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[00:0:00] Crack Open a Cold One!

Matthew: Kenji didn't do his normal prep, Blake, though. So, hopefully, you have some prep done-

Kenji: I didn’t know, Blake. What are we gonna talk about?

Blake: I have an idea of what I'd like to talk about.

Kenji: Okay.

Matthew: Okay, good. Don't tell me, just go.

[00:00:13] The Biggest Difference ...

Matthew: I guess I can't under-stress how important incentives are, and alignment is with these kinds of transactions. People start behaving, as you incent them, as a natural human response to things. Everybody in this second deal has a long-term incentive that is fully aligned. That is the biggest damned difference. It's just the biggest thing that we did better.

Kenji: It is huge, and I'll say this is also a good opportunity to kind of watch Matthew, and I, how our partnership works.

[00:00:51] All the Cool Kids are Doing It

Blake: Well, first, welcome to a special crossover episode of the Earmark Accounting Podcast, and Drink While You Think!

Kenji: Woo! This is what the kids call a collab.

Matthew: A collab?

Blake: Ah, yes, I have heard this term. I am your host of the Earmark Accounting Podcast, Blake Oliver, CPA, and I am joined today by-

Kenji: Kenji Kuramoto of Acuity, and Drink While You Think, and-

Matthew: Matthew. I'm Matthew May, The Tech CPA.

Blake: Also of Acuity. You two are the founders of Acuity, which has just been on a tear recently, it feels like. Is this public that you surpassed the, is it, seven-figure mark in revenues?

Matthew: The eight-figure mark.

Blake: Eight-figure mark.

Matthew: $10 million revenue mark.

Blake: Sorry ... I don't do a lot of accounting anymore, so I- my digits are off.

Matthew: I think-

Blake: Congratulations on that.

[00:01:54] What's in a Name?

Matthew: I think with the latest merger, we're going to be running about 10.5 in revenue. Next year will put us in the top 300, or top 350 accounting firms in the United States without being an accounting firm, so-

Blake: Really?! Without being an accounting firm.

Matthew: We're a top 400. If we were an accounting firm, we'd make the list, but we probably won't make the list because we won't fill out the paperwork.

Blake: Well, that's unfair.

Kenji: I know. Not truly an accounting firm, just because we were smart enough not to add assurance to our practice. So, I feel like that's unfair.

Matthew: Yeah, we did-

Blake: So, to be on- to be on this list, you have to be a CPA firm?

Matthew: I think you have to be an accounting firm. Isn't that the top accounting firms? So, I think we're more- but if EisnerAmper- they're going to have to make kind of an adjustment for-

Blake: An exception for them, right?

Matthew: -that. right? So, we are like the EisnerAmper private equity funded group. That's what we do. So-

Blake: Because of yeah, Acuity is not a partnership. It's not a CPA firm. You run it under a corporate model, and that has allowed you guys to grow in a way that I think a lot of accounting firms would be jealous of. When did it start?

[00:02:59] The Birth of the Non-Accounting Accounting Firm

Kenji: It started in 2004 in its earliest version. It was just advisory; it was just fractional CFO work. That's all we were doing. We added fractional controller pretty quickly just in Atlanta because nobody had any idea you could do services and- over the computer on this thing called the cloud. So yeah, we were just in Atlanta and then, uh, things changed.

Blake: I'm excited about the growth because Acuity, to me, is a true cloud accounting firm. So, it represents like the leading edge of this trend in pushing into the top 400, top 350 now that's- just congratulations on all that-

Kenji: Yeah, thanks. I think it is. I mean, we're seeing it across a lot of other firms, too. It's interesting. I had- one of my closest friends, who's from Dallas, Texas, flew in today, and I met him at our office ‘cause he took- after he flew in, took the subway up to our office. He gets to our office, and he says, "Wait, how many people again are on your team here at Acuity?" and I said, "Yeah, we're pushing about what, probably 140, 150, somewhere in that- we're getting up there." And he looked around at our little office, which is about the size of the room I'm sitting in right now, and he's like, "I don't understand how that's possible." And I'm like, "Hey, man, this is the way forward. This is what the cloud allows you to do." He's a big executive at Capital One, where they have like campuses, and things like that. So, it just- I don't think, quite, he understood what was happening.

Matthew: Yeah. We have reduced our real estate footprint, I think, every year that I have been at Acuity. We have gotten smaller, and smaller-

Blake: The opposite of what you normally do.

Kenji: Totally the opposite-

Matthew: And to give you an idea, we had 10 people when I joined Acuity, and we had a bigger real estate footprint then than we do with 150 people today. It's kind of crazy.

Kenji: This is the way.

[00:04:43] What'll You Have?

Blake: This is the way. So, this is a crossover episode of my show, and your show, Drink While You Think, and you guys have a tradition at Drink While You Think, right?

Kenji: Yes, we do!

Matthew: What are- what are you drinking, Blake? That's, that's what we ask you.

Blake: So, I don't know if this is acceptable, but I'm having an espresso pod, right now.

Kenji: It's a little earlier out there, and I think because this is unusual, as it's a crossover, it's a collab, I think we'll accept that, especially because, Blake, I think all of our previous history, I think we've definitely consumed enough alcohol together over the years that if you need to take a break this time, we'll allow it.

Blake: Well, I could go run down and get some Four Peaks. Are you guys prepared?

Kenji: We're prepared, yeah.

Blake: Okay

Matthew: Definitely.

Blake: Why don't you guys start introducing your beverages, and then, by the time I'm back, I can be the third one.

Kenji: Perfect.

Matthew: But then, you won't know what we're drinking, but that's fine.

Kenji: He'll know when we rate it. Matthew, what do you got, today?

Matthew: Well, I'll start. So, I- I'm doing something new for me. It's, uh, the PastryArchy- it's a Candy Cane Imperial stout from DuClaw Brewing Company - hoping I didn't butcher that - in Baltimore, Maryland, but it was in my local fridge here. And it's a, an 8.5-percenter, so, I'm really excited about having an Imperial stout today. It's a little chilly here, so it's kind of nice. How about you, Kenji?

Kenji: It is a little chilly. The PastryArchy. That's interesting. I thought it was gonna be one of those pastry type of beers. I don't think it is because we've had one of those before, and those were awful, so hopefully this one's better. I'm having- this is also in the vein of Matthew May. This is the Pay It Forward Cocoa Porter. I'm trying to be like Matthew here.

Matthew: That is my kind of beer, dude-

Kenji: This is, I believe, a Kentucky beer, and my wonderful mother-in-law actually subscribed me to a beer-delivery program, so I get beer on subscription, and this is what I got in the mail this week. So, we're gonna try this out- very Matthew May-like. Blake, you said you've got what, Four Peaks?

Blake: I'm winded. Uh, I did run downstairs, and I am back. I have a Four Peaks Brewing Company solar-powered seltzer called (Sun Day Solar Seltzer - Prickly Pear).

Matthew: You have to show- it's online for us, too, so, you gotta ... Okay, awesome.

Blake: We're going to show it on the video. It's called Sun Day. The flavor is Prickly Pear, which is appropriate because I'm coming to you from Scottsdale, Arizona; 99 calories; 4% ABV. I think technically it's a malt beverage, technically. It's not-

Kenji: Technically not beer; not even a seltzer? Are they calling seltzers malt beverages these days?
Blake: Well, I think it depends on how it's made, right, because- you guys probably know more about this than me, but they make it more like a beer than a- they say seltzer on the can, but it's not really.

Kenji: Yeah, I think it's a way to say that there's alcohol in it, but it's not beer. They used to do that to really, really high-gravity beers. They'd call them malt beverages, or malt liquor. Not that I've ever consumed any malt liquor, but I have ...

Blake: What were the, um, the silver 40s that people would get in college?

Kenji: There's Schlitz- Schlitz Malt Liquor were silver.

Blake: There's a different one-

Kenji: Olde English, the good OE; that was kind of a gold color, the original OE. Some of that was consumed when we were in Scottsdale. I remember Scott Scarano was consuming that, so-

Blake: Oh really? I can't get into that anymore, but-

Matthew: Cheers, everybody.

Blake: Cheers, guys.

Kenji: Cheers, gentlemen. As usual, I have a fancy glass, while you suckers drink out of the can.

Blake: I just spilled all over myself.

Matthew: If you're on the YouTube edition, you can see Blake spilling beer on himself, and if you're just listening to the podcast, that's okay. Blake's not as embarrassed.

Kenji: That's right.

Blake: So, I'll just be embarrassed on your YouTube channel.

[00:08:04] The Actual Tale

So, gentlemen, yeah, I did have a topic that I've been playing around with in my head, which is, uh, you know, you guys have been growing, both organically and through acquisition, and you have made two, recently, that I am aware of. One, Kenji, I heard you speak about - it was very enjoyable - at a conference we were at. We were at an Accounting Salon in New Orleans, and you spoke about a merger that didn't go, or an acquisition that didn't go exactly as you two had planned.

Kenji: Correct.

Blake: And then, you also announced another acquisition/merger of a firm I know well, called Catching Clouds, specializing in e-commerce; Patti Scharf, and Scott Scharf. So far, it seems like that's gone well, very well. I was thinking for the title of this, it would be A Tale of Two Mergers.

Matthew: A Tale of Two Mergers ...

Kenji: Ooh. I like that.

Blake: So, maybe we could talk- maybe you could tell the story- you and Matthew could tell the story of these two mergers, and what went well, and what was different; what didn't go well, and what you learned from them. I'd love to hear this.

Kenji: I'll say, on the first one we did, and this was a firm we did up in New Hampshire- I think Matthew, and I came up with a thesis about, you know, what we thought was going to happen in the in the overall accounting landscape. A lot of this came from listening to you, and David on The Cloud Accounting Podcast, and really being struck by the metric that was put out there about something around like 75% of AICPA members were getting ready to hit retirement age.

Yeah, I think you discussed on the podcast that, hey, maybe the AICPA needs to freshen up their membership a little bit. But also, we knew that even if that was an exaggerated number, and maybe didn't represent what was happening in the entire profession, there were a lot of firm owners who were going to be looking to probably exit. I think that started the conversation with Matthew, and I about, there's probably some opportunity here to help out fellow accountants; call it the generation ahead of us who needed to hand off clients and team members somewhere. We felt like we were getting of a size and scale to where let's maybe take a look at doing that.

We did that within a particular group called PASBA - the Professional Association of Small Business Accountants. Their big fall meeting' actual s coming up next week. Matthew, and I are going to be up there in Nashville. And we thought, well, if a lot of these firms operate similarly to one another, and we go and acquire one of them, and it works well, that may give us a really nice pipeline to go and do more of these. And so, that was the original thesis behind it, and kind of how we got started. Is that what you recollect, Matthew?

Matthew: I think, um, you know, we were aware that, uh, some of the firms, in that group, in particular, and some of the older retiring firm owners use what they would confess to be outdated technology and aren't in the cloud fully. But one of the reasons why we chose PASBA as a target is that they're aligned on so many other philosophical things, on running the business, from how we pay employees to transparency. I'm in a group of other firm owners, and the sharing is on a par above. Xero, and QuickBooks' ecosystems with other firm owners, uh to where we really dig in on each other's numbers and really kind of work together. So, there's a great collaboration effort. It checked a lot of boxes.

[00:11:15] The Good, The Bad ...

When I think about it, there's two huge takeaways that I have from the first one. The first was when you have a firm already in play, and you're going to acquire another firm, if you have a process that you think is good, which we do- if you acquire another firm, you almost have to onboard every single client onto your process. So, it's almost like a new customer acquisition. So, you have to take their clients through a pain point.

If somebody had just bought the firm that we bought and didn't have another practice, they would have been fine. They would've been able to continue it on. They would've been able to transition it in an orderly manner to cloud accounting, over time, as their clients opted in or whatever. But because we had a methodology, we were a little naive. We literally have to run onboarding for every single client because they've got to run our process to be in our CRM, to be in our workflow tool, to be in all those things. So, there's a huge, I'll call it, gap of naivete that we had on the technology infrastructure side and process side.

The second thing is I feel like we wrote one of the most beneficial deals, just deal structures that, we could have written for ourselves, at Acuity, the first deal that we did. In doing so, we created complete disalignment with the other owner as soon as things started going not great; complete disalignment. So, we protected ourselves financially, but in doing so created complete disalignment where- had-

Blake: What does that mean? Like they, they didn't have an incentive to make it work?

Matthew: They had an incentive to maximize revenue instead of maximizing like the effective churn. So, like It was easier for him to go look for new clients and start selling other stuff in anything that would stick, even if it was not an ideal client profile for us, which our team works on really hard. Like, he was filling the funnel because he was feeling the pressure that some of these clients were gonna churn, but he was filling the funnel with anything that sticks. So, like, a street return is not something we do. And behind the scenes, he's signing up street returns, which was totally not a part of our agreement.

Blake: Street return is lingo for?

Matthew: Uh, somebody that just walks-

Kenji: Just a word-

Matthew: -like a one-time return. We only work on-

Kenji: H&R Block, something like that.

[00:13:27] Matthew's Take on Merger One

Matthew: So, those are the two huge takeaways, from my perspective. were We had the chasm, or the gap of naivete on the technology onboarding side, and then we had this complete disalignment recreated, with the structure we put in place that we thought was going to protect us financially and ended up- we ended up throwing it away because everybody needed to walk away and just come to some reasonable meeting of the minds and just go their separate ways, which we did last month.

Kenji: On top of that, too, Blake, I'll say the other thing that happened is because we were looking at this as a customer acquisition vehicle. we were able to metric that fairly easily against, well, how fast do we normally acquire that level of- customers And so we had a very strong start to the year, but our sales and marketing team closed the same number of, clients that we acquired within a 90-day window directly after the acquisition.

So, it was a little bit like, wait a minute, we're already acquiring, at such a high pace, uh, vetted clients who we like- who have a profile that fit us. And you start thinking, well, where do you want to place those bets of putting dollars toward? Do you want to put them in acquisitions, and you have all this stuff that Matthew mentioned- some of the naivete around systems and things, or do you just say, hey, we should probably be doubling down on what works already? That was also running at the same time, giving us a very in-the-face data point of like, maybe we need to rethink this a bit.

Blake: So, this is interesting because I, I love the original intent behind this whole merger. It was create a scalable process to bring in a small firm that's part of this network. If you can do it for one, you can do it for many. So, you then have a pathway to grow inorganically or through acquisition with many of these firms that are going to retire, and you can build a reputation, so everyone comes to you, and you just have this cookie-cutter approach at a certain point.

Kenji: Yup.

Blake: That was the idea.

Kenji: I think that thesis was correct because we immediately had how many other, Matthew, like immediately other firms of that group who were like, "Can we be next?" without us even reaching out immediately.

Matthew: Two, immediately, that were like, "I literally want to be next."

Kenji: Yeah. We were, of course, like, "Oh, timeout, we're still trying to absorb this." So, that thesis was correct. We just weren't- we weren't prepared for how different these firms operate that are more traditional. They're in our same space. I would say that these are firms that probably looked a lot, like all of ours, just a generation ago, but they haven't adopted to the same technology standards we have in the same processes. And that was much more difficult to integrate than I, think I ever imagined. but To your point, the thesis was correct.

The other thing it did was, for me, and I don't know if, Matthew, you feel this way ... I needed to kind of demystify mergers, and acquisitions. You hear about it. It sounds exciting. And it's like, wow, this is a big, scary, sometimes like exciting- kind of all these emotions. At the end of the day, it's a business transaction. And I think we all know that, but you kind of needed to get- I needed to get through my first one to kind of go, oh, okay. Well, that's all it is. It's a transaction you run. So, I take that away still as of great value to me, personally. I think others would find the same thing of, like, okay, that demystified what, something to me, was like, whoa ... Almost- not taboo, but of like, "Wow! M&A is so crazy!". It's not, it's a transaction. There's things we should do better next time, and we did, thankfully, on the next one.

Blake: It's like in the startup world, everybody has to have a failed startup, or they have to have worked for one at some point. You have to experience it.

[00:16:44] Size Might Matter ...

Kenji: That is so- I mean, I hear more people talk about that. Like, "Who do you want to invest in the next time around?" I'm like, "I'm not investing as someone who hasn't had a failure yet," right? So, you hear a lot of VCs talk about that You do need to go through those. And we were, I think, at least wise enough to know that we did a good job of setting financial expectations that we weren't taking on too much risk with this. It was about the size. that Things could go sideways; if they did, it wouldn't hurt us too much as a firm, overall, and that we were at least going to learn something. I'll say, too, that we did it with an individual who owned the firm, who we had a lot of respect and trust in, who was trying absolutely his best to make it work, too. And so, there were a lot of things that stacked up in the right direction, even though the end result was like, okay, we're not going to follow that thesis.

Blake: Well, and in your defense, this was all happening during pandemic times. So, you couldn't go there in person, and this firm was very far away from where you guys are in Atlanta.

Kenji: That was complete hubris, I think, on our part, and just kind of, again, more naivete of like, well, wait, we do everything in the cloud. Yes, we do. I look back, and I think the combination of that, trying to do that during the pandemic; also, we did it right before tax season. I don't know Matthew, you remember? You and I looked at each other afterwards. We're like what? We kinda thought it was kind of, oh, this is kind of funny, and us that old crazy Acuity trying something new. And I think we looked at each other afterwards. We're like, "Well, that was just dumb."

Blake: It's a learning experience. Well, I have more questions about this, merger that didn't work out, uh acquisition that didn't work out first, before we move on, and then we'll talk about the fun one.

Matthew: It did work out. It didn't work out at the level we wanted it to, to be fair.

Blake: So, the deal- did the deal get canceled? Are you still acquiring all these clients-

Matthew: No, no, we just- we still have the clients. We still-

Kenji: -have team members from there. Yeah.

Matthew: The founder-

Blake: It's just not performing like you'd hoped.

Matthew: It's not performing as either side would have hoped, and we probably lost a couple of good employees from the other side that we wish we had retained if we had been in person earlier and stuff like that without COVID. And I mean, I wouldn't call it a failure. I just I just would say it just didn't meet our expectations. Like, we wanted it to be a, Let's go! Let's do the next one! Let's do 10 more!" and it was not that-

Kenji: -about that. Yeah-

Matthew: And it was- it was, it was humbling 'cause we're usually pretty good about getting stuff done.

Blake: The sticking point was, it was the clients, and the firm were on older technology. And so, for you to onboard those clients, and the staff onto Acuity's cloud stack was very disruptive, difficult, challenging. I mean, you had mentioned staff left, right? Did they leave because they didn't want to learn new things? Is that part of it or ...?

[00:19:24] Ch-Ch-Ch-Ch-Changes

Matthew: No, I think people hate change. Right? Generally, customers, and employees both hate change, generally. And then, we didn't do a good job of being onsite to help reassure people. They didn't understand who we were, kind of character-wise, and who are these folks in Atlanta, like, popping in on video chats. I mean, whatever; if they're checking Slack.

If you can imagine, like going from a weekly status meeting in an office to a video update in Slack from Kenji, like that's how big of a culture shock they were in for, and it's just- it can feel impersonal when we're trying to respect their time at home, right? We were trying to respect their work time, and it feels impersonal if you aren't used to it. Uh, so I think there's just a lot of things in that vein that we learned. We learned a lot-

Kenji: Yeah. The first time we got up there, I remember going up there- you got there first, Matthew, but Lisa, and I went- our COO, and I went up there just after you, and we were all kind of up there in kind of the May timeframe, so we're talking six months afterwards and- yeah, after we closed the deal.
Blake: So, you do the deal; tax season comes, and then, everything sort of pauses for six months, and then you get up there.

Kenji: So, so, I think that cadence is like- so Matthew had an interesting theory when we were in the middle of this, and it was still- we were still thinking about, okay, do we keep doing more of these? Initially, it was like, you know what, we're just gonna modify the timing aspect of this. What he had initially thought of was like, hey, maybe what we need to do is work during tax season to kind of target some of these firms, and then, we don't start anything until just after the initial tax deadline. And then, we use the summertime as our integration period.

We initially thought that it was like, okay, we just screwed up on the timing side, and that was just one of many of the things that we kind of underestimated, but once we got further into that, and once we saw everybody there, it was interesting 'cause it was- it was definitely the facepalm emoji, like in real life. We were oh my gosh, we're here in front of them. They're all looking at and talking to us. We're like, oh, I get it now. I get what you all are doing. You're real people. Yes. You use a whole bunch of different technology- Acuity does than they do ...

They started seeing like, oh, this is a next iteration of where the profession needs to go to, but during that six-month period, when we couldn't get there, I think a lot of people were kind of freaked out by who we are, and were like, "Hey, I need to go find a regular job where I can do accounting with normal people who aren't doing everything on the cloud and all these crazy different systems and tools." Had we gotten there earlier, I think we would've been able to get ahead of that a bit.

Blake: What an interesting takeaway. I mean, we've been living in the cloud for a decade now, and there's still some things that we just cannot do remotely. You need to be there in person for this kind of thing.

Kenji: I'll say also, too, I've learned through more and more people, as we shared this story, of how many situations are out there to where- actually the vast- it sounds like the vast majority of the profession is still just like that firm. I tend to get very myopic and think of- when I'm spending my time with Blake, and David, or Amanda Aguilar, or Will Lopez - this is the big community. It's not.

I was shocked by how we are still a small part on the front edge of our profession, and there is still a lot, most of it, that is just like that; they're doing things like after-the-fact payroll or doing- taking on just random returns from anybody who shows up on April 14th with a lot of paperwork in hand. There's- still most of the profession is doing that. which again, I needed to have that bubble kind of burst in my world.

Blake: So, before we move on to the second merger in our tale of two mergers, it sounds like you're actually still planning to go this route, or is that incorrect? Like the PASBA; let's talk to these firms, you know bring them in. Is that still on?

Matthew: One of the really interesting things that we've done a lot of research on in this space, and we've been through some private equity talks, and stuff like that, with different private equity firms about doing a roll-up- is one of the things about our ecosystem that most people aren't aware of is that there's about 100,000 accounting firms like ours in the United States. The problem is it's really diverse. They're usually between half a million, and $2 million in revenue.

One of our challenges is our sales team can do that in a quarter. So, our challenge is why not just do this organically, and just continue to scale our sales team and our pod, because it actually smooths out the timeframe on which we would onboard these clients, which we figured out we have to do if we run the PASBA model.

Blake: Right. You have to onboard the clients anyway. If you're acquiring them organically, you have to onboard them, so-

Matthew: They're spaced out though, better; they're spaced out through the quarter as opposed to doing- So, instead of doing one acquisition a quarter- so, our sales team does the same as acquiring a million-dollar firm probably every six months, but in a good quarter, we do it in a quarter. Every six months, we acquire a firm organically, right now, with our sales team. It's kind of weird, based on the people that we would buy.

[00:24:16] We Buy Ugly Firms?

Blake: And when I talk to folks about firm valuation multiples, in traditional firms, and cloud firms, traditional firms, you know, it seems to be getting lower, bit by bit below that 1X ARR. I think the reason is basically because modern firms are realizing we can just acquire their customers. We don't have to acquire the firm. We can just get the customers that want to change.

Matthew: Just to give you a sense of cost, it costs us about a third to do organically as it is to do it inorganically.

Blake: 'Cause you don't have to buy out the equity in the firm. Yeah, you're just sales and marketing costs to acquire those customers.

Matthew: We spent, about $350,000 in Q1 to acquire $800,000 worth of business. For a firm right now, you pay dollar for dollar. So, if you acquire an $800,000 firm, you pay $800,000, if you're lucky.
Blake: Yeah, you should just start making '50 cents on the dollar' offers.

Kenji: We, we did talk about that. We talked about that if we were to do it- to your question, to your actual question, Blake, we do more of this- this is very typical of Matthew, and I. We do love placing bets on things. We love running experiments. I think that's probably- When I think about what people say, "Oh, you guys are unique at Acuity," the only thing unique about us is, I think, our risk tolerance is a little bit different. We just like to do things a little funky. We don't mind making mistakes. We don't mind coming on here and talking about them or talking about them at a conference 'cause I think, for us, it's interesting.

The by-product has been, it's given us opportunity to try things out, and we don't worry about it so much. And I think that is where, going through a transaction like this, you may say- even when it wasn't working, we were like, well, maybe what we do next time is just put an advertisement on our website and say, "Hey, we're acquiring. If you want to sell us any of your clients, and they fit within these basic parameters, we'll pay you, right now, 50 cents on the dollar." What would that do?

Blake: Cash up front. It’s like, “We buy ugly houses."

Kenji: We buy ugly houses. Just do that, right, and say we don't actually want to go through buying the firm, or all the other things, like people. Like, if we're going to be just clear about all we want is customers, then just do an offer for just the customers, and let people sell you the customers.
So, I don't- who knows whether we'll do more of those, but I think that I would encourage people to open their mindset to like try things out; experiment a little bit. Sometimes, they don't go as well as you'd like them to, but you do get a better picture of the overall landscape of the profession, where people are, where your firm sits, and it certainly helped us identify a lot of weaknesses and areas we had to get better in. I, I don't know whether we'll do more of these, or maybe someday, you'll just come to the Acuity page and see a big old sign on it saying, " We buy ugly clients."

Blake: I love that.

Matthew: I mean, there's two sides of this, right? There's a customer acquisition side, and employee acquisition side. So last year, we acquired about 30 employees through the acquisitions, but we hired 35 organically. So, you have the onboarding issues on both sides, right?

Blake: It's easier to onboard somebody who comes to you voluntarily than somebody who comes to you through a merger, I'm sure.

Kenji: A million percent, yes; this may be a good transition to the other firm, but that is very different depending on the firm, by what we learned, very much.

[00:27:18] Chasing Clouds

Blake: Perfect transition, right? Because the second merger in our tale is Catching Clouds joining Acuity. I feel like it's going to be a very different story, even though I haven't heard it because Catching Clouds was already cloud-based; niched to serve e-commerce clients. How many employees where they at-

Matthew: 20.

Kenji: They were about 20-

Blake: So, decent-sized cloud-based firm coming into Acuity. Tell me about this. What's going well- when, when did it happen?

Kenji: So, it happened, um-

Matthew: It happened really fast.

Kenji: Really, really fast, yeah, but from a timing perspective, the conversations started happening in June of this past year, and then, we dug in with it, in July, and then, the deal was done, and announced on August 1st. So, it was a very- it was a short period of time.

Blake: Like a hundred days.

Kenji: The difference is, we had a long-term relationship with Patti, and Scott, and the Catching Clouds team. We've been- we view them as peers. In many regards, they're people we look up to, and firms we look up to, and so, that relationship had been there since our early days of being on the Xero Partner Advisory Council, and just knowing them in the community as "Well, something e-commerce pops up, you need to talk to Patti, and Scott." And so, We had a bit of a history there, which I think helped us on that timeline, for sure.

Blake: What made it different than the first merger?

Matthew: I think the main thing was alignment. So, we did an all-equity deal for the second deal, and we didn't do any earn-outs; so, no earn outs. We got rid of the earn-out concept completely, so that's not weighing over anybody's head. Nobody's worried about disalignment for the first 18 months, based on how old clients do, or new clients do, either side.

We agreed how much of the business we would all each own. At the same time, we also- our COO bought 5% of the practice, so we now have five of us that own the practice, which was alignment that was important to both sides to make happen. It was something that we had thought about in our site for a long time, and Patti, and Scott, when they were doing diligence on us, it was like, "Yeah, this has to happen for this deal to happen."

We have that alignment piece, and I guess I can't under-stress how important incentives are, and alignment is with these kinds of transactions because people start behaving, as you incent them, as a natural human response to things. Everybody in this second deal has a long-term incentive that is fully aligned. That is the biggest damned difference. It's just the biggest thing that we did better.

Kenji: It is huge, and I'll say this is also a good opportunity to kind of watch Matthew, and I, how our partnership works. Matthew is absolutely a guru when it comes to deal structure. So, he's going to speak in terms of the way that we structured this deal, and it was drastically different than the first one, and that is absolutely true. It made a huge difference. But I also think, on top of that, too, of things that were different, not just the alignment- absolutely the alignment from the equity component and going forward, but our vision for what we thought was possible in the accounting space.

In one case, you've got someone who's- honestly, the industry is running past them, and technology is running past them, and they're going, "Hey, I gotta get out." And I get that. We'd like to help. If there are cases we can help with that, we'd like to do that. This is very different, when you look at front runners in the industry of Patti, and Scott, who were saying there's a better way to serve clients; there's a better way to have our profession be more relevant.

And we get together and, right out of the gate, sat down and Patti, and Scott's living room and talked about what we wanted to do. There's was a, " We're not done. There is so much more work that we have to do in this profession to make it better for small businesses, particularly to make it better for people that work in the profession." That, right away, we're like, "These are very aligned visions." I think the vision component of what we all wanted along with how we structured the deal made all the difference in the world.

Blake: First deal was partner doesn't really want to adapt to the times, wants to basically exit, and so, you created an incentive plan that was designed around that; unfortunately, created some perverse incentives, or incentives that worked against what you were trying to achieve. In this one, it's all equity, so, it creates a really powerful incentive to make everything work, to stay long-term. But then, my question is how do you create liquidity? Because eventually people are going to want to retire or maybe want to exit. Do you have a provision in there for that?

Matthew: For everybody, except for me and Kenji, we were able to accomplish that.

Blake: So, you guys are stuck.

Matthew: This second merger was great for us in that we've also been thinking about that right? Kenji's real old, and I'm 46. So, I mean, we don't even talk about how old he is. One of the things we're trying to figure out is how to create that liquidity for owners long-term. How do you monetize and get out, so YOU don't feel trapped? I think that's one of the problems.

One of the things Patti, and Scott like is they can get out at any time, the way we structured the deal. We have a mechanism for them to get out, and leave, and go do stuff. So, if they're like not happy - which is one of our core values, happy - they can get out. Lisa's the same way. Lisa can get out. She can say, "Okay, we built this great thing ..." Well, long term, we'd like to do that for me, and Kenji, but I think we have to be about $20 million in revenue because then we need some outside help to be able to finance those kind of exits. That'll be interesting.

Kenji: so, We'd built that structure for the rest of them, and I think we've been driving toward having a place to where anyone, Matthew, and I, or other people can enter and exit the organization. And I'll be clear, not just partners; like this would be my ideal state-

Blake: Okay. That was gonna be my-

Kenji: - if you come- I think we're very influenced by the startup community because we do a lot of work in it. Um, it's helped us, in many regards, think about innovation within the accounting space by looking at what happens with tech startups, and you think about those who get equity or get options. You've had this many times, Blake, when you get options equity. The challenge with that is if it's not in a, a way that you can monitor- it's great that you get ownership along the way that uh, should allow you, theoretically, that, if value increases during your time there, you get rewarded for that. However, because lots of startups are not liquid, they're private companies, it's hard to sometimes monetize that.

[00:33:49] What's Around the Corner?

The idea down the road- and I thought this was interesting because I had heard some allusion to this by, uh, I guess it was Charles Weinstein, the CEO of EisnerAmper, which I thought was fascinating what they did- part of that capital raise sounds like it's there to provide a liquidity mechanism to attract great people, and to give them incentive to come work there. Not saying we would go raise private equity, but if we could find a way to, not just the partner level, but any team members who come and work for you, to be able to get some form of an instrument, that when they- if they ever decide to leave, whether it's retiring, go finding some passionate project, whatever it might be, founding their own thing, that they could get value for that time period there.

I think that's what we'd love to see. Whether that's possible or not through some of the different mechanisms out there, I think that's been one of the fun challenges that Matthew, and I had been trying to think through and take some inspiration from others out there of how did you get there? Because that's just not something you see in the profession today. I think it's lacking.

Blake: It's interesting you brought up EisnerAmper because I just had the opportunity to interview Charlie Weinstein for this podcast, this week; as we record, it's early November. And I spoke to him about that transaction with TowerBrook- I think it's TowerBrook Capital Partners-

Kenji: Correct.

Blake: While he couldn't divulge all of the terms, I did get the understanding that, the idea is to always have a pool of cash available, and the partners have stock. They do not have a partnership share anymore. This is in the, uh, the non-attest part of the firm. the partners, every- he said, hopefully every four to five years, there's going to be a liquidity event and you'll have the option then to sell your stock and exit if you want, or keep working, but you'll be able to trade your equity for cash, right?

Kenji: Yep.

Blake: So, that's really interesting because it changes the dynamic of a firm where now you don't have to stay until you retire to see the value of your equity. You're not committing for life to a firm, which, it's kind of crazy that that's even still something that people talk about-

Kenji: Absolutely!

Blake: And you compare it to the startup world, which is the opposite, which is what I was attracted into. So, I was a manager at a big firm, and here, I was presented with the idea of going into a technology company where I get stock options, or I'm going to stay and try to make partner at a firm, and there's no real defined path. What does it even mean? What's- even when you become partner, it's not really clear what exactly the value of your partnership is.

Kenji: Right. And I think that you- it's just interesting, as you think about ways into which you can find- you can get people motivated and incentivized, and they should be, I believe, incentivized on creating value from when they step in the organization to whenever they leave ,and exit. If we can help figure out like a way to give people that value during that time period, I think that solves a lot of the challenges we have.

When you mentioned Blake about like, hey, that model used to be, you sign up to start an accounting firm for life. To me, it's the exact reason we see those statistics from the AICPA about why there are so many people who are at the end of their professional career who are still stuck with these firms, and much of the profession is kind of either being held back by that or passing them by, and they're stuck, and they don't know where to go with it. If there are other opportunities to monetize that, or liquidate that throughout the road, they could have handed that off to someone who's like, "Hey, I'm the next generation. I really want to come in here and make some changes," but the way that we structured accounting firms doesn't allow that today.

Blake: There's no liquidity.

Kenji: Nothing.

Blake: That's the really, the key problem is all this equity is trapped in these traditional structures. And if we can free it up- well, we all know what happens in the economy when we have liquidity, and when we don't, it's a disaster. Why is accounting any different?

Um, so what's interesting, though, about what you're saying, that's kind of revolutionary, or it could be, anyway, is that EisnerAmper is not offering this to anyone but partners. Only the partners are going to get to enjoy this liquidity and equity, but you're talking about maybe-

Matthew: Everybody, we're trying- like our ideal is that everybody would be able to do that.

Kenji: And that, again, I think is more akin to what we see on the technology landscape. Every employee, in many places, comes in and gets options commensurate to their roles, and the value they provide the organization.

Matthew: But, I think-

Blake: That's what I liked about-

[00:37:57] Out Standing in the Field

Matthew: Well, one thing, I think we're really different from a lot of people in that we don't have that model where it's up or out. You come into our organization- people who are like 10 to 20 years into their career like being an accountant, or a controller, or a CFO, and you don't have to move up. There is a huge value in all three of those positions. Why wouldn't we try to push down that equity to those folks? Do you know what I mean?

Like, it doesn't make sense to me that we would marginalize that. I get, in a traditional audit model, where it's like up or out; that's fine. But I think there's tax people like that. I think there's accountants like that. They are good at what they do. Don't Peter principle people and make them go up to the- whatever the- promote them till they're incompetent, right? It's just awful.

Blake: Yeah. Let them do what they like doing. And not everyone wants to manage a team. Not everybody wants to do what a traditional partner does and make it rain. That seems to be one of those things you have to do as a partner a lot at the time, and it's hard to become a partner if you don't. There's just so much that we can fix about accounting, and so, so great to hear that you guys are thinking about those things. I think if anybody-

Kenji: We'd like to- we'd like to really try to move it here, in the next few years to action, and less probably thinking, but it took us- we're actually excited 'cause we'll be in Nashville next week. It's me, and Matthew's retreat that we take to go actually spend time talking about these things. Sometimes, we actually get some work done. Sometimes, we just come up with madcap ideas, and drink a bunch of wine, and beer, and just enjoy the conversation, but we are trying to move that down the path.

And there've been some others in this space. I think Liz Mason's doing a nice job of thinking about that. She's been really helpful to me in thinking about it. I think there's a lot happening outside of the profession that we could look to some inspiration and for some direction on ways to do this because I think it really helps us- yes, competitively, do we, Acuity, want to go out there and just get all the best people? Of course, we do.

I'd also, actually even more so, like to see all the great people come to the accounting profession. Say, "Hey, this is profession that I should come and work in." And we'd love to see more students, more people, wherever they are in their career go, "Hey, this is a great profession to work in." And I think there are some things we should be doing as firm owners to help attract them because right now it's-
Blake: shedding them.

Kenji: Yeah, I mean, it's pretty hard for me. I have a kid in college who is not going into accounting, but if he had been like, "Hey, should I go work in a traditional accounting firm model?" I'm like, eh- it'd be a little tough to want to recommend that.

Blake: Well, you know, hey, it's been great talking to both of you. I feel like I've kind of monopolized this episode. It is a crossover episode. So, are there any traditions you have on Drink While You Think that we need to hit before we go?

[00:40:38] Two Beers, One Seltzer ...

Matthew: Well, we definitely have to rate our beers.

Kenji: Yeah. The only one, we always finish- we rate our beers. I've got Matthew's pulled up here. I don't think there's screen sharing in this wonderful-

Blake: There is not-

Kenji: What you need to do is, first of all, follow Matthew, and I on the app. that's called Untappd. U-N-T-A-P-P-D, for all your social kind of beer stuff, and you can find us on there by- Drink While You Think. Look for us as a profile. So, we go on there and rate all of our beers from a scale of one to five, half increments. Matthew, the PastryArchy Mexican Hot Chocolate. What do you give it?

Matthew: This is the Candy Cane Imperial stout-

Kenji: Oh, the Candy Cane. Hold on-

Matthew: They have a Mexican Hot Chocolate? That'd be like a 10.

Kenji: I thought- I thought you picked that one.

Matthew: No, I've got the Candy Cane Imperial stout. I would have preferred the Mexican Hot Chocolate. If you can find the Candy Cane Imperial stout, it's a 4.25; it's quarter-point increments, Blake. Just so-

Kenji: Pretty solid-

Blake: Oh, boy! That’s quite detailed.

Kenji: -a 4.25 for Matthew. While Blake's thinking about his still, I'm going to do my Pay It Forward. I'm going to give this- it's good. I didn't get much of the- it's a Cocoa Porter. Didn't get a ton of chocolate or cocoa in there, so, I'm going to go 3.75.

Matthew: For false advertising?

Kenji: Yeah, for false ... No ... They could've had a little bit more-

Matthew: A 3.5, 3.75 is like a solid beer, Blake. Anything 4, you kinda seek it out to buy it again, you know? And then, 5 the best beer ever.

Blake: you can help me with the rating scale because to me, I mean, this is like my favorite seltzer for out by the pool. It's Arizona, it's 105 degrees. This is what I like to drink by the pool.

Matthew: My dad would say put that at a 5. That's like my favorite; like 4.75, or 5- my dad would be like- Corona was his 5. He's like-

Kenji: Yeah, we had Matthew's dad on here-

Matthew: I've drinking 40 years. Like, it's pretty funny.

Kenji: I was looking- It was funny. I was looking at our stats, Matthew, before we got on, and I'm like, what have been all of our 5s? And I'm like, why is there a Corona at 5? And I'm like, oh, I forgot, your dad always drinks Corona, so he just gave it a 5. Do whatever you want to do, Blake, but what do you think on a Sunday?

Blake: give it a 4.75, so there's a little room to-

Kenji: I like- it I like it.

Blake: And it's made with solar power, guys. That's the- this is sustainable.

Kenji: Oh, don't- okay, well, we'll have some more- we'll do another episode on Earmark about when we will have another announcement, hopefully in a couple months, around sustainability, and we'll talk about that.

Blake: I would love to. ESG is the hot thing.

Kenji: Ooh, it's hot baby. We'll have some announcements there, so-

Blake: Thank you guys. So great to chat you. Happy Friday-

[00:43:13] Contact Us!

Matthew: Wait, wait, wait, we have to do this because I've always wanted to do this. Blake, how do find you on- how do people contact you, if they want to see you?

Blake: You can find me on Twitter. I am@BlakeTOliver. How about you, Matthew?

Matthew: I'm TheTechCPA on all the socials.

Blake: And Kenji?

Kenji: I am Kenji Kuramoto. All of us who- yeah, well-

Matthew: -good luck finding Kenji Kuramoto ...If you can spell it-

Kenji: So, all of the real people here in the room actually use their real names. Some people use weird made-up pseudonyms, so, good luck with that, Matthew.

Blake: And if you'd like to send me a message, or send me a voice memo, that's even better because then I can play it on the show. Email that to blake@blakeoliver.com. Kenji, Matthew, it has been so great talking with you. I'm Blake Oliver, CPA. This has been a collab between the Drink While You Think YouTube Channel, and the Earmark Accounting Podcast-

Matthew: Well, now, the Drink While You Think Podcast launched two weeks ago. So, can actually- we can cross over- while you're listening to Blake's, if you like Blake's, add us, too. We're going to start dropping podcast episodes.

Blake: Listen and subscribe. Bye, guys.

Kenji: Bye.

[00:44:27] Sign up at EarmarkCPE.com for free podcast CPE

Blake: Hey, everyone. Blake here again. I hope you enjoyed that episode. If you'd like to get CPE for listening to episodes like this one and many more accounting and tax podcasts, go to earmarkcpe.com, sign up, and get early access, when the app launches later in 2021.