Track 1: Building the Revenue per Professional Head (RPH) of a CPA Firm

Transcription:

Doug Lewis (00:09):

All right, well thank you for joining us. My name is Doug Lewis with the Visionary Group. Beside me is Bob Lewis. Yes, this is a Father-son combo. Let's get that out of the way. It's not just the two of us. Thank God. There's a lot of things we have to hit at the front here, kind of who we are and what we do and all this fun stuff. Building the revenue per professional head of a CPA firm. This is the first time through this one. This is something we do regularly with firms. Kind of give you some background and before we dive into it, I like putting this up here. This isn't a sales pitch. It's going to sound like it, but I can promise you it's not. We'll try our very best not to sell this entire time to the crew, but I think it's important to note really who we are, what we do before we jump into how everyone should be running their firms and all the stuff we see in the metrics and all that fun stuff.

(00:53):

So 100% of our clients are accounting firms, coast to coast here in the us. Yeah, let's put it on mute. Please treat this like a movie. A hundred percent of our clients are accounting firms, coast to coast here in the us several of the top 100 we work with about half of our business is m and a transactions between firms. So we have a team that sources these transactions. We negotiate these. We write letters of intent. We do all this fun stuff. We help work out comp models, a lot of nitty gritty stuff in the m and a side. The other half of our business, we help firms remain independent, increase their profitability. Everything on this list is something that we do with firms, honestly enough right now we're getting a lot of firms coming to us with succession problems. I don't know if you guys have heard that there's a talent shortage going on out there in the accounting profession.

(01:37):

So succession assessments have become really big part of what we do. So we get really deep with all these firms and dig through their numbers. We talk to their people. We interview people one-on-one, spend a lot of time going through all this data and figuring out how to make firms more profitable, how to add advisory services. And the biggest distinction, again, not a sales point, but I think it's really important to note that where we're coming from is not just academic. We don't just consult with these firms and tell them what to do. We have a team that implements everything we talk about when our strategies don't quite work, they don't line up. We go back to the drawing board and we start again until we figure it out. So we have a team that actually implements everything and I think that's a really important distinction other than just coming up here and giving you a bunch of benchmarking statistics and all that fun stuff. So everything on here is something we do. I think it's again just important to give that background setting the table, but it's killing them not to talk. Usually we don't have to split the stage. Why don't you set the table. Set the table.

Bob Lewis (02:30):

Thank you for letting me set the table.

Doug Lewis (02:32):

Please. I know.

Bob Lewis (02:34):

So, every firm we look at, so years we've done for, I've done it for almost 30 years. It's shockingly, and it was an accountant a long time ago. Firms call us, they go, what's my firm worth? That's a very loaded question. Firms have. So two $10 million firms could have very different value outcomes in the market. So as a result of this figuring out how do you figure out what a firm's actually worth, we've come and evolved through this whole revenue per professional. That's one of our first things we look at, and I don't want to give away too much of how do the calculation on revenue per professional head, but we look at roughly a ballpark of $200,000 as a minimum threshold. We've got firms up in the 500 range. We've got firms in the one 50 range. So first thing we look at is if I can drive the revenue per professional head up inside a firm, that is a key metric for us to focus on.

(03:22):

As long as they're not driving it up by having partners billing 2000 billable hours each, that's a detriment. So underneath this though, we've got a whole series of drivers and levers that we're going to explain on how this works and if you start to focus on this for your firm, your drivers and levers may be different, but that is how you actually pull up the revenue per professional head and that's how you actually design the programs that help reach out into the markets or decide what you're going to do. Why don't we hit the next slide?

Doug Lewis (03:49):

Yes. This is a short one for us.

Bob Lewis (03:50):

Again, it gets noise out there.

Doug Lewis (03:51):

We got to crank a lot in. I know it kills them not to. So revenue professional head, this is really the core metric that most firms are tracking right now. So firms come to us, they say, what's my firm worth? How do I make it more valuable? When we have an acquirer, this is usually the first thing that they kind of regress all the metrics of every firm onto is the revenue per professional head. We're going to walk through how to actually do it, how to calculate it, the little levers he was talking about. We have a nice graphic to make it simple for everybody. Example, pretty easy. Most people in this room are accountants or accountant adjacent at least $10 million, firm, 50 full-time equivalent accounting professionals inside that firm. You do the math, that's not complicated. $200,000 per professional head in that example, you can calculate it in your own firm. We eliminate admins. We can get into the details of how it actually works, but just baseline revenue per professional head. How much revenue are you really doing for every professional inside the firm? This is the benchmarking metrics that is driving a lot of the m and a valuation right now. Whether we're looking at traditional firms, private equity, some new acquirers ending the space, this is where most people start their, I think this firm is worth this revenue per hat.

Bob Lewis (04:58):

We can size up a firm in about 30 seconds on where they're at with a very simple calculation to see where it looks like they're at in the market. I know it sounds like a really rough way to do it in 30 seconds, but we see a firm that's at 125,000 revenue per professional head. I don't really need to ask a lot of other questions about pricing and who their clients are and what they're doing because we know it's pretty screwed up. I see a firm at 500, we have to understand how they got to 500 and there's some interesting stories on how they got there, but this is a tell all and the tell all also shows you what you need to do to change, to make your metrics different and better and make your firm more valuable. Whether you're going to sell it or not, you should always be building the firm to sell it, even if it's an internal sale, if you're going to sell it in 20 years. If you're not, you're probably missing the mark. And by the way, in terms of the m and a sector side, which we're not going to dig into on this session, very few to no firms want to buy a book of business anymore. They already have too much work. So buying a book of business without staff, unless it's something very unique, provides no value to them. That's something just to keep in mind.

Doug Lewis (06:03):

And this $200,000 per professional head example up here, that's a good strong number. That's what most firms should be striving for. Again, there are a lot of firms significantly higher than this across the country. A lot of firms significantly lower, but this is our baseline. Alright, this firm's doing something right, this calculation, that $200,000 provided. That's where we kind of kick things off. Oh boy, there's a lot going on right now and we're not going to get into the m and a stuff, but this is driving a lot of activity right now. Oh, we're being told something's wrong. What'd you do? Did you break something?

Bob Lewis (06:34):

They're trying to get better. Camera. Camera. I don't know why normally people like to keep me off the camera.

Doug Lewis (06:38):

No one needs him on camera.

Bob Lewis (06:40):

In this case, I need to go this way now.

Doug Lewis (06:42):

Yeah, there you go. This doesn't look weird. Alright, so before you really dive into the actual numbers behind this whole thing and the train that's driving, oh, okay.

Bob Lewis (06:50):

Sorry. It's having a little fun there.

Doug Lewis (06:52):

Please, for the love of God, interrupt us if you have questions. We can never get off this slide. That'd be great. If you just want to talk about stuff. This is supposed to be interactive and it happens quite a bit when we do this stuff. This is ultimately here for you. So you have questions, you disagree with something you want to go deeper on it, just shout it out. Just shout it out, please. We both hear each other just talk far too much. So pretty much every single firm right now is coming to us and they're all at this exact point. I'm talking sole proprietors all the way up to shockingly several of the top 100 firms we're having this conversation with. Now. They're all at this inflection point, every single one here, and here's all the options that are available to them right now and it's probably going to continue to grow the avenues that firms can take right now, just continue to just be endless.

(07:34):

We get new opportunities, new acquires coming in space, all this fun stuff. Option number one, firm can always look to remain independent. Look to pull off that internal succession. A lot of firms don't really have that beneath them to do this pretty successfully, but that's beside the point. Option number one, it's always there and we're big proponents of that. Option two, you can always merge a thing up or sell into a traditional firm. There's larger firms across the country. I'm sure there are many here that are looking to acquire or continue their acquisition streak. Always an option right in the middle. Outside investment, IE private equity, and it's not just private equity anymore. We're starting to see outside investment coming from technology entities that are interested in acquiring accounting firms, offshoring companies who are interested in interested in acquiring accounting firms, wild stuff.

Bob Lewis (08:18):

Investment advisory.

Doug Lewis (08:20):

RIAs have obviously made their splash in the profession and continue to do so. There's a lot of different options when we look at outside investment, but it's there for firms. It's an avenue that most really should explore and at least understand that it's right for me or not right for me.

Bob Lewis (08:34):

On a shameless plug, we are also doing tomorrow a private equity panel. I think an hour after this ballpark, but keep going, Doug.

Doug Lewis (08:42):

Yeah, we will keep plugging throughout this thing. Option four, you can become the acquirer. It's out there too. There's a lot of firms that think that they're set and ready to acquire, but realistically don't really know what they're doing. Good size firms, but it's always an option. A lot of people know you keep doing it.

Bob Lewis (08:58):

The price is changing too. If you're becoming the acquirer because of the influence of the outside buyers, prices are going up and not necessarily in every firm. Everybody thinks all the firms are going to go up generically, but some of these firms are damaged and that's what brings the value down. Some people, if they're doing a heavy amount of 10 forties, if they're doing a heavy amount of low end bookkeeping, which I don't like the word bookkeeping, but we're using it right now, those firms are often unsellable. So unless they've got a great infrastructure of people, it's hard to move that book and the prices are not attractive. Most of our clients will walk from that at this point.

Doug Lewis (09:33):

The last option firms always have is you can change absolutely nothing. That's fighting a pretty uphill battle right now, but we don't have to get into that. That's not what this one's about. So these are just recent conversations within the last month leading up to this conference. We've had a $10 million firm come to us and say, we can't remain independent. The investments are just too much 30 million firm. There's just too much change happening for our leaders to keep up with or want to keep up with. We need to align with someone who has a bigger system in place. We have had a hundred million firm come to us very recently and said, you know what? I need to explore private equity because my partners refuse to sell advisory services through our base.

Bob Lewis (10:12):

And they've made the investments, although I think he's kind of lashing out in anger, but he's fed up and they're not sure if they need to maybe look at cashing out because they built the infrastructure and the people aren't executing inside the infrastructure and likely because that's not what they're trained to do. They're trained to do the compliance function, not the advisory. So it's a difficult transition for a lot of them.

Audience Member 1 (10:35):

When you say they made the investments, how so?

Bob Lewis (10:37):

They bought the companies, they bought the people. They've got people like you Rory, but who would be just a hundred percent focused in advisory, no compliance work at all, and then the partners are not embracing it and bringing them into the client base. So they should be bringing you into that opportunity. They're not doing that, they're resisting it.

Doug Lewis (10:55):

These are just real life examples that have happened recently. Good size firms coming to us with very similar problems all at that inflection point. And every single conversation starts with what is your revenue per professional ed? Because that's the driving force behind honestly, either moving forward with some of those options in their inflection point or eliminating some of them because they're either not qualified, not the right fit. Take your pick that revenue per head. We're just going to keep coming back to that obviously because what we're talking about today, what that is paramount and pretty much every decision that most firms should be making, especially right now.

Bob Lewis (11:26):

Okay, so the way we look at this thing is benchmarking is great. Benchmarking measures gives you an idea where you're at, what the metrics approach does. It creates your program because it's great to say that my revenue professional head is three 50 and Michael's is four 50 and I should be aspired to be at four 50. That's great. That doesn't really tell me much other than the fact that I'm a hundred thousand under Michael's firm. How do I get there? Does it even make sense for me? Could I even do that in my practice? So what we do is we look at this revenue per professional head top line. It's our first indicator how big the problem is if there's a problem or how good the opportunity may be underneath it, every firm will have four or five key sub metrics that they're looking at. These are critical things that drive that revenue per professional. And underneath each of those metrics, there's levers you got to pull. Each of those levers are part of your program that you need to design inside your firm to start improving that metric, which improves the revenue per professional. And if you're doing it right, everybody's making more money.

(12:27):

Levers example, what is the size of the client? By the way, it's really hard to read this when I'm on this side of the screen now. So what is the size of the client? Are they in a niche? So firms in the past have taken all kinds of clients and just put them into their infrastructure, and then as they get bigger and bigger, they're dragging these firms along the same clients that they've had the entire time. They're not cleansing them now, they're a 10 or 15 million firm and they're dealing with clients that are a million dollars or 1.5 million that don't have the ability to really pay the fees that are required anymore. That staff doesn't want to work on them. They don't have the ability to buy additional services. The things that build the most value inside a firm is building on a niche by far second, followed by really having a good team to execute that niche.

(13:14):

But the niche is critical. The other part is can a client use more than one service? So if you pick up a client that really just needs tax returns from you, what's the value of that client? I mean, it's great. It could be a compliance client, it could be a C, it could be an level compliance client with a lot of money, but if they're not able to purchase any other services from you, how are you going to ever expand and start to open up the advisory side? So when you start looking at your client's acceptance, that's one of the first things to hit is, is this client really something you want to begin to add? And now every firm in this country has been working on how do I rotate clients out? How do I shift them? There's a strategy to it and most firms do it one time.

(13:52):

They should be doing it three times a year. Doing it in busy season would be insane, but they should do it three times a year and the exercise becomes less and less of an effort every time they try and do it. Doug, let's hit this. So here's the exact example. So in this particular firm, we made up the example of clients being one of the other sub drivers. Very clever how we did this whole graph. I know underneath it we talked about the size, the niche and services. So if I have clients that are not in the right niche, what do I do with them? How do I prioritize those clients? What do I do to keep them to get rid of them if they're the wrong size? So here's a great example. We Oh, more adjustments on video. Can you just kind of stay this way of the podium?

(14:33):

This side? Yeah. Wow, that's really hard to do. We're both standing on top of each other at that point, but okay, so Doug, okay, you also can't see from the side of the podium. So I'm the size. So we executed a firm last year about a $7 million firm. We had some trouble, but we didn't actually execute them. I agree with you. It was board choice award, St. Tyson. So we did a transaction last year with the firm. Most of our clients were one to $5 million, but there was 7 million firm. I got the decent size. So they had to go up to a little larger platform. It's hard to take a client base of one to 5 million and put it up into a 20, 30, 40 million firm, not the clients they want anymore. So when you're looking to build this thing out, that became a little trickier fit to find a solution for them.

Doug Lewis (15:24):

So the example we use is obviously clients. You just drilled that one home. We have sub metric two, sub metric three. These are going to change by firm. Whatever your industry niches are, whatever your professionals are doing, whatever important to your firm. If you have a different advisory service line, no two firms operate the same way, which makes what we do in the m and a world, honestly a living hell some of the times. But each one is going to have different important levers. So this is just obviously an example. You should starting with clients. Every firm should really start there, but whatever the sub metric 2, 3, 4, 5 are, they're going to be unique to pretty much every firm's footprint, what they're doing, how they're growing, and what they're built upon. And so key metrics besides revenue per head, that's obviously number one. The second thing that most acquirers are going to look at, which again we come back to how can we build value. By the way, this is really weird. Now how to build this is bizarre, weird, how to build value the firm, right? Second core metric that most people are really going to look at is the revenue per equity partner. What is a good revenue per equity partner? I'm curious.

Bob Lewis (16:27):

You want to take a stab?

Doug Lewis (16:28):

What should an equity partner and a firm be carrying from a book perspective?

Bob Lewis (16:31):

So if I have five equity partners, what should the firm's revenue be?

(16:38):

I got 15, I'll get a 10. I heard some others over there. Average firm typically has about of decent size, has a two to 2.5 million revenue per equity partner price tag. They get into threes and fours. We know a couple that are like five and six. The book becomes unmanageable. It's very difficult. I'm not going to talk about the big four. I have no idea what their books look like. We're not in that Erie. So the problem with a lot of firms is I got a five partner firm with four partners, a revenue per equity partner, forgetting about who owns equal pieces of the book is 1.25 million. If that firm has to merge up or going to sell, there's a really good chance some of those equity partners, they're not going to become equity partners in the next firm because it's difficult to convert them. This is where you get into issues with, let's say I want to gift out stock to a younger partner. I want to make them a 1% or 2% owner. They got two, $300,000 value in the firm. That's really hard. They're going to probably have to undo that later. If you decide to make a move or you have to make a move. We look at partner billable hours.

Doug Lewis (17:44):

That's another good question. We'll save the polling for a little bit later, but it's not uncommon for us to see equity partners and firms billing, not working, billing north of 2000 hours. There's no leverage in that.

Bob Lewis (17:55):

Yeah, that artificially drives the revenue per professional head up, which makes the firm even less valuable. So I know a few of you have heard us say this before, so those who have heard this, if you could just kind of hold tight, what's the largest number of billable hours a partner has said that they've done in a year?

Audience Member 2 (18:14):

I've seen 2600.

Doug Lewis (18:16):

2,600. That's the number to beat. We need at least two more guesses from this crowd. 3000? 3000.

Bob Lewis (18:22):

Anybody higher or lower?

Audience Member 2 (18:25):

Higher.

Bob Lewis (18:26):

He took the easy round, the ball on there, 4,600.

Doug Lewis (18:32):

Billable.

Bob Lewis (18:33):

I'm sorry, I'm off my mark. Hold on. I got to get back over here. 4,600.

Doug Lewis (18:37):

Billable, billable hours. And he had a partner. Partner was at 43.

Bob Lewis (18:43):

Partner was low performing partner at 4,300 billable hours.

Doug Lewis (18:46):

He was really slacking.

Bob Lewis (18:48):

So we broke it down and we said, look, it's not possible. Here is the deal. I get in at six in the morning, I work till nine o'clock, six days a week on Sundays. I work half a day unless we're behind. Then I work the full day. They've been doing it for four years.

Doug Lewis (19:08):

We ended up acquiring half of that firm for a different client of ours at the time when we were doing that, digging through their books, trying to disprove the fact that they were actually doing this, which they were. They was legitimate. It made sense at the time. It was a two partner firm, 7 million firm, making a lot of great money completely under leveraged when we were doing the transaction. One of the partners was in the middle of getting a divorce and the second one quite literally had a stroke. Quite literally had a stroke in the middle of the transaction.

Audience Member 2 (19:39):

Before this slide, I'm just looking at all the statistics up there. Can you just highlight for me where you think leverage fits on that screen or doesn't it on that screen?

Bob Lewis (19:49):

You talking about the partner to staff ratios?

Audience Member 2 (19:52):

Yeah. Or revenue for partner.

Bob Lewis (19:55):

Yeah, well the revenue for partner.

Audience Member 2 (19:57):

Partner charge hour or so.

Bob Lewis (19:58):

This is part of the problem when you get into the leverage, by the way, sorry, it's just so hard to see with the lights. So the leverage is essential in making a firm really work well. Okay. So you need to have, if we've seen different mixes in different firms and the model does work, but if you've got five partners and five staff, that's an untenable situation. It's not that has a bad path. The leverage needs to be really looking at also your clients. How many clients are you doing? So we've got one firm that we're working with where one of the partners is doing an ungodly number of clients servicing them, and the other one, same firm has got like 50 total clients. So the leverage is huge in this situation because if you don't have leverage, who's going to end up doing the work? It is definitely going to be to partner level. It's going to be doing work. We do not want partners doing work. The best firm we've ever seen in partners have zero billable hours.

Audience Member 2 (20:53):

So as a key metric, where should leverage be?

Bob Lewis (20:55):

Well, I think you can't explain it just as leverage, but it should be from a partner billable time. Again, depending on the firm, we look at 800 to a thousand as the optimal. If you can do it with less, even better. If you can get to zero billable hours, that would be phenomenal. I don't necessarily always agree with the ratios of partners to staff metrics that are seen. I don't think the right. I think your bigger thing to look at here is the clients, which we're going to talk about in a little bit because the clients create your outcome. They really do. They have a huge impact on your outcome.

Doug Lewis (21:27):

But the conversation of leverage, there's no one size fits all. It's going to depend what the specialty of that firm is. And all tax firm is going to have a very different leverage point than an all CAS or outsourced accounting firm. Yes. So there's a lot of different nuances in there and that's why it's not one size fits all. It's a general thinker behind it that mostly gets kind of thrown by the wayside when we look at valuation in firms.

Bob Lewis (21:47):

But that we do see often partners billing 2000, $2,500 a year and they're touting I've got 60% profitability in the firm. Well that's because they don't have any staff. So how do I transition out a 68-year-old partner who's got a 500 billable hours and nobody beneath them besides two or three people? It's impossible to do it.

Doug Lewis (22:07):

It'll take two to three senior tax managers likely that's a textbook he's carrying to replace that workload.

Bob Lewis (22:11):

If even possible. So when you look at realization and utilization data, by the way, for our questions in the back of the room, please just shout them out. We literally cannot see hands. So the realization utilization data, I find that people are misled by that. They're looking at percentages. Percentages are an indicator. You should be looking at realized dollars and how to take the utilization, the non utilized hours. How do you convert some of them? That's one of the things we see huge gaps in opportunity inside firms. They're looking at their going, oh, I'm at 97% realization on what rate? How did you calculate it? And if it's, well, think about it this way, would you rather be at 60% realization or a hundred percent realization? Rory, I know you're a math guy, which is a better looking number on paper. A hundred percent or 60, the bigger number, right? Yeah, the bigger number. Would you rather be a hundred percent realization on $200 an hour or 60% realization on $600 an hour? Yeah, the numbers are misleading when you look at percentages. That's why you need to look at the realized dollars and do the conversion that way. We're okay on timers still.

Doug Lewis (23:19):

So this kind of goes back to the leverage question in the back of the room. Some general targets here on billable hours. Listen again, there's no one size fits all. This is just what we're seeing in the industry right now. What makes a firm saleable? What ultimately makes them valuable if and when they want to take it to market or sell internally to their next staff.

Bob Lewis (23:35):

And be careful on that revenue per equity partner piece because it seems like the numbers should just drive up and up. Wouldn't it be great if you could do four or five or six, but how do you manage that? We've had some of our clients who have done that and then begin to admit younger equity partners because they can't manage the book. Getting back to a leverage situation, they got over-leveraged and they couldn't handle a load. It was just too high. Although we've seen some firms operate in incredibly high levels. Talk about real life percentages and look at it, but look at it for more. Do I have a training problem? So this is where we're getting back into later into the client selection. So if I've got the wrong client, I may be able to hit a nice realization percentage but not the right realized dollar because they didn't price the engagement properly, which is huge. But if I look at the utilization and one of the things, I don't want to pitch this so pitch away, I don't know how else to say it. Pitch away. So we do these market value accelerators. I don't know how else to get around this, Michael. I don't like to do a sales pitch ever. But one of the things we look at is the utilization and realization hard. And we were like, okay, why are you at 50% utilization as a firm?

(24:48):

How can that exist? And then they're complaining that the fact that I don't have enough people to do the work, but I'm at 50% utilization. So the numbers often can tell the different story than what the actual professionals are saying. The other part too, is there a way to convert some of those non utilized percentages, even small amounts. If you can do that, that's a hundred percent drop to your bottom line, which can materially change the profitability of a firm by just a little tweak. So one of the firms we looked at, they had almost a hundred thousand of administrative hours, good decent sized framework, just taking 10% of those 10% of those hours and converting them at even a low hourly rate really move their needle on profitability. So the question is why can't they get there? So a lot of it's their own fault processes, clients, whatever.

(25:38):

But when you start looking at the numbers and you put these drivers in play and the levers underneath it, it forces you to be more accountable to what you're doing, not just to yourself and profitability. But when you look at it, if I'm not charging Rory here enough money, who's one of the few people I can see in the audience at this point because of the lights. If I'm not charging Rory enough money for his services, I don't have enough money to pay the staff people the bonuses that need or to make the investments in technology and it's comfortable for me to not charge Rory more money. We've got a good relationship. We've been around for a long time and I'm uncomfortable with having a situation that may be uncomfortable talking to you about raising your fees, but if I'm not doing that, I'm really hurting everyone else.

(26:23):

Plus I'm also crushing my own profitability as a partner in the firm. And that's one of the things that we've unfortunately seen in this profession is how long has the labor shortage been? Michael, you've been in this industry for what, two, three months now. How big has the labor shortage been on 20 years at least? Okay, so if you brought somebody in out of college and put them into your firm, did you tell them to go to networking meetings and to go out and sell anybody? No. First of all they hate it, but second of all, the answer is no. So I just fed them for 20 years. So now I've got professionals that should be in the driver's seat taking over who have no network, who never made a sale and probably never even priced an engagement and probably many of them have never even been on a sales call. How do you turn a firm over to somebody like that? It's very difficult to do. And imagine if I got five or six of them in the same seat like that because we've been feeding them the entire time because of the shortages.

Doug Lewis (27:19):

We're going to get into value killers towards the end. We don't want to keep it super negative, but realistically, this is probably the biggest tell in most firms. So when we see a revenue per head number that's significantly lower than it should be or market average or value, whatever we're looking at here, this is usually the driving factor. 10 forties, not having a minimum fee, not knowing your average fee, not knowing how many are standalone, 10 forties versus tied to a business client. There's a lot of different nuances when we start looking individual tax returns. What should a 10 40 cost if you're not doing the business return or any other work, just a standalone 10 40, what should it cost right now in this market?

Bob Lewis (27:58):

You want to take a stab? I realize there's some geographic differences, but pick a stab.

Doug Lewis (28:02):

General dollar figure right here. 2000, 2015, 5 to 700, we have one over here, 1500 Most firms are implementing a thousand bucks minimum. Minimum just to get in the door for a 10 40. We're seeing more and more firms start to creep up that 1500. We've seen them at 5,000. I've seen one firm at 10,000 minimum for a 10 40.

Bob Lewis (28:26):

Pretty much they're telling you to go away. They don't want to do 10 40.

Doug Lewis (28:28):

Yeah, no one do it.

Bob Lewis (28:29):

That's the answer pretty much once you hit the $5,000 markets, go away with your 10 40 unless it's really something special. The other question is how many of those 10 40 are tied to a business? Should you even take a standalone 10 40? We can't tell you how many firms do a thousand, 10 forties of half of them are standalone. And then we ask them the question, what's the average gross income of the person you're doing the tax return on? They don't know, but I'm charging them $500 and the person's making $500,000 a year. They don't know they shouldn't be taking them because when we try and sell that firm, which is why they come to talk to us, to mer them or sell them, I've got a hole and if that hole of 10 forties is like 30% of their total revenue, I've got an even bigger hole. I can't find firms that don want to acquire that some firms will put a minimum in, like I'll take a four or $5,000 client minimum. Then they don't care what they're really charging for the 10 40 necessarily. They'll bundle group it. But there's so many practices out there right now that are doing one. We had to separate ways with at once because they said why make a lot of money at $500 out of 10 40?

(29:42):

I don't know how they made money on a $500, 10 40 because what they were doing is I spent 10 minutes on it, but the rest of the team spends, God, how many hours on that 10 40? And tell me who wants to buy that.

Doug Lewis (29:54):

So that's how number one is a 10 forties when we look at a practice. And that ultimately can really hurt that revenue per head number when we look at it, if that checks out, firm's doing well in that area. The second tell on the bottom here, advisory revenue, how much of the firm's overall revenue is coming from advisory related services and not just tax planning. I know everyone calculates what advisory means a little bit differently, but we have very detailed financial profiles of thousands of firms across the country over the years, and I'm not in Vegas right now, but if I was and someone said over under 10% of accounting firm revenue coming from advisory service lines, I'm going under every single time.

Bob Lewis (30:32):

It's an easy bet.

Doug Lewis (30:34):

Easy bet. The majority of firms out there. And again, this isn't just small and mid-sized firms, very large firms, minimal advisory revenue. And I understand that's not the case. There are some firms who are north of 50% advisory revenue and are doing it swimmingly. They've made that transition. I know those are out there, but the majority of firms are still stuck in that compliance only mindset and that does impact your revenue per head and ultimately the value. Again, if you want to take the thing to market, you want to look at outside capital or you want to sell it internally, staff notices these things when they get to that. Should I buy into the partnership level?

Bob Lewis (31:06):

So let's flip this to the positive. So we see a firm that has two low pricing, no advisory services, no wealth management. What would that mean if you're going to look to acquire it or merge them up? Anybody want to take a stab.

(31:24):

Yeah, it's a greenfield of opportunity. In fact, the price is going to be, I'll say minimalized or more average. They're not paying a premium for that. I don't want to buy the firm that's got everything in place because they're going to probably want to buy me and the price is going to be really high. So I'd rather go into the firm and go, let me bring all the things that I put in place by the under leveraged underutilized firm and bring you all there. They got great clients. That's the biggest miss we see in most firms is they're not selling other services. I got 500 other business clients. You know how many firms are going to and go, okay, how many business clients you got, 500? How many are owners that are over 60 years old that own those businesses? Completely blank stare. Not a clue.

(32:07):

Is it 200? You got 200 clients that are in maybe the exit cycle somewhere in that exit cycle. Should be talking about 20 of them looking to sell this year. And if they are, what should we doing? We should be lining them up with an investment banking. We should be rolling their assets into wealth management. We should be opening up family office, putting their trust in place, doing the valuation work. That's all right there. It has high premium dollars and if we do it right when we sell them, they're actually worth more money long term than doing the compliance work. But if we let somebody else take it from us, we lose it. We see that in firm after firm after firm.

Audience Member 2 (32:42):

I got a question back here. You talked about that purchase of a smaller firm that you might want to tuck in. I'll tell you what, from experience, it can be a real challenge. Coming in there and convincing those shareholders that sticking around increase the fees on their clients that they have those long term relationships for. It's a really, really tough conversation and tough thing to do, especially if you put any sort of revenue guarantee on the contingency on the purchase because they're going to fight for their fear of getting paid. And big fear is raising prices on the clients a negative thing.

Bob Lewis (33:15):

Hundred percent agree. So one of the first things we do in a conversation like that is have that conversation not with you, who are the acquirer but the seller? And if they don't agree to it, that's a deal killer and we're going to move on quickly because they're holding onto the past. They want you to pay out based on historically how firms have been paid out. I want a full payout. I don't want to take a discount if I'm selling it, but I got to be realistic about what I've got here and if I'm not, they're not ready to exit and they're not going to be reasonable. This is like a marriage and maybe a short-term marriage, maybe only a couple of years with designed end. But those two years are going to be brutally horrible and if there's not a financial penalty that goes with it, it's not worth doing it. Quite frankly, if I have to penalize you financially to make this work, we shouldn't do it in the first place. That's what we really try to surface very quickly in a transaction.

Doug Lewis (34:05):

This isn't an M&A session obviously, but speaking on that a little bit more. Culture kills a deal before any metrics will. And ultimately, if you're not having these tough conversations in that first or second meeting with somebody, you want to kill the deal as quickly as you possibly can. You don't want to waste your time or worse, you don't want to claw back a deal after the fact if it went south. So having these kind of conversations about pricing, about strategy, about advisory service lines, all that fun stuff that should come first, assuming you even like each other, which shockingly a lot of firms overlook that. They jump straight to the metrics, the numbers, and they see the opportunity and they roll with it and then you try to figure the rest out later. Those are the deals that blow up. So culture obviously being number one that fits into that conversation. Just like dating.

Bob Lewis (34:48):

We've never had a transaction go backwards, get blown up in our entire history of this because we're very hard at vetting them on the front end. Next one will blow up. Now watch that.

Doug Lewis (34:57):

It's going to go south.

Bob Lewis (35:00):

The deferred comp is a big issue. Okay, so we've got a legacy of clients out there that have got these deferred comp systems. Partnership agreement. Has five or 10% of revenue can be paid out to a retired partner at any particular time? Depends on the agreement. People are going over the limit. So if I go over the limit and go over the limit too much, how do I handle it? Now the partners may vote to allow it to happen, but if I'm looking at a 15 or 20% deferred comp problem of my revenue, I'm in trouble. And you tell me what succession partners going to want to come in and buy into that. So the deferred comp is causing partless. The pending liability is who's going to continue to roll into the deferred comp. So there's solutions to it, but you got to get ahead of it.

(35:43):

Actually right now we're in an interesting modeling with a firm. It's a pretty size firm and we're modeling out their cashflow over the next four years. They're trying to figure out if they can survive on their own with their deferred comp, their other liabilities, their revenue, the profitability mix. So we're building this kind of unique model for them to be able to plug and play and change variables. It's the first time we've ever done that, but I kind of was excited to do that engagement because it's something very different. ebitda. What's ebitda? An accounting firm. Isn't everything one times revenue? Isn't that the way EBITDA was always done? It was. But now EBITDA is for the ballpark. We're going to use 30% before any equity partner take. So if I have a $10 million firm, I'm going to drop 3 million to the bottom line before any equity partner compensation, they make zero adjusted EBITDA is really where we're at now in the private equity sector, which we've got some private equity people I think in the room adjusted EBITDA is I'm going to take that 3 million, I'm going to gross it back up for maybe deferred comp or other things if it was gone away, what the firm's really producing.

(36:46):

Then I'm going to take it back down for maybe unusual expenses and then I'm going to take it for what the ongoing equity partner compensation is going to be, which typically in a PE deal is about half. But so I got to get to an adjusted EBITDA number.

Doug Lewis (36:57):

And that adjusted EBITDA number, he's going to come to one conclusion on how to calculate that. I'm a different firm. I'll come to a completely different conclusion, Isaac, right here in the front row. You'll have a third different conclusion on the same firm of what the adjusted EBITDA number really is. So there's no one size fits all. Everyone who's valuing firms has a different methodology behind it. But again, it all ties back to that revenue, Brad. That's the starting point, which really impacts everything else through the firm.

Bob Lewis (37:23):

The revenue professional head with all those drivers and levers underneath it show you what you need to do to increase performance to hit the goal you want to hit. And if you don't have it in place, it's difficult. This to me is the key to most of this stuff. We're very clever. It took us 45 seconds to come up with the C3. It's got three words that I'll start with C, but it is true. So the clients create the culture inside the firm. So if I have clients that are eating my capacity, which we see all the time, why would I be doing 1,010 forties at any rate that are standalone because they're chewing up my capacity. And I know we have some offshoring people in the room too, and Mike's over there. It's the only one I can actually see at this point with a light. Sorry. But yeah, we can outsource it to India or any other country out there, but why are we messing with all of them? Why are we doing them? Does it add value to the firm? That doesn't mean the offshoring doesn't have a value, it's just that we have to look at the clients we're picking. Are we chasing away staff? Yes, you are. So staff believes falsely that everything is going to get automated through artificial intelligence. There will no longer be a tax return or an audit or accounting because there'll be AI doing it.

(38:38):

Well, Michael, that's true, right? AI is going to do everything. We can just sit back and collect checks some clients now. So the staff wants to see a firm moving in a progressive advisory where role.

Doug Lewis (38:50):

If they don't, speaking of staff, by the way, last plug, I can promise you on the day tomorrow I'll actually be running a young accountants panel over in the main room where we have young accountants at different levels of their career, different stages, different sized firms, all going to be sharing what they actually think about the profession as opposed to just people guessing what the young professionals want to hear. So staff, we hear this directly from staff, a lot of these points here and tomorrow they'll kind of share their own stories. But last plug back to it.

Bob Lewis (39:15):

So if staff doesn't see you making progressive changes to move towards the advisor where they think the future is going to be. If I have to look at two choices and one's a hundred percent compliance doing kind of grind work they think's going to get taken away or one has the potential to do more, they're going to pick the other one and the compensation made or name not even the driver in that decision, they may not care. And the other point is, are these clients building firm value? Going back to the firm that had the one to 5 million clients that wasn't building any value of the firm. They were making money off of it, but it wasn't building the value firm. Now if that firm doing the one to 5 million clients had a wealth management environment, they're using it to feed that, that would've been a different conversation. But they weren't even doing that. At least there would've been more logic to it.

Doug Lewis (39:57):

So when you're looking at the client base and we look at valuation, profitability, revenue per head, revenue per equity partner, all these pieces that kind of add up to really what a firm is worth or regardless of whatever path they take, these bottom areas, the most profitable firms that trade at the highest values have one or multiple of these niches in place. CAS client accounting services, a robust CAS back office platform, not something that's ad hoc thrown together, which we do see quite a bit. Investment banking, a lot of firms are bringing that in-house now, wealth management, data analytics, I mean all of these emerging advisory service lines that are usually the most profitable arm inside of most firms who have these departments running successfully. Those are the firms that we see that revenue per head number three, four, $500,000 because they're taking advantage of these. They're doing this. More than 10% of their revenue is coming from advisory service lines like this. And I know there's a lot of different specialty niches out there, but these are some of the ones that people come asking us for. If you have firms like this, I will pay and I'll pay a premium for them. Those are the hot areas.

Bob Lewis (40:56):

And if you can't bring it, the cost is too high. Partner to start until you get enough volume and then bring in your own wealth management arm or partner with somebody like Rory. Shameless plug. Thank you. You like the plug? Thank you. Okay, so in interest of time here, we've kind of hit this. These are the clients. If they've got these other needs, they're not price sensitive. They're looking for you for guidance. This is what you want as a client. You don't want to take the client who just wants their business tax return done and probably gives it to you two days before it's due and it's incomplete and then they don't answer your emails or phone calls anyway. The culling and upscaling, we like to use upscaling. Culling is kind of a negative word I'm going to shed clients and you are in theory shedding clients. How do you fire a client effectively? What's the best way to fire a client without actually telling them to go away?

Audience Member Mike (41:42):

Triple their fees.

Bob Lewis (41:43):

Yes.

Doug Lewis (41:45):

Triple their fees. For anyone who couldn't hear that, maybe even quadruple honestly, if you really don't like them. But ultimately too many firms make the mistake of we're doing this across the board. Absolutely not. When you look at client culling, upscaling, whatever you want to call it, put your clients in buckets, your A, B, C and D level clients. Don't raise them all. Don't quadruple or triple all their fees. Start down here.

Bob Lewis (42:09):

Why penalize the good clients? I got my A level clients. Why did I give them the same 20% increase that I give a D level client, I got a hundred thousand client to give a $20,000 fee increase. I got a thousand dollars client to give a $200 fee increase. What's the logic behind that? We've got to chase away my good clients. The culling should be three quarters a year. Skip tax season every quarter. You should be looking at it was always your D client. Now that became a C, may become a B or may just become dropped down to a D and there is more work out there that you can just stick a net out and grab work. It's not hard. There's not enough people, not enough firms. So you just got to price it right and look right. Look, this is really simple.

(42:45):

We're going to watch our time here. Look at the clients pricing and selling skills. No offense to anybody in the room, but again, going back to Vegas, they are horrible. They're just not good at selling and pricing. The clients won't afford it. And the same thing happens with the offshoring. Our clients won't accept offshoring because I think they won't accept offshoring. They don't even try it. And by the way, a lot of the offshoring, not that this is part of the session fails because I wanted it to fail when I set it up. So I picked the wrong firm. I did things to maybe it get failed, the advisory and you get into staff engagement. If you do not have the staff engaged, you're running a commodity shop, you're going to have people coming in and out all the time and you're going to be in trouble. So if you're not showing some of these signs here, you're going to begin to have some difficulty. Doug, we're getting close to the end of the day here.

Doug Lewis (43:39):

We are. So staff I already plugged. Come to the young professionals panel tomorrow, actually hear what they want to say.

Bob Lewis (43:45):

Is there a young professionals panel.

Doug Lewis (43:45):

There is tomorrow in the main room. Actually, I don't know what time it is. Sorry about that. Dan, if you're here.

Bob Lewis (43:51):

Hold on. We got a question from Mike.

Doug Lewis (43:52):

Right in the front.

Audience Member Mike (43:53):

So you alluded to the fact that advisory gets a premium and I'm curious, is there a premium for a CPA firm that's really figured out the offshoring solution and dropping a higher percentage of that top line revenue to the bottom line?

Bob Lewis (44:11):

Yeah, that's leverage. That's the leverage he was talking about in the back of the room. I've managed to increased leverage and it also freed up my domestic people. I'll use the word to be able to do more client interface, to have a conversation and find out all the other needs that Rory has that I'm not fulfilling right now. They don't have the time to do it. That's a huge premium. So I know you're doing that. Maybe so the offshoring companies, people go more to them, but it's a great idea.

Audience Member 3 (44:34):

Bob, just a quick point on that, just follow up on that has also a fantastic employee retention strategy. Right now we're finding offshoot of offshore, which is pretty crucial right now. All staffing challenges that we're seeing staff actually embrace that option because they're able to do different things. They're able to develop, they're able to do more things because the offshore team using that membership.

Bob Lewis (45:02):

And I know this isn't in the session today, but you got to look at your training. If you're doing CPE training and it's 90% technical, you're just continuing to dig the hole. I mean, people don't have any kind of selling skills or networking skills and they don't see the advisory side.

Doug Lewis (45:18):

And it's not just sending staff to a sales training seminar or something like that. It's a mindset that has to really kind of reverberate throughout the entire firm. It starts from the top. That's ultimately what it is. But a lot of firms are doing it well. Really progressive. We're seeing a changing in the guard right now a little bit inside firms where new leadership is taking over and making a lot of these changes throughout the entire base. It just takes time. It's like moving a cruise ship, but we don't have to get too deep into this.

Bob Lewis (45:42):

Okay, great. This is a live example. Okay. Count walks into barber, okay? It's wrong story. Okay. But we use a nice graphic count and saves a client $250,000 in 30 minutes. How do you charge for that?

Audience Member 3 (45:56):

A lot.

Doug Lewis (45:58):

A lot.

Bob Lewis (45:58):

20%. A lot. Oh, what if the engagement life is I charged by the hour?

(46:06):

Exactly right.

Doug Lewis (46:06):

Change your, you got all the answers.

Bob Lewis (46:07):

Come on bro. Do you want to stand?

Doug Lewis (46:09):

Do you want to just do it?

Bob Lewis (46:09):

You have to stand in this side of the podium though. Okay.

Doug Lewis (46:12):

You get three up here.

Bob Lewis (46:14):

Yeah, it's exactly it. It's like this broke out into a giant debate at a conference we had and they're like, no, you can't do that. The engagement letter says you're going to charge $500 an hour, so you're supposed to charge them $250. It took you 30 years to figure out how to do this in 30 minutes. Why would you give that away? That's what firms unfortunately do. Because to you, it's not special to the client. It's massive. The things you're bringing to the table took a long time to learn. I can look at a letter of intent on an m and a deal in literally 30 minutes and pretty much take it apart in pieces fairly quickly. Assuming they didn't give a 80 page letter of intent with a full of conditions in it. That took me a long time to figure out how to do that.

(46:57):

The same thing with what you do. Everything that you do took a long time to figure out how to systemize, how to price, how to train staff, and we give it away on an hourly rate. That's just crazy, but alright. Tools to leverage revenue per professional head. Oh, outsourcing, not offshoring. That's possible. Outsourcing, which part of offshoring a part of it? ai. Look, everything's all about AI right now. It's coming. There's a lot of automation, there's a lot of firms that have used a lot of processes, but it's not here yet to fill the talent cap. And the talent cap is going to continue to get deeper. Even if the A-I-C-P-A figures a way to add more people in, because the exiting number of professionals going out is going to be much higher. So the water level is going to continue to drop. So if you don't start to embrace some of these in trouble. Question somebody. Nope, I'm sorry, I the had a question.

Doug Lewis (47:44):

Just a cough. Just a cough. Okay. So if anyone thinks that that talent shortage is going to get better, we do have some pretty interesting statistics that are, I don't want to say depressing, but a little sad. We're happy to share with you after the fact. And it's not to prove a point. It's quite literally just stating the facts of what's going on out there. But listen, all these pieces, again, it all feeds into the revenue had to value the firm staff notices this. So whether you are looking to remain independent, do that internal succession or find the next person to come up through the ranks and take it over, or you're looking to sell this thing, whatever you want to do, building it to command the most value internally or externally is going to be the best result. And how you do it is really tracking that revenue professional head across the board.

Bob Lewis (48:25):

You got so much data in your firms, it's not being looked at, captured and analyzed. And that's the massive value. And to me, if I was an aggregator right now, rolling firms together, it's one of the first things I'd look to do is figure out how to solve that problem. Because there are so much extra money that's not being taken. So what kills the firm? Wrong clients. Weak pricing. I don't have the sales skills. I don't have any kind consulting. I'm fighting outsourcing. I cannot tell you how many firms we've talked to that go, our clients will not accept it. We'll not do it well, they may not, but it's probably, you're not selling it right or setting it up right. Kind of a world. Are we in Doug?

Doug Lewis (49:00):

A crazy world?

Bob Lewis (49:01):

We in adapt or die world?

Doug Lewis (49:03):

Crazy world. We're in a crazy world right now. The rate of change in this profession is honestly just shocking. I know I've had this conversation with a couple of people probably in this room already, but if we have this conversation about how to build a revenue per professional head and accounting firm, three months from now, it's going to be different than it is today. Everything is changing so quickly. So rapidly. With all this m and a activity, advancements in technology, all the robots come and take everyone's job. All this fun stuff that is happening out there in the marketplace. It is just constant, constant change.

Bob Lewis (49:33):

And the solution will be different by firm Common pass, but there'll be nuances by firm Douglas is the last time we're at time here. Okay, why does all this stuff matter? Look, you're going to sell eventually. Either you're going to do it internally or externally. It's going to happen that the time the clock does not stop. So the question is, are you prepared to do an internal succession? And if you're not, you got to be prepared for an external exit. You need to watch your timelines on this stuff.

Doug Lewis (50:02):

The thing you want to avoid, regardless of it's internal or external, you want to avoid the fire sale, you want to avoid that fire sale, which is unfortunately happening quite a bit right now with the mass exodus of baby boomers who haven't taken some of these steps, who still own these practices. There's still time, obviously it's not all gloom and do, there's a lot of opportunity out there in the market.

Bob Lewis (50:19):

There's a ton of opportunity out there.

Doug Lewis (50:20):

But value drives everything and revenue per head ultimately drives the value.

Bob Lewis (50:24):

Hit the last shameless slide.

Doug Lewis (50:25):

Yeah, this is actually, I forgot we did have a shameless plug. This will just drop you to a page on our website, our market value accelerator. This is the stuff we do. We dig through the numbers, we interview key staff partners, all this fun stuff. Bridge the gap of what they think versus the actual results. Help them figure out what they can do from an advisory perspective. All kinds of crazy stuff. I don't want to pitch it too much, but I honestly forgot that we were plugging that in here. So sorry about that.

Bob Lewis (50:46):

And we have a Groupon. No. Yes, kidding. Absolutely. Alright, appreciate the time today. I know we're over. They're all fun people up there.

Doug Lewis (50:55):

If you have questions or you didn't like anything, we said come find us. Let's chat. Let's talk. Honestly.

Bob Lewis (51:00):

Doug, where could they find you tomorrow? Is that at the unprofessional fan, the young profess? I just wanted give that fourth or fifth plug on his young professionals panel.

Doug Lewis (51:06):

Yes, yes. And the private equity panel that I think is also tomorrow.

Bob Lewis (51:10):

Appreciate. Thank for time and enjoy.