The Firm Acquisition Playbook with Ben Wann

Hello, and welcome to the Big Four Transparency podcast. I'm joined today by Ben Wan, the founder and part owner of CFO Consultants, LLC. Welcome to the pod, Ben. Thanks for having me, Dom. Yeah, yeah, absolutely. So what kind of caught my eye about you on Twitter, and that's where I kind of like messaged you to see if you could join me here, is that you talked about how you are in the middle of firm acquisition number four. Can you talk me through that kind of like strategy of like growing through firm acquisitions? Yeah, sure. And we've actually done it pretty quickly. For background context, we purchased the first one last May. Number two was in January, number three was in February this year. And then we're potentially looking at this next acquisition to close this year. So I guess what we realized is that for your firm to succeed, there's kind of like there's no man's land. You either have to be really small and highly profitable, or you have to be large to get these synergies and scale effects, and put structure and sanity into place. If you get stuck in the middle, man, you're doing a lot of work, there's not enough people to do the work. And it's just chaos and low margins is what we found. And do you have like, in your own experience, like a an estimate of like those figures of like what that no man's land is like, is it like 500k to 2 million? Or like, is it like what what kind of range is that? Sure. Yeah. So I got to look at a lot of different sims of firms for sale. And the ones that are stuck, I would say between half a million to a million in revenue, their margins might be 10 or 15%. And that's what the owner is still working a ton of hours. Yeah. Okay. So that's kind of like the area where a lot of people run into trouble. I've heard that from a lot of other guests who a lot of people have kind of reflected on that as like, yeah, like I started the firm, things were really great. And then there was like a very significant rough patch. And then we managed to kind of like outgrow that. And I mean, things are never completely smooth sailing, but they were saying like, it got a lot better past a certain point, because we were able to kind of like, hire the right talent to do the right things and not just have to have everyone be doing everything right. So like you can get kind of specialists in who can kind of help you pass those certain points. Yeah. And I listened to other folks. I listened to your podcast. No, I've heard Brandon Hall, who's been on before say, once you get the 20 employees, things start to get easier. Yeah, you just need to be a certain level of scale to be able to run the firm effectively. And typically what people are targeting, it's a normal healthy margin might be 30, 40%. When you just start out by yourself, it's like 99%. Then you hire one person, and you hire another, and then you just get stuck down and bogged down. Yeah, really bogged down. Yeah. Yeah, I think it is, Brandon. One of the big things he talks about is like, you should be factoring in some base degree of pay on your partners if they're actually involved in client deliverable work, right? Because that's where a lot of people delude themselves in terms of like, oh yeah, my margins are great. And it's like, well, you have three partners who are not being included in that calculation, and they're involved in client delivery. So yeah, that's for sure something to look out for. And then so in the race towards that kind of like 20-ish employee threshold, where's your firm at right now? So we have a few, I think four offshore staff, and the rest are based in the US. I think we're at 23 right now, and just a little bit shy of 2 million in revenue. So it's typically $100,000 per employee is what it works out to. And so we're getting there, right? We have officers, we have an organization chart, we're able to do the things that we want to do. And I'm focusing a lot on marketing and business development. And a lot of firms, if you're smaller, you don't have the time or energy or budget to afford something like that. Even still, I'm not taking a salary from the business. I hope to at this point, but right now, it's just everything seems to take a lot longer costs a lot more to get done with these transitions we've learned. Yeah, yeah, that makes that makes a lot of sense. And through like these acquisitions, like how long does it take until it feels like these employees are like properly kind of integrated into the core of your operations? Because I imagine that that's part of the equation too, right? Like if you grow organically to 20 employees, it's probably a little bit different. Like there's less integration work to be done there. Yeah, with with the first acquisition, there were some learning bumps and lumps I got on the side of my head. And eventually we learned we didn't want some of them, the employees that were there to stick with the business, some didn't want to stick around. So it took a while for that one to feel normal. Number two was a lot smoother. So we learned our lessons, and it was just a better business to buy it came with three folks. And that was seamless after just a few months. It really felt like after three months, they were part of the team. And for our largest acquisition, which is in Pinehurst, North Carolina, we're still working on that. And I think that won't feel normal. And for at least another six months, part of the thing we're doing is trying to get the previous owners transition. So they're doing less work. We've got to hire new people to replace them, absorb that knowledge and become effective. So essentially, we're now paying for like double labor for high value employees. And just a lot of pieces that go into that transition and getting things to feel like they're normal. We've gotten a lot done. If we look back to see day one to where we're at now, it still feels like there's so much work to go. And what is it you're like looking for in these firms? What's your kind of aha moment? Like when you're scrolling through the list of firms who are available for sale, what are some of the key elements of things that make you go like, OK, cool, that's what I want? Yeah. So for me, I love to have a nice balance of the business. I like to see typically half bookkeeping, half tax, mostly focused on business tax. What I do see is a lot of these firms are listed are really like tax sweatshops. They're pumping out 1040s for not enough money at all. And that's not really a business I want to buy. I want to buy something that's sustainable as a relationship, is trust, has been in business for a long time. And also one of the things I've learned is when you see employees that have stuck around for a while, that means it's a good business. They're being treated well and it's sustainable because what are you buying with an accounting firm? You're buying the employees and you're buying clients. And if one of those leaves, you know that your money evaporates. Mm hmm. What is like a typical drop off look like in your experience, both in terms of like clients or employee base? Depends when you ask me that question. So the first one, I think we probably lost 30 percent of clients. Some we raised prices on, some we had just transition bumps. Some weren't the right fit for us. So we knew we would have some loss there. But for the firm number two, number three, I don't think we lost any clients, which is fantastic. And that's the way we want to keep going. For the third firm we acquired, there's already an employee who is out the door. There was another admin employee who just wasn't the right fit. But now we have the right people and the right team in place. And, you know, we don't see things being as bumpy. So we're feeling comfortable there. It's a steep drop off. You don't know what they're going to look like. I feel like there's a lot to know about just the business and management of these transitions. You've got to do well. I think we're getting there. And are the lower mid-level staff like are they usually like pumped about this acquisition? Because like I feel like it's like a cool. Like to me, being part of like a small firm, I think that that would be a really cool experience like being acquired. But a lot of people, although this is like different, but a lot of people have like these thoughts of like private equity coming in is evil. And so, you know, I wonder if people kind of think that like that extends to sort of like private investors and sort of like not non-CPA involvement kind of coming in. Right. Yeah, I think, yes, there's a big difference between who's coming through the door. If it's private equity, you know, they're holding like one of those giant pairs of scissors, they're going to cut costs and they're not going to do much for someone's career. And what we're trying to do is think about differently. We want people to be excited about the transition and say, hey, now you're in a bigger firm. There's more career opportunities. We have more opportunities for profit sharing. Hey, every three years we do a one month paid sabbatical. We love the benefits like that. And it's like we're trying to make your life better. You keep doing awesome work. Your pay benefits and work life balance are going to be incredible. So we're trying to position it so like there would be no reason to leave. Yeah. Yeah, that one month paid sabbatical for what it's worth, like I so the last company I was at, I didn't quite stay long enough for it, but I was working at a tech company that offered that. And it was after four years, I think. And just what what you can do for your employees when that's something you offer. First of all, it's a huge retention hurdle. Right. So you set it out like when when do people typically leave? And you put it like just a little bit after that, because if you go like I have like six months left, you do the sabbatical and you might actually come back super refreshed. Yeah. Willing to kind of go for another ride. Right. So I think that that's a very good strategic thing. But like the stories that people would bring back from these sabbaticals and be like, wow, this like really helped me change this thing in my life. This really I think that that that to me, I don't know, I found that that was like the most brilliant perk. I loved that. And like, again, like I left my last job to go kind of work on my own business, and I really liked that job. But like, I'm not going to lie to you, that was a thing in the back of my mind. I was like, oh, I'm close to this. I'm getting close. And I think that's such a good I think that's such a good benefit to offer. So, yeah, kudos to you on offering that. Yeah, it's like the biggest challenge with accounting firms. How do you retain staff? And I don't know how many articles we have to see now saying there's a problem. Someone should go solve it. This isn't rocket science. Treat people right. Pay them fairly. Don't work them to death. And that's what we're trying to do. And I think the more acquisitions we do, the more credibility we get for like firm one like, who the heck is this guy? And then firm two and three like, hey, talk to the other employees. They're happy. We did this thing as best we could. They're here. Ask them about their experiences. So it gains you more credibility. Yeah. And a lot of firm owners that like I've spoken to take a lot of pride in like the life that they've created for their staff and for their employees. Right. So like being a credible buyer with like a background of happy employees, I think that that matters a lot. I mean, obviously, price is a big piece of the equation. But like, you know, between a bunch of kind of similar offers for someone who might already have financial freedom, I think that that is like a pretty significant factor for a lot of them. And two, when we make offers, the people selling the firm want to know their staff are still going to be treated right. So say private equity might compete with me on a deal, but they know they're going to make their lives miserable and I'm going to make them better. I might get a better deal for less cost. And I think it's a differentiating factor for us. Mm hmm. And so when you're integrating these new firms, like are you looking for firms with like a similar tech stack to you or like what does that look like in terms of like a technology and processes side? Because I see that Carbon just like opened that new marketplace where like if you're a carbon firm, you can shop for other carbon firms. I find that really interesting for like ease of integration and hitting the ground running. But I'm curious kind of what you're doing with regards to tech and processes. Yeah. Ideally, you would love that they have the same software, but it's not a deal killer. So right now we have three different tax softwares. Next year we'll be down to two. And then after that one, we don't want to disrupt the business. That's priority number one. Don't go breaking things that aren't broken. But yeah, we've been implementing a tech stack that just makes it easier for people to work. We're looking to see what is it we're doing? How do we reduce the number of touches in a process? How do we make things more secure, better experience for our team, for the clients? And those are the things that we're going through doing the research and implementing. And it's nice because that's what I spend a lot of my time on. I really don't do much client work at all. I'm able to do the bigger picture process management, project management and implementation. And if you're a smaller firm, there's no one to do that for you. Right. That's why those things get overlooked. And so where you talk about not being involved in the client work necessarily that much, you're, are you a CPA? You're not, you're not from public. I'm an inactive CPA. Okay. Okay. And so inactive CPA. So you at least like have, you know, you've gone through a lot of the learning, but like you don't have a public accounting background whatsoever, right? Correct. No, I spent my whole career in the corporate world. I've got an alphabet soup of credentials after my name. Just I haven't gone the traditional public accounting big four route or anything like that. And do you think that that at any point, I would think if anything, it would be mostly after the first firm acquisition. Do you think that at any point really held you back? No, I think, I don't think it's held us back because of people want, we explain we're an accounting firm. We do all the same work that CPAs do. We do it with less red tape. And hey, we still employ CPAs. So if you want to work with them, you can do that. We explain that now we're an accounting firm and we do, yeah, all the same things. I think not being a CPA and not going through that, that big four experience has actually helped us and be able to look more creative, more creatively at fixing some of these traditional problems that firms have. Yeah. Well, that's what I find interesting is like the FPA and cost accounting background that you have. Like my last role was an FPA and like over the last three years and a lot of that job is basically like business refinement. And like if I wasn't leaving to do this, I probably like would have left for some sort of like process improvement role where like that's all you do is you go in and you like fix stuff in a business. Right. So like I think being that type of person with your own business is like super valuable because you can just like take a very objective look at all the processes. You understand best practices, you know what things should look like. So I imagine that that in itself has been really valuable. It's almost like you're like an external consultant brought in to like fix your own business. Right. Which is great. Yeah. I tell people if nothing else, I'm a I'm a project manager. I have my PMP certification. So the top one out there. And that's what this is. You make sure the pieces start working together. You fix the problems, define who does what and by when. And you make sure they execute. I make it sound simple. There's a lot more that goes into it than that. But that's the general gist of it. Yeah. And then how are you financing these firm acquisitions? I bet you there's probably kind of different ones as you've kind of gained up capital. But yeah, how are you how are you going about that? So the first one I did through the SBA process. So you can buy I think it's up to five million dollars worth of business right now through the SBA. And there's a whole bunch of banks that are big players out there. So you find the one that's suited for you. There's some that specialize in the accounting industry. So we did the SBA. Boy, it's a bureaucratic process. I think I lost some years of my life and got some gray hair through it. We got it done. And then number two and number three were seller financed. Number two was intentionally seller financed. And number three kind of fell through at the 11th hour. And because we built this trust and credibility in what we were doing, they were willing and able to seller finance it for us and kind of change from the terms of the deal to de-risk it for them. Okay. And usually seller finance, like just to kind of clarify for the audience, typically that would mean that you basically are paying out the like a pre-agreed purchase price over a number of years, right? You might be paying them 20 percent of the of the purchase price over five years or something like that. Is that kind of what it roughly looked like most of the time? Yeah. So for the first one, we paid 25 percent down. The second one we paid about 10 percent down. And it's actually a pretty good deal if you trust the other party, because it's you, not a bank in that interest. And it's an installment sale, which helps you defer taxes and get that into a lower bracket over more, a greater number of years rather than just one chunk. The tax deferral is actually pretty significant. Yeah. That's interesting. It all comes down to trust. Like, why would I give you my business? I don't want you to break this and me have to go back and fix it. And just that's the worst case scenario. Yeah. And to hear when people talk about seller financing, sometimes like zero dollars down. No one's doing that. No one wants to give away their business to you. You have to put something down. I think it's a really great path if you can get it. Yeah. Well, and if you even just kind of stop to think critically about like how an accounting firm runs the type of margins, like it's a pretty predictable business for the most part, other than maybe year one, when there might be some kind of like unexpected drop off from from the first, you know, owner leaving. But if you're saying you're doing like kind of 35 ish percent margins most of the time and you can kind of seller finance this, buy it where you're paying 20 percent of a purchase price on like a one to one point five multiple. Even if you're on the high end, your margin would probably just barely scrape by make payments on this. So by the time you've paid this off, you've effectively not put a ton of money down. And then you own this kind of tremendously valuable asset, right? Yeah. So when yes, when you're first getting these deals done, that's what looks like. And when you buy one of these businesses, say it's doing 20, 30 percent margin. Once you factor in your loan payments, once you factor in backfilling talent, you're probably a break even or a small one because that's right. You're one. And the whole the whole business changes, you have to grow. So now you can assume your fix, your costs are fixed. And when you add customers, that's going to hit right to the bottom line. But it's that's what makes it challenging. So you're adding additional costs and you're adding additional people and it's a whole new business. So you have to grow. But once you do, it is an incredible asset. And the way I'm phrasing it to my team is we've got to look at over a five or 10 year horizon where, say, we're going to bring in 15, 20 million in revenue or two million in debt. So, yeah, right away when you're looking at, hey, our revenue equals our debt in year one, that's scary. It is, but you just got to think bigger picture. Yeah. Yeah, I think like a lot of things where like debt's a factor is like that. Right. Like I have like I have one rental property and I kind of like look at that and I'm like, interesting. Like if you sell this thing in the first like five, 10 years, like you're kind of like missing out on like the entire, you know, you're kind of missing out on like the entire fun part where it's like, oh, no, like this thing's actually like producing money. And a firm's obviously a little bit more dynamic than that. But I think once you kind of look at the numbers of like a very like debt heavy, debt backed business, like that's kind of the way it works. Right. You get past the like really hard times and then and then as again, for a firm as fees increase and client base increases and whatever, then it like starts to kind of like make a lot more sense. And you just kind of have to like hold on for that starting period, which is cool. Yeah. And to tie into that, people ask, hey, you know, are you going to sell in five years of private equity? Like that's a typical timeline. People want to do some sort of transaction. But for me, I'm like, if I do all the work and I'm taking the lumps and I get to a spot where it's a cash flow machine, why would I then sell it to someone who might not align with my values? So my plan and the other partners plans are to keep this thing long term. And we're putting our blood, sweat and tears into this thing. And just to make a little bit of money off of all this hard work, I don't know. I'm seeing it as an incredible asset, not just a quick flip. Yeah, I like that. And I mean, that probably translates a lot into like your handling of these new firms once you receive them, right? Like, yeah, I think I think you can really tell what kind of time horizon your, you know, whoever the leader of your business is kind of working on. And I think that that reflects through a lot of the decision making. Yeah. Where are you finding these firms and like what type of multiples are you typically seeing? Sure. So there's different ways to find these firms. Of course, there's BizBuySell, which has every type of business listed. And we found some through there. But there's also several different platforms that just list accounting firms. So those are where we also found some of our deals. I think two of our deals. And, you know, it's people who just do accounting firms. And you go, you get the SIM, you take a look, see if it's the right fit for you. And then you can request more information and go from there. Typically, what we're seeing is most firms being priced down on revenue rather than EBITDA or the seller's discretionary earnings. And those revenues look about 1.1 to 1.5. And there's been some talk about private equity and the impact they've had coming into this industry, turning those multiples up. I definitely think that's true. I've heard those multiples used to be, you know, like 0.75 or 0.9. You're not going to get that deal anymore unless something's on fire. Yeah, like that's probably a red flag these days, right? Yeah. Interesting. And like, why do you think private equity is like sudden? Well, not sudden, but, you know, like very keen interest in accounting firms, like as someone who's buying them, like what do you think the magic formula is there that they're all pursuing? Well, they love recurring revenue. And there is a good chunk of that. There's ability to upsell. There's ability to look at pricing and do price increases to bring them up to market rates. I know accountants are notorious for not wanting to be confrontational. And sometimes that just escapes them for a few years. And also the multiples on like EBITDA or SDE are lower in this industry compared to other industries private equity has already gone into. So I guess the play is they're thinking if they can be the smartest person in the room to buy these businesses, put them together, make them profitable, and then flip it, they're going to have a really good outcome when they're finished in five or 10 years. I guess the watch out is for private equity, you're not buying a factory where it's like widgets and no one cares who owns the factory as long as they get their widget. People care a lot. It's all relationships between your customers and your employees. So if they're not smart, they're going to light some money on fire. And that's going to be some very interesting to see the next few months and years, what happens when private equity comes in and what are they actually doing to these firms? Yeah, I'm very kind of curious to, I'm like working on something for the newsletter right now to kind of like do a little bit of like an analysis on the impact they've had on firms where they've joined and whatnot. And I did a bunch of reading and it's cool. You can see some articles, Alan Colton's kind of like the guy in that world, right? But he contributed to some articles as far back as kind of like three or so years ago, talking about there was predictions and stuff. He's like, yeah, private equity is really starting to get interested. I predict that over the next 10 years, half of the top 25 firms are going to be backed by private equity in some form. And you're really seeing it play out now. I love kind of looking at those historical things. And so, yeah, I'm really kind of closely following that journey because I think there is like a little bit more doom and gloom than is probably warranted. You know, like, I think some good things will come from it, but I also do think, you know. that some of the firms, it will be, it will be just kind of like more squeeze on the staff, more, you know, all of that. And so some of the kind of lesser quality private equity firms I would definitely be like worried about, but I think they get painted with the same brush a little bit more than is necessarily fair, but we'll see. Right. And I'm very kind of curious to dig into that data for sure. Yeah, I think that that's, that'll be very interesting. That's, that's the, what is it? The elephant in the room right now on the industry. Yeah. Yeah. Well, and it, and it like, I see it firsthand where like, right, like I'm kind of looking at certain firms to like be able to kind of help them with their compensation strategy and like sometimes I'll like check back in on a firm like three months later and yeah, like they're owned by some other group now or whatever. Right. And you, once you start really, really paying attention, like these aren't all making the news, you kind of start to realize you're like, wow, things are moving fast. Like truly, truly, truly fast. Or like a lot of firms I'll talk to, they're like, oh yeah, like we're really interested in this, but like for like undisclosed reasons, like we can't, like we're not like entering into like any new contracts right now. And I'm like, oh, yeah. Yeah. So I found that to be interesting. The velocity at which things are happening is crazy. And two, taking away that partner track, which has kind of been the carrot has been dangled to work, get people to work long hours for a long period of time. What happens when that's gone? That'll be very interesting. Yeah. Yeah. I'm curious to see like how prevalent like employee stock option plans and things like that might be. Cause I think like they'll want to keep a pretty clean cap table, but at a certain point, kind of got to do something. Right. So yeah, I'm going to be really curious to see, like, I think the firms that do open up like an employee stock option plan and like treat their people right are going to do tremendously well. But if you want a nice clean entry exit deal, then yeah, you want to keep that cap table clean. So you maybe don't want to do that. So it's, yeah, it's going to be really interesting for sure. One more thing I wanted to ask you before I kind of let you go here, when you're getting these firms, like what channels are you going to, to be able to kind of like expand them from like a business development perspective? Oh boy, we are hit. We're trying to hit everything. When you look at us, then I think it's pretty uniform. All of them will say, Hey, we never market it. If you market, you know, you can grow this firm. But most firms grow through employee referrals and that's built through trust and being in business for a while and based on those relationships. But we're trying to do is see what works, what doesn't work, running Google ads, Facebook ads, doing in person webinars, seminars, we're advertising in magazines, we try to read like we're trying to see what won't work to figure out what will work. Yeah, like I said, it's very tough. It's been very tried and true path to grow these businesses. So we're trying to figure out how else you can do it. Again, listening to guys like Brandon Hall, content marketing seems to be one of the big things. So we have our blog with 350 articles, we have a YouTube, we have a TikTok, and those were pressing the gas really hard right now. Okay, I like that. Yeah. And like for Brandon's approach, I really like that he kind of like empowers a lot of the employees to become like their own types of creators and like they get a lot of leeway on that front, where like, there isn't that kind of like jealous worried approach of, you know, Jason Staths just had a podcast about this pretty recently, but like, how some people almost want to like, scare their employees into like being retained or like they want to like, oh, there's nothing out there for you. Like you need to stay here. Whereas like, I think this is very much the opposite approach, which is like, we're gonna help raise you up on this platform. And then we're just gonna like, if you start producing a ton for us, we're just gonna have to like, compete for you to stay with us, right? And then that's fine. And I think that that's like a very good mindset where you're creating much more kind of productive, much more, you know, effective business development within your staff. So I think that's a great mindset. And it's cool to see that like, you have, you know, you have some good influences that you're following there, which is great. Awesome. Well, yeah, thanks a ton for joining me, Ben. I really appreciate you kind of like sharing your insights on this. I think it's, you know, I think it's a really cool journey to follow. I really love kind of seeing the opportunities that exist in this space for people who are kind of willing to take a chance. And you know, whether or not you are an active CPA, you know, we spoke with Patrick Dichter previously, too, who's kind of doing a lot of these acquisitions as as a non CPA, I would say you're a lot closer to the CPA market than he was even. And I just I find it just incredibly interesting. And, you know, for one, I'm actually kind of excited about more like diversity of ideas, more different backgrounds coming into the space. And I can't wait to see. I can't wait to see where you are in another year from now. Yeah, it's very interesting. I think there's a lot of exciting things on the horizon. There's a lot of people talking about this idea of acquiring firms and putting them together. I haven't seen that many people doing it yet. I've done a lot of calls with people exploring the idea like I have. And like on this call, I've been very honest and transparent with them about what it's really like. It's tough. I think if you get it right, it's going to pay off. But this is not a one where the spreadsheet equals reality type situation. Yeah, yeah. And for, you know, the average listener here, we're probably pretty, pretty spreadsheet based people. So that's definitely important to consider. Yeah. Well, well, yeah. Thank you. Thank you so much for joining, Ben. I'm going to be linking all of your socials in the podcast show notes. I really recommend people kind of follow along. I think following on this type of journey, like whether or not it's in the immediate cards for you, I think it is very interesting. It kind of expands your horizons on what is possible for you. So yeah, I would highly kind of recommend giving that a follow. And yeah, I wish you all the success. Thanks for joining, Ben. All right. Thanks for having me.