Managing the Impact of PE

Both before and after a deal, private equity will rouse a lot of emotions inside an accounting firm — and change a lot of people's roles. Experts will discuss how to keep both partners and young staff on side, how to communicate with clients, and how to help everyone adjust to a firm's new structure.

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 (00:09):
Rounding the corner on this great private equity summit, we have our next panel up here. How about that for alliteration? Once again, I'm Seth Fineberg. I'm very proud to be moderating yet another panel for you. I definitely highly encourage anyone who is still out there for this discussion on private equity to talk to actual private equity entities and the people representing them. Today on this panel, we're going to be talking about managing the impact of private equity. We have lots of perspectives across the panel here. We have Dominic, Jeremy, Paul, and Bob all here to share their views. Please feel free to put your questions into the app; I'll do my best to get through them. I'm going to jump right in because this is a really powerful topic.

(01:52):
Realistically, to set the stage both before and after a deal, private equity will bring up a lot of emotion in an accounting firm. We will discuss that, see some of the survey work that our experts are going to discuss, how to keep both partners and young staff on your side, how to communicate with clients, and how to help everyone adjust to the firm's new structure. So without further ado, why don't we introduce ourselves all the way down the line here. Dominic, you first, buddy?

Dominic Piscopo (02:36):
Yeah, I'll keep it brief. I'm the founder of a base for transparency. We're the largest crowd-sourced database of accounting salaries on the market. We have a free offering for all accounting professionals who want to figure out what they should get paid.

(02:53):
We do serve firms with in-depth analytics on that same set of data so everyone can be in alignment when it comes to compensation discussions and there are no surprises. As part of that, we do media work and interview a lot of people in the accounting industry to get their perspectives on many things—including private equity—because that's one of the most interesting things happening in the accounting space. I get a lot of perspectives from that front and can speak to the experiences of individuals and firms considering private equity.

Jeremy Dubow (03:32):
I am the CEO and co-founder of Prosper Partners. We're a private equity firm headquartered right here in Chicago. For all of you that are about to hop on a train or jump in an Uber, we are right in that direction, so it's convenient. I'm happy to be here and talk about our experience as a private equity-backed business. Just as way of a quick background, we were the fifth or sixth private equity platform from April '23. We were the smallest business to become a platform, but today, happily, we're much larger. We have lived the experience from the early days to today, two and a half years later, and I'm happy to share my experience with you all.

Bob Lewis (04:34):
I'm Bob Lewis. We start companies and roll up a bunch of firms.

Paul Catanese (04:53):
I'm the principal of Inhs Advisory. We were acquired by Platform Accounting a year ago. Prior to that, I did my years with KPMG and as a partner. I'm a recovering CPA; I've been doing this for 40 years. We took this small firm 30 years ago and, with the help of a bunch of very talented people, grew that exponentially. We're heavily focused on consulting and specialty corporate transactions. I'm almost always involved in some kind of transaction, and I'm surviving.

Seth Fineberg (06:17):
Regarding managing the impact, let's talk about where you're at now and where you're headed.

(06:23):
Let's jump in. First Jeremy, then Paul: what risks were you concerned about when you created and ultimately rolled out your PE deal?

Jeremy Dubow (06:41):
Like a lot of the business owners or accounting firm owners here, we have lived a pretty static lifestyle. You've got the nature of the business, deadlines, and busy season. Your measurement of success in a lot of ways was: "Did I take an extra dollar out of the business this year compared to last year?" There weren't super sophisticated measures of success. We were looking at the marketplace and we knew a couple of things were happening. One, private equity was coming into the marketplace—there had been a handful of deals in 2022—so we knew that was a possibility, but we were looking at it differently. We were focused first and foremost on technology.

(07:30):
When you're running a business and also doing a lot of work, you're just not at the forefront of technology, and we wanted to be. We needed to change the way we were doing things to get to the head of the curve. Secondly, with respect to people, everyone knows that accounting is a labor-constrained environment. Everyone's playing musical chairs and leaving their existing firms, and we wanted to ensure that we were the premier location for people to have a great career. We thought private equity would allow us to convert our business a little bit into a technology company with equity compensation and stock options.

(08:22):
We want to ensure that when we're paying our people, we're paying market compensation plus having an equity kicker. The combination of technology and employee risk was actually the biggest risk that we were facing prior to doing a deal. After we did the deal, our people took part in what we call an employee purpose plan where they share in the upside of the business. It's motivating and exciting. It gets everyone excited to hit our strategic goals.

(09:09):
If you're going to bring about a ton of change, all accountants get nervous. You learn a lot about your sponsor and your investor. One of the things we were most nervous about is: Is your sponsor going to come in and sell you to somebody you don't want to be sold to? Are they going to push you in a direction you don't want to go? The reality of it is that it's a partnership first and foremost. It's a people business. If people don't like a future buyer, it's going to be difficult for a buyer to write a big check.

(10:04):
It probably took me a year or so to get comfortable with it, but I'm comfortable with it now. We view Unity Partners as a partner in every way. They would say, "We don't run accounting firms, Jeremy, that's what you do, but we can help you with strategy, growth, and marketing." That's what we rely on. Thanks for sharing that. Paul, over to you.

Paul Catanese (10:49):
Yeah, Jeremy, you put the words right out of my mouth.

(10:56):
The biggest thing I've always looked at is risk: the risk of doing nothing versus the risk of taking on a transaction. With so much consolidation going on, we did not want to be the last party to the dance. We did not want to be in a position where we had to compete with other private equity firms regarding technology and people resources. We wanted to be out in front. In terms of the risk to private equity, the biggest thing is autonomy and loss of control. That was a big issue for us and for our people. Our workforce is our most important asset, and we worried about how this would affect them. Our platform is all about maintaining local autonomy and control, which was very important to us.

(12:02):
Beyond that, the other biggest risk is culture. It is so important who you're going into business with. You have to work with these people for a long period of time. Yes, you can get a deal done and make money, but you're going to have to work with these folks. Through this process, we had been approached numerous times, and we'd always get down the road and my other senior partner and I would look at each other and go, "Can we really work with these guys?" The answer was always no until we met the Platform folks.

Seth Fineberg (13:30):
What sort of internal impact should firms be prepared for?

Dominic Piscopo (13:37):
I have a personal analogy that is very telling of the psychology of people at that point. Everyone is going to be hyper-aware and hypersensitive, particularly within the first couple of months. The perfect testament to this: my last job was at a tech startup. I was helping with planning underlying some layoffs, and in the midst of this, a director put a meeting on my calendar for Friday at 4:00 PM with no description. I was absolutely done that day. I thought, "Oh my God, I'm being laid off." It turned out she just hadn't spoken to me since I had gotten engaged and she wanted to hear the details. It was a completely innocent thing, but I spent the whole day sweating through my shirt.

(14:52):
Just be very aware of the psychological state that people are going to be in. I saw a discussion on a forum where a firm was acquired, and within the first week, the coffee machine was taken out of the kitchen. People thought, "This is the degree of cost-cutting measures coming in; this place is going straight to hell." It was actually just a routine upgrade, but it turned out to be nothing. Again, those little perceptions are where people think private equity is coming to get their margin. Be aware of how things are interpreted. Communication is key, and don't put nondescript meetings at the end of the week.

Bob Lewis (16:06):
It's funny that they take the coffee machine out, but these groups aren't buying a firm just to cut expenses. If that was the strategy, they would never make the investment because they would lose money. They are buying the assets, which are the people. Without the people, they can't make this work. What they're going to do is bring in different processes, automate more, and maybe bring in more management overview than your firm was used to. You need to be prepared to let go of old processes.

(17:20):
You have to be transparent with the people. The danger for anybody buying a firm is what happens when you have duplicate roles. If I've got two marketing people and I need one, that is probably the biggest risk because nobody wants to let anybody go. Most of these transactions are not intended to let people go, but you must prepare to move away from transactional work toward more consultative work as transactional tasks begin to automate.

Seth Fineberg (18:03):
Building on what Bob mentioned, I would like to ask Paul and Jeremy: were there any unexpected developments internally or externally?

Paul Catanese (18:29):
I can speak to that. Over my career, I've been involved in M&A a million times. The funny thing is with these bigger transactions, at 11:00 PM you press the button and the money goes everywhere.

(18:41):
You get paid, life goes on, and you never think about what happened to everybody else after the transaction until it happens to you. It's a whole other experience. The thing I didn't expect was the immediate emotional reaction of our staff. You can plan it out well, but they are accountants, and there's an instant emotional experience they go through. Secondarily, from a client perspective: how are your clients going to react? In our case, they were really happy for us, but their biggest concern was whether they were going to be managed by Zoom from somebody in New York City. They wanted to know that they were going to continue to have the white-glove service they've been used to.

(19:49):
Then you've got the unexpected issues between different functions. If your clients aren't set up right on the billing side, you might figure out you're not getting paid. You have to get your clients on board as well.

Jeremy Dubow (20:23):
Let me first clarify that we have not terminated any employees. Bob is right that there are times where there are duplications of roles, but in our organization, we look long and hard to find opportunities to support the broader role or elevate that person to a leadership position.

(21:22):
We have a set of FAQs for the companies we buy. We have the owners speak with their team first because they are the ones who have the most trust. We then come in second and talk about who we are and what we do. Our focus—and this isn't going to surprise you—is that things are not going to change with respect to client service. There will be elements that change related to technology, leverage, and automation, but that change is intended to add operational leverage to allow them to do their job better.

(22:56):
I fly in and have a conversation, and I'm expecting complex questions about equity compensation plans or offshoring, but the questions we get are about whether we are going to change the snack machine. Don was absolutely right. Every once in a while you buy a business and you think the teams are solidified—we do a lot of diligence to understand the next generation of leaders—but once in a while, a key talent will leave. That is the most unexpected thing to us. We would expect that owners would have done all the right things to ensure their people are taken care of, but sometimes that's not the case.

Bob Lewis (24:28):
With a 5% turnover rate, you're going to lose people every year regardless. Long before private equity, in every M&A transaction, someone is unhappy and someone leaves. One thing to expect is that there are going to be people who leave. Likely, the new people coming in are just unhappy or don't want to be part of a 50-person firm; they want to be part of a 20-person firm. That's the way it goes. Secondly, expect some resistance to using new technology.

(25:48):
Some people don't want to learn new software or internal processes. The other part is resisting charging the right amount of value. People say, "Oh, no one will pay that." I have to say, historically, every firm we go into has so much pricing opportunity. That opportunity might mean dropping some clients. I think those are the big things in the fallout. Be as transparent as you can about everything happening.

Dominic Piscopo (26:34):
It's dependent on the type of private equity transaction. For a lot of people who get acquired under a platform model, the actual unexpected fallout is the lack of fallout. I know people who were part of transactions with Ascend, and for some, nothing really changed except they got handed some equity as a senior when making partner wasn't even in their plan. They're pretty pumped about it.

(27:01):
The only thing I hear of—and this is inevitable—is people missing the "small" feel where someone walks by their desk and asks how their dog is doing. It becomes a little more like management by numbers. I alluded to this yesterday, but I was not someone who would fit that model, so I empathize with them. It ends up being a little more metrics-driven. You can't really blame anyone for that; when you have to manage 300 employees, it's harder than managing 30. Talking clearly with the leadership about which people might not fit the system so you can massage out a role for them is a good strategy.

Seth Fineberg (28:22):
Continuing on the communications theme, Jeremy, I'm going to start with you. How do you get a partner group on board with a deal?

Jeremy Dubow (28:36):
You have partners nearing retirement and junior partners thinking about their future. When we did our deal, our partners were approximately the same age and at the same point in their careers.

(28:47):
We were looking at the alternative of staying independent. We were looking at what would drive the best outcome for the partners and the people. We did the basic math and said that as long as we can grow our business, the private equity deal would be economically superior to continuing as a lifestyle business. We got our arms around the economic construct. To date, there's only been one private equity accounting firm that has done a second turn, so the jury is still out on how many second turns there will be, but I personally think there will be a lot of them.

(31:13):
In our model, every business we buy has a substantial amount of rollover equity. All of these sellers are making a bet on the future of Prosper Partners. We want to create aligned incentives. It's actually a whole lot easier to get them on board because they've already made the bet that their rollover equity is going to be worth multiples of what it was when they originally sold.

Paul Catanese (32:04):
We were structured differently. We had older partners and younger partners with a pretty big age gap.

(32:15):
Everybody's motivation was a little bit different. Being the first person that had to be comfortable, I invested my personal capital in getting myself comfortable with the opportunity. Then I got together with each partner individually and explained my rationale and what this meant for the firm. I tried to gain consensus before we did anything. I focused on: "What's best for the firm?" We know at some point we're going to transition anyway. I'm not going to live forever.

(33:18):
In a small firm, I can be the barrier to someone else's success if they are just waiting for me to retire. With the resources PE brought, we could grow exponentially and create more opportunity for senior managers. You also have to bring younger partners on board because they are the most vulnerable.

Bob Lewis (34:11):
We see a lot of diversity in the age of partners. Some partners just want to gently row to the dock, get off, and not rock the boat. Turbulence causes concerns. You have to sell the vision. Partners are looking for that.

(35:16):
I'm wrestling with that right now. Quite a few deals have younger partners who want to do it and older partners who say, "We'll do it, but we can't do it as a group." One of the reasons firms are doing transitions is because they can't afford the infrastructure on their own.

Seth Fineberg (35:55):
Several questions have to do with younger staff in particular. What was the reaction of the younger staff to your deal?

Paul Catanese (36:17):
To my surprise, the younger staff were more into this than the older folks. Expanding this for the younger people was a huge benefit to them. Innovation changed everything that a small local firm struggles with on its own. With the younger staff, it was a pretty easy lift. It's more with the mature managers that you have to deal with because nobody likes change. The key is to make sure there isn't any fundamental change to how they work. The biggest thing is: do you believe in what you're doing? If you believe it, they will trust you.

Jeremy Dubow (37:37):
Paul did a nice job of articulating the response. I'll summarize it: every single person in an organization wants to know, "What's in it for me?" The answer is an equity compensation plan—an opportunity to share in the upside. Secondly, a much more built-out support and operational team.

(38:49):
Inside technology also goes things like automation and offshoring. For us, offshoring creates a strong group of people outside our walls that allow our people to get the leverage they need to make their jobs better.

Dominic Piscopo (39:30):
I'm trying to fix the data gap by showing an objective third party. We can show people what typically happens. If an acquiring group has a track record, we can look at self-reported data. People assume hours are going to be bad, but we can show them that while hours might go up 2%, wages and equity compensation go up more.

(39:53):
Beyond offshore teams, many people at lower levels don't have access to tools that unlock leverage. Money greases a lot of wheels. You can unlock resources so you can ascend into becoming an advisor rather than being stuck in the weeds with compliance work.

Seth Fineberg (41:53):
This is a weighty question. Bob, I'll start with you. What do firms need to do when communicating with clients and prospects? How does it affect the people who are paying you?

Bob Lewis (42:37):
Communication should be upbeat and positive. You shouldn't talk so much about how you are changing, but about the value you are bringing to the table. Clients are going to be concerned about that. You need to hammer down on why you made this transition—not just because a partner is leaving.

(43:16):
What is the benefit to the client? You have to reinforce that. Refresh everything: emails, webinars, and websites. If you look at your website, would a prospect actually get past the first page? How do you make things look more engaging and appealing? This is a new, exciting chapter.

Jeremy Dubow (44:01):
Two and a half years ago, we were concerned about the reaction from our clients. We didn't know if we would lose any. The answer was we didn't lose a single client. Most congratulated us. They hoped our service would improve and—as I'm sure you can guess—they hoped we wouldn't raise fees.

Dominic Piscopo (45:08):
You want to explain that value. A salient example is saying, "We used to be so heads-down on compliance that we forgot to review your file for tax opportunities. Now we have the capacity to do that." Instead of you having to go to a separate bookkeeping firm, we can streamline things. You can explain that you have the capacity to go through planning more thoroughly because you're less stuck in compliance.

Paul Catanese (46:38):
The biggest thing clients want to know is: "Are you going to be around?" Let them know you'll be around for at least three years to migrate this. Most clients in business today understand consolidation. The main thing is just letting them know you aren't going anywhere yet and will work with them on who the next person will be.

Bob Lewis (47:26):
Before you announce, talk to your top 20 or 30 clients. Pick up the phone and have a conversation. Nothing works better than a personal conversation to make it clear that you are still committed to the relationship.

Seth Fineberg (47:55):
How does private equity impact a firm's relationship with vendors or third parties?

Jeremy Dubow (48:17):
We run our relationships and make decisions, but we now have a sophisticated project management office. If we're looking to make a massive change to technology, we're going to go through a rigorous process and analyze the decision. They aren't talking to your software vendors daily, but they are involved in the project management for the largest contracts. We seek their involvement because we want to make the best well-informed decision for the business.

Dominic Piscopo (49:45):
As a vendor to firms, it can be viewed opportunistically. I've had a deal with a small firm that then became a deal with a conglomerate of 20 firms. It can be a really positive thing. Communication helps because things tend to freeze up as the deal happens. A heads-up that you are still interested but going through a deal is a great way to maintain that relationship.

Seth Fineberg (50:24):
Well guys, we're at time. Thank you so much, Jeremy, Paul, Bob, and Dominic.