Keynote: The State of Private Equity and the Accounting Profession

Up until 2020, the terms "private equity" and "accounting profession" might have seemed contradictory. Yet, the past four years have brought about unprecedented change and strategic partnerships within the accounting field.

Concepts like PE, ESOPs, Private Capital, EBITDA, IPOs, roll-ups, mega mergers, and shifts in branding and ownership structures have become commonplace. CPA firm valuations have surged, driven by the need for capital to address challenges in talent acquisition, technology, and transformation.

Strategic planning and building the firm of the future are now at the forefront for CPA firms of all sizes. In his keynote address, Allan will delve into these developments and offer bold predictions on what the future holds for the profession.


Transcription:

Daniel Hood (00:11):

All right, welcome, welcome, welcome. Thank you all for coming. As I mentioned, I'm Dan Hood. I'm the Editor In Chief of Accounting Today, and I want to welcome you all to our first ever PE Summit that's PE for Private Equity. It's not if you're a gym teacher or a phys ed teacher. This is not the PE for you that's next door. On the other end. If you're an accounting firm looking to partner with a source of capital to shore up your retirement plans to fuel your growth plans to help you invest in technology and talent, this is the right place for you. If you're a private equity firm who's looking and trying to figure out what all the hubbub is about with accountants or just to meet more accounting firms, this is a great place for you. It's also a great place if you're one of the deal makers, the people behind the scenes, the lawyers, the bankers and such who help facilitate these deals and make them happen.

(00:55):

This is the right place for you, but I should also say it's the right place for a lot of other people. There's a lot of people here from all around the accounting profession. We've got standard centers and regulators, people from IFAC, from the A-I-C-P-A, from state societies, lots of tech vendors are here. Lots of people are interested in the subject of private equity and accounting and how those two are intersecting. It is one of the hottest trends going on in the profession at the moment, and that's one of the reasons we're having this conference is because as we looked around the profession, we realized there were a lot more questions about PE than there were answers. Our team goes to a lot of events around the space and we saw a lot of sessions there be an event would have one session on PE and people would go in and they get a lot of information, but they'd come out with a lot more questions than they had answers.

(01:38):

And when we would talk to some of the people who eventually became the co-chairs of our event, who I'm going to introduce later on, we talked to them and it turns out they were spending most of their time sort of ping ponging between calls where they would explain PE to accounting firms and then calls where they explain accounting firms to PE. And so as we talked to them, as we looked around the profession, we sort of said there is a crying need for a lot of information and a lot of clarity around how PE works for accounting firms, what it's doing for them, what accounting firms can do for PE, what it all means for the profession as a whole. And we said, it's a shame someone should really do a conference about this. If we knew anybody who did conferences, we should tell 'em to do it.

(02:15):

And then we realized that we do conferences and that we kind of had to do it ourselves. So this came about very quickly, which is one of the reasons why we're super, super, super excited to have the turnout we have. This is a far exceeds our expectations. There's a lot of people in this room who are looking for the sort of information we're providing here, but also who are looking. All of you I know are looking to talk amongst yourselves. So I want to talk a little bit about how we structured this event. One of the things you'll notice from the schedule is one that we're all in this room for all the sessions, for all the panels we have. They're all happening here. There's no breakout rooms or tracks or anything like that, so it's all here in one place. You'll also notice that there are lots and lots and lots and lots of breaks, and we deliberately set that up because one of the best ways for all of us to share information is to be talking one-on-one in small groups talking about the things you've just seen on stage about the thing you just heard Allan Koltin talk about in his keynote, that kind of thing.

(03:07):

But also talking about, Hey, what do you do in the field? What can you do for us? What are you looking for? That kind of thing. So we built in a lot of space for that. One of the thing you'll notice we don't do in a lot of our panels and a lot of our discussions over the next day and a half, I have q and a at the end of each panel. There's so much information to share in each of these panels and each of these presentations that we wanted to devote the whole time to it. So we're not going to take questions at the end of each session. What we've done instead is build an entire session at the end of the event. Literally the last session tomorrow afternoon before cocktails is sort of a town hall where we're going to have our co-chairs come up and basically serve to answer all the questions you've built up over the past day and a half. So if you've got questions, things you're not sure about, if you can't get 'em answered by someone you're talking to in the break, write 'em down, make note of 'em, bring 'em to the town hall at the end, and we'll put our co-chairs under the spotlight to answer all your questions in that last hour or so of the session.

(04:02):

The only other housekeeping thing I want to cover is CPE. For those of you who are interested in it, the way it works is you need to get scanned at the beginning of the session. Lizette and her team will be hunting you down and scanning you for your badge to make sure that you're registered at the beginning. Then what you need to do is at the end of the conference, you need to go to the attendee hub or go to account te.com under events, find the PE summit, go into agenda. There's a CPE form there that you need to fill out. You only need to fill out one form for the whole conference, and anything you've been scanned for will show up on that. We're asking you to return that form to us by the 25th, which is I think next Monday. So hopefully there's enough time for that, and then we'll aim to get certificates out to everybody within a week or so.

(04:43):

Thanksgiving may messed that up a little bit, but fairly shortly you should be able to get that. That's all the housekeeping stuff I have to talk about. And so with no further ado, I want to introduce you to our, actually, I do want to make a little bit further ado because I should start off by thanking you, one, thanking you all for attending. I should thank all of our sponsors. That slide was up here earlier. We have a tremendous support from a wide range of sponsors. There are a huge number of people who are interested in this and who support it and who work at different aspects of the intersection of PE and accounting. They've been very generous to support us and help us make this event happen. I want to thank our team who put all this together, particularly Heather Nielsen, who's been a trooper in making sure that all this happens, that we actually have people on stage say in interesting stuff.

(05:26):

But I particularly want to single out our co-chairs because they really helped us shake this event, figure out who should be here, what we should be talking about, what things we needed to focus on, what things we didn't need to focus on, a lot of the structure of the event. So I want to single out Allan Koltin. He's the CEO of the Consulting Group. I want to single out Phil Whitman of Whitman Business Advisors, Whitman Transition Advisors. I'm so excited to introduce Allan. I'm stumbling over my words, but Phil Whitman of Whitman Transition Advisors, and of course Bob Lewis of The Visionary Group. I want to thank all of them in advance, a little round of applause for them because without them, this event would not be what it is. And obviously that's my way of saying if you don't like it, blame them. But for now, I want to introduce the stage. Our keynote speaker is going to kick us off and give a sense of where PE came from, how it came into the accounting space, and what it all means is Allan Koltin, like I said, CEO of the Koltin Consulting Group. Any deal you've heard about, there's a strong chance he's been behind it and been involved with it. And with that, I'm just going to turn it over to him. Allan.

Allan D. Koltin (06:33):

Thank you. Okay, good morning. Afternoon. I don't know what time zone we're in. Yeah, it's great to be here. I can't see any of you. These lights are flashing on me and I can only see a couple of you, Terry. People are dozing off. Let me know. Let me know.

(06:53):

9, 1989, 25 years ago, I was in a room like this. It was the Mirage Hotel. Mike Milken was the sponsor, and it was called The Predator's Ball. Does anybody remember that? Yeah. Yeah. So I guess this is Predator's Ball too, right? We've got accounting firms, we've got private equity, we've got investment, everything here today in 45 minutes or so, talk to you about everything that has gone in the last four or five and a journey is there. I am echoing. Thank you. Thank you. You know what I think it is? I think I've got it in my pocket. Do you want me to take it out?

(07:47):

Yeah, I want to do just a couple intros before I get, and I've got some special people here, family, business, family, family. So Angela, can you stand up? Angela Brooks, I bet a good number of her by name, and she is sensational. Thank you for everything you do. And on her left is Lisa Benson, the global leader, Lisa, if you'd stand up, the global leader of Nexia. And she has this thing called, it's sort of a weekend job. She's our social media maven. So if you like her social media, she is not for hire. Thank you for all you're doing. Donna Cox, who many, many of you know, she's been with me for 30 years. She will be here tomorrow for those of you that want to meet her in person. And off to the left, I've got family over here. I've got my oldest one on the far left.

(08:46):

Jack Koltin. Jack, why don't you stand up? Jack is a newly minted attorney. He's a JD, MBA, just got sworn in last week, and Ru Shapiro and team is over here. He'll be at Levenfeld Pearlstein. And the one you always hear me talk about my son, Brian, right? My son Brian. Brian, stand up. Brian is with RSM, and he's in the transaction advisory business. And not to be left out there. They're very good friend Leo or Leo Grove. Why don't you stand up? And he's with Crow. Yeah. Yeah, good stuff. Thank you. Thank you for doing that. So let's get the party going here. So much to talk about and so little time private equity and the accounting profession history lesson first, if we could, this journey, as far as I know, it started in 2008. There was a firm, I think it's okay to mention, it was called UHY Advisors. They tried to do an IPO in the year 2000. Unfortunately, I think it was the same day as FedEx. And guess which one? The investment public preferred.

(09:53):

But we had a deal lined up. The problem was, and it was interesting, the PE firm was called Mid Ocean Partners individual named Tyler Zack, and we'll come back to that name in a little bit. And it was July, August of 2008 and we decided to go out and raise money. What would've been a problem with doing that in July, August of 2008? Yeah, the banks were closed, so that didn't go. They all went their own ways. And it comes up to about 2011, and there's a new one called New Mountain Capital, which is a familiar name. Obviously. They've done deals with Citrin Cooperman. And then later on with Grant Thornton and I got summoned to New York to meet with their group, and they said, we have a thesis. We have a thesis that accounting firms are the next industry to consolidate. And I said, well, how'd you come up with that?

(10:44):

And they said, well, we actually went to the dictionary and started with A and accounting came up. No, they didn't say that. It was a little more strategic. So they said, call the CEOs of the 25 largest firms in America and see if we can get a meeting fair. Would you believe that 22 of the 25 said no? They said no, because we're a steady Eddie business. This business was founded in 1887 by 27 accountants, and we've been in our own protective bubble, our own shell. We don't need capital. And if ever we did, we'll just go to the bank and essentially borrow it for free. But interesting, three firms took the bait. Charlie Weinstein of EisnerAmper, who ironically became the first owned large accounting firm. Number two was Joel Cooperman, Citrin Cooperman of founder of fastest growing firm in America, first generation. And third was Jeff Wiener of Markham, who you probably all know, didn't do a PE deal, although they did get closed with THL about a year ago until the regulator stepped in and just ended up doing a deal with CBI just a couple of weeks ago.

(11:54):

It died. It didn't go anywhere. And fast forward to 2020. It's April 6th. I'm sitting at the kitchen table. Now we're working from home. Is this a Covid audience? Right? It was there. Okay. And I get an email from a group in California, I don't think they're here today. FFL Partners, great firm. And it says, Hey, I want to introduce you to Caz and John. They've got a thesis that they think there's room for private equity in the accounting profession. Could we run it by you and tell us what you think? And I remember my opening volley with them. I said, fool me once, fool me twice, but not three times. There is no market for private equity and the accounting profession. And they pushed back and they pushed back hard and they said, well, actually, we think a lot of what you do in that compliance side technology is going to replace.

(12:54):

Maybe you haven't been looking at the statistics, but the kids aren't going into public accounting as fast as they used to. And they threw a couple other things at us and we took a run at Eisner Hamper. We actually got it to about the seventh inning and in the end it was just too different. There hadn't been done before, too hard to get their arms around it. Obviously. A year later, Eisner did end up doing a deal with TowerBrook, and then we went to Citron Cooperman, and interestingly, we got to the bottom of the ninth press releases written, and there's this nuance with private equity. I didn't know it. They have this thing where when you are ready to get married, their due diligence, what's our due diligence when we do accounting firm on accounting firm? What do we check for? When you acquire a firm, do they actually do audits?

(13:39):

Do they actually do tax returns? They do this thing called a Q of E due diligence. They validate the authenticity of the EBITDA of the number, and sure enough, it came back and it was about 20% off. You can imagine what was going on in 21. Think about it. Everybody working from home, nobody's spending any money. I mean, if ever there's a time to produce an EBITDA, there's no t and e, there's no conferences, any of that stuff. And as it turns out, they ultimately didn't do that deal, but they would do a deal a little bit later on. Fast forward to the present, congratulations. If I was going to write a book on public accounting and my 44 years in it, I would say that the period 2020 to 2024 will go down as the golden age of public accounting. Anybody agree with that?

(14:31):

I mean, think about it. I want you to look at the ceiling. Yeah, yeah. Look at the ceiling and look at the clouds and look in the heavens because the accounting gods do exist. How many of you took PPP money? I think it's free money. Isn't it pretty cool? How many had employee tax credits significant part of some of the fees you had? I believe it was the first time in 44 years where we got religion, we went out and we raised fees with our clients in a way we never thought we could or believed we could. I'd like to say we really believed we were worth it. I think it was a capacity issue. We had more work than we could handle, and we pushed the rates up. And what did the clients say? Okay, they maybe went for a second opinion, but they found out the firm down the block didn't have it.

(15:21):

We looked at our C clients and we cleaned it out. What do we say to our C clients? We're going to double your rate. And what happened? Half of them left, half of them stayed. Is there any accountants in the room that can still do math? Can you do the math on that? Double your rates. Half the people stay, right? Same fees, greater margins. And what's our second biggest cost after payroll? It's rent. Everybody's getting out of their space or hoteling or cutting the rent drastically. Bottom line, if you couldn't make money in 2020, 21, 22, 23, maybe a different profession maybe. So for me, the cow before the storm is June 20, June 30. I meant 2021. No private equity exists, but there's a lot of discussions. There's a big deal that happened out in Seattle. Bob Bernstein, I don't know if you're here today. I know I was with you yesterday.

(16:20):

There you go. Hey, there's Bob and I'm out. Bob blame this on Bob. Bob called and Bob said, you know what, Allan? How come we can't sell for what our clients can sell? We have this thing, we call it the unfunded chain letter. Come join us. You get nothing. And if you're still alive and you vest and the firm's still around and the industry's around, we'll pay you two times. Your comp spread out over what? 10 years as ordinary income. And Bob was able to get a group of firms for the first time to write a check. Remember that Bob, the first one said here, one times revenue allocated how you want, but you can't do it until they retire, right? That's the deal that's out there. We had a second firm come in there, we won't use names. We'll just call 'em Baker Tilly.

(17:03):

And they said, we can write a check. You know what we're going to do? We're going to take it off the backside. We're going to present value and put it here and take it. And then we had the crazy guy from the Wild West, Jeff Wiener, come in on the Markham private plane and said, amateur hour, here's $10 million cash and here's the rest and the backside. But eventually Jerry Grisko the only one with cash, real cash public company, CBIZ showed up and made an offer. So outrageous, there's a method to the madness. I don't want you to think they're giving away free money. It was so crazy that Jeff Wiener called me on the phone and said, Allan, you go call Jerry Grisko right now and tell him if he'll give us that same deal. The Bob Bernstein deal. We're in. Little did we know in 2021, 3 years later they got the deal.

(17:52):

So I want to talk to you quickly before we get into PE about maybe the future, and I want to talk about talent, technology, transformation. I think trouble, we got a problem. We can't find enough kids to come into this business and we're trying all different things, and I think the biggest thing I've seen the last couple of years is the spike in offshoring. How much work is getting done somewhere else at $25 an hour versus the 125 we have here? The interesting dichotomy, when I talk to private equity, investment banks, financial service companies, we in accounting, when do we ring the bell? We ring the bell when we get a whale, right? A big client. Isn't that the truth in financial services when they ring the bell, when they steal a star from another firm? When I still talk to all of us about the importance of getting talent in the door, we're still in that world of origination of book, book of business, chargeable time.

(18:54):

It'll be interesting to see if that goes away. New model out there. This is our friends at Markum. They put this together. It talks about the difference and sort of what we'll call the alternative workforce, stay home. Parents, retirees, people that just want to work part-time, partners that just want to work. I remember we had in our accounting firm, we had a partner apply for part-time. We said, no, that won't happen. And I think we finally have figured out I'd rather get 50% of a superstar than 0% of someone Wall Street Journal. Interesting. Don't know if you saw the article or not, and I'm going to attempt to read without glasses, which is dangerous, but KPMG US laying off 4% of their US audit workforce to counter fewer voluntary exits. Isn't that interesting? So in 2020 to 2022, what did we have? We had the great resignation.

(19:46):

350,000 accountants in public accounting. 62% of them with six years or more experience set 'em out. But it looks like to some degree, the bleeding stopped noteworthy to see that some CPA firms are experiencing slower than expected levels of voluntary attrition after aggressively hiring people during the pandemic. But get this also of interest is how the audit practices are struggling to find skilled accounting personnel and are now considering hiring prospective accountants and letting them, are you ready for this, Brian? You're not going to like this one. Past the fifth year of school required to get their accounting licensed. Last year, over 30% of new hires at the national firms non-accountants, science, technology, engineering, math. It's a brand new world. I saw my friends at CLA earlier today. They've got something that's absolutely crazy. They've got an alternative workforce arrangement. If you don't want to go through staff, senior supervisor, we've got something called signing director. They also have a third track. Are you ready for this? Tell us what you want to do someday. Well, I don't want to be a partner at CLA. Okay, we can live with that. What do you want? I want to be the president of a bank. Great. We're going to put you in our bank practice and we're going to get you ready to be the CEO of that bank. We just hope when that time comes, you'll remember who got you there and give us the audit work.

(21:16):

AI is the big disturber, right? Carl Riggs and Ingram yesterday, as I'm sure you saw, announced their private equity deal with Centerbridge, with a minority position with Bessemer partners. I will tell you on that deal, that was maybe the longest one I've ever been involved in was well over two years. And in business, sometimes you got to get the crap kicked out of you a couple of times, right? But you come back a little bit smarter, a little bit better. We had that thing happened where the Q of E got challenged. They go out and they bring in a big four firm or BDO or RSM to do the Q of E and friendly disagreement. It's interesting PE people in the room when that happens, you seem to say, Hey, we love you, but the third party says, your numbers aren't the numbers. I think we wish you'd say, Hey, you know what?

(22:06):

They may not be the numbers, but we're still going to love you. We're going to get married. We're going to honor the deal. We had, so a little bit of fun, volley going back and forth, the brain of an accountant. This has been a lot to process in a short period of time. It's a shock to the system. Private equity, we have all these ideas of private equity, we have scores stories of things we've heard from clients, and there's a good number of us in public accounting that are happy right now. If I've learned one thing in over a hundred thousand hours of consulting to accountants all over the world, here's what I've learned. Change in an accounting firm will only happen when the change itself is deemed to be better than the status quo. And right now, the status quo in the words of Larry David is pretty good. Yeah, it really is. So how you, I've had partners say to me, when we have this PE discussion, did we do something wrong? What happened? Why are we doing this? We had back to back to back record years. So it comes at a really interesting time. I think we're coming off the golden age of public accounting, and I look at 25 to 29 and I'm worried because a lot of those gimmes, a lot of those things we did then I'm not sure we're going to get the lift going forward.

(23:33):

I would offer up, I don't think the accounting profession is dead. I think the fourth industrial revolution is hitting us right between the eyes and I think we've got to take it in. I do want to make a comment about private equity. It's not for everyone. When this party is all over, more than half the firms, maybe two thirds of the firms in America will not be PE owned. PE owned is not a silver bullet. If you don't do PE, it doesn't mean you can't be successful. We've got some non-PE firms sitting in this room, and I don't think in my lifetime they're going to go the way of PE, but they're finding other ways to create capital or to figure out how to create the firm of the future. I will say one thing PE did, and if you know somebody in private equity, send them some wine, send them a fruit basket.

(24:25):

I think they raised the bar on our profession. I think they're making it more competitive. I think they're making tougher decisions faster. I think they're taking, I don't want to call it the dysfunctionality, the partnership model, but they're taking it and running it more like a business. I've done what, 50 retreats a year for 40 years? I don't know. It's a big number. Trust me. And I always think of that dynamic of the $8 million six partner firm where any one of the six in the room has the ability to say no, but oftentimes nobody has the ability to say yes. So we look to the future and I think one thing we can all agree on, whether you're independent or not, is we have to create the firm of the future today. And to do that in those key areas of talent, technology, transformation, it's going to cost real money to do it.

(25:27):

Barry Melancon, the great leader of the A-I-C-P-A, who retires at the end of this year said something at an A-I-C-P-A major firm conference two, three years ago in Laguna Beach, never forgot it, and now it seems to be more true than not. He said, if you think about what technology can do, what it's going to cause is the ability to take 200 people hours and get something done at a flip of a switch. And when I heard that, I said, yeah, that means our cost of sales will go down and our profit margin will go up, right? And what did he say? He said, no, no, no, Allan, if you look at the history of public accounting on compliance services, the market will continue to reprice. So I'm not sure we're going to gain from some of those things, but I talk to firms that are 70, 80% compliance and I think they believe in business.

(26:24):

This will last forever. Mark my words. Nothing in business is forever. How do you do it? You increase the capital requirements. A lot of firms out there today, if you make a million dollars, guess what? You leave a million in the business, retain more profits. We've got a little creative here with partner compensation. We've created something at these firms called innovation funds so that the compensation committee never even knows the money existed. We sort of like a bookie. We are a loan shark. We skimmed it off the top, go to the bank and borrow more cash. You may know someone that does this, but everybody talks about it and nobody does it. I know two instances, Jeff Wiener from Markham to compete on cash deals. He went and borrowed $250 million years ago. In 2002 when Anderson New England blew up, Rich Catalano, ultimately the Boston office of RSM went out and borrowed I think $60 million to get those people to sign on, reduce retirement benefits, reduce the value of the deferred comp program, reduce partner retirement, all of the above, none of the above.

(27:30):

It is a crazy, crazy time. I realize this slide's a little hard to read. It's interesting because 10 years ago this slide existed and it was only one column. There was only one column of firms that were over a hundred million. Today there's three. And what's the game? The game is if you're a column three firm, how do I get to column two? And if I'm column two, how do I get to column one? And as we're seeing all kinds of things going on from mergers of equals to private equity to majority minority deals to the creation of global firms, Forvis Mazars RSM announcing last month potentially combination with RSM UK. Wow, a real global firm. And Grant who in June received private equity money from New Mountain Capital has announced a combination with Grant UK and maybe a couple other UK firms. I do believe that the world is going to see more and more true global firms.

(28:35):

I think some of you're thinking, wait a second, G, aren't the big four global firms? No, they're global brands. Every country is insulated legal liability, decision-making, sharing of profits. So it's going to be a fascinating time. There's five more firms on this list right now that are in process. That's the term that PE and investment banks like to use, and I have reason to believe that all five of them by middle of next year will get to a finish line. One of them might actually do an IPO was interesting at the car rigs in Ingram Celebration Party. We were taking questions from the partners and one of the questions said, Mr. Carr, they don't call him Bill, they call him Mr. Carr. They said, Mr. Carr, what's going to happen in five years when Center Bridge, who's sitting up on the stage with Bessemer when they decide they want to leave home?

(29:31):

And I assumed he would say, well, we'll sell to a bigger private equity group. No, no, no. He said, this $450 million firm will be a billion dollars by then and we'll probably do an IPO. So I wouldn't rule out more and more of these kinds of things going on. Let's go back a little bit in time 2021. It's a shock to the system. And if you are like me and you are old enough like me, which only a couple of you are, we can't help but think about the failed consolidators of the late nineties. We seen this Broadway play already outside non CPAs coming into our industry trying to take it over and didn't it fail American Express, the credit card company got in and got out H&R Block. That's who in 1998, we sold our firm to. I think after they got us, they said, we need to do something bigger and better.

(30:29):

They went out and got RSM and RSM stayed with them for 10 years. It was called a service contract. And wouldn't you know it in 2009, RSM said to HR Block, thank you for your service, but we're going to go off on our own. And you can imagine HR Block said, no, you're not. We own you. He said, well, we really only own the tax and consulting business. We thought we would just borrow the audit business if that's okay. Well, one thing led to another, and obviously RSM did an amazing job of buying their company back at a fraction of the price that they sold it, and the rest has been history. But we are creatures of habit products of the past. So for many of us north of 55 years old, we said, haven't we seen this before? Why will it work at this time?

(31:16):

If you hear nothing from me in the time we have together, this is what you need to know. Not all private equity deals will be successful. I think there'll be some home runs. There's already been a couple. I think there'll be some really good ones, but I also believe there will be some that just don't meet the goals of what both parties had hoped for. It's a business. Nothing is perfect in business. But as I think about all of this, I want to make a comment really more about where this profession is going and we all talk about the flip, the five years and this and that, and I'll share with you some data in just a moment that shows I believe that this is not new, that this has been done many, many times before. It just wasn't called accounting firm. It was called wealth management.

(32:09):

It was called insurance brokerage. It was called consulting. It was called advisory. The harsh reality is half the firms in America that want to go the way of PE, right? You heard it the right way. There's nothing worse than a firm calling me and saying, can you help us go PE? That's the first thing I say. I say your profitability. Show me what your compensation is. I would offer, if you're in the bottom half of earnings of an accounting firm, and I have this with PE, they call me on the phone and they say, listen, we're going to pull out. We're not going to give an offer. And I go, what happened? And they say, we don't want to insult them, but the offer won't even be equal to one times the revenue for those of us. A little new to this. Let me give you just a little crash course here and how we price these deals. It's a simple formula. It's called EBITDA times multiple equals enterprise value. Now, multiples, it's been amazing. Good news, if you're thinking of selling, and I don't want to sound like a used car salesperson, but I will tell you they have every year, the last four years been creeping up like a half point. At some point, this party is going to come to an end. But EBITDA is an interesting thing.

(33:31):

Let me freeze that for a second. Lemme just knock some of these out. Everybody asks why private equity is interested in the accounting profession? Here's all the reasons we've heard. It's the one, the second from the bottom though. Remember I said that they've cracked the code and here's where they've cracked the code. I think they looked at the failed consolidators of the late nineties and they concluded that this is a way for the old group to cash out. But if you're young, I was one of those young people, believe it or not, back then, what's in it for me? So what PE did, it was very strategic. They said, let's build this from the bottom up. Let's make this a talent trap. Let's make this so good for the kids that it's almost a reversal that they've got to convince the old group to sign on.

(34:25):

John Jobs. You hear by chance, John, Hey John, how you doing? You're famous. I talk about you everywhere, but now Colin tells me he was the guy, not you, but I'm going to. I know, I know. So Jerry Becker, John John has been in it for two years, right? Atlantic Region leader of the audit practice, right? We're sitting in a meeting in Louisville, Kentucky, MCM, and John has a nice way about presenting, even though he's an audit guy. He says, Mr. Koltin, he says, let me share with the group why I think this is good for me. I'm 43 years old back then. He says, the way this deal works is, and it was fascinating and you didn't insult me, so don't worry. He took out a calculator and he said, now, Mr. Koltin, when Texas Instruments came out with this calculator, I'll bet the original one you had in the eighties didn't have this PV button called present value.

(35:20):

He says, they have it now. You should try pushing it. And he says, if we don't do a private equity deal, here's what's going to go on. We're going to spend the next 23 years, 22 for me of not unlocking any equity. And when I finally get to the finish line, assuming the firm is still around and the profession's still here, they're going to pay me two times my compensation. So let's just say for the fun of it, I'm making a million dollars. I'm going to get paid 2 million. I'm going to get 20,000 of ordinary income a year, and I'm in a 40% tax bracket. If you take that number, Allan, and you walk it back to today, you know what that is, I'll never forget it. He said, it's lunch money. He said, if you think that's going to keep me in my generation, the 20 and 30 and 40 year olds that all want a piece of the rock today, they're wired differently in a nice way.

(36:07):

He sort of said, you're out of your mind. He said, so if we do this deal, I'm going to unlock a seven figure check. I'm going to put it in the bank right now at age 43. I wasn't supposed to get anything for 22 years and in three years don't tell Parthenon, but this earnout we can do in our sleep. We can just go on autopilot. And so in three years when we hit the earnout, I'm going to get another seven figure check. And in about three or four years after that, as I'm approaching 48 or 49, they're going to sell. And guess what? We're partners in NewCo. We have, it's called Para Pasu. We own the same stock and they're going to sell and I'm going to benefit from it. And age 49, think about that. Age 49, I'm going to unlock my goodwill and when they flip it to the next firm, they're going to decide if they want to keep me and I think they will, but damn, they're going to have to give me more rollover to keep me going, aren't they? And heck, every five years I could have three, four, or five monetizations that go on. That for me was like a wow moment. Don't discount today that the kids want a piece of the rock at an earlier age. It's a different world out there today.

(37:26):

Oh, we lost our slides. Okay. Okay. Dan, did you pay the bill for the hotel bill? I gave you the credit card. Okay, okay. That's okay. I'm good. I've done this before. Don't worry. But I do need glasses. Apologies. Thank you. Thank you. So value drivers. Why? How can they take our businesses and make 'em more profitable? Did you ever hear the expression when it sounds too good to be true? It often isn't. Well, the early precincts on these deals that have gone on, every single one of 'em seems to be working. So let me give you my unprofessional evaluation of what I think a great marriage is between a private equity and accounting firm. First of all, I think it starts with a great accounting firm. It starts with a firm that has great leadership, that has strong organic growth, is uber profitable, is built to last, has a lot of next gen talent, if you will, within it.

(38:31):

And what would I look for in a private equity firm? I had look for a private equity firm that understands the people business. If you haven't done this before, I'm not sure you want to be the lab experiment. I'm looking for one that if they say we have great leadership, they're going to let us do our thing and almost be off to the side, they're going to be what we call a resource enabler. They're going to say, look it you were successful before you met us. You can now play on a bigger stage. If you have a major strategic or capital decision, let's talk and you go do your thing. We don't want to get in your way. I say that to you because I've seen that and I've also seen some where it's like a hostile takeover. They're running the accounting firm. So we're going to see all different kinds of things.

(39:22):

Thank you. Thank you so much. As time goes on, this is just a list of the obvious of why private equity is interested in the accounting profession. The next one up is what do they use the capital for? Recruiting talent, stealing stars. You may say that's not capital. I say it is. You've been looking for a great tax planning young partner now for 10 years, right? Well, that star is sitting at the firm over there, but the problem is that tax partner has a $2 million book. They're making $500,000, and if you try to bring them over, you're going to be in a competitive situation with nine other firms. You're going to have to pay that person 650,000 and a signing bonus and get this. They sign that little piece of paper which says they can't take the book for two years. So you are going to pay a lot to get less.

(40:22):

That to me is investment capital for some to solve a succession planning problem M&A. Hey, if you really open up the playbook of Citrin Cooperman and EisnerAmper and their just magical journey, trust me, they've just both hit it out of the park. Citrin was a $315 million firm on October one of 21. They'll close this year at 850 million. How's that? For three years and three months. The EBITDA on day one was 45 million. The EBITDA today is 125 million, 135 million. That rollover equity that was valued at $1.02 per share today trades at over $3 in the flip. If that's the next one to be, which there's a high likelihood it is, it probably will exit somewhere around five to one, a five time return and a five year period. So let me just do simple math here if I can. I know we've got some that are, this is sort of your first entree to it.

(41:26):

Think like this. Think about your firm revenues. You're a $30 million firm. Let's say that you're EBITDA and I'll talk about how we get to EBITDA is about 15%, 15% of 30 million, four and a half million. Let's just say you're best in class. You are just lights out. Let's say that you're a nine multiple, that's a big number. PE firms don't get mad at me. This is just for illustrative purposes. A nine times a four and a half. If I could do math, I'd be dangerous. I'm going to call it 40 million. So here's sometimes how that deal might work. Maybe they'll get 20 million, 50% of it. Think three buckets. There's the first bucket, which is the cash at close 20 million. There's the second bucket, call it 25%, right? And that's going to be the earnout. We just want to make sure you don't go to the beach, hit these growth goals.

(42:18):

You'll get a second unlocking a couple of years later. But it's that third one. It's the third one is where the action is. And I don't know why this is, there is a major disconnect when we talk to accounting firms about this. Honestly, I think it's because we don't think our businesses are worth anything. So this 25% of the 40 million, 10 million in five years, the goal is to five x that number, that's 50 million of value with capital gain. Plus the 10 million of earnout is 60 plus. The 20 million we already got in cash is 80 million. You talk about an absurdity, that's an absurdity. And then go and compare that to what we have today. Can you imagine the dynamic sitting in a room with a group of partners debating whether to do PE or not and then deciding not to, which is fair. One has to do this, but think about the older group sitting there and thinking, this is what it's worth on the outside.

(43:26):

This is what it's worth on the inside. Maybe we should have a discussion to talk about revaluing the firm. How do you think that gets received? If an older partner, great. If your younger partner, take a pass. I love, and you can't just make this up. I had a younger group of partners decide not to do it. And one of them, I said, take the truth serum. Tell me why. It just seems so obvious. What's up with that? And she said to me, she said, well, Allan, do the math. In three years, 50% of the older partners equity will be in our hands. Why don't we just pay him the measly payout right now and then we'll sell it, right? Yeah. Just crazy things in the boardroom. I never heard about the term tag along rights. I guess that's real. Tag along means, okay, you can go sell it after we leave, but we're going to roll the clock back and we're going to be a part of that.

(44:24):

So all the things that go along with it. We've talked about the taint of private equity is still in our profession, a lot of negativity. The majority in the two to one ratio still doesn't like it. Can't get their arms around it. I sort of look at this, if I had to sort of track this out, it would sound something like this 2020 most in the accounting profession when they were talking about private equity referred to it as the plague, not real positive. 2021 is let's kick the can down. Let's see how these early deals go. 2022, you know what? We have a fiduciary obligation to our partners. Let's put a toe in the water and at least find out what's out there. We don't know what we don't know this last year. I'm seeing most firms not necessarily doing it, but for sure, wanting to investigate it and play offense, play defense.

(45:28):

If we're going to stay as an independent firm, what changes are we going to make? Are we going to make changes to our partnership agreement? Are we going to revalue the firm? We need capital. So where are we going to get it? And yes, the bar has raised, we're going to need to make better, tougher decisions than ever before. So when I say to you, this is not new, look at private equity. What they've done in the wealth management business, this is just one slide of many. They have come into this business. I won't say they've taken over. They've formed a partnership and many, many, many success stories have come from it. They're a people business. The assets go home at night. You may say it's not an accounting firm. I'd say it's a professional service firm. It's not that different. And some of these are onto the second, third and fourth flip.

(46:18):

And interestingly, the journey of the flip isn't always private equity. It's sovereign wealth funds. It's big family office was on a call a couple months ago, the Ontario Teacher's Pension Fund. I said, oh, I'm so sorry. I think I got on the wrong call. They said, no, no, it's right. We want in to this business insurance brokerage. They've been in that business and done amazingly well. They've also gone into the worlds of business appraisal, valuation, forensic, all these kinds of things. I think the strategic thing you want to be thinking about is if you want to explore it, how do you want to explore it? There's different options. And I want to take maybe just a little bit of time to talk about those EBITDA. I think I covered that a bit. A big part of how we create EBITDA because at the end of the year, the cash register is empty.

(47:12):

We've paid everything out. You need uber profitable partners. People say, what's the formula there? But in most of these deals, the upper third of the earners are probably giving back more of their, the bottom third, the younger partners may not even take any kind of haircut at all, and those in the middle may be some. And then bucket two is elimination of maybe some people some things. And the X factor is sharing in the synergistic savings of the acquirer. I've coined this term recently. It's called artificial EBITDA. It's EBITDA that doesn't exist. But you get in a competitive process with three or four PE funds and they're all trying to figure out how to game the system. And all of a sudden one of them says, wait, you know what? We have this synergistic savings here. We're going to give you half of it. Throw it in to your EBITDA deals have died as many that have happened.

(48:07):

It seems like a lot. Trust me, as many have died and come back. The flip, I'll come back to in a moment, and I want to thank Stuart Ferguson, who'll be your next speaker from Point Advisory. We sat down one day and we began to put a slide together. What we concluded was there's an entire industry being created here in front of us, and we should try to capture this as best we can. So here's the options firms. One is you can do nothing. We can just stay as we are and keep going. Number two is we can stay as a fiercely independent firm, but we're going to have to come up with capital to create the firm of the future. Today. We can't just keep going like we're going. Number three is let's go find a big accounting firm. We call this the mothership model.

(48:56):

Maybe it's a top 25, maybe not. And we become the blank office of that firm. The benefit is an obvious one. They have all the resources, all the technology, everything's built out, but you do got to sort of line up and you got to change the culture a bit and you got to become part of something larger. The second one, and we've got a good number of you in the room. We call it the roll-ups. And these roll-ups, I'm telling you have hit it out of the park. I was thinking back to 25 years ago when they tried to roll a bunch of us together and it didn't work. But it's a new day today. Some of these firms already are in two years get this. One of 'em is approaching 300 million. One is approaching 170 million, two are approaching a hundred million and two are already at 75 million.

(49:44):

And what it's telling me is in the world of private equity, there's not one way to do it. And even within those roll-ups, there's different deals. In one of the deals, you roll over equity, you can be combined with 15 other firms and you hold hands together and you as well as you do or as well as you don't do, you're in it together. There's other PE models of roll-ups where you're going to sell 70% of your firm and that 30% you own. It's based on how you do you control your destiny. We've had one offset have been crazy. The craziest one was Peter Malu, the founder of creative planning, called me on a day. I'm out in the backyard and he says, is your name Koltin? And I said, it could be. I thought it was a prank call. He says, can you go get me a billion dollar accounting firm?

(50:30):

And I said, look, I see it's 816, that's Kansas City. I'm thinking it's my cousins. They're pranking me and I'm playing along. And finally I said, listen, I sort of got to get back to the backyard here. What'd you say your company name was? Could you spell it for me? I'm trying to get off the call. He says, okay, the first word is creative. I'm not going to spell that. You should know it. But the second one is planning. And there's three Ns in that name. His name was Peter Maki was the founder of the company. And he finally said, you don't have a clue who I am, do you? I said, Peter, I apologize. I thought this was a prank call. He says, well, why would you think that? I said, well, why in God's name would a wealth management firm buy an accounting firm?

(51:08):

That's absurd. He says, why you say that? I say that because you print money and we don't. We try to buy your companies. And he says, well, let me tell you my story. I was a sole practitioner. I was estate planner in Kansas City, and I noticed something about wealth management firms. When the market goes up, you're a rockstar. And when the market goes down, they can't wait to leave you. But if you want to keep these people, there's 23 wealth preservation, wealth enhancement tax planning, charitable giving strategies. He calls 'em prongs. And he says, you got to put those prongs in the body because then when the market goes up or down, they're not going anywhere. Because you are their advisor. You're not just their trusted advisor. You are their most valuable advisor. So we look to the future family offices coming in. Sovereign wealth funds, we talked about that.

(52:02):

Big mergers of equals CBIs, Markham, BKD, Dixon Hughes. We have had more transformation and change people than in the last 40 years. So I think it's a great time to be here. For me, the lab experiment, can PE be successful in the accounting profession? I think has been answered. That doesn't mean it's for all of us, but it sure means I think we need to explore it and figure out what our strategy is. Today is November 20, 20, 24. The strategic question I'd put to you is let's pretend it's November 20, 2027, 3 years from today. I want you to dream. I want you to think about what your business could be, and then I want you to roll it back and think of all the things that have to happen for you and your firm to be successful. I think that will help you to figure out is private equity for you or not.

(53:14):

I want to thank all of you. November 20 is a big day in my world. November 20, this is sort of embarrassing. November 20th, 1984 was 40 years ago. I was 27 years old. I gave my first talk ever. It was a much bigger room. It was the A-I-C-P-A MAP conference in Scottsdale, Arizona. And I remember, thank God the podium was not glass. You couldn't see because both my legs were shaking. I was nervous as hell, but I remember thinking that I knew nothing about anything. And here I am 40 years later, and you know what? I still think I know nothing about anything. I want to thank you all. Buckle up. We've got a great conference coming up for you, Dan. I'm going to bring you back up to introduce the next speaker. Thank you.