit. What's the outcome as David indicated, what are you even trying to accomplish with the transaction? And those are all components in which direction you go.

David Wolfscale (10:44):

I look at it a little bit differently. I look at PE isn't overpaying. They see the world differently than you do. Absolutely. And so they don't look at it the same as the traditional CPA. They look at as an opportunity to build more services with their clients and they're looking for the 3, 5, 7 years to oftentimes double the valuation because they've grown. So I don't look at, and there is some first premium for the first users, but they look at the world differently than you do and they see greater value than traditionally people have seen.

Bob Lewis (11:22):

Well in the last conversation we had earlier today, firms are 85% compliance or used to be compliance focused repeat work, but we weren't really selling that much additional services into the client base. And that's where I think the PE influence is going to come in and go, A, we can increase pricing, which I believe, by the way, every single firm under prices, their services still, let's go with that. That's an immediate hit. And then if you start beginning to get more aggressive on adding other services and adding things like simply even wealth management to your organization, imagine if you've got 500 clients you're doing no wealth management on. I mean what if you penetrate just one or 2% of that? It could be a huge amount of money. And I think that's how the outside buyers are looking at your industry right now.

David Wolfscale (12:06):

And what we see is we know firms that the partners make more money off the wealth and these are more traditional, they make more money off the wealth management side of the practice than they do off of the CPA side of the practice and that's already occurring.

Dan Hood (12:23):

I want to do, ask two questions that are tied but required different parts. We'll go into two, we'll break them up. And this is about getting a sense of the scope of the opportunity for m and a, both traditional m and a with other firms and for PE involved m and a. So we'll start describing that PE involved m and a is white. There's the first thing where the PE firm acquires often a platform counting firm, usually a much larger firm over you, not always, but usually. And then those firms go out and acquire other accounting firms. And then there's traditional m and a where just firms acquiring each other, not necessarily backed by PE. And I want to get a sense of do we have a sense of literally almost not, I don't need a number, but a ratio of transactions that will involve PE in one form or another, either the initial or then the platform plays versus regular M and A do? I'm not absolute numbers, that would be impossible, but just a sense of the ratio of how much of an opportunity is there in each one?

Bob Lewis (13:21):

You want to take this first or no?

David Wolfscale (13:24):

So one thing that Dan said that I I'd like to discuss first is it's for the larger firms. One thing that my partner Phil spent a lot of time is what he called democratizing PE. And it's not only PE, it's PE family office wealth management, publicly held companies. And we're doing things with firms as small as $10 million and we're having conversations with firms as small as $5 million. And although the multiple might be greater, as you get larger, the opportunities now are there for almost every size firm. And so for us, we're probably seeing 70% of the non-traditional plus then the traditional buyouts.

Bob Lewis (14:12):

So part of this comes down to really a little bit of a cultural thought process. Some organizations are looking at it like for years many firms have looked at wealth management is a conflict of interest. I haven't quite figured that all out, but it's a conflict of interest. They don't want to do it. They don't think it's the right thing to do for their client right now. I think that's kind of the battle that's going on. If I am going to merge up order sell, do I do it to another firm that has a cultural fit for me or do I go into a PE based operation where it may have a different set of operations and how they run. But see, the interesting thing about PE right now is, so if I bought your CPA firm that is imaginary, I bought your imaginary CPA firm and I'm a PE investor, are you going to leave?

(14:59)

Do I get rid of you right away? No, no, I need him. In fact, he's the transaction's worthless without him and his team. So I need the C P A firm's team to continue to operate for a period of years because one of the things that private equity groups don't know how to do is run a CPA firm. And to Dan's point is once we bought the first entity in a private equity structure, I can now, if David's my guy who was running the CPA firm, I can buy smaller entities and roll them up under the alternative practice structure into him and continue to grow that platform. However, though, if I don't think that's the direction I want to go and I don't want to continue to run the firm and I want to take my stuff and merge it into another firm, I have to make a decision either this is how I feel more comfortable operating and I think it's a better path for me where a lot of firms are struggling. The other thing too, when we talk to firms, the first question we ask when we're looking at an M and A opportunity is why do you want to sell or why do you want exit? The Y is not money. 90% of the time they got all the money they need. The why is they want a good fit for their employees, they want a good fit for their clients. And quite frankly, a lot of their clients are their friends and their relationships. So they want to make sure that's, that transcends to the next level. So there's a lot of these emotional decisions.

David Wolfscale (16:16):

And I think there's a lot of emotional decisions and that's why having an intermediary helps with those emotional decisions. But one thing I hear, it's not about the money until it's about the money. And sometimes at the beginning it's not about the money, but it becomes not solely, and I talked about you want to make sure the chemistry and the culture is a good fit for you, but the money I find oftentimes does play a role in that.

Bob Lewis (16:42):

It can't be overwhelming, Especially in the beginning. If somebody offers you twice what your house is worth, you have a plan on selling your house. But it's like, well, maybe I'm going to sell my house. Not that they offered me twice what my house is worth.

David Wolfscale (16:55):

And oftentimes we're seeing not only necessarily valuation but significant cash at closing as when I entered the CPA marketplace from more traditional businesses, it was odd that there was closings and we merged these nice firms together and nobody got a check. And now I think sellers are expecting checks because of the influence of PE and I think traditional firms are reacting to that, but I think that has made a significant change in impact.

Dan Hood (17:27):

Just to clarify, you're seeing in both PE deals and traditional accounting for mergers, you're seeing some cash on the table as you say. There didn't used to be, but now there is.

David Wolfscale (17:36):

We're seeing on both sides of the table, cash on the table, more on the PE side oftentimes. But certainly look, we react to competition and we have a lot of smart people in this industry and I don't think they're going to be passive about the future.

Bob Lewis (17:52):

Really good example of that, we were brought in to consult on a transaction down in Texas. We had nothing to do with the transaction all. They had five offers. Two of them were private equity and well, they actually had six offers. They threw one away completely. The other three were just traditional upward merger. And the two private equity companies had cash up. The other three offers had no cash on the table. The first thing we're, we're just really smart at consulting. The first thing we went back and said is, well, perhaps the other three could put some cash up on the table. That's what we charge so much for that advice.

Dan Hood (18:29):

You can see the value?

Bob Lewis (18:30):

It's you see the value. That's why it's the visionary thing. It's just you're forward looking. But there were a lot of other crazy things in the transaction. One of the buyers wanted to hold the partner's capital accounts for 10 years before they gave them the money back. So we're going through the list of things like to go back and shockingly, everybody came back to 40, 45% cash upfront. That leveled out the deal. Then there's working capital that they each wanted. And there was a whole different path how they got to the working capital and each one of them, the odd thing was every single one of the transactions, no matter how they got to it, the value came back to 1.25 within a practice of points. And I'm looking at this thing going, it's like we all decided we're going to go to the restaurant across the street, and we all took 18 different ways to get across the street. The thing though was they paid a bit of a premium for this firm because it was location, it was a hot major metro market that everybody wanted to be in. So I'm sure you see these things all the time.

David Wolfscale (19:27):

But talking about hot metro markets, another change, and I was talking to somebody after my session is it used to be being in those hot markets, being in those metro areas were really key and larger firms wanted to go into metro areas now because of Zoom and all those things and the pandemic and this new mindset from private equity location is much, much less important than it used to be.

Dan Hood (19:54):

Excellent. Well I'm glad you, I brought up that all those people converged on the same multiple or the same value indicates that there are some clear reasons for value. You said location less important now than it was, but still for some firms important. I want to dive into what goes into making a multiple, why some firms are valued more than others, but you wanted to make a point first I think.

Bob Lewis (20:16):

Sure. I don't care. Although, yeah, on the cities, by the way, just throwing this out there, this was a shameless plug for both of us. If anybody has a firm in Nashville, Tampa, Atlanta, Naples and West Palm, please call us because it seems like everybody wants to be there. Oh, did I mention Atlanta? Everybody wants to be there. It's like all the firms got together in a room and said, we need to be in these cities. Seattle not as much anymore. Austin not as much anymore. It's like the city shift. But it is kind of funny that it's like a broken record when we talk to a firm. What was your question, dad?

Dan Hood (20:50):

I was just going to say that the obvious answer there is to immediately go out and hire someone in each one of those markets and have them be your virtual office in those cities, and that's your presence there. But two things I wanted to dive into. What makes multiple, if everyone's converging on that same multiple, all the different people taking that different path to it, what are the things that differentiate one firm at a lower multiple from another firm at a higher multiple? Before I do that, I just wanted to quick bring in, you mentioned the influence of PE on bringing cash to the table in more traditional M and A. And I've just that one of the other things that's driving that not as much as PE, but is the number of firms that are acquiring non accounting firms. It's obviously particularly big at the big four and the billion dollar firms, but even we see even down to relatively small firms that are acquiring non accounting firms, which look at that and go, well, what do you mean you're not going to give them money, you're buying my company. I want some cash. And so firms are getting a little bit more used to putting down some cash. Like I said, it's not as big a deal, an influence as PE, but it's one we see a lot. Now it's something like a fifth of the deals done by the top 100 firms every year are for non accounting firms. So I just want to throw that in.

David Wolfscale (21:50):

And we have a deal makers group that works with non CPA firms and certainly the CPA firms have started to much more aggressively want those non-core businesses. And again, going back to the PWC, they want those non-core businesses because they see the engine of growth is advisory not compliance?

Bob Lewis (22:11):

Excellent on that. We've got three transactions pending right now on non-accounting businesses. And the problem with some of the accounting firms in this is they're trying to value this an accounting firm and their valuation people are calculating endless amounts of risk in the transaction, bringing the price down to nothing, and ignoring the whole concept of how these firms have sold. I've got one that literally is on my cell phone right now that we're going to talk to after the session about the final stab at how to make this thing work. But their valuation department came back in a multiple that was ridiculous, ridiculously low because they're putting all the risk into it and that the seller's like, look, we, you're just way under market. The other thing we're seeing is these are hybrids. They're buying 51% in the tech companies keeping 49%. They can't buy the whole thing and have these people leave. So they're in some cases. So you can continue to grow it and still have equity in it. Not uncommon to the PE model where Where're CPA from, they're going to buy 60% of it, the or 40% still own. And as a firm grows, we still have 40% ownership in a larger firm. So it's going to toss that out.

Dan Hood (23:21):

Absolutely. So like I said, if we can, let's dive into what makes a higher multiple. What about a firm gives you a, makes somebody say, yeah, you're more valuable than other firms. You mentioned that location is a little bit less now than it used to be. What are some of the things that are differentiators?

David Wolfscale (23:35):

I mean profitability, the best way to get a nice cost for your business is to run your business well as a common thing. Age of partners. And do you have any type of internal succession? On the PE side, less audit is probably more attractive. Oftentimes, again, they're trying to add these advisory services. Bob, why don't you add a couple as well.

Bob Lewis (24:00):

Production hours. We see partners billing, God help me, 3,500 production hours. I have one on the table right now where the partners a partner, not the partners collectively billing 3,500 billable hours a year. You're wondering how that can even be done. And when you get up at five in, you show up at work at five in the morning, you work till nine o'clock at night, you do the six days a week. The math does work. It's not uncommon for us to hear 2000. You can't, there's no leverage. So if I'm going to buy David's practice, and by the way, he doesn't have an accounting practice, so this is hypothetical. He is not running a bad practice and all of his partners are billing 2000 hours a year. How of course his profitability's going to be higher. Then he gets into is his rate, does he have the right kind of client mix?

(24:46)

This is an issue too. We've got an firm on the east coast, they're in the five to 10 million range, but their clients are all one to $5 million. So if I got to take that five to 10 million firm and move it upward, I got to move it up to a 30, 40, 50 million firm for them to have value and to get comfort out of it. But they don't want the one to 5 million clients. These are all things that really impact the value kind of behind the scenes when you start looking at the numbers. Anything else?

David Wolfscale (25:16):

I think there's a home for everybody. So that one to 5 million firm, we've seen consolidators who haven't tried to go up market and would be very happy with that. And then we've seen other people who would want to go up market. So I think exploring the marketplace to find those people who find your firm attractive is also important because for everybody, there's different things.

Dan Hood (25:41):

I want to broaden this discussion out. We've sort of been focusing fairly narrowly on acquisitions, mergers and acquisitions, whether through PE or more traditional ones and broaden the conversation out to more sort of succession planning as a whole and talk about that and that process and how do you start it? Because for a long time people talk about these accounting firms that literally hadn't started their succession planning at all, or if now they may have done it for individual positions but not thinking about it as a firm and the firm as a whole. Where do you start? What do firms need to be doing to make sure they're handling this properly?

Bob Lewis (26:12):

Did I hear it clearly? Succession planning is a whole, that's a joke. Sorry. So a little bit of a hole. There you go. See that one bomb, that joke just didn't, did not hit.

Dan Hood (26:21):

I liked it.

Bob Lewis (26:24):

They're all laughing at this depending on this one, laughing inside. So look, the succession planning's really pretty simple. People getting back to, do they even have a written plan? No, I've talked to Dan about succession planning and Dan's like yeah, I'd like to own the firm. And so when the time comes for Dan to actually do it, we haven't talked about how he needs to do it, what he needs to do, what the buy-in the value. And then Dan's like, well, I don't want to do that anymore. Now I waited four years for that to happen. Four years have passed. And I'm sitting there going, well, Dan doesn't want to do that and neither do the other two people I had in line. We really never talked it through. And he's going to tell me that he wants to do it. Because if you ask your team members do they want to be part of your, do they want to buy you out, they want to take over, what are they going to say?

(27:14)

No and kill their career right there? So you really need to have a pretty distinct plan on what the costs are for the buy-in, what the responsibilities are, and then as an owner, you need to sit back and look and go, can Dan bring in work if I'm depending on Dan to pay me out and he can't sell. And we have trained our people not to sell for 20 years with the staffing shortage, by the way. I just want to point that out. They got no network. They can't sell. I may be forced into going to David to sell me, so I probably sell myself, but sorry.

Dan Hood (27:49):

That would be a conflict of interest.

Bob Lewis (27:50):

So secession is a great concept and having a plan is a great concept. And we actually have a business called Impact Business Builders, which if you give us between six months and two years, we'll increase the multiple you're going to receive either on a CPA or in a privately held business, I believe 95% of the time, here's the succession plan. A friend of mine just got sick and I'm going to enjoy life. I just got sick and we have to go do something. I had a great time in San Diego and it would be wonderful if I could spend more time traveling. And I believe not only in CPAs, but in the vast majority of the world, there is no secession planning. And in fact, I knew somebody who worked for m and t Bank, he covered 13 states and his job was to do succession planning. That was his job. He had access to all the bank's clients had access to who was the right people in two years, he did 13 succession plans from 13 states. So I think it would be wonderful, and I think people do look more at the individual partner level, but I think oftentimes I wake up and it's a different day for whatever reason.

Bob Lewis (29:03):

It's kind of like fraud. Nobody ever wants to buy preventative fraud services until it happened. And then by a lot of it, because I'm in a lot of trouble. But succession is that same way. We just don't want to have the honest conversation. Honestly, part of it is I don't want to know the answer. Maybe the answer may be no. And I also don't want to share how much compensation I'm making because Dan, who is working for me and making much less money, by the way you're working for me now, He's making much less money. And if he says, wow, you're making, this is what I could make as a partner, but how about now why don't you give me $40,000? So a lot of people close off the compensation afraid the staff's going to ask for more money, but if they don't know what the carrot is on the end of the stick, why would I go through all the effort of the buy-in if I don't know he make three times what he's making now or maybe four if we start doing advisory services and other things because been to my optic on how I'm running it and I'm not really expanding it.

Dan Hood (30:01):

And he is worth just briefly pointing out that most accounting firm employees have no idea and undervalue what a partner makes. Oh yeah. You may not want to tell them exactly what you make, but they think you make a lot less than you do. And that's a problem because it makes less, there's less incentive for them to become a partner like, well, I can stay for 20 years and get $200,000 a year. Whatever they think it is, when it's really $400,000 a year, I think I'll make 400 when it's really 600. They routinely undervalue it by a significant number, so it's less attractive to them. Sorry, go ahead.

David Wolfscale (30:30):

And also, I did an 18 month class for next generation partners and my partner Phil said, we need to start with the business of accounting. And it's like we need to start with the business of accounting. These are all the next generation leaders, these people were all going to be partners in the next two years. But I trusted my partner and people didn't understand leverage, they didn't understand how firms made money and they had no clue what the partners made. And again, I think that goes back to the communication, starting out leadership of what a wonderful opportunity there is for you. But if we're hiding things, we're reducing it and we're incentivizing people to go take a different opportunity than the one with our firm.

Bob Lewis (31:15):

You hit on a huge point. Staff does not understand the economics of running a CPA firm. My job as a staff person is to bill a certain amount of hours, try to keep my realization in order my utilization. And if I'm not doing that, I may over pad my hours, but they don't understand the impact. What that does, they do not understand the economics of running a CPA firm. And honestly, I think most CPA firms right now, they've got decent values that create a good income, but they're not leveraged properly as David said. And they're definitely not. They're missing the whole swing about things like transition planning for your clients. I mean, we've got clients that bring in investment banking into their firms. They're selling their own clients and getting huge success fees and turning around, grabbing the wealth management and dumping into wealth management arm. They're making a ton of money off that. And when those people are all sold, there's a next crop moving in. Most firms are not doing anything with those.

Dan Hood (32:13):

I want to, just to throw out one thing for context. I think we were talking about succession planning. A lot of firms haven't really set it up properly. And part of it is because for a long time, and literally when I say a long time, literally generations, the structures of accounting firms took care of the succession issue. There was no need to think about it because you just always had partners. New people came in, you made a certain number of them partners, and it all sort of organically happened. There was no need to plan it. And now we're in a different era where firms really need to think clearly and strategically about their planning means knowing what you want to do when you want to retire, what your partner group wants to retire at, what kind of people you have coming in, all the plans you're making, all the other plans you're making for growing a firm over the course of time.

(32:51)

But it really requires sitting down and thinking about it. And this is true of almost everything in accounting firms. There were used to be sort of structures for everything, structures for managing staff, structures for onboarding people, structures for dealing with clients, structures for the services you offered that just sort of were part of the profession. And everybody sort of organically learned them by being part of a firm and just listening and hearing all those structures are changing. And that means you have to think about the structures you are going to adopt for your firm. And I think that's the thing. One of the issues with succession planning is previous generations didn't have to think about it. So they never taught younger and younger generations how to do it or why it was important to do it.

David Wolfscale (33:28):

I also think that talking about the previous generation, so first of all there's demographics where there's just less people, but oftentimes the previous generation were much more entrepreneurial. They took a chance and left the firm and started something and they might not have known where payroll was going to come for a week. They might not have known how they were going to feed their family necessarily in the beginning. And then oftentimes they brought people on and like Bob was saying, you don't need to worry about business. I take care of the business. There's enough for you. And you got brought up under their wing, which is both wonderful, but didn't bring the skills you need to be the next generation leader.

Dan Hood (34:09):

Well, you're always talking about the selling skills that aren't there in the younger staff or often aren't there in younger staff. And some of that goes to the entrepreneurial, the first generation had them. And so the younger generation never didn't necessarily need to develop them.

Bob Lewis (34:20):

And I think I'd cut that selling skills even further. If I look at a partner group at 10, there's three people that sell. You have the seven service and if you put them in a selling situation, they won't even know how to price it or how to close a deal. And that permeates right through your entire staff. And we use the 40 year old virgin phrase where I've been doing this for 15 years and I've never brought in anything. How now am I going to take over and learn these skills and build it? David, I know that you're neutralist profession. That's a joke by the way, another bad one. So how long does it take you to build your network, right? 20 years, 15, it never stops. But if you start when you're 40, 45, you're pretty far behind your curve.

David Wolfscale (35:05):

And one of the things that I see is even if we take those selling partners, if we put them in a room of people who were salespeople, even though they might be the best CPA selling partners, oftentimes they wouldn't be the best salespeople because from a psychographic point of view, that's not who they are. And that's another benefit of adding advisory services. You might have people out there who are better at selling than you are, and they can also be a new sales channel for you.

Dan Hood (35:36):

There you go. I want to do two things. We're getting down to the last 12, 13 minutes. One, I want to say, what's one thing firms should do right now to get their succession planning in gear or kick it up a notch or make sure that it's in good shape? One thing they can do when they get home and want to bother all the partners they left back in the office. Dave, do you want to kick us off on that one?

David Wolfscale (35:56):

To me, it's worth having a conversation. I think as a leader, part of your role is to explore what's out there, not necessarily take action, but I believe a leader's role is to explore the marketplace. And I would think that if you've never taken a meeting to explore what it might look like, because what we find sometimes is when people take those meetings, they go from scared to excited. They go from sometimes unsure to sure. And sure could be, we don't want to do anything, but when you're in your room talking to yourself, it's hard to know what's real. And so having a couple of meetings I think is something that I would recommend doing.

Bob Lewis (36:39):

Inventory or staff. So here you got to take an honest look at what you currently have on board and then you have to look at how long it is before you want to get out. So very quick story on somebody who engaged us last year to talk to their five staff people about what their thoughts were. Succession. The one gentleman who they completely ruled out, they just still let us talk to, but the other lady got helper. One of them was 29, wanted to be a managing partner in a year. Good for her. Literally she said, I'll be managing partner year. I would gone, which I wouldn't have told me, but, and the other one said, oh no, my husband and I are going to move to the Caribbean and open a tiki bar in three years. So the succession wasn't looking great. It turns out that the gentleman that they thought had no interest in this thing, he didn't have an interest because he said, I can't afford to buy in right now because my wife and I own a dog rescue farm.

(37:38)

We bought it and we're dumping all of our money into this dog rescue farm. We told the partner, the managing partner that, and she's like, well, I can work out a deal for him to be paid out a different way to buy in. He's the one that's taking over that firm. The others are all going by the wayside. Never tell that much truth to anybody who was asking that question. I'm going to be in three years, I'm going to have tiki bar. I mean, I can't believe what people say sometimes. It's kind of crazy. But it is to get that good to know that she knew exactly what she needed to do, the managing partner. And if she did, if that one gentleman didn't step up, she probably would've had to sell that thing.

David Wolfscale (38:14):

One other thing though, I think it's important for each of you to look into your own heart and decide what you want. And I think it's great to talk about the staff. I think it starts with leadership and for you to know what is the right thing for you and your family, your staff and your community. And sometimes I see managing partners put the staff at a higher priority than themselves working with a $6 million valuation firm. And he delayed a year because his staff said, no, we don't want you to sell and we don't want to buy either. We want you to stay. And so he was delaying his retirement because that's what his staff wanted. And again, your staff helped you. I'm not saying ignore that, but he was delaying his life for others. And I believe you should put yourself at least at an equal spot where he was actually making himself less important than his staff.

Bob Lewis (39:09):

That's actually hilarious. We have this same revenue size firm, different location, they not valuation I can tell from. And the managing partner went back to two of his four lead people and they said, we're going to quit if you sell or merge upward. Wow, this gentleman had not had a vacation in over two years. He has not been able to take a weekend off and over two years and he's being held harsh by staff. My point about inventorying the staff to see what you've got, because if you draw a blank on the inventory of your staff when you're talking to people, you know what you got to do that, that's not even an option anymore unless you've got enough runway to fix the succession. I'd rather see it coming at me that there is no succession than think I've got something and then get hit blindsided by it. But Dave, it's right. It's what you really want to do at the end of the day.

David Wolfscale (39:56):

And I think even taking stock of your staff, just because somebody says they would like to do something doesn't necessarily, they mean they have the ability to do so. Yes. And so maybe even before you ask those questions, maybe you should also self-evaluate, assume that this person won't or can't do it. But again, I find that skillset is scarce for people to have that ability.

Dan Hood (40:22):

Not everybody can run a teki bar. It's a difficult business.

Bob Lewis (40:25):

You got to mix the room together. It's common.

Dan Hood (40:27):

On the other hand, they're in tremendous need of accounting services. So I think there's a niche there in serving accountant run teki bars. That's the niche of the future. I want to open it up for questions. We've only got about eight minutes left, but I do have a couple more questions. I want to ask you guys about how you make a firm attractive for an M and A and for an acquisition. But other questions out there in the audience, I can't, if you have a question, shout it out because we can't see past the bright lights. Alright, go ahead.

Audience Member 1 (40:52):

Has there been any feedback on any of these?

David Wolfscale (41:04):

So in the deals that we've done with PE generally, again. They will how to run accounting firms. So generally they are more about adding advisory, adding cash to make additional acquisitions. And the accounting side there's some changes, but for the most part we're not seeing huge impact on that.

Bob Lewis (41:27):

And it's still pretty new. I mean, I think you got to wait a couple years to see how this thing is going to play out.

Dan Hood (41:33):

Yeah, I mean we're sort of, the firms that are going first are the ones that are in the strongest position. They're often the ones that are smart, very smart about PE. So they're building deals that really work for them and they're the first row with PEs coming in, so they want to make sure that they're creating a positive app result. So what we've mostly heard is people are very happy with it. Now, that's mostly from management of the firms. That's who we're talking to. But we haven't heard anything about large scale leaving or anything like that, or I haven't heard it.

Bob Lewis (41:59):

Well, a lot of M and A transactions, some people just leave PE are traditional. They don't want to be part of an entity and it is what it is, or they thought they lost ground. And honestly, I think an upward merger, whether it's a PE transaction or just upward movement creates more opportunities for your staff. But staff doesn't always see it that way. They think it's a decrease in opportunity.

David Wolfscale (42:23):

And what I find is the stronger staff, they're the ones who thrive and people who are weaker in either their vision of themselves or their ability, they're typically more scared and less effective.

Bob Lewis (42:37):

Good point.

Dan Hood (42:38):

Any other questions?

Audience Member 2 (42:41):

CPA Firm wants to offer M and A services to their clients. Do you find that their registering as a broker dealer to do that? Or do they find another way around getting involved in sale for it?

Bob Lewis (42:55):

Well, the FINRA rules changed in November. Honestly, the hotel clerk could sell the business now if it's under 250 million in revenue and under 25 million in EBITDA.

Dan Hood (43:09):

But could he run a tea keeper?

Bob Lewis (43:10):

Could he, so basically anybody can do this at this point. Then there's that whole level of are you qualified to do it well as a separate conversation. But you don't have to be worried about registering. And if you are working with a larger entity in that case, you do have to be licensed to do that. You can still get a revenue share from on any cut without having any kind of certification. So David, any different thoughts on that?

David Wolfscale (43:37):

So I'm not totally in alignment with that. We are seeing some are appropriate for broker dealers. It depends on the transaction, depends if it's a buying stock in the company or buying assets of the company. There is complexity to it. And I think a good hybrid is define what works without being in that broker dealer. And you can be a little bit of a hybrid. And for some, it could be a, it's a referral or a flat fee. So if you have a flat fee versus a success fee, it reduces that compliance. But we talked earlier about setting up the alternate practices to me and I'm in, I do deals both and CPA and non CPA, it's worth the journey. It's worth finding out about it, just finding out about the alternative practice. I think there is complexity there.

Audience Member 3 (44:30):

When you enjoy your team, if anybody present it, I can get honest answers without people feeling like if I answer no, I just got myself. That seems to be one of the things. Yeah, I'm 30, I have to three. (Inaudible)

Bob Lewis (44:55):

Well, I think part of that, it's a little bit of a guessing game, to be honest with you. I think that was Mike back there. I couldn't quite see that far. Sorry, Mike Max, me blinding lights are great. I mean part of this is you're also, Mike, we're not, we're going to ask other questions to you when we're talking to you. If you're the previous Mike at 25 years old instead of the current Mike of what, 28, 29 now? Yeah. So, Yeah, I know. I got that. I caught barely see. So we're going to ask other questions and you may say, yes, I want to be part of this because if you're really that bold to say, no, I don't want to be a part of it, you pretty much eliminated. But those other questions we're going to answer are going to really tell us your interest level because we're going to be asking questions about what you think we should be doing and where we should be going. And you're going to give us honest feedback on that. That actually is the bigger tell than anything. It's great if they come out and say, no, I don't want to be a part of this, because at least then we know where we stand. But it's pretty rare, David?

David Wolfscale (45:49):

To me, I look at actions over words in most things in life. And so although I might ask the question before I ask that question again, I want to make it sure it's somebody that I want the answer from. And I think those people who want to get ahead, those people who have that work ethic, who will go to a networking event, even though maybe it's uncomfortable, I would look at actions before. Just an answer to a question as well.

Bob Lewis (46:15):

If you're going to ask those questions too, if you're not doing it, and if you can't do it live, you definitely need to do it over Zoom because you want to see they, you want to see their body reactions, you want to see their face. Calvin, did you have a question?

Audience Member 4 (46:27):

No, I was just saying on license. (Inaudible)

Bob Lewis (46:36):

Good point.

Dan Hood (46:38):

I have one more question for them both, but I don't want to, if you guys have questions, I want those to come first. But alright, we got two minutes. Last question. Well, last question for me again, we'll take more if necessary. But we talked about things they want to do. If you're to get a succession plan going right, have the conversations, both partner level, understand yourself, what you want, and then have conversations at the partner level. And then as much as possible, have the conversation with staff to find out what they want, what everyone wants. So that's a good start for succession planning. If you're thinking about you want to be acquired, you want to merge up, whether it's PE or a more traditional one, what's the, what's one thing you can do right now or should do right now to make yourself more attractive to an acquirer, to a potential acquirer? Bob, you want to go first?

Bob Lewis (47:21):

I say you really need to begin to examine your leverage because if you do not have a leveraged firm, your value starts to dwindle. The other thing we look at, which our core theme is how do you build the enterprise value of your firm? If you're taking actions that aren't building the value of your firm, that could be the type of client you're adding. It could be your pricing, could be the services, the niche development. Those are the things that make you stronger. But the leverage is key. Every firm we see that has proper leverage in place, we have a client that's about $15 million. What do you think the managing partner bills a year? How many hours you want to take a stab?

Dan Hood (47:58):

Shout out a guess.

Bob Lewis (48:00):

250, 0 is a great answer, by the way. 250. And they built a whole family office operation. He's fully leveraged. Do you know what his copay co-managing partner does? Which is actually his brother in this case. He also build two 250 and they own the entire firm. It's

David Wolfscale (48:17):

It's not she his brother.

Bob Lewis (48:19):

He, sorry. Well, in this world. In this world anymore, you can't question that, David.

Dan Hood (48:26):

Alright, so examine the leverage. David, what's one thing they can do right now to make themselves more attractive to an acquirer?

David Wolfscale (48:31):

Look at that profitability and see how you can drive that bottom line number. And as Bob talked about, maybe it's raising prices, maybe it's starting to offshore on a more significant and serious way and pick a path and run. One of the things that was frustrating for me is we used to do partner retreats and we'd come back in a year, very little action, great days, very little action. And then we started to only do partner retreats if we could be part of the executive committee meetings so that we could drive those actions. So thoughts are much different than actions and I would be focused on actions I can take.

Dan Hood (49:10):

Fair enough. Any final questions from the audience? We're getting out to 15 seconds, but we could stretch it if necessary. Alright, in that case, Bob Lewis and David, thank you so much for sharing all the insights. Good stuff. Thank you all. We we're in this room again in about five, 10 minutes.