Acquiring Tax Into a CAS Practice with Chris Williams

Hello, and welcome to the Big Four Transparency podcast. I'm joined today by Chris Williams, the owner CEO of System6, a remote CAS and most recently slash soon to be a tax firm. Welcome to the pod, Chris. Awesome. Thank you so much for having me, Dom. Super pumped. Getting to know you, spend some time in person together and now we're jamming over a good old podcast. Yeah. Yeah. I mean, so we've spoken and been connected for a little while and I've kind of kept tabs on what you're up to and all that. But most recently with the acquisition of tax, it sounds like you may have already found a person, but I was kind of helping look for a head of tax. Let's maybe start there. So you've got a CAS business, it's humming along well. What was the kind of rough revenue range of the CAS business? Yeah. So today we're about a five and a half to $6 million CAS business. We've got kind of two divisions within that. The vast majority of our business is your typical like $2 to $10 million SMB that we're doing bookkeeping, payroll, bill pay, a couple thousand dollars a month type engagement. And then earlier this year, we launched a mid-market team, sort of think 10 to 50 million of revenue and above. We're going to have NetSuite and Sage in there. Those clients are more like $5,000, $10,000, $15,000 a month, much larger engagements. Yeah. That's our CAS business. And then for the past couple of years, honestly, I've been thinking about getting into tax. I've been looking for the right partner, the right way to get in. We lose prospects in our sales pipeline to great all-in-one guys. And then sometimes we even have had a few existing customers get a quote for bookkeeping from their tax provider and they're just like, Hey, it makes too much sense to go all-in, to not be all-in-one. So super excited for us to finally be all-in-one as well. Yeah. Yeah, absolutely. And what was the catalyst of like, okay, this time we're doing it? Was it a super regrettable turn or was it you just saw a firm up for sale that looked like the right price? No. I mean, I think it speaks to the power of the community and I call it the Cloud Mafia. And that's like said with love, maybe I should come up with a better word than mafia. But you know how there's this community of folks online and we see each other at conferences. Somebody had put me in touch with this firm owner actually. You know, it may even be on your podcast, Patrick Dichter, put me in touch with a firm owner probably a couple of years ago who was thinking about exiting his firm. It wasn't quite a fit for us at that time. But he and I had stayed in touch and his firm continued to grow and he got more serious about really wanting to sell this year. So when he came back around, so to speak, we were ready to try and work on a deal. And I think the fact that we met each other a couple of years ago, we've had meals together in person speaks to like, hey, if you're doing an acquisition, it's really a merger of people. And so if you can have a good relationship, especially one that's been developed over time, it just makes the road bumps easier. There's been no shortage of road bumps in this deal like in any deal. But when you build a bunch of trust first... So yeah, kudos to Patrick for the intro back in the day. And yeah, the catalyst, honestly, was just the seller being ready to rethink about leaving his firm this year. Interesting. And is this someone looking to retire? Because I feel like most of the time, these deals will come with an earn out based off of a bunch of factors, but also their continued involvement in the firm for a smooth transition. It kind of sounds like you might be building up a net new tax practice, right? Yeah. This is definitely, I think, a unique situation. And what we were looking for, as we think about additional acquisitions, I think is somewhat unique in that we're fully remote, we're super modern, it's been that way. A lot of the tax practices that you see out there for sale are not remote, or maybe they're hybrid, but truly do still have a physical presence or a market presence. This practice was not that. It had gone remote naturally over even pre-COVID. And yeah, it was built in a modern way starting in 2009, 2010. Honestly, the owner is mid-40s and just kids are of the age where he's like, I've been doing this for 15 years, I can take some chips off the table. I don't think it's a forever retirement, but have some time to pursue other interests. He's got some creative outlets he wants to spend some time on and have some focused family time for the next chunk of years. So that was his reason. And then yeah, I mean, we do have... There is still a... There's part of the transaction is contingent on revenue retention. But the seller here has a team that he feels like he really trusts. He has trust in me that we're going to retain the clients. And so yeah, he'll be transitioning out over the next six to nine months, training the head of tax that's replacing him that we had done a little bit of work on together. So yeah, we did go higher at a number two, so to speak. But yeah, I mean, it all starts with just building trust between seller and I. And yeah, I need to believe that this thing isn't going to fall apart, which certainly it won't. And he needs to trust me that I'm not going to run it to the ground because he's got some exposure. So there's always, I think, some sort of payment that gets deferred and tied to revenue retention. Yeah, this is very much like a play that I find interesting. And before we record, we were chatting about this. But I recently kind of helped make some intros for someone who is leaving a tax practice as a very experienced person. And I think that that's such a unique opportunity for people, too. It's really cool to get to go almost out on your own. You get to go build this kind of new-ish thing without the full risk of just kind of cutting any parachute. And you're unemployed out on your own, eating what you kill, so to speak. So I think that that's a really interesting opportunity. And I think that's a very cool model. Because not only do you sort of start on second base with an existing set of clients, but I'm sure your first year growth numbers would be very unreasonable for a standalone tax practice. However, you probably have a pretty tremendous opportunity to cross-sell, a cross-tax, right? Yeah, we're super excited about that. I mean, I will say though, we're going to wait a little bit to hit the cross-sell button. Because we feel super strongly, this is our third acquisition. So we've kind of done two on the bookkeeping side of like, Hey, look, the most important thing that we're getting in this acquisition is the team. And we need to get them settled inside of system six. It's a disruptive thing. And so the last thing we want to do is dump a bunch of new chaotic cross-sell onboarding on the team. So yeah, we're definitely going to wait and make sure folks are settled. I mean, honestly, given the timing, this is October. We're going to probably let most of the team get through tax season. Into March and April, before we really start trying to market. But we've definitely got a few clients we know that are chomping at the bit to leave their current tax provider. And we'll try to get them on board before year end. But to your first point, what I will say is I think you're right. There is something interesting there. Because there's a lot of firms out there that are for sale. That yeah, the owner wants to retire. And then there's a lot of buyers out there who maybe run a bookkeeping business, or wealth management practice, or they're financial buyers where they're like, man, this practice has a good list of clients, but there's no clear number two. And there's a bunch of modernization work that I don't know how to do. But I think you could play matchmaker of like, there's those buyers out there who are looking for that operational tax leader. And yeah, if you don't want to go take an SBA loan out yourself, or you don't want to go start your own practice, I think there's got to be a lot of those opportunities, just given how many practices are for sale. It's kind of in the middle, right? You don't have to go buy the practice all on your own. But you still do get a lot of autonomy if you're kind of, in our case, working for me, a leader who's not a tax person. So I'm going to give them a lot of runway to kind of grow this thing as they see fit. Yeah, for sure. Yeah, I find scope as a competitive differentiator is such an interesting thing, because it can be approached from either direction, right? So you have, I don't know if you know Zane Stevens. Yeah, he's in my neck of the woods. Yeah, I know. So I've had him on where they're a very dedicated, they just do the accounting, they will not do the tax, and they have no interest in doing the tax. And that has become almost a differentiator for them, because any tax firm is super incentivized to refer work out to them, because they can trust that the accounting and the books will be done super well, it makes their job a lot easier, and they're not worried about their client getting poached. And so they become the referral source of choice. But then, at the same time, it could be a limitation if someone wants the one-stop shop, or I mean, again, just getting more revenue per customer is huge as well, right? So it's this tricky thing on scope where I celebrate both of like, oh, intentional scope limitation, that's so cool. But then at the same time, being the firm that's going to offer someone wealth advisory, tax, bookkeeping, accounting, and just financial advisory, I mean, you might have some six-figure clients in there, right? Like that's also kind of wonderful. Yeah. I mean, I've definitely had my fair share of folks, especially on the bookkeeping side, be like, why are you getting into tax? It's so much harder to hire for. I mean, it's seasonal. I totally understand. It's definitely taking on a challenge. And ask me in 12 months and I'll probably have some lumps that I don't have today for it. But one of our core values here is we're always growing and we just feel like I've got ambitions to be a larger organization. And it just felt... I think especially because we don't maybe have such a targeted niche in terms of like, we only serve customers in X, Y, and Z industry. We're like, yeah, Zane's known as the wine guy. So every CPA out there in the world that has a wine client knows, hey, we can send them to Zane for bookkeeping. Without us having that, I think, specialized of a bookkeeping flag, so to speak, I just don't think that we had that natural steady stream from CPAs. And honestly, we'd seen a couple of our CPA partners launch bookkeeping divisions over the last couple years. So it just felt like, hey, if we're trying to grow, we want to get to 100 people. We want to be the best place out there in remote accounting. It just felt like we should have tax. Yeah. And I'll say one interesting thing I didn't expect is our internal team on the bookkeeping sides actually been pretty excited about us doing the tax. Because they're like, feel a lot of friction around year end with third party CPAs sometimes where it's like, we send over the books. And then there starts to be like, you guys did this wrong. And it's like, kind of finger pointing between firms. So we're kind of excited to hopefully eliminate some of that as we bring clients in house over time. Yeah. And so how are you financing these acquisitions? Yeah. Because it's not the first one you do, right? Comparative to your size, this isn't huge, but it's still sizable for sure. Yeah. So we're not private equity backed where we've got this massive ore chest. So yeah, there's a cap on how large of firms we can buy. Yeah. So the main avenue I'm using to finance these is SBA loans that are out there. It's called the 7-8 program. And it's, I think, super well known in the CPA space because there's obviously, CPAs have been buying out CPAs for years and years. So yeah, this will be my third SBA loan. I bought System 6 about 4 years ago. I've grown that business organically to the point where I felt like I had some time to add acquisitions as a way we're growing. So then we did a small couple person firm acquisition at the end of last year, used an SBA loan, and then this one as well. And all of these deals, we also do have a seller note component. It's usually somewhere between 20% to 50% of the purchase price, depending on the state in the book, the firm, lots of dynamics. And then the payout on that note is going to be tied to revenue retention over one to a couple years. And then we've been growing and been able to have some cash that we've built up. So there's cash off the balance sheet as well. But yeah, without the SBA, that's certainly the majority of where the capital is coming from for these acquisitions to date. Interesting. And you talked about trying not to rock the boat too much, but obviously something needs to happen. And so I'm always kind of curious for, what does the playbook on the first, call it 90 days, look like then if we're looking to not rock the boat? Because that more or less, call it 90 or so days, gets us into the ramp up to busy season. So I'm curious what actions are planned there. Yeah. So our playbook, I would say that, yeah, the don't rock the boat, it is kind of... Well, I don't ever want to crazy rock the boat, but there's a focus on like, hey, for a certain period of time right out of the gate, really don't want any boat rocking or any changes because we just don't want there to be disruption to service and stuff like that. So literally out of the gate, it's like we sign a deal. The first thing we're trying to do is make sure we have access into every system. I need an admin account so that we just have controls in case ever needed. And then super quickly get team members on board and onto our payroll systems, get them into our benefits, etc. So that's the first week that we're really focused on operationally. And then over the next handful of weeks, the folks that new team members are going to be reporting to just start to get to know the new team members, what are their clients like, maybe start to explore documentation like scope of work, start to understand strengths and weaknesses of those team members. And then the idea is by the end of the first 90 days, we feel like we've gotten to know the new team members that have joined us. And we can point out to them, hey, these are the areas we feel like you're going to need to make adjustments to ultimately be operating the system six way. And then we can give them a timeline on that. It's not like, hey, you got to make these changes over the next month. It's like, so in our case, the timing, it's like, okay, let's get into systems. Let's get to know the team. And then say, hey, towards the year end or at the end of December, these are the areas we feel like you'll need to grow and make some adjustments. But it'll be over the next six months, because we feel like you need to be focused on getting through busy season. And then let's worry about maybe changing some way things are done in carbon or whatever after that. So I think it's important to acknowledge that, hey, we're trying to integrate and get everybody kind of operating in a pretty similar manner. So there may be some adjustments to how you do things. Let's figure those out, communicate them to you, but then give people an appropriate time to work through that and not just jam it in overnight. Yeah. Yeah. I mean, that's a super important approach, because I think if your head is spinning and you're going into tax season, that's not a good place to be. Or you're trying to implement a new system and something goes wrong with it. Those are really crucial days. And I would say on this acquisition in particular, the firm we're buying has a tax component and a small bookkeeping component. What I just talked through is probably more relevant on the bookkeeping side, because we do have a system six way of doing bookkeeping and CAS and that type of stuff. We're not a tax practice. So part of the reason we're buying this firm is we think they do great tax work. So I don't think we're going to have as much suggested adjustments on the tax team, if at all. We might have some ideas on how is tax going to collaborate with bookkeeping over time. But we're really acquiring this firm because they do good tax work and we're going to hope that they just keep doing their thing and we're going to grow it. But yeah, certainly on the tax side, I'm not here to tell people how to do busy season, because I don't know how to do busy season. Yeah. Which I guess, speaking of not knowing how to do busy season, I want to get into your background a little bit. So similarly to Patrick, you're not a CPA, you have an investment banking and corporate development background. What drew you to the accounting firm space? Yeah. So it first started with... I was drawn into entrepreneurship and betting on myself and just felt like I was, at the time, when I was 28, 29, deciding to go back to finance investing or do something a little bit different. And found this path of like, Hey, instead of doing a startup, let me go try and find a great small business to buy from an owner who wants to retire. And then let me see if I can try and grow it. And this has now become a whole thing. It's the search fund model in some parts of the world. People know exactly what that means. And some other places, people have never heard of it. But the basic idea is you search for a business to buy, and then you buy it and you try and grow it. And so that was a decision I made. And then I started looking at industries that I felt would be a good place to buy a business. And with the recognition of my background, there's a lot of good industries out there, but I'm probably not super well-suited to run certain types of medical businesses. Because I don't have any healthcare experience, or engineering businesses. I was a math major, not an engineer undergrad. So I was naturally drawn to a lot of different financial services, wealth management, HR consulting. And discovered, yeah, accounting is obviously a huge world. I came into it focused on the outsourced bookkeeping space. Because at the time, there weren't as many non-CPAs buying tax practices. So I was more focused on the recurring bookkeeping businesses. And look, there's a lot to love about accounting. And that's why private equity has come in like crazy, is it's super important work. Accountants don't get fired willy-nilly. There's a massive market. Every business in the world needs accounting and tax. Everyone loves recurring revenue. Accounting is that. I think opportunities to grow and improve firms that maybe haven't been super business operations-focused. And so those things were attractive to me. And then it really became about, hey, can I find a good business with an owner that I get along with, where I feel like I can do a deal with him or her? But yeah, pretty quickly, when you look at accounting and I feel like... Look, I know busy season sucks. But firm owners, I think sometimes it's good to remember, you got good businesses. Decent margins, recurring revenue, massive end market, mission-critical services. That's why private equity is salivating and running in like crazy. And there's pros and cons of private equity, for sure. But they're not wrong when picking a good industry. Interesting. Yeah. I definitely agree on that front. Has there been unique challenges to not being an accountant? Because to me, I feel like particularly in the early days, maybe someone needs to get called into this thing, or the founder of the firm you've acquired takes a step back. And then it's like, oh my God, this kind of deep in the weeds operational thing has come up. Or are there some key hires that you did early on that helped you from that? So yeah, there's totally been some challenges. I would say I was lucky in that the business I bought, System 6, Jeremy, awesome guy, still good friends, who I bought the business from, he ironically wasn't an accountant either. He saw an opportunity to start a bookkeeping business. Kind of a serial entrepreneur. So it had been structured in a way... Obviously, if you start a bookkeeping business from zero, you got to learn some stuff. But he had built it in a way where while he had definitely had some client relationships, he wasn't in service delivery. So I didn't run into that issue out of the gate in terms of like, oh God, I'm getting pulled into doing work on a job that I don't know how to do. Where we did run into some issues where there's been challenges for me, not as an accountant, was we started to grow pretty quickly after I took over the business or continue to grow. But we started to go a little bit upmarket and hire a little bit more complicated clients, maybe more gap financial requirements versus the typical SMB. And so when it came to hiring, I didn't have the right understanding to know, okay, our client base has shifted a little bit. We need to ask different questions now. We need to get more technical in our accounting interviews. So I think that there was some lack of knowledge there. And then I also definitely made some sales. I was a sales guy for the first couple of years. We probably took on some work that wasn't in our sweet spot. It was maybe more specialized than I realized or whatever. And that led to long hours for the team or not fun, pissed off clients. And so that's, I would say, there were definitely some challenges there as a non-accountant around like, are we hiring the right technical tech team? Are we selling the right engagements? But there's, I think, we've learned from that. And there's been a lot of benefits too, I think, to not being able to get sucked into the work. That's allowed me to spend more time focused on the business. Why do you think more accountants aren't going out and making this play? And there's readily available financing through SBA. I don't want to get too in the weeds of that. I've done an episode with some folks from Live Oak previously. I mean, we've kind of covered that. But is it just like a risk tolerance thing? Or what do you think is impeding people doing this? Well, I think another version of it is just going out and starting your own firm. And I do think you see that happen a lot. And I think a lot of firms, unless you're the PE machine, that's just like, let's buy as much as we can and flip it in a couple years. You know, a lot of firms, you might be better suited just to start one than go buy the stereotypical old school firm and try and go through that modernization journey. So I think that's one thing. Yeah. I mean, look, there's risk here. I mean, the main thing with the SBA financing is you got to personally guarantee the debt. And I mean, I've got millions of dollars of personally guaranteed debt, and I don't have millions of dollars of net worth or house value. So you do the math, if this goes south, there's serious financial consequences for me. I don't take that lightly. I don't take on that debt flippantly. But you have to be willing to live with some risk, I think. And yeah. I mean, there's definitely risk-tolerating accountants. But yeah, accountants are not known to be... the biggest risk takers and probably shouldn't be from what you do as a profession. So there's probably some of that. And then I think just like anything, it's probably some... I think it used to be the way you did this was like you had to wait, wait, wait and do it on the partner track. I think it's just only now the word is getting out that you don't need to go be a partner somewhere and grind for 15 years. You can just do this at 33 if you go find a business for sale. And I just think some of it's getting the word out. I'd love to see more mid-career accountants go buy practices because it can be a pretty interesting, life-changing, wealth-creating path for sure. Yeah. Well, and I think the opportunity there too is with a lot of the current sellers potentially being as part of a retirement, you can sell or finance a chunk of it as well. And the way SBA works structurally, if they sell or finance a part that's something you don't need to come up with up front. And so you can actually kind of make this happen without that much capital up front other than again those personally guaranteed loans, which still feels like capital up front for sure. But I mean, yeah, there is a way for sure. But when you look at it, yes, the way I talked about personally guaranteed loans is in a vacuum, it's super scary. At first, I was like, I'm not doing this. No way. I got to find a business that I can buy without a personally guaranteed loan. But then it's like when you look at the business that you're buying, it's like, okay, how many things would have to go wrong for me to start not being able to make my payments? In an accounting firm, you can be like, well, if there's not a ton of customer concentration, I'd have to lose a ton of clients. Losing five clients isn't going to be the end of the world. And you're in a market where there's a lot of clients out there that you can go get relatively quickly if you do a good job. So you can't be dumb in how you structure it. You can't use too much leverage. I think it's a place that you can feel a decent amount of safety that, again, as long as you don't buy a business where the clients are all tied to the owner, do your diligence. But I think it's a space you can feel good about your SBA loan. And you've been involved in transaction or transaction-adjacent work in a lot of different industries other than accounting. Was there anything that struck you as being very meaningfully different about the accounting industry from an outside perspective? Yeah. I think that is what I just alluded to there. Clients tied to the owner. Yeah. And even tied to the person delivering the service, I guess I would say, which in the smaller firms is the owner. But if you think about bigger, $20 million accounting regional firms or whatever, you talk to most of their customers, their clients. And sure, they may work with Williams and Williams as the firm. But at the end of the day, that client is pretty tied to the partner or the junior partner that's doing their work. And that just doesn't show up in as many other industries. Clients are more tied to the brand, so to speak. And it's like, even when the brand is different than the person delivering the service, a lot of times, people are tied to that person. So that just introduces a dynamic in transaction structuring that you have to be aware of. So that's probably the biggest difference. Got a bunch of experience in real estate and other not-so-personally-tied industries. Yeah. Oh, go ahead. Sorry. We serve a lot of our clients now are folks who are buying businesses. So we're seeing how transactions are structured in a lot of different industries. You definitely don't see seller notes as common or at the same scale as you do in accounting. Yeah. That's such a blessing for people who are in the acquisition space. It can actually really make a difference on the economics or even just the feasibility of a deal happening in the first place. These people are used to pulling a certain percentage out as cash flows. So being told, hey, those cash flows will continue for a couple years if we structure it this way. That's not necessarily a bad thing either for them. That might actually be a feature rather than a cost of doing the deal. You were talking about it earlier, but as a buyer, you don't... In most other industries, maybe you're going to have to... If you're buying the business for $5 million, you're going to have to come up with... Maybe there's some seller note, but maybe it's 10% or something. So you got to come up with $4.5 million. But it's much more common in accounting for there to be a 30% seller note or something. You just don't have to come up with as much money up front. Well, I really appreciate you coming on to share this journey. I think it's an exciting time. I look forward to checking in. Hopefully we can do another episode in a year and you'll have nothing but good news to share. And we'll talk about that. Thank you so much for coming on, Chris. I really appreciate it. Yeah, thanks for having me. We're hiring great accountants now, great tax professionals anywhere remotely. Joy and flexibility are two of our employment experience core values. So if you have folks in your audience that are interested in a new seat or have a business they're thinking about getting out of, I'd love to hear from them. And thanks a lot for having me on. Awesome. Perfect. Yeah. And I'll make sure I link all your contact information as well as the business for anyone who's looking to get in touch. Awesome. Thanks, Chris. Thanks, Tom. Bye.