Private Equity’s Playbook & Perspective with Brant Hansen

Hello, and welcome to the Big Four Transparency podcast. I'm joined today by Brant Hanson, co-founder of Hanson Harding. Welcome to the pod, Brant. Thanks, Dom. Appreciate it. Happy to be here. First time. Yeah, my pleasure. So we've had some conversations in the past, actually by, it all started with a bit of a stray email talking about potentially being interested in my firm, which Big Four Transparency is not quite a firm, but I was sort of curious what you were up to with that. And for a little bit of context to kind of the listener, Hanson Harding essentially acts as an intermediary between private equity and accounting firms, helping kind of facilitate the deal happen. And this is something brand new to me, I have not had a conversation with anyone kind of doing that. So I'd love if you could kind of run us through this business model and just help me understand kind of how that works. Sure. Um, just a little quick idea of who we are. Yeah. So we're in 40 plus industries. Accounting firms is definitely one we've been heavily, heavily involved with, which is why we've reached out to our BD team was probably when I reached out to Dom originally. And basically, we do act as an intermediary. So it's just a light form of conversation, you know, usually 30 to 45 minutes with the co founder, or the owner of the CPA firm, accounting firm, you know, tax advisory, bookkeeping, whatever the source they're doing, just to kind of see if there's a good fit to which will be called a buy box to what a private equity firm is, you know, specifically looking for. And then if it kind of hits the criteria of a potential add on acquisition or a bolt on later on in the process, then we can we stay in contact with with them. But ultimately, we, you know, we don't take fees directly from them, we don't represent them. We don't give them a valuation, we don't negotiate on their behalf. So it's a pretty warm conversation, pretty light, just to see if you know, one of our private equity firms are interested in, you know, taking a meeting to going down a little bit further. And essentially, we attend the first call either, you know, myself or my partner. And after that, it's just a, you know, a handoff, and they deal directly with a private equity firm on that. Okay, interesting. So when you say there's no fee, like, it's a little bit like a realtor thing, like, if the firm was the buyer, right, like, ultimately, you would be getting compensated by the private equity firm. And so there's no, there's no direct cost to bear from accounting, there's no contract ever, like, I never put them in a contract with Hanson Harding. So, yeah. So ultimately, I don't work for free. But yeah, ultimately, we are compensated, either, you know, throughout the portfolio through equity, through a success fee. But that's kind of how we operate primarily is if we're involved in the portfolio. We want to be compensated through equity, because that's kind of what we're good at is the sourcing. So. And how did you ultimately like develop these relationships with private equity firms to where, you know, you become this trusted resource for them to help make the intros to the firms? That's a very good question. One of our good friends growing up is a president of a larger portfolio in one of the groups we work with. And it wasn't large at the time, it was about two and a half million of EBITDA, one that first launched. And over the course of three and a half years, 30 plus acquisitions, it's become one of their largest and best performing portfolios in their 40 plus years of being in the private equity space. And we grew up with this guy. And so me and my business partner, he was kind of bugging us to get into private equity. And we were kind of thinking, you know, maybe when we're 55, you know, 60, who knows, you know, can I get into that space? We'd always kind of find it fascinating how that worked. And we didn't really know anything, to be honest with you. But over the course of a year or so, there was a lot of conversations happening and a few introductions. And we had to go through a process for approval. And ultimately, we just brought in some deals and were able to close on a couple, and one of which was that, you know, the Certified Financial Planner, there'd be a partner with one of the groups that we facilitated the deal. And it's just kind of snowballed from there. Okay, interesting. And so, yeah, you kind of alluded to, yeah, the Certified Financial Planner things that you were doing. So this was essentially like a like a previous, you know, project with this private equity group where it was it was essentially a roll up, right, of Certified Financial Planning firms. Yeah, that's what it is. Yeah. So we just introduced the first initial platform to them. It's actually one of our good friends, and it just happened to be a perfect business. And they partnered together and now doing a roll up in Canada in that space. So that's kind of where our first initial launch was and still working with them very heavily on that, that roll up on introductions and that, you know, the portfolio manager space. But ultimately, that's we're a buy side firm. So we have other agreements in place to ensure we have, you know, we're maintaining those relationships and introducing more deals in different industries. Yeah. Canada, land of the roll ups. Right. So we're very known for, you know, a very, very initially successful anyways, dental roll up where like, oh, yeah, I don't know what almost all the clinics in Canada got acquired, including one of my uncle's clinics. So it, you know, the roll up market is someone who got rolled up in that dental space. Yeah. Yeah. And so the kind of like roll up space is something that, you know, I was working at Deloitte at the time where this was happening. And so, you know, I can't say on which ones, but there was like exposure to some of the deals. And I was like, wow, this is actually a very interesting business model. Can you share a little bit more like how that works and like some of the economics of it, though, for the listener? I think you'll you'll do a better job of, you know, breaking it down than I would. I think I know what you're talking about. I mean, just so you're aware, some of the conversations I've had with accountants specifically are very aware of the roll ups that have happened. That's that's probably their job to be aware of that. And there has been some negative, very negative aspects of some roll ups in Canada, too. So they bring some really good questions. But as far as structure of the deal, when you're on the platform, you know, there's a lot of different PE groups out there that structure a lot of things differently. But essentially, there's usually or could be a buyout of the whole company and then a reinvestment back in as a partnership or shares, which there are usually no preferred shares. So they all have, you know, hold the same shares as the PE company. And from that point on, you can grow and that share price goes up as you acquire more and more companies in that roll up. And so typically they you know, if there's a total enterprise value, let's just say it's a million dollars for an acquisition, they usually will allow you to invest 20 to 30 percent back in of that enterprise value to then some of these groups we work with have, you know, the last 20 plus exits, you know, that they've had in their in their portfolios have had a six X return. Right. So ultimately, your second bite of the apple was what they call it or your second exit or when you go exit, you ultimately potentially can make more money on the back end. Obviously, nothing's promised, right? Like that's that is ultimately the last 20 plus X, which is some of the groups you work with have received that, you know, six X. So. Yeah, and so it's like essentially they they buy in at a starting date, right, for a given valuation. And then now your firm gets added to this kind of group of firms where there's a lot more resources typically being invested into growth, you know, cleaning up, you know, whatever, whatever type of margin they can get to boost valuation. So a lot of the growth comes from that. But then at the same time, there's this thing kind of about multiples arbitrage happening. Right. And I'd be curious to kind of hear about like what some of the speculated changes in multiples might look like in the accounting industry specifically, because that to me, again, I hear about this a lot in the context of like an e-com business or something like that, but I haven't really heard of it very specifically and talked about numbers when it comes to like accounting firms. Right. So PE, for the most part, with the groups that we talk to and work with are very, very smart, way smarter than me. And so they won't even enter in an industry unless there's like a, you know, it's not for sure, but three to five X, you know, to acquire, you know, a million EBITDA type business. Right. And then on the back end, as they roll up to 15, 20 or 25 million EBITDA to have an exit of like 10 to 12 X, you know, that's that's kind of their whole model and their thesis behind that. And so without going to crazy detail, they do know that accounting firms can be in that realm as well. And they have seen some transactions facilitate to when you get in that larger area. They've seen those in the market hit 12 X. So if you're kind of already in that roll up, kind of like what dental, you know, that roll up is already done, too. If you're in that group and you're facilitating all those, you know, have all the resources and you're growing together, you liquidate at the very beginning, you remove some chips off the table. Maybe you have five to seven years left in your runway, don't really have a succession plan and play as an accountant. Right. Maybe there's one partner who wants to exit and two who want to stay and they're in they're either 55, 60 years old and they want to work for five to seven more years. It'd be a great option for them to work within the group to then, you know, have a good salary, you know, that they negotiate as well and work within us and, you know, have maybe have some revenue based growth bonuses that come on top of that. And on the back end, when they do exit, have that second bite of the apple that happens when they were to exit, if that makes sense. Hopefully I answered your question. Yeah, yeah. Well, it's really interesting to see that, again, assuming that this kind of multiples arbitrage works the way they hope and or think it will, then before any of the work is done, just by becoming a part of this group, the assumption is that you may have increased the valuation anytime, anywhere between like 50% to let's call it 150%, which is which is really interesting because if the, you know, if the cleanup that happens in the years after the acquisition isn't quite what you expected, you know, like they promised this insane level of growth and like improvement to gross margins, and that only happens a little bit, you can actually still benefit quite significantly just from being part of this larger pot where you get higher multiples. So yeah, I think that that's really interesting for for people to understand as well. And like, as you grow your firm, too, I imagine that there is some exposure to that too, right? Like if you sell as a $2 million firm versus a $10 million firm, it might not be worth 5x, it might actually be worth, you know, more on the backs. Yeah, yeah, back end. Interesting. And from your conversations with these like private equity firms, like what are they doing to distinguish themselves as the place that people selling their firm should go to? Because it seems to me like, it's a very competitive market in that a lot of private equity firms are kind of piling on to try to acquire the same firms versus, you know, I think maybe five years ago, if you're a firm trying to sell, it would probably actually just be that a firm is really desperate to get a deal. Right? It's a really good question. I would say, like, me and my business partner, we get in front of a lot of private equity firms who now want to, you know, utilize our resources as well. And we turn down way more than, you know, that, that, that we can just be based on the fact that some of their ideologies are based on acquisition, and just acquiring EBITDA. And ultimately, at the end of the day, that's not in the best interest of everybody. You still need to have full integration, right? Like everybody needs to be working on the same, you know, tech stack, same systems and same processes, because that's how you ultimately trade at a higher value and a higher multiple. And we're not in the business of just acquiring EBITDA. And so some of those private equity groups who are in that mindset, you know, 10-15 years ago, that did work, you know, just going out there to buy one to two or 3 million different, you know, EBITDA type companies and rolling them up and not really having a business in play, an actual, you know, ecosystem built out, to which now that you have to invest in technology, you have to actually invest in more people. And it's not just the acquisition, you have to actually put more, you know, infrastructure and millions of more dollars into it to actually operate like a smooth business. Like there's a guy I talked to. Is it where was it? Arkansas, I believe, anyways, didn't really matter where it was. But he actually acquired 19 different accounting firms. And, you know, hearing him say that got me a little bit excited, because I was like, Oh, this is this guy's, this guy has proven out how to acquire some, you know, in the accounting space. And as we, you know, dive deeper into the conversation, and, you know, an introduction to the one of the groups we work with, it turns out that these are still 19 operating silos, like they're not even funny at all integrated, but his value, his mindset is like, Hey, I have, I have 15 million of EBITDA. Yeah. And I'm like, great. You know, like, you have 19 different businesses, like they're not operating all, you know, on the same level on the same system, and utilizing different technology and all of them. And that's the hardest part, especially in accounting, right? Since there's different technology out there, who's using AI, who's not, who's still archaic, who's still using paper, like, a lot of these, that is going to be the hard part about accounting is to act the integration of it all. And so when you're choosing your partner, you want to be careful of who that is, that that to me is the most important part. Yeah, yeah. And there's a couple players in the industry that I think have been incredibly clever about this. So like, carbon having this marketplace. I don't know if you've heard about that. But like carbon, one of the one of the, you know, practice management software providers opened up this marketplace for firms on carbon. And I think that not only is that really interesting, just for users where it's like, Oh, this is a cool perk. But I think if someone's starting a firm with the potential intent to sell it, and you're picking your software, you might as well use carbon because this is like, oh, you get this little boost in terms of the likelihood of being able to sell because now you you know, you have this very, like high intent marketplace, you're able to list yourself there, it's going to make acquiring you a lot easier if there are intentional carbon sellers. And now I haven't used the software. I don't know if it's like, as good as all the other ones. But this is so interesting. First, I just want to make sure I heard you clear. So there's a bunch of different accounting firms utilizing carbon right now. And so you're saying that's a good ecosystem to kind of grab people from the same software uses and technology. Is that kind of what you're saying? Well, so what I was saying is carbon actually opened up a marketplace, okay, like that they host for firms using carbon who wish to be acquired or to acquire other firms. Yeah. And I find that to me is like, that's like the that's the industry acknowledging what's going on here and and getting ahead of it right and getting clever about it. It's very interesting. You say that because I mean, without saying who it is, but they know who they are. It's one of my best friends growing up companies. Before they were acquired, he had a software system. So what you're saying is ringing exact truth. And so that for them to go from two and a half million of EBITDA to right around 130 million now of EBITDA in three and a half years for acquisitions, how do you do that? Right? It's just a pipeline. And if you have that pipeline full of utilizing the same software, how much more easier that they have their bidding on it, they have their financials on it. And so when you do a due diligence, it's a lot easier to have all that data as well. Right. So when you're saying that, I'm like, Hey, are we on the same page here? Because for what he was able to do, in that course of three and a half years is unheard of that many acquisitions and go from two and a half to right around 130 in a three and a half year period is, is insane. Yeah. And it's because they were initially all in the same software that they had, like 150 or so. I think 150 different, you know, this, this company of these different, you know, resources inside. And so that's how they're able to achieve those results so quickly. Interesting. Yeah, that's, that's cool to hear. Because as soon as I heard about it, I was like, Oh my God, that's brilliant. Yeah. Yeah. And so now kind of changing gears a little bit, you talked about a platform firm a lot. And I recently spoke to Tim Petri from like ascend and HD growth partners, and they consider ascend to be a platform. And so their definition of a platform is basically that it's almost like an alliance of firms, but with perfect incentive alignment. And that's kind of like a whole PE back play as well. But it's like these 11 or 12 firms, and they all basically own equity, like the leadership all basically own equity in the kind of, you know, holding company at the top. And so it has become this kind of alliance with perfect incentive alignment, where, you know, partners want to help each other, not just out of the kindness of their hearts, but like from one firm to the next, and you want to refer internally and share resources and whatnot, just to kind of boost the overall equity valuation. And so when you're talking about a part platform, I think what you're referring to is like, the one kind of mother firm that you can kind of roll all the other firms into. Is that correct? Yeah, yeah. Okay. Yep. So I mean, I guess I it'd be kind of good to know their definition as well. Really, it's just they have the management like the C level management, basically, an ecosystem for us to build a plug into. So, you know, we've now Hanson Harding is met with Oh, actually, I just figured it out 211 different accounting firms over the last five months, in both Canada and the US. And so over those course, those conversations, and now, you know, we're utilizing AI as well, we're able to, you know, go through our data and find out, you know, margins, which is really, really interesting as well from, you know, bookkeepers all the way to no tax advisory consultancy, right. So business advisory, so that's where you can get higher margins, stuff like that. So it's a, it's a, they've been great conversations. But we've also identified where a good add on acquisition target would be, you know, narrowing, narrowing it down to how many partners, right, how many partners are there, what their pain points are. And on the back end, what a good, you know, potential platform or flagship would be. And so that number to some of our private equity firms are seven to 8 million in revenue, you know, operating on like a 25% EBITDA margin. And some of them are at 10 million plus, just depending on, you know, how aggressive they're wanting to grow through through acquisition. And so the whole purpose of the flagship or the platform is that once we bolt on to their systems and their processes, it doesn't really affect their day to day and we can grow internally and grow externally through M&A. So that's kind of the credit that we're looking for. And I don't know if you would know this, this is maybe like getting a little far ahead. But with the, you know, with the flagship, would the idea be to roll firms into it? Like, you know, if if Piscopo LLP was the flagship, and you bought some other firm, would that get absorbed into sort of my entity structure? Or would they still kind of operate under their own sort of brand names? Sort of like ascended? Yeah, so that's a really good question. And from what I've seen so far, and the people that you know, these, these accounting firms are in communities, they can be rural, they can, you know, have a very well known brand. That's not at all what they're wanting to do. Like one of you know, going just going back to the people we know, and the roll ups we've seen in the different industries. They don't want to take away from that, because they have a household brand, like or just their, their name is around. And so they're not quick to change it to Piscopo LLC. That's not what they want. Yeah. Because then nobody even like someone if you were to acquire somebody in Calgary at Piscopo LLC, or and then go and acquire somebody in Winnipeg. Nobody knows who they are or what that even means. Right? Yeah, so you actually become a brand and actually, you know, known, it doesn't make any sense for anybody to change the name and fully fully do that. As far as like processes and internal work. That's a different story. Yeah, or is externally, for sure. Like it doesn't make any sense to do anything like that right out of the gate. Yeah, so that's really interesting to me where like front facing, it's actually it's all the same. But you've just kind of ripped out the back end and you implement whatever more efficient strategy there is. They're like, yeah, we're at 55% margins. I'm like, really, some guys like I'm at 13%. Yeah, it's like, how are they so opposite, and they're in the same business. And so like, when you do these acquisitions, there's going to be a lot of internal discussion on how one company does it versus the other. And helping each other, you know, grow that way. And adopting different strategies that everybody else does, you know, for the betterment of everybody. Yeah, no, that's, that's really interesting to me. And so when you're doing these deals, like, what are some of the kind of factors that contribute either to a really nice closing? Versus what are some of the factors that kind of you've seen contribute to like these deals falling apart? In the nicest way possible, it's, it's ego. Okay, that and that's just not, that's not being rude. It's just when people talk to you, you know, verbally, because that's usually how it goes at the beginning, right? You're dealing with us directly Hanson Harding at the beginning, it's more or less we're trying to, you know, see if you're a good fit for, you know, our groups. And a lot of people just want to be acquired because they don't have a succession plan. And so maybe you say you're at a million, or you say you're at one and a half, you say you're at 2 million. And ultimately, when it's time for due diligence, when you're two months down the road, you're six, $600, $700,000 less than where you were. And it's not saying you can't still do a deal. But it does change a lot, a lot of things, right. And it may have been where you would have been, you know, pushed down a little bit, you know, down the road further, not saying would have been a no, but or it may be it's a no just right off the get right off the gate because of the way it was presented. So I would just say, the majority of the ones that don't go through is just based off of, you know, verbally expressing a number and not being close to where it is. That makes sense. Yeah, no, that's that does make a lot of sense. And then you alluded a little bit to this earlier, but I want to circle back to it, who's usually the firm owner who is willing to sell or like, what are like the dynamics going on in the firms where typically, they're, they're going to take on private equity? I would say, you know, based off of what we've got for an add on acquisition, it's two to 4 million is of revenue, with two to three partners with for sure one who's wanting to exit that just doesn't have the ability to because maybe the other partners can't, or there's just not enough cash flow coming in for them to afford to pay them out. Or there's nobody else coming in the ranks that actually is, you know, fits the criteria of being a partner. And the ones that are really in a struggle are the ones where there's only one younger one and two want to exit. And that can be an opportunity for the 30 or the 40 year old who's thinking they, you know, want to continually to grow the firm and they're ambitious that way, but don't have the resources or actually the ability to go and recruit and find find good talent. Ultimately, that's what accounting firms and CPA firms do tell me all the time, is that they can grow no problem, is if they had the right people and more people and build to retain the retain the right people, right? That's, that's the ongoing struggle. You probably know that more than I do with this. Yeah, I was kind of smiling. I was like, that's sort of my business pitch, right? So yeah, providing them with comp data, as well as like low cost recruiting. So obviously, like for my landing page, I had to dig out the stat, but Walters Kluwer did a survey, and it was 68% of firm owners say that the number one challenge inhibiting their growth is access to the right talent. And they've probably, you know, talked to face to face more than I have. But as those 200 plus I've talked to, not one of them has said they don't struggle with that. And that's ranging from 1 million in revenue, actually, less than that, all the way to 50 million revenue that we've talked to over the course of the last five months. It definitely is a struggle. And that's kind of like a little bit of a plug in, you know, to say that's where PE can definitely help out is that, you know, that firm that really believes they can get from 2 million to 4 million over the course of the next five, six years, right? And how do they do that? Well, maybe the, you know, the older owner of the company can take a step back and, you know, liquidate, enjoy his life a little bit more and only work 20 hours a week instead of 80. Right. And you can enjoy that a little bit, but do more business development, which is what he likes, you know, to go get in front of businesses and bring in more business. Yeah. And then the PE group or the if it's a family office, comes in and plugs in more and more talent for them. That's their investment in finding more people, the infrastructure of that 2 million revenue company to then be able to grow. So that's kind of where, you know, they, they fill the gaps of where they're lacking. And they fill the resources where they're lacking, so they can actually grow over that course of the three to five or seven year period. Yeah. And so in the case of that dynamic, like you said, there's like two partners who want to retire and sell out and then like that one young partner who wants to keep keep the show going. I imagine like what would typically happen in a lot of these cases is the older partners might take just a full cash buyout and then the younger one would kind of invest whatever maximum amount they can back into equity. Is that what we're kind of usually seeing? Yeah, exactly. And it can be structured in a lot of different ways because I mean, the groups we work with, there's two different types of PV that I've seen. There's probably more, but from what I've seen, my limited knowledge, there's the hostility, like the hostile groups, and the ones that want to come in and take over your company think they know better and think they can operate your business better than you, even though you've been there for 25 years. And they're not, they're not accountants, they think they can still do that. And there's the other groups who aren't operating partners, right, that they're there to facilitate and help and grow. They've proven out the multiple arbitrage and many, many different industries. And they're there to provide the resources for you to be able to do that. And ultimately, that's what they'll do for this younger partner. And what they ask every single time, which is what I really like and appreciate for all the people we're bringing them to in a very warm introduction, is what do you want? Like, what does a perfect partnership look like for you? And all the answers, we're all people, right? We're all in a different spot. Like, there's not one person's life that's exact same as mine, right? So that's, and they treat it that way. And so some deals are completely structured in a different way than another one. And they're very flexible that way, where some other groups aren't that way. And so that's kind of why we're very small, like Hanson Harding is a very small boutique, you know, buy side firm, for a reason, like we don't, we strategically partner with the right people. So we can help, you know, all the people we're in front of daily, anywhere between five to, you know, 30 different businesses every day to ensure that when we know we, you know, introduce these to these PE firms, that they're going to be treated fairly. Yeah. And, and you being kind of buy side only is like a very interesting dynamic too, where you can kind of plant these seeds and have these like no pressure relationships with these firms, potentially well before they're even willing to sell, right? You wouldn't, you wouldn't believe the amount of conversations like, Oh, hey, like, you caught me at a good time. You know, I was reading that email to having a bad day. And you got a good time. So I'm happy to have a conversation. And when the conversation happens, you know, it might not go anywhere, right? But we're happy to have those conversations and put those seeds in play. So when they are ready, like, yeah, I'm hoping I'm their first their first conversation. Yeah. Well, I mean, to anyone who's listening still 30 minutes in, you're clearly have some interest in this. And that's, that's like a major recommendation. So I, big podcast listener, but one of my favorite ones had Sean Pori on it. And he was talking about one of the early thing, a very successful entrepreneur, essentially. But one of the earliest things he did with the current business that he's working on is he talked to a bunch of bankers. And, you know, that type of folks about the type of exit that he would envision and that he would like to be able to be talking about one day with this business. And they basically told him all the elements of his business that he would have to clean up to arrive at that. Right. And I think that that's very interesting. Like if I were a firm owner who even thought that there was a, you know, fraction of a chance that I would maybe sell in the next three to five years, I would be kind of looking to have those conversations. Now, you know, just again, just with a friendly face in the space, like no pressure, but, you know, here's where I'm at. What do you think the steps would be for me to be able to get the best acquisition, get the best bang for my buck, because it seems silly, but like time and time again, I've had these conversations where like, you've put in 20 years of work into this firm, doing that last little bit of cleanup might make a 20% difference in terms of the value. Right. So it's just that little like last mile of effort. And I think like the best, most effective way to do that is to have a conversation with someone like you with someone who is a potential buyer of accounting firms well before it's time, and then focus on kind of implementing the things that they've talked about there. Yeah, I don't disagree one bit. Yeah, happy to always do that. Yeah, well, yeah, thank you so much for for joining me on the pod Brent. With that being said, you know, if you are looking to have those conversations, I'm going to make sure I put your contact info in the podcast notes. You know, I'll make sure I include kind of your LinkedIn profile as well. And people can kind of add you follow you there and have a discussion. But yeah, thank you so much for joining me on the pod Brent. I really appreciate your perspectives on all this. Yeah, you too, Dom. And I'll keep paying attention to all your your feed. It's been good to good to watch you