PE in Accounting So Far

In this dynamic panel, the three co-chairs of the event come together to explore the transformative impact of private equity on the accounting profession. They will provide a detailed analysis of how private equity has reshaped the accounting landscape, from influencing valuation methods and financial reporting to driving changes in regulatory compliance and operational strategies. Importantly, the panel will address why these shifts are relevant to all firms, even those not directly involved in private equity deals. By highlighting the broader implications and potential risks and opportunities, the co-chairs will equip attendees with the knowledge and insights needed to navigate the evolving environment. This discussion will set the tone for the event, emphasizing the importance of understanding private equity's far-reaching influence on the profession.


Transcription:

Daniel Hood (00:11):

I am going to assume it's difficult to see, but I think most people are in. So I'm going to just jump in because I want to have this conversation last as long as it can because you've got some serious powerhouse talent to talk about private equity. We really know

(00:25):

It's all about. You've had a chance to meet and listen to Allan & Stuart who are fantastic and you'll have plenty of opportunities over the next day or so to button hold 'em and ask them more questions. But I also want you to bother these two gentlemen with your questions. They've got a lot to talk about. We've got Bob Lewis from the Visionary Group. Bob, thanks for joining us. He's inside a lot of deals, work with a lot of private equity firms, work with a lot of other people who are acquiring or partnering with accounting firms. We'd like to have you. Thank you.

Bob Lewis (00:50):

Thank you. Appreciate it.

Daniel Hood (00:52):

And we've got Phil Whitman of Whitman Transition Advisors who similarly like Bob and Allan inside a lot of deals working with accounting firms for years and years and years. Not just PE universe, but all the universal people encounter too.

(01:05):

You gotta say.

Philip J. Whitman (01:08):

Absolutely. Thank you, Dan. I just want to, Dan's going to cut me off a couple times when I'm speaking because I'm very long-winded, but I have a quick story to tell. I was in Las Vegas at Engage and Allan was running late and he was hustling through the lobby and I went up to him and I said, Allan, can I carry your bag for you? And Allan let me carry his bag. And you know what? Now I'm up here on the stage with him. How great is that?

Daniel Hood (01:35):

He never let go of the bag. So he carries it everywhere he goes. If Allan needs to travel, Phil has to go with him. No, that's awesome. Thank you. I want to kick this off just by talking about, Allan gave us some sense of the private equity and how it's changing accounting and what it's doing, but I want to dive more deeply into that. So literally, I'm just going to start with asking each of you to sort of talk about how it's changing the landscape of accounting. Bob, I want to start with you.

Bob Lewis (01:58):

Okay, so it's great by the way. We can see none of you in that audience at all. So no facial expression. So what's really happened, what I thought PE brought into the landscape is it's got an awareness, like a sense of urgency just started to kick into place because if we look at it, Ellen, about four years ago was the major start, right? Average baby boomer was about 64 years old. We've got a succession problem because of what's happened with the labor shortage for a very long time. So now PE started entering the market and all of a sudden great sense of urgency occurred in the marketplace or people going, how do I get out? How do I transition? PE became a very viable option. We're still doing a lot of traditional MA deals with, I'll call it non-PE, even based firms. But to me that was one of the biggest things that happened and I think the biggest driver that's occurred because of PE under this is people really became aware of the succession problems they've got inside their firms. I'm keeping it short for you, Dan.

Daniel Hood (02:52):

I appreciate that. Phil, I just want you to notice that and I go to you tell,

Philip J. Whitman (02:59):

okay, that's It.

Daniel Hood (02:59):

I'm going to cut you off right there, Phil, your sense of how it's changing the accounting landscape.

Philip J. Whitman (03:05):

Yeah, so it's very interesting. I want to say it was right after EisnerAmper did their merger transaction. We got involved at a very small transaction with them and I started looking at this arena dissected the transaction, and to me it was like a whole new world total enterprise value EBITDA. What do you mean EBITDA? There's no EBITDA in a CPA firm. So by the way, just real quickly, and I'm going to do this so I could see everyone. If you are a private equity group attendee, could you stand up a second? Stand up raise. You're a private equity. Private equity. Stand up. Stand up. Okay, everybody look around. If you're a CPA firm, these are the people that you want to meet. These are the people that you want to talk to. But in any event, what I want to say is what do we got 25 people approximately standing up here.

Bob Lewis (03:56):

Not everybody's standing.

Philip J. Whitman (03:57):

I know standing. That's right. I see some of them sitting.

Daniel Hood (04:00):

Some of them ran from the door, but

Philip J. Whitman (04:02):

To date, yes. Say, who is that guy Dan? Give them the hook. But in any event, to date, I've met with 147 private equity groups, 147. They are very, very interested. There's never been a better time to be a CPA firm. Never ever. So what are they looking for? They're looking for CPA firms, like Allan said, profitable CPA firms private equity. They are the white knight that has come riding in to save the day. They have a better answer, they're better answers related to talent acquisition and they've got a better answer related to the succession challenge, as Bob just said, which we haven't been able to solve on our own.

Daniel Hood (04:52):

Alright. Stuart, what's your take on how it's affecting the landscape?

Stuart Ferguson (05:00):

Is that better? I'll just talk.

Daniel Hood (05:03):

Apparently not.

Bob Lewis (05:04):

You're not allowed to talk.

Philip J. Whitman (05:06):

Yeah,

Stuart Ferguson (05:11):

I will just talk. I have a very loud voice. It carries so I don't repeat everybody. I'll focus on two things. I think one of the things that's been fascinating with private equity investment in this space is it brought a different swagger to the CPA industry. But think back 10, 15 years ago, if a CPA firm was in the news, it was usually for a bad reason. It wasn't for a good reason. Now the majority of the news and press coverage of CPA firms is associated to the attractiveness of the growth potential. And thank you. I like shouting. It's focused on the growth potential and the opportunities and the great businesses that have been built by CPA firms. So I think that swagger, just the appreciation for, we've done a phenomenal job building these businesses and there's a reason to be proud of the business we built. I'd say that's number one. Number two, as PE is prone to do, it is a disruptor and it accelerates disruption. So firms are forced to think differently about tech talent transformation, everything that Allan had referred to in his presentation. So I'd say it's those two factors would be the focus area. Hopefully I didn't steal any of your answers.

Daniel Hood (06:19):

Allan, you want to wrap us up?

Allan D. Koltin (06:21):

Yeah, I mean everything that our esteem panel has said, I just think it's a proud chapter in public accounting. You sacrifice your life, you donate your body and your brain to the cause, and we never thought our businesses could be worth this could be worth this on day one and then ultimately could be worth something that much more. I think it's a proud moment, but I'll be quick to move off private equity and talk about non-private equity and say, Hey, a couple things. The bar got raised internal valuations. Look at what the market says this is worth. Maybe we need to change our valuation. And I think the real engagement is going to happen in a couple of years when the PE owned firms have people that have options in stock and units and those are the kids, those are the seniors, the supervisors, the managers, senior managers, and the recruiting war goes on and it's no longer going to be just about it bumping salary or bonus. It's going to be, Hey, they gave me a piece of the rock. I think ultimately that could be a game changer.

Daniel Hood (07:27):

I'm going to throw in one quick point of my own which, and it's all learned from talking to the three or four of you, which is one of the things I think it hasn't happened yet, but I think it will happen over time is that there has been a long-term movement for firms as they get larger, a long-term movement towards the appreciation of the need for a much more professionalized, corporatized form of governance, right? You talked about the problem when no one in the room can say yes and everyone can say no, that's an inefficient way to run a business. There's also accountability issues that accounting firms have been dealing with for years, and I think some of the accountability that private equity partners will be bringing to firms is going to leak out to the rest of the professions. They say, well, listen, if we want to compete with these PE-backed firms who are held to this higher standard of performance, we're going to need to match that to a certain extent. So it's going to be another spur to that. I don't think that's necessarily happened as much yet as it will over time.

Bob Lewis (08:20):

Hey Dan, add one point to that. I think if you look inside a lot of firms that are not PE-backed, when you've got some partners that have a heavy majority ownership in the firm, it can really change the decision-making process inside the firm. And I do believe private equity or upward merger partner into a larger platform kind of firm does solve some of that. But,

Daniel Hood (08:42):

I mentioned that all of you spend a lot of your time taking calls from accounting firms saying, Hey, what's this all about? What's going on here? From all your conversations and Phil, I want you get first whack at this. What do you think that accounting firms don't know about private equity that they should?

Philip J. Whitman (08:57):

So first and foremost, I think there's so much that they don't know about private equity. They may have taken a call from one or two and met with one or two. However, as I said, I've met with 147 PE groups. They are all different. There's not one of 'em that's the same as another. And you could have some that are long holders, short holders, you have some that want majority. We do have some that'll only do a minority investment. I mean, there are so many nuances to it. And then ultimately you look at the scrape and how much money you're getting upfront. I mean, there's just so many moving parts to this. One of the things that I've done, I've made it important to me to spend time with the private equity groups to really understand them because you know what, A CPA firm, a managing partner and the partners of a CPA firm looking to do a transition, it's a very emotional process. It's your baby. You've built this thing and I think everyone, you owe it to yourselves. You have to explore, you have to meet with them, but don't meet with one because it's like Baskin Robbins. It's more than Baskin Robbins. It's like flavor 147. Flavor 147 flavor,

Bob Lewis (10:25):

147 flavors.

Philip J. Whitman (10:26):

Exactly. And we haven't even scratched the tip of the iceberg. Allan probably has a great handle on the numbers. What are there 27 active PE groups that have foundational firms, something like that. And if you look at an EisnerAmper and a Citron Cooperman that maybe they've done 25 acquisitions each, how many CPA firms have taken an investment in private equity, a hundred, 110, something like that. And when we look at it, the AI CPA tells us there's 44,500 CPA firms out there, and a hundred of them, maybe a little bit more than a hundred have already sort of taken a leap of faith that in five to seven years, that's the biggest thing we get. What's going to happen when there is that turn? And I will tell you something, early adopters, some of them getting premiums on being first movers, but we are at the beginning of the beginning in this movement, and I believe that this is something that's going to be here not for the next five years, but for the next 10, 15, 20 years as those younger folks, as Allan said, take multiple bites at the apple,

Daniel Hood (11:48):

But each of those, all that everything's going to be, it's a moving target. It's going to change. It's not going to be the way it's now in two years and three years and five years, it'll be very different, and that's certainly worth bearing in mind. Excellent. Thank you. Stuart, what do you think?

Stuart Ferguson (12:02):

A couple of things. I think when I speak to accounting firms, there's always a question around what is the investment thesis? What is fundamentally driving the interest in accounting firms? And I think there's also a little bit of a disconnect in relation to that investment thesis of what the accounting firm thinks it's selling versus what the private equity firm is buying. The private equity firm is not buying everything you've done to this point in time. It's buying what you're going to do over the next period of time, and it's not a payday. It's an investment in growth and making sure that that's how the accounting firms are thinking about it as well as a factor. I think the other two big questions are why now? What has fundamentally changed in the industry that private equity is now in this point in time over these last four years, shifting its gaze to focus significantly on accounting firms or the professional services industry in general. And then the last big question that I don't think many folks really have a clean or clear answer to because it's being shaped and formed as we speak, is exits. Where is this going over the next 3, 5, 10 years? I mean, all four of us will opine ad nauseum on where we think it's going, but I don't think anybody really knows the answer. It's going to be a bunch of versions of the different answers that you hear over the next two days.

Daniel Hood (13:16):

I want to reinforce the point you made about not knowing what they're selling versus what the PE firms are buying. I think that's a problem that accounting firms have had pre PE with just M&A in general. There was just not an understanding of these people are not coming in to fund your retirement. I think a lot of accounting firms look at it as, well, you're buying my firm because you want me to have a comfortable retirement. That is not why no one's ever bought an accounting firm because they wanted the partners to retire comfortably. They bought it because they saw value and they expect that value to grow over time. And that's important hugely for any acquisition or partnership that you're looking at. That's I think a major point, Allan, I want to,

Allan D. Koltin (13:49):

Yeah, couple comments. The flip, there's one going on right now and I'm sure everybody in the room knows what it is. And it's interesting because when I hear some of the chatter about the flip, why would I want to do a private equity deal? I'm just renting a relationship for five to seven years. Who's the next one? Who knows? Well, the reality is this is a people business and you own it. And as I'm watching this one go on right now, the private equity group is sort of hands off. I mean, yeah, at the end of the day, you're going to have to pay the toll charge for them, but they're really saying to the CEO and the leadership team like, here, here's the ones that we're looking at. You meet with them, you figure it out. And I don't think it's a bait and switch.

(14:37):

I think they're really letting that firm pick who they want to partner with. And they're talking strategically. They said, okay, so you've gone from here to here. We want to get to here. Let's write the marriage agreement. Here's what we bring. Here's what you bring. Let's talk about life together. So I don't think it's like the, you hear this story, I remember 25 years ago, American Express Tax and Business, they were summoned to New York to find out they had been sold to h and r Block. They had no input in it. I think this is the exact opposite. The second I would say, and I think we all see it, Phil and Bob especially, and Terry is the multiples have been moving up. It's sort of a crazy phenomenon. When this started, this was the baseline, and then it was here, and then it was here, and now it's here and there's a top 21 going on, which most of us in the room know and it's going to break the meter again.

(15:36):

And it's almost like you want to say it's illogical, but what's happening now is those big PE firms are realizing this could be the last opportunity. If we lose this one, we're out. But what's also happening, and all of us were warned about this, when one PE firm cracks the code, they will come from everywhere. So we sat in those first couple of years in the top 25. Now we have PE coming from the middle weights, the Welter weights. Jeremy, raise your hand. I know you're out there somewhere. Jeremy Dubbo has a company called Prosperity Partners. Jeremy, I hope I'm not revealing any confidentiality. We looked at all the bids, right, that were owns and you said you're better than 'em. You didn't say that, but you were thinking that and you said, Allan, let's go find one. That's for us. We're a $10 million tax only firm.

(16:27):

And Unity Partners stepped up, Smith and Howard, 44 million, went to the dance, talked to all the bids. Hey, you can be, the Atlanta office. Didn't happen. And they decided to do it and never looked back. And then the Rollups, we didn't really talk much about 'em, but damn, they're hitting it out of the park and it's, come join us. It's a softer landing. Keep your name for a while. Eventually we got to bring you all together and we're going to give you some of that infrastructure, the HR, the technology, the different things. So this industry, and then let's not forget about the BDOs of the world. PE is not for us, but ESOP is, and their people have a piece of the rock. So everybody's doing this differently, but now you're seeing the big stage is coming in, getting anchor firms at the middle weight size, the Welter weight size.

Daniel Hood (17:24):

Right? Just to iterate, we're going to be hearing from a lot of the roll up firms tomorrow. We've got a panel with a lot of them on it. We're also going to have a panel PE firms cover yours just for a second. We're going to have a panel about alternatives to PE tomorrow. Okay. PE firms, you can uncover yours to talk about that. There are options. I want to quick get a sense here, not to be Allan Greensman taking away the punch bowl, but you mentioned the rising multiples and they just seem to keep going up. Is there, just quick from each of you, do we have a sense is that's got to stop at some point, right? At some point they've got to say there aren't top tier firms left to buy. I'm not saying when it will happen, or is there an assumption that at some point that will stop and you can't rely on continually increasing multiples? Is that safe to say? I

Bob Lewis (18:07):

Think that depends on the size of the firm. So one of the things that I was going to add into your question is we all just hit it at the same time, and then you can think about your answer, Phil, keep it short, but okay, so there's a massive resourcing imbalance out there. So when you, if you bring it down to like a 10, 20, $30 million firm as opposed to the really large firms getting a lot of these larger multiples right now, how are they going to compete? You got a $10 million firm with a 30% profit margin, that's a $3 million EBITDA. They make a million dollar mistake on an investment. They only make 2 million partners take a huge hit. If I'm a $100 million firm, I can make a million dollar mistake a lot easier. So I think this resource imbalance is what's pushing a lot of this activity because private equity can bring resources, they can bring capital, they can bring investments, they can open up advisory.

(18:53):

Things I can't afford to do. I can't cut my comp from 500 or 700, whatever your number is. I don't want to take a 50 or a hundred thousand hit so I take an investment. That's where I think a leveling thing is going to be in more of the middle market kind of firms. But that's why I think the answer into multiple is a hard one to answer because if you're looking at a larger firm, it's going to have a larger multiple to it. And it's not just the multiple, it's all the other pieces. But now Phil, have you had time to think about the answer?

Philip J. Whitman (19:19):

Absolutely. Okay,

(19:20):

So multiples are all over the place. When we first started, we would think a reasonable multiple for a small firm, let's say under 10 million was probably in the four to six. That's probably now the five to seven, but we've seen multiples as highest 14, and it's kind of crazy, and I think as Allan said in his keynote, it really depends upon how profitable the firm is and there will be a significant number of firms that simply do not have the profitability to be desirable for a private equity to make an investment. I will say this, that we were or were are working with a firm that got a initial letter of intent from a private equity group at 6.75 times leave behind EBITDA, which was about $5 million. They said No, okay, this PE group was talking to another firm. So they're like, okay. They said no.

(20:23):

Well, then they lost out on that other firm and they came back and their multiple went up to an eight times leave behind EBITDA, and this firm still said no, because this is a PE group that doesn't have a foundational firm yet. Well, the latest letter of intent that I saw this afternoon, that multiple is now at a 10. Okay, so now look at this firm three years ago would've been lucky to get one times gross revenue, 10 million, and now they're getting total enterprise value of $50 million. And PS looking to buy 60 or 70% of it. It is absolutely crazy what's going on. There are those first mover premiums that firms are getting. Obviously there's more risk because if you go with one of those, one of the things that many of our clients have said, they haven't built out the back office yet. What are we really getting?

(21:18):

I could go to this group, my multiple's a little bit lower, but you know what? They have hr, it, finance, facilities, marketing, business development, everything I need. I'm not the Guinea pig. So a little bit more risk, a little bit more return, but be cautious. As Allan said, there are going to be winners and there are going to be losers. I think what we've seen so far, I'm betting that there are going to be a lot more winners than losers, but there will be some losers out there. So you really need to do your diligence.

Daniel Hood (21:50):

Stuart, you want to jump in on this?

Stuart Ferguson (21:51):

Yeah. I look at two dimensions as you think about where's the upper bound hypothetically for multiples. One is we're focused on CPA firms more as they're defined today, as opposed to as we think about that continuation of the diversification to advisory and what are the multiples for firms and other subsegments of professional services. If you look at more of the OCFO consulting type firms, they're pushing high teens if not a bit higher than that. If you look at a consulting firm like a March McLennan public firm, they're trading at an 18, 18 and a half X EBITDA multiple. I think part of the factor is that we're right now thinking about multiples in terms of the point of departure today, as opposed to the growth potential for the assets will be in five and 10 years, which I believe will be substantially higher just based upon the diversification of the service mix.

(22:39):

That's number one. Number two, I think right now there's this belief that there's a certain upper bound on profitability, like ah, the EBITDA margin can't be higher than 20% sustainably for a CPA plus firm. I think it lacks a little bit of imagination. We've seen similar sorts of beliefs in other industries that private equity has disrupted where there was the belief in insurance brokerages, this is the upper bound of profitability, it'll never break through this ceiling. Lo and behold, five years later, it's 500 basis points higher than what the hypothetical upper bound was. So I think we shouldn't underestimate the impact of the technological disruptions, the delivery model changes and how that will evolve in terms of what the profitability of these businesses will be. And if the profitability still has continued upside EBITDA margins can continue to expand and the service mix shifts towards growthier areas. I could see an upward march for quite a period of time.

Daniel Hood (23:34):

But just to clarify, that requires them to make those shifts, to make those. It's not just if you're doing the same thing today in five years, you will not be. Just wanted to clarify. No, but that makes sense that if you make those changes, Allan, I started this all off of your comments, so I want to make sure you get a chance to weigh in.

Allan D. Koltin (23:51):

Well, I'm laughing because the three of us have 12 electronic prods from all the PE groups, and if we say something like out of line or don't mention their name, they buzz. Are you getting buzzed? Yeah. You wondered why kids are here. Multiple hospital is what I heard. Allan multiples too. Yeah, so see, we have to be really careful when we talk about the multiples, which they're doing is every situation is unique and you don't want to walk out of here and someone hears, well, they're trading at X. How come I'm not getting that? Well, not that.

(24:27):

Can I just take a piece of what we talked about a little earlier and just go a little further? I watch the psychology of what goes on in these rooms as we all do, and inherently you have an older and a younger group and I don't think we should discount it because it's very real. The older ones are pretty much already signed up. Why wouldn't they? Here's what I'm going to get over 10 years and here's what I'm going to get tomorrow. You've got my vote. So there's the skepticism of the young ones. So I'm going to give an example of what one firm did, but every firm does it and we need to talk about the currency that the non-equity partners get. So one firm has a program where if you have income partners, when you're an income partner and you retire at 65, you get one times what you're making, right?

(25:21):

So I'm making 500,000, I get 500,000, 50,000 a year. I think we talked about that. Well, this is what that firm did when they did their PE deal. They walked into that income partner who by definition is depressed. Would you be depressed? Well, how come you're do it now? I was going to be an equity partner in three years. You couldn't wait for me. What's up with that? And they said, look, here's a check for $500,000. That's what you are going to get at age 65. We want you to share in the upside, and here's another stock certificate for $500,000 of rollover equity in five years. That should be worth two and a half million. You walked in here without a dollar of equity, you're walking out of here. If you make it through five years, maybe $3 million. And the wisdom with the private equity groups, I don't care if it's a rollup, I don't care if it's a mothership. The wisdom is to take care of the stars, and that's a disruption that if I'm an independent firm, I have to think long and hard. Maybe we need to change our model. It doesn't mean the model's bad, it just means how do we compete and what's our artillery? Artillery is well, you didn't take a haircut on comp. Well, that's only so far so good for so many years. After three years, you have the right to earn your comp back. Yeah, sorry.

Daniel Hood (26:50):

Excellent. Bob, this question started as a question about what accountants don't know about PE and I don't think you ever got a chance to weigh in because we got a little sidetracked there. It was good stuff, but I wanted to make sure you had a chance to weigh in on that before we move. Well, I really think it's the resource and balance. I don't

Bob Lewis (27:06):

Think accountants understand the fact that the money's going to come from other places. So what's going to happen is you're going to be the one standing alone and these three firms have put themselves together and now they have so much more to invest and some more to bring on the table. They're going to find themselves at a competitive disadvantage. And I've heard from clients that we're seeing some of the big four dropping deeper into going after clients that are smaller using technology and offshoring to make that work. I think that's just going to snowball and get stronger and stronger and it'll impact every firm have all sizes really.

Daniel Hood (27:39):

That makes sense. Go ahead. No, that was good. I just wanted to make sure you had a chance to weigh in because we kind of got sidetracked. I want to sort of flip the previous question on its head. We asked what don't accountants know about? What doesn't PE know about accountants? Stuart, I'm going to point this one at you first.

Stuart Ferguson (27:56):

It's a dangerous question for me to answer. I'll focus on two things and it's nuance because this isn't universal. I think it's a spectrum, but I'd focus on one business definitions, especially early days when you talk to a PE sponsor and they're exploring the space and they say they're interested in advisory as one of the areas. And if you saw that chart, I put up advisory means about a thousand different things to a thousand different people. And what's important there is that each one of those different advisory service areas or competencies has different demand drivers. And so what you're underwriting or what you're ultimately expecting in terms of growth is wildly different depending upon your flavor of advisory. So the business definitions is an area I've seen a lot of people sharpen their pencils, get much smarter on. I think that's number one. I think number two is, I'll call it the ethos of the industry.

(28:48):

So it's a little bit of a softer point. I think there's a stereotypical expectation that accountants are all about numbers and I'm a CPI bean counter, so it's not too terribly far from the truth, but there's also a level of commitment to the integrity of the role and the ethics of the role. We play an important piece in the economy. We're the ones that are ultimately determining that there's transparency in that small businesses are supported in local communities, and I think CPAs take that very seriously and I think that's something that folks have appreciated more as they've gotten deeper into the space, the one technical dimension and one much softer dimension.

Daniel Hood (29:25):

Well, I think Allan, you mentioned Barry Milson talking about, I've heard him mention talk about PE a couple of times and that is a point, he's like, this could be great, it could be fantastic, but we always need to bear this in mind. We've got a public service duty, we've got some integrity things that are different from a dental office or a veterinary's office or a hardware store. There is that aspect of the profession and it's crucial to keep it in mind. Allan, how about you? We know you talked to a million firms, PE and accounting. What doesn't PE know?

Allan D. Koltin (29:53):

I think they have to understand that we're trained to be skeptics, whether we're on the audit, tax or consulting side. So when a new idea comes our way, the wall invariably goes up because we're trained to represent our client's best interest. We're not trained to play offense to say what's great about it. We're trained to find holes in it. So that's one thing you should know. The other is I find sometimes PE pushes too hard on the economics, almost like you would be stupid not to take this deal. And while there could be some wisdom in that, one thing I've learned, I was on a plane ride back sitting with someone and they said, what do you do for a living? And I said, I work with accountants. And they said, oh, I feel sorry for you. That must be so boring. And I said, well, it's actually not so bad. It could be actuarials, but when there's a question of integrity doing the right thing versus economics, we will always choose integrity over economics. So to the PE world, understand that's our brain of how we think.

Bob Lewis (31:04):

Absolutely. Bob, I'm going to go with risk, religion and supply.

(31:09):

They don't understand that accountants are a little risk adverse and they do not want to be the first ones through the door Doing this. Religion is, it's not right for me, it's not right for my people. It's not right for my clients. Just like wealth management was for a lot of firms who got out of it, came back into it trying to get back in. That's an issue. But the third part is supply. Now, Phil, I'm going to play into your earlier question. Ready? I'll get the mic. How many PE firms have you talked to? 147.

Daniel Hood (31:35):

One forty seven,

Bob Lewis (31:38):

Hundred forty seven. How many accounting firms are in the top 500? We got a supply issue. Okay, so I've used the slide at a PE event that you were at, Allan, I know if you were in the room or not still, but I said I feel like a bartender right now. Everybody wants a really nice cocktail, but all they have to offer is bush light and it's $75 a can. Okay, we got a supply problem right now. If we look at the top 500, the bottom out around 5 million or so, we know that that's not a hundred percent accurate because there's a much wider base of people that don't reply. But let's just say it's a thousand. I have 147 PE firms trying to shoot after a thousand, and I know Michael Howorth, but the only person in this audience I can see sitting right in front of me, I don't think BDO is going to make another sale that way. They went ESOP model. I'm going to guess maybe. I don't know. I don anymore. I don't know. Maybe Ernst is going to go. Don't want to spread a rumor. Ernst Deloitte have no idea if they're going to go, but the supply is an issue and we're thinning out, which I think also could cost us some of the raising prices we just don't know yet. But interest of time, I'm going to stop on that one.

Daniel Hood (32:41):

I appreciate your restraint. Thank you, Phil.

Philip J. Whitman (32:44):

Yeah, so having met with as many PE groups and facilitated many meetings, and I did this before, can we do it if you're a CPA firm, can you stand up a second? Please indulge me. CPA firms in the room, we need to see who to target. Okay, not we you private equity, so okay, a nice amount. Here's one of the challenges that I face and please don't take this the wrong way. We meet with a private equity group and so many of you are the shoemaker's children with holes in your shoes. I do a partner retreat and you could tell me all the metrics about your most important clients, but when I ask you something simple like what's your a CR? Some people are like, what's that? And I'm like, oh, just take your total collected fees and divide it by the total number of hours it takes to generate those fees because that's the most important metric.

(33:58):

It's more important than realization. Realization is a game. Just whatever you want it to be. I could make it that way. By the way, if I told you I speak to a Cone Resnick partner and they're 54% realization, but you know what? Their average billing rate for a partner is 12 or $1,500. And then some people say, well, so why don't they just say that their billing rate is $650 or $700 an hour? But so many times we get to it's time for you to supply financial information. And this is like it's September 15th and 2023. Financials haven't been completed yet. Now some of the PE groups we work with are very forgiving. They do know and they understand that. But if you're a PE group out there and you haven't yet had a meeting with a CPA firm, don't be surprised if it takes a while to get the financial information. So I think that's something that everyone needs to work on a little bit better is our own internal getting our house in order.

Daniel Hood (35:11):

Makes sense. You want to jump in?

Allan D. Koltin (35:13):

One thing I think accountants need to know about private equity, and please take this in the right spirit. Private equity friends, they are spreadsheet junkies. Don't ask a question unless you want it to go to a spreadsheet, just don't ask. The other is, I remember a call with one of the PE and firms, the CEO, the first 20 minutes that person went on about the insanity of all the things they now have to produce for the private equity firm. And that person was comparing it to the old days where they sort of winged it. They did it the old fashioned way. So the good news is private equity brings a discipline to the process. Don't say you're going to do something and then don't do it. You're accountable for it. You've signed off on it. So it's a little bit of a culture change. People are always worried about, well, I want to protect our culture. And you have to say to them like, look, your culture's been changing forever when you were a $2 million firm. This was your culture when you were 10 million. This is it. You're a hundred million. This is it. You're a billion. This is it. It's always changing. What shouldn't change is your values, how you treat people, how you treat each other. That should be the constant culture always changes. And

Daniel Hood (36:28):

If your culture doesn't include knowing your performance and being able to put numbers on what you're doing, that was probably a bad part of your culture. But I want to stick with that point that you brought up because it actually ties beautifully into my next question, which was about the levels of change that accounting firms that partner with PE firms should expect. You mentioned some of it in terms of accountability and reports and that sort of thing. We hear often when people talk about alternative practice structures, one of the most routine things we hear is they say for people, most of the people in the firm, there's no difference. It will make no difference to them at all. Who they work for, who they report to will be the same the day after tomorrow as today, but there's got to be some changes happening with a firm. Can you give a sense in addition to things you mentioned, what other sort of changes firms should be prepared to make accounting firms should be prepared to make.

Allan D. Koltin (37:16):

And feel free to pin in? I think change is a function of who you partner with. I mean, there are firms in this room that are owned and they're going to tear the bandage off. The new name goes up, here's the playbook, here's how we do billing, here's how we do client acceptance. Here's our tax software. You need to learn it. Here's our audit software. There's no waiting around and you are going to run that play that's called, there's other versions that are much softer. You know what, we don't even have to put out a press release on this. Let's just do the deal. And don't shock your people. Treat it like almost like a banking relationship when you changed from BMO to South Bank, you didn't put out a press release. Let's just do this sort of quietly. And some of the rollups do that and they don't want to shock the system. So culture is as much for the leader, what can I sell to my people, number one? And number two, I don't want to be in the business of flight risks. If I lose people, I got a problem, especially as it relates to the earnout. So we're thinking about what is the best option for us.

Daniel Hood (38:23):

Bob, you want to weigh in. What do you think? What kind of levels of change should firms be prepared for?

Bob Lewis (38:28):

Two things. One is it's not business as usual. I know it seems like a little bit of add-on to what you're saying, but they're not going to change the culture, but they made investment. They expect the investment to flourish. So you're not allowed to block opportunities Now they're not going to come in and make decisions about accounting tax or audit, but they are going to help you run that organization. And one of the jokes I always have internally with my staff, which they a hundred percent agree with, by the way, I realize from private equity, I'm not really a great manager. I'm too soft on people. I don't force deadlines. They bring more accountability at the table. Second thing is it's not a boss employee relationship. There's a lot of perception out there that if you sell to private equity, if you merge upward to a larger firm that all of a sudden you're an employee, that is really not the case because they're not looking for employees, they're looking for leaders to run these firms. And I think that's the two biggest things to look at in terms of change, but the change of how you operate and how you implement processes and how you hit deadlines, that will be much more reinforced. But I know we're running short here in time, so

Daniel Hood (39:29):

We're doing okay, but this is good, Phil.

Philip J. Whitman (39:33):

So I think one of the largest changes that most partners in firms are going to see is you're going to have a lot more available time. I go into a firm and there's four or five partners and one of them is focusing on it and someone else is the head of HR and somebody else is meeting with the marketing coordinator. And so the whole practice management function is now going to be taken over and it's really going to be professionalized. Obviously for the larger firms in the room, you probably have a full practice management team and you probably are doing it professionally, but there are so many firms in the under 10 million range that it's a partner that's the tech guru, and I think you're going to be given a gift of a lot more time that look, if you are working 3000 hours a year, take some of it back for yourself. If you are devote a little bit more time to business development, what they want you to do, they want you to go out sort of like the big four model. We don't want you putting numbers in boxes. We want you bringing in business, spend more time with your existing clients, cross sell new opportunities for them. So I think one of the biggest changes is going to be the gift of time that you're going to get.

Daniel Hood (40:58):

There you go. Spectacular. Stuart, what's your sense of what kind of change firms need to expect?

Stuart Ferguson (41:04):

Hopefully I don't fully repeat what everybody said. I'm going to hit three things that have some overlap, but really a positive thing that PE brings is, I'll call it thought partnership. I think it's worth recognizing that PE firms hire really smart people and for the people in here, hopefully it doesn't inflate too many heads. They hire the brightest minds and they pay them really well and they work incredibly hard and you have access to that entire workforce, that team, that thought partnership, they're going to look at things that you look at and see it differently because their entire job is to look at businesses and evaluate those businesses and think through ways in which to help those businesses grow. They're going to bring those experiences and that capability, much like we develop a capability over the course of our careers, they're going to bring that capability and they're going to help you leverage it.

(41:49):

They also bring the expertise and the benefit of the protection of the capital markets around your business. As you think through what your go forward strategy is, I would say the one thing that it's important to recognize that they will bring it is a stepwise change in terms of velocity. All of the investments are time bound by nature, and so their clock is ticking as soon as the investment closes and there's an expectation that there is a shared sense of urgency and there should be alignment and incentives, but recognizing that it's time to lace up the running shoes is an important thing to expect as a point of change.

Daniel Hood (42:23):

Excellent. Alright, we've got two questions left and eight minutes, little less minutes. So I'm going to make these sort of lightning round style questions. One, Allie, you touched on this a little bit, but Bob, I'm going to give it to you first just because that's the way the order works. Alright. You talked about what it might mean for the next generation of accountants, next generation of firm leaders and how particularly PE firms sounds like from what we hear, PE firms are making a point when they deal with accounting firms and say, listen, it's not just about current partners. You've got to make sure that you're looking at your bench strength and that some of this value accrues to the next generation because we want them to stick around. What does it mean for the next generation? What does private equity mean for the next generation accounting firm leaders?

Bob Lewis (43:03):

Back to that resource imbalance. Okay, what it really needs for the next generation leaders, they're looking at how do I buy out a deferred cob program that is kind of steep? I don't have enough young succession people to buy out the aging partners. That problem begins to go away. In addition, capital becomes available for that firm to be able to go and make investments and do the things they need to do so the young professionals don't have to wait 30 years necessarily to wait to get a deferred comp payout, which I'd like to know what an accounting firm would look like in 30 years. That would be fascinating. Personally, I have a whole strategy on it, but we don't have any more enough time. And it's a lightning realm, but it's really coming down to they have the ability now to do more and to invest more and have more options. I'll keep it short.

Philip J. Whitman (43:41):

Perfect.

Bob Lewis (43:42):

Thank you.

Daniel Hood (43:42):

Phil.

Philip J. Whitman (43:43):

So if I could be the 62-year-old senior citizen that I am, or a 41-year-old in a CPA firm, I would want to be the 41-year-old because the multiple bites at the apple that they're going to get. I'll tell you what, in five years when there's a turn, you know what? You have a new capital partner that's sitting at the table, but you got the same clients and the same business that needs to be continued to serve. And I think even some of those young folks, there's that fearful mindset of, oh, I'm never going to make as much as Bob did. The reality is you'll take multiple chips off the table multiple times throughout the career and you won't have to wait until you're 65 years old to get ordinary income paid out over a 10 year period.

Daniel Hood (44:30):

Excellent. Stuart, what's your take on what it means for the next generation of accounting firm leadership?

Stuart Ferguson (44:35):

I'd say simply the what and the how should change, but not the who and the why. And I'll try to keep it relatively brief. I mean accounting, it's a services business, it's not a product and it always will be a people business. So it's important to recognize that these are built brick by brick. And so yes, what we do for our clients should change, but the fundamental purpose that we serve for our clients. And so keeping line of sight, the eye on the ball is important. And so for the next generation, yeah, you're going to do a wildly different job, but at the essence, you're still enabling businesses to succeed and have confidence in terms of their numbers. So leave it at that.

Daniel Hood (45:15):

Excellent. Allan.

Allan D. Koltin (45:17):

I think for the young kid, you need to talk to him about generational wealth. Jay Alex partners, who's I think on their fourth or fifth flip, you talk to that 60-year-old who's now gone through four sales and each time they've unlocked lots of value. When I talk to accountants, I don't want to say we're scared, but we're fearful because it's so unknown. What does it mean in five years a new partner? Well, we have a choice and 10 years the brain can't process that. There's a scene in the movie, I hate to use this, but I love the scene. Hoosier, gene Hackman, they come into the big arena. You all know the scene for the championship game and the kids are scared, they're looking, they've never played in the place as big. And what does Gene Hackman do? He says, get me a tape measure.

(46:03):

And what does he do? He measures from the free throw line to under the basket and he says 12 feet, just like in Muncie, Indiana or wherever it is. I think we have to have more confidence in ourself. We own the relationships of our clients. We can't be replaced. We are important and will always be valuable. And I think sometimes we do too much worrying about stuff that just doesn't matter. Have confidence in yourself. If you want to do this, don't worry about 10, 20 years, it'll work. Its out. But the advice I'd give to a PE firm is get more of the companies that have flipped 2, 3, 4 times so you can help articulate what that future is.

Daniel Hood (46:44):

Well, I mean I think everybody's waiting, right? We need a couple of firms to have made that flip. Particularly accounting firms. We've mentioned at least once, the fact that accountants like to learn from other accounts, they want to see another accounting firm has done this. They can hear about all the other professional services areas that have done it. But it's when an accounting firm does it that it really counts. But alright, we've got just a few minutes. This was great. Appreciate your restraint on that. Last question. I'm asking for similar restraint on this question. We only got three minutes and then it's cocktail. So this is a serious deadline, which is I want to talk about what does this mean? Why should people, if there are firms are out there saying PEs and free me, I'm not going to be involved in PE. Why should they care? Why should they care about the fact that this generally big trend is happening in the profession? Phil, I'm going to go with you first.

Philip J. Whitman (47:26):

Yeah. So just be aware. New competitors are coming to town with deeper pockets. The biggest challenge is talent and talent acquisition. They're going to pay more, they're going to hire quicker. And that's going to mean there's going to be less of those folks out for you. They're going to provide more for their firms. And what I can say is you need to study them if you're not planning on taking private equity. But as Allan said, there's going to be a lot of people that don't take private equity and there are still paths forward for everyone. So you just need to know who those competitors are going to be.

Daniel Hood (48:02):

Stuart.

Stuart Ferguson (48:04):

It might be a little bit of a cliche, but I think Clayton Christensen's the one who said, disrupt yourself before somebody disrupts you. So I think it's important to recognize that doing nothing is not an option. Putting your head in the sand and assuming that it'll pass by is not a winning solution. So I think whether you take capital or not, recognizing that the ways of working need to evolve and employee value propositions, client unique selling propositions, all those things need to be updated and refined.

Daniel Hood (48:30):

Well, I mean we talked a lot of things you talked about in your presentation about where the value is going to come from. That's available to firms. Firms that aren't involved in PE can try to unlock that value, but they have to do something to unlock that value. It's not just going to happen. So excellent. Alright, Allan, I think I got you.

Allan D. Koltin (48:46):

If I was, and there's firms here. I had lunch today with two of America's most successful CPA firms. They know who they are. One's a top 10 and one's a top 30. I said to them, I don't think in your lifetime, my lifetime, you're going to do a PE deal. So why are you at this conference? And the answer was because we want to know what the competition's doing. We want to stay ahead. We want to figure out what we have to do. And I said to one of the firms, I said, well, here's my 2 cents. I think you should look at your retirement program and maybe throw it out the window and start with something brand new and have some allocation where the kids can get something sooner because the kids down the block at the PE owned firm are going to have that.

Daniel Hood (49:28):

Cool Bob.

Bob Lewis (49:30):

It's between me and drinks. 37 seconds. Okay. The re-engineering that we've all talked about. So if you're going to remain independent, you've got to look at this and how do I make myself look attractive to the open market? Because no matter what, I need talent. I'm not going to be able to attract talent if it looks like I'm doing some basic boring commodity work. There's a perception in the market right now from the younger generation that AI is going to come in and it's going to wipe out tax and accounting and auditing. So what's left? More advisory focus, more direction and consulting. If we're not displaying that, we're going to be in trouble. And one easy way to look at it, go look at your website and then go look at your LinkedIn account and go, oh, I haven't posted in seven months. That's where the younger generation is going to go. Two seconds. We're done. We're ready. Get that I hit it.

Daniel Hood (50:14):

Well apparently we got six extra. No is counting backwards. We're going

Bob Lewis (50:18):

Now we one the other direction.

Daniel Hood (50:19):

So we've got another 15 minutes. We're going to keep going. No, I appreciate it. Again, thank you one for all of your insights, two for your discipline in those last couple of questions.

Bob Lewis (50:27):

It's a tough one. I know.

Daniel Hood (50:28):

It's been tremendous stuff. Like I said, we're not going to do q and a at the end of each session though. If you can buttonhole them during the cocktail, feel free. I just put targets on all your back, sorry about that. But we are going to have at the end of tomorrow, literally a town hall, mostly q and a session. So bring your questions to that if you can't get 'em answered between now and then. But for now, gentlemen, thank you all. Fantastic stuff.

Bob Lewis (50:49):

Thanks.