If PE Isn't for You: How to Remain Independent

Accounting firms that don't partner with private equity still need to find solutions to issues like access to capital, capacity shortages, unfunded retirement regimes and more. That means developing strong, independent growth strategies, finding alternative sources of funding, structuring their firms in ways that attract future generations of partners while offering exit paths for current leaders, and much more. This panel will explore what it takes to remain truly independent in a changing landscape.

Transcription:

Dan Hood (00:18):

Welcome. We're here with Clint Costa, Senior Wealth Strategist at Coreo. Clint, thanks for joining us.

Clint Costa (00:22):

Thanks for having us, Dan.

Dan Hood (00:24):

Let me dive right in. What are the issues you think that are making accounting firms consider private equity?

Clint Costa (00:29):

I think this runs generally along two lines. The first is creating that succession plan for the senior accounting partners who are trying to figure out how to do that. But what we see, the real opportunity and where the real excitement is, is around creating a larger client advisory service platform. That's what we're really interested in as Coreo. We're a national wealth management firm that lives at the intersection of accounting and wealth management. What we really see is private equity coming in and being able to help accounting firms offer greater and larger services in general.

Dan Hood (01:05):

How else is private equity changing accounting?

Clint Costa (01:08):

I think private equity is coming in with the technical acumen, the business strategy, and the capital to make this all work for accounting firms that are otherwise burdened by all the day-to-day strategic and operational things they need to take care of.

Dan Hood (01:24):

When you put it or describe it that way, it's pretty clear why private equity might well be attractive to accounting firms. Why are accounting firms attractive to private equity?

Clint Costa (01:32):

I think private equity is seeing probably what we've seen at Coreo, given our heritage. Accounting firms have a tremendous opportunity to be really general business advice platforms for the middle market business that makes up so much of our economy. To the extent that private equity can help accounting firms with alignment of partners, alignment of service offering in order to bolster that process, it's something that's really exciting and offers tremendous opportunity.

Dan Hood (02:07):

It's very exciting stuff. Clint Costa of Coreo, thanks for joining us. Thank you, Dan.

Danielle Lee (02:17):

Hello everybody, and welcome to the next session in today's virtual PE summit. My name is Danielle Lee. I'm Managing Editor at Accounting Today, and I'm very pleased to moderate today's session. Before we begin, just some CPE information. It should have been apparent to you in the attendee hub, but just to go over real quick: to receive CPE credit, attendees must remain for the duration of the session. They must participate in the audience engagement feature such as polling during the sessions. They must complete and submit the CPE evaluation form no later than July 18th, 2025. Once the form has been submitted, you'll receive a certificate of completion from Horizon two weeks post-event. If you have any questions, you can contact heather.nielsen@ant.com. That information is also available in the attendee hub. But now let's kick off today's session:

If PE Isn't For You, How to Remain Independent.

(03:14):

This session will cover accounting firms that don't partner with private equity. They still need to find solutions to myriad issues like access to capital, capacity shortages, unfunded retirement regimes, and more. So they must develop strong independent growth strategies, finding alternative sources for funding, structuring their firms, and ways to attract future generations of partners for exit paths and much more. This panel will explore what it takes to truly remain independent. I'm very pleased to introduce today's illustrious panel of speakers. We have Bob Lewis, President at The Visionary Group, Nathen McEown, CEO at Whitley Penn, and Steve Piatkowski, Loan Officer, Accounting, Tax and Law Lending at Live Oak Bank. I'll turn it over to today's presenters to introduce themselves and give a little bit more background, starting with you, Bob.

Bob Lewis (04:10):

Sure. Thank you, Danielle. So The Visionary Group, basic background on what we do:

We have been working with accounting firms for over 30 years now. Over the last 15, 16, 17 years, we've done a significant amount of merger and acquisition work in this industry. We're very deep in the private equity sector, traditional kinds of acquisitions. We're actually going to be co-chairing the upcoming Accounting Today private equity summit in November, but we do a lot of work helping firms figure out how to remain independent and how to grow organically. It's become a little bit more challenging due to the infusion of outside capital, but we're going to go through some of those points today. As a quick side note, we did five transactions this month so far. Four of them were with traditional firms that have no outside capital and are not private equity. So there are markets out there. We just have to find the right ways. Thank you, Danielle.

Danielle Lee (05:04):

Thank you, Bob. Nathen, can you tell us a little bit more about yourself and your organization?

Nathen McEown (05:08):

Yeah, I'd love to, and thanks first of all for including me. So, Nathen McEown, based in Houston, Texas. I'm the CEO of Whitley Penn. It is a $260 million CPA firm. We have about nine offices and about 850 people. Our service line breakdown is about a third, a third, a third between tax, audit, and advisory. What we're known for over the last 20 years, we've had a historical growth of about 16% per year. That comes through about 30% inorganic, so acquisitions, mergers, and 70% organic. I'm a lifer, been here my entire career. I started as an intern in our Dallas office 21 years ago, came up the audit ranks, made audit partner, then shifted to leading our advisory group for several years, then became our Chief Growth Officer, and then became CEO this January.

Danielle Lee (06:03):

Great, thank you. And Steve, over to you.

Steve Piatkowski (06:06):

Yeah, thank you. It's nice to virtually meet everybody. Danielle, thanks for the introduction. My name is Steve Piatkowski. I'm a lender on our, technically it's called our professional services team, which covers tax and accounting and law firms. About 95% of what I do day to day is talking to tax and accounting firm owners who are looking for capital for multiple reasons. What makes Live Oak unique is that we are specialized lenders. We have about 50 industries or so where we have lenders that are specific to that certain industry. For example, it's tax and accounting for me. So we understand the needs of tax and accounting firms. If you go to a local bank and are looking for some financing for whatever reason, they may or may not be comfortable with it because tax and accounting doesn't have any tangible collateral. But because we understand the industry and we have been doing this a long time, we can get comfortable financing whatever opportunity that firm is looking for.

Danielle Lee (07:08):

Great. Thank you all. Let's begin with the basics. Why do firms want to remain independent? Nathen, I'll start with you.

Nathen McEown (07:19):

I can't speak for all, but I will speak for Whitley Penn. I'll say for us, it's much less about independence and private equity. It's more about can we execute on the strategy we have that continues to provide opportunity for our people, and we're growing, and we believe we can do that. So why would we give up control or ownership to an outside party? There's a lot of, I think sometimes you hear firms that "I want to be this, I want to grow 20%, I want to be top 10, I want to be 100." Whatever it is, for Whitley Penn, it's less about "bigger is better" and it's "better is better." So we have a strategy to get better every year, and as long as you have a great culture and provide opportunities, you are going to keep your people and continue to grow. We've been able to execute on that. For us, we will remain independent as long as we can continue to execute on that strategy.

Danielle Lee (08:10):

Great, thank you. And Steve, from your perspective, why do firms want to remain independent?

Steve Piatkowski (08:14):

Yeah, so Nathen had a lot of great points. I think maintaining that control and preserving the culture. We've heard some horror stories of private equity coming in and changing culture. That may or may not be true depending on the private equity firm, but having that independence allows firms to keep that culture. If you have a wacky tacky tie day on every Friday of the first month, you can keep that tradition alive. But then also there's ownership flexibility. Maintaining that independence gives partners more control. To Nathen's point, better is better.

Danielle Lee (08:57):

Great. And Bob, what are your thoughts?

Bob Lewis (08:58):

To build on what the other two gentlemen have said, we see a lot, we talk to a lot of firms, weekly 50, at least 50 firms a week with our group. A lot of legacy. They want to preserve the legacy that they put in place for whatever specific reason they feel strong about preserving the legacy. There is the issue of control. I want to be the one that makes the decisions as opposed to having somebody making it with me. But typically in most of these outside investment and private equity groups, there's a little bit more collaboration than it looks like on the surface, but it is an issue that you give up some control and in some cases, a lot of control, if you pick the wrong partner. Also, feeling it's better for the staff comes up a lot.

(09:40):

It's a better pathway for my staff, and there's conflicting viewpoints on that because staff going into a larger organization provides more opportunities. But at the same point, if you've got good A and B players inside your firm, like I'm sure Nathen does, they can escalate through the ranks quickly as the firm gets bigger and grows organically, and they can still use M&A tactics to continue to grow. But the last thing, I think, on remaining independent is really the myths on PE. Almost everybody has a horror story about "my client sold to private equity, and then it fell apart, and the whole company was ruined, and disaster occurred." That can happen if you make a bad decision, but our point is explore all options. If you're going to remain independent, you got to just create a plan to focus on it. I'll turn it back to you, Danielle. I feel like I know I'm by a news channel here, turning it back to you.

Danielle Lee (10:34):

Reporting live. That brings us to our first polling question. If we could get that polling question pulled up. The question we are asking is, How difficult do you think it'll be for accounting firms to remain independent over the next several years? Your choices here are: very difficult, somewhat difficult, not difficult, or easy. Please select the one that best describes the difficulty that you feel accounting firms will have in remaining independent over the next several years. We'll give everyone adequate time to get those responses in. It'll be interesting to see where they fall as we look ahead over the next several years and see just how much private equity continues to shape the profession and how difficult it'll be for firms to remain independent. We'll give everyone some time to get those responses in. A reminder that you can put your questions to the panelists at any point during today's presentation. We'll try to reserve some time at the end. In the meantime,

Bob Lewis (11:49):

Ask questions.

Danielle Lee (11:50):

I know our panelists are eager to respond, and I know we always have an engaged audience, which is great. It's a great topic today about remaining independent, so I'm sure we'll have some good ones come through and give everyone a few more moments to see. Do our panelists have any thoughts on where these responses may fall today?

Bob Lewis (12:19):

I think that's not easy.

Steve Piatkowski (12:20):

If anybody answers easy, they need to revisit it. I don't think there's a wrong answer here, so we'll see.

Danielle Lee (12:26):

No, it's definitely up to whatever all of our attendees feel, and it's just to get those polling results in, but it can be interesting to get a pulse from everybody. So give everyone a few more moments, make sure everyone's response. Yes, it's kind of a cliffhanger now. We'll have to see.

Bob Lewis (12:49):

Yeah, kind of want to hear now.

Danielle Lee (12:50):

What everyone's crystal ball tells them, but I'll count everyone down. I'll give everyone a final 5, 4, 3, 2, 1, and close out the poll. Great. Thank you all for responding to the polling question. Now, back to my questions. What are some of the challenges that are facing independent firms? I know there's a lot to talk about here. Steve, I'll start with you. What challenges are you seeing?

Steve Piatkowski (13:24):

Yeah, the list could be long, could be short depending on how big your firm is, what your goals are. But I talk to people who are looking to acquire or trying to acquire for the first time, and we discuss common themes that they're seeing in challenges that they're facing. Some of the topics that come up, or at least the top three reoccurring themes, are hiring talent in the space. Having people coming into the CPA industry or accounting industry, that pool is kind of slimming down as the years progress. No offense to the people on the line, but becoming an accountant or CPA is not the sexiest industry in the world. A lot of the younger generation is looking to do more social media influencer style. But definitely hiring is an issue. I've talked to firms in the past that acquire just to acquire the seller's staff, and they don't necessarily need the revenue, but they need the people that can manage their clients.

(14:28):

Another theme that I run into pretty often is technology. The technology is constantly evolving, and we all know AI is coming in or it's here already, and it's having an impact on the space. So having the capital to invest into the newest, latest, and greatest technology can be a struggle for some smaller independent firms. Then the third one is succession planning. That's something we've all heard as well, I'm sure. What is that current owner's plan? How are they going to get out? How are they going to fund their retirement, and where is the business going to go? Those are my top three.

Danielle Lee (15:12):

Great. Bob, before I turn over to you, I want to mention that our polling results: almost 60% said somewhat difficult, so kind of middle of the road there, so that was interesting. But Bob, what challenges are you seeing?

Bob Lewis (15:25):

I'm going to tag onto where Steve left off. The succession is an raging problem right now inside the industry. The staff that we do have in place—if anybody's not aware of this, they should probably pick up a subscription to Accounting Today—we've had a staffing shortage for like 20 years. The problem that we've got is now that staffing shortage is rolling over into a leadership shortage because the staff that I did have in place, I gave them work, I fed them. They didn't have to go out and build a network. They didn't go out and sell. I'm stereotyping because there are a lot of younger professionals who do that very well, but there's not enough of them. So I do have a huge succession void. The second thing is what's changed over the last three to four years has been this capital issue.

(16:07):

It started off with PE groups having capital. Now I've got firms, larger firms, that have outside investment capital that are going in and competing directly against the PE groups on transactions, which leaves the traditional firm, if they're going to do an M&A transaction, in a difficult spot to compete from a capital perspective, and I know Nathen approaches this in a way because he's built obviously a large firm here and is still doing transactions. The other part is how do I expand into advisory? That's a big sector. You got to make investments, and if you don't want to make the investments to remain independent, you should invest in partnerships with groups out there that you can do a revenue share to bring them in to provide the HR services, the exit planning, the wealth management, the things your clients need. The last thing is the biggest challenge: they're holding onto clients that are burning capacity. They're not profitable enough. We're in a market that's got a huge supply and demand imbalance right now. The supply of accountants is down, the demand for the work is steady and up. We should be charging accordingly. We've got clients out there that are bidding on audits and winning them because they're the only one bidding on the audit. What could they price that deal at? So I think the clients and the pricing are a big part of remaining independent, and to us, that's the core we look at most firms.

(17:22):

Nathen,

Danielle Lee (17:23):

Great. Thanks, Bob. Nathen, can you share your practitioner perspective?

Nathen McEown (17:29):

Not to go against or with the other two because a lot of similarities, but I think every firm is different, right? Obviously we're a $260 million firm, we have 850 people, great market density where we're at, and so our challenges are a little bit different. I would just stress that sometimes there's a narrative that PE is pushing to encourage people to come to them, and there's all this narrative, "You can't get talent now, you can have money for technology," and things like that. I'll say narrative's not always reality. For us, we don't see an issue with talent. If we want 100 interns, we go get 100 interns. I think the change with the 150-hour requirement is actually going to cause a little bit more of a glut of some of these accounting students, and you're going to have to really be smart about who you go after.

(18:14):

Then offshoring—there's access to creating offshore, which there are a lot of third parties that will help you, whether you're a 10-person firm or you're an 8,000-person firm. So you can get access to offshore in a pretty cost-effective way as long as you can organize it and manage that internally properly. Technology: My stance on that is the best technology for public accounting will be available for a lot of firms. If you are a really smart developer out of Silicon Valley, you're not going to go work for a Big Four firm in development technology. You're going to create a SaaS model exit for a bajillion times revenue, and you're going to be able to provide that to a lot of firms at various sizes. So I do think some of that is not necessarily always true. Obviously, it depends on the size and it depends on how profitable you are.

(19:00):

If you focus on profitability, you have more dollars to reinvest in the business and keep partners happy. We're very fortunate. We have 90 partners, average age 45, so we're young, we're hungry, we want to invest in ourselves and grow. That's not always the case, obviously, but maybe if you want to stay independent, you can look to partner or merge in with a firm that is bigger that can provide some of that, and then you still get that independent feel. You own your market, but you just now have a platform where you can share expenses and maybe leadership or other directives. M&A: that's one thing they always say is a challenge, and it is. You don't have a big bag of money, but there is access to capital. Steve at Live Oak can give you some money. You can get a little more creative and show that, hey, maybe owning more of the firm, you will make more money for your younger partners than if they just sell 50% private equity day one.

(19:55):

So you can get creative, you can think of things. There are firms out there that really want to stay independent, so go find another independent firm. For us, we really organically come up with a lot of M&A, and so it is still possible. I don't think that that's necessarily going to be so competitive that PE says it is. It's going to be different, it's going to be harder, it's going to be more strategic. So that's how we look at it. I do think there are challenges, but I think if you really think about it and are strategic, a lot of those challenges you can handle if you put in the time and effort.

Bob Lewis (20:34):

Danielle, before we move, I want to add on something Nathen said because going back to what we're talking about on clients and pricing, we do see, look, the goal isn't for the partners necessarily to make more money by increasing the price on the clients. The goal is to have more revenue available to be able to compensate and pay our staff and to buy that technology. To his point about remaining independent, the money is often in the firm. It's just hidden and not priced properly, and they're spending their time on the wrong clients. If they could just stop and adjust, and not just one time, but just continually, they'll have a much better chance of remaining independent because it is there. We see it in almost every single firm we talk to when we do our analysis on them. So I just want to throw that out. Thank you.

Nathen McEown (21:18):

Profitability can definitely cure a lot of things if you really manage it correctly.

Danielle Lee (21:26):

Great. Given all these challenges you've outlined, as Nathen mentioned, it can be very individual to the firm, but there are some universal challenges that have arisen. Will independent firms be able to compete with private equity groups and firms that have accepted outside investment, and how will they be able to do that? Bob, I'll start with you.

Bob Lewis (21:46):

Okay, so we hit some of this, but I'm going to hit it. It is going to be a struggle, and the struggle is if I sell the firm internally, like doing internal succession, a lot of the partnership agreements have a 0.8, 0.9, 1 times revenue or some other form of compensation for the partners to exit. Unfortunately, in this market right now, we see opportunities where it's not one times; it's 1.2 to 1.4 with cash. So the owners have to make a conscious decision to want to do this independently or remain independent, which is okay. It's a good thing to do. The struggle, though, is the argument that some of these firms make is the clients will go to independents. If you go to a private equity firm, the clients are going to spill out and go to independent firms. There is a lot of truth to that.

(22:34):

But the biggest problem is, will a firm that they're going to spill into have the capacity to absorb them? Right now, every firm we talk to says they're pretty much at capacity limits, and when we go into an analysis, we find out the capacity utilization is really like 55%. Where's the other 10 or 15% that could squeeze out? The big part is when firms think they're fully staffed already or fully at capacity, how do they absorb incoming clients, and they have to adjust that approach. That has been something that we've been looking at really hard in firms, and they have to have the infrastructure to support those new clients. Going back to the point I had with Nathen, clients and pricing, to me, the heart of this whole thing in independence is looking at your clients, looking at your pricing. So you've got those capabilities to be able to go out and build what you need to build and pay who you need to pay. I think that's enough of a lecture. I'll stop lecturing. Sorry if I got a soapbox to stand on. It's really, I'm myself, even.

Danielle Lee (23:31):

While you look for that, I'll turn it over to Nathen because I'm curious from his perspective, helming an independent firm: can independent firms compete, and how?

Nathen McEown (23:43):

Yes, absolutely. I think the big thing is you can't put your head in the sand. You can't do what you did the last 10 years and expect the same kind of outcome. The bar has been raised, which I think is awesome. I love. We got a lot of clients because of PE. They make our business thrive, and this is an amazing industry, and challenge accepted. We now have to think very strategically about our firms, and so we actually can compete. We just have to put some strategy and execute. For us, we focus on three things. Organic growth—that starts with great client service, cross-selling, getting great talent. We definitely could take on more clients, Bob, so tell those folks to send them to us. We will create capacity, we will find talent, new service lines, business development, getting the best rates, like he mentioned. Profitability is kind of that next leg of the table.

(24:40):

Look at your leverage ratio, your utilization, global workforce, make sure you're taking advantage of that AI automation where you can leverage that, investing in the business, which is a huge aspect for us. That means, okay, maybe we need to pull in a lateral hire from another firm. Maybe we need to invest in hiring somebody that, you know what? There's a data analytics senior manager we hired from a Big Four firm. Cost us a lot. We didn't do any of that work at the time, but he was sharp. We knew he was driven, and with our support, he could build something, and within 18 months, he had a $2 million book of business. Those things are happening out there and available. You just have to be smart about it, and you have to support them when they come in the firm. M&A: that's another, the fourth leg of the table, so to speak.

(25:26):

I would say for us, M&A is like a marriage. Their last name's going to change. They're going to move in. You're going to have to hang out with their in-laws, so you need to get to know them really well, build a rapport. For us, it's for life. It's not for an extra dollar on EBITDA. It's not for a five-year flip. So it's just a very different experience, and I think there are a lot of firms that want to be independent and would appreciate that. For us, we just try to find those firms, and we may not have as many. We may not do $100 million deals, but that's okay. We're going to find a great $5 million firm, $10 million firm, $20 million firm, and we are going to look for new niche businesses, new geographic markets, and we're not afraid to do cash upfront. I can't promise our deals are always going to compete with PE, but I think we can present it in a way where it makes sense. I don't think it's always PE is the best financial opportunity. I think there's a way you could do it with an independent firm, and it makes sense, and the cash, and we will talk about that a little bit later in terms of leverage, but Steve probably has some good thoughts on that.

Steve Piatkowski (26:35):

I think independent firms can compete with private equity. I think independent firms will always be around, and my answer would just be Nathen and what he's been able to do, and that answer he just provided, which was great. Also, I mean, there are banks such as Live Oak that are out there that provide growing capital for firms who might need it. But I think it's all about your strategy and what you're trying to do. I think also independent firms, a lot of businesses out there really count on that client relationship or the relationship they have with their CPA or an accountant. I think the independent firms focus on that. So yeah, I mean, I think they'll always be around. I know private equity is a big player, and they're here, and they've raised the bar like Nathen said, but we'll see long-term how it all plays out. But yeah, independent firms will be around for a while.

Danielle Lee (27:29):

Great. I like the optimistic outlook, and I liked that marital analogy, Nathen.

Steve Piatkowski (27:36):

I'm going to steal that one in the future, Nathen.

Danielle Lee (27:37):

Yes. That's great. Turning to firms that want to remain independent, we're sticking with that topic. How do they need to change their strategies? I know we've touched on some of those strategies already, but what other strategies would you advise for firms that are kind of trying to stay independent? Nathen, I'll go to you.

Nathen McEown (27:57):

I'll probably have a short answer here. The first thing is you need to decide what you want to be, and you need to then make a strategy around that. Then you need to come up with a way to execute that, and what do you need to execute that? Do you need to merge up and have a partner? Do you need to take some debt from Live Oak? What do you need to do? That's the first key, not to just say, "Let's get this return out and keep on going down the road." Have a strategy, how to execute it. That's the biggest thing. Bob touched on a great point in terms of this internal valuation. I do think firms need to rethink. Just like real estate, the cost of a house today is much higher than the cost of a house in 2019 before COVID. Well, PE came in the space, and our firms are all worth a little bit more. So if you're going to stay independent, are you valuing your firm correctly in terms of when your partners retire? We've looked at that, we've adjusted that, and I think that's beneficial, and that helps kind of suppress that need of, "Are we getting the value for the firm?" So think about how that impacts your firm too. But that's what I'd say.

Danielle Lee (29:02):

Great. And Steve, how should strategies be reworked or refined?

Steve Piatkowski (29:06):

Yeah, I think firms need to focus on what they value and what their long-term strategy is. You want to plan proactively thinking about a growth strategy or talent development partner succession years in advance. You don't want to just wake up one morning and have to kind of figure it all out. I think planning for five, 10 years down the road is going to set an independent firm up for success. Then possibly using debt strategically through mergers and acquisitions, using some of that debt for having a partner buy-in, or even just some working capital to upgrade technology to be able to compete with the larger firms.

Danielle Lee (29:47):

And Bob, the firms that you're talking to, what are they doing to be successful and staying independent?

Bob Lewis (29:53):

I'm going to make a quick comment about changing the game. If anybody has ever seen the movie Moneyball, basically in summary, Moneyball: the Oakland A's are trying to compete with their $40 million budget against the Red Sox and the Yankees at $120 million budgets playing the same game. If you're in a firm, you need to change how you play the game because you're going to be competing against bigger, well-funded resources. As an example, one of our clients just lost a senior tax person to an organization that came in and bid $100,000 more in salary. There was no way to match the salary. Now is that a feasible offer for their compensation for what they do? It doesn't make a difference. The offer was there; they lost the person. Some of that's going to happen. The biggest thing, though, is also looking at how do you create a niche in the firm?

(30:43):

The most profitable firms we've seen over the years have had deep, deep niches. Shockingly, real estate seems to be a leading one, which makes sense because you're going to have people with high net worth buying into real estate partnerships, things along that line. The other thing is changing partner behavior. Nathen, I know you're managing a herd of equity partners, but when we do an analysis inside firms, we see partners that are having high realization write-offs, write-downs, not write-offs. That behavior needs to get changed. It could be partner by partner; it could be firm-wide. But to me, one of the biggest things to look at inside a firm is to digest why I have a realization percentage issue. If I have a realization percentage at 80 or 85%, first of all, it's just a percentage, not realized dollars per hour. That tells me I probably have a training problem, a pricing problem, some other issue to look at, or I'm dealing with the wrong client.

(31:37):

Then converting all that to looking at what's the realized dollar per hour? The percentages are one thing, but I'd rather be 60% of $1,000 an hour than 100% of $100 an hour. They start looking at their metrics and making changes and understanding that in some cases, it can be partner behavior that needs to be changed, and that's difficult to change. These are friends; these are people you've been working with for a long time. But without that, I think they're going to put themselves in some trouble. They won't have the capital to be able to do what they need to do. What I mean by capital is the profits from the revenue to make the investments that they need to make. That seemed like a long answer. Sorry.

Danielle Lee (32:14):

It was thorough. It was great. Very insightful. Thank you so much, Bob. With that, we're going to turn to our second polling question. The question is, How familiar are you with other sources of capital outside of private equity, such as ESOPs, venture capital, SBA loans, lines of credit, et cetera? We've kind of touched on sources of capital already, and we'll get more into that as the presentation goes along. We are curious about your familiarity with these sources of capital. We're including in these sources of capital ESOPs, venture capital, SBA loans, lines of credit, et cetera.

Bob Lewis (33:01):

Now we're right in Steve's wheelhouse. He's waiting for all this.

Danielle Lee (33:03):

Yes, we're getting right in there.

Bob Lewis (33:04):

Steve's like, "This is the question I was waiting for."

Danielle Lee (33:06):

We'll see how our audience responds to this. We'll see the familiarity before we kind of delve a little bit deeper into those sources of capital and discuss. But for now, please get those answers locked in so you get credit for this polling question, and we want to give everyone enough time to get the responses in. I'll read it one more time. How familiar are you with other sources of capital outside of private equity, such as ESOPs, venture capital, SBA loans, lines of credit, and more? Your choices are very familiar, somewhat familiar, not very familiar, or not at all familiar. Please select one response and make sure you click submit that response to go through and go ahead and count everyone down after I give a few more moments. So everyone gets those answers in. I'll give everyone a final 5, 4, 3, 2, 1. You can go ahead and close out the second poll, and we'll see what responses we have here. It looks like it's kind of interesting: about half say they're somewhat familiar, but 23% not very familiar, only 19% very familiar. So you're all in the right place to learn more about this, which segues very nicely to my next question, which is, What are the other options for accessing capital? That question's going to go to Steve. He's our expert in that realm.

Steve Piatkowski (35:04):

Yeah, so I mean, I'm a little biased, and I'm going to talk about capital through a bank, which some people love, some people hate. If you hate us or banks in general, I don't blame you, but no offense is taken. In the world I live in, I deal with a lot of business owners specifically in the tax and accounting space who are looking for capital to acquire, working capital, whatever it is. Live Oak is traditionally known as an SBA bank, and that's how we started. The fact is that a lot of the firms that we deal with are anywhere between $2 million and below in revenue, so they fit that SBA lending box. But for larger firms out there who are overqualified for SBA loans, we wouldn't put them in that box. We get a little bit more freedom and a little bit more creativity when it comes to providing capital for them.

(35:59):

But our bank as a whole, we are comfortable lending to this space. We know the space. Bank financing is not the only option that's out there. There are a lot of investors who are willing to lend some capital to your firm, but that's kind of the world I live in, so it's what I'm most familiar with. If someone out there has any questions, obviously I'm happy to connect with them. But there are banks that specialize in it and are comfortable with it, and we are one of them.

Danielle Lee (36:35):

Great. Thank you, Steve. Kind of pivoting a little bit to bring Bob and Nathen into this discussion. How do firms handle the question of access to capital? Bob, starting with you.

Bob Lewis (36:46):

Okay, my answer will be on Nathen's side, shorter on this one than in the past. You're going to love this one. You could cut partner comp. That would create a lot of capital. Nathen, that'll go over really well on you for me. Cut partner comp or create cash. That's really not a viable option. Going back to my other strategy is instead of cutting partner comp, why don't we just make more money by charging more and having different clients? That's one. If you're going to look for outside sources for capital, like Steve's sources or one thing, my point is look at the different sources and look at the terms. We're seeing right now emerging, and it's going to be coming up next, will be limited investments in firms. That limited investment firm may come with a string, like after four to five years, that could get called back.

(37:33):

If the firm has grown, I got to repay that limited investment plus the growth, which may force a liquidity event for my firm anyway. So look at the terms of where you're going to borrow the cash from. Are they really a family office? If you go outside the banks, is it going to hold it for 20 years, or are they saying that, but they're going to flip it and call it back in three years? With that said, I'm going to shift it over to Nathen. He's probably well more in tune with funding resources than I am.

Nathen McEown (37:59):

Yeah, I mean, I look at it as things to consider. Bob hit on it. Number one, you want more capital, become more profitable. If you really focus on that, that's the easiest way to do it, right? Next is obviously there are debt options out there. The reality is if you take private equity, they're going to put three to five times of your EBITDA number debt on your balance sheet. So why not do that yourself and see what additional value you can create before PE comes in there if that's your ultimate goal? Debt is a lot more, the cost of debt is a lot cheaper than private equity. You've got to get away from this fear of debt because if you take PE, guess what, you're going to have debt. We're very fortunate, we don't really have debt, but we do have access to it if needed.

(38:54):

If we had the right deal, or we needed to do it, we don't have an issue going and executing that if it's the right opportunity. But profitability, size—obviously we have the ability to invest in ourselves without adding a bunch of debt, which is great. But there may be a day when we need to leverage that. We're not afraid to do that. Then last, maybe partner up, find another firm your size, come together, and get some scale. Think about niches that work, a bigger firm where you can still control your market. You keep your equity, you keep control of what's going on, but you leverage resources, whatever it is. I'd say PE is that kind of final step, just so different in control and equity that you're giving up, but that's how I would look at it.

Danielle Lee (39:40):

Great insights. We've discussed success strategies for independent firms, how they can compete with backed firms. Getting more specific, how can independent firms make themselves attractive to staff and potential partners? Bob, starting with you.

Bob Lewis (40:00):

Let's start with staff. Look, staff believes the compliance world is going to get automated and go away. Wrong, but perception is reality here. So we need to increase the amount of advisory services that we provide as a group so that we can draw on more talent to go look, really, this is more of a consulting firm that provides accounting tax and audit services. Second is the technology. We see firms just using obsolete technology. By the way, I wasn't an accountant a long time ago. For those who were on this call who remember green ledger sheets, that's how I learned with a pencil trial balance. That's not very cutting-edge technology in today's world. Guess what's not cutting-edge technology? A basic, I don't want to use any vendor's names, but a basic accounting package where it cranks out a financial statement; we send it to a client.

(40:50):

The technology is huge. Streamlining culture. Look, everybody's aware now that you just can't get people to work 70-hour weeks. Maybe on occasion somebody will put in a 70-hour week, but you can't expect people to work 70-hour weeks like the culture used to be in this industry. So how do you streamline the culture by getting the kind of work ethic in place, getting the right people, getting to embrace the work-life balance? The other side of the partners, to me, the biggest motivation for the partners: show them how they can sustain the ability that they have currently to make money and how to make more in an environment that has the right culture to it. The problem with all of this is it requires realignment. A lot of firms just haven't figured out how to realign yet. They can't get all the pieces moving. They'll move a piece or two, but they can't get it all moving. The thing about outsourcing that Nathen mentioned before, I don't understand why more firms are not doing it. I do understand why some of them tried and failed because they picked the wrong vendor, and they put the wrong person in charge of it. If you didn't try over and over again to get it right, it'll never be right. With that said, I don't know who is in the next bucket. I'll let you, Danielle, steer the question to the next person.

Danielle Lee (42:02):

We'll go to Nathen about how firms can continue to appeal to their staff and partners.

Nathen McEown (42:08):

Yeah, great points by Bob, for sure. Obviously, I'm at a $260 million firm, so it looks different for us. But the war for talent has nothing to do with your PE or independence. It's less about the culture you have and the opportunity you give your people. I'm sure there are PE-backed firms that have great culture, people love it, and they're going to stay there. I know there are independent firms like us; we have no issue. We've had no one leave to go to a PE firm because of that dynamic. If anyone leaves, it's they're going to industry, or the culture wasn't going to fit for them. So it's less about your independence/PE, and I think it's more about opportunities. You're providing the culture that you're giving, and as long as people can see they have opportunities to grow and flourish, they're going to be excited to be there.

(42:58):

Our best people are not chasing dollars. They have a passion for being successful, and they're in a place that supports them and allows them to continue to be successful. They know that ultimately that money and that profitability and that value are going to come to them because we've been able to prove that over the years through our partners. I think it's less about attracting because you're independent or not. You got to focus on a great culture. We've merged in some small firms that had amazing talent, and they just had really good people, and they could go recruit them and keep them happy. I think at all sizes can, but you got to think about how you're treating your people, what environment and opportunities you're giving to them, and how does that look.

Danielle Lee (43:43):

Great. Steve, what are your thoughts on this?

Steve Piatkowski (43:45):

Yeah, to echo kind of what Bob and Nathen already mentioned, I think culture is super important. You want to create a work environment that gives young professionals a roadmap to possibly some future equity in the business. When you treat your employees and treat them well, and they feel satisfied in their job, they're going to work hard for the business. Also, being able to have the right technology for business is important. If you have technology in place that makes work more efficient for those employees, they're going to be more likely to come over, join your independent firm than a firm that doesn't necessarily have those processes or culture in place. Yeah.

Danielle Lee (44:33):

Great. It makes sense that culture is a big aspect of this. Turning to kind of the clients, how should firms be rethinking their relationship with their clients, particularly independent firms? Nathen, starting with you.

Nathen McEown (44:49):

I think the business is all about relationships, right? So care deeply about your clients and their success, and you'll have a client for life. As Bob mentioned earlier, on a more mechanical level, the deeper expertise and niche you create, the faster you will grow. That doesn't matter if you're a $2 million firm or a $100 million firm. If you're a $2 million firm, but you are super good at X, Y, Z industry and you know it better than someone down in a Big Four firm, you're going to get more work because of that. So you got to have some great subject matter experts, and you got to really push them to continue to grow, get famous, go speak, do the things that's going to help them get more clients, and then also build more services around that. For us, we have a lot of industries. Our largest is the energy sector.

(45:39):

It's about 20% of our firm's revenue. We really started audit and tax compliance, but we were so deep in there. Then we created three other advisory services to feed into that industry group. Those took off, one of the fastest-growing advisory segments we had. Now if you're in that world, you're going to use one of our five things that we can offer you just because we're so deep in that industry. So I think that's something groups really got to think about is what is your niche, what is your story? And then exploit that, and that will help you grow.

Danielle Lee (46:11):

Great. Steve, how do you think firms can be strengthening these relationships with clients?

Steve Piatkowski (46:15):

Yeah, so Nathen, you're right, again, I mean it's a relationship-driven industry. When I see a lot of mergers or acquisitions happening, one of the first questions I ask is, "What was the seller's relationship like with those clients, and how are they going to be impacted when a new owner comes in?" So I think having that strong relationship with your clients, knowing their business is extremely important. We kind of separate ourselves here at Live Oak with knowing the industry, but when somebody calls, I know who they are, I know what they're looking for. They're not calling a 1-800 number, and that person has to dig through their file and figure out what they're looking to accomplish. It's a much more hands-on personal approach. I think independent firms taking that approach as well is beneficial for the long run.

Danielle Lee (47:09):

Great. And Bob, your thoughts?

Bob Lewis (47:11):

Well, some of the good thunder has already been taken, but here: one of the things we always look at is you've always heard the 80/20 rule: 80% of your revenue comes from 20% of your clients. I have to tell you again, every analysis we do, every firm we look at, it's really close to that. In fact, we're seeing more 85/15. The problem is that if 85% of my revenues come from 15% of my clients, but I'm looking and managing all the rest of those clients, what kind of attention am I really paying to those top clients? Not enough. That seems to be a recurring theme we see. When you're providing a good, healthy compliance engagement, Nathen, you've probably got a boatload of clients that use you for large engagements for compliance, and you're providing other services for them as well.

(48:00):

That's the part that separates the firm from being able to remain independent and maybe being forced to have to make another decision because the clients, they can get the compliance from anywhere, and the compliance may end up being automated to some extent, but they can't get that relationship. They can't get the advice, and that's what people remember. People have always asked me, "How come we don't do law firms?" because all we work on is accounting firms, because a lot of what we do, we could apply to a law firm. I said, "Yeah, about 80% of what we do, I could apply to a law firm. The 20% I can't do makes me a B. Why do I want to go into law firms when there are so many accounting firms that I can go in and pretty much play a game in?" The other thing to look at, too, is that client analysis: the A, B, C, D ranking. Firms do that one time, maybe twice, and when they look at the D's, sometimes the D's are worth too much money.

(48:44):

So our comment is take the D's and go D1, D2, D3, D4, and just focus on the worst of the worst. Start with your D4s and figure out how to get a process in place to free up some time so you can start spending the relationships with the bigger and better clients. The big comment is how do you go deeper than compliance? You got to go deeper than compliance. Otherwise, it's really not a relationship; it's just more of a service. People don't want to spend a premium for a service. They'll spend it for the relationship. Sorry, my camera went out, which is why now I went into apparently witness protection mode over here. So my lighting kit ended.

Danielle Lee (49:21):

We can still see you. So it's good.

Bob Lewis (49:23):

Good thing for some people sometimes.

Danielle Lee (49:26):

Your identity has not been compromised yet. Thank you all for that great insight into a very crucial question, obviously. Let's get into our third and final polling question. This will be an interesting question. We're asking everyone: How widespread will strategic investment be in accounting in the future? The possible responses are: most accounting firms will form some kind of relationship with PE or other strategic investors; only mid-size and larger firms will form this kind of relationship; or most firms will remain independent. So the question is, how widespread will strategic investment be in accounting in the future? We're asking you to give your thoughts on how widespread strategic investment will be in that future.

(51:34):

Give everyone time to get those responses in. Looks like we're getting the majority of them in now. So I'll give a final countdown.

Bob Lewis (51:47):

The winner is going to be...

Danielle Lee (51:48):

Yes. Let's see.

Bob Lewis (51:50):

What door will be the winner?

Danielle Lee (51:51):

Yes, three doors here to choose from. So everyone can place their bets. As I count down the final 5, 4, 3, 2, 1, let's go ahead and close out the poll and see how the responses shook out. It looks like about 43% say only mid-size and larger firms will form this kind of relationship. About 37% say most accounting firms. So in general, people think the strategic investment will stick around in the future of the accounting profession. Now turning back to my questions. I actually recently wrote a feature story about firms that are kind of steadfast in remaining independent. One thing that I found interesting, some of the people I spoke to said it's a decision they make over and over again. They always kind of want to take a pulse of the market and make sure they're making the right choice. They want to make sure they're informed of what's going on in the market. So my question is, how often should firms revisit this decision to remain independent? Steve, I'll start with you.

Steve Piatkowski (53:15):

Yeah, I wish I had a long-winded explanation for this or an answer, but I would say at a minimum they should be looking annually. That's really all I got on that one.

Danielle Lee (53:28):

Great. We're getting to the end of the hour anyway, so I'll ask everyone to be a little bit brief. We've had a lot of great content so far. So Bob, what are your thoughts?

Bob Lewis (53:38):

Shockingly, I'm going to be fairly short too. I know this is hard for the audience to believe. Every single month. It sounds crazy, but it should always be on your mind. You should be sitting there going, "Let's see where I'm at." Every year, every three years, you should be looking at this market and your firm and going, "Am I able to make progress on my independence plan?" and measuring that every month to make sure you need to adjust or reconsider. By the way, I've been sitting on this call for an hour and just noticed Nathen's sign in the background to "think outside the box," which is something we love to do, but I don't know if it was strategically placed for this event or not, but well played.

Nathen McEown (54:15):

Tell you next time we'll grab lunch. Yeah, sorry. Were you done, Bob? I'm done.

Bob Lewis (54:22):

It should always be on your mind.

Nathen McEown (54:22):

It's my fault. Yeah.

(54:24):

I mean, I'd say for us, I'll speak for Whitley Penn, we cannot predict the future. I have no idea what's going to happen in five, 10 years. So I think every firm should always make considerations. For us, I think my concern is when PE firms approach me about a liquidity event. Whitley Penn will never view this as a liquidity event for a subset of partners or this and that. PE for us, if we ever do it, will have to be because to execute on our plan to be competitive, to keep the culture of growth and opportunity, this is what we now must do, or some other event. But it's never going to be viewed as a liquidity event. You'll hear them say, "Oh, generational wealth, this and that for you." Yeah, usually a small subgroup or something like that. That's just not something we're concerned about. It's really more about can you execute on strategy? If you need it, then let's rediscuss it, but if you don't truly, well then let's keep on going down the path and investing in ourselves.

Danielle Lee (55:29):

Great. I know we're getting toward the end of the hour, but we've had some great questions come in, so I'll try to get to at least one of these questions. Someone's curious about technology resource demands. We've touched on technology, of course, it's a through line to all of the challenges and opportunities that we've discussed today, but more specifically, are technology resource demands driving PE acquisitions? How do you think they're driving them, and how do you think independent firms are able to compete with the way they are? I'll open that up to everyone.

Bob Lewis (56:03):

You want me to just jump? Nathen, do you want to jump?

Nathen McEown (56:06):

No, you can go.

Bob Lewis (56:08):

I mean, look, it gets down to some of the core things we've just talked about. The technology demands are going to continue to increase. The cost of labor increased, and you have to determine, A, do you want to take a partner comp cut, which we know universally the board is well received by partner groups, or B, do we get capital a different way by either borrowing it from somebody, Steve, or do we fundamentally fix the problem of we just need to adjust our pricing schedule, who we're serving as a client? Even if I borrow the money from Steve, I still have to fix that problem. I still have to pay Steve back. Steve, you want your loans repaid, right?

Steve Piatkowski (56:49):

Most of the time. You like that preferred.

Bob Lewis (56:50):

Anybody else?

Nathen McEown (56:56):

Yeah, I mean, I'd just say I think it's a part of the conversation, but there are a lot of ways to address that outside of taking capital. There's some big publicity of big numbers getting thrown out there by firms that they're invested in AI. I would love to have the computation on that because I'm not sure it's precisely what it's been led to believe. So I think there are a lot of ways to put technology into your firm, and you just need to be strategic about it. But back to what Bob's saying, profitability and having the dollars to invest and look at it and spend time, don't put your head in the sand. For sure.

Bob Lewis (57:35):

Yeah. If you're making too much money as a partner group, you can always do a donation to a charity, right? I mean, if you feel bad about it, you can always donate to a charity for making so much money. That's right. That's right.

Danielle Lee (57:49):

A good point about not putting your head in the sand. I think that goes well to the last question that I asked about firms revisiting their decision. I think that goes to everything we've discussed here today: just remaining competitive as an independent firm, refining strategies for staff, for clients, for your people. So thank you so much for sharing all these great insights with us today. Nathen, Bob, and Steve, thank you for your insights, for your expertise, and I want to thank all of our attendees for joining us today. You will go back into the attendee hub and then you'll be directed to the next session after this. So just remember to return to the attendee hub after this, and thank you all.