What you'll learn:
- How and when to begin transition process
- The framework toward choosing a successor
- M&A deal structures and which one may be right for you
- An overview of the influx of private equity in CPA firm arena
- The four ""Cs"" of a successful merger.
Bill Carlino (00:11):
Good morning everyone. We're going to talk about trends in M and A. Probably hit a lot of points that other sessions have already touched upon, but obviously I wouldn't go over material if it wasn't. I didn't think it was important. I am Bill Carlino. I'm a managing director at Whitman Transition Advisors. It's sort of like all home week for me because for those of you who remember, I spent 12 years as the editor-in-chief of Accounting today and I was the first conference chair for the what was then the Accounting Today Growth and Profitability Summit out in Las Vegas. So it's good to see that we're getting a lot, a little bit more of these smaller conferences and not relying so much on these mega things. I think it's important that the smaller conferences proliferate here. It's a little bit about me. There's my contact information. I'm not going to make it as an infomercial for our company. If anybody wants to talk to me afterwards, I'll certainly make myself available. Or if you'd like a copy of the presentation, I'll be happy to give it to you. Look at today's agenda, what's behind the current wave of m and a activity, how and when to begin the transition process, how to choose your successor and determine if they're ready. How to properly value an accounting practice, which could be a session on itself on valuation m and a deal structures, the different ones, which was probably best for you or might be best for you. A look at the growing trend of non CPA mergers and a couple of sessions touched on that yesterday. And finally, the influx of private equity firms into the m and a arena and what it means. But first we're going to have a succession quiz with a prize of $20 and it's a double-edged sword if you win the win, the $20, it's a mandatory sit down session with me on succession because it's age related for a chance to win $20. Answer the following question. Today's topic, presidential politics. In 1964, Lyndon Johnson and Hubert Humphrey faced off against Barry Goldwater, the GOP senator from Arizona for $20, who was Goldwater's running mate. And I'll give you a hint, he was the first person to star in the old American Express. Do you know me campaign? Does anybody know
Audience Member 1 (02:39):
Humphrey?
Bill Carlino (02:41):
No. Humphrey was Johnson's running mate.
Audience Member 1 (02:44):
Mondale?
Bill Carlino (02:45):
No. Mondale came later. This is the fourth conference. Nobody's been able to do it. Damn. Bill Miller, a congressman from Buffalo. Is Barry Goldwater's running mate? I know my father voted for him. Okay, what's keeping CPAs awake at night Staffing? Doug and Bob Lewis talked about this yesterday and some of the frightening statistics about how many less people are sitting for the CPA exam. I can't tell you how many calls I get a month looking for executive recruiting after effects of the pandemic. Certainly that has to be addressed. Succession planning, and I'm going to show you some very, very troubling statistics about that. Fee pressure from clients, not a new concern, but it's always there. Differentiating. Differentiating yourselves from the competition. Attracting new clients, new regulations and standards. Again, not something new, but always ongoing technology, software and investments and cybersecurity breaches. I don't think there's a week that goes by. You haven't read with some large corporation gets hacked. Baby boomers, one of the versus Gen X, Y, and Z. Look at the differences. The needs pension and purpose. My dad got a pension. The baby boomers wanted state for a pension. Now they want a purpose. The wishlist. Ah, I hope I get a good boss now. I hope we get great colleagues. The hours nine to five got to come in nine to five now it's whatever. How many people go to a Starbucks and see guys on computers or women on computers? They're probably doing BPO or CFO work, workplace. The office got to come into the office, have to now it's wherever and tenure, whole career. Get people stayed for the gold watch. My dad got the gold watch now it's whenever Gen X, they say Gen X, Y and Z will change jobs the first 10 years up to six times.
(04:54)
So if there are 50 things to think about in a transaction, the smartest of us will only think of 35. And if you're the smartest one in the room, you're in the wrong room. As my dad used to tell me three ways for CPA firm to grow. We've a lot of folks have touched on that first one, client at a time or what you refer to as organic growth. Second one again, certain sessions have hit on this. Develop marketable niches. Amy Vetter developed a whole keynote to the cCAS practice or merge and acquire another firm. Alright, what's driving this? Let's take a look at some of the factors. Geography, new markets now with remote and teams and zoom doesn't really matter anymore. New markets, we get one of the hottest new markets, believe it or not, we get calls for is Nashville, Tennessee. Now, 10 years ago, would you ever think Nashville would be a hot market for CPA firms? It is now. A couple of years ago, Southeast Florida was the big one. Personally, I think that was just a way for the northern firms to write off their golf trips. But that's it. New niches, cybersecurity, HR, CAS. Two weeks ago I gave a presentation for a certain county chapter of a certain state, CPA society. I won't mention the name, but it's close to New York. We had about 50 people there, 75% of them had no idea what a CAS practice was or what CAS even stood for. So this, there's a big learning curve that still has to go on. Competition, certainly not something a again, something nothing from firms above your tier, below your tier. Lack of formal succession plans. Look at this next statistic. 75% of the a IPAs, 400,000 members and that's in public and private practice are eligible to retire at the end of this year. 75% of that one person turns 65 every eight seconds in this country. So when we finish today 50 minutes, we're going to have 450 more, 65th birthdays. Some other factors overall inability to provide succession for partners. I apologize if that's not a little small, but I'll read it again. Baby boom Generation is still in control. You had 78 million of them exiting the workforce. Lack of talent, lack of skills to develop a new generation of leaders. I cannot tell you how many firms I speak to that have nobody on their quote bench to take over. They just have not developed new leaders. They just haven't lack of confidence by the retiring partners that they'll get paid. And no confidence by succeeding partners that they could afford to pay. We had a situation a couple of years ago, we had a client out on Long Island and their firm was heavily vested in new construction and real estate. And at the 2008 crisis, you remember what happened to both those areas. They lost about 50% of their business, but they were paying so much out to the retiring partners. They went from a $7 million firm to a $3 million firm. They were paying so much out to their retired partners that they weren't making any money. The firm was actually losing money and they had to close down. So it's always good to have safeguards like that and expensive and complicated technology. And there's certainly enough sessions at this conference about technology and in full disclosure, the AI Chat GPT helped develop this program. Still got a ways to go though. I went to the, for sort of an exercise in m and a. I went to back, as I mentioned, I spent 12 years at accounting today and I went back and found the 1997 top 100. Most of you're familiar with that study that they do every year in the top 20. These were some of the firms, Anderson, we all know what happened to them. Coopers and l Brand, again, we know what happened to them.
(09:41)
Amex Tax and Business services and we're going to look at them a little further down this presentation where we'd start talking about the influx of private equity and what they're trying to do differently from those consolidators of the late nineties and early two thousands. Constantine Associates, which was before my time. Maybe some of you remember it. I do not. George Olive, which actually merged within the first year I was in accounting today. I believe they were in Indiana if I'm not mistaken. And Alula and Glasser, which again, I have no idea, but that was 1997, not all that long ago. And you see how much the landscape has changed. Let's look at some of the in demand m and a trends. We heard a lot about Cass, so obviously client accounting services, outsource, CFO, HR and other similar sort of sub cybersecurity. Number one requested advisory niche. We get cloud it. Anything consulting and IT maintenance family office. We heard a lot about family office. I think he's here. John Napolitano did a whole thing on family office. If you were fortunate enough to attend his session yesterday, he went into let's look at what's not hot. Very cold trends, pure 10 40 and audit firms, I can't sell them. Nobody wants a pure 10 40 or audit firm. They don't want a 10 40 shop. They don't want something that does audit, not enough profitability in it. They want specialty niches and talent acquisition.
(11:25)
Multi in multi-partner firms, either all or most of the partners of seeking succession. I'm dealing now with a firm on Long Island. There were three partners. All of them are leaving. I can't get anybody to bite on it. They don't want a succession problem as opposed to a cash practice that in the DC area, all remote, 1.7 million. One owner, I sent it to seven firms in 15 minutes. Six of the firms responded that they wanted to meet a personal record for me. Six firms responded to the summary sheet in 15 minutes. Think about that and lease issues, especially if the successor firm already has a presence in that city. I dealt with about a seven, $8 million firm in New York City in Manhattan. Had one of the most beautiful offices I've ever seen overlooked. Brian Park, for those of you familiar with that. The New York Public Library. He was on the 50th floor, had a 2 million art collection, decorated his thing, but I couldn't get anybody in New York City or even in the suburb Jersey suburbs to look at this guy. First of all, his rent was half a million dollars a year and nobody was going to put that out. So what I finally happened is we got a firm from Texas to merge in because they wanted to establish a footprint in New York and he was big enough. Let's look a little, we're going to go into private equity a little further down in the presentation, but let's look at initially.
(13:01)
What do they offer that's different. Obviously a lot of money, opportunity to monetize the firm's value, give you a capital so you could grow ongoing participation in value, what we call value enhancement. A second bite of the apple when they go for another round of financing, some third and even a fourth. And I wouldn't be surprised if down the road somewhere like a CalPERS, the California Pension Fund or a TIA CREF steps into the market. We're actually working with a pension fund now up in Canada that's got 150 billion in assets that's looking to acquire CPA firms down here. The traditional acquisitions, it was a traditional purchase or sale transactions. They were usually resulted in. No new owners admitted to the successor firm. They would. Some might be admitted as equity partners or maybe non-equity partners Value often determine on a multiple of revenues. And we're going to go into that a little bit later because the three most frequently asked questions that I get are, what's the multiple, what's the multiple, what's the multiple? So we're going to and down payments anywhere from zero to 20%. Personally, I've never done anything past 15, but It's basically business as usual, Payments.
(14:34)
In a traditional merger contingent on client retention, which is why we always recommend at least two years for client retention. Because one year, if one year isn't long enough because the client will always say, all right, I'll wait it out a year, see how it is. If I don't like it, I'll leave. So if they're going to leave, leave in the first year and then the second year, hopefully they don't because that's going to affect the buyout payments made over five to 10 years. Stretch it out, often treated as deferred compensation. And if a stellar says on in full-time role, obviously the payments would be delayed if he's going to be part of the succession team. And the last one we'll look at here, I don't want to spend too much time on this. Valuations trending down from a hundred to 65% of revenues. Some people, especially in New York, which is commands probably the highest multiple in the country, maybe markets like LA could compete with it, Chicago, Miami. But other than that, I had an argument with a guy, he's got a million dollar practice in downtown Manhattan. He says, I'm not going below 1.4 a multiple. And I said, look, I don't make the rules of the marketplace but I have to live within them and nobody's going to bite at 1.4. So we'll see. They're the buyers are actually asking to retain the AR and whip from one to two years following the acquisition, which they'll pay it back sometimes even permanently. So it helps 'em with the cash flow terms of the payments sometimes trending longer. But again, I don't want to spend another question we get a lot, is it a buyer or seller's marketplace? Now, I would say 10 years ago it was definitely a seller's marketplace. They could set the rules, they could set the multiple. Now with COVID and lack of talent and everything, it's much more of a buyer's marketplace. You the still got the impact of the post coronavirus when organic growth slows m and a growth goes up. There was one year, 65% of the top 100 firms did at least one merger. The tuck-ins obviously have higher value because there's less outlay. Desperate firms usually mean weak value. And we're going to, what a desperate firm is, and I'll even give you a case study, it's a niche seller's marketplace. So if you have a niche that everybody wants, you could write your own ticket. And the staffing issues certainly is not going away, but they somewhat dissipate with the rise of Zoom and Microsoft teams calls. I mean during the pandemic, I used to make maybe half a dozen trips to Boston. I had New England was part of my territory obviously for two years everything was conducted via Zoom. The problem with that is if you have meetings with buyer and a seller have meetings, a zoom call is nice, but you don't get that one-on-one feeling. You don't share a lunch, they're not across from you. So you're not really going to, you're probably not going to merge with somebody you really haven't met in person first. So that was it. And the leases and satellite offices are more likely to be part of the m and a equation.
(18:05)
I think one of the presentations yesterday talked about a succession checklist, and I have a couple, everybody should be asking themselves. Every firm should be asking themselves this year, this every year, have any of the partners career retirement goals changed over the past year? Now many of you who are in firms probably have experience partners saying, Joe, I wanted to stay five years, but something now I think I want to get out in three. Okay, blindside again, do we have any partners who want to reduce their time commitment over the next five years? How about staff? That's one of the most overlooked things. A lot of your staff, even if they're not an owner, will have a lot of client, important client contact clients. See, maybe it's the administrator, maybe it's the receptionist at the front desk. They, there's that familial feeling and if they retire and do any of them require changes to our succession plan? How about these? Did you close or add a client service niche? How about another location? Did you gain or lose a large client? How about a change in revenues for whatever reason, a downturn or upturn in the economy or the local market or sudden loss of partners of staff, maybe resignation or death or disability? Hopefully not, but that's always a concern. What happens if you wait? Okay, I'm going to give you a simple answer to that. Nothing good. It's like people treat succession like a medical problem. If a lot of people who find something wrong, they think it's going to go away if they ignore it and it doesn't. So firms that wait too long to begin planning for succession, wind up with two options, a hastily arranged merger. And I've certainly seen my share and you probably have as well under not so favorable terms, turning out the lights and locking the doors. I had a woman, she had a practice up in Connecticut.
(20:09)
It was a nice little practice, like 1.2 million, alright? She wanted to spend more time with her family. She had just gotten remarried. Her first husband had passed away and she wanted to spend more time. Her children, she had children in college, but she was so hesitant about, she made everybody sign NDAs and everything like that. And finally she just calls me, she says, I'm shutting my firm down. She was that afraid to pull the trigger so she would shut her firm down and she didn't. Nobody was there to take over. And I always tell firms that if you're not proactive in succession, you're going to create client and real estate opportunities for those practices that are, and here's a perfect example of what happens if you hold off on a merger. I had a guy out on Long Island, again, long Island, it must be something in the water out there. He's had a million dollar practice. He was 68 years old, alright? I put him with not one, not five 11 firms. He had meetings with 11 firms and every meeting, every firm he would meet with, he would send me the next day a report. And it was almost like a report card. He was that thorough. But he always found something wrong with each and every firm. He was looking for the proverbial round peg in the round hole. And those of you who followed m and a, no, that's not always possible. But he said, no, I'm going to hold off for another year. So here's what happened. In one year, one of his key employees resigned, caught him completely blindsided. One of his large clients needed services he didn't provide.
(21:52)
So he started looking elsewhere. He never upgraded his IT system and it needed something like a $75,000 upgrade. And now he comes crawling back after tax season saying he's open to any offer that comes along. So that's why I title this one the high cost with the dollar sign of procrastination, starting the transition process. When should we start? Okay, well I always say the succession process, the succession planning process should start the day you open for business, you should have a succession plan, but rarely does anybody do that. So I always tell them five to seven years and they say, well that seems like a long time, five to seven years out. So I asked them, my next question is, of your clients, how often are they in your office sitting across from you? From many, many firms. It's one time a year. They drop the tax organizers off, they talk about whatever they need to talk about and that's it. They see 'em one time a year. So if you do the math five to seven years, that's only five client visits and you need at least two years for that. All important handoff if during a merger. So five to seven years might sound like, whoa, that's way out in the future. It's really not. And the thing I hate, the call I hate to get is when somebody, which always happens every first week in May, I always get it. I don't want to work another tax season. I want to get out this year. And it just, it's very, very difficult. I never use the R word retirement. There's a finality to it that people get nervous. The way I pose it is, how many tax do you want to work full time? And which sort of assuages their fears and puts them at ease. So they say, okay, two to three, didn't never say, when do you want to retire Again, client face time and the investments you got to make, including technology leases the future of the post pandemic marketplace. That's what we're looking at Now, how to select a successor?
(24:14)
I don't know if you could see this. If you can't employ the lunch test and the lunch test is very simple. If you have a meeting with a potential successor firm and you don't want to eat lunch with that person, do not under any circumstances do a deal with them. Because if you are not comfortable with that person, why on earth would you think your staff and clients would be? So that's what I call the lunch test. And if they fail the lunch test, move on specialties, they offer that you would need to understand size of the successor retention rates. Do they have excess capacity? Do they have the capacity to take you on billing rates? Professional credentials, for those of you who are familiar with New Jersey, if you perform municipal audits in the state of New Jersey, you need a credential known as the RMA, which is the registered municipal auditor.
(25:18)
And you have to get it, otherwise you can't perform municipal audits. So we had merged the firm in a New York firm, took in this jersey firm. The New York firm also did municipal audits, but they could not perform those in state of New Jersey until all the people in that unit got certified. So understand that billing rates, that's a big roadblock and we're going to go with the roadblocks later. Locations obviously, and culture. Culture can mean a lot of things, but it's also the difference between what I call brand loyal clients and partner loyal clients. One firm client versus eat what you kill. Typical books of business. Now, brand loyal clients, if you're a small firm, you have your clients because of you. Whereas in E and Y, their clients, they may not even speak to the person who does the work, but it's tethered to the brand of ENY or KPMG or any super regional firm.
(26:23)
One firm client where many, many partners. Service, service a client, the traditional books of business, which is one of the sticking points for that is a lot of the baby boomers obviously were weaned on the book of business concept. And when that firm merges it's, they sort of have to get the B.O.B pride from their hands during that makes it very, very difficult. They're set in their ways they don't like to share. That's why the, you're seeing a lot more firms sort of transition to that one firm client. And three questions to measure a culture fit. What's it look around? What if you're visiting this firm, if you have a potential successor firm in mind, look around, do the partners look happy? What's it like to be a partner here? What's it like to be a staff member? What's it like to be a client member if everybody looks miserable? And I could say from experience, there was a firm, and it was one of the at leading firms at one time in Nassau County, long Island. I went to see them. The founder had long retired. There was a new young guy managing partner. I sat in the lobby, the waiting room, and I don't think I saw anybody under the age of 60 walking around and there was not one smile and it was looked like the most miserable place on earth to work. And I said, look, I don't think I can help you. I really can't and couldn't. As far as I know, they're still around but a shell of what they used to be.
(28:10)
65% of firm partners are over the age of 50, probably closer to 55, 80% of multi-partner. Of multi owner firms expect succession planning to be the most important issue over the next 10 years. Well, with succession planning and staffing, of course, just 46% of multi owner firms, the ones that are surveyed, this is an AI CPA survey, have a formal succession plan in place, affirm with less than 15 employees and that may include many of you. 70% do not have a succession plan in place, and less than 6% of sole practitioners have a practice continuation agreement in place. Are you ready for succession? Vanna White is 65 years old. For those of you who watch Wheel of Fortune 65, think about that. Remember the what's her name? Girls just want to have fun. Cindy Lauper. Cindy Lauper is 69 years old. 69. Demi Moore is eight years older than the Blanche character in the Golden Girls. Think about that. How about this one? Mick Jagger is a great, great grandfather. Many of us remember these, used to wear those little skinny ties when they were performing in the sixties. He's not a grandfather, not a great-grandfather. He's a great-great-grandfather. And for those of you who like Diet Coke, it just turned 41 years old. It could run for president How to select your successor. Do you know why the other firm wants to merge? One time somebody called me from Michigan said, I think I want to buy a firm. I said, why? He said, because I got a bunch of empty desks on some computer terminals. I said something, do yourself a favor, sublet the space because you're going to spend more waking hours with your new merger partner than with your family. And fortunately he took my advice, the staffing situation, do they have excess capacity to take you on? Okay, how about current technology and equipment? I can't make this up. 10 years ago I visited a firm in the financial district of New York. The managing partner did not have a computer on his desk. How many managing partners have you ever seen that have no computer on their desk? Nothing. If the fire marshal ever came in, they had stacks of files that went up to the ceiling. This place would be banned if the fire marshal ever came in. How about financial strength? Do they have any issues? Plenty of outlets to find out. And the thing I always stress with our clients, they would say, well, they're a bigger firm. Bigger is not always better. It isn't. Better is better.
(31:18)
Okay, alright, When should we start? Again? We went over five to seven years. Ethic, language considerations. I want to had, for those of you who were familiar with the Astoria area around LaGuardia Airport in New York, it's a very, very heavily used to be, I don't know if it is anymore. It used to be heavy heavily Greek. So there was a Greek accountant that came to us, wanted to merge his firm, but he had a very, 90% of his clients were Greek. And this woman who had a Korean, she ran a firm, she wanted to buy his firm. I said, it's probably not going to work because 90% of your clients are Korean, 90% of his are Greek. It's not a good match. And the age of the owners and buyers could be a huge roadblock. I got a call the other day from a guy who's 81 years old. He goes, I want to buy a firm. I was like, I said, I'm not going to tell you when to stop working just because of the date on your driver's license, but I'm going to be real. I want to be real with you. Nobody's going to sell to an 81 year old man. It's not going to happen. So sometimes you just got to slap them around. You just do.
(32:25)
The four C's critical to any merger. If you write anything down, write this down chemistry again, if you don't want to eat lunch with somebody, don't do a deal with them. Capacity. Do they have the capacity to replace the retiring partners? And that's often a problem in likes size, mergers, I mentioned that I also service New England. I had a firm, two firms in the Providence area. One was six partners, one was five partners, two partners from one firm and three partners for the other. Were getting out in three years. I said, you realize what you're doing. You are doubling your succession problem now you're going to have to replace once you merge the work of five partners. So fortunately, cooler heads prevailed and they didn't. Again, continuity. How long have the partners been partners? How long have the clients been clients? Is there a huge turnover?
(33:13)
Are their staff, does their firm look like a fast food restaurant? And in terms of resignations, no. And culture again can mean many things. A dress code, jacket and tie versus high top cons, books of business versus one firm clients. These are the four Cs critical to the success of any merger. Let's look at the seven step M and A process though the one that we use. Okay, author, author of practice information including your goals, organize your must haves. And please, and I can't emphasize this enough, don't get stuck on unnecessarily unnecessary must haves. I can't tell you how many deals have been stall because people ask for ridiculous things and their must haves like, oh no, I don't like the name of that firm. Want to keep this, identify what your merger partner should look like. Have your initial meetings narrow the field? Who were the brides and who were the bridesmaids and who were the, forget about it. So after the second meeting, you should have a pretty good idea, perform due diligence. But before you do that, make sure you have a letter of intent in place because if you do not and you sit down at contract time and one of the acquiring firm or the seller firm said, Hey, I didn't agree to that. What a colossal how painstaking due diligence, what a colossal waste of time if you do it without having a letter of intent. And then hopefully now now's the time to call in the lawyers and close the deal. Main variables for valuing practice. Like I said, this could be a session in itself, but people just get too hung up on the multiple. I keep telling them and we tell them the multiple is the effect. The variables are the cause. So cash upfront in any, and as a example of that, if I'm acquiring a tax practice in August, probably 90% of that firm's revenues have been collected by then. And if he asks, so the chances of the seller getting cash upfront are very, very slim. I might have to operate that practice at a loss until next. Tax season. Treatments currently less cash available in demand niches. The deals cash flow, like I said, depending on the time of the year profitability, not the owner, the buyer's profitability, but the seller's profitability, the billing rates, tax ramifications of deal structures, goodwill versus current deduction and how that could change due to attrition.
(36:06)
Annual tax clients versus traditional clients. Obviously traditional accounting clients are a little higher margin. The future impact of ai, blockchain, robotics is the staff coming along, not just for the professionals but your admins as well as the key client contact people. Do you offer those advisory services? Again, are they too many partners seeking succession and are there cross-selling opportunities? We talk about somebody who services high net worth individuals that might be good for a high-end tax practice. You never know. Okay, structuring the transition. External straight sale. We rarely do a straight sale because obviously the inherent danger of a straight sale is client loss. People choose accountants the same way they choose dentists. I worked in Manhattan for 25 years. I haven't worked, haven't commuted in over 12. My dentist is still in Manhattan. I make the effort to get down there. I trust him. He's been my dentist for a quarter of a century, but if I walk into his office and Dr. Jeff is not there and I see someone else in the chair, you think I'm letting them work on my teeth. I don't know their skillset. It's the same with an accountant. If they see so many strains sitting by on the desk chance they're going to leave merger to a buyout. We don't see that very carving or calling out clients. I think someone was talking about C and D clients yesterday. Get rid of them. Sometimes you should have a key client program. It was like the IBM philosophy. 80% of revenue was 20% of your clients. You should review maybe eight clients per quarter whether you want to get rid of 'em or not. And the two stage deal, which is the most common one we do, you sell the equity but stay on and there's a lot less exposure and it's two stage deal basically works like this is what's his name?
(38:07)
Patrick, calculate this. Say Patrick is putting 40% down to the bottom line. All right. And I look at the labor and I say, Patrick, I tell you what, you come in with me, I'll take care of all your admin, all your overhead, you're making 40% now I'll pay you 40%. But of course if Patrick Patrick's hours and his billings have to remain steady to earn the 40% because of all of a sudden he's working 50 hours and he cuts down to 20, I can't pay him 40%. I'd have to make a ratable reduction in his compensation. Same with client billings. Alright, how long does Patrick want to work? Say he wants to work three years, so we backdate it three years, then his buyout begins. The advantage of the two stage deal, it's like a practice continuation agreement I like to say on steroids mitigates the impact of a client loss. Again, not to pick on Patrick, but if he loses a $50,000 client and he doesn't merge, he's out $50,000 because all his other costs are fixed. Alright, but now that I'm taking over everything, paying him 40%, he loses a $50,000 client, five times four, 20, he's out 20,000 instead of 50,000. Free additional backup support working less, maybe devote more time to business development and like I said, admin and other, those really nitpicking items that nobody likes to do. They passed on to the successor firm and obviously the higher client retention, the more money on your buyout to the buyer. If I'm the buyer, what are the advantages to me? Well, synergies in labor, rent, software, obviously when you renew it, malpractice insurance, you get a break on that and the transition.
(40:05)
When the stage one end and stage two begin, I had two firms talking in New Jersey. One of the partners was 76 years old. He refused to give a back date. He says, I'm not, don't know when I want to leave. I said, nobody's going to take you on if they don't. You're 78 and you're hanging around nobody's, if you don't give them a back date nobody going to take you. Retention could be, how do we pay a seller for a part-time continuing role? Usually the rule of thumb, the one we follow is any agreed upon accounting work, you get paid 30 per 33% of what you bill out for. That's fine. And we usually throw in a new business incentive clause 15, maybe 15% over three years if even if the client services, they service the client or not. What if some partners want to slow down and the others want to grow and stay? A lot of multi-partner firms, alright, partners who want to get out would just do a straight sale with them seeking to slow down a five years. We do a two stage deal like I had showed previously, and the partners looking on the stay on and merge, they become part of the succession team. But what does equity mean when they merge? Someone talked about some statistics where you had 60, it listed 60 equity partners, but only 40, 60 partners, but only 40 of them were equity. The rest were non-equity. What about the buyout? How does their comp and role change? All has to be role succession. If you don't have excess partner capacity or skillset, you must replace with a new partner. And I always tell them, you need to replace the role, not the body. So if someone's your rainmaker and they leave, you can't replace them with the quality control person or the tax or the tax manager if they're not a business development person. Let's look at some non-traditional M and A frenzy. In 11 year span, advisory services grew an aggregate of a 90% among the top 100 Deloitte, according to the latest accounting today, top 100 reported 27, almost 28 billion in US revenue, 54 of it per stem from its consulting services. I think Amy Veder touched on that today, this morning in her CAS, over the past three years have been more than 1200 consulting firm acquisitions or non-traditional mergers. With 25% of that figure attributed to the big four. What are the in demand non-traditional partners? I think we want on this marketing, healthcare, human resources, cybersecurity. A true story. It was a million dollar cybersecurity firm that we showed to one of the big top 100 firms, excess of 200 million. Now, normally they would never look at anything under 5 million. This was cybersecurity and the deal closed in like a month.
(43:06)
Literally. How in demand these thing, these cybersecurity, finding the right fit, again, not always the proverbial round peg in the round hole deals should compliment each other, not compete against each other or become counterproductive. For example, a financial planning firm specializing in high net worth individual and trust work is not going to make a good merger partner. A firm that pumps out $300 tax returns dear to a firm that may have made the transition to paperless, who's courting an IT practice specializing in SOC audits or financial stress tests, and maybe an engineer in construction firm might appeal to a practice that has a thriving cost psych business. Making your firm beautiful for a merger. Many of you have sold homes maybe multiple times. When does your home look better than just before you put it on the market? All those little nitpicking repair jobs that you've put off for year, months, and years. You have to get do because you've got to make your house beautiful. That's no different with a firm technology. Are you paperless? Do you have trained clients? Meaning do they pay on time? Is your realization rate high? Have an accurate understanding of your firm and its metrics. Your most important client is your firm. I can't tell you how many times I've talked to somebody and I said, well, what do you top in the bottom line? Oh, I don't know. After salaries and everything, whatever's left. They have no understanding of their firm metrics and be realistic on the terms and avoid long-term leases and offer advisory services or clients that lend themselves to them.
(44:48)
Always position the deal as a merger, even if it's a straight sale. Clients and staff, they hear sale, they hit the panic button. Everything is a merger. Even if it isn't, give the transition enough time. Appoint somebody to be the leader in charge of the transition process. Don't hope everything falls into place because it's not. Ensure a true handoff of duties and relationship. Make the day you walk out the door, a non-event for both staff and your clients transitioning. Your clients. Is the partner owner I trust de lair, is it going to cost me more money? If you have are 40 normally costs 800 bucks and all of a sudden you get a bill for 1200, that's a pain the client is going to feel. Or if the client's firm was a mile away, now he's got to fight. He or she's got to fight cross down traffic to get there. That's a pain. They feel. They don't care if you're on a different software platform as long as they get their 10 forties done. But the other things they will feel, and it's all packaging. Change is a dirty word. The emphasis needs to be on continuity. It's not the loss of your firm, but the gain of the successor firm. And of course client who gets the phone call, who gets the visits, separate your clients A, B, and C who gets a letter and always put the letter to the clients on the seller's stationary. If they see yours, they're going to think it's a solicitation for an accounting firm. So put it on the seller's stationary must haves capacity to take over the roles being diminished. General chemistry, again, I can't stress that enough. Culture and continuity of the relationships that will help retain the clients. I want to go into a little bit of the, what's the difference between what they're doing now and what the, like Amex and enterprise and CBIZ, what's the difference? It's a more entrepreneurial approach. It's more of a partnership rather than a top down structure. What some of the other things like Amex and CBIZ and everything, what they did was they converted the partners basically to employees. They really didn't, didn't have a say. Now it's a true partnership. Okay, CBIZ loan survivor 1990 through 2010 H and R Block. People forget H and R Block was heavily vested in this consolidator. CBIZ is the loan survivor. There's some similarities. The key differences now are what they base on what did not work back then.
(47:33)
Again, entrepreneurial partners were converted to employees only. Future upside was in the growth we require to overcome a haircut out of the partners. Comp never materialized. And in examples of Amex and H and R block, the accounting divisions never lived up to the core businesses already in place and the referrals never came. Amex thought the accounting firms would steer all their clients to their financial planning services. Guess what? They found out accountants don't like to share. Again, what are they doing? The same concept of compensation adjustment to create EBITDA. Flexible on the partner haircut, what they devoted to reporting in EBITDA, willing to consider some upside potential, not just relying on the historical results and not necessarily acquiring a hundred percent of the firm. We have engagement letters with 13 PE firms and they're looking at it anywhere from 40%, acquiring 40% to 60% of the firms. Again, I don't want to spend all this time because running out again, acquires becoming more competitive, more deals structured, larger upfront payments and they keep the younger partners. The question they ask is, what's in it for me? I know what's in it for the senior partners because getting all this money. They're, what they're doing is they're giving the younger partners ample capital to grow the firm, go into niches that are appealing to them, potential m and a roadblocks time. The undisputed heavyweight champion of all roadblocks. Time the number one deal killer. Too much time elapses staff can find out, competitors can find out adversarial nature of M and A seller wants to command the highest price and the buyer basically wants to pay the least he or she can. Messages that you send during the process. We always tell them even during tax season, keep the momentum alive. Call them, maybe set aside an hour, have lunch, unnecessary must haves. Again, be realistic about what you need an unexpected competition. And the 13th time you read an agreement, you're obviously going to see something that you didn't in the first time.
(49:53)
Why some mergers go south. A buyout situation where the cost of acquiring the partner's equity by the successor firm plus the cost of replacing them was greater than their comp. So the successor firm literally was going to be in a negative cash flow for many years. Business plan execution, not getting complete partner, and I know we're almost out of time, but I got to tell you the story. Two firms again on Long Island. I don't know why we had them in talks. They have an LOI in place and I told him, I said, now it's time to get the lawyers. We have to sit down and write the contract. And he said something to this day, I still can't believe he told me, okay, first I got to talk to my partner about merging. I was like, what? He says, I go, you never told your partner that you had all these meetings. You have an LOI and everything. He goes, no. And of course, what happens when he told the partner, the guy blanched, threatened to quit and equity. We talked about the rise in non-equity partners. Here's a problem we run into a lot. If three equity partners, 50, 45 and 5% merging into a 10 partner firm, the merger is not going to give the 5% shareholder an equity stake in the firm. It's just not going to happen. So they would give them a, they'll give them a partner title, but give them a path to equity.
(51:13)
Today's takeaway, succession planning could never begin too soon, but often, as you know, can begin too late. Ideally, firms should plan succession five to seven years out. You need to determine whether your succession solution lies internally or externally. Don't fall for the pipe dream. A young CPA is not going to walk through your door and miraculously solve your succession problem. It is not going to happen. That's the holy grail. It's not going to happen. Don't get hung up on the multiple. The multiple is the effect of several other causes as we win and don't merge simply because everyone is doing it. And you could expect at least a double digit increase in private equity deals before the end of 2023. So whether in business, in life, succession planning, whatever, remember these seven Ps of success, proper prior planning, prevents piss poor performance. And thank you very much.