Structuring the Deal

In this panel, accounting firm leaders will share key aspects of how to build a PE deal and make it work, including how to figure out what you want from private equity; how to build internal alignment and get buy-in from your partner group; how to find and vet PE firms; how to share the news with your employees and clients, and more. Attendees will gain valuable insights into what makes a successful partnership and how to navigate the complexities of private equity deals.

Transcription:

Bob Lewis (00:11):

Hey, good afternoon everyone. So we've got two people here who have gone through some serious transactions already. This session is intended to talk about the process, not why they did it, but what they did. How did they decide who to go after? How many people did they talk to? What was their decision process and actually making a transaction occur. Now we know it's snowing outside, so I think we're going to have enough cocktails at five o'clock for probably like 300 people. So I'm going to guess that all 40 of us will have a great time drinking, but anyway to kick this thing off. Let's start with introducing who our guests are. They already know me. I've been up here enough times. Who's this fine young looking man to the right of me.

Richard Kopelman (01:00):

Talking about Jeremy?

Bob Lewis (01:02):

Yeah. Yeah, Jeremy, not you. Yeah, Yeah. Hit it. Hit it, Richard.

Richard Kopelman (01:05):

So good afternoon. Hope everybody is awake after lunch. Not going to doze off. We got to keep him alert here I am Richard, legally, my name is Richard Berry Aprio Kopelman. I'm the CEO and Managing Partner of Aprio, headquartered down in Atlanta, 25 offices across the US, Philippines, Columbia. We completed a transaction about 110 days ago with the fine firm of Charles Bank, headquartered out of Boston. I've been with the firm for 32 years and managing partner for the last 12.

Bob Lewis (01:39):

Jeremy.

 Jeremy Dubow (01:40):

Fantastic. So unlike my colleague to the left, my middle name is not Prosperity, but I am Jeremy Dubow, the

Richard Kopelman (01:49):

I gave you that tip.

 Jeremy Dubow (01:50):

you did give me that tip, which I appreciate. Jeremy Dubbo, I'm the Co-Founder and CEO of Prosperity Partners. We are based in Chicago about a mile away. So just a quick tip for everyone that is heading to the airport later today for your flight. It's going to be a couple hours with the snow, so I'd consider the blue line if you're looking for an alternative. Aside from that, Prosperity Partners was founded in 2003. So we've been in business for 23 years. We have about 120 professionals, five offices throughout the country and I've been CEO and Managing Partner for pretty much all 21 years.

Bob Lewis (02:30):

So to chip in on what Jeremy said, if you're going to take the blue line, make sure your valuables are very secure, just letting you know that. Very secure. Don't let anything hang loose. Alright, so to kick this thing off, what problems, and we're going to start this first one with Richard, what problems where you're looking to solve, what opportunities were you looking to pursue when you decided to transform from your old firm to your new firm structure?

Richard Kopelman (02:58):

It's a great question and I'll talk more about what the future opportunities were and what we were looking to do than more so the problems. We are today a 72-year-old firm, and we, by the way, the name story, we changed our name seven years ago to Aprio. So for those of you who are licensed accounting firms or want to change the name of licensed accounting firm, just make sure someone changes their name so you can get licensed around the country. Fundamental trick to change your middle name. So we were a firm that was, we had no debt. We had deferred comp obligations that were extremely manageable. For us, it was about how do we build the firm of the future? How do we continue to make investments in technology hiring excellent lateral talent? We've actually completed nine lateral hires, partner hires in the last 110 days since we closed our transaction. And we continue to do that in an outpaced rate and accelerate the M&A and accelerate just our overall 2030 strategy was what we were looking to do. We wanted to abandon and move away from the deferred comp model, the mindset of being stuck on this is what I'm making and this is what my income is going to go down by if I make X investment. And we wanted to move to a model that was focused on creating value for the business, creating value for the owners, and growing the enterprise.

 Jeremy Dubow (04:35):

Those are all fantastic things and I think those are things that we think about at Prosperity Partners as well. But we came from a bit of a different perspective in that we were a small firm, so we were a small firm that had essentially first generation partners built our business from scratch and we had turned into a really successful firm with high profit margins, strong revenue, strong revenues per partners, some of the metrics that we've been talking about in the 24 hours that we've been here. But we were looking at our future and we were trying to understand which direction should we go, should we continue to be a strong profitable firm that was successful in creating partners within our ranks, having some succession, which is something that a lot of the smaller accounting firms struggle with. But we also realized we were at a crossroads in terms of a couple things, and these aren't going to be news to any of you people obviously we're in a labor constrained environment, but more so than that, we wanted to create a place where people wanted to be, where they had opportunities to build a strong career and hopefully would stay for a very long time.

(05:43):

But we also had to find ways to generate liquidity compared to the existing model that we've been talking about here. Secondly, no surprise to any of you as well. Technology is transformative right now as a tax focus firm, initially we were trying to find ways to be much better with our tax preparation process. How can we do more with less? And as a small firm, you make the changes that only cause a 10% improvement every year. So we're looking at it and we say, well, how can we make changes that instead of making a 10% improvement increase to a hundred percent? How can we be transformative in our business? And when you're in your standard partnership model, it's really tough to do that. And why is that? Because all the partners are trying to take all every dollar out of the business. We considered private equity transaction, we closed ours in April of 2023 with Unity Partners out of Dallas. We considered that because it would allow us to think about people differently, number one, and also be transformative in technology. And since we've done our deal, we've done both of those things really successfully and we have a very different business as a result. And we think it'll allow us to be the firm of the future that Richard was talking about. But it took that kind of step, that type of risk to allow us to move into the next level and we're pretty happy in the direction we're heading.

Richard Kopelman (07:12):

Can I add one thing?

Bob Lewis (07:13):

Please.

Richard Kopelman (07:13):

I'm just going to add one thing. The other thing there is one thing we wanted to avoid and we've watched firms across the country execute on the sale of parts of their business because the business was growing at a pace that an evaluation that didn't align with the buyout and deferred comp model, AAV, what is it, AAV model, all these various models that people have, they all boil down to the same thing, three x roughly of partner income. We wanted to do away with the mindset that we're going to have to sell this asset in order to monetize it before a group of partners retires and we retire. And we've seen partners, we've seen firms that have just robbed their younger partners of the ability to serve clients the right way. And this model is allowing us to retain those assets, grow those assets, and invest in assets like that which don't align to the traditional model.

 Jeremy Dubow (08:12):

I'll add to that because I think it's a great point. A lot of people ask me, the first question I get asked by pretty much everybody is Why did you do it? Come on, tell me really why'd you do it? And so with a room of 300 of my closest friends, I'm sure I can just tell you exactly why I did it. And it starts with certainly the business owners wanted to generate some liquidity. There's no doubt there's some element of that. But I got to tell you, standing up here 18 or sitting down here 18 months later, there's also this shot of adrenaline that it gives you for changing the way you run your business. So a lot of the business owners here who have been running their own firm, have been leading firms for 10, 15, 20, 60 years, whatever it happens to be.

Richard Kopelman (08:58):

You're not that old.

 Jeremy Dubow (08:59):

Well, you're not that old, but the firm's been not for a while. And so you've been doing it the same way. You know how to run a business, you've got a good firm, you're thinking about the same things, making a change in the type of change that involved a private equity investment. A financial sponsor in our business was absolutely this lightning rod of excitement that it's not just coming from me. The entire firm feels it. They're bought in, they're excited about it, they're focused on the right things. And we think that absolutely increases our retention rate and creates a massive difference in the marketplace. So can't go without saying that. It's fun, it's exciting, it makes you think about your business differently.

Richard Kopelman (09:40):

I made a decision this morning and one yesterday, and I told the people that I was making the decision with at the firm, we would never, ever had made these decisions under the old model. Just never wouldn't even have thought about stretching as far as we're stretching on some things.

Bob Lewis (09:57):

Well, I'm uncomfortable. I've never sat this line without speaking. You go so much against my grain. Want us to, should we ask you questions? No, we're good. We'll keep going. So you've kind of answered part of this, but I'm going to hit this before we move on to the next question. What was your top maybe one or two priority in the transaction? I think you've kind of hit some of this, Richard, but Jeremy, let's start with you. What was your top one or two priorities in this transaction?

 Jeremy Dubow (10:22):

Look, the top three were people, technology and infrastructure. It's funny, when we did our deal, we thought that we had a robust infrastructure in our office. We were excited about our HR team and our IT team, which of course was outsource rather than in-house in all of the elements. Our finance team, we were a bunch of accountants. We thought, hey, our financial controls and our metrics are fantastic, and you do a transaction and the first thing you find out really, really quickly is that all the things that we thought we did really well, at least on the non-running and accounting firm standpoint, we didn't do all that well. We weren't all that good at it. Our financial controls, our financial metrics, our KPIs, our HR team, our funnel for bringing in people through the interview process, none of that stuff was all that great. And so certainly with our private equity sponsor, we spent a lot of time in the first six months really creating robust infrastructure. And the result of that is we've got a much broader and a better business than we ever could have had. These are all things that I didn't quite fully appreciate, but I certainly do today.

Bob Lewis (11:32):

Richard.

Richard Kopelman (11:33):

Yeah, we set out with some very interesting priorities. Some of it is because over the last four years we had grown the business by four x. We had gone from 132 million to over $400 million between 2020 and the end of 2023. And we wanted to retain the mosaic of the firm that we had built with all of these mergers. And that was something that was coined to me about the organization a couple of weeks ago in a meeting by somebody else. So I took it from them and it's been very helpful in describing our business. And so we wanted to remain a platform that was, we set out on this process. That was one critical item. The other was we wanted to retain the partnership structure. We've seen firms that have become C corp and they've become, or maybe that you are today and have gone from K ones to W twos and they don't feel as engaged.

(12:34):

They don't feel like they're really the owners of the business anymore in the same way. And we thought that was really important. And then back to something I mentioned earlier, we didn't want to sell our wealth management business. We've continued to grow and scale that business. It's how we're serving our mass affluent and our affluent clients. And it's critical to how we view the relationship between the advisor and the CPA and the client, our privately held businesses and the individual clients. And we wanted to make sure we could continue to do that and provide that service. And we've watched, it's been all over the papers. Lots of firms have sold their wealth businesses before they've done transactions or immediately after. And we wanted to retain that and we also wanted to have a lot of, we wanted to control the day-to-day operations of the business and make sure we had great controls in place.

Bob Lewis (13:26):

So Jeremy, what other alternatives did you look at outside of private equity, if any? I mean, what were your other options that you crossed off the list eventually?

 Jeremy Dubow (13:36):

Yeah, of course you don't just jump into a private equity transaction and say, this is the only thing that I'm considering. We spent a lot of time looking at our alternatives, including can we accomplish our goals on our own? Obviously that's the first alternative you consider, which is we're running a strong business, we're profitable, we've got strong clients, we've got the right people. Why would we do anything? Everyone is moving in the right direction. We feel really good about the business in and of itself. But as I mentioned earlier, there's still some problems there. We're not making the changes that lead to transformative technology. We're not building the infrastructure. How do we retain people? When Richard next to me is trying to poach them every day, he's like, how do I make my business insulated? It's alright.

Richard Kopelman (14:28):

Just for the record, I don't think we've recruited anybody.

 Jeremy Dubow (14:30):

You haven't. You have?

Richard Kopelman (14:30):

Not yet.

 Jeremy Dubow (14:31):

Not yet.

Bob Lewis (14:31):

Well he is now. This is going to happen for sure,

 Jeremy Dubow (14:34):

But how do I insulate my business from everybody else who is pinging my people on LinkedIn seven times a day? And if you don't think that's happening, that's exactly what's happening

Bob Lewis (14:47):

A hundred percent.

 Jeremy Dubow (14:47):

And so you've got to make your firm the destination. And so I felt like we were running a good firm. I felt like we were a little bit of the unicorn that people talk about of first generation independent. We didn't have a wealth advisory business, one of the few firms that didn't. And so in some ways that was attractive to a lot of people. And so I didn't think I could do that on our own. I didn't think there was enough of a differentiator without doing a private equity deal because private equity allows us to issue equity to all of our people in our organization. We have an employee purpose plan where from top to bottom, everyone shares in the upside of the firm, whether it's through some sort of profits interest plan or management incentive plan or a stock option plan. Everybody participates so everybody's rowing in the same direction.

(15:37):

When there is another turn of this business, everyone is going to celebrate at the same time. So that was really, really important to me. Now, beyond private equity, we certainly looked at other avenues, no doubt being in Chicago, being the firm that we were, we talked with some of our larger competitors. They were interested in having us be their Chicago office of their business. I think Allan Koltin might've mentioned that yesterday at least briefly. And we ultimately turned them down. We felt like we could be a platform business. We thought we had the right people who have the adaptability and flexibility to really take this and run with it, which includes growing organically and inorganically. So to some extent, the simple answer to the question is we considered all of the alternatives including doing nothing. Which by the way, for all the accountants who are running accounting firms in here, I get it. It's super easy to do nothing. This is definitely the more challenging path, but I also think it could be the really rewarding one. Yeah,

Bob Lewis (16:39):

Before Richard goes that doing nothing thing I got to tell you, that's really not a good option. You got to do something, even if it's remaining independent, takes steps to remain independent. But Richard, please,

Richard Kopelman (16:49):

It's funny you mentioned that because I was with someone recently. I meet with lots of managing partners of firms and lots of partner groups around the country. And this managing partner said, we have a plan. Our plan is we are going to do nothing for at least four years and we're going to maximize partner income for four years and then we're going to sell it and let someone who's already made all the investments come in and rescue us. And I said, so your Selma and Louise. And so I call it the Selma and Louise plan. It's not a bad, at least I complimented them for having a strategy. At least they knew what their strategy was. As far as options, yes, we looked at everything. We looked at merging up, we looked at debt recaps. That didn't really work. So anybody, I've met a few people who are thinking about not here, but I've met people who are thinking about doing a debt recap. The problem is you do the debt recap and now you're at a capital. You can't really use that to grow your business afterwards. So it really doesn't work in the execution of a strategy where you're looking to build a firm of the future.

Bob Lewis (17:53):

Alright, Richard, we're going to go with you. We're going to go with you on this next question.

Richard Kopelman (17:58):

He's doing such a great job.

Bob Lewis (17:59):

He is doing a good job. He needs to rest. He needs to rest for a second. So how many PE firms did you talk to and how do you end up settling on the partner you chose? And just for clarity, let's not mention any private equity firm names. Let's just keep that generic, but what's the number?

Richard Kopelman (18:15):

I'll say dodge the bullet from some else. We didn't have any of that. So we engaged about three years ago as we started to scale the business, and I described that earlier, we engaged a firm at a Philly by the name of Falcon Capital. They helped us with really looking at the mergers and acquisitions we were doing from a traditional perspective. And so we worked with them for three years along the path of those 24 deals as we were scaling the business. And then we made the decision about a year ago, almost a year ago, to get engaged in a process. And we weren't sure at that time it was what we wanted to do, but we wanted to go out and investigate and look at the market and see if we could pivot some of the things that we were not able to execute on around technology, around people, around m and a by partnering with somebody.

(19:13):

And so they started with a pool of, I don't even know how many, we boiled it down. I think we had about a dozen initial meetings. We brought that list down to four out of that group, we went through four Qs and four diligence processes all concurrent. It was a lot of fun for our team. It was an enormous undertaking and we did it in relatively short order, I think about 60 or 90 days and then ultimately picked our horse. I will say the market is very efficient as people would say, that people say all the time that the markets, the capital markets are very efficient. It really came down to, it really didn't come down to the financials. It really was about what did we believe that we could do together and where was the cultural alignment.

Bob Lewis (20:11):

Jeremy, your process, how many did you talk to?

 Jeremy Dubow (20:14):

Yeah, as a smaller firm, our process was a bit different than Richard's, not surprisingly, certainly talking to this room where there's a lot of private equity professionals more so than the accounting firm owners. Where did it start with a bunch of cold calls and emails? So for all of you with your analysts in the room, a job you guys don't do so bad, do you have a good way of getting to the right people? And certainly a lot of phone calls, a lot of emails, a lot of attacks eventually make it work. But our process initially started through some cold calls. We like a lot of accounting firms in the country, didn't know that this tidal wave of change was on the horizon. And so we started to take a few phone calls and try to understand how this was working and what the value proposition was.

(21:00):

Like many of you, if someone said, Hey, how do you value your accounting firm? I would've said, yeah, it's one times revenue. And that's pretty much how I've thought about it for a very long time, or it's not really sellable. If you're big enough, you're going to do some sort of merger and get equity in the acquirer. And so I certainly had that, I guess to some extent, old school mindset. And I was educated pretty quickly over the course of a year through a combination of cold calls and outreach and then it shifted from having some of the private equity reach out directly to some of the brokers that are in this room, reach out directly and Hey, we're trying to get to know you. We've got private equity that's interested in the middle market or lower end of the middle market and we understand you're an attractive business.

(21:49):

Tell us your story, tell us a little bit about where you came from and of course give us your metrics as well. And so through that process, we ended up talking with a few other firms. So again, not as coordinated as Richards but sort of ad hoc in that we weren't necessarily looking to do a deal tomorrow if the right deal was in front of us. We certainly felt like it was the right path forward for all the reasons that I mentioned earlier. And we started talking to a couple different firms and then we met with Unity Partners out of Dallas and the conversation felt different. The focus on values, the focus on people, the focus on what the growth would look like was really interesting. And they also moved fast and acted quickly and were transparent. And to be honest, once we had a conversation with them, we probably spent two to three weeks before moving to the LOI phase. So after spending a year with what clearly wasn't great or what didn't work really well for me was easier to identify what did work and to Unity Partners credit and give them all the credit for it. They just did it the right way and we were able to get to an LOI and a purchase agreement pretty quickly. And I guess as they say, it's history from there.

Bob Lewis (23:10):

So Jeremy, this is interesting. You've got people actually calling you about looking at an acquisition or merger really that happens in this industry. Shocking. How many people in this room get four or five phone calls a week from anybody trying to buy something? We can't call you. It's a business model out there. The one thing to be careful on is Phil alluded to earlier, there's quite a few private equity firms in this market and other organizations, not everybody understands this game and the conversations can be misleading. One of the things we run into with firms we deal with is trying to correct a bad private equity call from somebody who didn't explain it well. And so sorting through everything becomes a very difficult part of the process.

 Jeremy Dubow (23:54):

So Bob, I'll add quickly. The only thing more interesting to me than a current private equity call is the recruiting call for someone who wants me to be a partner at their firm. I still get those every day as well, and all I have to do is put in front of them my covenant not to compete. And they're like, oh, this guy's a waste of time.

Richard Kopelman (24:13):

We still get calls, people want to invest in Aprio. I need to hang a sign out. I haven't been offered any jobs lately though, feeling a little, I must look the part or something. I'm feeling neglected. I don't know, I'm feeling neglected.

Bob Lewis (24:24):

Just let him give you more money. That's okay. You can start out the legal stuff later. So moving on to the next question here, how do you sort through the financial aspects of the deal? So as an example, everyone hears the word multiple and that's like the big part of the deal, but there's a lot of other moving parts. So what are your thoughts on how you filter through the financial side of this transaction? And Richard, let's roll with you first this time.

(24:50):

Dunno if I won Jeremy first, but whatever.

Richard Kopelman (24:52):

I don't want to bore people with the details of things. And it's interesting, I maybe start with the story, which is meet with a firm, very profitable, average partner income, let's say is seven figures. And they've brought their, they show up with their own documents and financial data and they're like, okay, everybody's going to start making two 50 a year and our EBITDA is 20% of top line revenue and that's what we expect to get paid on. And I look at 'em and I go, well, who's going to come to work in the morning after we do this deal? No one's showing up to work the next day for 250,000 when they're used to making a million dollars. I find that there's a lot of confusion. We had the help of Falcon where we were able to take our team not through it detail by detail, we did it at the board level. We were able to take our partner group and our partner demographics through the transformation from what is the obligation today the firm has to the partners? What is the current income level? What will the income levels be for partners post-transaction, calculating the EBITDA and then figuring out what we call the income contribution model, which I think probably most people in this room call the scrape. I dunno if you call it the scrape,

Bob Lewis (26:16):

They call it the scrape.

Richard Kopelman (26:17):

The scrape, the scrape. So we patented the income contribution model, so please don't use it and not kidding, a lot of laughs today.

Bob Lewis (26:27):

The laughs. It's a tough audiences

Richard Kopelman (26:28):

Tell better jokes.

Bob Lewis (26:29):

Well first of all, we got lunch coming through the snow and,

Richard Kopelman (26:33):

So we have a saying in the south, I don't know if you guys use it in the north and Midwest, pigs get fat and hogs get slaughtered. And I look at some of these models that get put in front of us and they're crazy. So we spent a lot of time taking our team through hundreds and hundreds of hours, probably a thousand, a couple of thousand hours when it was all done, bringing people through this model within our own organization. And then we were really careful about how we rolled this out, who we told when we told people we had changed the name of our firm in 2016, the end of 2016, beginning of 17. And to take it from Haber Fair, Gideon Win, which was the original name for 65 years where we were HA and w, one of our interns came up with that intern videos are great projects for them to do on marketing of the firm.

(27:28):

So we had learned a lot during that process of how to bring partners through a process and changing the name might not seem like a big deal, but when you're taking the founder's son's name off the last name off the door and one of your founders is still working and you're taking their name off the door, it's a little of an emotional thing. And so we learned a lot through that process. We applied a lot of those lessons learned to this process and taking partners through and we got it to where we had done all the math, we had locked everything down on the deal structure. We presented it to the partners on a Friday at the end of our partner summit in Miami and by Wednesday the next week, so within five days each partner knew what it meant to them specifically everybody's listening to their own radio station, IIFM, what's in it for me?

(28:28):

So we were able to do that. The only mistake I made is I told people if they couldn't wait and they lived in Atlanta, they could show up at my house between eight and noon on Saturday morning and my wife and son were like, why are all these people standing outside of our house this morning? This is so weird. And we rotated. They did bring a couple of 'em, brought some really nice, really nice gifts, pastries, gluten-free bakery, it was good. So we got it done very, very quickly. That was a big part of our process was to just take people through that. And it is a process, the income contribution model, the scrape is a process because the headline, when you see the headline, it's almost meaningless. What does it mean to me? What does that mean in terms of cash and equity? And not every partner is the same. And a lot of times partner legal documents say partnership legal documents or S-corp or C-corp legal documents say one thing but that doesn't match up with the economics and you have to bridge that gap. It's a very important part of going through the transformation from the old model to a fair value model.

Bob Lewis (29:39):

So Jeremy, before you go, I just want to share, you got like four laughs on that one. I heard in the audience,

Richard Kopelman (29:43):

A couple chuckles,

Bob Lewis (29:44):

Four or five laughs. So if you could make Richard feel a little better, a little laughing would be great. So Jeremy, it's

Richard Kopelman (29:49):

A serious crowd.

Bob Lewis (29:50):

It's a serious, so Jeremy, what are your thoughts on, what did you look at from the financial side of a deal?

 Jeremy Dubow (29:54):

I'm still trying to get right. The acronym for income contribution model ICM instead of

Richard Kopelman (29:58):

ICM. It's not the intercontinental ballistic missile, but yeah, ICBM, it's an ICBM, so it's FLA instead of a TLA three letter acronym versus a

Bob Lewis (30:08):

Going down, they're going down a rat hole right now. It seems a lot to me

(30:10):

Down the rat hole right now,

Richard Kopelman (30:11):

Right is easier Ivan. It doesn't sound pleasant though.

 Jeremy Dubow (30:15):

Fair enough.

Bob Lewis (30:15):

Should we take a break and the rest of us leave? We should talk this out.

 Jeremy Dubow (30:18):

We could just vote on it.

Bob Lewis (30:19):

We go, we got a little bit more action. We go

Richard Kopelman (30:21):

Show of hands, like who likes scrape versus ICM?

 Jeremy Dubow (30:25):

Alright, now we bounce on that.

Bob Lewis (30:28):

Jeremy, what was your process?

 Jeremy Dubow (30:29):

I think Richard really did a nice job of describing some of the moving pieces. When you're looking at the comp model, I think there's a couple points to really focus in on right now. So for some of the acquisition targets, the conversation that Richard started with, which they understand the ICM and they understand how much they're delivered EBITDA is that wasn't always the case. And you go back even 12 months and a lot of these potential sellers didn't understand how it worked. A lot of them came from the same mindset of, oh, is it a revenue multiple, is it one times revenue? And through this process in seminars like this, and certainly people like Bob, there is absolutely been a transformation in the education of accounting firm owners. They're starting to understand this concept of an EBITDA multiple and delivered EBITDA and what their scrape is and how that translates into value.

(31:29):

Whereas that hasn't always been the case in our industry. And so it's doing a couple things. On the one hand I think it's making our conversations with potential sellers a little bit easier. We're not spending as much time educating them on how it works. On the other hand, they're coming to the table saying, I want a massive Veeva done multiple of course, because everyone understands and hears that the multiples are going up and the platform multiples are going up. And so we still have this concept of there's always going to be this mismatch in the market, which you only are going to get a deal done if you can find an accord on what's the right value of the business. But in my experience, the sellers are finally getting it. So on the one hand I absolutely agree with Richard that if you're buying a business where they're making seven figures and they said I want $250,000, you say to them, well look, there's going to be another party who's going to buy our business some point down the road and there's no way they're going to say that.

(32:28):

That's reasonable compensation. And so we're looking for reasonable compensation on the scrape first and foremost. Secondly also, I think to Richard's point, we're focused on you got to get out of bed and if the number is too low because you're capitalizing more of your earnings, you're not going to be excited about doing some of the hard things that you need to do to create value in this business. And so in my experience, and I think our experiences as an organization, we spend a lot of time playing with those variables in order to get to the right number. Now that doesn't mean that we're so stubborn that we can't get a deal done. If someone wants to be compensated lower than I might want them to be compensated, frankly, we use that as a way to get deals done. And likewise, what I think internally with my partners and the people that are on our side as the platform, they're starting to understand it as well.

(33:23):

They understand how the deal works, what it looks like, what it means for them when there's another turn of this business, how the scrape works for them now that their compensation is rising. And I'll also add that there is a third component to the deal. A lot of these businesses that we're buying, they might have younger partners who don't earn enough to scrape compensation. And so what are they going to do in order for this to work, right? What's in it for me in order for it to work for them? You've got to find a transaction where they continue to get paid reasonable compensation or I like to say market compensation for their efforts. But then you also have to look at some sort of management incentive pool or for the tax geeks in the room, a profit interest pool and those types of additional equity incentive can also help you get there, bridge some of the gap on the economics and also solve the what's in it for me problem for some of the younger and newer partners who are not capitalizing some of their earnings after scraping compensation. And the sooner you're comfortable with that terminology and explaining that to people in this industry, I think is easier it is to get a deal.

Richard Kopelman (34:34):

I'll just add a couple things and Jeremy mentioned earlier the management incentive plan. We had I think about 700 people last Tuesday that became owners of ario outside of the partner group. So it is a very important, and you've echoed that a couple of times, a very important part of the model and a very important part of the deal structure and the value that the firm's receiving. The other element is the rollover equity and the scale on the J curve of the multiple that will be earned on the rollover equity component relative to how fast compared to how fast a firm can grow and scale their own equity value on their own. And that becomes, I think it's just a math equation to compare those two. And as we looked at how fast we could grow the business with capital, not just closing the transaction but a pool of capital to do things afterwards, the math became pretty simple for us to understand.

(35:32):

And then when you're looking at firms that are outside the accounting space, so we've now signed, if we get it all right, we'll have closed 10 transactions by the end of the year in 2024 since the closing with Charles Bank. Two of those are outside of the accounting space, three of 'em are outside the accounting space and we could have never done those in the old model you have to have. And I tried. I actually showed up with a plan one day to meet with, I met with a var and I showed up with this phantom equity structure inside of our partnership that was going to lay on top and it was going to be a separate sleeve. And he and his lawyer looked at it and they wanted to know if I had been smoking something funny before I showed up to this meeting because they were like, how is this actually going to work inside your structure? I said, I don't know, but we'll figure it out. And they were like, no, no, no, we're not doing this deal. That was in 2023. And that was an experience we had that was part of informing us as to why we needed to move and transform because we're not building a CPA firm. We're building a professional services business. CPA firm. Well, you're not a CPA firm, but CPA firm happens to be part of it. That's just one element.

Bob Lewis (36:45):

So I'm going to break the financial elements down a little bit simpler. This room has got a very diverse audience. We've got some people that structure deals know all the terms. So for those that are not quite as up to speed, there's a couple elements to look at. You have to look at not just ebitda, but what the adjusted EBITDA is because there has to be partner comp ongoing. You have to look at the multiple. You have to look at what's the working capital in a transaction? Are there management fees? Is there preferred dividends? Then what percentage of your firm are you selling? Are you selling a hundred percent of your firm? 50% of your firm? Typically 51, is it a small limited investment of 30%? These are all components that help shape the financial part. You need to look at each of these pieces and actually I think quite a few more other elements in here, plus what's my partner comp going to be moving forward.

(37:33):

But Richard brings up an interesting point about the acquisition of non accounting firms. So one of the things that has emerged from this private equity model and the investment is we're not just looking at accounting firms now we're going to buy tech firms, we're going to buy HR companies, we're going to buy other things that can help service the client base and the capital is there to make that happen. Or in the past it wasn't. Plus it's a whole different management group. People are running the tech company, which you're looking at outside without saying anything about your companies. You're looking at more of an outside approach of a tech company or

Richard Kopelman (38:06):

I would say tech enabled services with one owner that's run like a business, not a partnership.

Bob Lewis (38:12):

Yeah, that's a whole different, totally different whole different business model than the accounting firms ever really ran. So it's dependent on them, the person they're going to bring in to be able to run that business and scale it throughout your organization. So,

 Jeremy Dubow (38:23):

I'll add one thing that I think is really important, and we didn't quite hit on it, but we probably should in this concept, the value of the rollover equity, one of the hardest things that I have to do with my team is to convince them that this piece of paper that says they have rollover equity or profits interest or management incentive units is going to be worth something for all of you with firms and employees. What are employees focused on? Start with what's in it for me. Got it. But then beyond that, they're focused on how do I trust you that what you're compensating me and you're telling me is going to be more valuable than what you would get in the market really is so and so. A lot of us in the industry are certainly looking for that second turn, and Alan was talking about it yesterday that we're going to have a business that is likely going to have a second turn. And at that second turn, a lot of these employees are going to finally see some value in our firm. We do believe that that is going to unlock value for some of the people that might be skeptical, that are unsure whether what we're saying is going to be true. They've certainly seen some other industries struggle with it. And so this value of the rollover equity saying that it's going to be worth multiples of what it is today is absolutely a massive part of all the moving pieces in this game.

Bob Lewis (39:54):

So we're hitting almost a 10 minute warning. We've got a few questions left. I'm going to combine the next two questions and I guess we'll just start with you Richard. First, how did you get your partner group aligned? How did you roll the news out internally and then how did you roll it out to clients?

Richard Kopelman (40:12):

Yeah, I'll talk about, I'm going to start at the middle, which is how do we roll it out to our team? We had this awesome plan, fully baked. We had emails, we had video content, we had all sorts of cool stuff that as soon as we signed, we were going to start communicating internally with our team, talking to 'em about what's in it for them, what was the management incentive plan, the ability to invest more in technology. And we got a call about a month before we signed from a writer at the Financial Times who said, Hey, so tomorrow morning we are going to publish an article that Aprio and Charles Bank are combining forces. Would you like to comment? And luckily, I was not on the phone as a voicemail and I'm driving to the office and I'm listening to this voicemail and I'm like, oh. So that afternoon at three o'clock, this was by the time I got the voicemail, it was like 10.30 or 11. So about four hours later we did an emergency town hall. I call it emergency town hall. We did an unannounced town hall with about two hours notice to tell our entire team that this transaction was maybe going to happen. It wasn't signed yet. So that's how we ended up rolling it out to our internal team.

Bob Lewis (41:36):

So very small. I see it.

Richard Kopelman (41:37):

Very small, very smooth. It was amazing. It was really well received. I looked very well prepared in that town hall. It was done from my laptop at my desk. It was great. Not in our studio. So it was really, well, I think I was actually making notes on the sheet right before as the call was starting. So it wasn't very well done. We then really didn't do a lot from a client perspective in terms of rolling this out because the clients are still dealing with the same people, it's the same business, same company. This is just a capital source in the business. So we really didn't spend a lot of time with our clients. We did call probably the top a hundred. And other than that, we did a soft announcement via email and that was pretty much it. We didn't really focus on that.

(42:26):

I don't think it matters. This is not, we're not transforming software building systems. We're not changing leadership. The CEO isn't changing, at least not that I know of. So we did that in terms of getting the partners aligned. I mentioned a little bit of that earlier, how we had done the name change. We learned a lot from that. We've been keeping our partners informed about what's going on in the market and what was happening in the profession as private equity was entering over the last few years. And so they would hear about that at the monthly partner meeting. Allan came in to meet with, what about probably 15 or 20 of our partners over a day and a half. And you can't be a prophet in your own village. You got to bring people in from the outside sometimes to just share that information.

(43:29):

If, what's the word I'm looking for? The grapevine. Just work through, let things work its way through the grapevine within the organization. So lots of communication. I'm a big believer that trust and communication rise and fall together. So the higher the level of communication, the higher level of trust, and we're just communicating, communicating, communicating about where we were in, what we were doing when we entered the process as a board and what was happening throughout the process. We would give updates along the way to our equity owners and then eventually our income partners as well as our management team. And of course they had to be brought under the tent through the process as well.

Bob Lewis (44:13):

So he's not prepared for this next question. So the next question is a little off now I'll put you right on the spot. Did all your partners agree?

Richard Kopelman (44:23):

So we had a requirement that 90% of our partners sign on the dotted line. Their partner services agreement is what we call on partner contracts between signing and close between signing and funding and closing. We had specific individuals were even named that this is being recorded, right?

Bob Lewis (44:49):

I'm sure it is. Look at this camera's everywhere here.

Richard Kopelman (44:51):

Yeah, specific individuals were actually named. They didn't know that. So if they're watching this now, they know, and I told Charles Bank, we're going to get a hundred percent. And I think they thought, no way, 200 partners, there's no way you're going to get a hundred percent in the boat. We got a hundred percent in the vote. So we had a hundred percent of the partners sign their services agreements.

Bob Lewis (45:14):

The reason I ask that question is,

Richard Kopelman (45:15):

With no modifications, they're all the same contract.

Bob Lewis (45:18):

It's possible. Not everyone's going to want to do it in your firm and just one or two people blocking what's good for the rest of the firm, whether it's to remain independent or emerge or to do private equity, you got to get around that obstacle. You can't get one or two people control the destiny of the firm if it's not the right thing for the firm. That's just my opinion.

Richard Kopelman (45:36):

Well, it's also part of the process of going through our process. We weren't socialists, we weren't, we were more democratic I think, in our process for sure than we were capitalist and made sure that everybody, the W-I-I-F-M made sure everybody was comfortable with their individual, what it meant to them individually. And we did have to customize some things along the way.

Bob Lewis (46:03):

Alright, Jeremy, not on the four minute warning. Okay,

 Jeremy Dubow (46:06):

I think I can keep it pretty brief since Richard did a really nice job with that response. So first off, unfortunately the Financial Times was not calling me when we did our deal, which is unfortunate. So we didn't have to put together a last minute town hall, but no surprise, we had a town hall. We as a smaller firm were able to meet in smaller groups and inform them about what was happening, why we were doing it, what it meant for them. We also spent a lot of time talking about our equity compensation plan that we were going to bring out as soon as we did the transaction. So internally, at least with our people to some extent, it wasn't a big deal, but lots of questions on the side, lots of IMS and text messages afterwards saying, asking really, Hey, tell me what it means for me with respect to the clients.

(46:58):

We're aligned. We talked to a handful of clients, let 'em know what was happening. Most of the responses were congratulations and don't raise my fees. That's pretty much how it goes. Nothing else surprising. We didn't lose a client. None of the businesses we've acquired have lost clients because we did a transaction. And then finally, with respect to the partner group, it's a lot of trust. The group has to trust that you're making the right decision. It's a lot of math too. Everyone wants to understand what it means today, what it means in the future. And I think if you've run your business the right way and you've been transparent throughout the years of your partnership and dealt with complex issues in a reasonable way, you get your partner group around and if it's in the best interest for the partnership group as a whole, you'll get to yeses. So it doesn't surprise me. You got to a hundred percent, you've run a great business. And so that's what you get with your partners.

Richard Kopelman (47:54):

By the way, I'm going to introduce you to the guy at the Financial Times just so he knows who you are.

Bob Lewis (47:58):

Perfect for the next transaction, The Financial Times, we'll be calling, I'm sure. Alright, so we're almost done with the session. So let's just hit this pretty quick and Jeremy, we'll go with you. We've talked about a lot of this, but what advice do you have for firms thinking about, I'll use the word private equity, but just thinking they need to do an upward merger, maybe go to an RIA, go into private. What would advice would you give them on doing this?

 Jeremy Dubow (48:24):

Yeah, absolutely. Since we've got two minutes, I'll try to keep it brief, but first and foremost, I think it's important to maintain a good set of financial records for your business. A lot of businesses that we're looking at, unfortunately, even as accounting firms, they're not particularly sophisticated on the financial side, not acceptable. You got to be better on that. It makes everything a lot easier. Secondly, understand what you do really well. Different firms have a lot of strong attributes, whether it's their people or their expertise, or they have one, their international tax expert, they've got a strong wealth management practice, they've got a tech practice. Understand what you do well because it could be really valuable. On the other hand, understand your limiters. What are the things and what are the problems that you're trying to solve for? And I think that's also the biggest difference between being a potential add-on or a platform business. If you've got the right people that are adaptable and flexible and can do the hard things, maybe a platform is for you. But that'll stop and turn over Richard, for the last minute.

Richard Kopelman (49:30):

Yeah, I think those are all great comments. I'll add two things. One is what do the clients need and what clients do you want in the future? If we just listen to our clients, I always say if we listen to our clients and build our business around that, we'll have great businesses in this profession. So what do the clients need? What do I need to best serve them? Where are they going and where do I want the client base to sit? The other thing is, what does the professional, what are the professionals, what do the owners want for those that are owners in this room and partners in firms, what do you want to be? Where do you want to be in five years? Where do you want to be in 10 years? How do you view your role, your responsibility, your day-to-day life? What do you want that to look like and what kind of people do you want to be in business with? We ended up with Charles Bank not because of the dollars, we ended up with them because they walked in the room as a very diverse group and we have 60 languages spoken at Ario amongst our people. They walked in with a diverse group and lined their culture up next to ours and the conversation evolved and continued from there. And so ultimately, you got to decide what you want to be. The markets are efficient, so what do you want to be and where do you want to be?

Bob Lewis (50:46):

So quick recap on my part. What's the vision? What you want as a firm, which we talked about here, what obstacles exist or barriers right now that you need to overcome? And how do you develop the right pathway to figure out what is the right solution to get to is the obstacles are often obstacles that you created yourself, more so than they're in your head, more so than the real obstacles. Many things can be solved out there with some creative thinking. Thank you for your time today. We're 43 minutes over, 43 seconds over. Thank you very much.