Taking on Private Equity Investment as a New Partner with Justin Shelman

Hello, and welcome to the Big 4 Transparency podcast. I am joined today by Justin Shellman, a tax partner at Prosperity Partners, someone I had the opportunity to meet in San Diego at Firm Growth Forum last year, and we've stayed in touch ever since. So I'm really excited to have you on the pod, Justin. I'm really excited to be here, excited to talk to you about my journey, what it's been like, what the industry is looking like now, and looking forward to digging in. Yeah. Yes. I mean, we had Jeremy Dubow on probably a month, month and a half before this episode is going to be airing here. And he kind of gave us a whole perspective and story of this sort of deal happening with Prosperity Partners, formerly NDH, taking on private equity investment. And I think that you can provide a very, very interesting, different angle to this. So you had basically just made partner, like, weeks before conversation started about this deal. Correct? Yeah, that's exactly right. So I had made partner, call it January 1st of 2023. And two or three weeks later was pulled into, I'll call it a happy hour with some individuals from a private equity firm, which, you know, I later learned that or learned at the time that we were in negotiations with taking on an investment firm. Yeah. So, I mean, you, you got like the both sides of it, presumably there are probably conversations that you were not privy to as a senior manager. And then as someone new being brought in here, like, do you get kind of like a seat at the table in these discussions? And like, what does that all look like? Like, what's going through your head at the time? Yeah, it's an interesting question. So a seat at the table, sort of a bit of a loaded question in that, do I, or the time that we did the deal, I was a profits interest partner. So we changed our structure prior to me coming on as a partner, largely because of the economics of buying in under the traditional partnership model was just too cumbersome. And the firm had made the decision to switch to a profits interest model. So I wasn't a quote unquote selling partner at the time we did the deal. So I didn't necessarily have a vote one way or the other. But what I did have was the trust and respect of those that were the selling partners. And so I was included in those conversations and was a part of meeting the private equity group very early on, obviously, you know, months before we actually announced and closed on the deal. And so it gave me the opportunity to get a seat at a table, if nothing else, and in a listening capacity that I otherwise wouldn't have been afforded had I have come on at a later point in time, just because of the structure of my background, the way that I knew and worked with, you know, Jeremy, Jeff and Josh, who were the three founders that were, or the three partners who were there at the time that we did the deal. Very cool. And so like, you know, I think there's a lot of misconceptions about this. Like a lot of people view these deals happening as like, oh, it's a rug pull on the next generation of partners. But I mean, ultimately, I think the next generation of partners is actually a pretty big component of the deal value, where they're counting on you for succession and continued, you know, management and interest in the firm. So like, how is that kind of reflected in, you know, maybe some of the structuring or some of the decisions being made at that point? Yeah. You know, one of the things that I hear a lot as we go from growth forum, right, you go to the Accounting Today Private Equity Conference, you sit in some of these rooms and everyone talks about what a great deal private equity is, for example, for the founding partners or the selling partners, and what a potential raw deal it is for everyone after that. And, you know, as a guy who is in that generation who should be in the raw deal, I'm looking at it going, man, I have an opportunity that I never thought I would have. So old model, right, you work until you're 62 years old, you hit your mandatory retirement, you're paid out by a multiple of your book at ordinary income over 10 years. In today's world, I have liquidity events that I can look forward to. And so, you know, really, you hit the nail on the head that these private equity firms that are coming in, they're looking at it saying, hey, the Justins of the world, like, that's my future leader of this firm. Because they understand that the private equity model might be a target to earlier retirement than an individual would otherwise have in this industry. And so they're really looking at it saying, we've got to make sure that they're bought in, we've got to make sure that they're willing to put in the effort. And we've candidly got to make sure we have motivated and excited people at this firm. And so, you know, I've spent a lot of time talking with our private equity group, they've spent a lot of time on our firm coming to our holiday parties to make sure that they're putting their faces out there, that we're understanding that this is not just a, hey, they're going to come in, buy a bunch of people out, trim the business lean and flip it and sell it in a couple years. We're really building this for the long haul. And so, you know, obviously, private equity is not always an investment for the long haul, but they also recognize that they look better when they turn good investments. And there's nothing that says that they're selling 100% of the next one. And so they've shown a concerted effort for the next generation of leaders in this industry, focusing a lot of with our firm dynamics and, you know, I've been lucky enough to sit in our board meetings, I've listened to the questions they've asked and how they've approached it and what's really unique is the amount of emphasis that they put on our young team and how they really focus on that. And so for me as that partner, that's exciting for me to hear because I'm farther away from retirement than the guys who, you know, were able to experience that liquidity event in the first cycle. And so it's an opportunity for me to get excited to say that this is building it the right way combined with the fact that we're now getting technology features we didn't otherwise have. We now have the ability to pull some levers and add some capabilities internally that we wouldn't have had organically, which has been really exciting. And not to mention the fact that for those who are very successful and very good at what they do at this job, you know, there's also this concept of a refresh, right? So we talk profits interest, you get a refresh whenever you do the next cycle, there's a new profits interest pool that gets allocated and, you know, the compensation model is certainly not insignificant from a cash comp. And so, you know, there's a lot here that gets the leaders excited. They're focused in this in this structure on what do those people look like and how do we get them excited. And we're all making sure we have our incentives aligned because, you know, we joked about it internally here when we talk about private equity and the negotiations and you do all this. But, you know, once the ink dries on the paper, right, we're all voting for the same success here. Because if they succeed, we succeed. And it really creates, you know, aligned incentives for the entire group. Yeah. Yeah. And I've seen this play out in different ways. Like for obvious reasons, we haven't recorded on air before, but like I know someone who was at Citron Cooperman when the flip happened, or I think it was when the first PE deal happened and they were about to make partner. And as part of that deal, they just basically got like a large cash payout. But because they weren't partner or something, there wasn't like a rolled equity model. And then immediately they left to another firm who then immediately went and did another private equity deal. And he's like, man, like, so, you know, he's like, I just kind of cashed in double in a very, very short timeframe, which I think is super interesting, which is one perspective of it and is, I think, the perspective that people talk about the most. But you sort of, while that maybe wouldn't have been a terrible thing to happen, you sort of got to make partner in this firm and then, you know, you get this huge cash infusion and it's like your role has just kind of changed, right? It's like, okay, cool. Like now we can do so much more in this firm. And I'm sure there is some financial component in it that like they need to make it interesting for you. But at the same time, like you also got kind of handed this like incredible set of tools that you can kind of now use to change things how you would want them to be, right? So what was that like when you, you know, I'm sure already you have ideas in your head of like, here's how I think certain things should maybe evolve or be done in the future. You become partner. But then now, you know, part of the thesis of these PE firms coming in is tech investments at scale and investing heavily into growth. So like, what were some of the things that you got to do there that might have been really interesting for the firm? It was fun because when we did our deal, we were the smallest platform investment of a private equity firm in the public accounting space. We were, let's call it 40 people at the time that we did the deal. It wasn't earth shattering numbers. We've grown today to be 250 plus individuals in less than three years, right? We were the second fastest growing firm, you know, at accounting today last year. And so we hope to be back on that list again this year. But being that small afforded us some really fun opportunities, namely the fact that we could really strip down our technology. So we were using what I would call a smaller firm tax preparation software, not something that we ran into limitations as we had family office returns with complicated allocations or operating entities with multiple states. We had issues there. We had issues with our document storage. How do you store it? Where do you store it? Do you do a traditional file server? Do you keep it in the cloud? How do we look at trial balance softwares? How do we look at all of these different components? And we were able to really turn the corner from the private equity investment, get to the next stage of life, which was to look at it and say, what do we want our firm to look like in five years, in 10 years? Use it right now today as a small firm to really build the base of that. And so we were able to fully evaluate all of our tech offerings that were out. We ultimately landed on a really cool package that we're all excited about here that gives us a lot of features. Nothing's perfect. They might talk to the team. They might have some frustration points along the way, but that's life. Everyone's frustrated with something at some point. But really, you end up with this, okay, we were able to strip down, start all over, build a package that not only works for our 40-person firm, but one that we truly believe works for a 100, 200, 500-person firm. And we can scale it because one of the fundamentals of our strategy had been a one-firm approach. We want to partner with these firms that are looking for like-minded individuals. We want to get them onto our tech stack, and we want to be able to work together. And that's been a core belief of what we're trying to do. And you can't do that when you're on separate tech stacks. There's no cross-collaboration because if someone's working in a Thomson Reuters product and someone's working in CCH, those are incompatible, you're stuck. So we were really able to do that small, go through the growing pains as a 40-person firm of, wow, this conversion process really stinks. It's a headache to do. It takes a long time learning what does and does not come over and using that to create a playbook for these firms so that while it's certainly not painless for them, it's not as painful as it was for us to go through that process where we were really able to dig it and develop that. And so that's been the best part. And as part of that, like everyone talks about in this industry, we've gained a ton of efficiency. The tech stack that we have today is allowing us to move quicker and more accurately than we ever thought we'd be able to do, which is giving us a better product. And you combine that with things like learning how to develop an offshore team that we have that's captive to our firm, well, what we have is the ability to also leverage down farther in our firm. And what I mean by that is our associates and senior associates who might have been preparing returns historically are now doing first level review, right? Whether it's from an OCR, AI tool or an offshore team, but they're now thinking critically, developing strategies and understanding the ins and outs of the return, whereas before they would have spent the first five years, four years, six years of their career literally just learning how to input 1099s and K1s. Yeah. Yeah. And I mean, putting you on the spot here a little bit, but like all that work, like could you come up with maybe a rough percentage efficiency gain in your head, like even like very rough ballpark? Because I'm obsessed with process improvement. There we go. Sorry, blanking on that. But yeah, I'm very curious to see the outcome of that. I tell you right now, I'd say 15 to 20%, right? Maybe 10% at times. It varies by office. Big enough gap that we're all extremely excited about it. But what we're also excited about is that you can learn, right? It's hard to teach an old dog new tricks. There's a lot of us around here who have used old tech stacks and old processes and old work papers for years. And so learning takes a little bit of time to get there. But we're two and a half years in on the new tech stack and now we're all getting comfortable with it. I think that that efficiency gain, whether it's 10, 15, 20% is going to grow as we get two, three, four more years in. And suddenly we're going to have more tools to learn because technology is going to continue to develop. It really has been a game changer for us to get to the right spot, to allow us to do the work more efficiently and be better advisors. And I think a 15% benchmark right now of increased efficiency is probably the right number. Yeah. And I mean, that's huge, right? When you translate that across a growing organization. And that was always something that I think is well overdue in the accounting industry. I've seen both sides. I've been at a huge accounting organization where there's these little sticky things that slow everyone down, that get compounded by tens of thousands of clients. And then on the flip side, I've been at a tech company where the mentality was like, how do we implement systems when we're at $20 million of revenue? How do we implement systems that'll stand us through $500 million of revenue? And I've taken a lot of that away myself with Big Four Transparency. In terms of the rollout of the data to the firms that we support, I'm most of the way through a project right now where it's like, how can I serve 500 firms with less drag and pull than it's currently taking me to serve for 40, 50 or whatever that number may be. And I think being able to do that kind of unlocks the next steps of growth because it's not like, oh my God, everything's breaking at the seams here as we're trying to kind of support this growth. I think that's a worthwhile investment. I don't want to spend the whole time talking about private equity either. So thank you for that perspective. I think also, you have a cool story. You're now a partner at Prosperity Partners, which was formerly NDH. And you were at NDH early in your career and you actually left and came back. What were you looking for and how did you kind of maintain those bridges and do it all in a way where you clearly haven't compromised relationships, like you're now a partner of the business? So yeah, what's that story like? Yeah, you know, a little bit of a unique story. So originally, I'm from Kentucky. All of my family still lives back in Kentucky. And so when I graduated college, I moved to St. Louis and then ultimately to Chicago and did the things that a lot of young people want to do, right? They want to live in the city and see what else is out there in the world. And I got to a point in Chicago where I was kind of saying, hey, maybe it's time to think about moving back home. My wife and I were both looking at, you know, okay, time for a house in the suburbs and do all of the stuff you're supposed to do. And you know, we pulled the trigger on that. We ultimately moved back. But you know, candidly, I think that our world is a very small world, right? The accounting space is very small. And I'm a firm believer in you do not burn any bridges. It's bad form to do that. You have to understand that what goes around comes around. And so I left ultimately very respectfully. I was very clear to what the rationale was. It was a family issue. It wasn't anything that the firm did. As with anyone at the time, there were frustrations with the firm. That happens, right? Again, go back to my comment earlier. Everyone always has frustrations. And I was candid and clear with those in my exit interview. But I also made a very concerted effort. I left right after the spring tax season. The firm that had offered me the job in Kentucky, I was clear with them. I wasn't going to leave my team here in Chicago high and dry. I was going to see the spring season through. Stayed. And I ultimately left every single return, and candidly, as you'll probably laugh, in better and cleaner shape than I've ever seen a tax return on 415, right? My files were pristine knowing that people that I viewed to be my friends and candidly, in some respects, like my family, I didn't want to leave them high and dry. I didn't want to leave them cleaning up my mess. And so I think that that allowed me the opportunity to leave on good terms. I also, you know, Jeremy, who's been on your podcast, who's our CEO, you know, he was my mentor from day one. And I really, to this day, view him as a great friend and lean on him for, you know, personal questions and for professional questions. And so, you know, having the ability to stay in touch with him was key. I would visit Chicago on vacation for the brief period I was gone, stop by the office and see everyone, talk to them, you know, how are they doing, follow along with them, text and email them along the way. Ultimately, after 18 months down in Chicago or in Kentucky, I sort of decided that that wasn't what I wanted. And, you know, sometimes you need to have something in life to understand. And so I opened up the door with Jeremy to have a discussion about returning. And, you know, luckily, Dom, because of all the, I think the good things I did on my way out the door, he was more than amicable to allow me to come back. And so, you know, that was a really interesting piece to go down. And you always, I think in this industry, it seems like you always think the grass is greener somewhere else, right? Your tax season is better, the clients are going to be better somewhere else, the processes are going to be cleaner and more efficient. And you come to find out that sometimes that's just not the case. Sometimes it is the case. There were certain things that this other firm did, and I actually liked working there and I loved all the people there and still talk to them when I see them. And, but ultimately it was, I missed the group of what we did here. And I missed the clients I worked on, the freedom I had, the entrepreneurial ability to really kind of reap what you sow. And that was a lot of fun for me. And, you know, was able to come back here, came back and continue to climb the ladder as I took a, you know, I used to joke it was a brief sabbatical that I took when I went back to Kentucky and jumped right back in and getting to partner. That's cool. And that's something I like, I preach a lot on here of like, listen, like the more relationships you can maintain, even if it's kind of loosely and just like, hey, shooting someone over a text, like, I saw this, you know, thought of you or whatever, like just, yeah, even like these kind of loose connections, like I think can be so, so valuable. And I mean, it's also just nice to have like people in your corner, like when you're, you know, whatever, whatever it is you're doing. But it's really nice to have people that you can kind of like commiserate with or like just stay in touch with and, you know, a classy exit from a firm. I think people view things with too much finality. Like I think people really think like, I'm so scared to try this thing because of all the doors I'm closing. And it's like you can kind of allow yourself to act in a way where those doors will not close. Right. And a lot of people I speak to who are partners now or even like running their own firms, a lot of them are like, yeah, I left this firm at one point and I went and did a stint in industry because the grass is so much greener. And I realized that I actually missed the client service side of things and came back and they pulled things with them. Right. They're like, oh, man, I understand the client perspective now and I'm actually able to serve them so much better than I ever was before. Or from you, I'm sure you learned some things from the firm in Kentucky that you went to and were able to apply that. Right. And I think that that's like a really interesting thing where, you know, not everything needs to be as like final, open and shut as we necessarily think. And then you alluded to kind of, you know, climbing the ladder at NDH. Like a lot of people who listen to this are interested in entrepreneurship. But I mean, again, there's a lot of listeners, too, who are at a place where they're super happy and they just the goal is just to make partner. And, you know, that being a little bit more of like a somewhat recent thing for you, like, what do you think really made the difference between being able to make partner after having come back? Like in terms of like, you know, was it did it did a lot of it boil down to the book of business you delivered or, you know, communication of your intent within the firm? Or like, what do you think were some of the kind of key difference or differentiators that allowed you to make partner? Yeah, I mean, I think one of the easiest things and I'll expand on it. But, you know, I do think I'm pretty good at what I do. And I say that a little tongue in cheek. But, you know, ultimately, there's a lot of firms out there that I think handcuff people from what I've heard based on, hey, your promotion is coming on this timeline, right? It's not a not merit based. It's really based upon, you know, is there an opening for another partner or have you been here X number of years? And I think that plays a large role in it. One thing that that I've always really appreciated about, you know, NDH and now Prosperity is you do reap what you sow. And I alluded to that earlier. And so, you know, I showed up. My joke is that I showed up having never worked a fall tax season, didn't know fall tax seasons were a thing, to be completely honest with you. I'd never seen a family office, couldn't have even began to hypothesize what a family office was. And I showed up in July thinking I was going to coast into the spring tax season. And all of a sudden I had, you know, a multibillion dollar family office setting on my desk that I had to go do tax returns for. And instead of getting overwhelmed, I rolled my sleeves up, I dug in and I really tried to learn the ins and outs of what they were doing. And that's ultimately led to me, you know, leading the family office practice today. And so, you know, that intellectual curiosity, which is sort of, you know, Jeremy's favorite word here, he's harped on that for years, that buys a lot. You combine that with the ability to be an adult and manage your workload, respond to clients, take care of the people that want to be taken care of. And that really led to a lot of my ascension. I mean, I'm not dumb. I got to partner really young. I was 34 whenever I was promoted to partner here. And I recognize that there's a lot of people who, you know, are well into their 40s before they're promoted to partner. And so, you know, ultimately I saw an opportunity when I showed up here. I was very clear with all of the partners leading into that about exactly what I wanted to do. I did not shy away from, I really want to be a partner in the CPA firm. I want to be a part of tomorrow here. I want to help to build this thing into what we all thought that it could become. And, you know, I never let off on that. And candidly, I still haven't let off on that today, right? There's things that I want to do and pieces I want to be a part of here that I really dig in on. And I think ultimately the combination of the intellectual curiosity and the entrepreneurial spirit led to me getting to partner quicker than most people do. And how'd you kind of approach that conversation with it being like a let's get there together type of mentality, not like, oh, there's this like annoying keener who just keeps saying like, I want to be promoted, I want to be promoted, right? Like, how did you make that like a really kind of, you know, friendly, approachable kind of conversation? Yeah, well, first off, it's candidness, right? It's hey, this is my intention and here's why, right? It wasn't I want to get to partner to make more money. Like that's a byproduct, right? Making money in this industry or in any industry candidly is a byproduct of just being good. And so it starts off with I want to be a part of this and here's why, right? I want to help develop the team. I want to develop the clients. I want to have these relationships. But then it also spurs into you have to be receptive because you have to ask the question, what am I not doing good enough? What do I need to be better at? How do I need to think? What do I need to learn? What what shortfalls do I have in how I approach my daily life? And not only do you have to be open, be willing to ask the question, you have to be willing to accept what the answer is and you have to be willing to act on it. And that was always something for me where I always said, you know, every day I wake up, come in the office and I want to be better than I was the day before. And that's been a big piece of it. And, you know, being able to have relationships with the partners at the time, have those candid conversations, but also ask the hard questions and be willing to accept shortfalls and errors and mistakes and learn from them. That was the biggest driver of ultimately how we got from A to B. That's cool. Yeah. Yeah, I appreciate you sharing that, because again, like that's like a little bit of like a daunting conversation to have, and I think it needs to be handled like kind of the right way for it to be productive rather than just like a nagging type of thing. And then, yeah, family office is really interesting. Before we hit record here, you were talking about, you know, right now there's a lot of focus on the purchase of airplanes. Is that like is that something that's new in the tax code that you're like really leaning into or something that was changed with with OBB? OBB, B, B, B, B, B, B, A. Yeah, I was like just counting in my head. Yeah. Yes and no. Right? So, buying airplanes in your business, buying airplanes for your family office has been something that's been around for as long as there's been airplanes, right? Yeah. What has spurred people's interest has been the depreciation rules around those airplanes. Yeah. And so, if you go back to pre-TICJA, you had 100% bonus depreciation available. So, we were involved in helping client structure it there. Now, what's interesting is as the firm grew, our client's net worth grew, and that was not an accident to get there, right? We focus on high net worth clients because we think it's an underserved area in the industry. And we ultimately were able to get in, in, you know, let's call it 17, 18, 19, when you had this bonus depreciation, you were able to take a 100% bonus depreciation airplane. So, the question became, how do I write it off, right? Everyone sees their Instagram reel of, hey, this is an amazing tax play. And of course, I get sent those by clients, and I'm like, hey, you absolutely cannot do this. This is not a valid, you know, piece of tax advice. But there's always the story of their buddy from the country club bought a plane and wrote it off. How do I do it? And so, we were getting those questions from our clients. And what we found is that the number of people who can answer those questions is a very small number. Airplane taxation rules, it's a niche market. And so, there's just not a lot of expert advice that's setting out there. And so, go back to my intellectual curiosity and entrepreneurial spirit, you know, I rolled my sleeves up and said, this is something I need to learn. We're getting enough questions that I need to know this. So, go through, you know, then you had the financial dip during COVID. You had rollback of 100% bonus depreciation. The questions came around a little bit less. Now we hit OB3, and all of a sudden now, you have 100% bonus depreciation back on the table, and everyone's getting excited about this again. But even when you had lesser depreciation, you still have the ability to deduct operating costs, things like that for your business flights. So, what it became was also a parlay into, our clients are gonna buy these planes, whether or not we advise them or someone else does. We might still do the tax return, but they might hire this expert. But we have to be the educators for how do you structure it? What is a true business flight? What can you deduct? What can you not deduct? What are the rules for imputed income whenever I take a personal flight? So, we have to be educators on that for our clients, because we value the role of being the advisor way more than we value the role of being the tax preparer, right? We wanna be the person who's sitting with them to help them navigate it. Also, candidly, to keep them off of the IRS bad list. And so, you know, we help to make sure that we're in conformity with the tax code. We're documenting everything we need to document. So, that's been a big push the last couple of years through, you know, pre-COVID and now post-COVID again, really focusing heavily on, you know, what does that look like? Interesting. That's cool. It's also cool to hear that, like, you know, all the bad advice going around on Reels or TikTok or whatever, it can actually, like, translate into good work, right? Like, I think that that's like a cool opportunity to lean into, even in terms of, like, client communication, right? Like, hey, you know, we noticed everyone's talking about this online, like, sort of, but come talk to us if that's, like, something that's of interest to you. I have some other firm that I work with who's, like, heavy into the real estate play where everyone's buying G-wagons and they expressed something similar, too, where it was like, yeah, the, like, whole meme around, like, oh, just buy a G-wagon and, like, pay nothing on your taxes. They were like, actually turned out to be really good because our clients were, like, smart enough and informed enough to know that it's not actually that simple and that, like, that actually, like, snowballed into a lot of additional work for them in a cool way. So I love leaning into that and, yeah, learning new stuff about buying planes in case that ever comes up. So, yeah. You know, it is interesting because you do get, we always tell people, our clients, right, we don't know what we don't know. And there's times where, you know, an individual might say to me, hey, this bill was signed or this bill was introduced that allows me to deduct a home office. Well, I didn't know you remodeled your home office. And so let's have a discussion about what we can and can't do. Like, that Instagram reel in and of itself is incorrect and here's the reason why, but let's talk about what else we can do. And so you're right that you hear that. If nothing else, it causes people to raise their hand and can parlay into, you know, something better where we can truly add the value. Yeah. Well, awesome. Thank you so much for coming on and sharing, you know, both the perspective of someone in your position when a firm goes through a deal, but also, you know, your own journey to partner and kind of leaning into some of these niches. And yeah, I really appreciate you coming on and sharing. Yeah, no, I appreciate you having me on. It's been a blast to talk more. I'm looking forward to seeing you again in San Diego and, you know, appreciate you letting me come on here as, you know, the young kid and have a little discussion about my journey.