Opening Remarks & Staying Independent

Private equity isn't inevitable: It's perfectly possible for accounting firms to remain proudly independent — but to do that, they need to address the many issues that PE-backed accounting firms are solving by taking on private equity money. That means new approaches to strategy, services offerings, staffing, partner retirements, raising capital, and much more.

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. 

Daniel Hood (00:08):
Good morning and welcome everybody to our second annual PE summit. We're excited to have you all here. We appreciate it. We're excited to have this event again. It was a big hit last year. Given the trends that are going on in the profession, we think it's going to be even bigger this year and going forward. I want to talk a little bit about what we're doing this morning, which is a little different from what we did last year. The point of the PE summit in general is to bring together accountants, PE firms, deal makers, and everybody else involved in that process. But this morning, if you look to your left and look to your right, it's only accountants; it's only CPAs. The goal for this morning was to give you a little space for just you all.

(00:49):
We can ask the questions you need to ask and learn about things you need to learn about without worrying about who's around you, who's looking at you, or who's looking for the "hunters," let's put it that way. So feel comfortable. It's your space to learn the things you need to learn and ask the questions you need to ask. Now, speaking of questions, Heather, if you want to put up that slide: we are taking questions through the app this year. Last year we used a mic in the audience, but it was complicated and confusing. So what we're doing this year is you can ask questions through the app. You add the session to your schedule, and once you've added it, you can go in and ask questions through there.

(01:35):
We'll keep an eye on them. We'll try to save some time at the end of each session to answer as many as we can to make sure our moderators get a chance to see them. We do have a lot to talk about and our panelists have a lot to say, so we may not address every question, but we'll certainly try to. I should also say that there's lots of networking and break time for you to buttonhole the panelists and ask more questions. I'm sure they're all happy about that. So, put your questions in the app—that's the most important part for you. We will be going over that regularly through the day.

(02:14):
A couple of rules about CPE: you have to scan into the sessions. You don't need to scan out, but after the conference, you'll need to find a CPE form that's in the app or on the website. You can sign in there, and there'll be a form available towards the end of the conference that you need to fill out and get back to us by Monday, November 24th. I'll be reminding you of all this stuff to the point where you're sick of it, but just know that you scan into sessions and then fill out that form so we can make sure you all get CPE if you're interested. I want to thank our panelists first off; we've got an amazing group of firm leaders, people from PE firms, and deal makers willing to share information about all the different aspects of this.

(03:02):
It's a really amazing trend that's taken over the profession. I want to thank all of them, all of you for joining us, and all of our sponsors for making it possible. The list of sponsors is enormous and amazing. I think that's all I've got. We want to dive right in because there's a lot to cover. So with that, I want to introduce our first moderator, Danielle Lee. She's the managing editor of Accounting Today and she's going to be leading our first panel. So, Danielle, thank you all for being here.

Danielle Lee (03:31):
We've got some great firm experts and leaders to discuss this topic today. Just going down the line, can you all introduce yourselves and tell us a little bit about your organization?

Bob Lewis (03:41):
I'm Bob Lewis, the president of the Visionary Group. I'm the only non-firm representative up here, but we help firms with their independence. We've been working with accounting firms for 30 years regarding their internal marketplace.

(03:54):
Okay.

Jeff Barbacci (03:55):
Good morning. My name's Jeff Barbacci with Thomas Howell Ferguson (THF) out of Tallahassee, Florida. We are a Florida-based firm of about 180 people. I believe I'm the smallest firm representing the panel today at about $36 million in revenue. We have five offices in Florida: Tallahassee, Panama City, Dade City, Lakeland, and Tampa. We're mostly in small-market offices except for Tampa, and we're working to grow that practice. We've got 14 partners, eight of whom are equity partners. We are a second-generation firm; we've retired two of our founding partners and have five years left on their buyouts. Within our partner group, we probably have five or six partners who are going to retire within the next five to 10 years.

(04:58):
We keep that on our radar with respect to this conversation. The industries we serve are probably similar to most firms. We've got specialty niches in insurance and state government consulting that really drive our growth. We had substantial growth about six or seven years ago that doubled our size from about $14 million to $28 million. We had a lot of challenges with that; we had to work on our back office to get them up to speed to keep up with the growth of the firm. A lot of practices were outdated or manual. Our goal is to be a Top 100 firm.

(05:49):
To do that, we believe we have to double in size over the next five years, maintaining at least 10% organic growth plus strategic growth on top of that. So those are some things on our plate that we're trying to work on.

David Bundy (06:06):
David Bundy, president of Dean Dorton. We're probably going to see about $115 to $120 million. About 35% to 40% of that is advisory services. We're in six markets from Jacksonville to Indianapolis. Lexington is our smallest market population-wise. We are also a second-generation firm, which I think weighs into this conversation. I've been in the role about 13 years, and actually, I will be in this role for about another 40 days. So, do you want to buy my firm? No, I'm just kidding—you can't sell us deals.

Jim Meade (06:52):
I'm Jim Meade, the CEO of LBMC. I don't want my accent to give it away, but we're headquartered in Nashville, Tennessee. We have six offices, primarily in Tennessee, but we also have one in Louisville, Kentucky, one in Charlotte, North Carolina, and then an office in India. We have about 1,000 people and $250 million in revenue. We're unique in that we're about 62% advisory. We started advisory practices a long time ago, so they have had more time to incubate and grow. Our primary industry is healthcare; about 30% of our entire organizational revenue is healthcare-related. We do a lot with private equity, so we love them as clients. Please don't let anything I say today be held against me from a client perspective because they are absolutely perfect clients to have.

(07:55):
So, that's a little bit about us.

Danielle Lee (08:00):
So my first question is: why is it important for your firm to stay independent?

David Bundy (08:05):
You know what's funny is we don't use the word "independent" internally. We use the word "control." We're a second-generation firm, and we like what we have today. We've been successful at building it and we want to maintain that control. We want to make the decisions we want to make, when we want to make them. We want to invest in what we want to invest in. If that's a six-year payback, we're okay with that. We want to drive the strategy. So I'd say control is really what we're after.

Jim Meade (08:42):
It's a great question, and the answer probably differs depending on who in the organization is answering. Like most of these gentlemen, the lion's share of our careers is in the rearview mirror. But we've been around for 40 years and we're now on our third generation of leadership. As we talk with our young owners and leaders—and we are very proactive about ensuring they get into leadership positions early—they constantly say they want to remain independent. It's important for senior leadership to ensure we offer them that opportunity as long as we see a sustainably successful path forward.

(09:36):
And Jeff, why is it important?

Jeff Barbacci (09:37):
I would say the same thing as David with respect to control. For us, I almost grew up in the firm. I've been with the firm since 1995 and helped develop a lot of the growth. Having the freedom to go in different directions and make the decisions we need to grow is very important. Our shareholder group is adamant about remaining independent because they want the opportunity to have that growth, control it, and reap the rewards. I don't know that they fully realize the opportunities that could come from a PE deal, but they definitely understand control.

(10:34):
We work with a lot of clients in the professional service industry that have gone through a PE deal, and many of them are not happy and are trying to figure out a path out. That's something we don't want to get into. We want to maintain our culture. We just did an acquisition where the company told us that had we been involved with PE, they wouldn't have gone with us. They sought us out specifically because we were not interested.

Bob Lewis (11:25):
Let me explain what's happening. We get at least one new firm a day telling us they aren't sure what to do or asking if they can remain independent. The big drivers we see are, one, control—if they think they're going to lose the lead and just be collaborating with whoever acquired them. Second is the emotional aspect; it's a big decision. Third is the internal relationship; they wonder what's going to happen to the younger staff. Most people don't understand the process. People need to make a data-informed decision on their options and make a conscious choice to stay independent with a plan to do it.

Danielle Lee (12:27):
That's a great segue. How has your decision to remain independent factored into your current strategy? Jim, I'll start with you.

Jim Meade (12:40):
Another way to ask that is: how has the introduction of PE changed our firm strategy? In one word: everything. Whether we admit it or not, PE has raised the bar for all of us, and I think that is a very good thing. The professional services business was largely unchanged until the arrival of professional investors. They focus on the right things from a business perspective, and as a result, we've all had to raise our games—whether it's talent acquisition, growth, market evaluation, or investment in technology.

(13:34):
It has changed our strategy in every aspect of what we do.

Danielle Lee (13:39):
And Jeff, how has remaining independent factored into your strategy?

Jeff Barbacci (13:43):
From a growth perspective, we're looking at the advisory services we need to invest in to remain competitive.

(13:54):
Internally, it means having more direct conversations with our owner group about understanding what enterprise value is and how you create it. That can be a difficult conversation—getting them to understand what drives value and what we are buying from them when they retire. We have to develop an independence plan. Our shareholder group is adamant about remaining independent, so we need to be more intentional about what we're going to do and how we hold each other accountable.

(14:51):
IT is also a big concern right now and how we invest in that. We've always been good at developing strategic relationships to bring solutions to our clients that we may not offer in-house. We can continue to do that, but we need to be focused. The independence plan is going to be a key focus for our next strategic plan.

(15:40):
You mentioned those difficult conversations. Do you have any advice on how to navigate them? Be direct. I believe that when you admit new shareholders, it needs to be for the right reason—it can't just be a promotion. They have to be able to drive business, understand the industry, develop people, and be entrepreneurial. You get to the table by being a good technical expert, but if you can't drive business, the water is only being carried by a few, and that isn't sustainable.

(16:33):
Those conversations are frequent: "This is what you're bringing to the table, here's what you need to do to get there."

Danielle Lee (16:42):
And David, how has your firm strategy been influenced by staying independent?

David Bundy (16:48):
Almost the opposite, because I don't think our strategy has changed much at all. Ten years ago, we were basically a one-office firm in Lexington, Kentucky. We built a strategy to mitigate the risk of being able to transition the firm internally. Every decision we made was to make ourselves more valuable. We've built a firm with a fantastic track record of organic growth—about 15% this year.

(17:39):
So we're going to continue that strategy. We've implemented mergers when we needed to enter a new market, but it's not the biggest part of our strategy. We recognize that mergers might be more difficult for us today because we don't have the same capital behind us as PE firms, so we've tweaked our thought process on new markets, but it hasn't been a wholesale change.

Danielle Lee (18:14):
And Bob, what have you seen in terms of strategy elsewhere?

Bob Lewis (18:18):
They hit a lot of points here. One thing we're seeing is that you are now competing against larger organizations with more funding.

(18:26):
So how do you change the game plan? In every firm we work with, we see misalignment in strategy and low pricing. There is no price gouging going on, but people are really afraid to change their pricing. We do a deep dive analysis called a "Red Dot" where we map out all clients. Red Dots are clients under 80% realization. It's amazing how many Red Dot clients firms of all sizes are supporting. Why burn capacity when 80% of your revenue comes from 20% of your clients? To remain independent, firms need to create the capital to compete. If they don't, it's a slow death where you can't recruit or position yourself.

(19:17):
However, there is a lot of opportunity right now as clients fall off of larger firms onto smaller ones.

Danielle Lee (19:37):
I'm curious how you're solving the problems that other firms are solving with private equity, like access to capital or funding succession plans?

Jeff Barbacci (19:49):
Regarding access to capital, our shareholder agreement provides for it. We capitalize at optimum levels. Our current problem is funding more of our receivables with capital rather than using it strategically. Capital hasn't been an issue because we are a profitable firm, but getting shareholders to understand that investing for the future might mean taking home a little less today is the challenge.

(20:32):
How do we convince shareholders closer to retirement that they should invest in the firm even if it potentially reduces their compensation? We need an environment where shareholders are committed to the long-term survival of the firm.

(21:00):
Regarding buyouts, we have formulas that cap payouts to 25% of net income before partner compensation. We're well under that right now. If we have the growth we expect, paying out founding shareholders shouldn't be a problem. If we're admitting the right entrepreneurial shareholders and focused on the right advisory services, I believe we can be successful.

Danielle Lee (22:10):
David, how are you funding growth?

David Bundy (22:13):
We looked at what our realistic capital needs are for the next two years. Right now, a transaction line with our bank is the cheapest way to have that capital available. We have enough dry power to do what we need for two years, but we aren't naive. If we ever need to pivot to get more capital, we know which avenues to go down.

(22:45):
If we sold the firm, we'd have an abundance of capital, but we wouldn't know what to do with it because it isn't part of our strategy. For succession or deferred comp, we haven't traditionally funded it. We recognize that multiples may increase, so we've worked with an advisor to create a plan to finance and fund that without a huge drain on our cash. We're going to implement that in 2026.

Jim Meade (23:45):
Private equity is a very effective way to monetize your investment in your firm. That is the primary purpose, and there's nothing wrong with taking advantage of an opportunity that didn't exist years ago. When we look at our capital needs, we break it down into buckets: organic growth, M&A, technology, and people. For us, people is not an issue. We accept the top 10% of applicants and have an intern class of 60 or 70. Retention has also gotten much better across the industry compared to 24 months ago.

(24:48):
One thing PE helped us realize is that we needed a larger offshore presence to increase our contribution margin. We didn't need capital to do that. Regarding technology, I push back on the idea that you need PE for it. If you're a billion-dollar firm, maybe. But if we're a $250 million firm, we have to think about the use case. Are we an accounting firm or a technology firm?

(26:24):
To me, the biggest challenge over the next few years isn't who owns the firm; it's the impact of AI and technology on our workforce and how we deliver services. Regarding M&A and succession, we have mechanics in our documents that provide for succession planning. We model it out 10 years and revisit it every year. Our firm sells every year on fair value, just like PE. We have a third party value the practice and we enter and exit on that.

(27:18):
We also have access to significant credit lines. We're accountants—we don't like to borrow money and we certainly don't like to personally guarantee it. You don't have to do that if you partner with PE. But the cheapest capital is your own. We put a third to the bottom line, so it's just a matter of whether you're willing to reinvest that cash to increase the value of the firm. Banks also love to loan money to high-cash-flow businesses.

(28:13):
I can't come up with a use case where we need massive amounts of capital that we don't already have or can't get through traditional credit facilities.

Bob Lewis (29:03):
Briefly, 90% of retirement programs are unfunded. The problem many firms are having is needing three partners to buy them out but only having one. Four years ago, PE didn't really exist. The old model was that I buy Jeff out over 10 years; that model is dying.

(29:57):
Now, I can sell a firm for a much higher multiple than deferred comp programs pay out. Firms have to decide if they are willing to do an internal succession at a lower cost. You can create internal capital by moving your margin from 30% to 40%, but you have to have the discipline to reinvest that extra money instead of splitting it up. That's the hard part.

Danielle Lee (31:22):
How has your competitive landscape been changed by the entry of PE? David?

David Bundy (31:35):
In our markets, we've seen firms take PE and we braced ourselves, but we haven't seen the negative impact yet. We haven't lost to them. In fact, we've had opportunities to pick up clients and talent from them. We didn't take all of them because there's often a "dump" of bad clients in these transactions, but we got some great people.

(32:24):
The competitive landscape has actually been beneficial to us so far. The only area where I see it being harder is if we went to the market to acquire something ourselves.

Jim Meade (32:48):
Similarly, I would say it's been a non-event. Nashville has been a high-growth market for 10 years, so new competition is constant. We look with intrigue at firms that have taken PE to see if it changes their philosophy or aggressiveness, but so far we've picked up more clients and people than we've lost. We're seeing more aggressiveness from national firms and the Big Four than from PE-backed firms.

(33:54):
As independent firms, we don't need board approval to change our strategy. If we want to get aggressive on pricing or strategy, we can do it. That is a significant advantage.

Jeff Barbacci (34:27):
My markets are small. We've had one firm in Tallahassee take PE. I keep waiting to see if they will bring more resources to the table than we can offer, but I haven't heard that from clients yet. We haven't seen pressure on new opportunities. We've actually been able to recruit people from those firms.

(35:27):
In some ways, I'd like to see more competition just to motivate my partner group and say, "Look, it's on our doorstep, we need to be more deliberate."

Danielle Lee (35:45):
Would you and David agree with what Jim said about agility being a big advantage?

Jeff Barbacci (35:53):
Yes, for sure.

Bob Lewis (35:59):
Think of the market in two pieces. You have the large firms here, but there are thousands of $5 million to $20 million firms. They don't have a Director of Recruiting, a CIO, or a CRO. Those firms are struggling with the changes because they don't have the internal infrastructure.

(36:35):
That's the main thing we're seeing: smaller firms don't see the ability to do this on their own, whereas larger firms have more resources and leverage already in place.

Danielle Lee (36:56):
How often do you revisit the decision to remain independent?

Jim Meade (37:08):
Probably not frequently enough. It's not so much about PE being an issue, but about the pace of change in our industry. You have to ensure you have the right resources. Everyone says they have an AI strategy now—I even heard a commercial for lawn treatment that has AI. But you need independent resources to help you vet what is actually strategic for you. We spend the most time on that.

Danielle Lee (39:05):
What about you guys?

Jeff Barbacci (39:07):
I think about it daily. As a group, we talk about it at least annually. Being a smaller firm, we don't have all the C-suite positions filled, so that is a priority for us—building out our back office to support growth. I'm not concerned about the funds; I'm more concerned about finding strategic growth with other firms that also want to stay independent.

Danielle Lee (40:16):
David, is it a similar annual revisit for you?

David Bundy (40:21):
It's a constant review. Two years ago, we realized we couldn't just "park" the idea. We've built relationships with family offices and maintain contact with them quarterly. If our strategy ever requires it, we'll be ready. Right now it isn't necessary, but we aren't naive to the fact that they have an abundance of capital if we ever needed it.

Bob Lewis (41:07):
I see firms that wait two or three years to get back to us, and by then they're older or a succession candidate has left. This is on every firm's mind. Smaller firms are just trying to figure out how to survive. A $5 million firm is at the bottom of the Top 500. My biggest fear is that they will simply run out of time to make a plan.

Danielle Lee (42:14):
Is there anything that would change your mind about staying independent?

Jeff Barbacci (42:22):
Absolutely. If our shareholder group cannot drive revenue and growth, or if we don't function well as a group. As I get close to retirement, I want to make sure I get paid. If we aren't moving the needle, I'd consider a change. However, I'd prefer an upward merger with a like-minded firm that fits culturally rather than a PE deal.

Danielle Lee (43:46):
David, anything that would change your mind?

David Bundy (43:51):
Before I was CEO, I was a healthcare consultant. The worst thing was talking to an organization that had no options left but to sell because they hadn't done what they needed to stay viable. For 13 years, our approach has been to never be in that box.

(44:15):
We will stay independent as long as our strategy dictates it or our younger owners decide a different avenue is best. It would require a deep look at all options.

Jim Meade (44:48):
Similarly, our younger shareholders are passionate about independence, but they aren't as passionate about paying out the exiting senior leadership. That's the reality. If that ever became an issue, or if there was a seismic shift where a $250 million firm simply didn't have the resources to execute its strategy, we would look at it. But it wouldn't necessarily be PE; there are mergers of equals, ESOPs, and strategic mergers that allow for some autonomy.

Danielle Lee (46:26):
Bob, have you seen firms change their minds and pivot?

Bob Lewis (46:33):
Sometimes an offer is made that they can't refuse. But firms need to stress-test their succession plans. You can't fix a mistake in a year; you need four or five years. Second, if you can't get partners to agree to be accountable and in alignment, you're in trouble. We recently saw a $20 million firm with $9 million in write-downs. That is a partner accountability problem that needs to be fixed to remain independent.

Danielle Lee (47:59):
A question came in for you, Bob: can you clarify how PE solves the "double hit" of needing to invest in technology and pay for partner buyouts? Are you saying PE allows them to buy out older partners all at once?

Bob Lewis (48:35):
If you have an outside investment from PE, typically the first thing they do is pay off the debt or buy out partners from the cash settlement.

(48:46):
On the technology side, PE is buying an asset. That asset isn't just the revenue; it's the people. If they can increase EBITDA by improving technology, offshoring, or adding advisory services, they get a massive return. They aren't looking to cut costs; they are looking to add capital to modernize. Is PE the perfect solution for everyone? No. But they are all looking to modernize the accounting profession.

Danielle Lee (50:03):
Any final thoughts on the strategy to remain independent?

Jeff Barbacci (50:21):
Keep an eye on it. I'm glad to be at this conference to be better educated.

David Bundy (50:45):
Outside investors want to invest because there's opportunity to make money. We say: why give that money to them? Why can't we do it ourselves so we keep the rewards and the control? We don't even look at realization anymore; we look at margin by engagement. PE coming into the industry has helped make us better because it forced us to take a better approach to metrics.

Jim Meade (51:49):
Don't panic, but don't ignore it. Change is here. You have to be ready to execute. I've asked my peers who took PE: "How many tax returns do you plan to review? Are you going to sign an audit report? Are you doing campus recruiting?" The answer is crickets. If it's just about money, accept that, but don't expect revolutionary wisdom to help you with the actual work of the firm.

Danielle Lee (53:00):
That's a great note to end on. Thank you all for sharing your valuable insight and experience. I appreciate it. Thank you so much.