Acquiring & Efficiently Operating Firms with Patrick Dichter

Hello, and welcome to episode 2 of the Big 4 Transparency podcast. Thank you all so much for the love, encouragement, and feedback following the launch of our first episode. In this one, I bring you some new perspectives from someone who actually acquired some firms as a non-CPA. This topic feels especially relevant to understand the recent surge in interest from private equity in our industry, so I hope you enjoy this discussion with Patrick. This is also the first podcast that is sponsored, so this episode is brought to you by Canopy, your one-stop shop for firm management. One of the key drivers of success for modern accounting firms is mastering the management of their practices, and Patrick actually recommends Canopy as a key improvement he made to his firm. So be sure to check out Canopy in the link in this episode description. Thank you all very much, and I hope you enjoy the episode. Hello everyone, and welcome to the Big 4 Transparency podcast, where we look behind the scenes of what's going on in the accounting industry, your career as a CPA, and the people running the firms that we're doing work for. Today I'm being joined by Patrick Dichter, owner of Appletree Business Services. Patrick, nice of you to join us. Dominic, thanks for having me. I'm honored to be here. Yeah, absolutely. So we had a bit of a conversation earlier about who you are and your background. I'd love to have you share more about it, but you've acquired a number of accounting firms recently, and you have a bit of a different background for what we're seeing in this field. Care to talk a little bit more about it? Yeah, I feel like the oddball that snuck into the party here, being on the pod, so you got me. I am not a formally trained accountant, I'm not a CPA, so kind of took a winding path to owning an accounting firm. What that looked like, I worked for a digital marketing startup for seven years, worked on small business, and then I did small business consulting for three years. When I was doing that consulting work, all my new clients would have terrible bookkeeping, and I was always referring it out. And then I started to hear about people that buy businesses, and I thought, what if I bought an accounting firm? And the more I looked at that, the more excited I got, for multiple reasons we can get into, but I ended up buying Appletree a little over two years ago, and then I've since acquired a couple other firms as well. Awesome. What was it about accounting specifically that made you interested? Was it really just that you saw how much work you were referring out to bookkeepers where that was lacking for your customers? Part of the reason I ask is we're seeing a lot of private equity involvement in CPA firms now. We're seeing a lot of outside investment coming into the industry, and it's really interesting to get a perspective on that as someone who's essentially been a part of that. Yeah, that was one of the big factors, is how much I was referring it out. I think it's an area to make a big impact on small business. There's good recurring revenue. There can be a good margin if you run it well, and I thought it played well to my strengths of sales, marketing, recruiting. And the other business I'd come from, agencies, I liked when I looked at the profile of an accounting firm better than I did a marketing agency in terms of what I might like to hold long term. So interesting. And then with growing by acquisition, how has that been? Has talent retention from acquired firms been good? Is it something that you can really count on to grow both your headcount and, I guess, customer count? Yeah, the talent acquisition or retention has been good. I think in the first firm, there were 12 people, and a year later, 11 or 12 of those original ones are still there. And then the other ones were smaller. So outside of the owners leaving, we only picked up three people, and they're still with us. So it can be a good way to pick up people. But more often than not, I've heard that culture changes, things change, and sometimes people just don't stay. Yeah. I mean, that's pretty good numbers. When I look back at my own experience as someone working in Big Four, I had a five-person cohort in tax. I left two and a half years in, and there was only two of them left. Now, two years later, there's only one person left of those five. So sounds like you're doing pretty good on that front. With acquiring firms, what type of multiples are we seeing on those, just in general as a range? Yeah. They usually trade for between 0.9 to 1.5 times annual revenue. These are firms that use a range of 500K in revenue up to 3 million. That's kind of the typical multiple range that you'll see, 0.9 to 1.5 times. And they'll fetch higher if they're cloud, modern, subscription-style billing, and there'll be a lower multiple if there's a lot of owner-independency. It's kind of an old-school firm, a lot of tax-only work, that kind of thing. Yeah. Do you kind of look at EBITDA margins or, I guess, just gross margin in general as a determining factor as well? Or is some of it really just a binary of whether or not there is this technology stack? Yeah. You're definitely looking at the profitability of the firm. You're saying like, okay, how much cash flow is going to that owner? And that's going to affect how much you might be willing to pay for it. And then, yeah, how well you think it's run, how resilient you think the staff might be in a transition, those sort of things. Okay. Right on. And one of the things we talked about here is you have a bit of an uncommon structure for compensation at your firm. So we just kind of covered the fact that it seems like your retention is really good, especially when we're looking at basically taking over a business where maybe not every employee is going to be that adaptable to change. So it seems like you've done really well on that. So being part of Big Four Transparency, I more or less live in the accounting compensation data field. So this is the first conversation that I've had where there's actually a variable component to the structure that's actually pretty meaningful. Can you share what that looks like and maybe why you think that that's the way to go? Yeah. By all means. We're not perfect. We still have new hires that don't work out or they don't like us or vice versa. I think how you and I originally got connected, I tweeted out, we have an accounting or tax manager who made 50% more than a coworker and a staff accountant who made 60% more than their coworker. And that was by choice. So that's kind of what I tweeted out because we have a production paid model where if they want to take on more work, they can and they get paid for it. And my comment was a lot of other accounting firms, they just pile more work on the top performers and they might make the same amount or five or 10% more. So that's kind of how this conversation got started. I'm sure everyone listening is like, what, what, what, how does that work? The short version is everybody gets a percentage of the revenue that they complete. So our accounting and tax managers, they get a percent of the tax work that they do and they get a percent of the bookkeeping work that they review. And then our staff accountants, they get a percent of the bookkeeping that they get done. Now, you know, they still need to be putting out quality work and like do it efficiently and be a good team member. But it really incentivizes them to be efficient, serve the client well, and put out quality work that doesn't need a bunch of like reruns or revisions. And then that way, you know, they can make more. That's awesome. And has that caused like a lot of friction? Like I know compensation where I was, there was all these kind of political limitations where, you know, it was like, oh, we can't do this for this person because that might like upset some of the other people in their cohort if they found out. And for you, I mean, with a variable compensation model, it's very blatant that not everyone's going to be making the same amount of money. Has that been much of a challenge at your firm or has it been pretty smooth sailing and people just understand that they get out what they put in? Yeah, it was already in place at the first firm. So I can't take credit. So a lot of this came from the prior owner had been in an association called PASBA, which shares best practices around hiring and comp and tech. They had really pioneered a lot of these things on production based pay 10, 20 years ago. So that was the DNA of the firm. It was like, hey, you come here, you're going to have a flexible schedule. We're not going to track time. And if you do a good job, you know, here's how you can make more. So that was already in place, which I think is huge. If I were taking a traditional model and then trying to convert it, that could get really painful and messy. But yeah, it's not for everyone. When I interview candidates, some people are frankly scared away by that. As much as I try to explain like, look, you're going to have a guarantee for the first few months and then we'll help you make the transition and I'd tell a staff accountant instead of making like 20 or 25 an hour, you can make 35, 40 an hour. Or I can tell an accounting and tax manager like, look, you're not going to work more than 50 hours a week during tax season and, you know, first year is like 80 to 110, second year is 100 to 140, it's up to you where you fall in those ranges. And some people are for that. And then some people are like, nope, I just want my guaranteed fixed salary and like, okay, it's not, it's okay if it's not a fit for you. Yeah. Is this a remote first firm? No. So half our team is in New Hampshire and then the other half is distributed. So over time we've continued to hire more remote, but it's hybrid. Okay. Interesting. I like to ask kind of region when, as soon as kind of like comp figures come up, you know, like if people are in New York, like that's probably not great, but if you can do that remotely and you're in a low cost of living place, like that's a tremendous opportunity for someone who is ambitious and wants to put in the work to get ahead, right? Like being able to earn that in a lot of places in the U S is pretty game changing for a lot of people. So, and very, very intrinsically motivating, right? Where you feel a little bit more in control. I think, I think that was some of the downfall maybe on my personal journey where I, I had a lot of interest outside of just the billable hour. And I just felt like that was maybe not recognized and would never be recognized or, or at least wouldn't be until 10 years down the line. And so it was just like, ah, like, you know what, maybe this isn't for me. So you know, it's, it's really nice to know that these places exist with different structures, which might again, appeal to different people rather than just having them leave the profession, right. Right. Which is increasingly an issue. So yeah. So you mentioned that your employees don't deal with time sheets and they generally don't work weekends, which are both, you know, pretty primary concerns when people are talking about why PA can be frustrating public accounting. So I'd be curious to hear about both of those. So just to be clear, the first one, how are you structuring your billing to avoid the need for time sheets? And I guess just how, how has that been going? Yeah. The key is trying to scope the client well when it comes in, but we do value-based pricing. So yeah, you know, subscription style billing. So just to give you an example, let's say there's a, a landscaping client. We're going to do their bookkeeping, their business taxes, and the owner's personal taxes. And we'll charge them, call it a thousand dollars per month, right? So that's what we tell the client, like, Hey, this includes everything unlimited support, a thousand bucks. And then internally on our side, we're allocating, okay, X percent of this is bookkeeping related, X percent of this is tax related. And then they, you know, get a percentage of that. So on the front end, you have to make sure you're kind of scoping the volume of work and the complexity. And then we look at it annually to see if it needs to be adjusted a lot, but that's really how we do it and how we track it. And so, you know, a bigger complex client, they're going to get more of that revenue. And then like a small, quick, easy one, you know, they'll, they'll make less, but they can get it done faster. And is there like, kind of feedback from like the manager who's owning that file kind of saying like, Hey, I think we might be underbilling this person or, or anything of, you know, anything like that? Yeah. Just had it come up today. You know, there's a guy who bought a home services business and he made a comment about the way his payroll is integrating. And I read the email with the manager, like, Hey, it looks like he's asking for, you know, classes or like divisional PNLs. Yeah. We didn't scope that. We can do it, but just know that like we need to adjust the fee. So there usually is a pretty good feedback loop and then annually, you know, we'll raise fees for inflation, but we'll also say, okay, did this client become a lot more complex or grow a lot, or are they a pain? And then we'll, we'll raise the fee based on that. So, and then they get a raise right after that, right? Because yeah, those fees, they get a raise. So it's something that we're, we're always, always looking at. There are other firms that are on this model and they'll tell clients like, Hey, here's what we think the price is. We're going to review it after 90 days. Maybe should do that, but we just, we just don't. But yeah. The way you do it. Yeah. I mean, it's a good balance between like maintaining a good relationship where you can actually give them some certainty and making sure that it feels fair for your employees and it's just a well-run business in general. I know on Blake Oliver's podcast, I think the accounting podcast, it was, they recently went over some survey results and it was some, some crazy percentage of firms were not increasing fees on any kind of regular basis or the ones who did were not even keeping up with inflation. Right. And that's where I think some of these firms where they're struggling to either compensate talent properly or like they're really having trouble attracting talent. I think it's like, yeah, like there is a talent crisis going on, but at the same time you kind of have to review your business practices and make sure you continue to be well run. You know, otherwise you're going to kind of run into these problems and it's just going to be difficult to maintain. Yeah. There's, there's so many different factors going on, right. With like the crisis of the talent shortage, but that's a big one. These smaller firms or solo shops, they just, they don't raise prices or they don't charge enough to be able to get adequate help. So you, it's uncomfortable, it's a little awkward, but you, you have to do it, you know, we do it annually. And if you don't, you're going to look up in like the past few years, if you didn't raise fees, like what was inflation really like 8, 10% a year, you're just, you're so far behind. Yeah. And is it you having those conversations or is it often like the manager who owns the client relationship doing that? Both. So like really new clients, I might have that conversation. And then when the messaging goes out, the manager is the one that interacts with them if they have strong pushback or want to talk about it. Right on. I think that's like a, it's a big learning for a lot of CPAs, right? They hate it, but it is what it is, like they, you know, they know it needs to be done. So yeah, it's a tough conversation, but again, it's, I think it's something a lot of people in the industry would really, really benefit from. Like they do all these kinds of like personality tests. I know like at Deloitte, when I was there, it was, it was, you know, there's a personality quadrants, guardian, driver, and all that. And it basically has to do with like how extroverted and, you know, by the book you are and all that. And there was quite a divide, like the personality types in general are the people who are probably going to struggle to have these conversations, right? A lot of the people kind of were in this guardian quadrant, which basically means like you, you like to follow rules and you want to work within a structure and you want to avoid conflict. And so, you know, good on you for, for teaching people those skills, right? I think it's really important to have, and you know, someone who maybe wants to run their own business down the line will learn a lot from having that experience. So yeah, that's awesome. And then on the weekend, working weekends point, how are you managing workflow to avoid, you know, some of this is seasonal, right? So avoid being overstaffed in slow periods and then kind of understaffed and requiring all that overtime in what we refer to as busy season. Like do you, do you only take on clients as like a package deal where we'll do your bookkeeping and your tax? And is that like a huge part of it or? Yes. So that's a big part is like what kind of new clients do you lay on the front door? So we don't take on tax only, we don't take on 1040. So we have much less of a crunch during, you know, that, that tax season because of that. Don't get me wrong. Like we're still like working really hard and people are under pressure, but yeah, we don't let in new clients that are just tax only. So that's thing one. And then because we're talking to them throughout the year and work with them throughout the year and we have confidence in the bookkeeping and that makes the business return flow a little bit better and easier. Yeah. And then we just have, because the firms have been around for a while, we have a good feeling for what's capacity look like and you know, what does it take for a new person to get ramped up and you know, a new client. The first month of bookkeeping is probably like three to five times the amount of work and that tax return the first year is probably two to three times the amount of work. And we also know with our, our managers that it really takes them a year to like get acclimated. And it's kind of a double whammy if you have a new manager getting new clients. So we try to be mindful of that, but we still have, yeah, we still have an intense tax season, but it's not, it's not like, you know, where you're putting in 70 hours a week. Yeah. Yeah. That, I mean, that's awesome. Like the, the standard is pretty much that, right. Is like for a while you're going to, you know, kiss your family goodbye and say, Hey, I'll see you. I'll see you later. So it's, it's good to hear that there are places where that's not entirely necessary. And I guess, yeah, like you mentioned by owning the bookkeeping pieces, you're, you're not getting that one customer who just brings in like a smelly briefcase and like 40 pictures from their iPhone that they just text you, which is a real client I've had. So you know, yeah, so I guess that makes a lot of sense. So as an outsider kind of coming into the accounting space and acquiring these firms, you obviously have a bit of a unique perspective, right? Like you, you mentioned like ramp periods and guaranteed pay and stuff like that on new managers. Like that sounds a lot like a sales teams kind of, you know, lingo. So you obviously have a bit of a unique perspective. So when you're coming into the accounting industry, what is some of the low hanging fruit that you kind of found in terms of process improvement that you were able to address? Like what are some of the things where accounting firms in your experience, like just generally are not doing very effectively and have like room for this business process improvement? Yeah. I think a lot of it stems from like improving your marketing and sales process that you can take on the type of clients that you want and price them properly. Right. I think I'm pretty good at sales and marketing, but I still, I still close like, I don't know, one in five proposals. And part of that is because like people decide not to move forward or they're just like, that's more than I want to pay. So that's thing one is like, if you improve your marketing and you're responsive with the leads, yeah, you'll price things well, right? So that's a cascading effect where you can pay your team and pay for support, et cetera. I think a couple other common themes that I see is like people wait to hire or they rush hires and wait till the last minute. They're like, Oh, can I afford to hire this person? Like the work is there, like hire two, you know, there's a couple of like people on tax Twitter that I'm friends with that have like started firms and like, they're like, should I like, and I know they're drowning in clients and they're making a lot of money. I was like, hire two because more often than not, like they might not both work out and heaven forbid, like you hire one and they don't work out, then you're really like burned out or not serving clients well. So being understaffed I think is a big one. I think the other thing that I see is just a general like big start, stop on improvement in tech. And really what we try to do is like, look for like tiny incremental improvements throughout the year. Change sucks. Right. And yeah, it's hard to like do any of these things during tax season. But if, if you're just like, it'll wait till after tax season, then you catch your breath and then you have to decide on vendors and like decide what you're going to do. Well then it's September, October, you have October deadlines and then next thing you know, you're into the next season. So if you can make like small iterative change and improvement, I think that is a big difference. So and we've seen that, you know, like I just had that conversation this week. Like one of our big clients, we migrated from desktop to QBO and client didn't necessarily want to do it. The accounting manager was like, why are we doing this? Like, yeah. And I talked to her today and she's like, oh my gosh, the client relationship is better because of the way they use QBO and our processing is faster. And like, and it was because I was the bad guy that was saying like, these people have to be off desktop by this date. And like, yeah, you kind of need somebody that is just helping implement and drive those improvements. Yeah. Steadily. Otherwise, like, I just don't think you can, you can fix everything and improve everything from like May to November. And has a lot of like the change that you've driven kind of been like movement towards more sort of like cloud solutions to offer more flexibility and, you know, control over what you're doing? Or has there been anything that you'd recommend that was like really like a key turning point where you thought it really unlocked a ton for your firm? We've changed a lot and it was a well-run firm, you know, like good staff, good processes. But I think it depends on just the state that you're in, you know? So we picked a practice management tool, you know, we picked Canopy and it was like, let's decide in November and maybe we'll implement after tax season. And then I was just like, you know what, there's so many phases to this, let's go with this now. Yeah. We're going to start using like 20 percent of it and then we'll implement the rest after tax season. So that's an example where I think you can, if you're going to make a big change like a practice management tool, you can implement pieces of it over time. That was probably the biggest shift that we made. It's like implementing, implementing a practice management tool because, you know, it's like client info, it's tracking production, it's automations, it's tracking our production for compensation, billing, new client portal, yeah, you name it. I mean, everything changed when we did that. Yeah. I remember spending a lot of time on like client intake and stuff like that and, you know, there's a lot of admin that falls into it. So that's awesome. One of the big topics that's, you know, got everyone up in arms is kind of the talent shortage, which we touched on a little bit. And a lot of people are talking about these credit hours, 120, 150, you didn't go through the CPA path, so maybe less of interest to you. But I have a bit of a theory on some of this that, you know, a lot of this talent shortage kind of stems from, you know, certain firm leaders who are maybe not managing their firm as effectively. And so when there's that lack of profitability, it's really hard to kind of keep up with where compensation and. market rates are going, right? And so I think, you know, your approach to having that variable compensation and just generally kind of relatively aggressive total compensation package is really interesting. But I would love your take on kind of this whole situation as someone who's been hiring, like, has it been extremely difficult? Has it been a bit of a selling process to even get someone on a new, I guess, compensation platform? Or do you think maybe like the talent's out there, but like, they're just not super eager to jump because maybe some firms are kind of lagging behind on compensation? That's a lot. I think it is really hard for us to recruit still. And honestly, even with our, you know, we'll say like, hey, you're gonna have a good team around you, you don't have to bring a new business, you're gonna have reasonable hours. If somebody has those three letters behind their name, CPA, and they can like sneeze, like. Yeah. They're gonna be making 100, 120, 140 somewhere else already. So a lot of times I can't get that person unless they are looking for a lifestyle change. Right. What we found success with is, you know, maybe somebody who's been working for a few years, will, and they've had some tax experience, will have them get their EA in the first year, will pay for the training, will pay for the test. There's a $3,000 bonus that we'll give them when they pass. Nice. And the other thing, this takes a long time, but we've had some people start as staff accountants and then they work in that role for a year or two, and then they'll go get their EA and they'll move into the tax manager role. Yeah, I haven't been through all the, you know, testing and everything that's required for CPA. I still think there's immense perceived value once you go through that, but if firm leaders are gonna have that as a filter for hiring talent, like it's gonna be, you know, it's gonna continue to just be a massive shortage unless we open up to, you know, enrolled agent or just other career paths versus that. Right, so basically some of the solution for you has been to kind of go outside of just CPAs and find other people who can do other, certain parts of the work, right? Like especially bookkeeping, I don't think you necessarily need any designation, right? You just obviously need an understanding of accounting and just how business works, right? So, okay, interesting. That's interesting. I think right now we have nine accounting tax managers and four of them are CPAs. And three are EAs and then the other ones are like on their way to getting their EA. Okay, interesting. And as we kind of approach the end here, one of the things that a lot of, you know, a lot of people who kind of follow the newsletter and just in general on the website are curious about is, you know, how to make partner, what some of the perspectives of people behind the scenes are on who becomes a partner and how that all works. So you don't currently have any partners at your firm. Which, as you mentioned, kind of more follows like the revenue share model rather than the traditional partner path. But if you were to promote someone to partner or equivalent role down the line, what do you think you'd be looking for in terms of like unique skills that this person brings to the table or even sort of attributes? Yes, I think the short answer is like, if they want a piece of the pie, they have to help make a bigger pie, right? So they either need to be a rainmaker, like bringing in a lot of new clients, or they need to be somebody who's like excellent at training other staff that increases our capacity. Or they're, you know, bring immense value on the ops and tech side. So those are the things that would, you know, make the value there. And for me, I'm still wrestling with like, if I want to ever have a partner model, because I feel like a lot of ways now we give them that upside early. Yeah. And we give them say, and we give them, you know, leadership without having to like buy in. Yeah. Now do we have a little bit more risk because it's maybe easier for them to leave because they're not legally a partner? Yes, we do. But I know that's something that I wrestle with all the time if it's worth it. Interesting. So there's kind of multiple paths to get there, right? Like either, yeah, business development side, or just being essential like to the operations and just being really able to kind of like improve overall efficiency of the firm. So interesting. Well, thank you very much for joining me. And it was really interesting kind of hearing about you. I really wish you and your firm all of the success in this new year. And is there anything you'd like to plug, somewhere to be reached in case anyone is interested in what you do or might be interested in working with you? Yeah, I appreciate you having me on. I think it's awesome what, you know, your content is doing and hopefully more people will have more opportunity within this field. If you want to connect with me, yeah, happy to chat on Twitter or LinkedIn or the internet, wherever you find me. And yeah. At Patrick Dichter and on any of them pretty much? Yes. Perfect. I'm on those platforms and happy to chat. Perfect. Thank you so much, Patrick. Thank you. Bye.