Alternatives to PE

Not all firms are interested in private equity — but still have problems that need solutions. Fortunately, they have options, from regular M&A to ESOPs to joining up with a wealth management firm. This panel discusses the options, and how to decide among them.

Transcription:

Philip J. Whitman (00:10):

Okay, we're going to jump in right now. And one of the things, when I started the journey, as I shared yesterday and had conversations with, I'll say the big three, Eisner, Amper, Citrin, Cooperman, Cherry Becker, I did say this isn't only going to be for the largest of firms. And as I met with, remember, does anyone remember the number that I said yesterday? How many PE groups did I meet with 147? Well, I met two more here that I didn't know. So now I'm at 149. But in any event, what we have up here is different, and I've always liked different. I don't want to show you the same thing with a different head on the same body, the same transaction, just change the heads. So we've heard a lot about PE and for you PE guys that are out here, this is the first time I'm looking out into an audience and I don't see all bald guys and all gray haired guys and gals.

(01:28):

I see youth, and I think because of the youth that you are bringing into our profession, I think we're going to see that trickle down. And you guys are going to do an amazing job getting those young folks excited and having them re-embrace the wonderful business of public accounting. So please, if you're a PE group, don't throw Rotten Tomatoes at me because this session is all about alternatives to you guys. And again, we like to show everyone different alternatives. So everyone knows about PE. We've got family offices and sometimes a family office looks like a PE group. What's that expression?

(02:24):

A sheep in a wolf, in a sheep clothing or something like that. But in any event, we've got family offices with deep pockets, with patient capital, long, long holders, and some of them are sitting in this very room. We've got wealth management groups, and some people are saying that the convergence of tax planning and tax return preparation marries up really, really well with wealth planning. And I believe that organizations that take wealth management and tax services and put it together, they're going to be competitors to the public accounting, to the private equity groups. We have foreign pension funds, sovereign wealth funds. We even have in this very audience a bank holding company out of Indiana that is looking to invest in the CPA firm arena. Naturally, we have CBIS and there's a very large publicly traded company that we're working with that's looking for a foundational CPA firm, and it will continue.

(03:53):

One of the alternatives we have obviously is the ESOP model. And we've seen, at least to my count, within the past year, two years, we've seen three firms go by the way of ESOP. It's sort of like a refresher. It's not really new because there's a firm in Indiana, KA Sapper Miller. They've been ESOP owned for probably 21 years now. There was Redpath and Company, but most recently we saw BDO sort of set off a little bit of a trend. And I truly believe we're going to see more because after BDO, we saw Lou Grassi do an ESOP deal, and then we saw Ron Wiener of Perlson Wiener do ESOP deal, and we're talking to a couple firms about putting together an ESOP transaction for themselves as well. And I think there's different reasons why people do that. So first, before we launch in and go a little bit deep into these things, I'd like to introduce our ESTEEM panel. And I think we're going to start with Steve Ferrara, not Steve Ferrara, who is in the audience. I don't know if you've met him, but in any event, please introduce yourself. Tell a little bit about yourself, your organization, and if you could keep it short, we did this last night at dinner. We had almost 60 people at dinner last night at Capitol Grill. And tell us something that is an interesting fact about yourself. Steve.

Steve Ferrara (05:51):

Good afternoon, everyone. Welcome to Chicago. I was born and raised here, still live here and brought the snow in just for you today, but I spent 33 years with B-D-L-U-S-A and last 12 I was the COO of the firm. I retired on June 30th. I'm still trying to figure out what the hell it means to be retired. It's a little weird, but I'm enjoying it so far and I look forward to chatting with you today.

 Philip J. Whitman (06:19):

Thank you. Thank you, Steve, Chris?

Chris Gallo (06:22):

Yeah, sure. Good afternoon. My name is Chris Gallo. I am a Partner at Creative Planning, as everybody knows here, we're going to talk about recently of Bergen, KDB for the past. Oh, that was forever, really up until the past about year and a half. An interesting fact about me is I've got a very healthy fishing obsession, which I'd like to be doing right now, but probably not in the snow.

 Philip J. Whitman (06:48):

Alrighty, awesome. And Michael.

Michael Cerami (06:53):

Hi everyone, my name is Michael Cerami. I am part of the leadership team@cpa.com. Many roles there, but probably the one that's most prominent is I lead our development and management of our strategic commercial partnerships and our BD activities. For those that may not know, CPA.com is the business and technology arm of the AI CP. A big focus of CPA.com, which is probably most relevant to today's discussion is just the amount of work we do with firms of all sizes, assisting in the transformation of the different practice areas. So we live, I think, a little bit of what we're going to talk about here today from that side of it and gives us a lot of perspective.

 Philip J. Whitman (07:42):

Thank you, Michael. Now, Michael, let's stick with you. Why don't you share why are so many firms looking at PE and other alternatives and the things that we're talking about here at this conference?

Michael Cerami (07:58):

Sure. So I think well maybe zoom out a little bit from that. Phil is we do a lot just as far as monitoring the market, the marketplace, hard trends, soft trends, a lot of trends that we know, we have a pretty good level of certainty in those that are maybe more a possibility. So just focusing on the hard trends, I'll probably be the thousand person to say it in the last 24 hours is really big. Three big trends that are impacting, I think firms of all sizes, right? It's PE and alternative structures, it's demographics and it's technology, and they're coming at everyone like a freight train. And so I think everyone is trying to determine, okay, how do I continue to compete and get better, faster, stronger, kind of in that operating environment? Again, if you look at pe, it's driving a lot of the M&A activity.

(08:57):

It's modernizing and bringing innovation. It's making a lot of firms games stronger. At the same time, it's introducing a lot of anxiety to the profession. Where is this going to take us? What's next? Where's thes the broader profession going? If you look at demographics, again, we talked a lot about it. Look at the two ends of the pipeline. If you've got one end of the pipeline where less people are graduating with accounting degrees and sitting for the exam, and the other end of the pipeline is a really intense rate of retirement. And so when you have those two, it's going to tighten the talent pool and create capacity issues for firms, again, of all sizes. So sticking with demographics, you have a generation Z workforce that's emerging in quite a big way and they're going to be interested in alternative work environments and firms need to be thinking about that. And then lastly, technology.

(10:07):

I mean, I lived through the cloud, which I thought was really the last big transformational technology to impact accounting and AI is the cloud on steroids? I mean, the amount of technological, the pace of change is nothing like I've ever seen before. Now I think people are still figuring out the utility and the application, but there's no doubt that it's pretty intense. So those are the big environmental factors that I think have everybody scrambling and thinking about what's best, what's best for our firm, but I don't care what alternative structure that you are thinking about, whether it be pe, ESOP, bank loans, just good old fashioned m and a. I think the partnership model needs to move toward more of a corporate led structure. And at the end of the day, it is really about infusion of capital. It's about access to technology and how to leverage it successfully and it's talent. And this is really, I think, what's driving so much of the consideration being given to a multitude of different options.

 Philip J. Whitman (11:32):

And Michael, I'm curious, as you folks at the AICPA and cpa.com saw these trends, obviously shelman, Eisner, Amper, Citron, Cooperman, cherry, Becker, and then some of these constellation roll-ups, ascend and create professional alliance platform accounting, they're all coming. What were you guys thinking when you sat back and you saw all of this occurring? Was it exciting? Was it, were your thoughts of, wow, these folks got to be careful? I mean, I had the pleasure yesterday of sitting next to, we do have someone here from a board advisor from the P-C-A-O-B, and obviously there's the biggest caution that we throw out to private equity groups and anybody getting involved in this business is the regulatory environment. And we've heard from some of the attorneys, but what were your thoughts and your colleagues at A-I-C-P-A thinking as you started seeing this evolve?

Michael Cerami (12:47):

Yeah, I think there was a certain amount of inevitability. I mean, I'll even go back a little bit deeper than that, Phil, again, going back to, I've been with cpa.com since inception, so it's been a while, 2001. And again, we saw in oh 5 0 6, just the whole proliferation of cloud technology and saw how transformational that technology could be to firms. And I remember having conversations at nauseum about, now I really like my on premise product and I like it under my desk and it's more control and it's safer and there's no need for this thing called the cloud. And so this is dated, but we were talking more about cloud, forget about the solutions that were in the cloud and was very evident was that, and we saw very early on the impact that cloud in particular could have on outsourced accounting. We call it cas, but one of the slides yesterday, PE firms had it in the upper right margin.

(13:51):

Just the amount of growth that's happening in that area. And I mean in oh 7, 0 8, I mean cas, I put my people in the basement. It was flickering fluorescent lights. It was a means to an end. It really wasn't a very strategic part of what firms got up and thought about every day. I'm generalizing, but for the most part, and along comes this technology that really turns that upside down and creates a much more strategic practice area with good margins, very sticky, a lot of the things that many of the PE firms in the room like about the profession. But we saw firsthand just how difficult it was for firms to launch something new in their current governance structure. I mean fighting over books of business and talking compensation strategies. And we quickly realized that the traction was going to be very hard if all that other stuff never changed.

(14:54):

And so I think of the conversations that are happening just in the last couple of days, but really what's been happening in the last few years is regardless of what structure the firm chooses, I think it's very healthy, the kind of competition that this discussion is going to create. It's going to make everybody really think about how do I act a little bit more in the context? You can preserve the partnership model act a little bit more in the context of a corporation and a lot of the things that have been talked about the last couple of days. And so I think that's a good thing. I think there's how it impacts the other things that are maybe more core of the profession. I'm probably not the best person to speak to.

 Philip J. Whitman (15:41):

Wonderful, thank you, Michael. What we're going to do right now, I'd love for Steve Ferrara Ferrara, sorry,

Steve Ferrara (15:50):

I've been called worse.

 Philip J. Whitman (15:51):

Yes. To take us through BDOs journey to its ESOP. So I got to meet Wayne Berson right before he became CEO of the firm. And for those of you that don't know that story, it is a wonderful one from his humble beginnings to being the CEO of what I call one of the global seven firms. But why don't you take us down what that journey looked like. And I'm really curious, what problems were you looking to solve? Because I always looked at BDO and I said, you don't have a succession problem, you don't have a money problem, so why go down this path? And as you were going down the path, was there any consideration we could do this or we could do private equity if you're at liberty to share with us why you went the ESOP route as opposed to talking to one of these large private equity groups?

Steve Ferrara (17:02):

Okay, shall I take 'em In order of how we got to where we ended up?

 Philip J. Whitman (17:07):

And I'll keep you on track, but I know I threw a lot in there. Was there a problem that you guys were looking to solve?

Steve Ferrara (17:16):

And I think Michael alluded to it. If you look at the profession and you look at the partnership model in 1995 when I became a partner at BDO, they said, Steve, stay till you're 60 and we'll give you a pension. I was like, that's fricking great. I was 38 years old and I'm going to work my tail off till I'm 60 years old and get this pension. That's equivalent to one and a half to two and a half times your compensation. If I tell a 40-year-old person today, stick around for 20 years and we'll give you a pension, they think you're crazy. And the profession, the model we had in my opinion was outdated and it needed to change. And I see Alan sitting over there, and Alan and I have discussed this on more than one occasion, and I'll weave Alan into the story at some point because this really started almost three years ago.

(18:13):

I was on the board of the Illinois CPA society and Allan presented to the Illinois CPA society, a PE option, and Wayne and I worked very closely together. Wayne's my brother from another mother who spent the last 12 years attached to the hip. And we both agreed we had to look at alternatives. We really didn't want to change. We liked being a partnership, but we had to consider alternatives just on behalf of all the partners in the firm. So the things we were thinking about were how's it fit into the profession? I'm speaking strictly about ESAP because we went down various paths to end up at the ESOP and we said, okay, will it fit in our profession? Will this model work with a professional services firm? And when we dug into it, there were more architectural and engineering firms that are ESOPs in America of the 25 largest ESOPs in America, most of them are architectural and engineering firms.

(19:14):

So it fits in a professional services model. They have regulations and a regulatory environment to deal with. A little different than ours. But that was one concern was how will this fit in the profession? How's it going to impact our partners and our employees? And one of the biggest challenges is an ESOP is fricking confusing. Trying to explain it and help people understand it was a real challenge, but we wanted to make sure it was going to be something that would benefit everyone in the firm. What was the economic outcome? If we could do an ESOP, but it wouldn't give our partners the same outcome as a private equity transaction or something else that wouldn't be fair to the partners. So we had to look at that, was it going to be flexible and give us the flexibility we needed to effectively run our business? And one of the things that was really a concern of ours was we wanted to be able to control our future control, the outcome of the firm, control the management of the firm. And would this give us a good model to do that?

 Philip J. Whitman (20:21):

So I guess what you're saying is since you wanted to make sure it would give you at least a good enough economic impact as private equity is, it's safe to say that you went down the road with a couple of private equity groups to explore.

Steve Ferrara (20:43):

So that's where we started three years ago. I'm looking at Allan, and he presented at the Illinois CPA Society board meeting, and I called Wayne up. I said, we got to look at this. So then we agreed and we met with Alan, and Alan started us down the PE path, and we looked at a number of different options. And the one thing I want to say is there's not one size that fits all. There's not one model that works for everyone. It's an individual decision firm by firm based on where you're at. And we had to consider a number of factors. The future of the firm, BDO has been around for a hundred years and we didn't want to do it an initial deal. And then on a second or third transaction, have Wayne and I be responsible for BDO no longer being in existence.

(21:29):

We want to ensure the future stability of the firm. We had to look at what was in the best interest of our partners, of the people that worked for BDO, how's it going to impact our clients and our client relationships? And if we change the structure, when we talked about one of the concerns of our assurance practice was they would be bifurcated off into a separate entity. And that created some angst amongst the assurance partners and then the ESOP model, we didn't have to do that just based on the way we structured it. And then we also had to consider regulatory changes. And this was one of the most significant things you may recall about two years ago in August, the SEC came out with some comments regarding, if you're doing a lot of work with public filers, it may have an impact. A private equity ownership may have an impact on your firm.

(22:24):

We didn't know what that would mean. A big part of BDOs assurance practice was auditing public filers. And that was a consideration we had to consider. And then the last thing I want to say, I mentioned it's not one size fits all. We are seeing PE firms considering coupling an ESOP with a PE investment. And Pete Stavros from KKR started an organization called Expanding ESOPs that's championing revisions to ERISA to make it more lucrative to considered starting an ESOP organization and coupling it with private equity. So I don't think it's private equity or ESOP or something else. As we go forward, these things are probably all going to blend together and we'll see much different models than we have today,

 Philip J. Whitman (23:17):

Yet another new model on the horizon. So what was it that was so attractive about setting up an ESOP? So I've done a lot of work with KSM and the one thing that I learned in my journey and an ESOP is not an ESOP. I mean, every ESOP is a little bit different and there are different ways to structure it. And in theirs, they bring on a partner and they're like, oh, we're going to lend you $300,000 and it's going to be paid back by the dividends that you're going to get. And oh, by the way, the ESOP has returned 18 to 20% every year, and partners would love to put even more money in it. And it's been a very successful model. And then when they go out and they do a merger transaction, it doesn't affect any of the partners now, especially in this environment where folks, you need to put cash on the table to get a merger transaction to the finish line. The ESOP is so flush with cash that it's not like it's coming out of the partner's pockets. So I'm curious, in the ESOP that you guys did, and by the way, I am not an ESOP expert, but you could do a partial ESOP. We know a firm that did a 35% ESOP, but one of the beautiful things now all of your employees are owners, so why don't you just talk to us a little bit. Has that helped with recruitment and retention?

Steve Ferrara (24:49):

Yeah, so let me just tell you, I'm going to step back for a second. Many years ago, I helped a client do an ESOP transaction as a local Chicago company, a manufacturer. And I would go out there every quarter and meet with their CEO and he'd take me around his factory and show me his new toys. And one day, a few years after they had done the ESOP transaction, we're walking around the plant sap and met a gentleman who was working on the shipping dock. And I asked him what he thought of the ESOP, and he looked at the CEO and he said, this gentleman has given me and my family wealth that I never could have dreamed of. And that always stuck with me. And to your point, in an esap, everyone in the entire firm benefits. The partners benefit, the employees benefit, the employees continue to get their bonus, their 401k matching, the health insurance benefits.

(25:48):

This is really the cherry on top, something extra that is hard for a lot of people to wrap their head around. But that was a big consideration. All the employees benefit, everything we've seen, and we've read shows that ESOP companies have lower turnover, it helps with recruitment. And one of the things that we found after we did the ESOP was it was easier to recruit partners in, especially partners coming out of a traditional partnership model because they were getting that pension of two times comp or whatever it was after 20 years and coming to BDO with the ESOP and the upside of the ESOP was very attractive to them. So from an employee and partner recruitment and retention, it was big turnover's down. We maintained control of the firm and our future that was significant. Same board, same management team. And it also provides the financial resources similar to what a private equity deal would do to allow you to go out and do additional transactions and partners will receive fair value for their investment in the firm. When we found that the valuation under an ESOP model is consistent with what we would've received in our PE model. And one thing that really is hard to understand are the tax benefits. There's tax benefits to the individual partners when they sell their shares to the ESOP. And that's 10 42 exchange.

 Philip J. Whitman (27:23):

Tax free transaction.

Steve Ferrara (27:25):

Exactly.

 Philip J. Whitman (27:26):

It's very interesting. Obviously as I've said, Lou and companies, another firm that did an ESOP, and Lou calls me up one day and he says, Hey Phil, you should be talking to all the CPA firms out there and tell 'em to come to us because if they merge into us, forget capital gains, we could structure it in a way that it's totally tax free. Can you talk a little bit about that? Is that a fact? Are there ways that if let's say BDO were to see a firm that happened to be in this room and they're like, oh, maybe we should roll in and become part of BDO and they're ESOP and we could do it in a tax-free manner. Is that, and by the way, I don't know if there are any ESOP experts out here, but I have found, even though we're the CPAs and the CPA firms and we've got significant technical knowledge, unless a firm is specializing in it, usually most CPAs don't know too much about ESOPs, as I'm sure you didn't when you first started going down that road, other than the experience you had with your client.

Steve Ferrara (28:33):

Correct.I mean, I had a very high level understanding, but I don't think it's as simple as, yes, it'd be tax free if you have the right structure, it could be tax free. So there's that benefit if you're a partner or an owner in a business that sells to an ESOP, it could be tax free based on how you structure it. Secondly, to the firm, there are significant tax benefits because when you set up an ESOP, you sell shares to the ESOP. The ESOP takes a loan from the firm to buy those shares. And as you make your ESOP contributions, which are tax deductible for the firm, they turn around and pay it back to you. You fund that with a third party lender, you're paying the debt off tax free. And then ultimately when you get to the point where you could become an S corp ESOP, you could be a tax-free S corp ESOP down the road. And I don't want to get too deep into this.

 Philip J. Whitman (29:34):

I was going to say so much to learn as it relates.

Steve Ferrara (29:36):

There's a ton to these ESOPs.

 Philip J. Whitman (29:37):

I'm sure one day we'll be having an ESOP conference, but thank you so much for the sharing that you've done. Steve, I'd like to just really, Michael, what are you seeing in terms of ESOPs elsewhere in the profession?

Michael Cerami (29:53):

I mean, I don't have a ton to add. I'll add anecdotally that like you Phil, I mean know the KSM guys. Well, really happy with their circumstance. Redpath was on a G 400, was on a panel at G 400. The ASP is G 400 meeting. I think they're turning back to a partnership this year. That's at least what the gentleman on stage had said. So I don't know the reasons for that. But since BDOs has done their ESOP, the number of folks that have come up and asked me what do I know about ESOPs firm leaders, what I think is tenfold. So it's clearly brought that back to at least top of consideration. And the only other thing I'll add is when they say that they cite control and culture. Now I don't know if that's real or perceived, but that is usually the reason that they give of why they are actively evaluating that. So that's my general comments about the marketplace on that.

 Philip J. Whitman (30:59):

All right. Thank you so much, Michael. Chris, sir, I would love for you to take us through the journey of BerganKDV, joining creative planning. And while we will follow up, what problems were you looking to solve and why don't you take us through that journey?

Chris Gallo (31:23):

Yeah, you bet. So I like to say at the end, we enthusiastically sold our business to creative planning. The journey along the way was not always an enthusiastic one. And I'm sure anybody here that's gone through merger and acquisition on your own by buying firms, I was a part of our M&A team. And so it was a very interesting shift in the mindset, and Alan was a part of that. I think the guy's a part of about everything these days

(31:56):

Knew our ownership group. They say hello, excuse me, excuse me, the president and CEO of the firm. And we were heavily into buying firms. We were looking at a growth through acquisition doing small deals, million dollar, 2 million, 3 million. And eventually some of those went well, some of them didn't. We started to talk as an owner group about larger deals and less small, fewer or more large, I guess, or singular larger deals that just takes money. And we're like, well, where are we going to come up with the dollars to do that? And everybody understands in this industry it's aging and the dynamic between people who want to spend more money, those generally that have the dollars are the ones that want to retire as well. And so we had a bifurcation of our firm a bit, I would say. And we also had to then consider the earn, not the earnouts, but the deferred compensation that was coming in.

(33:07):

As you had said, the pension, well, that's generally through deferred compensation. And if you've got a large deferred compensation, you better hope the young kids want to work. As hard as I like to say we did, we all know that's not going to happen. There's actually a study out right now. I don't know who did it. It might've been Harvard that said people, I want to say I think 35 years old, maybe 40 do not at that age. And I think even above, do not want a bonus. I would say increased responsibility or a pay bonus. There's some vast number of this, and it's really staggering that they actually did a study on that and found that's the sentiment of the workforce today. And I think we were definitely seeing that with the younger staff. So they weren't really interested in funding older people's retirement, but we didn't need, at the time, that was always obviously coming up, but we didn't need to sell the firm.

(34:12):

So we were going down the path of our own m and a. And I don't think we were looking to sell. We were told we weren't, but we were always entertaining deals. We were a top 50 firm. We were one of the fastest growing firms, doubling in size quickly. And so obviously it was getting the attention of those who are buying. And all of a sudden at a partner, a retreat that we were having in Colorado, Peter Malu showed up. Peter Malu is the owner of creative planning. What's interesting is creative planning is I believe the fastest growing RIA in today's world. Not a person there had heard of him, not a person there had heard of creative planning, hadn't heard of Creative Peter Malu. He gets up on the stage and now we're finding out as we had gotten there, hey, we're interested in maybe selling our firm to this guy as a part of the leadership team at BerganKDV, I was and a part of the m and a team having fun going through those things.

(35:18):

I mean, I was absolutely a staunch opponent to this. No, thank you. It was pretty much how the sentiment was. Somebody had mentioned the audit, the audit and the test side being split off. We ultimately ended up doing that. There was a whole group of people who were absolutely against that too. So there were probably no supporters of this day. One, we felt that we were healthy, we weren't interested in selling anything. We hadn't really talked a lot about it. What we had talked about is we weren't interested in private equity. If we were going to grow, we were going to do it on our own. Culture was always a big deal. As we were going through and acquiring these firms, we said, well, we were encouraged by Dave Hinnenkamp, who's the CEO at the time. Why don't we just listen? And he used the term, Peter Maeu is the Elon Musk of wealth management. Okay, that's interesting. We'll listen, and then you get through all of the details. We can go into how we'd done that, but really weren't looking.

(36:29):

Peter was looking to purchase, and I think this is an interesting story. He actually had gone to Wiley, and when you're starting to look for firms, I think when you get that big, they're pretty expensive. So we were about $130 million at the time, and I think it was more affordable, but we were top 50. We were regionally focused creative planning space out of Kansas City. So the more that we started to learn about this culture fit regional, obviously a national powerhouse really in the wealth management, we were growing regionally and these things just kind of started to fit. Peter had always said his clients told him that they have, that he's got them taken care of at home with their own personal wealth and some of the business wealth and a lot of the 401k wealth first venture into 401k was through Lockton, a Lockton deal.

(37:20):

I don't know if any of you recall that he bought that private equity or he bought that investment part there too. And he said, I've got my clients taken care of in their household, but I can't help them with their business. And that was his main fundamental interest in buying a firm like ours big enough to have the experience and expertise that we did in a vast majority of areas. And he really loved the tax return and the business tax return when his clients, of course, those who have wealth generate it generally from a business a lot of times unless you inherit it, but the business tax return. And he just, he knew that he wasn't really serving those businesses as well as he could. And so that was his vision to go out and be able to serve his clients with businesses with an in-house function. And that's how we got to starting the conversation.

 Philip J. Whitman (38:13):

So I'd like to dig a little bit deeper into some of the challenges and hurdles. Maybe you said even you at the onset were a staunch opponent to doing this. Your audit group didn't want to do it, but you did say, and they say, God says, we have two ears and one mouth. So listen more. So you guys listened. Was it a one and done after listening to them,

Chris Gallo (38:39):

Hardly.

 Philip J. Whitman (38:40):

Did you meet with private equity? I mean, what was, because you didn't have to do anything?

Chris Gallo (38:45):

Yeah, we didn't have to do anything. What was going on behind the scenes, whether we were meeting with private equity or not, I'm going to know, I'm sure we were meeting with them, but that was not on the table. It never really came up. Most of the discussions where it would transition would come up, would be equal merger size or upward sale to a larger advisory firm like ourselves. So we weren't looking at private equity. That was a bit compelling. Like, okay, well, Peter owns the entire business. There's a little bit of investment from outside there, but he's currently an 85% owner. And I think we had, we'll go with 65 70 owners at the time, and for those of you who have that many owners and many more, that can be a pain in the butt,

 Philip J. Whitman (39:41):

Herding cats.

Chris Gallo (39:42):

Yeah, it can be a lot of that. And so the more you start to think about something where you don't have to get 75 opinions on making a decision, you can start to get to a compelling reason why this might be a good idea. And so throughout, over the course of, I mean this took, let's see, we started the discussion in October. We went through multiple votes, president and CEO, I forget who was talking up here. Somebody had said, you can show up at my house between eight and 12, and everybody was there. I think that happened a lot. I think Dave Henning camp, who was our CEO at the time, I think his full-time position became just discussing what that looked like to the equity partners. Obviously that's the biggest deal. And then the equity partners had to really convey the confidence that this was a good move for everyone effectively down the line.

(40:43):

And so it really started with that ownership group. The numbers started to add up and look right. That's always helpful. If it makes sense financially, people are going to be more interested. So that started to look good. And then just what roles and responsibilities, just such an absolute key component. I lead our outsource business accounting team currently it's about a $40 million business. Peter's growth mindset is 10% gain. Clients grow at about 10%. We're like, well, we can do that. We've been doing that. There was nobody in front of me. There was nobody in front of our tax leader. There was nobody in front of our m and a team. So we were really a bolt on and we became creative planning business services. And I think that was a huge part of it because if we didn't get acquired, we were not going to be acquired and then have to report to somebody else. Fair to say, we've all got fairly large egos. We weren't really interested in going in and reporting to anybody else. And Peter really assured us that that wasn't going to happen. I mean, I had talked to him constantly. I had the guy's cell phone, I could text him right now, and he would text you back. In my own instance, I said, Peter, who's going to lead the accounting channel, said you are.

(42:07):

That sounds great. His vision was always acquiring wealth firms, acquiring wealth firms. And it is to this day now, it was a very different mindset for him to go and acquire this business firm, create a plan of business services now. And he wanted to do it once and you got to take a person at their word. And so if he had no plan to continue to acquire CPA firms, which he doesn't now, we were going to be the one and done. We were going to lead and operate under his guidance, but generally speaking in the same fashion that we were already doing it, that became a compelling reason to go ahead and do this deal.

 Philip J. Whitman (42:53):

And what made BerganKDV so attractive to Peter? Did you have a huge amount of AUM? Were you already in the wealth management business?

Chris Gallo (43:04):

We were. No, I don't think that had anything to do with it. I want to say maybe 2 billion AUM. It was not a big part of what we were doing. The main drivers of BerganKDV tax audit, our advisory cash practice, what we've been doing there. So just really that business consulting is what he wanted.

Michael Cerami (43:28):

And I will just jump in. I mean, I've known Chris a long time and worked with him a long time. And my opening comments, I mean, Chris had one of the more entrepreneurial and innovative outsourced accounting practices that I've come across. So I don't know, he can talk about how, but he was able to move at an incredibly fast pace to build that practice. He was able to innovate and somehow a lot of the obstacles that we talked about in the partnership model did not impact Chris' ability to grow.

Chris Gallo (43:59):

Yeah, we went to just my business. I went from two to $20 million in five years, so really about a hundred percent year over year. And we've rolled a couple other of our actual business entities in under my umbrella now, which is business accounting, very entrepreneurial spirited firm. I think look up, hook up Peter. I mean there's no better entrepreneur, CEO of the year, I think it was, I don't know what Fox News, I think maybe CEO of the year. So that was cool. We're like, all right, this seems really interesting. So it really kind of started to come together again, Midwest entrepreneurial feeling. We didn't have anybody in front of us. We could kind of do what we wanted to do based on what he wanted to see. And we sat in on a number of meetings where we had questions around ownership and partnership and the CFO would be there and Peter would be there. And every single one of 'em of those meetings is recorded. And just to watch him make decisions and say, this is recorded. I can make that decision. Does that make sense? Talking to CFO, he said, okay, let's do it. And it was done.

 Philip J. Whitman (45:05):

So is it safe to say you're a CPA firm in a wealth management business clothing? I mean, is it for the business services business as usual?

Chris Gallo (45:18):

Yeah, it's pretty much business as usual. It's very much business services. So being the entrepreneur and having a competitive spirit, I like to think my client accounting business is going to overtake CPA sooner than later. We'll see. But it's very much business services. We've got investment banking and we're doing a lot with ESOPs for our companies and m and a and client accounting. We still have the audit, but we spun that off into a separate entity. Tax is a huge component of it. And then we've really fit hand in glove with all of the business owners at our current clients. But what I found was interesting is I think the growth expectation for both sides because of the clients that Peter had was going to be astronomical. We really didn't see a lot of that. Yes, we've got business adoption, but we still continue to drive the vast majority of our organic growth ourselves from our old BerganKDV model.

 Philip J. Whitman (46:18):

Wonderful. So we have just under three minutes, so I'm going to steal from Dan. We're going to do a lightning round. And now what I'd like to do, and I'm going to start with Michael, what does the landscape of firm models look like going forward and how different will it be to work at a CPA firm?

Michael Cerami (46:39):

Yeah, so I mean, I wish I had that crystal ball, but if I'm predicting, look, we've said it a few times. There's about 45,000 CPA firms in the us. About 33,000 of 'em are sole practitioners. So it's a pretty big chunk of that. I think largely firms are still going to operate under a more traditional model, the bulk of firms. I think everybody here has agreed with that. But I do think those firms, all firms need to figure out how to move toward a little bit more of a corporate led structure and all the things we talked about. How do I think technology is the great equalizer done right? It's going to bring in a lot of capacity for those other firms to compete, but people need to constantly thinking about that, about culture, about governance, about compensation. I think we're going to have a healthy blend. We'll see when the music stops. Chairs left.

 Philip J. Whitman (47:38):

Thank you, Michael.Chris?

Chris Gallo (47:39):

Yeah, I would agree it's going to be a healthy blend. I think any outcome that's a good one, is a good one. So there's a lot of different paths. I think soul practitioners are going to continue to do that. We run up against, you're too big, you're not here, you're not on site. So I think there is a need for those and they will probably do very well in that space. Exit strategy is going to be interesting. So you're going to have to work forever if you don't have that exit. I believe this, I think upward merger acquisition and growth is going to continue to happen for a period of time. How long? I'm not sure the bigger going to continue to get bigger, but I also believe that there is going to be at some point the creation of a whole bunch of smaller firms again. So maybe earn outs get done, or maybe young kids come back up into the industry and they're like, no, I'm not going to go that way. I'm going to start my own firm. Start my, I think there's probably a lot, there's a lot of good reasons for that. So it's going to be the eighties and nineties all over again, and then big's going to have its place and then Small's going to grow.

 Philip J. Whitman (48:43):

Thank you, Chris. Steve, we got 25 seconds.

Steve Ferrara (48:46):

I agree with a lot of Agree. What said,

 Philip J. Whitman (48:49):

what's the landscape of the models?

Steve Ferrara (48:52):

 I wish I was 20 years younger because I think the next five to 10 years are going to be the most dynamic in the history of the profession. And I think a lot of it's going to be dependent upon what happens with these initial investments. How's Eisner move forward? Citron move forward and it's going to be the first term, but the second turn is where it's going to get interesting. I think change is what we're going to be looking at. And as far as the work environment, hopefully Michael, our friends at the A-I-C-P-A, I think they've gotten the message in this 150 hour rule is going to get backed off of and we can start recruiting young people.

Michael Cerami (49:26):

Don't throw that one to me, Steve.

Steve Ferrara (49:27):

In the US and the profession.

 Philip J. Whitman (49:29):

Yes. Well, I want to thank our esteem panelists. As you can see, there are so many different things that are going on in our profession, and I think one of the things that we're already beginning to see some of the things that people like out of these different models, don't be surprised when you see the outsourced back office for CPA firms that don't do any private equity transactions where they have a fractional team so that they can do what they're doing best. Because I think that's one of the things that a lot of folks really like about private equity, but we are in a changing dynamic environment and don't be an ostrich. These guys all listened. They didn't need to do anything and look at where they are today. Thank you, gentlemen. Thank you very much. Pleasure.