How to Capitalize Your Firm

A key consideration for accounting practices that want to remain independent is finding the capital they need to invest in staff, new technologies, and growth strategies — particularly those that involve M&A. Fortunately, more and more players are entering the field, from banks and venture capital firms to ESOP advisors and beyond. This session will dive into the details.

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Seth Fineberg (00:08):
Once again, we're about to jump into a panel discussion here on how to capitalize your fund. We're going to go down the road real quickly and we're going to be bouncing around throughout. I've got a lot of questions for these guys that'll likely take up the majority of our time here. But again, we do have some time at the end. We will get to it. Just enter your questions into the app and we'll review them. Why don't we start to jump into my immediate right? Where's your place in the world?

Jeremy C. Vokt (00:45):
My name is Jeremy Vokt from Omaha, Nebraska. I'm married to my wife of 23-ish years. I have three seniors: one in Florida and two senior boys in high school. In my part-time, I'm also a high school pole vault coach that keeps me busy with spring, which is fun.

(01:05):
My real job is Managing Partner at Bland Associates, a 120-person firm in Omaha, Nebraska. We are an EOS-centric firm and a 100% employee-owned ESOP firm as well. We became an ESOP in January of 2020. Our firm in Omaha has a specialty for government consulting; we do a lot of healthcare consulting directly with CMS and the federal government. The rest of the firm is a traditional firm: audit, tax, and advisory services.

Seth Fineberg (01:36):
All right.

Steve Piatkowski (01:38):
Hey everybody, my name is Steve Piatkowski. Thank you to Accounting Today for having me up here. It's an honor. I'm really looking forward to the next few days and hopefully having some engaging conversations with everybody. I have a different perspective; I'm looking at this from a banking perspective. I work for a bank called Live Oak.

(02:01):
Live Oak is located in Wilmington, North Carolina. We're not like your traditional Bank of America space; we don't have branches on every single corner. But we do have the ability to lend to all 50 states. We have a treasury management side of the bank that handles your checking, savings, and deposits, but I am on the lending side. Live Oak is unique in the sense that we are verticalized lenders based off of your industry specifics. For me, I cover professional services, where 99.9% of my time is spent in the tax, accounting, and CPA space, just because there's been such a need for capital and so much M&A activity. Traditionally, Live Oak has been known as an SBA lender—we're the nation's largest SBA lender. That is a great product available to provide capital for firms.

(02:56):
If you qualify for that, we also have conventional financing as well. Conventional financing is for more qualified firms that have been around for a while with a proven track record of profitability. We have the ability to lend or provide capital as low as $10,000. I don't think we've ever done a loan that small, but we do have a small loan team that gets really excited about those opportunities. Our biggest debt customer in the portfolio has about $100 million of debt with us. So surely, if you have a desire or need for capital, we can find a loan product that would work for you.

Seth Fineberg (03:41):
Cool. Great.

Brett Haness (03:46):
Nice to meet everybody. I'm Brett Haness. Thanks for having us here. I'm the co-founder of Alan & James Partners. We are a national platform of like-minded accounting and tax firms. We like to say "good people know good people," so we try to find partners that are of high integrity and have similar values and vision to ours. I think we've had a lot of fun building this platform. We've got about 20 offices now across the US, with a few in Southern California, Northern California, and we just extended into the Pacific Northwest. We've also got some folks up in New York and New Jersey. I'm based in Dallas and we're entering the Southeast now as well. We've got about 60 heads in an offshore labor center over in India. Our model is very much a partnership-minded model.

(04:39):
We don't change the name on the door; we don't change the brand. We also always say we're not building McDonald's here. We think there's a lot of brand equity in the local firms and cultures. We view it as our mission to preserve the legacies of our partnerships. Prior to co-founding the firm, I'm from Southern California originally. I was chasing a dream of playing football in college and landed at SMU in Dallas, Texas. I quickly realized I wasn't destined for the NFL. I was like, "Brett, how do you hedge this bet?" and I ended up studying finance and did a Master's in accounting. I started my career at Goldman Sachs in one of their balance sheet investing businesses. We were partnering and investing in founders and companies across the US. I loved it, but left to go to business school and then ended up co-founding an investment firm called Beacon Cove Partners, which provided a meaningful amount of capital to our partners.

(05:33):
Thanks for having us. Great to be here.

Seth Fineberg (05:36):
Absolutely. Joe.

Larry Miles (05:42):
I'm a co-founder of Choreo. We're a $30 billion wealth advisory firm. These days I spend much of my time on corporate development, partnerships, and acquisitions. We trace our roots back to 2000 when RSM started their wealth management practice. My private equity partners and I helped facilitate a management buyout of that business in 2022. We've since acquired the wealth management businesses at BDO amongst others. Today we think we're the partner and acquirer of choice for CPAs who have wealth management or want to offer that as a service to clients. Today we have about $30 billion and about 7,000 clients. We have 42 offices across the country and we're very planning and tax focused. We very much partner with our CPA firms to jointly serve clients.

Seth Fineberg (06:50):
Excellent. Thank you. So we're going to jump right in here. We started touching on the last panel about why you are seeking out not just PE, but other sources of capital or new partnerships. What problems are they facing? What are they trying to solve for? This is for the whole panel. I'd be curious to start with Steve. What's the most common thing firms are saying?

Steve Piatkowski (07:32):
The majority of the loans or the capital that we provide is for some sort of M&A activity. But in this space in general, there are issues just like every other industry. There are underlying concerns: succession planning, technology investments, and incoming staff. Those are all potential problems that capital can solve.

(07:57):
When we're looking at partnerships or exploring other options for capital, there are limited options for CPA money. If you need capital for your issues or growth desires, you can go to a private investor or private equity. Typically, they are going to ask for some control of the business, but there's such a demand for firms to maintain that control that it might not be the ideal scenario for you. There is also getting some capital from friends and family members, which is an option if you want to avoid bank lending. But then if you do need capital and the only option you can think of is your local bank, I have examples of individuals who have told me horror stories. A lot of people have an existing relationship with their bank because that's where they've kept their deposits since they were 18 years old.

(09:01):
But then you go to that bank and say, "Hey, I need two million dollars because I need to make an investment into technology or I want to acquire a firm." They'll entertain it and request documents. A month later, they'll request more documents, and that cycle will continue until they basically tell you no. The fact is you're lending to an industry where there's zero tangible collateral and you're basing the repayment on the historical financials of the business. A lot of local banks who don't understand the industry can have a really difficult time taking such a large risk. At Live Oak, because I focus primarily on the tax and accounting space, we're comfortable offering a $10 million line of credit for purposes of acquisitions based off of historical financials. There are options, but not many understand the industry.

(10:14):
We're looking for firms that want to be successful. We're not commission-based loan officers, so we're not just going to do a loan for the sake of it. We want to make sure that when we're lending, we're working with individuals who are highly motivated and want to succeed, because when you succeed, the bank succeeds. Bank regulators don't like when we do lines that end up defaulting in a few years, so we're very calculated with our decisions.

Seth Fineberg (10:38):
Same question to you, Brett. When people are looking for capital or partnerships, what problems are they trying to solve for?

Brett Haness (10:55):
It's a great question. I think any CPA firm owner wakes up in the morning and isn't necessarily like, "Oh, I'm excited to go find a new private equity partner today or raise new capital for my business or take a new loan out or start an ESOP." I think firm owners are waking up and looking at a rapidly shifting industry landscape.

(11:13):
It's no news, but everybody's had challenges finding young people to come into our firms. We've had challenges retaining players and the labor market continues to be tight. I think you've got the rise of new technologies that are rapidly shifting the digital transformation landscape. You've got the rise of offshore labor in the Philippines and India and there's just a lot of regulatory complexity shifting the tax code. There are a lot of challenges that folks need to navigate right now on their own as independent accounting firms. On top of those industry issues, there might be unique idiosyncratic dynamics going on at an individual firm where they might need a growth partner. On top of all those factors, I think 75% of CPAs hit retirement age in 2020. You've got the first succession quest inside of all of these firms as well.

(12:05):
And so as you're thinking about all that, if I'm a firm owner, yeah, I want a great partner to navigate that with, whether that's a lender, a private equity partner, or a larger network of firms. Our model helps our partners address a lot of those challenges in a partner-led manner while also letting partner firms retain their brand, identity, and culture. We try to give the best of both worlds. Obviously, no one likes having new partners in the room always, but we think we're pretty friendly guys to work with and feel like we've built a solution that helps address a lot of the challenges.

Larry Miles (12:55):
I get to talk to a lot of managing partners and CEOs of different firms and there are really two themes that I hear the most. They're both growth-oriented. The first is I hear the laments of firms that offer audit and consulting and have really happy tax clients. They do a great job providing those services, but when it comes time for that tax partner to talk to happy tax clients about using their audit services or consulting, there isn't the cross-selling opportunity or introduction.

(14:34):
What we've done in our partnership is we launched a training program that helps the CPAs have those discussions. It's beneficial to us because our CPAs view us as one of the services they offer. That ability to take a happy tax client and introduce other services could be the easiest form of organic growth. Similarly, they're looking for additional revenue streams. Those that haven't branched out into other services look to acquire or start to offer those services. I think that's where they look at Choreo as an "easy button." If they want to get into wealth management, we could be in business tomorrow.

(14:34):
There are no startup costs, there's no acquisition required, and because we've spent our entire quarter-century life working with CPAs at that intersection of tax and wealth planning, we have natural partnerships. Those growth-oriented elements are what we hear the most from CPA management partners: "How do we grow?" I was having flashbacks to conversations earlier when people were talking about having capital but not being sure where to invest it or not being able to convince all partners to invest it. Making a multimillion-dollar investment for a firm of any size is a serious consideration, especially when that money is coming directly out of the pockets of the current partners. When folks are looking to make those decisions, I've been struck by how everyone is so focused on what's best for clients.

(15:36):
It is just a tremendous focus. It's about how we do what's best for clients, but also take care of our people at the same time, and sometimes those things run in conflict.

Seth Fineberg (15:49):
Good point. Jeremy, I have some more questions to dive into your particular model, but same question here. Do you have anything to add regarding growth? The ESOP model is very interesting. What was your goal in setting one up?

Jeremy C. Vokt (16:33):
Our goal, starting back in 2017, was to break the model. We wanted to do things differently. When I say "we," I mean myself and two other shareholders. We didn't want the antiquated model of paying out capital or three times your earnings over the last five years. We looked at it and asked: why are we not actually a fair market buyer like all of our clients? How do we break that model? At the time, yes, there were a couple of ESOPs out there within the CPA industry.

(17:07):
We started on that path in 2017 with that in mind—how do we get fair market value for that? It did take time. We got to that point in January of 2020 to become 100% ESOP.

Seth Fineberg (17:32):
What options did you look at?

Jeremy C. Vokt (17:32):
At the time in 2017, there really was no other model. I joke about it, but I saw his name on the attendance here—I spoke at another conference in the fall of '21 after we'd done the ESOP. I was the warm-up act to Charles Weinstein and EisnerAmper, talking about their big deal. So, we kind of did this ahead of the time. There wasn't really PE in the market at the time, nor did we consider that. We wanted to get our ownership down to the employees.

Seth Fineberg (18:02):
I think maybe some of the audience who aren't as familiar with ESOPs might not know about the process.

Jeremy C. Vokt (18:13):
Our process was unique because we had zero ESOP clients at the time. There was an advisor that would come to town and talk about ESOPs to our clients and we kind of tagged along and got educated that way. That started to intrigue us. We don't like the current model; how are we going to do it differently? The first thing I did was go to the State Board of Accountancy and ask, "What do you think about this?" They said, "I don't even know what ESOP stands for."

(18:46):

They told me to go talk to so-and-so and go down that path. We had to get the law changed first in Nebraska to allow ESOP ownership within a CPA firm. The law was written 75 years before and it said "natural person." Obviously, an ESOP trust is not a natural person. That led to other states contacting our firm to see how we changed the law. We partnered with a sell-side advisor that was an ESOP expert. We thought maybe we could clunk along ourselves, but we thought our little firm was worth a billion dollars—of course, that's not the case. Having the ESOP advisor walk us along that path during the transaction was big for us. Very helpful.

Seth Fineberg (19:41):
Jumping down the line, Brett, let's talk about your model of working with firms.

Brett Haness (20:09):
Sure. Our whole ethos is built on keeping the brand, culture, and identity of our partner firms intact. Our model allows firm owners and leadership to access liquidity and monetize the equity value they built, while also bringing on a growth capital partner that can leave their name on the door and their team intact. We say we like to "hire, not fire," so we're focused on how we can grow these firms.

(20:43):
I'd say a big part of our transactions is that a lot of our partners actually remain in place and continue leading the firm. They roll a substantial amount of equity in the same class of shares where our entire leadership team's life savings are invested. In every deal we've done, we also provide equity opportunities for that second and third layer of future leaders in the firm. We make sure that the lieutenants who couldn't have been equity partners before either have equity as part of the transaction or a path to equity down the road. Another piece is preserving client relationships. We don't want to mess with anything that touches the client.

(21:30):
When we partner with firms, we don't mandate a change in tax software or practice management software. We haven't done that in a single firm partnership yet. We try to let the existing partners maintain the client relationships. On the other side, we give our partner firms access to shared resources like offshore labor in India, or recruiting and IT folks that can help fill gaps when a staff accountant quits. Providing those shared resources under a big umbrella while keeping a local brand feel has been our secret sauce.

Seth Fineberg (22:28):
Larry, same over to you. We're talking about the model of working with accounting firms very specifically.

Larry Miles (22:38):
Our model for working with accounting firms is partner-based. We start working with firms two different ways. One, we might buy a wealth management business if they have one. Generally, the push for that is regulatory and compliance, like the SEC. It becomes more burdensome to own the business directly, so they sell it to us and then we enter into a partnership. The second way we start working with accountants is if they don't have wealth management but they want to offer it. They think about buying it, building it, or partnering. Hopefully, they just partner with us. That partnership really has four pillars. The first is equity. CPAs that have gotten into the wealth business got into it for the right reasons—because they believed it was better for their clients to have a guided experience rather than finding an advisor on their own. They don't want to get out of the business, so when they sell to Choreo, they can roll over some of their proceeds into Choreo equity.

(24:09):
Second is revenue share. When they refer us to new clients that we work on together, they share 25% of the revenue in perpetuity. Third is the real estate partnership; we want to be an extension of their team. Our financial advisors sit in the CPA firm's offices so we can be as close to them as possible. The fourth is education. We provide a lot of education to all levels of the employees of the CPA firm.

(25:14):
If we do our jobs correctly, they view us as a natural extension of their team—audit, consulting, wealth management. It's a strategic partnership. One of the advantages of our size is that we're large enough to have resources to invest in all facets of the wealth business. It's the only thing we do. We don't do tax preparation or estate planning; this is our business. We have the scale to do it well, but we're small enough that all those resources are available.

Seth Fineberg (25:50):
Absolutely. Steve, how does the partnership conversation go at Live Oak?

Steve Piatkowski (26:21):
Live Oak was formed in 2008, but we started lending to CPA firms around 2015. Similar to Larry, we view our relationship with our borrowers as a long-term partnership. We treat every customer like the only customer. From the initial conversation to the time your loan is funded and even afterwards, you have a main point of contact and their cell phone number. You're never calling a 1-800 number or talking to a robot.

(27:04):
Because we have a dedicated team for tax and accounting financing, we see it as adding value. Whether it's an acquisition or just a working capital loan to invest in technology, we're there to guide you. We can lend to firms doing $100,000 in revenue to large firms at $50 million. We like to view ourselves as educational as well. We advise on what we're seeing in the industry—what worked on one deal and what didn't. Ultimately, our goal is to protect our borrower's investment. We want to make sure you're successful.

(28:16):
Even though we are based in North Carolina, for any sort of transaction, we're normally coming to you. If we move forward with a loan, I'm more than happy to get on a plane. If there's a seller involved, we'll sit down with the buyer and seller and discuss what the transaction looks like.

Seth Fineberg (28:38):
Excellent. We are doing really good on time. Brett, how do you differentiate A&J from other acquirers out there?

Brett Haness (29:14):
We talked before about keeping your local name on the door, which is somewhat unique. A lot of competitors will force a rebrand on day one and force the migration of systems. We try to avoid that. Regarding the partnership model, our firm leaders typically have a percent of the profits that they're compensated with each year and they're truly treated like partners. For every dollar of growth, we're sharing in that together; for every dollar we miss our budget, we're sharing in that pain together. It's a partnership through and through.

(29:57):
We do everything we can to support our partners. Second, we try to fill our leadership team with CPAs that know these business models incredibly well. My co-founder Dan was a CPA firm owner for a decade. We've got a number of other folks out of the Big Four and other top firms. Having a leadership team that can empathize with the firm leaders we speak with is a key way we differentiate. Third, we like to think of ourselves as the most flexible buyers in the market. Part of that is speed.

(30:45):
There are some people at this conference that called us with a unique opportunity where there was a 30-day window to get something done. That was around the holidays one year, so it wasn't a fun one, but we got it done. We make really quick decisions and can move efficiently. On the other side, we've had some firms we've built relationships with over multiple years before they were ready for a transaction. Those are some of the key ways that we differentiate.

Larry Miles (31:31):
I'm newer to the world of public accountants, having really been introduced just four years ago. One thing I appreciate about the industry is how serious everyone is. There are so many different ways of running a great business, all with the same common goal of doing the best job for clients. Whether it's taking outside investment, borrowing capital, or doing an ESOP, the business is as diverse as the clientele.

(32:22):
There are a lot of good cultural benefits and strong community groups. That curiosity and willingness to learn and evolve is key. Coming from the independent financial advisor community, there aren't many firms that have been around for three generations. The fact that so many CPA firms have celebrated their 80th birthday doesn't happen by accident. It happens because leadership constantly thinks through the evolutions of the business, industry, and technology. That gives me a lot of confidence that our respective businesses will be around for a long time.

Seth Fineberg (33:19):
Jeremy, I was curious if you had a relationship with the State Board already?

Jeremy C. Vokt (33:25):
We just called directly to the State Board and the State Society and worked with them so they could start to see the benefit. ESOP has definitely become more of the forefront when you look at PE and the old model. I've had other firms come up to me and we've talked about it—one-partner firms and larger firms as well. The ESOP model does compare when you think about PE in terms of value. All of our employees are owners.

(34:18):
All that value is allocated to everybody every year. It's not just the 10 partners; it's every single person. My new kid out of college starts to become an owner a year later. We've never had that before where you didn't have to wait 20 years to own a piece of the firm. When I think about capital, those first couple of years of an ESOP involve paying debt depending on your structure. But around year five or six, we are self-generating capital to figure out what we want to do strategically.

(35:03):
An ESOP S-corp pays zero taxes, so you have 40% to 45% more cash flow. Once the debt is paid, you decide: what do we want to acquire? What do we want to go after? You can see that from the largest ESOP, KSM in Indianapolis. They're a $170 million firm and they're acquiring firms. I can't imagine the capital that a firm that size is generating. Why would you not want to be part of that model where everyone's aligned on one vision?

Seth Fineberg (35:51):
Good point. Larry, how does Choreo approach valuation when partnering with existing CPA firms?

Larry Miles (36:13):
Valuations for wealth businesses continue to increase or stay at all-time highs. The most important factors of value in our business include a premium for size and scale. Over $250 million or $1 billion in assets will increase the multiple of earnings. Then it's really organic growth—adding more new assets than you might be losing. Those are the big factors.

(37:32):
CPA-owned wealth businesses are arguably more valuable than a standalone firm because the growth is repeatable. If the CPAs are bought into the partnership, you see that in the growth of the wealth business. We factor all of that into the valuation. The valuations are meaningful, and multiples can certainly be double-digit EBITDA on an adjusted basis. Another rule of thumb: what we've found from our partnerships is that if you're a CPA firm wondering if the juice is worth the squeeze, the wealth business can generate cash flow equal to one time your current CPA revenue over the next five years.

Seth Fineberg (39:58):
Steve, we touched on criteria earlier. What makes you find a firm worthy of a loan?

Steve Piatkowski (40:38):
We're a cash flow lender. Most importantly, we want to make sure the business can repay that loan. If your business is not profitable and you're asking for a $5 million loan, we're not going to do that, and we'll tell you pretty early on. We also want to make sure any opportunity we're financing makes sense.

(41:04):
If you're in New York and want to buy a firm in California that is five times as big as what you're currently doing, and there isn't a solid business plan, we're probably going to pass. We want to make sure the consolidated financials of the two firms can support the proposed debt payment. If there's any sort of seller financing or earn-out agreement, we factor that into our debt calculation before making a final decision.

Seth Fineberg (42:10):
There was a question for the panel: how does the capital structure work when you have advisors and accountants together? Are shares created equal and how do you handle the difference in margin between revenue streams?

Larry Miles (43:09):
Not all investors are created equal. We're very fortunate that our private equity sponsor owns a little bit more than half the business. The rest is owned by myself, employees, and our partners. Our PE firm focuses only on human capital-intensive businesses. When it comes to things like share classes, every share class is the same. There's no preferred return. The only nuance is the PE folks have the voting shares, which makes sense, but everyone is the same.

(44:25):
If we buy a business from an accounting firm and they elect to roll over some proceeds into Choreo equity, it's the same equity that I own. It's an honest, clean way of running a partnership. Everyone knows they are treated the same. As for margin, the ownership is the same, and the revenue share is where we partner. We want to partner with firms committed to wealth management that believe it's important to clients. They are asking the same questions you guys are about succession planning and whether selling is a good opportunity for younger folks.

Seth Fineberg (46:16):
This has been a really good panel for getting ideas out there about options available beyond PE. I'd like to spend a couple of minutes on your own advice for firms looking for alternatives.

Jeremy C. Vokt (47:21):
It is vital right now to have a strategy. Do we want to stay independent, stay away from everybody, or grow and take capital? Have a strategy and then be decisive. As accountants, we seem to hem and haw sometimes around decisions, but you need to get a decision around that strategy, plant your flag, and go. Get the culture and the team behind it and just move.

Seth Fineberg (48:14):
Are you having these conversations frequently?

Jeremy C. Vokt (48:27):
We talk a lot about it. Firms reach out to each other at conferences like this. I've gone to one-partner firms and I've gone to partner retreats with 10 or 12 partners. In one case, I felt like they were on that path, but they decided they didn't want to do it. We left that meeting not being aligned in terms of what they wanted to do.

Seth Fineberg (49:22):
Steve, any final advice?

Steve Piatkowski (49:35):
If you're curious about our process, just give me a call. I tell my wife all the time, "Money don't make no money." If you're debt-adverse, which most CPAs are, we try to explain that it's a tool. Paying debt the first couple of years probably sucks, but you'll do great.

Seth Fineberg (50:07):
Brett?

Brett Haness (50:09):
My advice would be twofold. First, look in the mirror and think about what exact problem you're trying to solve. If it's succession planning and you have a good bench, call a lender. If you need a technology partner or capital to grow and acquire, you need a growth capital partner. Second, I recommend a "listening tour." Go talk to five firms that have made the ESOP transition or talk to five references that have taken capital from Live Oak or Alan & James. It's one of the most powerful things you can do.

Larry Miles (51:18):
Businesses get easy when you look at everything through the lens of what's best for the client. When looking at wealth management, stay serious. If you've not offered wealth management because you think you'll cannibalize business from wealth advisors, track how much business you actually get from them. One firm decided not to do wealth management for years and then tracked it for three years; the grand total was $45,000 of revenue.

(52:04):
They realized they weren't getting that much from outside advisors and decided to get into the business. Likewise, if you've been growing a wealth business for years and it's stalled, ask if that's what's best for the clients or if there might be a better way. We're here to learn and ask questions.

Seth Fineberg (52:51):
Definitely find these guys. Have a plan and a sense of the growth you want. I really appreciate everyone's perspective. We're heading into a networking break. We'll be back at 11:25 for "What Drives Value." Thank you very much and enjoy your break.