How To Buy An Accounting FirmDownload MP3
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Blake Oliver: [00:00:01] If you'd like to earn CPE credit for listening to this episode, visit your mark CPE. Com Download the app, take a short quiz and get your CPE certificate. Continuing education has never been so easy. And now on to the episode. Hey everyone, and welcome to another episode of the Earmark podcast. I am your host, as always, Blake Oliver, CPA. Joined today by Michael Ly.
Michael Ly: [00:00:28] Hey, how you doing?
Blake Oliver: [00:00:29] Owner, founder of Reconciled.
Michael Ly: [00:00:31] Yeah, yeah. Thanks for having me over Blake.
Blake Oliver: [00:00:34] You can see we're in a slightly different location. Well, if you're watching the YouTube version of this, you can see that we're in my backyard here in Scottsdale.
Michael Ly: [00:00:42] Very nice. It's very nice with your fake cactus here and everything.
Blake Oliver: [00:00:46] That's right. Beautiful work of art that I don't have to water, which is nice because you do have to water cacti and they will die if you don't. Yes, I've learned that even I can kill a succulent. But yeah. Thanks, Michael, for coming out and hanging out in my backyard for a change of pace. You are down in Tempe?
Michael Ly: [00:01:04] Yes. Yes, I've been down in Tempe. Yeah. I was born and raised there.
Blake Oliver: [00:01:07] Born and raised in Tempe. Yeah. And your firm, however, is well. Got some people here in Phenix area. Yeah, but most of your firm is spread out.
Michael Ly: [00:01:17] Yeah, I started it originally in Burlington, Vermont, and. And where my wife's from. And then now we have employees in, I think 15 states, something like that in three countries.
Blake Oliver: [00:01:29] So that's amazing. Yeah. How many employees?
Michael Ly: [00:01:31] We have 55 employees right now.
Blake Oliver: [00:01:34] 55? Yeah. I feel like the last time you told me that number, it was in the forties, right?
Michael Ly: [00:01:39] Yeah, right.
Blake Oliver: [00:01:40] And that was like, months ago.
Michael Ly: [00:01:41] Yeah. And it's fluctuated up and down this year between 50 and 60. We haven't quite gotten past the 60 mark yet. And then if you count contractors, I guess technically we're at 70 something, but we don't, we don't count them in our employee count.
Blake Oliver: [00:01:56] So that's amazing. So 55 employees, 15 states. And what kind of work does reconcile.
Michael Ly: [00:02:03] Do reconcile does online accounting. So it's outsourced accounting primarily for small business. We focus on bookkeeping, payroll, financial statement creation, accounts receivable, accounts payable management. Really anything you would have a inhouse accounting team do for your small business. That's that's our.
Blake Oliver: [00:02:21] Focus. Tax duty tax work.
Michael Ly: [00:02:22] We do we do tax where we started offering that about two years ago and that was because of a few acquisitions that we had done and now we're in the tax game. I don't have that background though, so I'm not really involved in that department, but I have a great team that that that does that.
Blake Oliver: [00:02:39] So yeah, you just bought you see you bought a tax firm. Yeah. Well we built it internally. Yeah.
Michael Ly: [00:02:44] We bought three firms in the past two years as part of our growth strategy and two of them had fairly large tax practices.
Blake Oliver: [00:02:54] Yeah, So that's, that's what I'm excited to talk to you about. In particular is buying accounting firms. That is the title of this episode, How to Buy an Accounting Firm. Okay, great. So, Michael, how do I buy an accounting firm? I want to well, and how do I do it successfully, I guess is really the right. That's the subtitle is is How to buy an accounting firm and have it work out. So how many acquisitions have you done?
Michael Ly: [00:03:19] We've done three.
Blake Oliver: [00:03:20] Three. And have they all worked out?
Michael Ly: [00:03:22] I would say on all of them, they have been all great lessons of how to buy an accounting firm. And with every single one that we've done, the most recent one we've done, we we become more and more successful at it. So it really depends on what your definition of success is, because we're still fairly new into it. We're only two years into it. And so the first firm we bought two years ago is now two years. We're two years in. The second firm we bought was earlier this year, so we're a year in and the third third firm we bought was this past July. So we're only six months in. So really depends on how you want to measure it and define it. But overall it's been a good experience and we want to continue doing so.
Blake Oliver: [00:04:05] Cool. So so that's good. So you want to keep doing it. That means that's one measure of success. Yes. You're not like giving up.
Michael Ly: [00:04:11] Yes. Yes, exactly. Exactly. Where we haven't given up and we haven't said no more. We haven't stopped and said we're not doing it anymore. And we so we are actively looking for more.
Blake Oliver: [00:04:22] Nice. So two years ago and then a year ago in the six months ago. So like and you want to do more how how how many more firms do you want to do? How often are you going to do it? Like, yeah, that's your goal.
Michael Ly: [00:04:34] That's a great question. And that's always hard to it's always hard to measure how many will be able to get to be able to do. And really there's a mix of hitting our revenue goals in, in our acquisition plan. But also that's then makes up, well, how many firms make up that revenue goal. So the past three firms we focused on have primarily been between 800000 to 1.5 million. Dollars and range in revenue range. And so those three combined roughly roughly make up to two and one half and 3 million a year in revenue. And but now we're looking at firms where we can buy one firm that does that much revenue. So instead of doing three, we can do one.
Blake Oliver: [00:05:17] Got it.
Michael Ly: [00:05:18] One now.
Blake Oliver: [00:05:19] So so targeting firms doing ideally 2 to $3 Million a year in revenue.
Michael Ly: [00:05:24] That's who we're actively talking to now. We're going as low as a million. No, we were going lower than that. Now we've kind of focused on a million in size and then ideally somewhere around 2 million to 3 million. That's where we've been focused.
Blake Oliver: [00:05:37] And so how are you like how did you get started doing this? Like, where do you find these opportunities?
Michael Ly: [00:05:46] That's a that's a great question. That's really.
Blake Oliver: [00:05:48] Great. Just talk to people. You go out and like knock on doors. Yeah, like say, Hey, you want to sell your firm?
Michael Ly: [00:05:52] The good old door to door sales. Kirby Vacuum way. Yeah. No, You.
Blake Oliver: [00:05:56] Put up a billboard that says I buy ugly accounting firm, Right?
Michael Ly: [00:06:00] Exactly. That's. That's hilarious. No, I was here at the beginning. I was actually actually here visiting my family at the beginning of the pandemic. My parents and my siblings. And before the pandemic hit, I was here. And it was we were it was early 2020, and we already had gotten through four years of the business. And I sat there going, okay, we've really built something I think is a very attractive business. The firm was growing at a very, very fast clip compared to our competitors compared to other accounting firms. And one of the things that stops most firms from growing is that most accounting firm owners have a very difficult time growing past the number of people they feel comfortable managing in their firms. So if you look at the landscape accounting firms out.
Blake Oliver: [00:06:51] There, it's like a half a dozen to a.
Michael Ly: [00:06:53] Dozen. Yeah, half dozen does it actually. And actually even smaller. The average that like the most most firms in the country are anywhere from 2 to 3 people. You know, if you if you count a solo owner with two or three staff as a firm. Yeah. Then that's literally the majority of firms across the country. So doing no more than 250 to 500000 a year in revenue. And they don't go past that because they get uncomfortable managing the people and finding the talent, and especially if they're in geographies where they can't get them local into the same office and they haven't gone the remote work or hybrid route, then it becomes difficult. So that's one piece. Second is most accountants have a difficult time actively selling to scale and then creating a systemized process to bring those customers in, and then the same time finding the talent to serve them. So we had done that at Reconciled by by early 2020, we had a pretty solid base of customers, a solid process. And so I actually began began writing a I guess you call it a thesis or a guidebook on how would reconciled go about inviting firm owners to sell their practice to us. And I spent the basically the first part of the pandemic putting that together in early to mid 2020.
Blake Oliver: [00:08:06] And then you hadn't done any acquisitions yet, you were just planning it out?
Michael Ly: [00:08:10] Yeah, I was just planning it out. I hadn't done any and I, I, I talked to some, some people for advice, like, I talked to some bankers that specialized in accounting firm financing. I talked to some brokers that represented firms either for sale or would represent as buying brokers. And then in the first few years of Reconciled, I had actually been courted by multiple firms and and investment groups to be to be sold to them or to have an investment brought in. And so I kind of was familiar with a little bit of the other process, but getting that advice was super helpful. And then I also partnered with a buying broker that I, I went out and scouted and recruited that would represent us on all of our deals and would help us with the basically the searching process of finding the right firms that would fit fit our fit our needs.
Blake Oliver: [00:09:02] So made a plan, went out, found a broker. Yes. And because I've heard mixed reviews about using brokers. Yes. So it was a positive experience for you? Yes. Is that how you found your first deal?
Michael Ly: [00:09:13] I think that that is how I found the first deal. And I think that most accounting firms have an experience with the broker representing them for sale. And my my approach was a little unique in that I wanted to find a dedicated broker to represent us for purchase, and he would be the dedicated person doing that. So I found a gentleman that actually had represented a a larger accounting player in the industry, and I knew that he had experienced doing this for that firm. And so when I heard that he was available to hire, I went out and talked to him and hired him to represent us.
Blake Oliver: [00:09:52] Okay. So then he goes out and he has like a list of firms that he knows and he says, okay, these. I mean, it's got to be a lot like real estate. Yes, I imagine. Right. Like they have their list of people they know that are selling or are interested in doing so. And then they they look at your criteria and try to fit you into that.
Michael Ly: [00:10:12] Exactly. Exactly. It's very similar to real estate, commercial or residential real estate brokering. There's great real estate agents. There's bad real estate agents. You know, there's ones better than others, and there's ones that know what they're doing, especially if they've done multiple deals at a time. And so this this person that represents us, he had done multiple deals in the space. He had come from a corporate development background. So he was very, very helpful in advising us in the whole process and also helping us get the firms we were talking to comfortable with selling to us as well, because we were we were clearly new to doing this. I had never it's not like you take a class on this at college or you learn about it in an accounting program. Yeah, this was and there's really no book or handbook or guidebook you can just go pick up. You literally learn everyone that I know that's done this in in accounting or not learns by doing it and by making mistakes and having failures in the whole process.
Blake Oliver: [00:11:10] So you would recommend using a broker?
Michael Ly: [00:11:12] I would recommend doing it, especially if your plan is to do multiple and your plan is to do multiple deals going forward. Of course, you could take the time. Just like buying a home. You can always represent yourself. But this is a this is a risky endeavor that you're undertaking. Do you really want to wade through the unknown on your first deal with having no representation or having no one on your side? You can even have your attorney or an attorney represent you. But most attorneys have never done an M&A M&A transaction. So they neither have represented nor sold a business before, let alone an accounting business. And that's really where having a broker that understands not just a regular generic broker, a broker that understands the space specifically is super helpful.
Blake Oliver: [00:12:00] Okay. So you have your criteria. You mentioned revenue, headcount. Any other criteria for going out and finding a firm that's going to be a good fit? Yeah.
Michael Ly: [00:12:10] For us, we wanted to find a firm specifically where the name of the firm wasn't the name of the owner, because that told us a little bit about how they sold to the marketplace and how their customers saw their relationship with the firm. It's a signal to us and then other the other is that the seller is ready to retire or be done. And we usually have the seller, the owner involved in a six month to one year transition process. But other than that, our intention is is not we're not planning to buy partners. If you'll if you see how other accounting firms generally by accounting firms, they're buying partners. They're bringing those they're they're buying that practice, bringing on the owner as a partner. Right. And oftentimes that partner might be running the office in a major city that that firm's not in yet. So a big firm buys in a firm in Phenix with a big presence. They have the partner or partners, be the managing partners of the PHENIX office, or the same thing with New York City or whatever. That's not the approach we took. We wanted we wanted the firm owners to not not no longer be involved and have to be there ready to sell and not be involved. And they're moving on to retirement or moving on to something else.
Blake Oliver: [00:13:20] So are these firms, CPA firms, are they accounting firms Like are they non CPAs? Is it a mix?
Michael Ly: [00:13:27] It's really it's it's a mix. The first firm we purchased was owned by a CPA, but they ran it like a local bookkeeping firm and they had a separate tax practice, a literal separate tax practice. And we end up buying both, both practices. But the tax practice was much smaller than the bookkeeping firm. And almost all the work are pretty much all the work was being done by the staff, the owner. We really was not involved on either side of the practice. He was just a salesperson.
Blake Oliver: [00:13:57] And so is the is the acquisition for you to acquire clients or to acquire staff?
Michael Ly: [00:14:03] It's it's actually both. It's actually both, yeah. It's to acquire the clients that are that generally have been loyal to this firm. And if you look at most accounting firms, no matter what type of flavor they are, most of them have been around 15 to 20 years that are ready for sale. The owner is ready to retire and they generally have had clients for a very long time. Five, ten, 15 years. They've they've had relationships with these clients. So those clients are sticky clients. And if the owner is planning to retire and exit out of accounting or exit out of the workforce generally, then that client has to go somewhere. And because the staff is the same staff that we're bringing on, we're acquiring that staff ends up working with those same clients anyways. So it seems like it becomes a seamless transition. The other thing that we do then is we begin a migration to a more updated tech stack. So most of the firms that we end up talking to, most of them are still on Outlook using Microsoft Outlook and a internal network server based I.T system that's literally housed at the accounting firms office and most of them are at best on QuickBooks desktop or QuickBooks Enterprise hosted. We want to do a conversion to QuickBooks Online or to zero or some cloud based product as fast as possible. So we take that six months to a year post acquisition timeline to do that transition. And that's what the owner helps us do, is that transition and that's part of their both compensation in that first year. And then it's that that transition is tied to the performance of of how they're paid out at the end of the year.
Blake Oliver: [00:15:41] So Michael, how do you finance these deals?
Michael Ly: [00:15:44] There's multiple ways to finance deals, just like there's multiple ways to buy a house or there is a whole industry that is focused on financing small business acquisitions. There's the most banks that are backed by the SBA have loans. They call them SBA seven day loans. And most firm owners end up going through an SBA seven a process to buy a firm or buy a practice. You can do that process whether you own a firm already or if if you literally are an accountant practicing in private or public accounting, you can go to your local bank and say, Hey, I'd like to buy a firm. And generally most of them can give you a pre pre qualification. They'll you apply and say, generally this is the firm size I want to buy. This is the type of firm I'm going to look for. What can I qualify for it? They'll tell you in that process, just like you pre qualify for a home mortgage.
Blake Oliver: [00:16:37] So how easy is it to get said? These are SBA loans.
Michael Ly: [00:16:40] These are SBA loans.
Blake Oliver: [00:16:41] How they.
Michael Ly: [00:16:41] Make it? They make it rather easy because it's a part of encouraging entrepreneurship and small business creation. And in general, they know when a business a business switching hands is better than that business shutting down business shutting down means jobs are lost to communities impacted, revenues lost, tax revenues are lost in a community. So the SBA loans step in to help a bank basically take a bet that they necessarily wouldn't take on their own. Most banks or a majority of small business acquisitions are done through SBA seven A If you're including a building or a commercial property or physical building in the process, then there's other SBA products that get involved. But all of this goes through your local banks. So you basically find a small business bank that does SBA lending, and there are banks that specialize just in accounting firms as well. So you have that that route, and that's the route I've generally gone towards when I can because it's the cheapest route.
Blake Oliver: [00:17:39] Is there a limit on how much money you can get for that? Like is there a minimum? Like what can I I'm thinking, hey, you know, maybe I want to go buy a firm, right? There you go. Can I just go in and say, Hey, I'm a CPA, I want to go buy a firm?
Michael Ly: [00:17:52] Yes. Yeah, you can do that. And and there's a variety of ways in which you can match. You can get matched to the banks as well. When you go to a broker who's representing a firm for sale. Generally, most of those brokers actually have a relationship with a bank that is willing to finance the deals they're selling. So you actually can go and talk to the bank that they have queued up and that because that bank is involved with that broker, generally, that bank is able to move very fast. It's kind of like a real estate agent recommending a mortgage company work with you. Right. They can move very fast because they trust the broker, they trust the quality of the firm. So that's that's one route you can go and the max you can borrow is up to $5 Million on a single borrower.
Blake Oliver: [00:18:33] Yeah, that's pretty good, right?
Michael Ly: [00:18:34] So me as me as the firm owner, me alone can only borrow up to 5 million. And I can do that in multiple firms. Right. So I could do that with two firms equaling 5 million. Three firms equaling 5 million. But not I can't go past 5 million. That's the max ceiling for borrowing, and I would have to pay that down before I could borrow some more. If you want to go past that or you find a bank in that that thinks that they can just fund you directly through a conventional loan, you can also do a commercial conventional loan that's outside of the SBA. Generally, you need to put more money down when you do that process.
Blake Oliver: [00:19:07] Oh, yeah. How much do you put down for the SBA loan?
Michael Ly: [00:19:09] Sba loan? It really depends. There are some banks that are able to do it up to 100% with no money down, because if you own a firm, they actually count the equity. Having your own firm as the down payment towards the new firm you want to buy. And then they're able to finance up to 90%, sometimes 90%, 100% of the rest. So it can be it can be very easy to do this.
Blake Oliver: [00:19:32] Yeah. So put it into real terms for me. So you did this with one of the firms?
Michael Ly: [00:19:36] Yep.
Blake Oliver: [00:19:36] Yeah. What was the price and what did you have to put down? Yeah.
Michael Ly: [00:19:39] So, you know, for a firm that's roughly 1.3, $1.4 million, you can, you can do a 10% down on for 130,000 and there's a lot of banks willing to do that and you know, and then you would finance the remainder of that on SBA loan. So, you know, one point, whatever the remainder at 1.3, so 1.1 million.
Blake Oliver: [00:20:00] Less, I put down 130,000. Yeah. And then I finance the rest and I can buy a $1.3 million firm.
Michael Ly: [00:20:06] Yeah. And generally going to be on a 7 to 10 year loan at SBA rate's very low single digit interest rates. It's the some of the cheapest money you can get from, from business acquisition purposes. Yeah.
Blake Oliver: [00:20:17] So when you say $1.3 million firm, like how is that valued? What is it revenue is it that's typically it for an accounting firm, right. It's like yeah most revenue.
Michael Ly: [00:20:28] In general most firms are are valued based on revenue and they are there's a mix of revenue their growth rate which for most firms is very small. They're growing at 5%, 10% a year at most, and they've been around for a while. So it's a lifestyle firm for the firm owner and then the quality of the clients, if there's any revenue concentration and then you can structure the deal, the payout of do you want to do you want to have the payout to the owner? B Over a period of time, do you want them to get it all up front? Do you want the seller to actually carry a note so that, you know, maybe you can't maybe you find a bank, but you can't finance the whole thing or you can't finance you don't have enough for the down payment. You ask the seller to finance five, 10% of it on a seller's note. Yeah, that happens all the time. And it actually happens quite often. And so then the seller has to basically trust that you will be successful and help you be successful in the transition. And then.
Blake Oliver: [00:21:33] That's amazing. So let's say I get a 90% SBA loan. I could go to the seller and say, Look, I can't I don't personally can't finance 10%. Will you do a note for ten and I'll pay you over time. Right. Well, that's. That's like a zero down.
Michael Ly: [00:21:47] Yes. And this happens all the time. And not just in accounting, not just buying accounting firms, but buying any type of business. Right. Seller's notes are involved in many, many, many transactions because it may be the only way a seller gets even a portion of their cash up front. Otherwise, what other options do they have? And most most individuals don't have the liquid cash just sitting in their bank to do a transaction like this, let alone the down payment.
Blake Oliver: [00:22:12] Yeah, right. No.
Michael Ly: [00:22:12] So yeah.
Blake Oliver: [00:22:13] Well that's, that's, that's exciting. So. And how so how are you valuing firms? Like, if I have 1.3 million in revenue, you're valuing my firm at 1.3 or is it less or more?
Michael Ly: [00:22:24] Yeah. That range could be anywhere from 80% of that value to 1.2% of that value. It really depends on the EBITDA size as well. Yeah, the firms that we've spoken to and these are between the firms that we've seen, financials that we didn't own, purchasing and firms we ended up purchasing, The ibuyers can end up ranging from 20% to 40% for the best performing firms. So that EBITA range will also dictate how how high we want to value that firm.
Blake Oliver: [00:22:51] So even 40%, that's pretty darn great. Oh yeah, you'd be probably happy to give them one point over one over one times, right?
Michael Ly: [00:22:58] Exactly. Exactly. Because you're generally you're still you're still ending up in a 2 to 3 times EBITDA range. Yeah. So regardless of the revenue valuation, if you're ending up there, then your payback period on that firm is just a few years. Right. And your goal is to own those customers and keep servicing them anyways. And you're using debt to do so, you're not using your own cash anyways.
Blake Oliver: [00:23:20] Yeah, that's amazing.
Michael Ly: [00:23:21] So it's amazing. Yeah, it's amazing. When you do the IRR calculation, it actually comes out really, really good. Well, it.
Blake Oliver: [00:23:25] Just seems crazy to think that there are firms out there that are closing their doors that don't have a buyer. Like like the financing is there, the government backed financing is there. It just you have to be willing to take what seems actually like a pretty small risk if you can get it all financed, right? If you have no if you're not putting any of your own money down. And then I'm sure there's probably, you know, provisions in there to protect you in case the clients leave. Right. And non competes and all that stuff. Right. So like because that's your big risk is you do the acquisition and then like half the clients are out the door.
Michael Ly: [00:24:00] Yeah. There's really there's really three primary risks. You do the acquisition, clients walk away, staff walk away because that's a risk or the seller does not act in good faith, right? So you, you then have to have recourse if something happens and the seller decides I'm going to go ahead and keep doing accounting, even in some other way, I'm going to still be present in my community and still sell in accounting, Obviously that would be violating your agreements. But that does happen, right? That does happen.
Blake Oliver: [00:24:27] As any of that happened to.
Michael Ly: [00:24:28] You know, fortunately, no. The sellers we've we've worked with have all been aboveboard. They've always abided by their agreements. And so they've been people of character. These are all things that you want to have due diligence in in research. Now, the the reason why and you spoke you've actually spoken about this on your podcast is that there's some industry challenges going on that prevent sellers from selling. One is there is a record number of firms either ready for sale or getting ready to sell because of the number of CPAs retiring, right? So the number of firms coming on the market and that you're going to continue to see every year only is increasing. Secondly, the firms that are actually attractive to buy, even though there's a lot of firms they might not be attractive to buy. For example, that firm might be in a really, really small town where there isn't a buyer that wants to either take over the lease of the firm that the of the building of the firms in, or maybe the clients in the area aren't attractive to them to to acquire. Right. So there's a number of variables like that. Third, the staff they have might also be retiring or nearing retirement age. Does a buyer want to buy a firm that has great customers? But but the owner and almost all the staff is nearing retirement age. So there's there's multiple challenges going on. And that's why vetting every single firm you talk to is important.
Blake Oliver: [00:25:49] I would definitely want to know all those things, right? Yeah. The the staff, you know, what's their tenure? How long have they been around the clients? Right. If it's a bunch of clients who are, you know, boomers, then how long are they going to be clients? You know, maybe not that long. So you look into all of that.
Michael Ly: [00:26:06] Yeah. Yeah, exactly. And then, you know, also, if you are attracted to, let's say you want to buy a tax only firm, well, you've just removed a lot of the market because most of the accounting firms have a mix of services. Or if you want to buy a firm with zero audit and assurance. Right. Which is what we look look at we I don't have a CPA, I don't have an audit or assurance background. I didn't want to have to buy a practice that had any of that. And I don't have a business partner that has a CPA. So that removes a set of firms that are out there and even sizable ones that might have a quarter of their revenue in. Audits or if you want to buy a bookkeeping only firm or an advisory only firm and you don't want tax or audit, that also removes a population of firms to buy. So that is also a variable you want to look into. We've we've been focused primarily on majority bookkeeping or majority bookkeeping advisory firms with some tax. And we realize that almost all the firms we want to purchase are going to have some level of tax involved, especially if it's owned by a CPA and you.
Blake Oliver: [00:27:07] Prefer the ongoing bookkeeping.
Michael Ly: [00:27:08] We prefer the ongoing bookkeeping advisory, and we would we would much rather do larger deals with bookkeeping only firms versus having a firm that has any level of tax revenue. But we we go ahead and make an exception when it's the minority of the revenue. Yeah.
Blake Oliver: [00:27:23] So you're moving up to the 2 to $3 Million for a year firms bigger like how many staff that would be I mean you're probably over how many staff would that be.
Michael Ly: [00:27:33] Roughly 15 to 3050. The general rule of thumb is, you know for every staff member, they're probably managing 100, 150,000 of revenue a year. And the best, best, best firms out there are probably doing 200 or 250 a year. But those are four super highly paid CPAs. Generally, a firm has a few seniors, a few entry level CPAs, maybe one manager or one partner. So their average is around 150,000 in revenue per staff.
Blake Oliver: [00:28:01] Per se.
Michael Ly: [00:28:01] Or per head count. Yeah.
Blake Oliver: [00:28:03] So how do you how do you do that? Like, do you have a team that at Reconciled now that just helps to onboard all these staff and these clients. I mean you said you're changing the tech stacks. Yeah, that's a lot of work.
Michael Ly: [00:28:16] Yeah. There's, there's a lot of work involved. So if you look at the cycle of what happens, you know, pre then close and post acquisition most of the time spent pre acquisition is negotiation with the seller and due diligence as well as your financing, due diligence because it's just like buying a home. You have to provide documents to the financing company and you need the seller's involvement and participation in that. The seller is going to be aware that you're getting financing and through and who it's through, and the seller is going to have to give permission that their firm is sold. You're going to have to decide on the type of structure whether you do an equity purchase or an asset purchase. Generally, they're done as an asset purchase.
Blake Oliver: [00:28:56] And let's talk about the difference between that cause that's important, right? So equity purchases, I'm buying the actual entity, correct? Right. And asset purchases, I'm just buying the customers the stat like all the staff.
Michael Ly: [00:29:07] The brand, the naming rights. Right? And basically you're buying the ability to practice as that practice without buying the historical the stock and the historical ownership of all the liabilities.
Blake Oliver: [00:29:17] That's the thing you want to avoid is buying all the potential lawsuits, correct?
Michael Ly: [00:29:21] Right. Because if you buy the equity, it's as if you're stepping in. You're just switching places of the owner. So you're also carrying all the historical liabilities, including liabilities around tax returns. They filed liabilities around books. They've done, clients they have advised. And generally you want to do an asset purchase, and then you also require the firm owner to carry an insurance policy to protect the the seller, the firm owner from from any historical claims against them. Right. If they don't have that, then you risk that customer, that client coming to you and saying, well, I can't I can't get anything from the seller. I'm going to come after you as the buyer. So you have them carry a tail. They call it tail insurance that that protects that does a look back of insurance. That's all part of the the deal process.
Blake Oliver: [00:30:12] And how long do you have the owner stick around.
Michael Ly: [00:30:14] You said anywhere from six months to a year is the length of time we try to aim for.
Blake Oliver: [00:30:19] That's probably nice for them because a lot of firms would want them to stay for years. Right, Right, right. And in a more traditional.
Michael Ly: [00:30:25] In a more traditional. Yeah. Original merger, they're serving in a partnership capacity There may be running the office still. Yeah. And they're literally working really not much differently than they were before. They're just now getting an extra dividend or pay out of the purchase price. Right. Which they weren't before. They were just extracting dividends, whatever they wanted to of their own firm. Now they're getting payments from the firm that bought them. And and really they stick around for a handful of years generally or more and finish off the term the term until they get to retirement. So you'll see a lot of firm owners do this that traditional practice around as early as 60 years old, maybe even 70 years old. They work for four or five more years, then they retire with us. We try to actually get them out within a much shorter time frame. You have the staff you want to bring over and then you have the owner. So the pre pre purchase, it's really your interaction with the owner getting to understand the firm, all the due diligence in the financing. Then as you get too close, it's getting all the ducks in a line so that when close happens you can then begin announce it. And for most purchases you actually don't ever meet the staff until the day after you've signed and closed. So you hear about them from the seller, but the staff does not know generally that. They're actually they actually have a new employer or they're going to be offered new employment starting on a specific date, whatever that close date is.
Blake Oliver: [00:31:48] Okay. That leads me to a question. How do you avoid freaking out the staff?
Michael Ly: [00:31:52] That's a great question. And I would say to you, you know, you've worked at accounting firms. I've worked at accounting firms. Most accountants that I know and most accounting staff I know have a hard time with change. They like stability. They like predictability. So it really is a matter of about approach and how you present it and approach it. And also being in line on how the seller, the firm owner selling to you is communicating to their staff that first week. Right? So generally how we've done it is we do a virtual or or even in-person meeting if it's if the staff are all local to one place, me and our HR team will really fly there and meet in person with with the team. We'll do a joint announcement with the seller of what's happened and introduce ourselves. And really the goal is to humanize what's happening instead of making it look robotic like a big corporations coming into to buy this, that they can see who I am as the founder, as the leader, and shake my hand, sit down with me, and then we schedule one on one times with HR where they actually get their formal offer letter and also one on one times with me as the owner for them to ask any questions about the transition. And that transition is going to take it's going to take that roughly the first 30 to 60 days just to get everyone situated in your new firm, just in general.
Blake Oliver: [00:33:09] On payroll, get their benefits going and get their systems up and running.
Michael Ly: [00:33:13] Exactly.
Blake Oliver: [00:33:14] Yeah. So imagine the time of year you do. This is pretty important.
Michael Ly: [00:33:17] Yes, it is. It is. You want to try to avoid, obviously, during tax season, That's you know, we did do one in January, but that was not because we wanted to. It's because the financing got delayed by a couple of months. So we were hoping we had hoped to close November of last year of 2021, and then it got delayed.
Blake Oliver: [00:33:34] So did you have to, like, change all that stuff or were you able to wait until after busy season?
Michael Ly: [00:33:39] We wait till busy season. If you if you buy a firm in the middle of tax season, my recommendation and the sellers will push for no changes until the tax season is over, and rightly so. The staff is just bombarded with with things and it's a really overwhelming feeling to to go, Wow, I have a new employer I wasn't prepared for or I wasn't told. And there's no guarantee they're going to accept your offer either because you are you purchased the right to make them an offer. You can't force anybody to come work for you. And so it's it's really important how you approach it. And then you go about the work now of introducing yourself to the customers. And that is what takes a much longer process. Oh, really? Right. Because you want the seller to then do an introduction to all the customers in a press release announcement. Right? But then for the high value customers that maybe they have the relationship with or understand or more more afraid of change, you want them to have one on one conversations with them. So that could be 100 clients, 200 clients. It depends on how big that firm is. So we have the seller involved and that's what takes the most time, is that transition is the customer transition.
Blake Oliver: [00:34:43] So I want to go back to one thing we mentioned. I don't think we finished talking about financing. We talked a lot about the SBA financing, but there's other ways to do it. You said commercial. Was there another one that.
Michael Ly: [00:34:55] Oh, yes, yes. So there's there's SBA financing commercial. There's also just obviously your own cash, right? So if you have a firm and you have enough equity in it and you've built either personal savings or business savings, you could use that to just buy a firm with cash and then.
Blake Oliver: [00:35:09] Pay out over time and pay.
Michael Ly: [00:35:10] Out over time or force or do a mix of cash and force, have the seller do a seller's.
Blake Oliver: [00:35:15] Note. So that's what we did. So when I sold my bookkeeping firm, it was a valuation multiple of annual revenue and then I got paid out over, I think it was five years.
Michael Ly: [00:35:27] Okay, yeah, that's pretty typical.
Blake Oliver: [00:35:28] It was just paid out of cash flow.
Michael Ly: [00:35:30] Yeah, that's pretty typical. Yeah. Yeah. And, and if you find a seller amenable to that and, and because if you involve financing like a bank, that can delay the process, just like when you get a mortgage on a home, it could fall apart, right? The deal could get compromised.
Blake Oliver: [00:35:46] Can you do a deal and then go get financing.
Michael Ly: [00:35:48] It generally to go get the financing. They do want to see the asset purchase agreement signed. So you do have a deal where the letter of intent and then the asset purchase agreement are signed with a financing contingency, just like a home. And so the risk for the seller, though, is.
Blake Oliver: [00:36:03] That financing.
Michael Ly: [00:36:04] Financing falls through. So for how.
Blake Oliver: [00:36:05] Long how long do you have to get the financing from there?
Michael Ly: [00:36:08] Well, that's all outlined inside your your what's standard. Generally in standard, you have 90 days.
Blake Oliver: [00:36:13] Okay. That's pretty.
Michael Ly: [00:36:14] Generous. I've seen as fast as 60. Right. And then I've seen as long as 120 days. Right. So it really depends. And if if the seller trusts you and thinks, hey, I don't want that to be the delay, I'm willing to do just the seller seller financing agreement and and let's close in 30 days, then the seller can move that faster just by by removing the financing situation.
Blake Oliver: [00:36:36] So what's the what's the biggest mistake you have? Aid so far in the three deals you've done?
Michael Ly: [00:36:43] That's a great question. The biggest mistake was probably in our first deal is we went too fast on the transition of the employees to our systems and we underestimated their abilities, their ability to move as quickly as we wanted to. And we didn't recognize the fact that not only are they getting a new employer, but they still have their regular ongoing accounting work. They still have clients that they're serving. Even though there are clients now, they've got to do that job, which generally they're going to be in full capacity, right? A firm owner selling their firm doesn't just have the employees sitting there not doing work. So they got to do that job and onboard to our systems and probably learn a new tech stack. So all that takes a lot of time. And we we really tried to speed that process in the first 30 days and it really should have been a much longer process.
Blake Oliver: [00:37:36] Now it sounds like you're doing 90 days or. Right, Right. Or I think that's what you said or longer.
Michael Ly: [00:37:42] Depending on if we're in the middle of tax season. So that was probably the our biggest mistake is, is.
Blake Oliver: [00:37:47] I've heard that you're not the only one I've heard that from. I think it was Kenji and Matthew at Acuity. Yes. They tried to very quickly migrate systems with one of the firms they acquired and they lost staff as a result because like you said, there's nothing wrong with this. This is just the personality profile of us as accountants is most of us tend to be conservative and we don't like change. Right. And especially when it comes to technology.
Michael Ly: [00:38:12] Right. And and we're seeing now at the size we're at, even though I would still consider us fairly small at 55, we're seen in the market to most firms as a mid-market, mid-sized firm on the lower end of a midsize firm or the upper end of a small firm. And for for the staff that are used to a firm where they talk to the owner every day or they see the owner every day, or they get coffee once a week or do check ins to go to a firm where not all the staff has interactions with me on a regular basis. They don't have access to me. So to them it feels like it's a big corporation for some of them. And that change is what really can rattle people and also their stability and certainty around their job. And that's what we I really underestimated people's ability to move, I thought could move much faster and not realizing that they had a full load of work already that they were handling.
Blake Oliver: [00:39:02] That's that's the thing we got to be sympathetic with is like the workloads in this profession are very high. Yes, right. Like not I mean, it's not, it's not I wouldn't say in a lot of firms it's unreasonable, but it's there's no there's no Lyway. There's no there's no there's no slack. There's a slack. That's no.
Michael Ly: [00:39:18] Slack. It's really hard to go, Oh, yeah, today I'm just going to reduce everything by 50% and then do this new work that you're asking me to do. Even if it's for 30 days, it's very difficult to find a week to do that.
Blake Oliver: [00:39:30] So so that's that ends up coming out of personal time, which is where you get the conflict. What's the smartest thing you've done? What's the thing I'm most proud of?
Michael Ly: [00:39:39] Yeah, I think the thing I'm most proud of so far is we were able to find our third deal. We were able to find a deal that was really probably our best match so far because that firm was already all on a tech stack that aligned with ours, and we were able to get that person involved in in the due diligence process a little more heavily. And she this, this firm owner was really incentivized to make the process work. And so I think just me going going I'm actually met with her in person before the deal is part of the deal. As I flew to where the firm was located, I spent time with her and the staff. I was able to actually meet the staff before the deal closed. So that, that and that really was a decision by the seller who said, I'd like you to meet the staff before we close. I went, Wow, this is that was actually a huge help in the whole process. That's not something that we can get every time, but it was definitely super helpful on the process.
Blake Oliver: [00:40:39] I would definitely want to meet the staff. Like I want to know, I mean, these are these are the people that are crucial to the functioning of the firm, right? Yes. So it seems kind of strange to me that that wouldn't be standard, but I guess the seller would be nervous about you stealing their staff.
Michael Ly: [00:40:53] No. The risk for the seller is is the staff know they're going to sell the staff decides to do something beforehand, like like sabotage or even just leave.
Blake Oliver: [00:41:02] Right. Right, right.
Michael Ly: [00:41:03] The the there there's really dynamics within relationships between the firm owner and their staff, especially staff that have been there a while. Dynamics that you never you never think about that that'll happen. We've had we've seen staff upset at firm owners for their were selling we've seen staff.
Blake Oliver: [00:41:22] We see that with tech companies.
Michael Ly: [00:41:23] Yeah we see that with tech companies too. We've seen staff that don't understand what is actually happening and maybe are aren't aware of how this this deal is a normal process in the industry, but also it's a big risk for the seller because if you meet the staff and then decide you. Don't want to buy the firm. Now, you've just introduced yourself to a staff that knows about you now, but. And thought you were going to buy the firm and got their hopes up, right? Maybe especially for the staff that wanted the. I like the idea of going to a different firm or a place that was bigger. You've just gotten their hopes up now. You've just left that bad taste in their mouth for the seller, and that's all risk the seller carries. So I can understand why most farm owners wouldn't want.
Blake Oliver: [00:42:07] That, right? Yeah. Yeah, that makes a lot of sense. Now we got to figure out a way to. To. Yeah. How do you hedge that risk and still get to meet them? Because that would be my biggest I mean, like, let's say I'm going to go out and buy a firm and now I've got a handful of staff. Am I going to really buy that firm and be working with these people every day that I've never met before? That's like a that's a scary thing for me as a buyer. It is. I mean, you're you're big and you know, you're big now. You're a big shot, Michael. You don't have to you don't have to manage the staff yourself, right? You've got a team that does that.
Michael Ly: [00:42:38] But. Right. That's where you have to fill out the the seller, the firm owner that you're buying from and fill out what is the type of culture they probably built. And that's really going to be representative. Who are they as a person? Right? That's generally most firms. It's representative who they are. So you've got to get really comfortable with the seller and and trusting that, okay, is this the kind of person I would want to do business with?
Blake Oliver: [00:42:59] That's a really good point, right?
Michael Ly: [00:43:00] And that's a fair that's reality.
Blake Oliver: [00:43:02] Would you say that's the most important thing?
Michael Ly: [00:43:04] That is that is definitely in the top five. I don't necessarily know if it's the most important. It depends on what your goals are, right? If it's the only firm you're ever going to buy, then you're going to put a high priority on the integrity of that firm. Owner. Yeah. If your goal is to buy multiple firms and continue to grow it, well, there there are other things that might be more important to you because in the long term, they're going to they're going to make a better and bigger impact on how you go about this process.
Blake Oliver: [00:43:32] Yeah. Any final words of advice for those would be accounting firm acquirers out there? Michael?
Michael Ly: [00:43:39] I would say get some help. If you're if you're going to do this, if anyone's going to do this, get some help.
Blake Oliver: [00:43:44] Don't write your own legal agreements.
Michael Ly: [00:43:45] Don't write your own legal agreements for sure. All right. Look, look at this as buying your first home or making your first investment property. You probably want some help. You want professional help. And that's where another CPA attorney and a broker can can be super helpful in the process.
Blake Oliver: [00:44:03] And if anyone wants to reach out to you, Michael, and ask your advice. Yeah. Can they do that?
Michael Ly: [00:44:08] Yes, of course. Yeah, you can find me on Twitter or LinkedIn. I'm happy to talk to anybody.
Blake Oliver: [00:44:12] All right. We'll put the links to Michael's profiles in the show notes, so check those out if you want to connect with him and follow reconciled. It's really interesting. I mean, this is not a traditional accounting firm by any stretch of the imagination. It's really been awesome to be your friend, Michael, and follow your journey.
Michael Ly: [00:44:28] Great. Thanks. Thanks, Blake.
Blake Oliver: [00:44:32] Thanks for listening. I hope you enjoyed this episode and that you learn something new. And if you did, wouldn't it be nice to get some CPE credit for it? Well, I've got great news. My new app, Earmark CPE offers free Naspa approved CPE credits for listening to podcasts, including this one. Visit earmarked CPE to download the app, Take a short quiz and get your CPE certificate. That's earmark CPE.