Earmark Podcast | Earn Free Accounting CPE

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Ashley Rhoden: [00:00:00] I always talk about culture. Culture is so important to evaluate during due diligence and ensuring that your cultures are aligned. Without the people, you have nothing.

Blake Oliver: [00:00:11] Are you an accountant with a continuing education requirement? You can earn free Nasba approved CPE for listening to this episode. Just visit earmarked in your web browser. Take a short quiz and get your certificate. Hello everyone and welcome back to earmark. I'm Blake Oliver and today we're talking about integrating firms not buying them integrating them. What do I mean by that. That is everything that happens post acquisition. And joining me today is Michael Ly. Hey, Michael.

Michael Ly: [00:00:45] How are you doing Blake.

Blake Oliver: [00:00:46] Great to see you and Ashley Rhoden. Hey, Ashley.

Ashley Rhoden: [00:00:50] Hey, Blake.

Blake Oliver: [00:00:52] I'm going to let Michael and Ashley introduce themselves briefly. And I'd love for each of you to also give us a little background on your experience when it comes to integrating firms, putting them together, Michael. Go for it.

Michael Ly: [00:01:06] Hey everybody, I'm Michael Ly, I'm CEO and founder of Reconciled. And I'd like to say I'm Blake's, one of one of Blake's closest friends as well. Um, and my experience with integrating firms Reconciled, uh, through our through the business Reconciled. We've actually been successful and unsuccessful at, uh, purchasing three firms and unsuccessfully purchasing other firms. And then the integration of those firms, um, I, I led with my leadership team on integrating all the acquisitions. We completed, um, and had both successes and failures, um, in that process. So definitely a lot to share and a lot to learn from.

Blake Oliver: [00:01:47] Can't wait. Ashley.

Ashley Rhoden: [00:01:49] Yeah. Thanks, Blake. Um, I'm Ashley Rhoden. I'm the chief operating officer at High Rock Accounting. I have had the joy of integrating four firms at a previous firm that I was with. It was quite a roller coaster, learning and and going through that journey of integrating firms together. And I'm thankful to be able to share that information with you guys. So that way you can learn from our successes and our failures.

Blake Oliver: [00:02:14] And I've been through one integration myself personally. I sold my firm, integrated it into a CPA firm, and I gotta say that was pretty stressful. It was not easy. Uh, and then I had built up the buying process so much that that's all I was thinking about. And then all of a sudden we had to actually make the integration happen. And I ended up leaving after that. And maybe that was a problem with it. So I don't know. Um, Michael, let's start with you. Uh, in our conversations, you have mentioned that you agree that buyers tend to overinvest in the buying process or spend a lot of time in the buying process, the selling process, like I did, and they don't think as much about the integration. Can you explain what you mean by that?

Michael Ly: [00:03:02] Yeah. So you know, the the idea and you lived this dream out, Blake, this dream that every firm owner has is they want to sell their firm, they want to sell it. And then on the buying side, when you're a buyer, you want to go buy your first firm. You're like, wow, I want to go buy my first. It's like buying your a shiny new car. And so you invest all this time and you invest all this time and research into buying that into looking for it. And, um, or if you want to sell your firm, you invest all this time and making your firm look pretty and the best it can be and brokers, you hire brokers to do so. And it would be like akin to buying that new car and then not realizing what are the maintenance costs of this car? Should I should this car be in a garage all year round or not? Uh, does this car have limitations on driving? Uh, if it's an electric car, is it an electric car? And can it only go certain distances. Does it need to be charged every once in a while? So most firms, when they're going through the buying process of buying, they overinvest in that process because they're so excited. But then when they sign, they think, oh, all that hard work is done. Now I just let my now I can just let my team run with it. And let me tell you, that's a big mistake. And I, I did that on my first acquisition. I thought, oh I'm excited. My team must be super excited. And they must have everything planned out to make this integration work. And we just did a poor job, and I did a poor job at really investing my time, energy, and the team's time on think and thoughtfully working through what the integration timeline and and period would look like. And so that's that was a big reason why our I would consider our first integration to be, um, definitely left wanting and a lot of lessons learned how to fail at an integration.

Blake Oliver: [00:04:54] Oh, yeah, I like that failure. Let's talk more about your failures, Michael. So, uh, what do you mean? Like, did you just hand when you say hand, hand it off to the team. Is that what you did? You just said, hey, here you go. Here's a firm.

Michael Ly: [00:05:08] I think most most buyers. Right. It's led by the CEO, the visionary, and maybe some of the other sea levels, depending on how big your firm is. And then you have the executers, right? The integrators. And you have to remember if especially if it's your first purchase, you've never done this before, you don't know what you don't know. And there is no handbook written about this. That's a part of why Ashley and I wanted to do this podcast with you, this series, and then probably we probably could do an infinite amount of podcasts episodes about this topic because there are no books about this. The human element is unpredictable, especially in firms. You're ultimately buying both employees who are human and customers who are human. And that is so unpredictable. And no one has written the book on it, you know. So that's where I completely underinvested and I underinvested and also my own team that I was expecting to integrate, assuming they would be as excited, assuming they knew what they were doing, assuming that even though they've never done this before, that they would understand what to do. That was a massive mistake on my end. And and so, you know, caution to buyers is if you're going to as much as investment in time you put into the buying process, you need to do the same amount or more in the integration process. Um, it's no different than hiring an employee and investing all that time in recruiting and then having no way of orienting them and integrating them into your company once they're hired.

Blake Oliver: [00:06:41] Oh yeah, I've never done that. No. Hired somebody without an onboarding plan?

Michael Ly: [00:06:47] Yeah, exactly. Actually.

Blake Oliver: [00:06:49] Yeah, I guess that's how most of us learn how to do it is we we realize we have a need, we hire somebody, and then we figure it out. But that's not scalable.

Michael Ly: [00:06:58] Yeah, it's not scalable. And you and you want this integration to work out, right. And actually actually knows that the key for you know once you buy you vessel is time and money. Of course you want it to work out. Well that's what integration is. It's making sure it works out. And that's the way to think about it.

Blake Oliver: [00:07:15] What about you, Ashley? I know you have had experience integrating multiple firms. Uh, do you have, like, a playbook now that you've developed?

Ashley Rhoden: [00:07:24] Yeah. So I was thinking about this topic some more, and I actually believe that integration starts before you even get to the Loi. So just like businesses have ISPs, ideal client profiles, right? You have that when you're reaching out and targeting specific clients that you want to bring into your business. When you're talking about acquiring another firm and integrating a firm into your own company, um, I kind of coined this term, whether it's made up or not, I don't really know, but you need what I'm calling an IBP. So your ideal business profile for acquisitions. And when you're really, really clear about the firm and how they'll actually fit in with your culture and operations, then you're going to save yourself a massive headache. Just like when you're really clear about hiring an employee and how they're going to fit in with your culture and operations. Same thing. So you have to think about this in the same light of, you know, I'm hiring a key employee that's going to help me take my business to the next level. Well, I'm also buying buying a firm or buying another company, whether it be a tech company, an accounting company, whatever it is that's going to help me get to that next level. And, um, you know, when you're when you're working through the whole due diligence process, you really have to create a roadmap.

Ashley Rhoden: [00:08:34] And that due diligence process is then going to, in turn, turn into a checklist that's going to help you integrate that firm. So, you know, you talk about people and culture Understanding the team structures, compensation, figuring out who the critical client relationships are with. You've got systems and technology. You have to make sure that all of that comes into play. You have to establish and evaluate all the client relationships. Make sure that you know the service delivery model is the same, that you're understanding who the high value relationships are, not just with the clients, but also with the employees, and where those high value relationships sit and how you manage them. And then the operations and the processes. So what's the workflow? What's the documentation standards? What's the quality control measures. And then you create a checklist and a first 100 day plan that comes directly from what you learn in that due diligence period. So it's a whole process of going from, hey, I've got my ideal business profile that I want to target all the way through for your first 100 days of what that's going to look like, to integrate that firm into your company.

Blake Oliver: [00:09:40] So it's the due diligence. The due diligence isn't just about whether or not to do the deal. It is how you create your checklist for the integration that happens afterward.

Ashley Rhoden: [00:09:51] Correct.

Blake Oliver: [00:09:52] I love that. That makes due diligence a little bit more fun. I want to do it more, I'm sure.

Ashley Rhoden: [00:09:58] Yeah. I mean, you can't just look at the financials, right? You have to go and dive deeper into understanding the business and everything else that's going on. A company could look phenomenal. They could have great financials, but that doesn't mean that they're going to be a good fit for you to acquire them.

Blake Oliver: [00:10:16] What about you Michael. Do you take that approach?

Michael Ly: [00:10:18] Well, we we didn't the first time. And what Ashley says is wisdom and clearly something that she learned and from her experience that in order to be successful, you really need to have that plan. And so in in the acquisitions after the first, we definitely took that approach to say, hey, what did we what did we learn from the first integration? What mistakes did we make And what did we not have for ourselves that we should have had? What what playbook? What checklist should we have had? What what should we have asked in due diligence to make sure it would fit? I love Ashley's analogy. Like, okay, the financials might seem amazing. You might find a firm with 4,050% SDC or EBITDA, depending on how you look at it. But what's underlying that? When will you dig into the financials? Well, what workflow management system are they using? Is it going to be a beast or a bear to integrate that workflow management system into your own? Are they an archaic one that's not cloud based? What vendors are they paying and what literal credit cards or checking accounts are they paying those vendors through? Well, those have to transition to you. What's that going to look like on day one? From day one, you don't want the seller doesn't want to be paying their bills after they've been paid. They sold their firm to you. They don't want their credit cards charged anymore. So what does that look like in the back end? How do you get those literally practically transitioned the domain name of the website you're buying, this company's websites and email accounts and domain names. Do they have master admin access to that? I ran into situations where a IT contractor a seller is using actually owned everything they had master. Well, they didn't have a relationship with that IT contractor anymore. They just they.

Blake Oliver: [00:12:00] Owned they own the domain name.

Michael Ly: [00:12:02] Yeah, they own the domain because, you know, accounting firms don't know. A lot of them don't know. Wait. Oh, yeah. I bought this domain through my IT contractor years ago. I just never got around transitioning it to my own name. Well, that's a problem. You know, how do we get access to that domain name? So those are all little things you don't think to ask that has to be covered in due diligence, right? And then that that creates the checklist of hey, is this going to be a problem? How do we and what happens in the buying process is you hedge against these challenges. Um, in the actual asset purchase agreement or equity purchase agreement. And you, you put either, you know, warranties or a basket of dollars that you're going to set aside to make sure. Look, if this doesn't happen, if we can't get access. Look, you've committed $25,000 out of the purchase price because we can't buy that domain from you anymore or we can't get access to that IT contract anymore. So all that comes out through due diligence.

Blake Oliver: [00:12:55] So you're not just doing the due diligence, you're also hedging your bet.

Michael Ly: [00:12:58] Oh yeah. For sure.

Blake Oliver: [00:13:00] You're assigning a dollar value to these assets that you have to get control of.

Michael Ly: [00:13:04] Yeah. And it's risk and the risk right. And the risk and the biggest risk. And what Ashley knows and I know is the biggest risk is always people. Because we know integration is almost always highest correlated to as long as you can keep the people you will keep the most clients, especially in those first hundred days. If you can't keep the people, the faster they leave, the higher the churn rate is going to be. No matter how amazing you are as a buyer, no matter how beautiful you look, no matter how polished your brand is, you will not sustain those clients without the people that have been serving them for years, that have relationships with them for years. And so that's the the hardest piece, the most important piece of that integration period.

Ashley Rhoden: [00:13:50] I always talk about culture. Culture is so important to evaluate during due diligence and ensuring that your cultures are aligned, that you know, you're you're with compensation models are your employees, that you're I hate to say that we're buying employees because technically you can't buy employees. They're not slaves, right? But we are we are hiring them to come work for us. And you have to make sure that, you know, there might be operating on completely different compensation models. How are we going to ensure that we're going to make all these employees whole when they come and they decide to work for us? Without the people, you have nothing. And that's what we tell, you know, everybody. It's like we can't do our job without you. And you are the most important aspect. The employees are the most important aspect of this integration. That's the client relationship. And that's when we talk about, you know, in the due diligence process, understanding those high value relationships, understanding that client concentration and who's managing that high value relationship that you have and how you're going to manage that transition, and how you're also going to introduce key leaders from the new firm into these high value relationships. Because you can't always be dependent on one person having these relationships.

Blake Oliver: [00:15:00] Yeah, that's a huge risk, is you have to figure that out in due diligence. Who at the firm that you are acquiring has the relationships that bring in revenue. And often it could be just a few people like really key people. So keeping them is absolutely critical.

Michael Ly: [00:15:21] And what you what what's important is both the firm you have. You know, you as the buyer. You may have a few leaders you want involved, but you actually and Ashley's had experience with this. You actually may you may night some employees at the seller to say, hey, actually I'm going to give you an opportunity here. I'm going to I'm going to put you in charge of, of this part of the integration process, and not only today for this, but going forward, I want to empower you to be part of us, especially if you're planning to be a roll up, you know, do a roll up strategy or buy multiple. We've done that ourselves. We we have leaders at Reconciled from the second and third acquisitions that just performed amazing. And we said, hey, if we want to be successful, we need to let them own a key piece of this integration because they know the firm they're coming from. They know the firm better than we do. And so let's empower them. Now, let's put a C-level or somebody else they're they're accountable to at our firm. But let's empower them and say, hey, look, not only do we want to invite you to come join us, we want to invite you to join our vision of what we're trying to do going forward. And Ashley's had that that same experience, same experience with what she's been able to do, um, with with the integrations and the work she's done. And it's very empowering because to say, hey, this buyer doesn't even know me, but they recognize a skill set that I could have in a role I could play in this integration, and I could do it not just for this, but for the future firms that we're going to go by.

Blake Oliver: [00:16:56] And that really aligns with what I understand about what motivates people is compensation is important, but people also want to have a meaningful role. So you take these all stars, the best performers, the top people with the relationships at the firm that you are integrating, and you elevate them and you make them a leader in a bigger team. They are much more likely to stay with you, at least I certainly would be, and put up with the disruption that the integration causes Is the pain, which I imagine that is like one of the hardest things to deal with, right? Is the seller of the firm is happy to sell it. The people who work there often feel the opposite way because change is hard. Is that your experience, Ashley?

Ashley Rhoden: [00:17:49] Yeah, I think that's it is. So, um, going from, you know, having been acquired and going from a small firm to an even bigger firm and then doing roll ups of other firms along the way. You know, it's it's a big change. And managing change management is hard. You have to find ways to communicate and communicate in every different way that you can communicate, because people learn differently. And you also have to be ten steps ahead of their thinking, right? You can't when you're when you're talking about any kind of change management, you have to think about everything they're going to think about before they think about it and tell them before they even think about it. And I think that's probably one of the hardest aspects of integrating a firm together. Um, and also being really clear and, you know, in my experience, we've created timelines and it's like, hey, you can expect that we're going to transition this software between this month and this month. And it's we expect it to take, you know, eight weeks, six weeks, whatever it is. The timeline is. So that way they know what to expect. The employees understand what's coming and they can be really aware of, hey, I've got, you know, this client work that I'm focused on and that's their main priority, not your integrations that you have that you're working on. So that way your systems all rolled together properly. So setting setting realistic expectations, communicating really clearly and thinking ten steps ahead of the employees is probably the best thing that you can do when integrating a firm together.

Michael Ly: [00:19:17] Yeah, I think I think that the assumption buyers make all the time, including myself and I, made this mistake. We assume that the selling employees will all be excited for this amazing change that's about to occur, and that is just not the truth. Now some will be. Some will be in because they love change. But we all understand the nature, the general nature of most accountants. They didn't go into the accounting field because they love change every day with their job. They go in accounting because there's consistency, there's rules, there's a science behind it. Um, it's it's scientific. Right? That's why the BS in accounting is a science degree.

Blake Oliver: [00:19:59] Yeah. And there's a lot of variety in the job, but the job itself doesn't change.

Michael Ly: [00:20:05] Right.

Blake Oliver: [00:20:05] There's rules right on the job. Yeah.

Michael Ly: [00:20:07] And most firms most firms are going to buy most firms that are being sold. They haven't had a lot of change. They've been in center generally one office or one metro. They've had the same clients for many years. The owner has been consistent about the way they've operated. So now you, as the shiny new buyer comes who is all about change. And this is not going to be just the first and only. This is going to be one of many firms you buy most likely. And so assuming that everyone's going to love the change is a bad assumption. And you've got to do as Ashley said, everything in your power to communicate or have a plan of communication ahead of time. The other thing you're working up against is you and the seller selling owner have had many months, if not a year, to talk about this purchase, but you as a buyer will almost always never get a chance to talk to the employees until after the documents have been signed and the money has been wired. It's very rare. It's very rare if you ever get to.

Ashley Rhoden: [00:21:09] Yeah, let's talk about that because I have seen it both ways. And I will tell you that if you can get some reassurance in your seller that this deal is going to close and the seller will allow you to communicate with the employees ahead of close. Your success rate in integrating those employees on day one will be ten times what it was. If you have to communicate on the day the business closes. People don't like surprises. They want to know they they want consistency and they want to know. And they don't. They want time to think about what's happening and what's changing. And they don't like a rushed decision of, hey, guess what? Surprise, we sold the company and now you have to sign a new employment agreement because they're your new employer and you have to have this done because otherwise you're not employed because the other entity doesn't exist anymore. So if you can get some confidence and Michael's right, you know, a lot of a lot of sellers, they won't because they're afraid. They're afraid that the deal is not going to go through. And then their whole team's going to know that they're thinking of selling, and then they leave. And then that jeopardizes the client relationship. There's so much that goes into it. But if you can get some solid confidence in the seller, I highly, highly, highly recommend that you have that communication with the the new employees or the employees employees that you're going to hire from the acquisition before close?

Michael Ly: [00:22:28] Yeah, I agree with Ashley on that. We had that on our on our latest acquisition that we did our third one, and the seller had confidence and was able to introduce us. There are more employees around from that acquisition than the previous two, and it's because they got a chance to get insight in and hear about the culture and hear about the plan long before months before the close happened. So that ability to communicate and and not not create the surprise the week of close and not create this pressure of you've got to sign the employment agreement within 24 hours or you don't have a job. That's a lot of pressure. After hearing the news that your company was just sold, that you've worked at for 10 or 15 years, all these things are swirling through your head as an employee. What happens to the clients I build these relationships with. Do I keep the same clients? What about the office I go to? What about my desk? What about my personal belongings I have at the office? There's all these things that go through. Do I get the same boss or not? You know. So you got to think through all that. So the more you communicate ahead of time, the better.

Ashley Rhoden: [00:23:33] It doesn't have to be all the employees either. Like, a lot of a lot. It could just be your your key employees or your the leadership team that you're bringing over and getting their buy in because the the rest of the employees, they're going to look to their key leaders for guidance. They're going to look for reassurance from other people. So, you know, if you could get a seller to bring in some key leaders that can help during the due diligence process, they're also going to be able to provide a lot more value than a than the business owner who might not be involved in the day to day aspects of the business anymore. And that's what then helps you through the due diligence process, through the the full 100 day checklist, integration planning because you have the true institutional knowledge.

Blake Oliver: [00:24:16] Okay. We need to identify leaders who are going to help bring the firm over, integrate it. Let's walk through those roles. It's not just, well, if it's a small firm, maybe it's one person, but chances are there's going to be multiple people involved here, right? There's multiple jobs to do. Um, we've been talking about how people is really the most important thing. So why don't we start with that, the HR. And that that has to happen right away. Because as soon as that deal closes, the entity doesn't exist anymore. You got to move people over, right? So is that where we start? Hr payroll?

Michael Ly: [00:24:54] Yeah, I think that's a really important part. And I'll actually talk more about this, especially since she has experience not only as a by as part of the buying process, but also as part of the being being bought and being an employee that gets an offer letter. Right? Don't assume the person, the HR leader that you have at your company knows what to do. You need to coach him through this. I had to coach my HR director that was at the top. Was around for the first couple of acquisitions because again, all your leaders, this is the oftentimes the first time they've ever done a purchase. So we had to literally walk through a timeline of what does day one, day two, day three, day four. Day seven, week two. Week three look like in her role and what will she be expected to handle and what will she not be expected to handle? So that was really, really important. And because it involves the people you want, you want to ask, okay, is she making the offers? Am I making the offers? Who's making the. Is the seller making the offer letters? That little detail is really important. And then what's being actually said, what's being said to them and what, um, and and what timeline are you going to give those employees to be able to accept that offer letter. So all of that is really, really, really important. Actually, you probably have a lot more experience than this from both sides.

Ashley Rhoden: [00:26:17] Yeah, yeah. So I think, I think, um, in my experience, you know, having a really clear communication plan. So as part of, you know, your draft close plan, you're you've gone through your due diligence process. You've you feel confident in the company that you're buying. Well, great. Now it's time to switch gears. And it's hey, what are we going to do on day one, day two, day three, day four, day 60, day 100. And that's when you really have to create ownership within your team. Um, creating client communication plans. Employee communication plans, um, you know, a FAQ for things that that might be asked, um, that you can again, think ten steps ahead of what the employees are going to be asking you. And, um, another key aspect, too is, you know, the money. We're we're concerned about the money. So it's not just the people, it's also the money. So operationally, how are you going to ensure that you're collecting all this revenue that you have coming in? And how are you going to ensure that the seller is not paying for anything anymore? And that's where you really need to take your leadership team and assign very specific roles and responsibilities in your 100 day checklist that you're going to create. That's going to outline, and it's going to have really clear instructions, because you cannot assume that everybody knows exactly what they need to do.

Blake Oliver: [00:27:33] So if you're doing an asset purchase and there are deposits going into a bank account, but that entity doesn't exist anymore, what do you do? You need that money. And it might be a bunch of ACH payments. Yeah. So do you. How do you how do you how do you do that?

Michael Ly: [00:27:48] Yeah.

Speaker4: [00:27:48] So it's messy. It's very messy.

Michael Ly: [00:27:51] From a practical standpoint. Inside the agreement. You're going to outline a, um, a a clause that says buyer and seller will be collecting and paying for things throughout, you know, post-close. And that that has to be Reconciled. About once a week, once a month, whatever rhythm that you want to take, but that neither buyer nor seller are keeping or expending more or less what the agreement says should occur. So it's almost acting like escrow. You know, your seller is acting as escrow, and you as a buyer are also acting as escrow because there are things that you're going to have to make sure you pay for. But the seller paid for because the card, literally the card gets charged the day of close for a certain vendor or whatever. Right. And the seller goes, oh wait, I forgot about this one.

Speaker4: [00:28:42] So yeah.

Blake Oliver: [00:28:42] So the entity, the seller's entity stays open so that you have access to these bank accounts and credit cards. And in the agreement you just set up access and the the legal obligation to transfer the funds and pay for the credit card, that sort of thing.

Ashley Rhoden: [00:28:57] There's a lot of due to, due from.

Speaker4: [00:28:59] Yeah.

Ashley Rhoden: [00:29:00] And reconciliation. Good play on words, Michael.

Blake Oliver: [00:29:04] Michael's firm is called Reconciled. For those who don't know, excellent branding there. Um, okay. Yeah. Getting people paid. Super critical. Don't want to miss that first payroll. You want to. You want to establish confidence 100%. Missing payroll doesn't doesn't do that. Okay. Let's talk about well, we actually did already talk about the next item on the agenda which is paying the seller's expenses getting access to financial systems. So yeah, if it were me I would want to be able to like get into that bank account. Right. The seller's bank account. If the deposits are coming in there, get get them to agree to that.

Ashley Rhoden: [00:29:41] So it's not actually the bank account because you're doing an asset purchase, right. So they still own the bank account. It's more that you're getting into the billing software, and you're making sure that you're rerouting all the billing and changing that ACH information from their account over to your account. It's, uh, updating, you know, if there's any rev share components that are making sure that those are then redirected to you, it's, um, going in and updating all the subscriptions to make sure that you're being charged for them instead of the, uh, instead of the seller looking at and updating addresses on invoices to make sure you don't have ACH, that the clients know where they're supposed to mail a check to if they're paying you via check. Uh, there's a there's a lot of different systems and processes. And then that goes into the operation and understanding and back to the due diligence of, hey, what what software are you using? How are you using this? What is it used for? What do you pay for? How many licenses do you have? Really getting into the nitty gritty of what is helping them to operate their business.

Blake Oliver: [00:30:39] Yeah, I should probably make a spreadsheet like that for myself. We've tried to we've tried to like, list out everything that we pay for, and I feel like it's never complete. It's crazy. Uh, how much firms spend on tech these days? I read an accounting today that it's like 20 to 30% of firm budgets. Is that. Is that right? That sounds like a lot.

Michael Ly: [00:31:02] It is a lot. It is.

Speaker4: [00:31:03] A lot. Yeah, it's a lot.

Blake Oliver: [00:31:06] So that's more than you typically spend.

Michael Ly: [00:31:09] I mean, it depends. You're oftentimes you're augmenting human beings because of that technology. So you're saving on having to hire additional workforce. I tell people there's certain tools. I tell people if I didn't have this tool, I'd have to spend an extra $100,000 a year, 200,000 on on staff just to do what the tool does. So that's what you're augmenting. You're actually saving money. If you think about.

Speaker4: [00:31:32] It.

Blake Oliver: [00:31:32] It makes sense if that's what it's doing. I just think it's, uh, it's remarkable how quickly it's grown that that budget for it, because I feel like when I was practicing, it was like 10%. And we're already like, it's doubled in ten years. Um, it's just. Which is wild, but it makes sense that it would if you can't hire people. I mean, if you can delay hiring people using a tool.

Speaker4: [00:32:02] Yeah. And speaking.

Michael Ly: [00:32:03] About it. You mentioned it.

Speaker4: [00:32:05] Yeah.

Michael Ly: [00:32:05] That's also, you know, one of the steps is that, um, small firms and maybe you as a buyer, you may not have a dedicated IT person, maybe you have an IT contractor, maybe the firm you're buying has an IT. I mentioned that IT contractor. So, you know, one of the things you got to figure out is how do we gain master admin admin kick everyone else out. Access. Right. How do we get that as the new owner. And how do we ensure the seller can get give us that because there's not guarantee they can. And it sometimes you forget to ask do you have access or access. So you're talking about QuickBooks online accountant the proposal system. Um if you're using zero you know zeros accountant uh, built Bill.com. Right. The AP system, the invoicing system. Gusto. The payroll system used for clients. Whatever you're using. Does the firm, the seller have complete master access, and can they transition it to you? Then that includes social media accounts. That includes website domains, the website itself. Those are all things from an IT perspective. They may not. They may or may not have documented well. So you you want to talk through that in the due diligence. And then finally get that from day one. Just say give me it, give it give it over to me.

Blake Oliver: [00:33:15] That's why you get that list in due diligence as you list out every single app, every single account with a password. And then who's the admin?

Speaker4: [00:33:23] Yep.

Blake Oliver: [00:33:24] And get that access on day one.

Ashley Rhoden: [00:33:26] I think another lesson that I've learned is really involving integration consultants during due diligence. Right. So we think, you know, maybe we should just get them after closing. But I think that, you know, when we're talking about it specifically and we're not all IT master admins, like I will be the first to admit that I use an IT consultant because they have a different skill set that I don't have, and their experience when you bring them in during due diligence can help identify any potential integration challenges that you're going to have. And, you know, let's say like, let's talk about Michael's experience with not having not even owning the domain or the website like that, bringing somebody in to identify that early during due diligence could impact the valuation or the deal structure. And so it's really important that not only are you using experts in fields, but you're using them early enough to identify any issues that you have.

Blake Oliver: [00:34:26] All right. We've got access to critical systems. We've got payroll. We got it stuff. We got accounting finance. Now we got to deal with the clients. So you were talking before about how we want to get the, uh, the people, the employees of the firm involved earlier, if possible. Can't really do that with clients. No. So when do we communicate this change to clients, and how do we do it? Ashley.

Ashley Rhoden: [00:34:57] In my experience, you want to do it the day you close, if not the day after you close. So, going back to due diligence, we're identifying those high value relationships that we have with clients. So you look at, you know, your client concentration depending on the size of the firm that you're buying. Maybe it's the top 20 clients by revenue that are going to receive a meeting request or a personal phone call from both the seller and the buyer. Um, and having a really clear client communication plan that's very structured of, hey, you know, you should tell as the buyer, you should tell the seller exactly what you want them to say. You don't want to lead them down a path that maybe you don't agree with. So have a really clear script of, you know, hey, I sold the company. I'm really excited for it. And having a communication that's not a written communication. Now, your lower value clients that you have, you know, maybe they get an email and then maybe they get invited to a meeting where, you know, the new leadership team is there, along with the seller's leadership team. There's different strategies, but you should plan on communicating with the clients as soon as possible. Because they are going to have relationships with the employees, and the employees are going to be the first one to say, hey, we just got sold. And if they don't hear it from the buyer first, they're going to be all up in arms and they need to be aware and made aware of any changes that are coming just as early as the employees need to be made aware.

Blake Oliver: [00:36:20] Yeah, that's a great point.

Speaker4: [00:36:22] Yeah.

Michael Ly: [00:36:22] And it's really important that the employees that you've made offers to you make it really clear what that communication plan is because you don't want them spilling the beans, because remember, likely they have the cell phone numbers of every single client they've worked on for the past 3 to 5 years that they've built relationships with. They they may know the names of the family members, the kids. A lot of these firms that the firms we purchased, these clients came from church, the country club, you know, PTO at the school, the sports teams. These are real relationships. These are in the community often. And so unless you're only buying virtual firms, most buyers, most firms for sale are local community based firms. And so you're not the the seller of that firm isn't the only one with the relationships. It's really those employees. And you want to have a agreement amongst all the team members who is going to communicate and how. And if you don't want those employees saying anything, then you make it really clear. Do not say anything, you know. And if it means accountability on whether or not they keep a new job, then you say that because at the end of the day, all this integration, as we've talked about, the goal is keep people, keep customers. You you will not be successful if you can't keep customers. There's no revenue coming in. And so so keep keep people and ultimately keep customers. And every single piece of the step through this process is to ensure all that occurs.

Blake Oliver: [00:37:53] And to make sure that happens often. One of the most important people to get involved is the seller. The seller can smooth this over with clients that they've had a relationship with for years, if not decades. What are your expectations for the seller being involved after acquisition? Michael, you and I have talked about this a lot on previous episodes, so I'm going to let Ashley give her take.

Ashley Rhoden: [00:38:15] I think it could be different depending on the deal structure. Right. So you could be as the buyer, you could be hiring the seller to take a role within the bigger firm. Um, and or it could be, hey, the expectation that's, that's built out into the APA is that, you know, we expect you to be available as a consultant during, you know, a specified transition period, but they have to be in agreeance to be on board and to be able to communicate and effectively help you smooth over and win the client relationships, whether that be them coming on as an employee to work for you or working through a transition period. And I have seen it go both ways. In my experience, and I don't think there's one right way or another other than that you need their buy in and you need their support to help you during the transition.

Blake Oliver: [00:39:09] Michael, what about if the seller does not meet their obligations? What kind of contingencies? We've already talked about, um, maybe some like specific provisions in the due diligence for access to systems. What other contingencies related related to the seller's obligations do you include?

Speaker4: [00:39:26] Yeah, there's.

Michael Ly: [00:39:26] A lot of obligations that you got to think through that the seller is um, is providing warranty to. And that's going to be, um, language in the agreement. There's also holdback oftentimes in a, in a purchase there's a dollar amount that's held back, whether it's 50% of the purchase price, 20%, 30%. And that might be tied to the performance of the customer staying on or might be tied to other variables that you're going to, you're going to tie the purchase price to. So you do want to make sure you hold the seller accountable. And remember, no matter what amount you gave them upfront, whether it's 50%, 20%, 100% of the purchase, they've just got a large chunk of money in their bank account, and depending on the seller, they may be checked out. At that point, they may not even care about the remaining amount. And you've already wired the money, right? So you got to think about that and how to hold them accountable. And that's all outlined in the provision. But the best thing is constant communication with the seller. If your goal is to have them involved, even for a little bit of time, make sure you lay out expectations.

Michael Ly: [00:40:28] Make sure they know the role that you want them to play and the role you don't want them to play at all, and that they're not going around circumventing the success of this integration. Most sellers believe they know better on how the integration should go and what you as a buyer, should be doing with your business. Most sellers believe that. And I know that because that's after talking with three companies that I've bought, they all have an opinion on how you should ought to do things. But you have to remember, they didn't buy your practice, you bought theirs. And so oftentimes you have to sit there with a smile, take their advice and go, hey, thank you for that, that that thought. I'll think I'll, I'll, I'll consider it as, as we go forward with this plan. But you're ultimately the buyer. You have to figure you the buck stops with you. They're not at risk oftentimes because they've gotten their money. So so that's really clear. Communication is important.

Blake Oliver: [00:41:21] So there are many thoughts on how to do a firm integration. And so it makes sense that the seller would have their ideas of how to do things. Um but we're going to have ours. And so let's talk about the two main ways that that firms get integrated. Um, and actually the kind of the two approaches that private equity is taking to roll ups. So the first is a full roll up and the second is a platform approach. Ashley, what are you. What's what's your experience. Full full roll up or platform approach. And can you describe it.

Ashley Rhoden: [00:42:04] Yeah. So um, a full roll up experience is where you buy the firm and you integrate everything into one unified platform. So what's really great about this approach is that you're getting all your data in one place, so there's no more headaches from you trying to pull reports from five different systems, reconciling different ways of doing things. Um, there is a drawback to that, depending on how big the firm is that you're buying, integration is not should not be taken lightly. Right.

Speaker4: [00:42:33] Um, the.

Blake Oliver: [00:42:34] It stuff the having to get everything switch over all the systems. What if you bought a firm that's on zero and now you got to move them all over to QuickBooks?

Ashley Rhoden: [00:42:42] Or how about how about their on legacy QuickBooks desktop and you have to convert them all to QuickBooks online. Like, there's so many different things and aspects that you have to take into consideration. And it could take a long time. It could take months. Um, to get a firm a big size firm fully integrated in. So, you know, you have to think about not only the team but also the clients and how these changes are going to affect them and their experiences with the company. And you don't want to make any changes that are going to affect the clients within the first six months. In my in my opinion, you want to just kind of let things ride and let the dust settle a little bit, let them get comfortable with the new ownership, let them see that they're people are still there. Um, and then slowly start to make those changes and start chipping away at really the internal systems first and then the external systems later. The other option is to do a platform. Um, and so essentially you're going to acquire a company, but you're going to let them operate pretty independently. So instead of completely overhauling their system. You're going to layer in some back office support to help them and to support them in through their growth.

Ashley Rhoden: [00:43:49] And the the employees love this. It's less disruption in their day to day. They get to keep using the tools that they love. But this is something where you need to go back to that due diligence period and make sure that that's the approach that you're going into, due diligence with that, it's going to be a platform firm and that they're going to be able to work effectively and efficiently in their systems that they're currently using. And if they're not, then you should reconsider how you're going to integrate them in. A drawback to the platform is that you don't have these integrations. You don't have a way to pull a report from one system. So you're going to have to figure out a way to build out dashboards and create KPIs that are going to come together, uh, in a way that makes sense. So at the parent level and the parent company, you're able to report effectively and efficiently on the data that you need to provide and the metrics that you're tracking. So I've seen it go both ways. I can't say that there's one that's better than the other. I think you just have to know what you're trying to achieve before you start the due diligence process, because the outcomes are vastly different.

Blake Oliver: [00:44:55] Michael, do you have a favorite? What do you do? What's your approach?

Michael Ly: [00:44:59] We give we give a period of time for post post-close, for the firm and for the reality of this purchase to settle in. And when we when we did our first acquisition, we really tried to speed up the integration and get the selling employees to just transition to all of our systems as fast as possible. That was a mistake. So on a case by case basis, it actually says you really want to take a an approach of what is the firm culture like. Is it an old school firm where things move slowly? You might have to take a slower approach if it's a more modern firm where they a lot of younger demographic. They love change. They're excited. Maybe you could take a faster approach. Um, ultimately, I, we believe that our brand Reconciled is is the stronger brand of the firms we buy. So our goal is to eventually integrate them into one, one platform. And that's our goal. To me, just the the time frame it's going to take, it's going to be a little different per by the firm you purchase.

Ashley Rhoden: [00:46:02] I think the other the other aspect of that too is, you know, if you're buying a firm that has a pretty recognizable brand, then that's why you would consider doing a platform versus a full roll up.

Blake Oliver: [00:46:14] Got it. They've got a good brand. They're well known in the local market. You don't want to throw away that value.

Ashley Rhoden: [00:46:20] Exactly.

Blake Oliver: [00:46:21] Yeah. Is it ever. Do you ever see, um, sort of a hybrid approach where you have the platform for the brands, but you have all the same systems on the back end? I guess that's not really possible, is it?

Speaker4: [00:46:36] You can have some Systems.

Ashley Rhoden: [00:46:37] But I think specifically, you know, especially when you're talking about different niches that they may be using something that another like vertical would not be using. And so that's where that specificity in the technology comes into play, where you might need data from that other system, but it doesn't apply to the other other verticals that you're servicing. And so you wouldn't you wouldn't do that. You wouldn't take that expense and put it on the other, uh, employees. Because why? Why do that?

Blake Oliver: [00:47:10] Ashley, Michael, thanks so much for joining me and sharing your experience and knowledge about integrating firms. I know Michael has to go, so, uh, we'll let him do that. And, and, you know, there's there's more to talk about, much more for a future episode. Um, love to have you back, Michael. Where can people connect with you online?

Michael Ly: [00:47:29] Look me up on LinkedIn. I have the fire emoji in front of my name. That way I know you're real. Just make sure you reach out and do not put that in your that fire emoji when you reach out and I'll know you were a real person.

Blake Oliver: [00:47:39] That's Michael Ly, spelled l y and Ashley Roden. Where can people connect with you?

Ashley Rhoden: [00:47:44] You can connect with me on LinkedIn as well. Looking forward to connecting and happy to help. That's one thing I love about this community is there's there's enough work for everybody and always happy to meet with anyone and share any of my experiences or advice.

Blake Oliver: [00:47:56] And I am Blake Oliver. This has been an episode of the earmark podcast. Don't forget that you can earn free CPE for having listened today. Go to earmark app. Get the free app. Find the earmark podcast channel. Find this course. Register for it, take a quick five question quiz and you've got your continuing education requirement already. One hour done. Ashley Michael, thanks for joining me. Great to talk to you. See you again soon.

Speaker4: [00:48:22] Thank you.

Ashley Rhoden: [00:48:23] Thank you.