Discover why accounting firms are becoming hot investment targets and what this trend means for the profession's future. Gain insights from Crete's real-world experience and walk away with actionable strategies to navigate these forces within your organization.
- The accounting industry is experiencing unprecedented change, fueled by private equity investments, digital transformation, and evolving compliance demands. Join Crete's visionary founder and industry experts as they unpack what it means to build an accounting firm from the ground up using private equity funding. Explore the unique challenges facing emerging and established firms, including the evolving role of independence compliance, the rapid adoption of digital technologies, and the lessons large firms can learn from nimble newcomers.
- The Power of PE Investment: Private equity investment can be a catalyst for growth and innovation in the accounting industry, enabling firms to scale rapidly and access new opportunities.
- The Importance of Agility: Accounting firms must adapt to a rapidly changing landscape by embracing technology, adopting agile methodologies, and fostering a culture of innovation.
- The Critical Role of Compliance: Robust compliance frameworks are essential for navigating the complex regulatory environment and mitigating risks associated with M&A and PE transactions.
Transcription:
Tom Koehler (00:00:11):
Good morning everyone. It's nice to see you at that early stage. Wonderful. It's always a challenge to have a seven 30 breakout session for a topic. My name is Tom Kohler. I'm the managing principal at Intapp and leading the accounting and consulting industry, and I have a very distinct members of my panel today talking about the topic PE and accounting we learned yesterday from Alan. Of course, there are variations of type of investments. Today we're talking more about the rollup and I love to introduce you of course, to my distinct panel. Maybe Leslie,
Leslie Adler (00:00:51):
I'm sorry, introduce myself. Hi, I am Leslie Adler, General Counsel of Crete Professionals Alliance. I joined in January after having spent 16 years as General Counsel of Marcom LLP.
Steven Berger (00:01:04):
Thank you. I'm Steven Berger. I'm a Partner at the law firm of Better Price, and I have been working with accounting firms in all aspects of their practice for more than 20 years, and especially in the last five years, focusing on APSS.
Josh Funk (00:01:20):
I'm Josh Funk, I'm the Head Chief Development Officer for Crete, PA, and I was a practicing CPA for 25 years and tried to go through this journey myself in January of 2022 and it didn't work out and that ultimately is the reason why I'm here today.
Ben Harrison (00:01:39):
Good morning everybody. My name's Ben Harrison. I work with Intapp. I started out in the corporate finance and advisory business and also worked in the private equity industry for a number of years. Didn't participate in rollup of accounting firms, but did execute a few strategies where we pursued similar type of fragmented businesses. So spent some time looking at adjacent industries where we were doing that and founded a technology company actually focused on private equity industry and the accounting and consulting firms that's in tap. So very excited to be with you here today and talk a little bit more about this. Learned an incredible amount yesterday from the folks who were speaking. Good morning.
Tom Koehler (00:02:25):
Thank you. Thank you Ben. I would say we have been educated yesterday by Yosh with his data slides. It was quite amazing to see the numbers and how they analyzed the market, but maybe the first question to you, Yosh, why is that? Why happening now? Also in the in accounting field, it would be interesting to see what's your thought on that one?
Josh Funk (00:02:52):
Why accounting and why not? Yeah,
(00:02:54):
Okay. So when I was practicing accounting, one of my clients, their playbook was a unit level partnership model. Typical fragmented industry, recession proof, recurring revenue, hopefully a simple, more simple business model and past successes and the accounting industry in general checked all of those boxes. So from there the question became why not? And why hasn't this happened before? Because these characteristics are not new to the industry. And ultimately I think there's two answers to that. And the transactions that occurred in 2021 weren't necessarily a law change. There's been this, Steve could tell you that he has worked on an alternative practice structure deal in 1998, but for some reason there's a lot of reasons, but it didn't catch the way it did this time. And then second, you think about the why, not in the accounting industry you have risks. There's a technology risk, there's a people risk, there is what's going to happen with the next generation of talent because as the demographics of the industry change, if we can't figure out a way to motivate the next generation of talent, what do we have from a sustainable business 10, 5, 10, 15, 20 years from now?
(00:04:24):
And ultimately, we looked at all of those things as an opportunity. We think that the next generation of people today probably wants something different than I was being offered 25 years ago. We think technology is an enabler, not a disabler. I used to repair state tax returns by hand. We've enabled, we've modestly embraced change and use technology to become more efficient. And from there, there's also a demand issue. The industry is like we have too much work, not enough people, and then we have to figure out if there's less accountants coming into the profession, how do we solve that problem? And the rule changes with covid, with who can sit for the CPA exam and how we work as a industry have changed over the past five years. And there is the ability to use talent offshore. And if you combine those risks and look at them and figure out how there are opportunities, we think there's big potential.
Tom Koehler (00:05:31):
Well, and what are the key factors then that should guide an accounting firm in choosing between staying independent, pursuing M&A on accepting P and E investments, Steve?
Steven Berger (00:05:44):
Well, it's a complicated process. The a PS structures have been, as you heard, have been around for more than 20 years, late nineties, early two thousands. And they exit UHY CBIS RSM failed attempt at American Express. And I've worked on most of those back then and they around and they survived and they did very well. And nobody paid attention to those as alternatives to growth.
(00:06:17):
Market has changed, technology has changed, things have gotten very competitive. PE provides a huge source of funds for competition, succession planning. Most of the bulk of accounting firms are small. I mean the top 100 firms, if you go down to the top 100 at least five years ago, the annual revenues would be surprising how low that was to get into the top 100. That's all people need. Revenues to compete, go into expand markets, technology attract talent. And I think the model now we can accomplish succession planning and attract talent with incentives that are comparable to other kids coming out of school and starting a new profession that they're getting in other industries like be itself or investment banking or going into industries. So accounting is catching up. So I think that PE offers the opportunities to growth. The other issue, and we can talk about it a little later is accounting firms are unlike other places where PE has put its money, the very highly regulated industry. And that causes some concerns and we'll talk about that in one of your next questions.
Tom Koehler (00:07:32):
And Josh, when you started the strategy of Creed, what was your target model? When you think about the size of the firms, because that would be also interesting, seeing the data from yesterday. What was your pick?
Josh Funk (00:07:49):
Well, the size of the firms and how we think about it. So in my head, and I didn't see the slides yesterday, but in my head we kind of separate firms into three groups. There's kind of group one, which is firms that are probably over 15 to 20 million of revenue and have infrastructure and systems and and they can absorb in smaller firms that may or may not be able to go forward. Then you have a layer in between that's maybe from five to 20 million. And this would've been the firm that I worked at where we had about seven to 8 million in revenue. We had five partners under 45 years old. We were growing at 20% a year. There's no reason why we would've ever had to do a transaction and the firm hasn't done a transaction, but ultimately we needed some help. We are to the point in our growth curve of an entity where we needed to invest in administrative things and go outside of what we had done up to that point.
(00:08:53):
And that's kind of the next layer of the firm. Like Steve said, there isn't that many tier one firms a couple hundred, and then the next 300 gets you to 500, probably gets you down to 5 million. And then there's 45 to 50,000 other firms that I think are in a rough spot on multiple levels on how they're going to move forward today. And that is our government's doing everything that it can to make things more complicated and create more billable hours in the profession. And those same firms that a lot of which are 10 employees are less, do not have the resources to invest into the technology that needed to compete. And if you don't have the technology, none of the young people want to come work for you. So now you can't keep up on education, you don't have the right technology and you can't find people. How do you move forward? And those three layers of firms all have different paths ahead of them. And we think that there's a path where we can help all of those firms in one way, shape or form.
Tom Koehler (00:09:59):
And Steve, when you talk to this mid market, what is the biggest hesitation when you talk to those accounting firms to take PE funds
Steven Berger (00:10:09):
A lot. They're scared of a lot of things. Is the PE firm going to come and change our culture? Is it going to change how we manage ourselves? As I said, it's highly regulated and they're concerned that some of the PE firms might impose limitations on their commitment to quality of the assurance services. And I have to tell you, with my experience working with both PE firms and accounting firms, everybody's rowing in the same direction. The PE firms are very concerned about complying with regulatory requirements. And I think try to assure my accounting firm clients that that's the case. I mean, it's an adjustment in terms of information that's required to go back and forth, but I haven't encountered one experience where PE firm has said, yeah, we don't care what regulators say. They're all very concerned about the regulators and because it's the essence of the firm. So I think that is one hesitation about change. We're not going to do what we used to do. And you've got a lot of partners who are being ready to retire and why would I do this now,
(00:11:21):
I've had, I've been doing this my entire life, why should I change it? But it's a new world, new technology, new businesses, new industries that the accounting firms have to adapt. So I think it's a lot of fear of change and a fear of not having a voice in the direction of what the firm is going. And I just don't think that's true. I think that once you get to the terms of the deal, the implementation, I mean, I have a lot of discussions with the accounting firms about how you continue to comply with the regulatory requirements. I can tell you that their marketing departments hate me because of what I tell them that they have to do and what they can do and they can't do that is necessary to comply with the regulatory requirements. And in fact, the PE firms have said to me, I want to see what we have to do.
(00:12:15):
I want to make sure it gets done. So again, everybody's rowing in the same direction. It's just an education on the accounting firm side of how it's got to work in terms of applying the PE information to their existing processes and getting the PE firm saying, look, if you want to make sure you're especially independence, which is a huge issue that you've got to supply the accounting firm with all the unnecessary information to make sure we don't have an independence violation. And in terms of the regulators, the regulators only have jurisdiction over the accounting firm. They don't right now have jurisdiction over the PE firms. And they haven't tried it yet, but well, that's a concern. Everybody is concerned about what the regulators are going to say. So the whole discussion about compliance needs to start at the same time that you have the discussion about the terms of the deal because it often requires significant investment in compliance resources, both people and technology. And it requires just a different mindset. And it's everybody has to understand that this process, you can need to complete it to get to closing, but it's a real time everyday process.
(00:13:32):
PE firm goes out and buys a new portco. How does that impact independence? The PE firm goes and does a tuck in, you need to look at the new firm again. How does that impact independence? So as everybody probably knows, there's only been one true decision from the regulators on the a PS structure. And that was almost 10 years ago and it was a narrowly focused decision, but at this point, everybody's just waiting to see when the other shoe's going to drop because the regulators, I know I've gotten some curious calls from state regulators about how these things work. You've got the SEC, the PCOB, every state regulatory board, A-I-C-P-A, every state's professional society, the DOL, if you're doing benefit plan audits, there are so many people that have a say in independence and how these things work and you've got to keep all the balls up in the air at the same time.
Tom Koehler (00:14:39):
It's about trust, right? I think it's about trust and at the end, and I found it super impressive, Leslie, the sheer number of companies you brought into your network. How do you see this actually from a compliance perspective, right? We all know independence is table stake,
Leslie Adler (00:15:00):
Table stakes.
Tom Koehler (00:15:01):
How do you deal with that?
Leslie Adler (00:15:03):
Well, as Steve said, the communication starts when we're dating any potential target in explaining if they haven't already formed a PS structure, what's going to be required to complete the transaction? And this misnomer that private equity is only concerned about profit, and I mean compliance is table stakes. I was hired as was our director of compliance prior to us really even having full-time jobs based on where we were at because of what a concern, what level we have this concern at. So we have a director of compliance who comes from Cherry Becker and me from Markham. And lots of experience. We came from firms where we saw independent checks, for example, still being done manually and using technology and leveraging better systems to be able to do that from day one was not even up for decision. So we can do this in the best and most efficient way and gather the data,
(00:16:15):
But this is even, this is such an important issue for us. I just don't know how much I can emphasize that. And we work with people like Steve and other experts in the industry to make sure that we're on top of all the regulations, but this requires a lot of communication with all of the targets we bring in. And they're all incredibly open to it, but we've centralized this. We're not making them do it on their own. We're advising them on a PS structure and compliance. And we're centralizing the independence function in that our firm still input information, but we are centralizing and standardizing the search parameters that we use and leveraging it hooks into our ERP systems. So it's an essential part. And nobody, you asked Steve, what are the concerns of firms coming in? The firms that are joining us know about this and are willing participants.
Tom Koehler (00:17:16):
Ben, what do you think about that? I think we, coming from the technology industry, of course we see the trend from a different perspective because we have a lot of great likes customers talking to us now, and I think we see an increasing complexity. And what do you think about that?
Ben Harrison (00:17:32):
Well, I think this is a really interesting discussion about the complexity and Leslie, the fact that this starts when we're dating and one of the things that's starting to happen to us as a company is we have almost 3000 private equity customers and relationships around the world. And I think there was a comment made yesterday that we've talked to 150 firms. If you look globally at the number of alternative investment firms that are out there, equity credit, that different flavors, there's almost 10,000 of 'em and they control about somewhere between 10 and 12 trillion of capital today. And that's the primary capital source that is powering the non-public markets. And so when you think about that, that's like an incredible force globally in the monetary system. And it's so competitive. We think about the top 100 accounting firms, the top 500 accounting firms. When you're putting money out to work in your competing in a global system of 10,000 firms and your hurdle, the bar that you have to achieve is you really need to beat the public markets.
(00:18:54):
So if you can put your dollar into the S&P and get a eight to 12% annualized return, the alternative markets and the private equity firms are held to a higher standard, they have to get more money than that. And that's how they move the money from your public 401k into their funds. And so what we have found in working with them and in working with them on this topic is they are trying to get really organized. So before, and a lot of the advisory community who was sitting up here yesterday is spending time helping educate them and helping teach them. But what we're seeing is before they even identify a target, before they even get to the table with a group, they're actually doing a tremendous amount of work to come up with an operating plan to say, if we go execute this investment strategy, these are all the things we're going to do.
(00:19:51):
I think to your point earlier, we're going to put in the technology infrastructure that doesn't exist there. We're going to put in a sales and partner led incentive structure under the new compensation scheme and figure out how to do that and incentivize people to stay there and be here and keep growing. We're going to double down on risk and compliance and not make a mistake and put the reputation of the firm at risk. So I think one of the things that we've come to appreciate because we serve the customers on both sides is the private equity community and the sponsored community is really trying to get their act together with a plan in advance of coming to you in advance of working with you. And it was funny, I think it was Steven, but somebody made the comment yesterday, oh, we're three weeks into this relationship and the reporting requirements are super hard, and all I do is I do my spreadsheets back and forth and it's taxing.
(00:20:49):
But I think the amount of complexity that's in the market, the regulatory dynamic that's in the market, this is really real. It's really hard. It's not as easy as just buying a manufacturing business or distribution business. It's more complex than that. And so we're seeing the sponsor community really try and build that operating plan in advance. They're trying to identify the best targets, the ones that will grow and be sustaining businesses. They're trying to understand who can be the platform versus who can come into these models from a tent pole or a rollup or integration strategy and really be helpful to the management teams with a operating plan. So I think for the accounting leaders in the room and the business owners and the people who have a decision to make about the future of your firm, you can really leverage that. If you choose to work with one of those groups, you can be looking at them and saying, well, what's your plan?
(00:21:51):
What would we do? What would we invest in? What's your plan? How would we operate this? And they have tremendous amounts of resource and smart people, and they'll do that work for you. It can almost become an extension of the management team on building some of that strategy and some of that plan, which can be really nice. Then we know that some of the decisions around who you hire, how you incent people, how you pay people, all those things need to stay separate too for good reason. So I think some of the trends we're seeing is because the returns bar is high for those groups because they have to make a certain amount of return for their funds and their investors, they really are working very hard to come up with the right strategy and the right plan before getting married to a group so that they can make sure they hit that bar and that hurdle return. And so we're hearing that because we spend time with the sponsors, we're hearing that for them. They're saying, Hey, this is how we're thinking about it. This is how we're looking about, they're taking a lot of counsel from the advisory community you heard up here,
Tom Koehler (00:22:52):
And that may be something for Yoshi. Again, when you're thinking about that target operating model arm, I guess that you build this arm from scratch in order to help be attractive also for targets. So how do you deal with the technology stack and this new target operating model?
Ben Harrison (00:23:12):
Well, I think regardless of how you choose to capitalize and regardless of how you choose to fund your business and the balance sheet, investing in your companies and growing your businesses and professionalizing your businesses is a great thing. And that's being accelerated. That is being accelerated in this market right now. And so regardless of the plan and what you're doing, I do think what we're hearing, we sell software in the private equity community and in the county consulting community, and we have got an increased demand for our platforms recently. And we were like, Hey, what's going on? And we started to see why that demand was getting accelerated in these markets, and this was a special couple days because both of those groups were coming together that we were hearing that from. So we started to see that happening. And so I think regardless of where you are, the industry is getting accelerated, it's getting consolidated, it's becoming a little bit more institutional in nature, and that gives everybody the opportunity to look at their business and say, what are we going to do to make it stronger and better?
Josh Funk (00:24:26):
Yeah, I mean technology stack in general is something that's evolving, right? There's a misconception that Steve mentioned that private equity wants to come in and cut costs and drive profit, but ultimately that's not our playbook in this industry at all. We're coming in and seeing an opportunity with demand that's outpacing supply and figuring out how can we tap into those demands. And ultimately the answer to that is by increasing the resources that we provide firms it's with, let's think about how the processes and systems of how things move around your firm, what technology you use, what are your pain points, how can we improve them? So that's on technology. We're going to be investing in technology, not taking it away. Compliance. We're partnering with firms that are five to $50 million of revenue. They did not have Leslie in their corner, no firm of that size had their own in-house general counsel or in-house compliance supervisor.
(00:25:30):
That's all they did. We're adding to the compliance resources. And then when you think about the other things, we're adding benefits. We're adding things for the staff, we're adding new opportunities for them. We're looking at how to offshore remote work in a more different manner. We're thinking about how can we provide more resources and give employees more options like we're adding cost because we know we can pick up the revenue that will more than make up for it on the back end. So we're not going at this as a cost cutting profit only type because the industry has the demand. There's just 95% of the firms that I talked to. We're turning down clients, we're trimming our client list and we're figuring out how can we capture that demand and grow the firms in a healthy manner, in a more efficient way that makes it so we're not the industry that's pounding our chest saying, we worked 80 hours, aren't we great last march? That's not what we're trying to do. And we're looking for alternative ways to transform the industry to make it more sustainable, but yet be profitable. In the meantime,
Leslie Adler (00:26:41):
We're leveraging best practices. We are bringing in resources to smaller firms in some instances that they couldn't afford on their own, like learning resources. We're looking for the most talented people within our own network. For example, QC people. Many of the smaller firms don't have dedicated QC people. We formed QC committees where we meet twice a month and discuss issues. And as a result of those discussions, we then take the opportunity to either bring in outside resources if we think there's a need or to circulate policies and procedures where we think there's an opportunity to do that. We're standardizing engagement letters so that we have same rules of engagement throughout our entire network. So we're actually taking the opportunity to bring more resources and better quality to most of our firms.
Steven Berger (00:27:35):
Let me add one thing also. For the accounting firms looking at considering the opportunity, there's a lot of due diligence that goes on or the PE firm of the accounting firm and UE, et cetera, et cetera. The accounting firm should be doing its own due diligence if it's considering offers from various PE firms, and one of them is a compliance, just as Leslie said, it's on the table at the beginning of the date. It should be on the table for the accounting firm at the beginning of the date. What is the PE firm's attitude towards compliance? Are they going to help bolster it? Are they going to work together with you? So it goes both ways and both sides should be interested. And it's not something that we should be looking at the week before the closing. It's got to be done because it's a long process and it's an education, and you have to balance that with a lot of these negotiations are quiet and the firms don't want people in the firm knowing what's going on. A lot of loose lips. It is amazing. The accounting profession, as big as it is, is also very small. Everybody knows what's going on everywhere. And so there's a lot of concern about how many people know about what's going on. And so the firm itself has to take some precautions who they bring under the tent, but the compliance issues and what the future is going to look like is just as much a due diligence item for the firm itself as it is for the PE firm.
Tom Koehler (00:29:07):
And also, there's no doubt the industry isn't a kind of transformation because also you need to rethink or reimagine your delivery, how you deliver. Because technology is, with all these AI stuff coming around the corner, cloud computing, all these delivery mechanisms are there. And from my experience, it's also always a debate in boards to get the adequate funds for it to spend money on innovation. And how do you deal with that and creed?
Josh Funk (00:29:39):
Well, how we deal with it is there's the ability to leverage, right?
(00:29:45):
We're a platform today that it's about 170 million of revenue. And if we want to spend $250,000 investing in something that's going to conform engagement letters and take the process of being able to send out 10,000 engagement letters in 10 minutes, that's okay. But there's the five, $10 million firm, even if they wanted to take the money out of their back pocket that they would've normally taken home in distributions, generally speaking, they don't have a champion that can devote a hundred to 300 hours that it takes to implement a process like that. So firms that are maintaining their independence, the industry is evolving, technology's evolving. How we recruits evolving, where our employees are working is evolving. And for you moving forward, you have to have a champion at the firm that's going to think about these issues and invest lots of time into how am I going to change my firm to keep up with this moving forward so that I'm relevant 5, 10, 15 years from now?
(00:30:59):
And we are able to do that as a platform because of the leverage and the size and the scope of our team because we have people that aren't working in the business, they're only working on the business, but your average partner has a 1, 2, 3, 4 million book of business that they're serving as they're trying to implement the roadmap of the firm moving forward. And that's a lot. And ultimately, when they get into conversations like this and they have things on their calendars and appointments to deal with the administrative opportunities, all of a sudden a client issue comes up and it gets pushed out two more weeks. The next thing you know, a tax season's gone by and nothing happened again. So the ultimate answer to the question is we're able to use the leverage of the organization and having people that aren't in the day-to-day client facing positions, evolve and manage processes and systems with the help of our partners. We're not doing this on our own. We do engage them, but it's only 10% of the work, not a hundred percent of the work for the partners
Tom Koehler (00:32:05):
In the last P-C-A-O-B spotlight, September, I was reading about that there's some suggestion about realtime, near realtime monitoring features in independence. So technology is needed definitely. Right, especially in your case, how much you guys investing actually to modernize or leapfrogs certain processes to make this more lean?
Leslie Adler (00:32:30):
Well, you would know that.
Tom Koehler (00:32:31):
I know that, but you know better now.
Leslie Adler (00:32:35):
No, it's real-time process. It's not a one-time thing that happens just when we look at the target. It's something that we are consistently monitoring. And again, as we described before, that's something that's explained to our firms during the dating process. We are also unique in that our structure is that we're not reporting up to another fund where working with the operators and the money are the same people. So that also makes us unique. But Steve, do you want to weigh in on this as well
Steven Berger (00:33:07):
In terms of the Yeah, it's an ongoing increasing obligation of both sides of this to make sure that independence and is observed, the information is gathered quickly, processed quickly, consistently for the firm. And it's an internal education as well, both on both the firm side and the PE side. Everybody needs to understand the implications of non-compliance. It's serious and it can come in any shape or form from a regulator, from a private lawsuit. And it's not something, the structures are complex. The independence inquiries are complex, and it is an essential part of doing business. Also with firm mobility and individual mobility, you are subject, even if you're not licensed in a particular state, but you're delivering services to a client and stay consistent with law, you are subject to that law that states accounting laws. So you have to assume that you're subject, if you're going across the country and doing acquisitions, you have to assume you're subject to accounting laws in every single jurisdiction.
(00:34:23):
And they're not inconsistent, although though each state has some particular idiosyncratic provisions that you need to be aware of. But I spend a lot of time with my accounting firm clients dealing with regulatory issues and subpoenas and inquiries from state boards. The state boards are now starting to pay attention more than they did. I mean, it's about 12 to 15 states back 25 years ago that issued letters proving APSs, and that's all there is and that people are waking up and it's taking a long time, but it's going to happen. So this whole process of compliance is an essential, essential part of every single transaction.
Ben Harrison (00:35:07):
I'm interested for the Crete team. So the cost of noncompliance and that side of the equation is interesting. Are you using any of it to think about business selection where you may have the opportunity on multiple angles and to say, okay, from an independent standpoint, we actually would pick this over this from a business selection standpoint because of the profitability or the nature of the client that you'd rather have that than being on the other side of that. Is there anything that's leading to making decisions not just for compliance, but also for saying, Hey, this is where we want to be and this is where we want to go as a firm?
Josh Funk (00:35:49):
For sure. I mean, there's a holistic approach to the plan where we're going to build a 500 million to billion dollar organization from a revenue standpoint. And if you think about the firms that are of that size today, we're thinking about how can we construct a firm that 5, 10, 15, 20 years in the future will still be in existence. And that can serve basically all the needs that any potential opportunity, even if firm A doesn't do it, we'll have firm B that can do that and kind of keeping them in the Crete family, but yet letting people practice in their own niches. So when we're evaluating a target, there's a checklist and a scorecard and all the standard stuff that we're looking at that's holistic, and that's one of the many issues, but there's all kinds of things. And then back to the question of investment is as much as the money aspect, which I don't know the actual cost of the technology that we all use, but it's the time, right?
(00:36:58):
We started our first discussion with Intapp in particular in July of 23, and that was before we had any partner. We had no partner at the time, but we knew that this was something that we needed to have in place as soon as possible, as the number of partners increased and we needed to communicate amongst the firms so that independence would take one to three days. So I'm also, I manage the fund of capital that we're using to acquire these, and I went to one of the national firms what our investment documents said we had to do, and it took them five weeks to clear us for conflicts to accept us as a client. I'm like, we cannot allow this moving forward in our organization. This is not okay. So the investment, as much as it is money is time and organization to make it happen. It took about a year process for us to get the systems and processes up and running in real time.
Leslie Adler (00:37:58):
It's not about speed though, it's really we're looking for thoroughness, which is really important to us. But we were thinking ahead about this because we all came from firms where this was being done manually.
(00:38:10):
Brad and I both came from very large firms who had manual systems in place forever. And so then transitioning to something like Intapp was a really, really heavy lift. Not that this is not a lift, but having this in place from the get go we think will be much easier as we continue to grow. We're even looking at the intake module for acceptance because as we talk about quality, we think that standardizing the minimum standards of acceptance will be another boost to the quality of our organization. So we are at a size where we're agile. Josh can add to this, we can look at a software and we can test it in one firm, and we have the ability to focus and to look at more options. The industry, the accountants like Josh on the panel can speak more to this using the same technologies. The 30 years, nothing's really changed and we're hoping that we're going to find new and improved technologies and efficiencies in the industry. Josh, do you want to add to that?
Josh Funk (00:39:18):
No, I think that everybody in the room knows about the technology that we've used the past time, and some of it's improving. Some of it's not. And certain companies, somebody was outward about their dislike for certain vendors yesterday that we were talking to, but things haven't changed. And firms in general, the leaders of the firms are aging. Let's be honest with ourselves. We're accountants, we're conservative, we don't like change. And things have been pretty good. Like Allan was talking yesterday, this has been the best time period ever to be an accountant. Financially. You have been able to do things over the past five to 10 years that have never been able to be due from raising rates and churning your clients and getting rid of people you don't like. And why do I want to change? And that's something that people need to look in the mirror and think about and we think there's some compelling reasons, but everybody needs to figure that out for themselves.
Tom Koehler (00:40:20):
Typically, there's no time to innovate, right? There are so in their operations and think through when you have a green field actually that what you have done, you think about the platform and then you think about, okay, what is my entry level for certain back office functionalities? And in the past, from my experience, people took this back office very okay, cost factor only. Instead of competitive advantage in creating business outcome. I believe nowadays, if you are smart, you're looking into your back office function and trying to understand if you have 10 firms that are doing the same stuff manually, there's a no brainer If you bring automation in that it will help, but it's also culture change. And I would like to shift a bit our focus from technology to culture. When you're talking to these diverse networks, how do you cope with 1120 plus firms and the different cultures?
Josh Funk (00:41:18):
Culture's tricky, right? There's no silver bullet for that. But the biggest thing ultimately is that accounting is a people-based business, right? Whether you like to admit it or not, we're selling relationships. We need people to like us and they trust us. Admittedly, probably 50, 60, 70, 80% of the clients that I worked with didn't know whether I was a good accountant or not. They just trusted me for whatever reason. And for the most part, nothing bad ever happened. So it all worked out for everyone. But we're selling trust and it's a people business. So as we're building this platform, we're partnering with people and generally we partners that are founded, the firms are currently the managing partners. They're going to stick around for 1, 2, 3, 5 years in most of the circumstances. And while that's going on, the risk of culture change isn't that great, but what we really need to solve, and we feel like we've put together something that's fairly special, but is the culture of the next generation of talent.
(00:42:37):
Ultimately five years from now, when the managing partner does decide to leave, who is the next generation of partner who's going to take on those roles and responsibilities? And when we come in on day one, how do we get them comfortable with the fact that we didn't take this opportunity from them, they felt like they were going to take over the reins, they've busted their butts for the past 25 years, 10, 15, 20 years, and now big bad PE is taking this opportunity away from them. And that's not how we think about it at all. We think that we're giving them an opportunity. We're giving them, there's risks in the profession too, whether it's technology, people, government, there's risks. And ultimately for writer, for right or for wrong resources, have the ability to reduce risk. So will you be able to recruit people? We have resources to recruit beyond what you normally have.
(00:43:35):
Will you be able to implement new technology? We have resources to test and negotiate and get you not only technology, but hopefully the right technology. And so we're going to give you the ability, the next generation to still run your firm, still be in control, still have the same financial upside, but also we feel that we can reduce the risk associated with that and increase the probability of high quality outcomes that are positive for starting from those individuals from the next generation of staff and ultimately a better client experience. So we look at it holistically with three levels of people that are not us that we need to please for this all to move forward in the way that we would like it to.
Leslie Adler (00:44:25):
I think we impact culture in other ways too. We've had this discussion amongst our team culture is not just whether you serve lunch at the office or whatever, and we don't necessarily control what goes on in the everyday life of our autonomous firms, but we have buying power, so we have better benefits. So we impact culture. If we give people better benefits, we impact culture. If we're trying to look across our platform and standardize compensation, and in many cases that improves compensation for people and we're improving your ability to grow with us and have an equity stake at some point and changing the partnership model of I work for you for 10 years for the privilege of becoming a partner and giving you my money for you to invest, for me to wait another 20 years, for me to get two times my best, three of six years of comp at ordinary income and being taxed as ordinary income. We're changing culture by changing that opportunity. So we changing culture in ways that we don't always think about as culture. Whether you come to the office and you're just like who the people you're sitting with are. I think that we have the ability to change culture in some impactful ways.
Steven Berger (00:45:40):
Prior to the last five years, succession planning, most of the accounting firms were small to mid-size. And succession planning was an issue. And there used to be a saying that if you didn't have a succession plan, you actually had a merger plan because the partners were going to retire and who was going to buy them out. I think what PE investment has done has changed that calculus and that there is a way of both taking care of the founding fathers or the blood, sweat and tears factor that I call the people that founded the firm. It's their name on the firm, it's their baby. There's an emotional attachment. How do you get the next generation prepared to take that over? And if your succession plan had been that the retiring partners are going to get 50 cents on the dollar for the next 10 years, the younger partners aren't going to do that.
(00:46:30):
It's like, why should I bother? I mean, I can go somewhere else and reap full benefits. So the PE culture has changed the way succession planning works, I think for the better because I think what's happened in the last five years, and I think Alan referred to it yesterday, is that somebody woke up and said, we have to attract, keep the younger people involved. They have to see the future. And I think that is an advantage, and it is a cultural shift. It's a lot of, this is my firm. I grew up with it. It was my daddy's firm, my mommy's firm. You have to be careful with what you do with my name. And I think you can have both people take care of it. But I think the reward and the incentive for the next generation is essential. And I think what the PE structure has done is accelerated that to the forefront and recognize that that is essential for the continuity of the accounting industry.
Ben Harrison (00:47:29):
It's interesting, we're talking about all the things that you can do up and down the operational stack, benefits, comp, all the things that you can impact. But if we look at the history of some of these, not the accounting firms, but some of the industries that have been rolled up in similar models with size and scale comes power. Not just our ability to operate better and more cleanly, but if you go to the veterinary practice, it was a cottage industry. It's now consolidated globally. And if you're in Atlanta, it's owned by this particular brand and this firm, it's backed by private equity. And your bill when you go to the vet is twice as much as it was six years ago because they consolidated. They have a brand, they have a operating procedure that feels a little bit better and more refined. And so I think Allan was, and Steve you were referencing, it's been a good time.
(00:48:29):
You've been able to raise price, you've been able to command price. But I think in the consolidation of the market, you actually also gain power in a little bit of swagger to continue to do that on the front end of the business, not just on the operational side of running it, but actually in your ability to raise price and value, sell the brand and the larger scale that you bring to the market. And I think it's hard to say exactly how that happens in this industry, but if you look at the other rolled up industries, all of the healthcare services businesses, private equity's been through the blue collar trade businesses as well. I had a plumber come our house on Long Island, and it was like $1,100 for the house call. And I was like, that's insane. And I went through it and there's the private equity firm that owns 85 HVAC and plumbing businesses from this zip code to this zip code. And they're running it better. They're commanding price and professionalizing the experience. So I think the operational excellence is amazing and has huge opportunity. I also think that there's opportunity for margin improvement in price and consolidation with the power that you can get in certain geographies and managing.
Steven Berger (00:49:45):
Let me add a little bit of a contrary view, not contrary view, but a contrary point is that I have heard from regulators that they are skeptical about the quality assurance.
Ben Harrison (00:49:55):
Sure.
Steven Berger (00:49:55):
They look at, I've heard when someone said to me, well, private equity went into vet practices or medical practices, and I think the quality of care has gone down. Is that going to happen in counting?
Ben Harrison (00:50:09):
Well, this is the most existential question I think for everybody and for the people who are in the trade in the practice, which is we don't want that to happen. This is the fundamentally one of the most important services and things that it's done to support business and the community today.
Steven Berger (00:50:27):
And that's a misperception. I think people have to get over that. This is not EBITDA over quality.
Tom Koehler (00:50:34):
Absolutely.
Steven Berger (00:50:35):
This is helping to assure quality, but everybody's got to have the right attitude to do that.
(00:50:41):
I think that is the public perception that needs to be overcome.
Tom Koehler (00:50:47):
Needs a bit of communication, I would say. So we have almost nine and a half minutes left. We love to open the floor for questions. If somebody happens a room would like to address this personal question to the panelist volunteers,
Josh Funk (00:51:05):
Anybody on the left side of the room, we can't see you.
Steven Berger (00:51:10):
The lights are pretty bright.
Audience Member 1 (00:51:16):
I'll pick up on that quality theme. How does PE work to maintain quality? I operationally, talent wise? What's the vision or the plan for keeping quality at scale and improved margins?
Steven Berger (00:51:32):
I think that the audit, remember, remember in these structures, the audit firm is separate from the non-audit assets, and the audit firm must be run by the attest partners, the licensed CPAs. They have to have the budget to. And that's part of what I think the process is going forward is that both sides contribute to the budget and they now have more resources to attract better talent, better assurance people, better QC people. A lot of these firms, their QC department is one person part-time. That's not going to fly anymore. So I think the idea is that, and under these structures and in the agreements, the audit firm has to control supervises trains the audit people. So I think that process is not going to change. They just now have more resources to expand the quality.
(00:52:39):
And it's a cooperative effort. I mean, look, the PE firm is going to make money if both sides of the practice make money. So everybody, that's what I said earlier, everybody's rowing in the right direction. And I think that part of the process and the budgeting process every year is what do we need? What technology do we need? What kind of people do we need? How do we make sure that everybody's got the right training, the right CPE? So the audit firm is still going to do what it was doing before. It's now going to have more resources.
Tom Koehler (00:53:12):
100%. And our quality is a top issue for most of the people because you get your internal report every year and onto your audit quality findings right now you have the resources, you're starting to automate stuff. You are using maybe new technologies and you have the funding now. And so the quality aspect for me is actually a positive thing because they have the resources to,
Steven Berger (00:53:35):
And we need to, again, the assurance people need to be rewarded for quality assurance, not churning clients. And I think that still is in the hands of the audit firm. That doesn't change.
Leslie Adler (00:53:52):
Nothing's changed actually about the essential delivery of the services at the core. When you buy a target firm still buying Josh and his relationship with all of his clients, if Josh's quality of the work that he does significantly decreases and we lose his client book of what value is that to anybody? So the essential delivery, nothing has changed.
Steven Berger (00:54:16):
We firm is not getting in the middle of your delivery of services.
Leslie Adler (00:54:19):
No, and we are more risk averse, but we care more about we don't want you to get sued. We want to make sure that the level of quality is there and we want to make sure that you are retaining your clients and continuing to get more, which in this industry is by word of mouth and people learning about the kind of work that you do, nothing's changed about that essential delivery. It's not like private equity is not coming in and hiring robots to do so. We maintain the same desire and we have more resources to make sure it's true, but we maintain the same desire to have quality, to deliver a quality product and to earn the trust of the people to whom we provide the services.
Steven Berger (00:54:57):
Accounting as a service-based business, it's not changing. Quality of service is going to get you quality clients, quality revenues. So the way you do business is not going to change. It'll be better, but it won't get worse.
Leslie Adler (00:55:20):
I don't see it as analogous to the question about the veterinary practice. My medical practice, the doctor who does my mammography was purchased by a network.
(00:55:32):
And not to get personal, but the woman that I've been seeing when I go there, the nurse that sees you first, she told me now that we were acquired, make sure that you come here early in the morning, get the first appointment always. And I said, I don't understand. And she said, because we have so much volume requirements now that we see so many more people that by the end of the day, I think the staff is more tired. And somebody that's looking at your mammography might not give the same attention to it as in the morning. And that's literally what she told me. So you get the first appointment every time you come because their volume requirements have changed. There's nothing analogous to that in what's happening here. We're still buying a business based on, as I said, relationships and the quality of the services we were providing before or we're going to lose the client base that we purchased, which makes no sense to anyone.
Steven Berger (00:56:25):
Which goes back to the comment I heard earlier about looking at the decrease in quality medical practices once private equity got involved. And I don't think that's the same. I don't think that applies to the accounting profession.
Tom Koehler (00:56:38):
That's another question.
Speaker 7 (00:56:41):
I think this is a question to Leslie and or Josh. Can you talk a little bit about, I think, Josh, you mentioned that this kind of capital leads to investment that enables your partners to work more on their business versus in their business. Can you talk a little bit about how partners lives improve, how partners react to be able to free up to spend more time on delivering client service versus anything else?
Josh Funk (00:57:09):
Well, I'll step back to the, I'll go back to my personal experience first. We grew a firm from four people, 40 people. And along the way, one of the partners needed to be in charge of technology. One was in charge of employee reviews, one was in charge of career plans, and one was in charge of the firm bookkeeping. And those were commitments whether they were 50, a hundred, 200 hours. And we split 'em up between the partner group. And the interesting thing about it is we took, I was arguably the most productive transaction accountant that our firm had in consulting on m and a. So we took me away from 2, 3, 400 hours of m and a work and said, because you're good at m and a work and client service, you're now going to be our HR manager. Like, okay, somebody has to do it.
(00:58:04):
And we were able to grow and things didn't completely fall off the track. So we as a CPA profession have been smart enough to fill the buckets and be the leaders in all of these various aspects of running a firm. But I would also argue that we were dumb enough to think that we're the best people for the job because I was never trained to do anything with HR because I was a good accountant. I was defaulted to hr. Ultimately, we're coming in and we're giving you resources, and I'll speak for our partners. They still have the final say on whether they're hiring somebody, but they're not the ones originating the search, doing the work. And we're taking the hiring of a senior level person. Might've been a 50 hour job. We're going to deliver them. Our recruiting department is going to deliver them three candidates that we've interviewed multiple times that are ready for them to make the choice.
(00:59:00):
And it now went from a 50 hour job to a five hour job. They are no longer entering in their own firm financials and paying their own bills. We have a half hour financial meeting once a month and they can ask questions and we'll get them the answers. And what was a six hour a month job is now a half hour a month job. And you still are involved in all the aspects of running your firm, but we are a resource and we have a team of 35 people that are working full time to support 10 active firms. And their job, they have 10 clients and it's their job to do all of the things and make your life better. And a lot of those things, it takes the time you had to focus on A, B, or C. It goes down by 70, 80, 90%. You're still involved at the very highest of levels and not getting into the nitty gritty of the day.
Steven Berger (00:59:51):
I have a client that got sold to a PE firm, the managing partner, and he's still the managing partner, but his life has changed. He says, I have much more time to tend to my clients because all, I won't use the right word, whatever, all the crap that he was doing before, he doesn't have to do now.
Leslie Adler (01:00:10):
One of the things that makes me laugh that excites target firms the most is they don't have to fill out an insurance application ever again because they're on our platform. And those of you that own your own firms that have had to go through that process, it's a big task. So things like that, really HR would make me laugh that Josh said that HR reports to me. It amazes me it at every one of our firms, it's sort of like that somebody got dubbed head of HR with actually no training talent in the area or whatever. And we're playing a very large role in, I always used to say this to people at Markham, why do you want to be involved in firing someone? It's not what you do. Stay in your lane and it's such an unpleasant task. Why would you want to do it anyway? So we offer people that specialize in those things. And from my role as well, I am participating in risk conversations. No question is stupid, call me. Let's go over something so we can avoid problems in the future that they didn't have a resource like that before. So we are definitely taking a lot of things off their plate.
Tom Koehler (01:01:12):
Wonderful. So thank you so much for the insights. We learned a lot about Thanks for having us, your step up and of course we all here and looking forward to speak with you in the video. Thank you. Yep.