Track 5: Private Equity in Accounting

Transcription:

Bob Lewis (00:08):

Good Afternoon. We need to get six more people in here so the room will completely overheat. Okay, today's session. I'm Bob Lewis with The Visionary Group. We have been doing mergers and acquisitions for the accounting industry specifically for almost 30 years now. I know it's hard to believe I look so much younger, but any event, what we have today is a discussion on what's happening in the accounting industry with private equity. We have three esteemed, we'll leave 'em esteemed for right now. Firms that are dealing with this, dealing with acquisitions of practices. And the goal today is pretty simple. We'd like to actually answer your questions more than have us listen to our panel, talk about prepared questions like what's happening in the M&A industry for private equity. So let's talk about our slideshow. That's it. Okay, so slideshow's over. I'm glad. Take a photo, Michael, take a photo, post it up on video. That'll get everybody going. Alright, so let's talk a little bit about what's happening.



(01:16):

I think most of the people in this room have a pretty good handle on what's happening in this industry, but let's do a quick recap for everyone who's not. We've got an aging population, we've got deferred comp problems. We've got a lot of firms merging, merging because they have to make investments in technology and people in advisory. Some have gotten to a point where they've gotten too big, where they don't believe they can manage it on their own. And there's a variety of reasons why firms are looking at this option. I want to make it clear this is an option. If you're looking and you don't think you can do an internal succession, your option should be what's the timeline I need to look at? Do I merge upward? Do I merge and sell upward like a hybrid? Do I go to a private equity model? And every firm may have a different path that they're going to take. So with that said, I'm going to start with our panelists. I'm just going to let you introduce yourselves quickly and then we'll start.



Josh Funk (02:10):

Thanks for the intro. Josh Funk. I work with Crete Professionals Alliance through 2022. I was a CPA, like many of you in this room for 25 years and built a firm that I started at in 2005 from three people up to 35 people. And we did approximately 7 million in revenue. And along that path had some great relationships and my clients were all growing me and I went down the path of trying to merge our firm up into Crowe. Cone Resnick and UHY were three groups that I dealt with. And at the end of the day we had Lois from all three of them, but they all had things that just made my stomach cringe. And then started talking about this with one of my clients and they had three platforms and three different industries. And the more and more we talked, we thought we can do this in the accounting world, accountants need options. And so I gave my year notice and in January, 2023, I started with Crete and we decided by March we were really going to do this. And we partnered with our first firm in August of 2023. And since then we've partnered with an additional seven firms and we're looking to continue growing and giving accountants opportunities that are hard when you're busy working with your clients and running the firm in general.



Bob Lewis (03:41):

Thanks, Josh. By the way, it's really hard for me to stand there this long and not talk.



Nishaad Ruparel (03:47):

Yeah, happy to go next. That's a great story, Josh. My name's Nish. I'm the President of Ascend. I grew up in the Northeast. I started my career in sort of the New York finance world, so JP Morgan, investment banking, and then I worked at a firm called a EA, which is a private equity firm. While I was there, very fortunate to see a lot of investments go really well and actually fortunate to see one investment that did not go so well at all, right? Probably similar to a lot of the headlines that you guys have read. And the reason that that investment didn't go well, as I sort of reflected on, it had everything to do with people, wrong, people in the wrong seats, and our firm not making that decision to make a change or to upgrade until far too late. So it sort of impressed upon me the importance of getting that people question right in the world of investing.



(04:48):

And I kind of continued to pull that thread throughout my time at business school at Stanford and then later on at a firm called Alpine, which actually is a private equity firm whose core tenant and core philosophy is on a program called People First Investing. So what they do is they build the management team first. They look for the industry second, and they make sure that by doing it i n that order, we get that question right far, far, far more often than we get it wrong. I joined Ascend in November of 2023. It's been a very fun ride. We have 12 partner firms that are part of Ascend domestically. We're a top 100 firm. Our vision is to be a top 20 firm with the most engaged employees in the industry. So all of that people, first goodness that we learned at Alpine, we're kind of cascading down to each and every one of our partner firms and we're supporting them on their own growth journeys.



Alex Goldberg (05:45):

Everybody. Okay, Daniel First, thanks for hosting us. Great, great show, really appreciate it. Partner at F3. We're a private equity firm that's fairly new, about two years old. Accounting was our first investment. We have two accounting firms that we've partnered with, slightly under 50 million in revenue and in a few weeks from now we'll have four and we'll be approaching a hundred. I guess everyone's why we chose accounting. It's in my career. If I look back at the deals that have done exceptionally well, and it's ones where financial engineering is not what carries the day, it's not one of these roll-ups where you're putting a few things together. It's where the sum of the parts really does add value whereby adding, whether it's Bob, you mentioned technology or outsourcing, you make the job better for the individuals and people make more money and we thought accounting was just right in the bullseye for that.



Bob Lewis (06:39):

So I'm going to add a little bit onto that and we'd like to ask questions too. So if you've got questions getting ready, one of the reasons why there's a strong interest is we have a repeat business model. So a tax return and audit accounting continues to come. It's regulated. So outside of the accounting, which you really can't do the tax and the audit without it, but it's required to be done. We've got mandatory audits, government audits, state audits, corporations, SEC, everything across the board. What we don't have in our industry right now probably well developed is we've got a low penetration in the advisory services in most firms with a giant client base of clients who have all kinds of other needs. We've got an aging client based population that means opportunity. Those are firms that need to be, companies that need to be sold.



(07:27):

They can convert into wealth management to open up family offices, trusts, valuations, all kinds of opportunities. We're not really the best at it in every firm in organizing that and executing on that because we're trained to do compliance for the most part. On top of that, if anybody hasn't figured this out yet, we've got a very deep labor shortage. Anybody not aware of that? The labor shortage? Is there a solution coming to that? Some firms have been thriving, but pretty much the labor shortage is going to continue to escalate because even if the incoming flow picks up, the exiting flow is going to accelerate from the baby boomers that are now I think average 68. So if we don't change and adapt, which is one of the things, the option that they're providing, we're going to probably have difficulty attracting and keeping talent. So with that said, we have a question for anybody yet, question anybody. If not, we're going to go to ours, but ours will be more. I'm going to jump here quick. Okay, let's go to the main show. What's the plan? Alex, I'm going to start with you and go backwards. What's PEs plan? Is it world domination? That's what I thought, but I'm not sure.



Alex Goldberg (08:39):

Just make your life as miserable as possible. Let's go one, two, and three. So I think I can only speak for myself, right? Just like accounting, there's many different firms with many different cultures and private equity is the same for us. The plan is we view it as three legged stool. One, everybody has to make more money. If you're doing the deal with us, we're coming here. Everyone's got to be financially better off. Two, it's got to have something where the work is better. Whether that means you're working less because we've added invested in infrastructure, that means you're not at the end of the month rushing to do billing or you have the right staff or you're not doing five admin jobs and an accounting job. That's important to us. And then the last is we have to make sure that the growth, all the tools are there for everyone to grow. Once we've built that, we don't really have a set timeline. We talk three to five years and then either find another private equity firm that wants to take it from, we'll have six or seven geographies to go to 14 or find another private equity firm that wants to continue investing and stand behind the growth and the business that we put together.



Bob Lewis (10:00):

Nish, why don't you give a perspective on that?



Nishaad Ruparel (10:03):

Yeah, similar to Alex, I can't comment for all of private equity as an industry, but I can certainly talk about our planet Ascend. We want to be a top 20 firm with the most engaged employees in the industry. That's really how we think about it. And the benefit is we're partnered with firm Alpine investors that I mentioned earlier that has the duration of capital to be able to back us in that vision. So what I mean by that is they're willing to stand by us for a long period of time, and we have created a company in Ascend that has 45 employees that'll have 60 employees by the end of the year that are all fully dedicated to serving our partner firms along that journey. So the way we get to top 20 in our view is to have, don't quote me on a number, but maybe 40 or so, really successful regional, independently operated public accounting firms that are great places to work.



(11:04):

As I said, we have 12 today. We're kind of moving along that journey. And the way we support each of those 40 firms in being great places to work is actually a lot of the things that Alex mentioned. So kind of culture, growth and talent on culture. We are constantly measuring things like employee net promoter score, employee retention, standing up, things like having our values in action and making sure we're committing to living those values every day on growth. We have a lot of support related to adding talent or thinking through different centers of excellence related to price or offshore or technology that can improve the efficiency of any given firm. And then on talent, these things feed onto each other. If you have a great culture, that great culture enables growth. And if you have a growing business, you need more talent and not less talent. And the whole thing kind of works in and of itself. So we want to be a top 20 firm with the most engaged employees. The way we're getting there is through that regional, independent firm model,



Bob Lewis (12:10):

Josh, you got a plan or you're just winging it. We



Josh Funk (12:13):

Got a plan. But I think about it a little differently than these guys. I agree with everything they said, and for me as a former practitioner, those are almost like table stakes that we're going to do and try to do the same thing. But I think our goal and our vision when we sit down and do our mission vision values is to create a fantastic place to work where we can win together with purpose. And we're going to create accounting's been a great industry for the past 50 to a hundred years, and we're going to build a company that will be a great, should be a great place for the next 50 years. Now with that, we're going to have liquidity events. People are going to make more money. We would like to create a great culture. We're not changing cultures. We do it through a JV model where every firm or every major firm that we partner with is going to own, they're going to own some portion, they're going to have a rollover at their local level.



(13:12):

And that's kind of the way where we're going to make it so we're not messing with our culture because they're going to have the same managing partner, they're going to have the same people, they're going to have the same processes. But when you say, what is our plan? Our plan is to build a rockstar business that's going to be around for the next 50 years. And CBS partners has done that three other times in three different industries, and they have had liquidating events and their partners did get paid a boatload of money, but all three of those businesses are continuing today and growing faster and more profitably than they did as independent practitioners in those industries.



Bob Lewis (13:49):

Okay, so I'm going to go a little off script. Sorry. They're all flexible, adaptable professionals. So hopefully this works. We hope. We hope. Yeah. Get ready. Battle may start. So what's this going to do to the CPA industry? So Nish, I just picked up on something you said and then they all said the same thing. I just picked up on a number. So the total is like 40 firms. Okay. It's an estimate. It could be 50, it could be 12, whatever. You're probably close to 12 already, but okay, if we're going to take 50 firms out of the pool, skinning out the pool, right? What's the top 500 going to look like? The top 1 72. I mean, what's the number going to be? So how do you guys think? I'd love to hear from the audience I'd ask, but what do you think this is going to do? The profession itself, I have a really interesting theory that would be better with some alcohol, but we don't have that right now. So what would your thoughts be on what that's going to do to the industry? Anybody want to take a stab? I'll



Josh Funk (14:47):

Jump on this one.



Bob Lewis (14:47):

He's jumping.



Josh Funk (14:49):

It's going to create opportunity for those who embrace change coming in, not necessarily me, but in general, PE is coming in looking to provide more resources, provide more capital run businesses. I'll throw myself under the bus. You know what? I was good at accounting. You know what? I was not good at picking out it? You know what? I was not good at HR, handling our freaking 401k and filling out our professional liability insurance. These are all things that I as a partner in an accounting firm had to do on a daily, weekly, monthly basis. I hated it and I was not good at it. We are going to provide resources so that partners don't have to do that. We're going to help them run their businesses more professionally. And at the end of the day, it should create more opportunity for everyone to raise the bar of the work that's being done, the work-life culture balance that should all improve.



(15:47):

And what that's going to do is whether it's a sends 40 firms, our 50 firms, all of a sudden the rest of the firms across the country are going to be competing with us. And if they keep doing what they've been doing forever, which I was a part of, I'm not. It is what it is. But we haven't been the greatest in the profession at running our own practices and we're going to raise the bar and we're going to be competition for you. And I think the whole industry is going to have a better work life balance, be more profitable, and be ran more professionally as time goes on. So



Bob Lewis (16:21):

Before we go initially, I going to make a comment on this one thing. I was very kind of non-private equity and referrals rolled out because ignorance is bliss as you start to figure stuff out. It's a right fit for some and not for others. But one thing I have definitively learned from this entire process is I am not a great manager. I will keep people on too long. I'm not hard enough on 'em. I don't hold people enough to the disciplines Now, as your firms continue to scale and grow, and Josh, you hit on, this is why I want to hit on this. I agree. He's not a good, he's not good at what are those things? It was a long, it was really long list of things you're just not good at. So what are you good at though? No, I'm just accounting. It's good at accounting. He's got the accounting thing covered. So when you get bigger and bigger, it's really hard. You can buy the technology, but I can't manage it. Then I got to find people that can manage it and then maybe they're coming and going and I got a problem there and I don't have the HR, right? It's not stuff that most partners and firms are good at. What they're doing, they're good at, what was that word again?



Josh Funk (17:26):

Accounting.



Bob Lewis (17:26):

Accounting. It's a very short word. So I just want to throw that niche. What are your thoughts on what would that do to the industry? Yeah,



Nishaad Ruparel (17:33):

So Bob was worried that you guys wouldn't be able to tell the difference between the three of us, but I'll just tell you I'm not very good at accounting.



Alex Goldberg (17:42):

Same.



Nishaad Ruparel (17:45):

And look, I think there's a few things, right? So the first thing just to be very sober about it is for a long period of time, this industry has transitioned ownership through the partnership model. And that partnership model took until age 65 or whatever that retirement year was. And the way that you got paid out was over a period of time, like 10 years. And the way that that benefit was valued was maybe two or three times compensation. Maybe it was 0.8 times revenue. But regardless, it's, I think everybody would agree that that valuation is different than what private capital prices that ownership at. And so you have a huge group of partners at this point in the industry that are looking at that dynamic and that are saying that's interesting.



(18:40):

There's a reconciliation that has to happen between how it's worked historically and how the market is pricing it today. So it brings up the question of what are those modern economics going to look like and how do you provide opportunities to young partners that are in this industry that may not get the chance to be a part of that wait till 65 partnership model? And candidly, many of them don't have a ton of interest in participating to those types of economics. So the way that we are addressing that head on is standing up things like our equity buy-in program where people down to the manager level or senior manager level can actually be a shareholder at that point in time and have access to liquidity a lot sooner than they might have in a different paradigm or in the status quo. So that is one example of a paradigm shift that's taking place and that people are taking different approaches on.



Bob Lewis (19:38):

So Alex, I'll tell you for just a second, who is in the Young professionals panel earlier? Okay. What did the young professionals, besides not having a preferred parking spot that they got there at 6'o clock in the morning, what is it that they didn't want to do? What was the main thing that people said? How many hours someone went to work? Michael. Michael apparently fell asleep during the session. No. Yeah, they want to work 80 hours a week, right? Looking for 55 hours a week. And if you want me to work 80 hours, be honest about it. But pretty much if you're telling me I want to work 80 hours a week, I'm probably going to go somewhere else, which is one of the problems we have in this profession right now. So kind of the reason I'm bringing this point up is this is adapting to the change we have to, that was in the other room.



(20:21):

We've got to adapt to that market because something I did learn at a conference a very long time ago that stuck with me was a gentleman walked up in a suit and tie and he had two different color flip flops in his hand. He said, you can try and get in place to wear a suit and tie, but they're going to come in with two different color flip flops on, and if you don't adapt to the market we have to hire from, you'll be lucky to hire one out of 10 people that come in the door. So we got to play the cards we got dealt with right now. And that's the way I'm looking at this. And one of the things that comes out of private equity in this is it is accelerating change in the profession and the ability to maybe move more to the advisory and use robotics better and use artificial intelligence. But Alex hit it.



Alex Goldberg (21:00):

We don't use robots.



Bob Lewis (21:01):

Yes, I know I slipped that word in by mistake. I was currently watching a movie or Something.



Alex Goldberg (21:04):

Yeah, I agree with everything that was said, right? When we do our partnerships, we spend an inordinate amount of time thinking about how the next layer is going to become a partner and what their acceleration in their wonderful careers that you all got to have or some of you here what'll look like for them. But this is not the first industry that private equity has invaded. This is not the first panel of a bunch of guys telling who went to some business school telling you how you should, lemme tell you the future of a business that I've known for two years. I think you started what, two years ago, two years ago, one year ago or something like that? Here's when I look at other industries, right? Here's what I think. I think you have people who put their heads in the sand, do what they did forever, they'll do fine, and then when they go for their liquidity at the end, there's no one there.



(21:53):

They didn't build anything of value. They had a job that a small firm that's really a job. Then there are the folks who built a specialty. You built something really differentiated. You were able to have an edge in a particular field, a particular part of accounting or dentistry or vet, and that will be sacred. Can't a big conglomerate, a big rollup of firms can't do that. Then there are other guys who jumped on board and in that there's sort of tears. There's the folks who cashed out right away super happy, they got a really nice house. Then there's the second group that did a big role. They got one nice house, their kids have nice houses and they got a beach house. Then there's that few guys who did the role, did the sale. And then on the second time they said, you know what?



(22:45):

I'm going to hold off. I'm going to roll again. And then their outcome was they got an airplane. So when I think about the change of the accounting for people, I think this is a wonderful opportunity and don't take my word for it. Don't take any, we're talking our own book. Call your dentist friends, see if they know who's the most successful dentist in your county and your state, and ask them if they're happy. Private equity got into the industry if they did well and if depending on which bucket they're in, and those three, they're in the first bucket, they're going to say they hate private equity. They really messed up the industry. If they're in the middle of, they say they're all right, and if they're in the end, they're going to say the best thing ever happened.



Bob Lewis (23:24):

So I want to kind of throw one thing out. So when you have an interaction with anybody, and when you're talking about transaction, whether you're the acquirer or you're the one that may be going upward or being sold, you talk to some people that you don't necessarily align with is the best way to fit that. So when you're going through the process of looking at, can I pull off an internal succession if that is your desired plan, and if I can't and I need to do it and take another action, you have to look at do I like the people that I potentially could go into? And everyone will have a little different personality, a little different approach, a little different change in their business. And that's when you look at, if I stereotyped all three of these, I go, okay, there's three private equity companies and there's others out there that are going to come back with a similar offer, but which one do you think you plug into best and fit best with and align with? And that's a big part of this decision. If you're deciding to do something, who do you fit in best with? Another question I want to throw, Dan, you got a question?



Audience Speaker 1 (24:24):

Just a quick question to maybe get a sense of looking question what you're thinking of. One, is there a sweet spot for each of you that you look and say, when you think about firms you like not sweet spot in terms of revenue or size or something like that, levels below which you wouldn't, and then maybe second, as you look across the universe firms, do you have a sense of percentage of firms might be 10% or 20% or 50%? Or



Bob Lewis (24:56):

Did you try and steal my future question? You did. It's right there on the list. But



Nishaad Ruparel (25:01):

Yeah, I'm happy to take this one first. Yeah, we do. So the kind of regional firm model that I described with those 40 to 50 firms, the starting point for those firms we think fits really well when they're in that 20 to 40, 45 million dollar range. But that's the worst of all attributes to screen buy, to be honest with you. Because size is just size. It matters how you got there, it matters how you're constituted. The two things that really do matter to us is openness to having an outside perspective and a growth orientation that the actual desire to have your fingerprints on a vision of what a $50 million version of your firm could look like or a hundred million dollars version of your firm could look like. And then finally buy-in to our, what we call our people first operating rhythm. So there's a table of folks here who are chief growth officers at Ascend.



(26:03):

Bob's question earlier, what can outside capital do? One of the great things that it can do is bring new talent into your business. And so each of these folks is partnered with one of our partner firm CEOs to create that type of growth. And our businesses are growing quite well organically, and it's coming from different places like price offshore technology and the like. But you have to be open to that. And so that screener of what percentage of firms does that apply to? We're out there every day having conversations, trying to figure that out. But we are building it for the long term and we are building it in a people first way. So it's through conversations like that one that we're able to qualify that question, it sounds like



Audience Speaker 1 (26:43):

A relatively small percent. I'm insisting on a number, but it sounds like that's not looking ready for a year.



Nishaad Ruparel (26:52):

Yeah, it's probably 10% of all firms out there that are the starting point. So



Bob Lewis (26:57):

Let's clarify. Dan, you issued list on firms. How many firms are there in the top 500? Sorry, sounds kind of obvious, but it's not 500 because a lot of people don't report. So that's kind of a trick question on my part. So let's just say it's a thousand. Okay. And that's the top 500. What's the lowest number on the top 500? About five and a half million right now. Somewhere in the zone SO'S estimate, 45,000 CPA firms in the United States. If a thousand of 'em are $5 million on up, let's put another couple thousand from the one to 5 million range and a whole bunch under a million bucks. So it is a fairly limited footprint.



Alex Goldberg (27:32):

I don't mean to correct you, but if you and I have, every time I talk to a firm, we talk to the same firm. After you've bought that 10 to $40 million firm, there's a $5 million firm in the same geography, right? You would talk to that firm? Oh yeah.



Nishaad Ruparel (27:49):

So each I was describing the, it's a good clarification. Thank you. I was describing the 40 kind of regional firms that end up being that 50 or a hundred million dollars firm in our vision of being a top 20 firm. But each of those will have acquisition opportunities of their own. And one of the benefits of being partnered with Alpine is that we have a lot of capital and candidly talent to help those firms grow through M&A. And so in those opportunities, something like a three or $5 million firm would be interesting to us.



Alex Goldberg (28:20):

The reason I know that, like I said, every time I talk to a firm or every time he talks to a firm, we're in the next room over. For us it's similar with 10, we like 10 to 40 is where we'll start. But really after that, once we have a presence in a geography, as long as there's a culture fit, when we look at a firm though we don't have a chief growth officer we put in there, we want it to be that the way they operate is the way we would operate. Yes, there'll be some fine tuning, yes, we'll give them resources that they didn't have before, but they would've done it if they had the same checkbook we have. They would've done the outsourcing, they would've had the CFO, they would've had the reporting, all that thing. So for us, yeah, I agree. Revenue's not a great metric to look at revenue's like it is a filter though, right? We don't want to waste people's time. And then it's do you have a culture and a focus and a desire and a reputation of behaving and operating a certain way? And if it fits the way we operate, then great. It's probably a marriage even.



Bob Lewis (29:31):

Yeah. Thank you.



Josh Funk (29:32):

And I want to echo that last piece is the most important piece, but when we think about the firm demographics, I would divide the firms that of those 45,000 firms, I would divide those into three buckets. There's probably 80% of those firms that are the one $2 million that they can't compete on talent. They can't compete on software, they can't. Government's doing everything to make things so difficult that they need a home that is not them. And then there's probably 10% of the, so that's 80% of the firms, 10% of the firms are going to be firms. The firm I was at, we had five partners that average age 45. We'd grown from nothing to 7 million. We needed some administrative help, but we didn't need to join that regional firm. We could have survived on our own. We just needed some help. And there's a lot of people out there that want to keep their local brand, don't want to be tucked in that want help finding people, want help offshoring, want help with it, want administration removed, but yet keep their own brand.



(30:43):

We have a home for them. And then that last 10%, those are the firms generally are probably going to be 10, 15 million and up in revenue that have the processes and systems in place where they can absorb those first 80% of the firms that need a home. And we would like to believe that as we grow, we're in five markets right now. As we grow, we're going to have a home for all those people. But so we think of the population as a 45,000 firm population, but I would guess that 25% of those firms are truly going to be open to change and doing things differently. And those are the people we want to partner with at all sizes.



Bob Lewis (31:22):

Okay. Stan, just a quick,



Audience Member Stan (31:25):

So I deal with the quality control, and I assume that you talk about fine tuning and I assume quality control, I mean to cut quality control, get rid of our staffing issues. So just figured I have the three of you up there I ask,



Bob Lewis (31:52):

Okay, hold on. Just for clarity, in case they couldn't hear it. Basically eliminating quality control, cutting, eliminating, cutting quality control to accommodate for profitability. Would that be a fair phrase? Okay. Sorry



Josh Funk (32:06):

About



Alex Goldberg (32:07):

People back here. That was the first good question. That was tough. That's a good question, right? We're coming in there. We care about profit and you got all these firms around the nation. What are we going to do with colleague control? We should talk about the negatives of private equity. I think the bar on quality control is extremely high. I know for our firm it's a nuisance. It adds a layer of difficulty and complexity to your day. We talked about all the good things that come out of it. This is from the perspective, not the partners. The partners get it from the perspective of the hardest guys to get in the industry. That five to seven year folk, it's hard. It adds to their list of things they need to do and it adds to the oversight. A yes no. The answer is that we do add it. We've hired two folks for it and we plan on making it a larger department.



Bob Lewis (33:09):

Can I just throw this out there? I have talked to quite a few at organizations over the last couple of years on this topic. They're not going to come in and tell you how to do a tax return, how to do an audit because they don't know how to do it. The only one out there who's done accounting is him. So they don't know how to do that. They're gauging you, they're acquiring you to do that, and then they're managing the profitability of the practice. And if they come in and cut, can you imagine? You can come in and cut quality control out and the peer review process happens. Yeah, that's not a problem that everybody wants to have. So they got to avoid that question in the back there. I can't see. Well, sorry.



Audience Member 3 (33:50):

So know how to deal with, we talk about and helping HR.



Bob Lewis (34:16):

Okay, that's a good question. So actually one you're getting ahead of one my questions is one, we're going to have to rapid fire a couple of questions we're going to run out of time. What does happen to the people kind of in alignment with her question? So are we moving the firm to Mexico, like the manufacturing plant? Is that what's going to happen here? What happens to the people who



Josh Funk (34:39):

On a day-to-day basis, nothing's changing. That sounds too good to be true. It sounds like you can't, but we're not coming in and changing who the managing partner is. We're going to give, we have a head of HR, we process the payroll at our parent level, but the day-to-day operations, there's still going to be a manager at locations. We partnered with you on June 30th. The person that's in charge of the HR issues at the local location is going to be the same on July 1st. I mean, the concept of needing to have employee issues and deal with them isn't going to go away in our profession ever. And you're always going to need somebody working on it. And when there's a question, we're going to have resources and capabilities to figure out the answers and help the person that's on the ground. But you're always going to have somebody at that location that has those same duties and responsibilities under us anyway.



Bob Lewis (35:31):

We have such a people shortage. We can't afford to get rid of people. The only time you're going to get rid of the people is if they're completely inadequate. And frequently in almost every merger we've ever seen or deal we've seen, almost nobody gets eliminated unless they wanted to eliminate the person but didn't want to do it themselves and use the merger as an excuse. Now, are there overlapping positions that will occur? Yeah, unless I've missed, I missed the bus on this one. You guys are taking care of all the back office. So you're going to have an HR professional in charge of your organizations. So there'll be some overlap, but if they're good people, they'll find a way to repurpose I. And you're still going to need boots on the ground in each office location. So just kind of throwing that the people is critical.



Nishaad Ruparel (36:14):

No. Can I add something to that, Bob?



Bob Lewis (36:16):

Oh, go ahead. I'm sorry. I didn't catch.



Nishaad Ruparel (36:18):

I would also say there's one question about people, which is do they stick around and what happens to them? There's another question that's like, okay, great, they're sticking around. What does their career look like? And we are doing a ton on the what does their career look like front? So first of all, we have nine recruiters at Ascend that are working really hard to fill open positions at each one of our 12 partner firms. And in between October 15th and April 15th, we actually were able to make 70 hires across the senior manager and senior manager level. The second question is, okay, well how do you develop them? We've put a ton of thought and made a ton of hires in that department as well. So we have a head of professional development that's specifically focused on this issue. We have a head of culture that's specifically focused on how to amplify the unique cultures that exist at each one of our independent firms. And then finally there's the issue of like, alright, so you've been able to acquire talent, you've been able to develop talent. How do you compensate them in this new regime going forward? And we have put a lot into that question as well. We have people that are getting paid bonuses this year that are going to far exceed any bonus that they've made in their career as a senior or a manager.



(37:42):

I appreciate that.



Bob Lewis (37:43):

However, they had to work 200 hours a week to make that. No, I kidding. That's not true.



Alex Goldberg (37:50):

I mean, we've done the same. We had a former head of HR from CB, we put together a recruit. We only got 23 or 24 folks, so you got us beat there. But I think what two pieces. One is private equity can help you think about how to incentivize people correctly, different structures and different carrots to give them that you may have not seen before. But real, you said you've been running and folks have been doing this for decades, right? Again, I haven't. Our CEO has Dan Reinhart, the folks that are going to be involved in people issues and partner issues and family issues that spill into the firm. The same folks that have been doing it forever. There's no guy from New York or San Francisco who's going to be able to do it better than the guy who's sitting in your office who's been doing it for 20 years.



Nishaad Ruparel (38:43):

I fully agree with that. I don't handle any people issues myself. I didn't mean you by San Francisco, just make that clear. But you do need expertise. It's definitely an important subject and you definitely need expertise.



Bob Lewis (38:53):

Question. No,



Audience Member 4 (38:56):

I think a lot of the driving force, the private equity model, 20 30% of the purchase price is rollover equity. That kind of handcuffs the person looking for succession, looking at the desk for how do you think an approach ultimate issue hand, which is these bull who acquire the firm from are to make their per incentives around that since the purchase price rolled into



Bob Lewis (39:48):

That was the longest question I've ever heard. So no. Does everything back here that clearly enough? Okay. I'm going to kind of paraphrase. So please correct. If I got this wrong, what kind of succession is going to be in place? So I'll be the firm that's acquired. It'll be me. I'm going to be exiting. What's the succession plan for the people that are left in the firm? How are they going to be motivated? Did I catch it? Close enough, fair enough. Good enough. Got it. Who's up?



Josh Funk (40:15):

I'll go. So the first thing is, that's one of the things that we're going to talk about when we're deciding whether this is a good or bad idea for us to partner with you is do we have a plan? Do we think there's a plan? How long are you going to stay? How can we coordinate this? And we're going to work together to figure out what that plan is. And if we don't think you don't, there's a plan in place. We don't think there's a plan in place, we're probably not going to end up being the right partner. But if there are a second generation of talent, there's a lot of variables that you can use to help motivate people to transition the work to plan out, and we have more resources and ability to fill those holes and solve those problems. You're going to have that problem with or without partnering with private equity, how do I transition my book of business?



(40:59):

But generally speaking with us, you're going to have more resources to solve that problem. And then the second layer to the next generation is we have a plan where we will grant people, profits, interests instead of busting your butt and then having to buy in and cut a check and buy out. We don't think that's sustainable and what the youth is looking for today. So we're going down more on when we determine somebody is a high performer, we'll grant them some sort of profits interest that they will vest into over a time period. So they will be owners when we determine that they're the right people to move forward for the firm.



Bob Lewis (41:39):

That's quite okay. Dan, two questions. Yeah,



Audience Member Stan (41:43):

I'm sorry. So it seems like there's been an evolution, your period or however long it's been in the business. It started off majority ownership. It kind of evolved in the ascend model, majority ownership, but independent and then recently minority ownership. Do you envision may model going that way to We will invest and we'll reap the rewards, but you could keep your food, your majority, we'll be a business partner.



Bob Lewis (42:20):

Okay. The core of the question was are we going to be seeing more of a shift to I'm going to buy 30% of Stan's business as opposed to a hundred or 70 or 40% or whatever the limited capital investments have been occurring. And I think they're happening more in a family office kind of environment. Like Noah's organization has a whole different family office structure on how they do acquisitions different than how they do it versus how one of the managing partners in the room may be doing acquisitions. Anybody want to try and cover that question? Yeah,



Nishaad Ruparel (42:50):

I can take that. I think candidly, I think it depends on the problem that you're trying to solve. So if the problem that you're trying to solve is, I have a bunch of partners who are retiring and I have some younger partners that are not sure that they want to buy them out, but that ownership is clearly worth something. Capital alone can solve that problem, and that's kind of one reason that we wouldn't do something like that. But if the problem that you're trying to solve is I have a really deep bench of young partners. I have a lot of ideas about where this firm could be going in 10 years or 20 years. But when I look at the cost of remaining independent and I consider things like recruiting or talent or technology or the ability to do m and a without capital, I look at that laundry list and I say, man, that's intimidating.



(43:39):

I wish I had a partner to help me with that. If that is the problem you're trying to solve, then capital alone cannot solve that problem because those types of problems get solved by talent and process. And so we can have a debate on what is the right type of talent and what's the right type of process. But the deals that Ascend is doing, they're not majority deals are actually 100% control. And the trade that our partner firms are making is that their shares in Ascend plus the capital that they get upfront today, plus our support, leaves them in a position where they're financially better off and having more fun. Everybody's going to come to a different conclusion as to how they get there, but that's ultimately a function of the problem that they're trying to solve.



Bob Lewis (44:25):

So we're down to five minute warning. We got a question in the back. Go ahead. Fire away. That is you. Yeah.



Audience Member Stan (44:33):

This is really interesting. Demographic up and coming generation working. Talked about some sort of equity buying program. Elaborate on that. Are they lending money to buy in?



Nishaad Ruparel (45:00):

Yeah, it's a great question.



(45:06):

There's a few forms of motivation. The first one is they're getting stock and ascend. Yeah, I'll be quick. They're getting stock and ascend on day one, right? It's just how we pay for some of these partnerships. We pay with cash and we pay with stock. So they get stock on day one. The second thing is we do have a profit share program where they get cash compensation for the growth of their firm. And then the third thing is we have access to equity that they can opt into along the way. So it's a combination of day one plus the profit share plus equity along the way.



Bob Lewis (45:38):

Okay. I'm going to throw out something real quick. I've got two $10 million firms both dropping 30% to the bottom line before equity partner compensation. How much are they each worth? Great answer, Mike. That's why you're not in this business. But yeah, the answer is they could be very different. Depends on the production hours, staffing, all kinds of variable variables, even though the numbers look identical on a financial statement. So even when you're looking at an offer from somebody like them or other people in the audience that may be making an offer, you got to look at all the pieces. I want to kind of bring this up. We're down at time. So Alex, can you answer this question next? Will values fall?



Alex Goldberg (46:20):

I don't know if I had to bet. I think values are going to go up unless you're in that last bucket. If you're in the last bucket where you're stranded on an island, you don't have anything. Everyone's found a partner already. It's three, four years from now, you could be in a tough spot. But if I were a betting man, I'd say values are going to continue to go up.



Josh Funk (46:43):

I would agree with that. I mean, my answer would've been, I hope not. But that's kind of a culmination on if three groups like us are successful in what we're doing and we're able to keep the talent. If we're successful in what we do, values will continue to go up. If we go fast forward five years and we fail on the people and the transition, then the values probably will come back down because that's just how it's going to work. If we figure out that we're not doing this right, we're not adding value and things are going backwards, we're not going to be willing to pay as much anymore. So if we do our job, they should go up. I hope they go up. But we are going to have to fast forward three to five years there for sure.



Bob Lewis (47:24):

One other question, then we'll go to the audience. Last question, and I want to ask this one Tanish because I think we haven't answered a question yet on this one. When will the window close? I'm asking these questions. I get this call every single day from somebody. When will the window close? How much is the value? How do we make the value? How's this thing work? Will the window close?



Nishaad Ruparel (47:43):

You mean just the window of being able to access a transaction like this one?



Bob Lewis (47:46):

You're not going to do this anymore. You've stopped, boom. Not you specifically PE in general. Will this PE window close or is it going to keep going for the next five or 10 years?



Nishaad Ruparel (47:56):

Alex is the end of time. That's Alex's answer. Look, I think that



Alex Goldberg (48:02):

Has it stopped in any industry?



Nishaad Ruparel (48:04):

It hasn't. I think that's right. I think if you prove that this is a valuable thing to do, meaning that there are firms out there that were run in a partnership model and when they get access to resources and maybe they get access to a different operating rhythm than the partnership governance, they inflect in terms of their growth trajectory. That is happening. That's certainly happening at Ascend. And I imagine other places too that doesn't go away.



Alex Goldberg (48:35):

And by the way, just like CBIZ, I know it's a four letter word. Look at the stock chart. It's like one of the best performing stocks in American history. And like you said, it's going well for you. For us so far it's going great. It's been proven in every other professional services industry. It's worked. Accounting is different, but it rhymes, right? It's not like it's



Josh Funk (48:58):

Better. Yeah, recurring revenue is higher than any other industry. We look at our stats and we have a 5% client attrition with an 8% growth. We have 103% retention. It's better than every other industry. I would be very surprised if



Bob Lewis (49:12):

I know we're out of time. Went backwards. The issue on the window closing, there was one more question we were going to address. The issue on the window closing is maybe it's kind of like what's going to be the next role of advice when you're in Vegas? What numbers are the couple? We're not a hundred percent sure if the window will close, will values fall? It's a little bit of a gamble. You had a question? We we're going to wrap it with your question. So feel very make it a really good one.



Audience Member Stan (49:33):

It's not a good one. Great.



Bob Lewis (49:36):

Really bad start to your question. I'm just throwing that out there. Okay.



Audience Member Stan (49:41):

Yeah, a little bit. Because it seems like a lot of the focus when we're talking about rolling up the platform firms that have been around for I heard decades. How do you guys think about rolling up maybe smaller firms that have built operating advantages, say these firms decades aren't this tech. You guys think about bolting on smaller firms.



Bob Lewis (50:13):

What size would he be thinking like $500,000 firms or I thinking



Audience Member Stan (50:16):

Like one to two.



Bob Lewis (50:17):

Okay. Alright. Just kind of clarify. Does everybody kind of hear that question? He's in the middle of the room. So how about bolting on one to $2 million firms? We got rapid fire, 30 seconds.



Alex Goldberg (50:28):

Can't mix 'em. They got to be separate businesses. You put a guy who's telling him you got to do this software, that software, he's 27 years old. He has a $600,000 practice, the other guy's got 35 million. He's made more money than the guys made in revenue last year. It's just you can't mix them.



Bob Lewis (50:44):

That was longer than 30 seconds ish. 30 seconds because Josh is down to three seconds now.



Nishaad Ruparel (50:48):

Okay 30 seconds. So one of our CEOs had a phone call with me a few days ago where he came to me and said, this firm is down the road. I've been dreaming of partnering with them my entire career. I've never had the capital to do it. Will you meet this other CEO? I met him in the cultural alignment was obvious to me. We're going to continue to see how obvious it is over time, but to the extent that that exists out there, for sure, we want to investigate it.



Bob Lewis (51:12):

Okay, Josh, you have minus five. Now. Again,



Josh Funk (51:14):

We 100% embrace those firms that have a niche that do things better than the rest of our platform and we'll probably pay a premium for it because we want to learn from them and either refer business to them or teach our other firms how to do something similar. So we'd be excited about that opportunity.



Bob Lewis (51:30):

So I'm going to wrap this with one last comment, that comment about the one to five. We get these calls all the time or the one to 2 million firm. The problem is often the clients that they're serving don't support the larger firms base of what they're trying to get. So it can be a challenge sometime, but if the client's open and they have the right infrastructure it can work. With that said, I'd like to ask more questions. We're out of time. Thank you. Appreciate it. Thank.