Earmark Podcast | Earn Free Accounting CPE

[00:00:00] Preview

Blake: So how do you structure a deal like this? This is always the question. How do you structure a deal like this, Jay, so that you don't feel like you're giving up everything that you've built? I think that's a big concern of smaller firm owners when they merge into a slightly larger one is, I created this, am I going to really get all the value out of it that I deserve?

Jay: And you know what, you have that in the back of your head right up until the moment you sign that agreement. And I will tell you, I haven't thought about it since.

[00:00:37] Introductions

Blake: Hello everyone, and welcome back to the Earmark Podcast, I'm your host, Blake Oliver. I'm talking today with Jay Kimmelman, formerly of... What was your firm called, Jay?

Jay: The Digital CPA.

Blake: The Digital CPA. I almost said Digital CPA. It's The digital CPA, not the conference, the firm. I want to know, did you ever send like a letter of cease and desist to the AICPA on that one?

Jay: I didn't. A funny story, when I was getting a name for the firm back in 2011, digitalcpa.com was like $3,800, The Digital CPA was $38.

Blake: What a deal.

Jay: What a deal.

Blake: You won that. Also, on the show today, returning is Rachel Fisch, High Rock Accounting's chief global development officer. Welcome to the show.

Rachel: Thanks so much, Blake. Yes, back again. It was funny because the last... You probably want to tee this up, but this kind of started because I was kind of joking with you that the day after our last podcast aired, we announced another acquisition. Did you want to-

Blake: Yes. Right. So, the impetus for this second appearance on our show by you is that we did an episode with Megan Tarnow, with Liz Mason, with you, and me, about High Rock's acquisition of The Mobius Group. And that was Really because you were in Scottsdale doing a company retreat, a firm retreat, and you happened to be there and invited me over, and we had a chat about it. And that was really great. And we had a listener, actually more than one, say, "Hey, I love that episode. How do I get CPE for that?" And I realized that episode is too short to offer CPE because of the requirements that we have. So, the idea was let's get on, let's talk about Jay and The Digital CPA because... Well, would you like to announce what has transpired, Rachel?

[00:02:42] High Rock acquired thedigitalcpa.com

Rachel: So, we announced that effective December 31st, so I guess January 1st, High Rock has acquired thedigitalcpa.com. So, Jay and his amazing team of three women all coming on board. And Jay can tell you about his role and stuff, but yeah, that was pretty exciting. The conversation with Megan, which was a great conversation, got launched, and then it was like, "Oh, by the way."

Blake: The next day.

Rachel: And everyone liked that we're announcing tomorrow. So yeah. So, we wanted to jump on and talk about that too.

[00:03:17] High Rock's growth strategy.

Blake: And I think this is going to be of interest to our listeners because this is part of High Rock's growth strategy.

Rachel: It absolutely is. Yes. Yeah, we've always had kind of non-traditional growth strategies. We can talk about some of those others, but one is definitely acquisitions. And being as unique a firm as we are, we then seek out very unique firms as well to kind of join a collective, as we like to call it. So, Jay was just a supernatural fit.

Blake: So, I'm excited to talk to you and Jay about you know how you do acquisitions, what were the easy parts, what were the tricky parts? How is the sausage made? As much as you can let us into that sausage factory, we'd love to know.

[00:04:03] Background on Jay's firm

Blake: But first, Jay, can you give us a little background on your firm? How did you get to this point?

Jay: Yeah. So, we had pretty much natural growth for a number of years. And it started out just to myself. And I said I could never do that, so I started bringing team members in. A lot of the team members were friends and family, they were coming in from different roles. My wife was working with me, helping me get to that point, yet I was still doing a lot of the day-to-day work. So, we started shifting a lot of that over. We had outsourced some of it. We had a really bad experience doing so. And we had been going through the entire traction methodology implementing the entrepreneurial operating system in the company. And we had all of these lovely charts of where we were with me in 35 different buckets. And the future showed me in one bucket there at the top, and we never could quite get there because that whole thing fell apart. And we had to unravel it, and I started doing all the work again.

And all throughout all of this, I had been doing the zero thing and working with Liz. And our firms that kind of joined about two years ago because we'd been using the same platform for taxes. And we really saw some synergies there. And over the last couple of years, we talked about it and talked about it. And I will say this year, or not this year, last year, at Engage, I was approached by another firm, and I had never thought about doing any of this and selling, joining another firm, making a move like this until that moment. And it's like, hey this sounds like a great opportunity. Oh my God, maybe I do need to do this and get all of that work off of me and let me breathe and live again.

Now we are, what is it, the 27th. In the last 25 days, I've never felt better I'm energized, I'm working more because I just happen to be, and I am doing things that I love. I mean, I'm still doing client work. I'm closing out some clients. I am getting ready for taxes, doing end of year, but I'm also diving into other tech projects. And I'm leading a tech team and implementation team, and it's really invigorated me. And it's gotten me to the point where I'm loving life again.

Blake: That's good. That's good. I really love that.

Jay: Exactly. It really is. And-

Blake: And to say that late in the end of January is an accomplishment.

Jay: Yes. And at the same time is that I have a full kitchen renovation going on right behind me, so it's been loud, it's been crazy. And the COVID bug hit, and I was down for a little bit there, but I truly love what I'm doing, I love the people I'm working with. And I can't wait to get my team fully integrated with the High Rock team. And for them to start feeling the love that I've seen and for them to start sharing the knowledge on their e-commerce clients that we're dealing with and take it to the next level.

Blake: So, to summarize, you had built The Digital CPA up over years to you and, what, three people or so?

Jay: We're as many as seven.

Blake: Many as seven. Okay. You tried to scale with outsourcing and that didn't go well.

Jay: Correct.

[00:08:02] What were the issues with outsourcing?

Blake: What were the issues you had with outsourcing? You don't have to name the outfit if you don't want to. You're welcome to if you'd like to.

Jay: No, I won't name the outfit. So, our outsource resource ended up, during COVID, getting pregnant and was going out on leave. And when we started talking to the company, they said, "Well, in the Philippines they get a six-month paid leave." I'm like, "Okay, that's great, but what resources do we get?" They're like, "Well, you pay for her, and we'll give you an admin resource to make sure that nothing falls through the cracks." Now, keep in mind during that period, I am training this resource, I am pushing my work down so that I can do more advisory work, talk to the clients, have those meetings, the normal thing we do when we're trying to scale. And the plan was to bring in another resource and another resource at that point, but it just broke apart with the other company. And basically, they were going to double my fee and would have to go through the training again. And at that point, it just fell apart.

Blake: Yeah. It's really tough when you're trying to transfer knowledge to somebody and you've got one person that relies on and they leave, you can feel like you're just starting all over again from scratch.

Jay: And you anticipate it's a contractor relationship, but from their perspective they made us the employer and made us responsible for all of these other fees.

Blake: So, you were actually the employer of record in the Philippines?

Jay: Not in the Philippines. We weren't. No, the company was.

Blake: The company was.

Jay: But they passed along all of the fees to us because we are, and I'm using air quotes, "the employer".

Blake: Got it. So that was in the fine print.

Jay: Yeah, And I will tell you, going through the agreement, there was nothing in there about a maternity leave. I went through it, did not see it. And it really bugged me at that point. And you know don't know if you were in the room when we discussed some of this, that accounting's a lot, but I brought up you know everything that had happened and how scarred I was and how I thought about never going back out there and utilizing any of these services. And I will tell you, it's one of my current coworkers gave me a company to reach out to. And we had reached out and started using this other company on a few engagements, so just feel it out again, and it was going in a really good direction. So, I say, "Do your homework and learn from those mistakes." And that was quite a tuition for me.

Blake: Well, lesson learned there, and hopefully our listeners fall into the same trap, you really got to know what you're signing up for when you sign up for one of the outsourcing operations.

Jay: Most definitely.

Blake: And they give you a full-time equivalent. So that was a terrible experience. I assume you must have taken a little time to recover.

[00:11:08] Previous experience with High Rock

Blake: But you'd been working with High Rock for a few years with tax work. Is that right?

Jay: Well, we've been utilizing the same platform and gaining efficiencies from that perspective as far as working with softwares, like using Xero Intelli to make an efficient tax process. So, things like that, we've been doing together. But no, we never actually brought our work together. And that was kind of what led to the conversation that I had with Liz and Rachel, was let's do that, and then it ended up, well, if we're going to do that, let's do it.

[00:11:47] How do you structure a deal like this without feeling like he gave up everything he built?

Blake: So how do you structure a deal like this... This is always the question. How do you structure a deal like this, Jay, so that you don't feel like you're giving up everything that you've built? I think that's a big concern of smaller firm owners when they merge into a slightly larger one is, I created this, am I going to really get all the value out of it that I deserve?

Jay: And you know what? You have that in the back of your head right up until the moment you sign that agreement. And I will tell you, I haven't thought about it since. Because honestly, I mean, I no longer have to do payroll. I no longer have to ensure that this employee is getting whatever they... I mean, I now have a team that I am managing. I have other responsibilities. But I don't have those, I don't want to call it shackles, because you're not locked to it. It really did unleash me; is how I feel.

Blake: Well, you've got the help you need. You've got a bigger team now.

Jay: That's exactly it.

[00:12:56] Kristy Monahan - tech guru at High Rock

Jay: I mean, my right hand, I mean, I can't say enough about Kristy and what she has done. And it's really funny Rachel wanted me to meet Kristy before the deal went through, and I'm like-

Blake: And who is Kristy?

Jay: Kristy Monahan. She is the tech guru in the tech team at High Rock. And for years, I've known about Kristy from whether it was Seth David's Facebook channel or School of Bookkeeping. And it's like we got on this Zoom call together, and it's like, "Oh my God, I can't believe I'm talking to you." It was just you know this mutual admiration for each other. And I can't say enough for the work that she is doing. And just knowing I have a resource there that I could just say, "Hey, I need this," and it's done and done efficiently and done right and it's awesome. She's just amazing. And I am surrounded by those type of resources.

[00:14:00] How much is High Rock looking to expand and their strategy for acquisitions?

Blake: That's great. So, Rachel, how many of these kind of deals is High Rock looking to do? What's your strategy? Or I guess, for those who didn't listen to the previous episode, can you recap the metrics that you're at? I feel like every time I talk to you, there's more people at High Rock.

Rachel: Yeah. Well, there is. We're growing rapidly. So, I think you know from the beginning of the year, last year till the end of the year, we essentially doubled our staff. I think Liz was quoting some growth rates of our revenue being consistently 60% year over year since the business's inception, whereas the industry average is 4.2. And 60% is like the average. So, we've had higher years, we've had lower years. 2020 of course was only 40%. But these are the kinds of growth rates that we're dealing with.

[00:14:50] Sometimes organic growth doesn't move fast enough - need acquisitions

Rachel: And so there comes a point where our organic growth strategy is great, but sometimes it just doesn't move fast enough. So, we you know take a look at acquisition. Our first acquisition is The Mobius Group out of Minnesota, with Megan Genest Tarnow and her team of two others as well. They've been a phenomenal addition to the nonprofit industry segment that we've got now at High Rock. And so, we've also been able to you know not only add Megan and her team, but we've also been able to... We really believe in the choose-your-own-adventure model where every single team member within High Rock can really choose; they're going to go from here, from when they come in until wherever they can go.

And so, there were a couple of team members who were passionate about non-profits, but they couldn't run an industry segment on their own. And so, with Megan and the team coming in, not only do we have you know the skills and the talent that that team brings, but we're now also able to give the opportunities to these other team members to fully immerse themselves into nonprofit accounting. So, it really is a win all the way around. I heard your podcast with Matt and Kenji, of course, of Acuity. We have similar pain points. And some of the things that we've done have worked and some haven't worked.

[00:16:18] Don't want to move too fast

Rachel: As for how many more we're going to do, we do have one that we would still like to get done this winter, but I think we're going to hold off until at least summer again before looking because there is such a thing as too much too fast.

Blake: Yeah, you can only digest so many people into your firm.

Rachel: Yeah. And even the way that we went about things with Megan and her team and then realizing some mistakes that we had made there and then correcting those with Jay and his team and then finding that we didn't get those quite right, so then making additional adjustments for the next team to come on. So, we're just ever evolving and ever improving.

[00:16:55] What are some mistakes you made with acquisitions before?

Blake: I'd love to hear about the mistakes? What mistakes did you guys make with Megan's team?

Rachel: Oh Lord.

Blake: What can you tell me?

Rachel: One thing that we honestly did not give enough thought to, and it didn't even occur to us at the time was that there is a different pace of onboarding team members, whether they are a brand-new team member like applying for a job and getting in or whether they are an acquired team member. Because that acquired team member is coming with a full slate of client work. So, it's not like a new employee coming in where they can commit to you a full week of learning all the things and getting their computer set up and all of those other things. Trying to do that when the employee or when the team member, sorry, has a full client workload is really challenging. And so, we did go through... I would say the first six weeks were rough in terms of they were completely overwhelmed. So first addressing that, and then, okay, what do we need to pull off, how do we then face this?

[00:17:56] Why were new team members overwhelmed?

Blake: Were they overwhelmed because there were just so many different tools to learn? Was that it?

Rachel: Yeah, there is a lot to learn. We've talked about putting our entire internal tech stack within dynamics. That isn't done yet. So, it's like we're starting to roll this out while they're coming on board. They still have a CRM that they're using, but we need to start putting their stuff in our systems. So yeah, we learned a lot. And actually, when you were at the retreat, that was first day as High Rock team numbers. So, it's like your first date going to a family wedding. It's like everybody all at once. And it was a lot. And it was, I think, great for the social aspect of the team to get to know the people as humans and to get to know stuff that we're passionate about and have drinks on the patio at night and stuff like that.

But it did present some other issues as well where, again, they're coming with a full client load and trying to make sure that we can properly get them onboarded as team members was challenging. So, we've taken a much slower approach with Jay and his team, possibly a little too slow. So, we need to find a happy medium there, but yeah, it's been... We just want to do the best that we can and give the best experience to each of the team members.

[00:19:12] Financial implications of these deals - how does it work?

Blake: Well, that's great to hear. In terms of the financial implications of the deal, how does it work? Jay, are you a partner now of High Rock? High Rock's not a partnership structure though. Do you have equity? How do you guys do this?

Jay: No. There is no equity in the firm. I am a member of the leadership team and get my salary. I mean, that's how it is. And then we structure the buyout deal separately.

Blake: Got it. Okay. So, it's a buyout and then you get the employment contract.

Jay: Correct.

Blake: I see. And how do you do those... Yep, go ahead, Rachel.

[00:19:55] Standard asset purchase - portion upfront and earn-out

Rachel: No, I was just going to say, so it's a standard asset purchase where there's a portion upfront and then there is an earn-out. And so, it's really interesting, even as I've gotten deeper into acquisitions, to hear some of the other chatter that's going on around acquisitions. And to me, it just invests the seller into the growth of the business. And of course, maintaining their existing clients. I mean, that's the whole point. We're here for the talent and for the skilled staff, but part of the desire was to strengthen and reinforce our e-commerce team. E-commerce is not going away anytime soon. And so that was kind of the original draw, I think, besides how well Jay's firm and our firm is in terms of tech stack. For the leadership team, there are some equity pool available and stuff like that. So, we'll make sure Jay's taken care of. Don't worry there.

[00:21:01] How difficult is it to put together one of these deals?

Blake: How difficult is it to put together one of these deals. I mean, that seems pretty simple, the way you described it to me.

Rachel: Well, you think.

Blake: I mean, how do you value the book of business? That's always a challenge.

Rachel: I mean, there's financial models. There's straight calculations that we can take a look at in terms of how to value that. nothing gets done without the buyer and the seller agreeing that that's what it is going forward. I think in terms of Jay, it was... I don't know what? Jay, is easy the right word? It seemed like we were on such the same page from so early on that there wasn't the back and forth and back and forth like can be with some others.

Jay: Yeah, pretty much I would say that was the case. And I think part of it was I was just prepared. I mean, from my perspective, I was prepared. I felt like I was late with everything, but Rachel was like, "No, no, thanks. I mean, you got in way earlier than I expected." And it's like, "Oh that's great, I'm glad to hear that." So, I thought it was fairly easy, although we took it right down to the last... I don't want to say last hour, but it's almost last minute there.

Rachel: I was thinking Christmas got in the way, the holidays. I'm like, "Can we not close a deal when everybody's on holidays, please?" That made it a little challenging.

Blake: During my stint in tech, I learned that you never try to close a deal in the month of December.

Rachel: At all.

Blake: That's just ever. It either happens before Thanksgiving or it waits until the new year.

Rachel: I think that's fair. I think.

Jay: Yeah. No, for sure.

Blake: Well, this has been great just chatting with you briefly, Jay. I mean, I know this is the early days, and because it's busy season, you haven't had a chance to really integrate as much into High Rock. But I would love to chat with you down the road, and I'm sure I'll see you around.

Jay: Almost definitely. Yeah.

Blake: Jay, anything you want to leave our listeners with, at the very least, how they can follow you online?

Jay: Oh, for sure. So, on Twitter, @JayKimmelman. And I still have my LinkedIn, Facebook, all the other channels are up. Everything under The Digital CPA is going to start going away.

Blake: So, you're not going to be you know Jay the Digital CPA, brought to you by High Rock, like that?

Jay: No. We talked a little bit about that, but there are a couple of things. We haven't really nailed down exactly where we're going with The Digital CPA brand going forward. So yeah, maybe that'll be another conversation for you podcast.

Blake: Would you consider selling it?

Jay: You'll have to talk to Liz about that?

Blake: All right. So maybe somebody wants to buy The Digital CPA if they're listening, I guess, Rachel, you'd probably be the person for them to talk to. How can they get in touch with you?

Rachel: I would. Yeah. Twitter, @FischBooks and of course on LinkedIn. And I would love to have a conversation if there is anyone out there who may be interested in joining the High Rock collective.

Blake: Wonderful. Thank you, everyone, for listening. As a reminder, you can earn CPE credits for listening to this episode. We're going to pair it with the High Rock episode. And I can't remember that episode number, but if you go back to our archives and you search for High Rock, you'll find it. Listen to that one, listen to this one, then download the Earmark CPE mobile app. Find the course, register, take a quick quiz. It's five questions, multiple choice, you'll get your CPE certificate emailed to you. It takes like 10 minutes. I bet, Jay, if you downloaded it right now, you could be sending yourself a CPE certificate in like five because you're so digital. You're so good at this stuff.

Jay: I'll let you know.

Blake: Let me know. All right. Thank you, both. Talk to you soon.

Jay: You're welcome. Thank you.

Rachel: See you later. Thanks, Blake.

[00:24:53] Outro

Blake: Thanks for listening. I hope you enjoyed this episode and that you learned something new. And if you did, wouldn't it be nice to get some CPE credit for it? Well, I've got great news. My new app, Earmark CPE, offers free NASBA-approved CPE credits for listening to podcasts, including this one. Visit earmarkcpe.com to download the app, take a short quiz, and get your CPE certificate. That's earmarkcpe.com.