Earmark Podcast | Earn Free Accounting CPE

Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Devin Mathews: [00:00:00] I mean, my vet got sold to private equity. I talked to my landscaper every week about. Please don't sell the private equity. And I'm not here to defend the industry because my vet was sold to private equity. And all of a sudden, my 14 year old dog needed his teeth cleaned twice a year when he had never had his. He'd never been sedated to have his teeth cleaned at the vet, ever. And he's 14.5, and now all of a sudden he's got to come in every six months, get sedated, get his teeth cleaned for a thousand bucks a pop. Right. I never knew I needed so many dental services since my. My dentist got bought by private equity. Right. It's the upsell opportunity.

Blake Oliver: [00:00:35] Are you an accountant with a continuing education requirement? You can earn free Nasba approved CPE for listening to this episode. Just visit earmarked app in your web browser, take a short quiz and get your certificate. Today we're talking about two forces reshaping accounting firms private equity and AI. Private equity and accounting is producing wildly different experiences. Some people say it brings financial rigor and accountability. Others describe a cultural dumpster fire. And at the same time, AI is getting good enough at research, review and workflow tasks that it's even spooking public markets. My guest today is Devin Matthews, a partner at Parker Gale capital, and he's thought deeply about the math of investing, especially what happens when you buy a company at a bad valuation. We're going to talk about private equity and accounting, how artificial intelligence is reshaping professional services, and more. Devin, welcome to the show.

Devin Mathews: [00:01:33] Thanks for having me, Blake. It's been I was a first time, long time when I reached out in the fall. And you've been a great advisor to me on our podcast and what we do. So I'm looking forward to this conversation. And I know enough to be dangerous. So 30 years in private equity, I have a good sense of what's bubbling underneath the surface. And a lot of these, uh, CPA acquisitions and roll ups.

Blake Oliver: [00:01:58] I'm looking forward to getting your perspective. Um, given your position inside private equity. Pe has been the hot topic in accounting for the last few years, with some major firms, top 400 firms taking significant private equity investment, sometimes majority, sometimes minority, sometimes just, uh, financing. And it has had a dramatic impact. We're starting to see survey data come in about what is changing at these firms. Accounting Today did a survey recently that found that while over two thirds of partners at PE backed accounting firms say that they're satisfied with their experience, only about 15% of all other employees, the non partners reported that they were somewhat or very satisfied. So big difference partners are happy staff? Maybe not. I'm curious, given your perspective, I'm curious to hear your perspective on this spread.

Devin Mathews: [00:03:03] So let me get this. Let me get this straight. You sent me the survey, which I read, which I thought was great. And, uh, yeah, not a lot of industries have these surveys. Uh, so appreciate that the accounting, uh, industry does, uh, but so let me get this straight. The, uh, the partners who got paid in the, in the transaction because I assume most of these private equity, uh, or most of these accounting firms weren't distressed when they sold. Right? So they didn't need capital to run the business. The capital was to pay out the owners of the business, the equity holders, uh, largely the partners. So they're ecstatic because they have terminal value. And we can talk about, you know, the power of terminal value for an asset, uh, and the rank and file who maybe probably didn't even know their business was for sale. In many of these cases, their lives have completely changed and the expectations have gone through the roof. Now that private equity owns the business. So the people who got paid are happy. And the people who, uh, didn't get paid are miserable. Is that about right?

Blake Oliver: [00:04:02] Pretty much. You got it.

Devin Mathews: [00:04:04] Amazing.

Blake Oliver: [00:04:04] So, like, what's going on there? Right? I mean, like, why why are the staff, you know, having these issues? I mean, one thing is, one thing I wonder about is ours. The expectations, the workload. How does private equity make money? Right. It's it's taking that share of the profits. How do you make money in an accounting firm? In a traditional model, it's hours billed. So if you want to increase profits, increase distributions, make that return for your investors. It's it's work your staff more. That's one way to do it.

Devin Mathews: [00:04:38] Yeah. This is the challenge with professional services investing in private equity. Right. The assets walk out the door every night. And that had always been a challenge for certainly venture stays away from professional services. Private equity has been more comfortable with it because, again, the assets walk out the door every night. If you make some bad decisions or you hurt the culture, people can walk across the street and go work for another firm. But yeah, I mean, how do you ring the cash register at an accounting firm? You bill hours. I mean, this conversation is happening in the legal market today, too, as private equity firms set their sights, set their sights on law firms. So my sense is that's coming next. But you bill hours, you raise bill rates and you get more efficient. Right. You can drive revenue. You can drive margin and you can do acquisitions. That would be how to grow it. Right. So yeah, this is the challenge, uh, is the owners of the business. And I don't, you know, have any inside information to what's going on at the accounting firms that have sold the private equity or taken investments. Um, they're generally not the ones billing the hours. Right? They're the ones managing the business, setting the strategy, uh, running the firm and the people who didn't own equity, by and large, uh, who were this 15%, you know, who are happy with it in the 85% who were miserable.

Devin Mathews: [00:05:53] Um, the expectations for them have completely changed. I'm not saying that these CPA firms before they sold were, you know, uh, kinder, gentler. Hey, don't work hard. Go home and see your kids, like, relax. Don't worry about billing hours. Don't worry about being efficient. That's not true. But I think a lot of them maybe on the smaller end, um, were great places to work. Um, because maybe the expectations weren't the maxed out. Uh, but when private equity comes in, I mean, before they've ever even bought these firms understand that the associates and the investment team at the private equity firm are taking every employee and sorting them by bill rate and by utilization. Right. And then they look and say, okay, this person gets paid a lot of money and doesn't bill a lot of hours. And I'm sure inside each of these CPA firms, there's somebody who's moved up the ranks quite well. And other partners would say, hey, they're not carrying their weight, right? This guy has been around for a long time. I mean, this happens in the law in legal firms all over the place. Somebody built a great reputation. Maybe they're pretty good on Bizdev, but they're just not billing the hours anymore. So that's going to be the first target for, uh, for private equity is to say, hey, Devin, a nice guy, but he's not carrying his weight. He gets paid too much for how much he's billing. His utilization is low, his bill rate's high, and he's got his points in the business.

Devin Mathews: [00:07:12] Right. However, they share the profits. So that's the first person private equity is coming for. And there may be partners. And I read this in the survey who are happy because the business is being run more like a business. So you've got some camp inside the firm saying, yeah, finally we have accountability, where ten partners sitting around a table in a CPA firm in Kansas City, you know, there's there's probably accountability, but there's also relationships and friendships and people humans don't like conflict. So there may be some conflict avoidance we can get into, like the dynamics of a professional service firm. You know this better than anybody. Um, having lived inside it, we see it all the time when companies but understand private equity is going to come in and they don't care about conflict. In fact, they're very comfortable leaning into it and they're going to right size the ownership group. They're going to optimize the bill rates. They're going to drive utilization. Um, and that could be very positive. As you've seen, some of the people like great. We finally have accountability and people are driving outcomes and tracking the important KPIs that make a good business. Now, that's great for the owners and the people who have equity. It may not be. It may be great for some of the non owners who are billing out or who are administrative staff whose jobs just got harder, the expectations just got much higher.

Devin Mathews: [00:08:29] And there may be some people in that you know non ownership group are like this is great. I've got opportunity to move up because now it's more of a meritocracy. I know if I do these things I'll move up in the organization and I can take on more responsibility. And there are some people who just say, hey, the rules totally change. And I don't know how what success looks like anymore. They're not communicating to me. I didn't get the raise I used to get or I got, you know, higher expectations of my bill rate has to be this or my hours. Utilization has to be that, or I'm out. That is 100% true. I think that's more of a communication problem than it is, like a private equity problem. Um, and I can talk about kind of how when we step into a business, kind of the speech we give people, uh, to, well, the speech we give them, which is one thing, and I'm sure they all got the speech. But to like the actual follow up to the speech, to make the employees be like, all right, this is actually better. I feel better about this, and I'm not going to answer that survey the way the survey got answered. And there's a lot of these a lot of message sending going in that survey, which I think is totally appropriate.

Blake Oliver: [00:09:28] Yeah. Let's talk about that. So what is the message that you when you enter a business. Sure. So you give to the employees.

Devin Mathews: [00:09:36] So I've been in private equity for 30 years. Um that's either good or bad. However, you know, why am I still in it after all this time? That may be a good question. I'm a glutton for punishment. Also, like you, I was an artsy major, right? You were a music major. I was an art major. Uh, so, you know, I come at it from maybe a slightly different mindset than other people. But here's the speech. All we buy are family and founder owned companies almost exclusively software. So we can talk about AI and what's happening there. But we know professional services extremely well, and all of the businesses we buy have very similar dynamics to your typical mom and pop or family, you know, friend owned, partner owned accounting business, which is ownership is concentrated in a handful of people. And, uh, most people in the organization don't exactly know what's happening in the boardroom. Right. That's a very similar dynamic in these accounting firms and also in these, uh, in these, uh, these family owned businesses we buy. So here's the speech. I come in, uh, the day we close the deal or the day after, oftentimes very few people in the organization even know the business was for sale. My bet is if they did the survey and they asked, you know, the 400 firms that private equity has bought in the last several years? I think that's about right.

Devin Mathews: [00:10:51] Right. They bought 400 of the 45,000 CPA firms in the US. They surveyed them. Most of the employees of those 400 firms didn't know the company was for sale. Certainly didn't know it was for sale to private equity. Now, this is often the worst kept secret in the company, but largely they were kept out of the due diligence and sale process. Maybe they heard rumors. So when I walk in or when these private equity firms walk in here would. Here is my speech and here would be the speech I would hope they would give. And then what they would do afterwards is, hey, I appreciate you didn't know this business was for sale and this is a surprise to you. Many of you are thinking, oh my God, private equity now owns the business, right? What's the scariest sentence in the English language? I'm from private equity and I'm here to help. And everybody knows the stories of private equity is kind of, you know, sucking the soul out of a business, reducing the quality and jacking up the price. You can see it across retail and and other industries. So that's the big fear. So just address it right away.

Devin Mathews: [00:11:52] I appreciate you're scared. I appreciate you don't know what's happening. I appreciate you didn't know this was happening until the press release came out, or until there was a Zoom this morning that announced the company's been sold to So and so. So I would have the conversation that said, hey, here's the thing. The expectations have never been higher. Now you're owned by private equity. We this business got to $30 million over the last 30 years. It's a great business. We're going to try and get it to $90 million over the next five or whatever the goals you're setting, right? Trying to triple the size of the business so I could triple my investment or more. That's completely unnatural. It took 30 years to get to 30 million, and now it's going to take three years to get to 90. That's kind of crazy. So the expectations have never been higher that we need to move fast, be efficient, drive value, focus on the things that matter the most and uncomplicate the business and make your job easier. But I promise you, the resources you have to do that have never been higher. We're going to invest in systems. We're going to invest in people. We're going to invest in training. We're going to give people upward mobility opportunities to take on new challenges.

Devin Mathews: [00:12:59] If that's what you want, you're in the right place. If you are not interested in that at all. And I totally get it. You didn't know about this until 20 minutes ago, but if this is now something in, give me a month. If in a month it doesn't feel better or the same. If you like it, then come to us, our talent team and we will help you find a place that's a better fit for you. Because you didn't sign up for this. You took a job at XYZ accounting firm and one day it's no longer XYZ accounting firm. It's owned by private equity. So we appreciate that. So that's the story. Now you have to deliver on that resources right? Expectations of ten out of ten resources a ten out of ten. That's a great combination. Um, because oftentimes these family owned businesses, they're not investing in systems and technology and training and, you know, and all that stuff. So that's the that's the speech I would give. And it's the speech I hope that me and my team deliver on. And I based on this survey, it doesn't feel like many people under the partner level at these firms feel like, uh, that was the contract that's being lived up to.

Blake Oliver: [00:14:05] Well, one of the challenges, if you're a manager at one of these firms or a director and you're not yet a partner, is that now that the firm is no longer a partnership owned by private equity, the opportunity to become a partner is gone. Like, I'm not going to move up and become an owner of the business anymore. And so that's been like the social contract of accounting firms for 100 years. And that's suddenly gone. So how would you coming into a firm and I don't know if you've made any investments in accounting firms like. Or have you like professional services firms?

Devin Mathews: [00:14:48] Professional services? Yes. Accounting. No. Which is why I'm the perfect guest. Because I can talk smack about it and and not hurt my ability to to source deals. But I also coming at it from, I think a pretty pure angle, which is I understand how this all works. Uh, I do a lot of calls with a lot of employees who just got bought by private equity, and they're saying, what do I do? How do I handle this? How do I negotiate this? So anyway, I interrupted you. Yeah.

Blake Oliver: [00:15:11] No, no I asked. So going back to my question, um, I was a manager at a top 25 firm, um, years ago, and I'm trying to put myself in that position. Imagine that. That firm took private equity money, and now we're no longer a partnership. So, like, how should I feel about that? Right. I'm not. That pathway to partner is not available to me anymore. Why would I, you know, stick around? I would feel pretty bad about that, I imagine.

Devin Mathews: [00:15:42] Here's the good news. Especially in this industry, there are 44,600 CPA firms in North America that aren't owned by private equity. And you can leave.

Blake Oliver: [00:15:53] Yeah.

Devin Mathews: [00:15:54] Uh, so that's one. Uh, and I'm not saying that flippantly, like you have the opportunity to go somewhere else where the ownership, you know, um, values you. And if you don't feel valued, you should bet on yourself and start your own firm and compete with them or or go somewhere else where you feel valued. So that's one. Two is. Yeah. You drive home after that speech I just gave and you say to your husband, hey, remember that path I had that I was going to be a partner and I get points in the firm, and that meant that I'd get certain amounts of distributions every year from the profit pool. And that was what I was sold 15 years ago when I joined here. And I've worked my butt off and moved up the organization. I was just at the level before that. And then they sold the private equity, and then they just showed up with a bunch of Pius or scissors or options or phantom equity or whatever that is, and that's somehow supposed to replace this promise I had of a, you know, a profit stream in perpetuity until I decide to retire. Yeah. And now it's like I only get paid if there's an exit, right? I wonder? I own a I own a small piece of the business. And now there has to be an exit for me to get paid, which private equity says. Yeah, we're aligning incentives. You get paid when we get paid. Uh, and a lot of people say like, well, that's not why I joined a CPA firm to have an exit to drive wealth creation for me. Now, all these owners who just sold just had a massive, you know, who knows where they are, but they just got a good payday. Some of them got an incredible payday. Um, and that creates a lot of tension, uh, in an organization, I would bet. Uh, so we can talk a little bit about that, but I think that's pretty straightforward about why that would be a problem.

Blake Oliver: [00:17:33] I wonder how these deals work out for private equity long term when, like you said, the the capital is human can walk out the door if you don't have those managers sticking around, if they decide to go somewhere else so they can have that ownership stake. How does the how does the business thrive long term? Right. It's a business that really relies on the expertise of the partners or the partner level people to, to drive value to, to bring in revenue. And so if there's not that ownership stake anymore, how do they keep those people long term. I mean, I could see it working for a few years. And then you flip the firm, which seems to be like the model of a lot of these private equity companies that are buying accounting firms is it's it's let's buy the firm. Let's, uh, streamline it, let's get margins up. Let's cut the dead weight, and then let's turn around and sell it in 3 to 5 years. I can see that working. But then how does it keep going? At some point you lose the people. If you don't, if they're not motivated to stay, right. And then the, the then the merry go round stops or whatever.

Devin Mathews: [00:18:47] Yeah. I mean, this is the challenge. And I would look at okay, who are who bought it. Have they invested in professional services businesses before. Do they have a history of buying people businesses and helping them thrive in some way? So one, if I mean, I'm a largely a software investor, very similar dynamics of when we buy and kind of the reaction of the employees when we buy a family owned business. Um, but my assets don't my assets certainly walk out the door every night because the people are important. But I also have thousands of customers paying 2 or 3 year contracts for a software license, so it's not as risky. Right. I don't need people to be in everyday billing every day to generate revenue. So, um, but the flip thing, I mean, I hear, hey, you're just going to come in and flip the business. Yeah. That's what private equity does. They buy, they hold, they hopefully improve or add value. Right. This is like value creation and value added and all these things. We can debate whether or not that's true. Um, if private equity can really add value or the value is happening in the company, I think largely the value is happening in the company from the employees, not necessarily from the private equity firm. But yeah, if you get bought by private equity, you are going to be sold in the next 3 to 7 years.

Devin Mathews: [00:20:03] It's going to happen now for the owners of that business, the woman I use as an example, hey, I don't have a path to equity partner or point partner in this firm anymore, but they just gave me 10,000 RSUs valued at $100 million. Okay, well, now the business sells for $300 million. Okay, well, that person just got paid and they maybe they got more than they would have gotten from being a point partner at the firm. I don't know, but I would want to make sure that the private equity firm is showing that woman the math. Right. Here's why you should stay. Here's what's in it for you. If we make three times our money. Here's how much money you'll make. And this is why I want you to stay. And I'm going to give you new AI tools. I'm going to give you, you know, we're going to invest in marketing. I'm going to give you salespeople so you can people who sell the business so you can just do the business. Again, I'm not saying this is happening across the board, but this would be the pitch. And again, there's a huge incentive for the private equity firm to make money on the investment.

Devin Mathews: [00:21:04] The way they make money is, like I said, a few ways they could grow it faster. They could do acquisitions just like this roll up or consolidation, buy and build thing. They don't have to grow the business, just have to make it more efficient. Or they could come in to a family owned services business and say, you're just not doing all the things that great service businesses do. You're not tracking time as well as you could. You're not in sending the employees as well as you could. You're not using the systems to cut out all the administration and paperwork and optimize right the margins. So my sense is like in some of these bigger deals, like there was recently a quick flip. I mean, quick flip, three years, New mountain sold the business maybe to somebody. I think I had read somewhere, um, and it was a relatively quick flip for three times their money. My sense is they came in, put leverage on the business. The business was under profitable. It was profitable, but not as profitable as it could be. Private equity came in, made it quite profitable with all the value creation and other tools, probably to some degree at the expense of the employees experience and some maybe to the benefit of employees experience. Again, you have some people in the firm saying this thing is run like a family business.

Devin Mathews: [00:22:13] It could be more efficient, we could drive harder. And you have some people saying like, no, this is the right pace for me. This is why I joined here. They jacked up profitability through all the tools they had. They paid down debt because the business was profitable and increasingly profitable because of the optimization and efficiency stuff they did. And then another firm came by and said, hey, we'll take that off your hands because we're going to go buy 25 more of these. And somebody said, hey, I can make three times my money in a market where understand private equity, liquidity as A is at an all time low. So somebody comes and says, I'm going to buy one of your companies for a very good price. I think most firms would sell sooner today than they normally would, because they've had a hard time over the last three years generating liquidity, given lots of other things. You can read about what's going on in the private equity industry right now. Um, so again, one size does not fit all, and one firm could have a phenomenal experience with their private equity owner. And the firm across the street could have an absolutely miserable experience with their private equity owner.

Blake Oliver: [00:23:10] This has been going on for a while in medical, in legal. What lessons can we take away from what's happened in adjacent professions, other professions, doctors, lawyers, that sort of thing.

Devin Mathews: [00:23:25] Well, I would think you as the consumer when people know this. I mean, my vet got sold to private equity. I talked to my landscaper every week. Uh, about. Please don't sell the private equity. Uh, your eye doctor got sold to private equity. Uh, your dentist is owned by private equity. All that. Uh, and I'm not here to defend the industry because my vet was sold to private equity. And all of a sudden, my 14 year old dog needs needed his teeth cleaned twice a year when he had never had his. He'd never been sedated to have his teeth cleaned at the vet, ever. And he's 14.5, and now all of a sudden he's got to come in every six months, get sedated, get his teeth cleaned for a thousand bucks a pop. Right. I never knew I needed so many dental services since my my dentist got bought by private equity. Right. It's the upsell opportunity. Now, I left that vet, and I left that dentist. Um, and that's what we get to do as consumers. And if you're a customer of a CPA firm now owned by private equity and the experience has degraded, or you feel like you're getting nickeled and dimed or you're getting up charged all the time. You should leave and go somewhere else. I don't think that's universal. Just like I think the survey points out, like there's wildly different views of how this experience has gone. And my sense is there are as many as experiences being felt by employees and customers of CPA firms as there are private equity firms who own them, who have different styles, different approaches, different motivations for how to run and manage that business, and how much of the current ownership has to say or sway over how the business gets run.

Devin Mathews: [00:24:55] Um, so I would say beware. Trust but verify. You said you're going to come in and make it better and they're going to be more services. And now my CPA firm can now do these things that they didn't do before because they were a mid-major. Right. And I was thinking of leaving for one of the big guys. But oh, now I don't need to because now you're you made an acquisition and you're offering a service that's important to me. Treasury management or some, you know, consolidating international subsidiaries and things like, now you have that capability because you're owned by a bigger firm. That could be a positive thing. But also I would expect, I could expect in many cases you're going to get charged more for a similar or lesser service, because that tends to be the approach in professional services and private equity, not universal. But I wouldn't just blindly say, oh, it's going to be better because now professionals own it. And I wouldn't say, oh, it's going to be worse because the, you know, because the vultures came in. Yeah.

Blake Oliver: [00:25:51] I mean, we know as a profession like this is widely known that many firms, many partners, we underprice our services. So that's the easy lever if you're a private equity, coming in to pull is look at all these engagements that are underpriced where the fees have not been raised for years, or maybe only a small percentage every year. And just increase prices. Shed some clients. Revenue goes up. You now have more capacity. There's. Then you bring in more clients for the team. And I can see why the team would be unhappy because their comp basically stays pretty similar. But they've got more clients to work on, more work to do. Yeah.

Devin Mathews: [00:26:36] So 100% totally agree. And I promise you before this firm has ever been acquired, right. So XYZ accounting firm in Kansas City decides to we're going to go up for sale. Okay. This just doesn't happen overnight, right? They've been talking about it for months, maybe years. They're seeing their competitors do the same thing. They're having the debate at the partner offsite about should we do this or should we not do this? They've invited investment bankers and lawyers to come in and basically tell them, how does this work? What do we know about the industry? How is it going to go? They then make this decision. My sense is this is happening over a couple few years, right. A highly considered decision. There's dissent. Some partners don't want to do it over my dead body. And some partners, you know, are going to quit if they don't do it. So you've worked through all that. You've then hire an investment bank. You go out to the market to all the likely acquirers. You know, the list of all the acquirers. Towerbrook, alpine, Blackstone, Hellman, Friedman, new Mountain Capital, you know, uh, Charles Bank, Bain, all the firms that are either buying or trying to buy companies in space. You meet all of them, you get pitched. And then you're signing a letter of intent. I promise you that after that letter of intent is signed, if not before, they have taken every employee their salary, their age, their bill rates, their client list, and then they have hired BCG or Bain or McKinsey to then benchmark that across the industry. And they know by client, by partner, by, you know our how much they can turn the dial and other services they can offer and charge more for or services you're already offering for, but you're not charging enough for.

Devin Mathews: [00:28:20] So they're going to maybe the core, you know, audit experience is going to be the same price. But here comes tax. Tax now 50% higher than it used to be. And they're going to test they're going to dare the customers to leave. And they're going to want some of the customers to leave because they're not profitable enough. And then that partner who's had that client for 20 years gets told, hey, we're firing one of your relationships. I mean, that's personal. And it hurts. So like and so the firms, the private equity firms, the owners who understand that going in, who can talk with some empathy about this might happen. And here's why we're doing it, and here's what's in it for you to go along with this. Right. It's like, explain the why. Why are we doing this? Most people are fine. If you explain to them why we're doing this, they may disagree, but at least you trusted them enough to share why we're doing it. Again, most firms come in and just say we're doing it, and it happens. And it happens somewhere in a room somewhere. And it gets then told, you know, um, told to them this is happening. That doesn't feel right. But there's a good way to do it because because firms have figured out how to do this and people who have disagreed have gone along with it and say, I understand why we're doing this. I hate to lose this client. Let me manage them out in a humane way and get find them a good home.

Devin Mathews: [00:29:40] Or you just quit and you go across the street to the firm that's not owned by private equity. And you take that client with you someday. Right. But all that's been done, like some 26 year old in New York, has run all that math, and they literally know you and your business better than you know it. And they're going to come in and show you the spreadsheet and say, how come your bill rate is this on this client and this on this client? How come your utilization, your team's utilization is here rather than here? Because this other team in the other office is blowing you away. And our revenue per employee in Kansas City is twice that. What it is in Dallas. What's wrong? And we need to get Dallas up to Kansas City. And people are like, what are you talking about? We don't ever talk about this before. I'm like, well, this is all the private equity firm is talking about all the time. And that can be really it can be confusing and really demotivating. It could also be wildly motivating for a lot of the people in the organization who are sitting there thinking like, we could do this better. We're not moving fast enough. We're not innovative enough. I got a bunch of old guys clipping coupons, sitting in partner slots that are that should be mine, right? This firm isn't good about exiting the old guys who keep clipping the coupons and not driving the revenue. And some people it's like wildly motivating for as you would imagine, I don't know. Does that ring true?

Blake Oliver: [00:31:02] Yeah, I could I could see myself being, uh, excited, you know, private equity provides capital for technology innovation, potentially. But I'd also be concerned that they're just going to squeeze the squeeze the lemon or, uh, whatever, whatever fruit I am, you know, and get the most out of me and not necessarily do that. Right. Because that seems to be the easy path. The easy path is to do what you said and do the spreadsheet and, you know, increase the revenue, increase the billing rates, increase the hours and work us harder to get more profit.

Devin Mathews: [00:31:39] And what if they laid out here is here's where you're at, Blake. And here's the benchmark. You're 20% below the benchmark. And you can agree whether the benchmark is the right benchmark or if that's even the right language to use. Hey, Blake, if you get to this benchmark and we're going to help you with all these tools and tricks and all these things we have, because we've invested in professional services businesses for 30 years and we know how to do it the right way, yada, yada. Right. They give you the speech that maybe is true. And then if you do that, this is how much more you can make. This is how your career can go, and this is what your career path is for the next five years. Don't leave. You gotta trust me on some of this. I know I have to deliver it for you, but here's the math. We're going to help you get there, and here's your share of it. And then you'll be like, okay, yeah, I could see that. I could do that. Now, again, I don't think that conversation is happening down deep down in the organization. I think it's happening at the board level and then the executive team level, and then it rarely gets filtered down. Right? Um, well, I mean, right, there's a whole reason why there's communication consulting firms that do just this. It's trying to cascade that message all the way down to the newest employee. But, uh, I mean, let's also be honest, like, people don't go into the accounting profession to take big risks.

Blake Oliver: [00:32:59] Right?

Devin Mathews: [00:33:00] Right, right. They're really good at it. They're really good at it. They like the client interaction, but they're not here to like, I'm a I'm an accounting major because I want to go for it and take a bunch of risk. And here comes PE saying, I want you to go for it and take more risk. It's like, okay, that that is uh, that's a big dichotomy. They gotta they gotta close.

Blake Oliver: [00:33:19] Well, but that idea of showing me the path, I'm a manager. Give me a path to make more money, give me metrics that I can achieve that is appealing. Because the one thing that I found dissatisfying about my time in a large firm was that the path to partnership was completely opaque. There was it was never explained to me in my time there, and it was. It's a mystery, and you have to just hope that you're going to someday get there. So if private equity can come in and replace that mysterious partner journey with something that while there won't be necessarily the same kind of ownership in the future, there will be a promise of more money, more income, maybe stock options. You mentioned census, that sort of thing. Right then that I could see that making me want to stick around, operating it more like a tech company, which is what I left for, right? I left for tech because I was making I could make 60% more immediately and I got stock options as opposed to just waiting around to hopefully become a partner someday. So that's that's that would be exciting.

Devin Mathews: [00:34:25] True. And it and in some cases hopefully many. It is exciting and it is true. Now I've got the PowerPoint I could walk you through and it would sound really great. And then six months later you'd be like Where's Devon? What happened. Right. You got to deliver on the pitch, right? And that's one of the big challenges is delivering on that pitch. Um, but yeah. And some people may say, like, I didn't sign up to be to I didn't sign up here for career progression and, like, oh, opening a new office and I don't want to move to San Antonio to open the San Antonio office. Some people may be like, that's really exciting. Now I want to be a manager. I would also say if I'm a manager. All right, show me how I make the money. Connect the dots between what's happening at the board level. Show me your value creation plan. That would be. Here's here's my advice to anybody in accounting firm that's owned by private equity. Hey, show me the show me XYZ capital. Let's use Bain Capital. Show me Bain Capital value creation plan. How what did they underwrite this to and how are they going to get there. So they've underwritten the business to go from 100 to 300 million in revenue.

Devin Mathews: [00:35:32] Let's make it up. Okay. How are we going to do that organically? International expansion. Inorganic. You know, we're going to buy other companies. We're going to grow organically. We're going to add new services. We're going to jack up bill rates and cut service level. Like what did you guys underwrite to show me that? That does explain the why. Because everything everybody does this is the private equity dream alignment, full alignment, incentives, accountability. This is what we talk about, okay, that is all true. If it's communicated down through your organization, you should be able to ask anybody in the company, what are you doing today that rolls up to the value creation plan for Bain Capital? Why are you doing it? Why did you choose to make that choice today? And the good investors push authority down to where the information is. If you know what the the goal for the investor is, who owns the business and you own the goal of the CEO and the goal of the executive team and the goal of your manager as a frontline employee, I know what choice to make today because I know how it rolls up to the greater goal, and I know how I get compensated and rewarded for making that choice today. But if I have the information about a client, about a a regulation, about some know how I should have the authority to make that decision.

Devin Mathews: [00:36:50] That's how a business like really gets rolling. And this is all the private equity books say all this and very few that all breaks down once you get humans in a room and people who don't like conflict, people who like conflict too much. That all starts to break down, but it is somewhere in a PowerPoint presentation. Sitting in the investment firms office is all that. Here's how we're going to win and here's how we're going to do it. And here's your role in it. And, uh, that's really empowering and exciting because most family owned businesses, and I imagine most of these 400 accounting firms that have already transacted were partnerships or sole proprietorships. One person owned all the equity or a handful of people owned all the equity, right? They weren't have outside investors or some or public or things. A lot of businesses like that. There are three problems. There's either no plan or too many plans. Right. You're sitting there as a manager and you're like, I have no idea what we're doing. We're doing too many things or we're doing nothing. We're just existing. Go get another client. Go, Bill another hour.

Blake Oliver: [00:37:55] Same as last year.

Devin Mathews: [00:37:56] Yeah. Or we're doing the oh my gosh they've got every day. It's a new strategy and new this and do that. It's very confusing. Yeah. One problem. No plan or too many plans. Neither of those is good. Have a plan. Stick to it. Communicate it. Two. There's no communication. People don't know why they're doing what they're doing. They're just doing what they did yesterday and doing what they did last year. And like some people are totally fine with that. But other people are just like, hey, I'd like to be in on this. And then three, nobody knows why they get paid what they get paid. This is my salary. But if I did, what would I need to do to make more? What would I need to do to get promoted? Where do I fit in the nine box, right? Where do you have me and how do I get from here to here? And are you going to invest in me to get there? That those are the three. That's a problem with every company out there in the world. And we're all every day as employees and investors and owners trying to get to perfection, to get to a place where everybody knows we have one plan and everybody's sticking with it. Everybody's been communicated to what the role is, and they know exactly what their compensation is. And I'm not saying everybody's driven by compensation and equity and ownership and all this stuff, but it does help, right? If you knew if I did these things, this is how I get rewarded with all the psychic value and benefits, but also all the financial value and benefits, right, of why employees are motivated and what you do and all that takes is communication. A lot of trust and then deliver on it. And then I think it could be really, really a really great place to work.

Blake Oliver: [00:39:23] So it seems like private equity is really good at coming in and taking this traditional business model that accounting firms have been operating under, selling time services, using people to make money. We've been doing that for decades. Private equity comes in does does it better, better information, better systems, better management, management that is not actually doing the work but is simply managing the business. And then increases profits and potentially everybody wins. Some people might win more than others, but you know, that's the dream. But there's something coming along here from a technology perspective that could disrupt all of that, that traditional business model. And that's all this, uh, artificial intelligence technology that we've been seeing, like Llms over the last few years. Devin, you primarily invest in technology companies. So I imagine you are really up on this thinking about this a lot.

Devin Mathews: [00:40:21] Yes.

Blake Oliver: [00:40:22] I mean, AI has the potential to automate so much of the work that CPA firms and accounting firms and just any professional firms like legal, especially also that we do. And so what happens with these private equity funds that invest in all these accounting firms? If all of a sudden now oh, I can I can write that, you know, GAAP memo with AI. I don't need to hire an accounting firm to do that anymore. Aw, wow. Ai is starting to do basic tax returns on its own. Is it going to do business returns soon enough or it can do bookkeeping? We saw one of these, um, uh, Jeff Bezos backed bookkeeping firm's accounting services firm's pilot just issued a press release saying that they've created an AI agent that can run the full financial close. Now, I'm skeptical about that happening right now. But, hey, in a few years, given the pace of the innovation that we're seeing from OpenAI and Anthropic and Google, maybe that'll happen. So, like, is that a threat? Do you see that being a threat to this whole PE investment in accounting?

Devin Mathews: [00:41:36] Uh, we'll also understand. I run a professional services firm. I run an investment firm with humans and processes and things, and Vista, one of the largest private equity firms on the planet, all focused on technology. The owner of that, the CEO of that business, is out recently, famously saying he's laying off a bunch of his own employees because AI can do a lot of the work of their junior employees. Now, I would say not a very motivating message to send people business that technology can do all this, knowing that all of us have played with the technology enough to know that hallucinates, it gets things wrong. It's wildly confident about things that knows nothing about. I totally believe that Jeff Bezos's little project here for bookkeeping can take a perfectly clean set of documents and financials, perfectly laid out in all the right rows, with all the right formatting and and footnotes, and close the books. But how many companies have you worked for in your life? You know, big, medium and small have a perfect set of information that requires no human in the loop to determine it. So this is, uh, we're all in on AI. We're using the heck out of it in our portfolio. We're using a lot of it inside our own firm, but I get pitched every day that I don't need an associate because if I get a data room for an acquisition we want to do, all I have to do is run Claude Cowork against the data room, and it's going to model the business, right.

Devin Mathews: [00:43:01] The investment memo, do all the diligence, point out all the legal and accounting issues that, you know, I don't even need to hire third party diligence. We have played with all of it. We are so all in on every Friday we call in our firm Friday for a DIY. I require everybody in my firm for a DIY. Um is you need to spend two hours on Fridays playing with the tools, having it try and replicate a workflow, have it model for you. Have it review a model for you. I want everybody in my firm playing with it, and we're paying for all the models right now for everybody to play with, and we've all come back to it's all right. It's not perfect, makes a lot of mistakes. A lot of times we come back with it took me twice as long to review and audit what it built than it would have taken me to build it on my own. But here's what it's going to get better. It's going to get way better. Here's what's going to happen. I think in general, it probably doesn't mean mass layoffs across, um, accounting firms, professional service firms and other. Right? I mean, Harvey has raised gazillions of dollars in the legal field. Everybody in legal, you know, if you believe their press releases, every law firm in the world uses Harvey. My bills at Kirkland and Ellis have never been bigger. And they've never built more hours against against against my account.

Blake Oliver: [00:44:24] So what is Harvey?

Devin Mathews: [00:44:25] What is Harvey is like basically is we can draft documents and we can review documents and we can create documents. And we're basically as good as a, you know, fifth year lawyer out of Harvard Law School. So you can get rid of all your paralegals and get rid of all your associates and junior partners, because Harvey will just do it all for you. Yeah, but there's equivalence in accounting, right? Equivalent, uh, investors. But it's raised. I know it's probably raised half $1 billion already. Um, but Kirkland and Ellis is charging me no less than they used to. And they use the hell out of this product called Harvey. So I don't know where the efficiency is happening inside, you know, big law firms. And I think what probably happens is the stuff gets really better, uh, way, way better quickly. It takes a lot of the mundane work that a lot of people in a CPA firm don't like to do anyway. Automates. It allows you to be more in a review and approve than in creation mode. That might be really bad for entry level accountants, right? What's happening in our portfolio? We own 12 software companies. It's make it's more of a ceiling raiser than a floor raiser. So it makes.

Blake Oliver: [00:45:30] Explain that.

Devin Mathews: [00:45:31] It makes makes very good to excellent programmers developers amazing. It makes entry level people a little bit better, a little faster. But you need to have the knowledge of coding to understand what the agent is doing for you, and to then look at it and say like, oh, okay, that was clever. No, let me tweak this, let me tweak that. But an entry level developer, like an entry level accountant, doesn't have enough domain knowledge or experience to see that what it did was wrong, because it's confidently giving you slightly wrong answers or totally wrong answers. But somebody really experienced can see that, and they can tune the model. So it actually gets smarter and smarter, and the hallucinations get lower and lower and maybe come up with some pretty novel things to do. So I think it probably makes the entry level accounting job a little tougher because as these especially private equity firm owned firms, they're really squeezing headcount. They're really squeezing margin. So it's like, hey, I can make the the eighth year accountant ten times faster, better than they can manage things. I could also, you know, here's the pitch. I can make their job more fun because they're not in the weeds doing the stuff they hate to do because AI does that. They just get to do the fun stuff they do, which is client interactions or sales or thinking through really meaty issues around cross border and tax stuff and regulatory stuff like that that actually might make their jobs more fun. It may make the need for entry level employees or administrative employees less. So. I think what you see is as the firms grow, they just don't hire as many people to grow. It's not a linear equation. Yeah. Which is the pitch in these professional services deals, which is we can use technology to bend the curve, meaning I don't need to hire one employee to generate 100,000 more of revenue. I could hire a half of an employee to generate 100,000. So actually, as I grow like the it's not a linear equation from headcount to bill rate to revenue. Does that make sense?

Blake Oliver: [00:47:23] Yeah.

Devin Mathews: [00:47:24] I'm not saying that's going to.

Blake Oliver: [00:47:25] Be.

Devin Mathews: [00:47:26] That's the dream. But I don't know if that you know that is the pitch. I think we're a long way away from that. I think we're longer away from it than most of the kids in Silicon Valley will lead you to believe. I think it's doing some really cool things, but we are not in like, automating, you know, huge swaths of the labor. Of the labor pool.

Blake Oliver: [00:47:44] We're not quite automating entire jobs because somebody still has to look at the outputs and correct. It's like you have to steer that AI. And like you said, entry level folks don't have the knowledge to steer it the right way. So it just goes off the rails. But if you are experienced and you're willing to like, play around with it to learn how it works, it can make you go so much faster. Um, so it's it's a strange labor market we're going to have because it's a great time to be mid level or experienced. It's a bad time to be entry level because those jobs, those tasks that you used to do at an accounting firm are being automated by tech, by software, in audit, for example, like sampling, cash confirmations, uh, rolling forward prior your work papers, all that is being automated because their simple routine tasks that you can draft instructions for and have an AI agent do over and over again with high confidence.

Devin Mathews: [00:48:47] So here's my so here's my pitch Blake is for the early career people who who feel like, um, their jobs going to get automated or they're not valued by the firm anymore. How about this get really good with the AI. Like so good with it. Way better than the 35 year old or the 45 year old. Could be way better. And start your own firm. Get a few buddies, start your own firm, and be an AI first accounting firm that you own. All of it. And you don't raise venture capital or private equity for it. And then you can have the nice exit when you're 40 or 50 to private equity and move on. It's never been easier to start your own business. It's never been easier. It really never been easier. Never been easier to start your own business. Like software, writing software is not hard, right? You can go on legalzoom and get all the documents you need. You don't even need a lawyer to set up your LLC and get going. You can go and write a blog post or a LinkedIn post that goes viral. That's, you know, a million people read and all of a sudden you can start a YouTube channel. You can start a podcast and you can speak directly to the customers and you can build your own business.

Devin Mathews: [00:49:56] You don't need to wait in line at, uh, you know, at, uh, a big, uh, traditional firm. You don't need to hope that the private equity firm that bought you is going to treat you right or better than the the guys who owned the firm before they sold the private equity. Like, this is what I've got kids in my in the early 20s. I'm like, you don't need to wait in line anymore. No. And it's pretty obvious most adults have no idea what they're doing, and they're mostly full of BS. So don't wait your turn. Go get it. And the tools are there for you to go do it. So, like, you know, not to end this on like a remember the Titans kind of, you know, end of the podcast here. But like, why do you need to wait in line and, and have some private equity firm tell you how you get to run your business. Go do it yourself. Go find some other people who believe in it the way you do, and go build the firm in your image with AI or with without AI. Who cares? Just build a great firm together and own it.

Blake Oliver: [00:50:51] I think that's a great message for our listeners and inspiring. Devin, you have your own podcast. Tell us about it.

Devin Mathews: [00:51:00] So 12 years ago, my partner who's a who is a brilliant technologist, uh, and uh, and an all around great guy also was a professional fighter in this in the 80s and fought, uh, for the US, uh, championships and kickboxing multiple times. Now, he never won, but he came in second a bunch of times. Uh, so, uh, he and I, uh, we buy family owned software companies and technology companies. We go through a lot of these dynamics that you have, you know, you and I have talked about today. Um, uh, of buying these businesses, motivating people, kind of explaining the why and all that. So 12 years ago, we started recording our conversations and putting it up on, uh, iTunes. And for a year, nobody ever listened to it. And we couldn't even get our parents to listen to it. But we did an episode a week. And so fast forward, we have a 310 episodes we're launching on YouTube in a couple of weeks. So it's called the Private Equity Fund Cast for C.a.s.t. And our tagline is private equity should be fun. And that gets so many haters who are just like, private equity sucks. It's the devil. You guys are the worst. Hey, I get it. Like, you know, bring it on, bring it on. Totally fine. But we are trying to subvert this whole. Most people in private equity were born on third and thought they hit a triple, right? The old knock on Mitt Romney thought he was like a man of the people. But, you know, he grew up as a rich kid. That's all. That's fine. But admit it. Like, you know, you weren't you're not a self-made person. So our view of of private equity is let's get in the weeds. Let's do what you're doing with accounting is we are two experts talking not we're not talking down to the audience.

Devin Mathews: [00:52:40] We're in the weeds of what we do in these companies, how we buy them, how we sell them, what we do after we buy we own them. How to get jobs in private equity. What is the job of private equity? What is the job of running a private equity business? And we've had 2 million people listen to it in the last ten years. So we're relaunching on YouTube. The audio feed is on all the, you know, wherever you get your podcasts. P fun cast or private equity fund with an n no D cast. And, uh, yeah, it's just been an absolute joy because what it's done just like you is how did you and I meet each other from your podcast? How do I meet? How do I meet people? We get an email every day, multiple emails a day. Hey, I heard this episode. It was really helpful. And just like you, we're there's too many smart people in private equity. They all want to sound smart. They want to be smart. We want to be useful. So hopefully this conversation with you is I wasn't trying to impress anybody with my knowledge of private equity and the accounting space. I was just trying to be useful to people who were in the thick of it, who were like, what do I do? What questions do I ask? How do I navigate this? And it's been like a total side project. But like one of the great joys of my career is connecting with people around the world who found something we said helpful at a time when they really needed some help and didn't know where to go.

Blake Oliver: [00:53:53] It's been so great talking with you, Devin. I'm so glad that you connected with me and I'm so glad I started my podcast. Another another great reason to do it. Uh, check out private equity fund cast. And, uh, your firm. Devin, is Parker. Gail Parker, Bill.com. Check that out as well if you're interested in learning more about private equity. Devin, thanks for joining me.