Track 2: Change creates opportunities to build firm value

Every firm is going through some form of transition. It's more than buying, merging, or selling -- it's managing capacity, outsourcing, expanding advisory services, culling clients, value pricing, assessing succession, and managing partner and staff needs. These items require firms to transform to new ideas, realign their marketing, and adapt how they practice. Every step should build firm enterprise value, but each item may trigger the need for other actions. As an example, what metrics should the firm track? How should they train staff to cross-sell? How can they teach or refine selling skills? And what type of client should the firm focus on moving forward? This session will provide ideas on how to manage your firm's many transitions, as well as metrics that build value and create a firm of the future.

Transcription:

Doug Lewis (00:10):

Actually, it would be really funny to watch you struggle to get up the stage without the stairs, but that's a whole separate issue.

(00:18)

All right, trickling in. Still trickling in. Does everybody have enough space? By the way? Is everyone good? We can get some more chairs if we need them. We can call them in. We are important people. We can get that done for you. It's interesting to see about half the people have their very own table. I was telling a couple people up front here, we had the exact opposite happened to us last week where our room was too small for the session and people had to stand along the sides and layers of two and three. So that was real full circle moment for us right Now.

Bob Lewis (00:55):

Do have a quick question for the people running logistics? Is there any way to tune that light down at all? It is. I understand why the other speaker had mentioned that. That's massively bright.

Doug Lewis (01:05):

Okay. Yeah, the least amount of light you can put on both of us. Everyone's going to be much better off, I can promise you.

Bob Lewis (01:10):

So we're just going to start this process because it's a giant room. Appreciate everybody being here. Doug, why don't you kick us off and we'll go forward.

Doug Lewis (01:20):

All right. Opportunity to build firm value. So I'll get into really who we are and what we do, but I want to be clear at the front of this. My name's Doug Lewis with the Visionary Group. I've been doing this for just a shade under 10 years now. Bob Lewis, our President, fearless Leader here. You'll hear plenty from both of us here since it is such an intimate gathering. We do this a lot. We speak a lot. Would love to just turn this into a big round table if it goes that way. Don't be shy, interrupt us. We're both really sick of hearing the other one talk at this point. So please, if you have questions, take us off the rails. We want to serve you guys and figure out what you want to accomplish here today. So who we are, what we do, is anyone not familiar with us in the crew?

(02:04)

Anyone not familiar? I use not. So if you don't know who we are, you have to raise your hand. Great. Only two people don't know who we are, so that's perfect. So all we do is work with CPA and accounting firms nationwide. All right? We do a lot of CPA M&A transactions. We have an entire full scale consulting team on that side of the house. What's becoming a more prominent part of our business is internal succession testing and planning for accounting firms, right? That's a big problem. Big red flag. We help firms figure out how to implement advisory service lines, increase their revenue, ultimately build their enterprise value to the point if they want to sell their practice, they can take it to market and command the highest possible dollar at that time, even if they never want to sell it. Making your practice more profitable is also really great for your internal succession team.

(02:51)

So we'll get into kind of what that is and what we do. For the M&A side of the house, we do about 70% of our work is on the buy side, 30% on the sell side and brought in as third party deal consultants on many transactions. Our core transactions are really that one to 10 million practice. That's where most of the deals in the country happen. Our buy-side clients are several of the top 50. So we're all over the board. What we see are just themes that are across the board, really all firms of all sizes. So any of these bullet points are these news to anybody in the room?

Bob Lewis (03:25):

They should not be.

Doug Lewis (03:26):

Right? We've already seen what, two, three presentations over and over and over with a lot of this, but the aging CPA population that we currently have, they're only getting older. There's less and less coming into that talent pool. And we actually have the next slide, which will put some statistics behind the talent shortage right now, which are pretty eye-opening for a lot of firms who haven't seen it. Firms are really trying to figure out how to offshore more, how to increase their capacity, and then of course, remote work life balance. Can't hear that one enough. We need to pay people more. They need to work a lot less and be a lot happier. There's a hint of sarcasm if you didn't hit that part. So here's where firms are. What's the inflection point?

Bob Lewis (04:08):

Okay, so boy, I'm going through withdrawal. It is like three and a half minutes, right? Didn't speak. So the inflection point is something that we're seeing happening literally in every single firm and inside your client base at the same time, as Doug had mentioned, there's a lot of change occurring. You've listening to, you listen to Alan speak, you listen to this morning, I'm sure other conferences, there's a massive capacity problem. It's not just in our profession. Firms are trying to figure out in our profession where to go and what to do. So this inflection point we're seeing is literally hitting every firm we're talking to. The first thing they're trying to figure out right now is can we pull off an internal succession? Okay, so we're going to talk a little bit about succession when we go a little bit deeper into this session, but most people are not prepared to be able to really pull off an internal succession. They may think they have the team, but they haven't talked to the team about the financial structure, timing, what they need to do to be a partner. And unfortunately, part of the things we've done as a profession is we've teached.

Doug Lewis (05:11):

Teached, we've teach,

Bob Lewis (05:13):

Yes, okay, I'm from Chicago, so it's obvious.

Doug Lewis (05:16):

So Chicago public school.

Bob Lewis (05:17):

We've teach them. People literally taught them not to sell. So we brought people in. We've had a staffing shortage for 20 years. We've got people now that are 40 years old that have never sold, have no professional network, and they're expecting to buy out the aging partners. The problem is the aging partners are like, well, they can't bring in work, so how are they going to be able to afford the buyout? Much more complicated than that. But the second thing we're seeing firms running into, do we merge upward or sell? So I'm looking at my internal succession and figuring maybe I can't pull it off or I don't have one. Do I merge upward and sell? And then how do I approach it and what's my timeline and how do I do it in this market right now, it's again, not just this industry.

(05:57)

All industries are facing these same issues right now in our profession. We're also looking at outside investments. As you've heard Alan speak earlier, the private equity market is raging right now. So the question becomes, do you want to be part of that? Do you want to be a part of what maybe an outside family office that maybe wants to make an investment with a longer term play does that may make sense to you? This is like church, the outside investment things, people are like, I don't want to do it because it's, it's not right. Others are looking at this as a solution for them to actually get the money to help them grow. Then they lick at their own to become the acquirer. So becoming the acquirer in this market is a very difficult task, especially when you're starting to compete against the private equity money.

(06:40)

Then the last thing you're going to look at is, I don't want to do any of these things. I think I'm in good spot. I don't want to merge up. I don't want to sell. I don't want to take money. I think my successions, okay, so what do they do if they change nothing? Now think about your clients too. All your clients are going through this in your manufacturing companies or distribution companies or professional services, all figuring out where they're at in this cycle and how do you service them. So even if you did no M&A of any shape or form for your firm, this activity is happening in your client base and there's massive opportunity for it, which you have the next slide.

Doug Lewis (07:10):

And before I do, I would love to hit that next slide. So starting with this next slide and a couple after that, it might seem like it's all gloom and doom, right? We're just throwing up. We're setting the stage because there is so much opportunity to grow. I just want to be clear, we're not, fearmonger is saying everything's falling apart. This is a phenomenal industry to be a part of right now, but if your firm's at an inflection point and you want to change nothing, here is some of the pieces you'll be up against. So almost a 10% drop in college enrollments, almost a 17% drop in junior college enrollments. These came directly from the A I C P A and there's a little bit of lag on this, so these could even be a little more dire. And that's not accounting enrollments. That is just across the board.

(07:50)

People going to higher education institutions. Nineteen ninety five, a hundred and twenty 7,000 individuals sat for the CPA exam. The most recent statistic we have, which is a five year gap, five year window from now looking back was 95,000. We think that 95,000 is very generous in the amount of individuals who are sitting for the exam today. Baby boomers are getting old, they're retiring, blah, blah, blah. You can't hear that one enough, right? Huge wave coming. All of this, think of the talent shortage, like a big swimming pool. So there's some cracks in the bottom. The baby boomers are on their way out and the drips of talent coming into the pool, new CPAs, new professionals in general, it's slowing, it's getting smaller. So how do firms take advantage of this? How do they adapt to what's going on?

Bob Lewis (08:40):

So on this last slide, there's an added point, which we hit this last week at BDOs conference. Wayne Berson, who's the CEO of BDO was up there talking. There's 150,000. The demand for accounting jobs is 150,000 people. Unfortunately, the Exodus coming out of college right now is 75,000. So I get 75,000 accounting graduates coming out. So looking at that slide, going at 95,000 sitting for the exam, let's say it's 90 and actually believe it's under that. If my new crop coming out is 75,000, they're all not going to sit for the exam. So we're probably looking at numbers that are realistically sitting for the exam, more than a 60,000 coming up, which is going to be about a third of what the job demand is. And so the issue we're really trying to drive back to is no matter how much you keep struggling to find new recruits, if you don't change the process to expand your capacity a couple different ways, you're going to have trouble.

(09:36)

It's just a matter of time. And some of the better firms may be able to overpay to get people and drag them in, but how long is it before that person goes from one firm to the next? And you still will have a permanent solution. So here's our core firm disruptors. I've got a succession. We do this with firms with quite a bit of frequency. We're running in a lot of succession assessments. We talk to the firm. We think we have a succession team in place, but the firm doesn't know. The staff who's coming in, doesn't know what the buy-in process in what they need to do, what's the cost of the firm? And the second point in this is the staff is questioning the value. So let's say a bill bill's in the back. You're involved in some firm M&A stuff. Let's just say for argument's sakes, a firm is worth one times revenue.

(10:27)

Let's just leave it out there. So if I have a 10 million firm, it's worth 10 million, which is a very false statement, but let's just leave that out there. The staff is going, well, I don't think it's worth 10 million because I don't want to buy the 10 40 work and I don't want to buy the small accounting work. So the question becomes if I'm going to buy in or better, probably he's going to buy in because me buying in at my age would make no sense. But if he's going to buy in, he's going, I don't think the firm is worth one times. I think it's worth maybe 0.7. And now we have an impasse because I can't sell him the firm at 0.7 and sell it to you for one times. It doesn't work that way inside the firm. So we're fighting lots of issues there.

(11:05)

The third piece is even at any price the staff doesn't want to own though they're making too much money, they don't want to take the risk. They're looking at their lifestyle. So these factors are causing a lot of disruption right now inside our profession. And again, going back, looking at your client base, your clients are having the same issues, just different vernacular, different terms, these foundational investments. I haven't made investments in technology. I don't have any recruiting in place or people development. I'm not offshoring, by the way, for those who are not in the tomb. Offshoring is now the very cool way of explaining outsourcing, which has got a little bit of a bad name. So they've changed it to offshoring. And then I can't create advisory services. So when you're looking at capacity and you're looking at value of the firm, if I'm not offshoring and I don't have advisory, I'm going to be dependent on accountants to grow my practice, which we've seen as a shrinking number, a dramatically shrinking number.

(12:00)

So how do I overcome that? And to Doug's point about the average baby boomer, it is 67 right now depending on how people are counting to baby boomers, it could be 68, it could be 66, but the point is it's getting closer to 70 baby boomers own about 60% of the businesses in the United States. That number's starting to shrink because they're selling some of them off. But that's a huge transition coming up. How do we adapt? So sounds pretty negative, okay? We don't have people, but Calvin, Calvin is got a great firm. He's got a gentleman, Calvin, are you making okay money this year? We are we able to make your mortgage payment? Congratulations. I'm happy for you. So any visa card too, he's killing it, this guy.

Doug Lewis (12:47):

That's not push it.

Bob Lewis (12:48):

Yeah, they repossessed his car, but that's okay. So the thing is, there's a ton of opportunity here. The firms that are sitting there with their heads stuck in the sand going, we're not going to offshore, we're not going to open up advisory. We're not going to change the way our deferred comp program works. Those are the firms that are sliding into the tar pit and we talk to them at least five to six or seven of those firms a week. Bob Nash is one of our M&A consultants that's right here, Bob, common conversation. We talk to people, they're aging. They've got a great book of of business to sell. It's profitable. But who in this room wants to buy a book of business? Anybody, any, any CPA firm who's a CPA firm?

Doug Lewis (13:27):

Let's clarify that. A book could be a great book of business with zero staff.

Bob Lewis (13:31):

Yes.

Doug Lewis (13:32):

Nobody to work it.

Bob Lewis (13:33):

We hear this all the time. Well, we are firms that are producing it, 50% profitability. Who in this firm's running 50% profitability on their book? Anybody who wants to admit to it, it's hard to do. And as you get bigger, our larger clients, they're looking at profitability of 20, 25%. So we've had these firms come and go, I'm doing 50% profitability because I have no technology. They don't put any of the foundational investments in place, and they're wondering why they can't sell their firm. So that is opportunities for every single one of us to be able to look at this and go, how do I look at expanding with offshoring? How do I add the advisory? How do I acquire those firms that maybe have some staff that I can be able to put into play or build a platform location into?

Doug Lewis (14:16):

So the core theme of everything we're going to hit here on the not so negative part of what we're talking about, building the enterprise value of a CPA firm, right? A lot of fancy words strung together for almost a sentence. There's a lot of different ways to do this, but the firms that aren't thinking ahead, the fact that you're in this room puts you ahead of most you willing to make the investment in time, energy, and resources to come here and learn from some of the innovative thought leaders in the profession. There are a lot of firms out there that are not willing to make these investments. So this is kind of an interesting piece. Now, more than ever, the entire spectrum of firms is in play. And what we mean by that is from a merger and acquisition perspective, we talk with thousands of firms a year, right?

(14:59)

Anywhere from a million dollar practice all the way up to work with several of the top 25. So there's a lot of common trends, common themes. We see the last 24 months, we have had more 10 million plus firms come to us saying, we have no choice. We need to sell merge upward. And the majority of those are north of 20 million. And if you really start looking at the IPA list, there's not that many firms of that size in the country understanding that the IPA list is fractured and flawed a little bit. Not everybody reports, but the amount of larger firms that we're seeing that have no options, no recourse other than to sell, is increasing exponentially.

Bob Lewis (15:37):

And as drivers, it's not just some of it's a deferred comp programs too large. That's a big problem. Others are that we have an opportunity right now that will happen. They're closer to 20, but the business model that they're in, they're competing against very large firms. So they're like, look, we cannot, cannot win the work we need to win unless we're part of a large firm infrastructure. And I bounce with that. They have a couple of other things. They're looking at the foundational investments as a problem. They have a little bit of a succession issue, but they have a great practice. They could independently run this thing on their own, but they're like, we choose to merge up because we need the bigger name. We need the resources to be able to win these larger contracts. So in that situation, everybody's going to win. That's kind of the opportunity here. It's not just the firm that's going to do the acquisition, it's also the firm that's going to be acquired or merged in. And quite frankly, there are very few acquisitions, most of them mergers or what we're going to call a hybrid, which we'll touch on a little bit.

Doug Lewis (16:35):

Vision. Well, you're the visionary.

Bob Lewis (16:37):

Okay, see, I'm the visionary, please. So by the way, I started this like 27 years ago. I used to be an accountant. So for the more mature accountants in the room, do you remember the green ledger sheets? They're great. And you knew you were really sharp when you'd taped the green ledger sheets together to make a more extended green leather sheet and pencil it all through and then drop it into the manual trial balance accuracy was just overwhelming. So

Doug Lewis (17:05):

Look,

Bob Lewis (17:06):

Mike, Mike Max and I will be doing a session on Wednesday at what time? Mike? Noon.

Doug Lewis (17:15):

Good

Bob Lewis (17:15):

Plug. Good plug on exactly what will your firm look like in 10 years. So Dan Hood will be moderating that. So if you really want to get deep and dirty into those details, show up for that. I think that'll be interesting because him and I and Dan Hood on the stage together is a very interesting combination. We should have alcohol on that stage at the same time, but I'm afraid Dan may fall off the stage. So we don't want to do that. So what no way do you need to get there to go to where you want to head as a firm and can you get there on their own? And that's where this, going back to that inflection point, can you get there on your own? And that's where firms are stumbling. We're talking to another firm up in the Midwest from a group we met with two weeks ago and they called us young leadership team and they said, we're 20 plus million. We don't think we can do this on our own. I'm thinking, I get it where there's maybe some more mature leadership team, but I think the oldest partner in that firm is like 51 and they think they need help getting to the next level. So it's an interesting conundrum we're running into here.

Doug Lewis (18:16):

And that conversation is happening more and more than ever before. The last 24 months has massive uptick in firms that are north of 10 million with that exact conversation, and then even more that have had an aging partner group with no other options. But that's a whole separate, separate piece.

Bob Lewis (18:32):

Are you doing this or am I doing this one?

Doug Lewis (18:33):

Oh, geez. Well, you can go ahead. Come please.

Bob Lewis (18:37):

Okay, we talk about capacity expansion. Everybody immediately thinks how do we recruit more? And they actually will go to offshoring and in insourcing too, but I'm going to put that as one of our five. So there's offshoring and insourcing. We're going to go to India, we're going to live Philippines. We're going to go to an outside country to put these things in place. Just a quick little share. I just facilitated BDOs tax outsourcing panel last week. If you are out, can I ask who is outsourcing? I will not pick on anybody. Okay, is it all 10 40 s or is it more work? Okay, so interesting fact, for those of you who are not off showing right now, the only way thing you need to have signed is that 72 16, and that's only for individual 10 40 returns. So for business returns, audits and accounting, you do not need the client to sign off on it.

(19:28)

You just need to put in your engagement letter that we may use an outside party to help support our services. Just throwing that out for those who have thinking that's part of a problem. But the insourcing, insourcing, there's a couple of providers that do insourcing from, I don't know if Perro is here right now in the room or tax file, but those are the two that we know of that do insourcing in the United States. So you can outsource with a domestic and not have to do the 72 16. The other thing firms are starting to do is they're looking at locations in remote areas. We have one in the Pacific Northwest. It's in a little bit of a remote area, horribly performing firm.

Doug Lewis (20:05):

But what do they have?

Bob Lewis (20:09):

Well, so if anybody's familiar with revenue per professional head, their revenue per professional head is less than 125,000. That's a really low number.

Doug Lewis (20:16):

Think back to that main session. A piece that Allen threw out is a 50 person firm with zero clients. That would be a goldmine for so many firms out there. You think about that when you go through this here.

Bob Lewis (20:27):

They have 30 pounds. The oldest, they had four of them in their sixties. The other 24 are like 25 to 41 years old. They are in a horrible area for selling your business, meaning no one's going to want to buy it and they can't get enough clients because they market predominantly to their geographic area. That is something we have other firms across the country talking to about acquiring them as a permanent insource solution. There's more and more of that happening. Redirection. So who's short on tax? People Who has excess tax capacity? People? Anybody? Nobody does. Okay, so why do you take things like salt and r d credits that you may not have in-house with full-time professionals leading it? Try and do it in-house. Partner with somebody. Keep your tax people focused and redirect their time. We see firms constantly make this mistake. They're sitting there going, well, I'm going to take my two best tax people because we have salt issues who don't understand salt and take them away from that, put that on them, and then they have to figure out the tax laws in like 50 states and it's a disaster. It's my two best people. Why am I doing it? Outsource it to you. Enough volume. Bring somebody in full time. Our clients down in Houston, they got a full-time R and D person. That's all he does, and he's very good at it. He couldn't do a tax return to save his life and God helped him in front of an audit would be even worse. But they used to outsource until they brought it in. The client culling. We like to call it upscaling. Okay? Culling is still negative. It's such a bad word.

(22:04)

Every firm we talk to is trying to figure out how to cut clients because it's the only way they can address the capacity even when they're offshoring, even when they're raising fees. So what's happening for a lot of firms who are raising fees way more than double digits. They're going into the twenties and 30%. I'm trying to fire him and can't. He keeps signing an engagement letter. So next year I'm going to bump you up again. And you're a great client now profitability wise, but I don't have enough people to do the work. And we're getting back to one of the other points of a building enterprise value of your firm. You should build the firm so that we can sell it later or do an internal succession. And you know what? I have a situation right now with the firm up in I'll, I'll just leave it on East Coast.

(22:51)

There's 7 million firm, extremely profitable firm. One owner, that's like for us at dream. By the way, if you have a one owner firm, there's only one person to negotiate with. The problem is, it's all say and tax work, it all sounds really good. Would you like to buy that firm? Just go with it. So yeah, you live to buy that firm. Their clients are too small. They're one to $5 million. So I got a $7 million firm. You don't have to go into a 30, $40 million firm to get aggregate value. That $40 million firm doesn't own one to 5 million clients. He's backed himself into a corner. It's profitable. He's replaceable, but it's going to be hard for us to move that firm because of that situation. So you want to look at building the kind of clients. That's why this client calling is really important. The value pricing, I'll tell you right now, it's almost a disaster.

(23:38)

Nationwide. We're seeing firms that's going well, we'll raise fees across the board by 15%. Why would you do that? You raise fees according to your A and B and C group. You break them down accordingly and you raise fees accordingly for that group because you want to get more eight clients. You don't want to chase your eight clients away, and every firm in this country is dropping clients. So think of a waterfall. They're dropping clients like crazy. We want to grab those clients, pop them in at a high price, and we want value price him.

Doug Lewis (24:04):

Well, the good news is he just ruined a lot of the back half of the presentation with that. So get into some of this pieces is in a bit here. So client upscaling, right? Client coaling, cutting clients, fir clients. Take your pick, right, Brad, there we go. Here's some stuff that you ruined. So obviously just make this a regular part of what you're doing when you're managing your practices, how to decide this, how to figure it out. There are, there are other options than simply firing clients. If you double the fee of every single client in your firm and half of them leave, what does that do to your profitability? You're making more money. Making less money. That's an extreme example. We don't say go out and double your fees across the board, but thinking about it that way, if you have a lot of lower end tax accounting work that you don't want anymore, instead of firing it, there are providers out there who will buy that work from you might not be at the best fee, but you can still retain. They'll buy it from you 50 cents on a dollar and give you cash upfront for it. So there are other options to work into these conversations other than let's just raise the fees of everybody across the board. And if you take that route, which most firms do, they'll have their annual increase across the board make it more than two and half percent. Because my, yeah, see here we go. Yeah. You know what I'm talking about. A lot of firms are still taking that approach.

Bob Lewis (25:24):

2.5, right?

Doug Lewis (25:26):

Of course. So the fear of the clients are going to leave. We had an article come out, I don't know, a couple months ago now, and counting today. If you're not subscribed, I'd be shocked if you were in this room, but please do and pay for the premium. You're welcome, Dan, if you're in the room. So is there a price ceiling? This is what the article was really focused on. It's time and time again. Firms are raising their fees at absurd clips, absurd rates, and their clients are not leaving. The type of fee models that we see out there is hourly. Is anyone familiar with an hourly fee model in the accounting profession? Has anyone ever seen that before inside of a firm? Yeah, it's great. I love when I get three smirks out of it. So more firms are moving towards a fixed fee subscription model. They're trying to value price, even if they're doing it, let's just say horribly, because that's what most firms really do.

Bob Lewis (26:17):

But we've got some clients that kill it.

Doug Lewis (26:19):

But some are great, some are great. If we have more time, we'd go into very specific examples. But we do have to get through this for you guys. So why couldn't you put an engagement letter out saying, our fee is going to be this, not to exceed this price and set that price very high. Are you going to get pushback? Where are these clients going to go with your lower fee clients? They don't have many more options. Especially you can look at 10 forties now, walk into an h r block or liberty tax or one of the retail 10 40 shops out there. See what those fees are up to now for just a simple 10 41 w2, maybe 10 99. Take your pick. They're astronomical from where you think they'd be. And time and time again, we see so many firms chock full of 10, 40 books or small business returns or audits at my God, less than sometimes 50% realization when you actually dig into the numbers a little bit. But keep this in mind, the price ceiling. If you have found a price ceiling at your firm, please come find us after this. Cause I would love to hear that story.

Bob Lewis (27:24):

So give you an example on pricing too. One of our clients put a bid out. They're in a smaller community, not small, but a almost sea level city. They're not like a Dallas or Houston, a big, big metro area. He puts the bid out to a Chamber of Commerce audit, which line, whatever. That's what they want to do, puts the bid out and he wins the bid, which is a good thing normally, right? I don't know. Put the audit out like 25, 20 $6,000. I don't remember the number. Gets the letter back. The letter says, congratulations, you've won the audit, blah, blah, blah, blah, blah. You were the other three people we sent the bids out to, decided not to even respond. He won by default. He was the only one that bid. That is happening a lot. The question now is he bid it too low. I think he bid it too low thinking he bid it like he would normally price it to win. It got to break that mindset because you know what? If you lose nine out of 10, the one out 10 you're going to win is going to fit and build that enterprise value of your firm. Pricing is a huge area right now, and people cannot find other accountants to do this work. So we're holding onto this baggage and killing ourselves with that. Go ahead Doug.

Doug Lewis (28:28):

Pricing is massive, but of course the shift from compliance to advisory cannot hear that buzzword phrase enough. And so many times firms go, well, we're doing pretty well. We're making good money. All this fun stuff. I don't have time to do advisory. I don't have time to consult with clients. Listen, it's not a choice anymore. If your firm is just ignoring this or choosing not to pursue this route, you're going to struggle. You're going to fall behind. And selfishly think about it. Throw the clients aside for a minute. We all want to serve our clients in the best way possible, but they can't really challenge your compliance work. They're not going to care too much about it, to be honest with you. They're not going to go, you know what? That audit, I disagree that that's not something they're going to do, but.

Bob Lewis (29:13):

Well, they actually may disagree, but that's not problem.

Doug Lewis (29:15):

Yeah, they might disagree with it, especially if they get caught, which we've had that problem before. But what they're really going to remember is how did you help them take their business to the next level? And you're not going to do that solely through compliance. And we're not saying compliance is going to be eliminated entirely. It's always going to be a core function of an accounting firm, but adding the other service lines, it's also going to help you with your recruiting. Everyone comes out of college now saying, ah, I want to go be a management consultant. I want to do this and tell people how to run their businesses and all that fun stuff. When they actually start learning how the world works a couple years in their professional career, what they're going to want to do is advisory services. You're going to have a better chance retaining and attracting and developing talent if you don't rely solely on compliance. Plus the fees for advisory. The highest performing firms out there are pushing 50% of their entire revenue in advisory service lines.

Bob Lewis (30:06):

We've got a lot of clients that are in that 30 to 70 million zone. They're doing 50% of the work in consulting now 50%, and they're pulling larger compliance visas. They're lotto because of the stickiness of that client. By the way, for those people in side, with my apologies, I cannot make her eye contact of any shape or form because it's like I'm staring into the sun. So sorry about that.

Doug Lewis (30:31):

So again, thinking back to the advisory piece, do they really value your compliance function? Is that something that they come to you say, thank you, my God, this tax return, I, I've never seen anything that's great in my life.

Bob Lewis (30:43):

And they do have value. It's a value point. It's not trying to degrade the service that you guys provide, but it is a required function, okay? It's like putting gas in a car. If you never had to put gas in a car and a car work, you'd never put gas in a car. Again. They need to have these things done. And smart audit work will come in and provide ideas on how I can maybe re-engineer and do some things differently. Tax strategies can be very complex and can save me a lot of money as opposed to going to somewhere else who will do it a low fee but lose a ton, lose me a ton of money because they weren't doing the planning for me. But they'll remember this for their life and they'll talk to their friends about consulting. You come in and help them figure out a succession issue, how to buy a company, how to overcome a problem. They'll remember that for the next decade. They'll pay you more for that, the compliance work, and they'll talk to their friends about it. And that is really what you need to look at. And in this market. Back to what Doug was talking about, Doug, how old are you? I should know that.

Doug Lewis (31:35):

Old enough. I am his son if anyone doesn't know in this room. So he actually should know that.

Bob Lewis (31:39):

Well, that was a facetious question, but okay.

Doug Lewis (31:41):

So he should know that I'm this Somewhere.

Bob Lewis (31:43):

I I'm 30.

Doug Lewis (31:44):

For anyone who's wondering and I lost Track of that.

Doug Lewis (31:46):

31, let's go.

Bob Lewis (31:46):

Let's point is he's looking just like your younger recruits are looking and going. They're hearing that compliance work's going to go away. Artificial intelligence is going to wipe everything away. Good luck with that. But okay, it's going to wipe everything. All the compliance work's going to be gone, right? So they're going to go, I'm going to move into a progressive firm that's advisory focused. If you're not showing that on your website, and I'll tell you right now, if you're looking at your go look at your LinkedIn profiles, go look at your LinkedIn postings for your firm and go, is that attractive to recruits? Because that's all they're going to have to judge you off of. They're getting five offers. If they're talking to five firms, they're going to go to your website, they're going to go to your LinkedIn page, and they're going to make decisions based on how they think, how progressive we are. And if you're having your people talk to them in the interview process and telling them about the incredibly great 70 hour work weeks, you pretty much have killed that opportunity. So I have your right people talking to them.

Doug Lewis (32:36):

So everybody knows we need to do advisory, but why? So when you start looking at the time, compression compliance is always revolving around deadlines, right? No matter what it is, there's always a deadline to hit. But when you look at some advisory service lines, these can be done year round. More importantly, they can be numbered by non CPAs. Yeah. Yes. If depends on the advisory service line you want to roll out, you're going to need some credential individuals. But that talent pool of shrinking CPAs, it's really only getting smaller. So can you get creative and create year round revenue streams by hiring non CPAs to do some of these service lines? And yes, advisory services is very broad, right? Every firm has a different definition of it, but this is an option, and this is where the smarter firms are going. You can hire non-accounting professionals right out of college, seasoned professionals from other industries to come into your firm and offer some of these service lines.

Bob Lewis (33:29):

They actually, Dan Hood was talking last week from me about one of the firms that just opened up alternative practice structure and had nothing to do with private equity money or an investment. They opened up the alternative practice structure, and we're seeing this as other clients so that we can open up an advisory arm. He can be an owner in the arm. I'm the CPA firm that owns part of that company, and we market that thing separately so that we can cross sell his services into my client base. That's becoming a huge area.

Doug Lewis (33:56):

Yes, running a regular business is what he's describing.

Bob Lewis (33:59):

Running regular business. That's where most firms

Doug Lewis (34:01):

Are starting to get to. So how do you actually do it? Yes, you're welcome for that one. How do you actually do it, right? There's really three main methods to do it. You can build this thing internally, my accounting firm. I want to build this advisory service line out. I can go hire these people to come in here and do it from scratch. That's tough. That takes a lot of time. Talked to a 40 million firm managing partner, said, I am interviewing data scientists right now to come in and build out our data analytics department internally. I have no clue what I'm asking these people about was his exact quote. He did? Yeah. He said, I don't know how to interview these individuals. I don't know anything about the industry. So that is some of the larger firms are investing quite heavily in building this thing internally.

(34:42)

You can go out and buy it. Your accounting firm can go out and acquire a specialty consultant, the value added reseller, technology, consulting, whatever. You're looking to do an RD firm valuation. Can't hear that one enough. You can go buy it. The multiples on non accounting businesses are usually significantly higher than we're seeing CPA firms trade at today. Or the third option, which is one that we prefer and is the easiest one to drop into just about any firm you can partner with external parties who provide these advisory service lines that you choose a right for your client base and then take a revenue share from them. There are several vendors out here, or partners, sorry. Oh, vernacular we're we're using here that can actually offer this for you. A couple in this room that I'm seeing right now, anyone in this room can partner with a CPA firm and share some revenue stream. Oh, well, there you go.

Bob Lewis (35:31):

That buy it. By the way, we have three transactions right now on the table of non accounting firms. These are all technology focused entities and one's a specialty consulting company and there's more and more demand for that. We're seeing that as a huge market for firms. The problem is some of the firms are having trouble understanding the valuation because they're trying to compare it to the CPA firm world. So we're struggling a little with the internal valuation people, but this is going to continue to expand and they're really merging them, not buying them, buying out partly interest and merging the rest in because they need the people to stay to run those practices.

Doug Lewis (36:05):

So M&A, we'll hit this pretty quickly since we got a couple things to get through going on in the M&A sector right now. It's like the wild west, right? No rules. Everything is getting blurred. Who's buying who? Who's merging with who? Who's acquiring what? The valuations are two main options that most firms are still looking at today, right? I'm going to have a platform firm. I have my firm in Chicago. We're from Chicago. Unfortunately, I want and open an office in Cleveland for God knows what reason in the world. I don't know why

Bob Lewis (36:33):

We like to pick on Cleveland. I don't know.

Doug Lewis (36:34):

Yeah, sorry. Sorry, those if anyone's from Cleveland. But if you're from there, so I want to open to the office of Cleveland. I'm going to go acquire somebody in Cleveland. Hey, there's my platform. I can start building around that, or I'm going to start tucking practices into my existing locations that I already have. So most firms are open to acquiring virtual practices. That's still kind of a gray area. So if you are building a virtual practice, don't think your value would at all be diminished. That's very highly attractive for other larger entities who are building virtual practices, CPA firms, acquiring non accounting businesses, just like we talked about. You can buy them. Advisory service lines, technology consulting, our specialty consultants, take your pick. Salesforce consulting companies. That's a big one that a lot of firms are trying to get into right now. We have a large client CPA firm that owns and operates two independent functioning hospitals. It's all over the board. Architects engineering and the lines are really getting blurred with who's acquiring who. But that's becoming a bigger part in what the more progressive firms are doing in the industry. The

Bob Lewis (37:35):

Hospital one's a little out there, but it's a true story.

Doug Lewis (37:38):

Outside investment, private equity, we don't need to beat that dead horse. I'm sure we've all heard about it quite a bit, but some are looking for limited. Some we're looking for full scope investments. Now they're starting to represent them. Do we have any private equity people in the crowd?

Bob Lewis (37:52):

We do. I can barely see them, I think, but yeah.

Doug Lewis (37:55):

So some are now representing themselves as family offices instead of private equity companies. Oh yeah, somebody Gabby, here we go. So that was probably him, huh?

Bob Lewis (38:05):

The issue is on this whole thing is will it go to more limited scope? Right now, a lot of firms are resisting because they don't want to give up controlling interest. Will it go to limited scope investment? Is it affordable for a private equity company or a family office group to buy limited scope? We'll see, we, we'll see. That all shakes out that this is a huge slide.

Doug Lewis (38:23):

So the basics of the CPA metrics, right? So our M&A team talks to thousands firms a year, right? We have very detailed financial profiles of firms, anywhere from a million dollars all the way up to the top 50. It's all over the board. We see this a bit revenue per professional head. Everything we look at is from the acquirer standpoint. So if you're building your firm to sell it or just building it to increase that enterprise value, like we talked about, look at these metrics and if you're already hitting these metrics, continue to increase them because these are just general benchmarks that we see. Revenue per professional head, $200,000 per professional head inside the firm minimum. How do you calculate that? Oh, right. You take your revenue, calculate your firm, and you divide it by their employees. It's tough. They're accountants. They can figure that piece out. Revenue per equity partner, this is the money ball right now. So most acquirers out there are really looking for between one and a half and 3 million per equity partner. Some are going as high as five. An equity partnered for a managing 5 million book.

Bob Lewis (39:21):

So let's, let me throw something at you. We just did Thursday this week. We did an AI CPA, a large group session for about an hour and a half. We had 14 very large firms in the room. And the metrics we were looking at were from accounting. Today's top 100, sorry Dan if you're here, but they had the numbers reported and they, for the top 100, they flush out more details. So we put our own special columns to do revenue per equity partner, revenue per employee revenue per professional head. And I'm talking to one of our larger clients showing them the list. And the numbers were right because they reported 60 equity partners. 60 partners. Problem is they reported 60 partners when they've only got 40 equity. So those numbers you see on all those lists, they're not asking necessarily the right questions. You need to separate certain pieces of the information out.

(40:12)

Otherwise you start chasing bad information. So you want to be just a little careful with some of the information you see that's out there on these public lists. But almost every transaction we're seeing right now, last, any of the, I'll call larger firms, anybody over about 25 to 30 million, they're looking at about 2 million. It's kind of like the benchmark. They're looking at revenue for equity partner, and it's become a challenge for a lot of firms because sometimes the equity partners don't have enough. How do you bring in an 800,000 equity partner when my benchmark's 2 million when I have other people waiting to be a partner in my firm? That's become a huge challenge for you to work out and get through.

Doug Lewis (40:53):

Profitability stripped on the firm, right? Before any equity partner takes home a dime, whether it's a draw or however your comp structure is centered, take it all away. Range of 30, 40, 40% on the bottom line for most firms is pretty standard. Higher performing firms are obviously much higher. Most of those come from advisory service lines. When you break it down, as a firm gets bigger, that profitability at the bottom line is going to shrink. There's no way around that. Why? Because it does cost more on the foundational investment side of things. Technology costs continue to go up. Recruiting costs, take your pick.

Bob Lewis (41:26):

We see firms at 50% profitability. Our first question is, what do your production hours look like? That's the first thing I lost.

Doug Lewis (41:32):

And the partner level production is going to be well in excess of 2000 billable hours a year. Well, in excess, which is a lot for anybody who didn't think so. Succession, let's have you talk about it.

Bob Lewis (41:45):

You're old. You talked about unclear buy-in and cost. So when we do these succession assessments, this is not a pitch, but I need to understand what do we do? We talk to the firm, we get their basic financial information. That's pretty easy. But then they have us interview their succession people. We start talking to them. What are their thoughts? What are their challenges they're having? I'll give you a really good example of what we did in Nevada last year. You don't come across these things too often. So this is an interesting story. So they had five people they wanted us to talk to inside the firm. The lady who was getting out was in her early forties. She had owned the firm since she was 20. She was putting in 70 hours a week. And she said, I've made money and you want to spend time.

(42:31)

She had a five year old daughter, I want to spend five. My daughter, I want to get out. And she had another partner there, but then they were talking about the rest of the succession team. So we're interviewing them and they said, well, there's one. There was four ladies and one gentleman we had to talk to. So said, we don't think the gentleman has any interest in buying into the firm, so it's fine. He was the last one we talked to there. The one, the 29 year old told us she wants to be a managing partner in a year. Like, okay.

Doug Lewis (42:56):

Okay. I heard one.

Bob Lewis (42:58):

Good for her. One laugh. Okay, one of the other ones, and this is the best part of the whole thing. She goes, well, my husband and I are going to be in three years. We're going to move to the Caribbean and open a tiki bar.

Doug Lewis (43:10):

Oh, it was Thailand. Thailand. They want to move to Thailand and open up a tiki bar. Yeah, I remember that. Cause it was so specific.

Bob Lewis (43:16):

Why would you tell somebody who's actually talking to you about your succession in the firm is a succession candidate that you're going to be in opening a tiki bar in three years? I mean, that's pretty much just cut her off completely in the firm. There was no sense even talking any further. The interesting thing was the gentleman, the one that they thought didn't want to buy into the firm because he wasn't expressing the he could. He said, look, I really want to be an owner in this firm. The problem is my wife and I, we bought a farm and it's a dog rescue farm. We have dumped all of our money into this dog rescue farm. I have no money to buy into the firm. Partners at the firm thought he just had no interest. He's actually the one that's going to be the one that's going to probably take over that firm because they managed to cut a deal with him to make it.

(43:58)

They give, they're gifting him equity to some extent. He's paying it back with distributions. But they thought he was completely gone. They weren't sure if they were going to have to sell the firm. This is the stuff that comes out of these conversations. And the best thing is you want to know. You want to know where you stand. You want to know do you even have the option? Cause if you don't have the option, your next option is how do I prepare the thing either to me up and sell it, or do I need to do that today? Or can I build a succession team? Do I have enough runway as I like to call it, to be able to build a succession team underneath me? We've talked about some of these other issues in here. I will you the staff not being, can you go back one slide. Sorry, one slide. I'm running short on time. The staff having minimal selling skills is a big issue. You cannot sell a firm to staff that can't bring in work because work will run off even in this environment where it's rich, would water work's just coming down daily? That will be a problem. Oh, go ahead.

Doug Lewis (44:53):

Well, how do you know if you're, well, it's almost like you've ruined this one as well.

Bob Lewis (44:56):

So I did. I ruined this slide too. So good about this. If they're not, here's the way you test this. Look, sit back if your own firm and go, do I even have a written succession plan? Not one in my head. Okay, I got lots of crazy stuff going on up here. Is there a plan that isn't 17 pages long that looks like a legal document that you can't figure out? Just a simple plan. One sheet of paper does a detail of financial buy-in. Is the financial buy-in actually reasonable? The big thing and the disconnect is we're not talking to the succession team about the plan or the costs. So

Doug Lewis (45:31):

Let's use us, right? Let's say you did this for visionary here. He put this plan together. It's great on paper, it's phenomenal. All the numbers make sense. Problem is he's ready to go. He's ready to execute that plan, and he never talked to me or anybody else inside of that plan about it until it comes time to execute that plan. Turns out, no, thanks, I'm on. Yeah, I don't want it.

Bob Lewis (45:53):

We hear the no thanks all the time from the partners who are, then what do we do? The other part is the financing. So when you do have a succession plan and somebody's actually going to buy the equity, are they buying it or you gifting it? So if I'm going to let you take 10% ownership in the firm, right, and pay you back with partner distributions later, are you really buying into it or am I really gifting you that equity by giving you partners distributions you shouldn't have had and you're paying me back with my own money now That's happening a lot. So the question is how do you get financing though? Some banks will loan financing to put money in to put into a capital account. We just restructured one of our clients down in Houston. So their partnership agreement was kind of messed up like many partnership agreements are, but they didn't have a clear way to be able to figure how do you buy 10% equity in firm?

(46:48)

This is a 20 million firm, so you wanted to buy 10% equity, which is pretty significant. How does the partner buy in with a 2 million check, which is what it would be worth if we sold it probably tomorrow. What happens is the deal's structured so that he buys, he gets a capital amount for, I think it was in this case we did $400,000. Something along that line gets a loan for $400,000, which we hooked up the financing for him, puts it in the firm's capital account, and then he starts to invest 1% ownership over like a 15 year period. So he's investing it. So right now, if we sold the firm tomorrow, he'd have zero a year later, he'd have 1%, two, 3%. And the reason why our partner is selling 10 million worth of equity, basically, I'm sorry, 2 million worth of equity at that low price is because he's making money off of that the entire time he's there.

(47:42)

That is the way you have to structure a buy-in. That's a big thing. We got two and a half minutes left. How do you build enterprise value? Look at your revenue per professional head. Huge. Look at the revenue per equity partner. Those are two core metrics. Also the pricing. I will tell you right now, any firm you're going to look at to acquire or emerge in is probably not pricing properly. Just keep that in mind. So there's opportunity right there on the table. They're also probably not cross-selling. They probably don't have CAS in place. They have no advisory.

(48:13)

Are these the clients that you would want to buy that are in your firm. So do you have the kind of clients that you'd want to buy if you were buying your own firm? So how do you scale your clients 1040's? So here's the 1040 dilemma. I've got 1,010 forties at $500. What is that? Does that sound good? Calvin, that's your practice, right? All 10, but that's okay. You can use a group on in his practice to get it down to four 50. Okay, so he's got $500, 10, forties, a thousand of them. The reason why they don't want to get rid of them is they go, well, that means my income will take a direct hit if I get rid of all of them. They're not looking at the fact they can upscale the pricing, get rid of them, spend their time on more profitable clients because the partners are going.

(49:00)

That's what I'm comfortable doing. You wonder why a lot of auto practices kind of struggle audit's? Almost always the lowest realization we see, unless it's an all audit firm, then they know how to do it better. The reason they do that is the audit partners don't want to give up their book and convert it over to CAS, because if I do that, what's my value? That's an internal struggle. Capacity expansion. You read the rest of the slide. We got a minute left. What's your vision? You can take that QR code. Not sure where to start. What's in the QR code, Doug? I don't know.

Doug Lewis (49:26):

That's a good question. We did this a while ago, but I'm sure it's great. Whatever it leads to now it leads to our market value accelerator. This is the only plug we waited 49 minutes to plug really any of our own service lines in here. So we'll give it to you now, right? This is what we do when firms come to us and they have no clue what to do. We can dig into your financials, all this fun stuff, but more importantly, we're going to talk to the professionals inside your firm to get their unbiased feedback. And my God, well, they tell us things that you would not believe when we start talking to some, not only partners, maybe you have a couple key managers that you want to work into this mix. This is telling not only from a recruiting and a performance standpoint, but just culturally across the board. There are a lot of firms that didn't know where they really stood until we did this with them,

Bob Lewis (50:11):

And it gets down to there's a easy way to fix a lot of what maybe an apparent problem. If there's enough time, the issue becomes when time runs out, then you're kind of forced to make another decision. I appreciate the time we did today.

Doug Lewis (50:23):

Time actually just ran out on us, so, oh, there's our whole team. Oh, there we are.

Bob Lewis (50:26):

Oh, okay. So we're here. We're also here at the rest of this conference. Anybody wants to talk about anything? We're very low key on selling, so if you ask us questions, we will not be drip campaigning you over the next four months and in cold calling you. We're probably doing that anyway, so there's nothing additional.

Doug Lewis (50:46):

Yeah, if our marketing team did that under one of our names, that wasn't us. Just know that I can promise you.

Bob Lewis (50:52):

Thank you for your time. Enjoy the rest of this conference. Anybody has any questions far away? All right, thank.