Episode Transcript
[00:00:10] Speaker A: Hi there, and welcome to the podcast. I'm your host, Meryl Johnston. The lifestyle accountant show exists to help today's accounting firm owners build successful firms while also living a healthy, happy life without sacrificing sleep your weekends or time with loved ones. Today I have producer Elle joining me. Hi, Elle.
[00:00:30] Speaker B: Hi, Meryl. How are you going?
[00:00:32] Speaker A: Doing well. I keep forgetting that your professional name is Eleanor, so I should actually, as a friend, I call you Elle. But on the podcast, I keep forgetting it's Eleanor Carey.
[00:00:42] Speaker B: Please refer to me by my full name every single time. Thank you very much.
So how's your week been?
[00:00:52] Speaker A: Up and down. It's just really busy this week. So I have been trying not to have early morning starts and I actually have a 07:00 a.m. And a 06:00 a.m. Webinar that I'm presenting on this week. So it's not ideal. It makes surfing or going to the gym difficult. And then it so happens that it's a week of appointments as well. GP, they take so much time, don't they?
[00:01:17] Speaker B: Those things, like by the time you get there and then they're running behind and oh, God, I wish you could just outsource those to someone else. But unfortunately, when it's like the dentist, you can't really send someone in your place.
[00:01:28] Speaker A: And the thing I find so pre kids, you'd just fit it in and you'd go to an evening appointment, that kind of thing. But for me now, those kind of things either cut into my workday or they cut into exercise time. And it means that I can't go and do something outside. So it's a bit challenging.
[00:01:44] Speaker B: I also went to the dentist recently and I did have the thought. I'm like, can I bring my, how old is he? Can I bring my eight month old son with me to the dentist? And I was like, probably not because I guess the two appointments I find most difficult because I've usually been able to bring him so far are getting your eyebrows done because eyebrows, eyelashes, you have no eyes, can't see him. And then I guess dentist, you've got no mouth, can't talk to them. So I feel like they're two that fall into the category of can't really bring the baby.
I think I have joined your gym actually in of recent times, but I haven't run into you there yet. How's your gyming and your yoga in going doesn't mean you're not going. I'm not accusing you.
[00:02:25] Speaker A: I think we go at different times. Yeah, I'm going to the gym a little bit, so I love spin classes, so I have been getting there a little bit, but this week particularly has not been great because of the other commitments. But I have been getting in a pretty good routine there. Yoga, not so much. I'm just finding it hard to fit into my day. And I mentioned doing family yoga, just having to do it with the kids, putting on YouTube and doing it, and it's just getting worse with being climbed over, kicked in the.
I've just. I'm not bothering with that, but I am doing some of my own stretches. And so the main purpose is mobility. And so even if I'm just doing some stretches on the mat in front of the tv at night, that's kind of helping to achieve the goal, but definitely not hitting the yoga every day goal. What do you mean? Getting kicked in the face doing yoga isn't the vibe. What are you talking.
My two year old actually loves it and so sees my yoga mat, but then just wants to do it with me or just climb on top of me.
[00:03:27] Speaker B: Kind of almost ends up falling into a different category than your health fitness mobility category, doesn't it?
[00:03:34] Speaker A: Yes.
[00:03:36] Speaker B: And you've recorded, you were a guest on another podcast this week, weren't you? How did that go?
[00:03:42] Speaker A: I quite enjoy that when someone else, and often they're asking interesting questions or things that I haven't thought about recently. And so then I feel inspired after the conversation. So this was a podcast with a guy called Matt, who runs a marketing agency for accountants, and he was asking some of my perspectives about marketing and what I've done for Bean ninjas. And we were talking about, well, how has the industry changed? And so some of the strategies that I use almost ten years ago now, if I was starting a firm today, I wouldn't use. Back in the early days of Beaningers, I was doing a lot of content writing and SEO, and so we were getting leads. People would find us on Google, and that is still one of our strategies now. But we've been in that game for a long time. We've got hundreds of articles and we've really invested a lot of time and energy in that strategy. But I think it's more of an established strategy these days. It's more expensive. And if I had a new firm without a big budget, I probably wouldn't be using an SEO strategy. You're competing against the big software companies, the big firms, and I'd be using more of a social. So social media strategy for my digital strategy. So in both situations, I used in person networking to drive the early leads, but I was trying to pair that with some kind of digital marketing strategy. And today I'd focus on one channel and really concentrate on that. So I think of social media as a rented platform so you can get booted off. So I know two people that have been booted off LinkedIn. I know many people have had Facebook.
[00:05:23] Speaker B: Wait, are they permanently booted off LinkedIn then? Or is it like a school suspension for a few days or something?
[00:05:32] Speaker A: One was able to get her account reinstated with a lot of argument and possible, I don't know if she knew someone who was able to help with that. And then the other, he never got his account back and had to start again.
So note, something I've been doing is downloading my contacts from LinkedIn every now and then, because it would be very annoying to try and start from scratch again and not recall everybody that you were connected with. Yes.
[00:05:57] Speaker B: So it would be a devastating blow to business to lose that, wouldn't it?
[00:06:02] Speaker A: Would. And so I think of those kind of platforms as rented.
They're good platforms in that they give you extra reach. So if you are posting on LinkedIn or Twitter or you, they're helping to get you in front of their audience because their objective is to get their users to stay on the platform for longer. So if you're creating useful content or interesting or engaging content, they're going to help you. But that's the upside of the rented platforms. But the downside is that you don't own it. And so then thinking about how can you get people off the rented platform onto something that you own? And that could be your website, probably more so your email list. So how can you get them onto your website to then subscribe to your email list, but something like that, where even if your email provider is really your list, even if you happen to use convertkit or one of the other.
[00:06:56] Speaker B: Tools, even like writing on Substac or beehive, even though you're still sort of using then their referral networks and things like that, getting subscribers to my newsletter on subsec that I think I stopped writing two years ago. So it's still sort of just building up in the background, who knows? Might do something with that one day, but you can still download the entire list and then you're able to take that with you wherever you go. So I think that's a really beautiful intermediate step, I think between having them, it's fully on your own website versus still being able to have some network reach effect from those bigger platforms.
[00:07:29] Speaker A: And so if we wanted to go.
[00:07:30] Speaker B: And listen to this deep dive, what podcast was this?
[00:07:33] Speaker A: It's the marketing for accounting firms podcast. The episode isn't out yet, but potentially by the time we have the show notes for this, it might be so we can link it.
[00:07:43] Speaker B: Oh, well, we'll keep an ear out. And so speaking of what is coming up, who is the guest on our podcast today?
[00:07:50] Speaker A: Yes. So we've got Brandon Poe on the podcast today. He's the founder of poe group Advisors, which are brokers in the accounting firm space. So he and his firm have worked on hundreds of deals helping accounting firm owners to sell. He also helps a little bit on the buy side. So we run through trends in the mergers and acquisition space for accounting firms. So what's happening in 2024? What's changed over the last couple of years, and where are the opportunities? And then he also talks through a number of examples of deals that have gone wrong and what to look out for. So the reluctant seller, how to handle a situation where there's multiple partners involved in the firm looking to sell. Why you might want to let a deal collapse. There's a particular story about that, an employee from a seller side that almost caused a deal to collapse. So there's a few great stories there as well.
[00:08:50] Speaker C: One of the things that, especially, like in our accounting practice academy, one of the first things that we teach owners to do is oftentimes the first thing you have to do in order to really transform your business is you have to create capacity. You have to prune, so you have to take away before you start to add. And that's very counterintuitive for a lot of owners, especially if you've built from scratch and you've scrapped along and you've valued every client and every dollar that you've ever brought on. But a private equity buyer, that's one of the first things they do. And usually with an owner, there's an emotional attachment to those clients. I would say most accountants are very service oriented. They are very caring about their client relationships. They really, truly want to help everyone succeed. They just can't make those cuts. I mean, I've had owners, they're like, the buyer is going to have to do it. I'm not going to do it. I can't go up on the fees.
I can't cut things that need to be cut. There's an emotional attachment.
[00:09:55] Speaker B: I love a good case study with all of the nitty gritty details of what really happened. I'm almost like getting into true crime style, but with accounting firms.
[00:10:09] Speaker A: All right, here we go with Brandon Poe rhyming.
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Hey, Brandon, welcome to the podcast.
[00:11:12] Speaker C: Thank you, Meryl. Glad to be here.
[00:11:15] Speaker A: It's fun to be chatting. We actually had a conversation recently, but you were interviewing me on your podcast, and so now we're turning the tables and it's my turn to interview you.
[00:11:25] Speaker C: Love it. Yeah, I'm ready and looking forward to it.
[00:11:28] Speaker A: Well, let's start. So you run Poe advisors, which I would describe as a business broker, but I think you describe it in slightly different terms as a CPA intermediary. But why don't we start there? What does a CPA intermediary or a business broker in the accounting space, what do they do?
[00:11:45] Speaker C: Well, we are truly in the middle of the deal. We find people who are ready to exit and we often coach them leading up to the sale. So they might come to me, 3410 years, sometimes before they're ready to exit. And we'll have some conversations and try to help them position their firm for a sale. So there's that aspect of it. And then when they're ready, then we create a package that goes out to potential buyers. Very thorough package, so buyers can kind of from a 30,000 foot view, see what they're looking at to see if it might be a fit for them. We help the seller basically focus on the fit. Our big focus is on fit. So if we can match a good buyer who has the proper experience, the right work experience philosophy is aligned. That's something we look for and some other things. If we can match those people up well, and it's truly a good fit, then it usually helps the seller get the most value from the practice.
The buyer is getting something that is going to work for them, so they're getting value. We also help with the negotiations of the deal. So we're kind of that buffer. And we have a structure so people are not just sort of verbally negotiating deals because verbal negotiations, a lot of things can get misunderstood or just left out. And then at the 11th hour, some things are discovered that weren't discussed and that can be problematic. So we have a structure to help everyone come to a meeting of the minds, if you will, get the document on paper, sign off on the deal, and then they conduct their due diligence. We also help with financing. So we work with lenders who specialize in accounting, practice, acquisition loans, and help the buyer get good financing if that's part of the deal. And then we also coach buyer and seller together on transition so that the handoff is planned and based on our experience. We've got a lot of experience transitioning these deals, and so we want to share that experience with our clients and that really helps the buyer. So we're truly helping both parties through this deal. So we like to call ourselves intermediaries, but we are known as brokers as well. But I think what our service is, is a little bit more involved than just, hey, you want to try to put two people together and let them figure it out. We're much more hands on.
[00:14:42] Speaker A: Yeah, I can see why you use that term, because when I think of a broker, I think of you acting for one party. So representing the interests of either the buyer or the seller. And it sounds like initially you're getting involved with the buyer, sorry, with the seller to help them prepare their firm for sale and then matching them up at coaching both parties through that process of the deal making and then the transition. So where are you finding the people or the firms that are on the acquisition side? Do you have a pool of firms that regularly buy or how do you actually find those?
[00:15:16] Speaker C: Well, we make ourselves very findable.
We do a lot in terms of marketing to put ourselves out there. We have a lot of resources also. So what typically a buyer is going to do in their journey is they're going to look for listings. For one thing, they're going to look at potential opportunities. They're also probably going to do some research.
They're going to read or they might listen to a podcast about someone who's purchased before. So we have a lot of content that helps them kind of think through due diligence, think through fit. Again, it's choosing the right practice. We have a lot of content that kind of comes up at the top of the search engines when people are doing research. We also just been in the space for a long time, so we've been selling firms since 2003. So there's a cumulative effect of just being in the market for a long period of time. People just hear about us. Sometimes it's word of mouth, sometimes they see our paid advertising.
I do speaking events. I do all sorts of things to kind of, over time, that network just gets bigger and bigger, and then it creates a gravity.
[00:16:30] Speaker A: Actually, let's jump into that for a moment. So I will ask you about what you're seeing in the space in 2024 for mergers and acquisitions in accounting. But actually, I am curious about your business itself and how you got started as a business broker and what your firm looks like now. So maybe you could tell a little bit of that story.
[00:16:49] Speaker C: Well, it's funny, because I started by calling the wrong person. So I made the wrong phone call. And what happened was, I had been in public practice. I started my career at Ernst Young. I left public practice, and I was going to continuing professional ed with a friend who had purchased a firm. And this was in the neighboring town a couple of hours, and I was spending the night. And so we went out and we were shooting pool and having a couple of beers after the education event. And he said, yeah, you should call this guy. All he does is he sells CPA firms. And so I get home the next day, and I can't remember the guy's name that my friend told me. And so I go on Google, and I call this guy in Texas, and his name was Howard Holmes. And he said, well, I don't have anybody selling firms in South Carolina. Do you want to sell CPA firms? And he was just getting started. And this was the company accounting practice, sales, which is a big player here in the United States. Long story short, he ended up selling his company, and I parted ways with the new owner. That was an amicable split, but we split, and I started po group advisors.
So that's how I got into it.
[00:18:18] Speaker A: I like how you describe that as making the wrong vocal.
[00:18:22] Speaker C: Yeah.
[00:18:22] Speaker A: And so, what does pogroup advisors look like today in terms of team or maybe number of deals done?
[00:18:30] Speaker C: So we have 20 people on our team right now. We just had our annual team meeting, and we were all surprised, like, wow, we got the 20. That's kind of bigger than we could have imagined several years ago. Yeah, we're growing.
We have buyers in all 50 states of the US, all provinces of Canada. So that's our footprint, that's where we operate. We sell a lot of virtual firms. So we've taken the lead in the cloud sales space, and I don't know how many cloud firms we've sold to date, but we have that broken out separately on our website so people can just search cloud listings if they want to.
Yeah, we've got a rep now in Los Angeles. We've got someone based in Toronto, in Canada, Montreal.
We have one person who lives in British Columbia who works on our team, and then a couple of us here in South Carolina, we're headquartered in Charleston and one rep in Louisiana and one in.
[00:19:39] Speaker A: Reps. Are they running their own deals? Is that what they do?
[00:19:43] Speaker C: Well, we have sales reps and then we have brokers. So we have the sales reps are sourcing deals and our brokers are the ones that are doing the negotiation and doing most of the client touch when someone decides to sell. We also have a virtual coaching program called Accounting Practice Academy that we launched in 2020. And that's an eight week program. So that's another offering that we have. So we're growing and branching out into different things. And yeah, it's been a fun ride and I think we'll continue to grow. I think we've got quite a bit of room to keep growing.
[00:20:29] Speaker A: It's interesting talking about the academy. We're actually just about to publish an episode on the podcast about opportunities in the education and community space for accounting firms. So it's interesting hearing you mention that as well. Well, let's get into some trends. You see a lot of deals go through in the CPA, the accounting firm space. So what are some of the things you're seeing at the moment in the market in 2024?
[00:20:55] Speaker C: Well, just in the last couple of years, we've definitely seen an increase in buyers from private equity. So we're seeing that and it's a little bit of a messy playing field there. I will be the first to admit, I think a lot of these private equity backed buyers are, they don't yet know what they're getting themselves into or potentially getting themselves into. I don't think they fully understand the space.
That being said, some of the private equity firms do understand the space quite well and they've got some interesting strategies for rolling firms up and really kind of making them run more like a very professionalized company. They're running them by the numbers, they're bringing in their management expertise. That's very objective, very numbers based, and that I think is going to impact the industry. I think that's going to have possibly a really big impact. We'll see. We'll see how successful they are with their roll ups.
[00:22:02] Speaker A: So what are some of the changes they're making in terms of how they're running the firm compared to traditionally, how a firm's run?
[00:22:10] Speaker C: One of the things that, especially, like in our accounting practice academy, one of the first things that we teach owners to do is oftentimes the first thing you have to do in order to really transform your business is you have to create capacity. You have to prune, so you have to take away before you start to add. And that's very counterintuitive for a lot of owners, especially if you've built from scratch and you've scrapped along and you've valued every client and every dollar that you've ever brought on. But a private equity buyer, that's one of the first things they do. And usually with an owner, there's an emotional attachment to those clients.
I would say most accountants are very service oriented. They are very caring about their client relationships. They really, truly want to help everyone succeed. And so they just can't make those cuts. I mean, I've had owners, they're like, the buyer is going to have to do it. I'm not going to do it. I can't go up on the fees.
I can't cut things that need to be cut.
There's an emotional attachment, and a private equity buyer is going to be a very objective business owner, and they're going to come in and they're going to stay very much at arm's length with all those aspects of the practice. So it's messy and it's not soft and warm feeling, but it's effective.
[00:23:44] Speaker A: And is there a certain revenue threshold or minimum level of revenue before they would get interested in a deal?
[00:23:53] Speaker C: They're looking at everything right now. I think it's a very good question, and I think a lot of them don't know the answer, which is why I feel like it's a little bit messy out there right now. I personally think private equity probably shouldn't get involved unless the firm is at two and a half million, unless they already have a lot of other practice ownership, so that if they lose key people, they can shuffle the work around and get it done. That's the beauty of scale in an accounting practice. You don't get pulled back in as an owner. If you have enough scale, then a team member loss or a change will not pull the owner back into the weeds, which you know that firsthand because we talked about that.
[00:24:45] Speaker A: Absolutely.
[00:24:49] Speaker C: I think 5 million is a really magic revenue number. For an accounting practice, 5 million us.
And that number is increasing as inflation hits. But I think 5 million is a number where if you can get a practice to that point, then your scalability, it just becomes easier and easier to scale.
[00:25:12] Speaker A: And why is that? That's related to the people issue.
[00:25:16] Speaker C: It's the people issue. It's the people issue? Yes.
You've got enough managers or tax specialists or experts, you can weather any personnel loss.
[00:25:32] Speaker A: And how are you seeing private equities structure those deals? So what kind of valuations are they paying or they're offering? And what kind of deal terms? All cash up front. Spreading that out, what are you seeing?
[00:25:47] Speaker C: Well, they want to spread it out.
They want to make it all contingent. They want to put all the risk on the seller.
That's the beauty of using somebody like us, is we can bring multiple parties to the table. So you've got a competitive environment. Right. So a lot of private equity.
We have mixed results in the offers. We've gotten some really bad offers, but then we've also gotten some good offers. So you're going to see a mix of offers. So I think the best way to get. I'm a big believer in fixing the terms. If you're a seller, fix the terms because the buyer is ultimately going to be what determines client retention rates. The buyer is going to determine staff retention rates as well. So it's their actions, their decisions that impact that. So why should you as the owner, if you're relinquishing control?
That's the big part, right? If you're relinquishing control, why should your payout depend on someone else?
So that's my philosophy, and I think it's a sound philosophy, because what happens is it changes the behavior. The deal structure actually changes the behavior post close. So if you've got a fixed price deal, let's say you're selling your practice for all cash, right? The truth is about transition is you don't need a long transition to be an effective transition. So if the transition is pretty quick, it's a cash deal. The buyer is going to do everything they can to make sure everybody's happy, make sure that clients and staff are happy because it's their dime. Right. If it's not their dime, I'm sorry, it's just human nature. They're not going to give it the same attention. It's just the way it is.
[00:27:42] Speaker A: So by a fixed deal, you mean not having contingency? If, say, clients leave over a period.
[00:27:49] Speaker C: Of time right now, there are exceptions to that there are valid reasons to have some contingencies in deals. I'd say about ten to 15% of our deals do have a contingency in them. It usually involves a large client. So there are a lot of practices that have clients that have an outsized impact on the total revenue.
[00:28:14] Speaker A: Let's chat just a little bit more about what you're seeing in the space, and then we'll move into some case studies. Outside of the private equity buyers, are there any other common themes you're seeing around who else is buying firms and what they're looking for?
[00:28:29] Speaker C: Well, I'm seeing a lot more of an entrepreneurial spirit coming into the accounting profession, which makes me smile, because I think it's overdue that this profession really gets into thinking more like the clients that they serve.
And I'm seeing a lot of the virtual firm owners, in particular the younger firms, almost.
I don't know what the data would support, but I would say most of the younger buyers or the younger people who are starting firms are starting virtual firms.
And that may be a function of the early adopters. The people you see doing this are early adopters, and they're entrepreneurial by their very nature. It'll be interesting to see if this holds true 510 years from now. But I'm seeing an influx of very entrepreneurial, business minded owners, and a lot of them are scaling very rapidly, and I think they're providing better service than a lot of the traditional firms have been doing in terms of giving the client what they actually care.
[00:29:54] Speaker A: I still. I chat with my business partner, Wayne, about value to the client, and we still talk. Are the clients even reading. We send monthly reports. Are they even reading them? We're trying to provide value in terms of accurate, timely financials for decision making. And then if they're not reading the reports, are we actually providing value? So that's something that I'm thinking about and talking about with my business partner, but also other accountants. Is there anything you're seeing in terms of a group of aging accounting firm owners that are looking to retire or exit in the next ten years? I feel like there's a trend there, but I don't have anything to back that up.
[00:30:34] Speaker C: I've been hearing about the silver tsunami for many years. There's going to be these baby boomers and they retire. I just haven't seen this giant wave yet. And I've been waiting for this wave for. I've been thinking, okay, maybe the pandemic is going to create a wave, maybe this is going to. And I feel like people are working a little bit longer. There's certainly very high demand for our services. Right. There's a shortage, at least in North America. There's a pretty big shortage of accountants. There aren't as many people coming into the, you know, I think perhaps people are working a little bit longer.
Maybe when they do sell, they're staying involved in the profession a little bit longer.
But the numbers would support that. There's going to be a wave sometime.
Maybe it's just a large swell and it's so gradual, we don't feel it.
[00:31:45] Speaker A: All right, well, let's get into some of these stories. So the first one is, have you ever sold a firm where the seller wasn't really motivated to sell?
[00:31:56] Speaker C: Absolutely. It happens, unfortunately, too often. Yeah.
One in particular comes to mind. It was a younger gentleman, and he had a virtual firm, and it had scaled pretty rapidly, and he was feeling overworked and he was feeling burned out, and he had a family, and he literally was teary when he first did our kickoff meeting, our onboarding meeting, and he was actually teary, which in hindsight was kind of telling, right. That he was having a hard time with the idea of selling. And it does happen. It happens more often than I would prefer that it did happen. And we try to really make sure people are ready. And there are a number of times when I'll have a conversation with a potential seller and I'll realize, hey, I don't think you're ready. I kind of think you're just burned out. And if you could straighten these things out, you might continue to be happy with the practice.
I had one such story. I had another younger, probably mid 30s owner, and he called. He said, yeah, I got to get out of here. And I said, well, do you enjoy what you do? He said, oh, yeah, I love my clients, and I love the work that I'm doing.
And I'm like, well, when was the last time you had a really decent vacation where you weren't working? When was the last time you went with your family for, like a week and you just didn't work at all? He goes, oh, I think it's been years. I'm like, well, I think before you sell your practice, maybe just go take a vacation and kind of think things through a little bit when you get back. And so he actually did that, and he let go of some clients when he returned from his trip, he let go. I want to say it was like 100 clients, like, smaller firm, smaller clients. And he's still in practice. So that was probably seven or eight years ago when I had that conversation with him.
[00:34:14] Speaker A: Yeah, that's so interesting. And I can imagine that if a seller thinks they want to sell, but maybe their heart's not really in it, then the deal could get right to the final stages and then pull out right at the end and waste everybody's time. So that makes sense that you're trying to assess that earlier on to see, well, do they actually want to sell, or is it something that they're just burnt out? And can that problem be solved a different way?
[00:34:39] Speaker C: Yeah, well, I've learned the hard way over the years that if they don't want to sell, they're not going to sell.
There's going to be something that it could be some really tiny little thing.
And it's natural. I will say, too, it's natural. Even if you're ready to feel some of those second guessing sort of thoughts, I think that's kind of normal in any situation.
[00:35:08] Speaker A: Imagine that that could happen if there's multiple partners in the firm, too, where there might be a couple of partners that do want to sell, but there might be one that doesn't want to, who could really slow down the deal or come up with excuses. Have you ever had something like that happen where there was one partner that didn't want it to go through? What was that like?
[00:35:30] Speaker C: All too often we've had that situation because a lot of times that person is a little quiet in the beginning and they're not speaking up, that they don't really want to do this. But then when you get into negotiations, there's a lot of resistance from that person, and there's a lot of like.
And then you get some passive aggressive behavior between the partners. And we've seen all of those things, and we've seen some people hold up sales, that it felt a little like a payback.
You have a junior partner, a senior partner really wants to exit, but maybe that junior partner felt overworked and underappreciated over the years, and suddenly there's some animosity between those two, and it appears at the point of the senior partner trying to exit, we have seen that.
Again, we try to feel that out and see if that's there before we put something on the market and address it. But I think if you're in a partnership, if you're thinking about going into a partnership, that's a really important thing to think about in your agreements, because if people are a different age, they're not going to have the same exit time frame. So you have to know that going in and have some way to resolve that.
[00:37:04] Speaker A: I believe you've got a story about a husband and wife team that sold to a brother and sister team. Can you share that story?
[00:37:11] Speaker C: Yes, I do. This is kind of going back to someone who wasn't sure if they wanted to sell.
The husband was actually contacted me initially about selling, but he was really on the fence and he admitted as much. And so I talked with them and I said, well, maybe getting into accounting practice academy is good, and you can either think about, okay, here are the things that I think I need to do to fix the practice so that I can continue to work in it a little bit longer, or you look at those things and you go, yeah, I don't really want to do that. I'm ready to exit. So I felt like that would give you the clarity. So they took me up on that. They got into the workshop, they really implemented some of the ideas extremely well. And then he went into that workshop in the summer, and then in December, I get a call and he says, yeah, we did all the things, and it's great, but we do want to sell.
So we put it on the market. And this is where the story kind of got a little crazy, is it goes under contract in January. So it was only on the market for a month.
And we went on the market for like 1.5 million.
And then I get a call in March, and he says, I think I want to let this deal collapse. So the buyer had missed a deadline in the purchase agreement so the seller could get out of the agreement. So he said, I think we've made all these changes. I think we're going to be up like $400,000 this year. And I don't think this is priced fairly. So we actually let that deal collapse, and they put it back on the market, raised the price, and, yeah, they ended up selling to a brother and sister whose dad had also been a firm owner. And it was one of the best transitions I've ever seen.
It was three weeks, two, three weeks. And the buyer said, okay, we're good with transition.
This was like $2 million practice, and it was transitioned in three weeks, essentially, and then they developed a really good relationship with each other afterwards.
[00:39:47] Speaker A: Yeah, that's a nice story.
[00:39:49] Speaker C: A good success story.
[00:39:50] Speaker A: All right, the next one, you listed a multi franchise firm, but there was a snafu at the end.
Were there any red flags that could have indicated that something was going to go wrong there?
[00:40:04] Speaker C: Well, you talked about the one partner who might not really want to do something. Well, I had one of those and I knew I had one of those. He had been difficult the entire time. And they had 36 franchise stores. And I'll never forget, I had to create this practice profile and I personally did the profile back then and I had to put each franchise as one column and we had to add it all up. It was a really complicated profile and it was a really good performing business.
And yeah, we found another, it was a franchise. So another franchisee put an offer in and they signed the deal. So this is how far it got. The deal got signed and then they checked on something with the bank accounts with the franchise. And the franchise would not facilitate a really quick transfer of those accounts. And the seller, all the seller would have had to do was let the buyer continue to use the existing accounts until they could get transferred over. And the seller wouldn't do it. He killed the deal. And so they didn't put the FedEx package in the FedEx box and the deal was, had worked. I had worked a lot number of hours on that deal and my team had worked on that and we didn't get a single penny for that deal. So that's the downside.
[00:41:46] Speaker A: All right, I've got another one. What's the worst employee issue that you've seen come up in a deal?
[00:41:52] Speaker C: Yeah, we had a seller in Calgary, Alberta. This was probably ten years ago. And he had sort of his right hand person and he trusted her and figured everything would be fine. And so our guidance, our general guidance is you don't tell anyone until you close. You don't tell your team until you close.
For one, they get nervous and they start to wonder. Sometimes they go and get their resumes and they start applying for jobs and because they don't know what's going to happen. So the uncertainty can really cause people to do things that you don't want them to do. So anyway, he insisted on telling her. He felt like she's been with me for a long time. I feel like I owe it. I have this loyalty. So he tells her and it's like a week before closing and he lets her know that he hasn't closed the deal.
She really put up a stink and told all the other employees and they basically came into his office as a group and confronted him and were all upset and threatened to leave, his wife said, she said, I thought he was going to have heart attack, he was just so stressed out. But the deal did close and I don't know whatever happened with that employee I don't know how long she stayed with the new firm, but she sensed that she had a lot of responsibility in that firm, and I guess she felt empowered that she could put the deal to bed and she was going to do that.
[00:43:50] Speaker A: So you think she was trying to ruin the deal by telling everybody?
[00:43:55] Speaker C: Yeah, I don't know if she thought she was going to be the one to take over the practice.
I see that a lot.
You might have a key person, and the seller is sometimes a contributing factor to this scenario is where over the years they might have dangled the carrot to someone and let them think they were going to have the first right of refusal or that they were going to get some really inside deal.
And then they learned that they don't have that option and the seller, so people can get upset. And that's something buyers should be careful about, too.
Has the seller had discussions with employees about taking over, and if so, why didn't they buy it? I think a lot of employees don't want to be an owner.
If you have that situation, you really don't have a problem. But if you have an employee that wants to be an owner and then they're not the owner, then you might have some bad feelings.
[00:45:03] Speaker A: Yes, I can imagine.
Next one is, what's the smoothest deal you've seen?
[00:45:10] Speaker C: Yeah, that was a deal that happened about a year and a half ago, and I didn't actually work the deal, but I was watching it as it went through, and it was just one of the best cultural fits that I've seen. And the leadership team from the selling firm sort of went into the new firm and they weren't planning on doing that, but they were just happy with the role. The role that the buyer offered them was attractive. It gave them that lifestyle that they were looking for and took enough responsibility off of them and gave them enough money, and they were happy with all of those aspects of the deal.
And then the two teams came together and they were just culturally a really good fit. And that's not always easy to accomplish with a fairly larger firm. I mean, I think you had like a 50 person firm purchase, a 25 or so person firm, and for them to really integrate well, I think there was some luck involved in that.
[00:46:34] Speaker A: And what's the most frustrating part of deal making?
[00:46:37] Speaker C: I think the most frustrating part is when negotiations create surprises that seem like someone's doing that surprise sort of intentionally.
You start to question the integrity of the other party.
I'll give you a story of a deal that just collapsed recently on our team and the seller accepted the offer in the form of a letter of intent, and we advise, go to a purchase agreement immediately, or even skip the letter of intent entirely. I really don't like letters of intent. And most lawyers will advise clients to use an LOi.
We have seen too many instances where the loi either creates false assumptions because it might be silent on things. We had this buyer, this deal was under Loi, and the seller was so trusting of the buyer that he let the buyer talk to some key employees right before the deal was supposed to close, and after that, and everything was fine. The due diligence was apparently complete when that happened. And then he came back and said, yeah, I'm only going to offer you literally 50% of what was on the loi after all of that. And so that's why we like to see a purchase. We like to see something a little more binding.
I have seen people, and it could just be a negotiating tactic to where they're just trying to get a couple of bucks off the price right there at the end, right before the closing table.
[00:48:28] Speaker A: So you think that was the strategy because once the buyer had talked with the employees, then it becomes more difficult for the seller to back out of the sale because.
[00:48:38] Speaker C: Exactly.
[00:48:38] Speaker A: There's a problem.
[00:48:40] Speaker C: Exactly. That's leverage. Right. And it's human nature.
And these people, they fell in love. The buyer to seller met and fell in love, and everything was fine until it wasn't.
And the other part of that, I think sometimes lawyers can make the purchase agreement lawyers, especially in the US. I think in the US, the legal environment is a particular fun place to do legal work.
So there is definitely an incentive for the lawyers to make the process more complicated than it might otherwise be. And so if you don't put some kind of boundaries on that process, you can end up with some really complicated deals, some difficult negotiations. There's a saying in our business, like, lawyers are either deal makers or deal breakers.
And it's very true. It's very true. And if you've got a deal breaker, they can not only break the deal, but they can really run up a lot of fees in the process.
I had a seller years ago that had about a million dollar practice, and I knew what the lawyer was, his lawyer was doing, and he had a $75,000 legal fee at the end of the deal, and it closed. But I mean, it was just ridiculous.
[00:50:13] Speaker A: Yeah, I can see if they're billing by the hour, then there's an incentive to bill lots of hours.
[00:50:20] Speaker C: And the more hours they're working on it. The more complicated it becomes. So if it's more complicated, it's less likely to close. Right.
[00:50:30] Speaker A: Have you seen any other, when you were talking about it sounded a bit like a dirty negotiating tactic. In that last example you mentioned, have you seen any other tactics like that that sellers should watch out for?
[00:50:42] Speaker C: Well, I think the other tactic, and this is another thing about human nature, is if you put an earn out in a deal.
I did a paper on, it's on our blog, reasons to avoid an earnout. And I did research. This paper was written a while back. It was published by the AICPA. And something like over half of deals that have a contingency, there is a fight over that contingency. Now, might not be a legal fight, but they're often not a meeting of the minds on how that calculation should work or who is responsible for what loss. So earn outs can really change behavior. I've seen buyers come in with an earnout and not service the clients as well as they should, and then they lose clients or they price them out knowing they're kind of discarding the clients, or cherry picking, if you will. And so the seller ends up being the one who gets left holding the bag in that situation.
[00:51:54] Speaker A: Well, fantastic. Brandon, I know you've got some resources that are helpful for buyers, for sellers. Did you want to mention one of those and where the listeners could go to find it? And then we'll link up the others in the show notes?
[00:52:10] Speaker C: Yeah, I've got a couple of resources. If you're thinking about selling. We've got a book how to prepare your CPA practice for sale.
If you are a buyer and you're wanting to scale a practice, particularly a cloud firm, we've got a book about scaling your cloud accounting practice.
And if you just want to take a vacation without checking email, we have a book about taking unplugged vacations.
And all these books are fairly short reads and they're free downloads on our website and they can all be found on our resources hub.
[00:52:48] Speaker A: Well, that last one definitely fits with the theme of this podcast, the lifestyle accountant show. We're definitely encouraging people to take vacations and work less hours.
Brandon, thanks so much for dropping by. It's been really fun talking about mergers, acquisitions in the accounting space. Was there anything else you wanted to add on the topic before we wrap up?
[00:53:11] Speaker C: Not that I can think of. Those are great questions, Meryl. This was a lot of fun and hope everybody got a little nugget here or there from it. So thank you so much for having me on.
[00:53:27] Speaker A: It was really fun having a chat with Brandon today.
I didn't know that private equity was so interested in acquiring accounting firms, and particularly how the minimum annual revenue threshold seems to be dropping over time. And Brandon was talking about the way that private equity thinks about accounting firms and where they see opportunities and how their metrics driven. It can be quite different from how a typical accounting firm owner is operating their firm, and I think there's something that we can learn from them. Brandon talked about why $5 million in annual revenue is the magic number for an accounting firm. Again, something that I hadn't thought about. But in hindsight, it makes sense that when you get to that kind of scale, when you have people issues or a key person leaves, which is one of the main challenges in running a service business, like in a caddy firm, you can weather that storm much more easily when you're at that kind of scale than if you've got only one manager and then they leave, that's going to have much more of an impact. I also loved hearing the war stories from Brannon, particularly about some of those deals collapsing and the way that experienced buyers can try and manipulate the sales process. And a few things he mentioned to look out for are try to avoid Lois. So letters of intent and go straight to deal terms. And also being mindful of how you work with lawyers, because they can make a deal, but they can also ruin a deal. And check out the show notes if you'd like to connect with Brandon. And we've also linked in a couple of the resources that he meant tuned on the podcast as well.
[00:55:01] Speaker B: See you next week.
[00:55:02] Speaker A: See you next weekend.
