The Evolution of Accounting Firm Deals

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Rachel Dillon: Welcome to Who's Really the Boss podcast. I'm Rachel Dillon, and along with my husband, Marcus Dillon, we share the joys and challenges of leading a $3 million accounting firm together. From team structure to growth strategies, we share our leadership successes and failures so you can avoid the mistakes we have made and grow a valuable accounting firm.

Rachel Dillon: All right. Welcome [00:00:30] back to another episode of Who's Really the Boss podcast.

Marcus Dillon: Hey, thanks for having me back.

Rachel Dillon: We have a very special guest with us, Sara Sharp. Sara, welcome.

Sara Sharp: Thank you for having me. This is great.

Marcus Dillon: All right. Sarah. So I think some of those listeners may know you. You're an attorney, but whenever we ask you to be on the podcast, you actually kind of scared us a little bit because you've been working with us in a capacity to evaluate some things over at DBA and collective and you're like, [00:01:00] I don't want to step through client attorney privilege. And I was like, oh man. So we share a lot on this podcast about what's really going on in real life. And, you know, you have been working with us the last few weeks, months to kind of clean some stuff up and get some stuff in place for 2025 and beyond. But all of that to say, will you give just a self intro of who you are, where you sit and what you're focused on?

Sara Sharp: Happy to. Um, I'm a lawyer, so exciting [00:01:30] and not an accountant, but all I do is provide services for people who are buying and selling accounting practices and people running them. So it's the whole world that I live in and it's really exciting. So my law firm is S and S law group. And then I also have a course platform called Deal academy.org and spring for the.com because, um, I wanted to create courses for people who are buying accounting practices. Sometimes [00:02:00] they're not quite ready to get a lawyer involved, but there's a lot of legal work at the front end. So it's just kind of an educational thing that I do.

Marcus Dillon: And you sit in Colorado?

Sara Sharp: I do. I'm in Denver.

Marcus Dillon: And how long have you really been focused on CPA firms? Because that it's really ramped up here recently. So has that been something that's been in your skill set for a while?

Sara Sharp: It I started doing transactions in this space about four years ago. And then now it is truly [00:02:30] almost all I do. I have legacy clients, but this is about it. So, um, the niche, you know, you read all of these? I have my business books in my office, and, um, you know, the other books are elsewhere, but these are all the business books. And they always say, niche focus, get an industry specialty. Um, and boy, when you do it and you find the right one, it really takes off. And it's so exciting to be able to actually understand. You know, each client experience informs all of my other client [00:03:00] experiences, which is great.

Marcus Dillon: Yeah, all that experience culminates. And, you know, your most recent client is the beneficiary of all of that years of knowledge, right? So, yeah. Um, you haven't always lived in Colorado, so I know that Rachel and I say y'all a lot and kind of the southern drawl, so hopefully we can pull some of that out of you today because you were native Tennessee, correct?

Sara Sharp: I'm a Tennessean. Yep. So I go back regularly. I [00:03:30] am known in Tennessee as Sarah Claire. So double name. Hard to explain out here in the, I guess from Midwest. I don't know if Denver counts as Midwest, but I do get asked out here a lot. Are you from Texas? And I have to say no. Stop asking me that.

Marcus Dillon: It's Tennessee. A lot of a lot of Texas people do retreat to Colorado, so that's probably not an uncommon question for folks.

Sara Sharp: Not a lot of Tennesseans leave. So yeah, it's [00:04:00] a good assumption they're making. They're like, we have mountains here. We don't need that.

Marcus Dillon: Yeah. Yeah. No for sure. Well very cool. Well, Rachel, I think you're up next as far as, like the question you ask all guests.

Rachel Dillon: Yeah. I was going to ask what is your opinion on Niching, since it seems like that has taken off and you answered that. So I'll go with my next question. We like to ask every guest, what is the best piece of advice you've ever received? Just in case we don't share anything else about you on this episode, [00:04:30] at least they'll get that one good piece of advice.

Sara Sharp: Oh well, I don't know if, uh, if this is globally applicable, but, um, my mother gave me the best piece of advice I've ever given. So she she I reflected on this because you sent this to me in advance, thankfully. Um, but it comes up pretty regularly. What she told me, which was in law school. She. I was asking her about my law school boyfriend, and she said, Sarah, Claire, [00:05:00] you can't marry that boy just to keep from hurting his feelings. And I know that you might think, how does that apply to anything ever? But it comes up constantly when I'm helping people buy and sell accounting practices, and they've gotten pretty far down the road on a deal, and it's just not the right deal anymore. And they know it's not. But they don't want to hurt the other side's feelings. They've had them. They've met each other's families. Sometimes they've gone to dinner and they've envisioned [00:05:30] their future together, and there's just a lot of gravitational pull towards going through with the deal, even if it's not the right deal. So I do bring it up a lot, and a lot of people will say, oh, we need Sarah's mom on this call.

Marcus Dillon: Yeah, I think that's applicable to this conversation. Like Rachel and myself, I think I just wore her down or caught her at the right time, and she did marry the guy not to hurt his feelings.

Sara Sharp: Well, I mean, it did work. I guess so maybe it was the worst pieces of advice [00:06:00] I ever got.

Marcus Dillon: No, no.

Rachel Dillon: That that that is working for us. But having those difficult conversations for the betterment of people, of the future, of other opportunities, and sometimes just your own sanity and well-being, I think, is where we need to just, yeah, bite the bullet, have the hard conversation and keep going rather than make decisions. Will regret for [00:06:30] years. Yeah.

Sara Sharp: Yeah, exactly. And with kind of my role as a lawyer in the deal process, when people are buying and selling accounting practices, they're talking to their lawyer a lot more commonly. And, um, you know, there's brokers, there's bankers, there's lots of intermediaries around, but most of those people only get paid when the deal closes. So there's this huge amount of gravitational pull from all your advisors to close, close, close, close. And I think that's a [00:07:00] really important part about the position that I have, is to be able to say, I get paid either way, hopefully, and you walk away, this isn't the deal anymore. You guys, you know, you did it. You had the hard conversations and somebody, you know, you just you found out that you're not a good match anymore.

Marcus Dillon: Yeah. And that's why attorneys and accountants are no are known to kill deals. You know, because we aren't the ones that get paid on the other side of it typically, um, and we do speak our mind. Hopefully we speak our [00:07:30] mind and advise the client appropriately. Exactly. Well, well. Very cool. Well, thanks for the background. Um, as I've already kind of discussed, the client attorney privilege is, you know, hopefully kind of pierced, I guess, or whatever the legal term is. Um, just because we have, um, you know, kind of mentioned that we have been working together in a professional setting. Um, part of what we identified as an opportunity to improve in 2024 was just firming up [00:08:00] some of our employee handbook and just areas that we may have not known to be non-compliant in, but just maybe thought we could be more compliant in. Um, so you did a really good job, you and your team of firming that up for us and kind of softening the language that our PEO provides and thank you and your team for that. But in that kind of engagement and, you know, DBA, [00:08:30] 15 team members, multiple states, is there something else outside of employee handbooks and that noncompliance like DBA had that is really prevalent in our industry that you see time and time again.

Sara Sharp: There is um, so there are a couple of things that are just so specific to accounting practices that they're done, um, constantly, like more often than not. And they're just not not accurate. So one [00:09:00] of them is common. And this is across industries. People always get contractor relationships wrong. Right. Um, so that's misclassification issue generally speaking. You know, you have to be really careful to not pay somebody who's acting like an employee, like they are a contractor, or you'll get in trouble. And that's a very high level way of looking at it. But you might know that, um, it doesn't really account for the way that relationships with service providers evolve. So, you know, maybe somebody [00:09:30] started out as a vendor like I was to you, and then all of a sudden, you know, there were more projects, you're working on it, you know, they're coming into the office sometimes. So paying attention to when you need to change those relationships. In the same with the handbook issue. Right. When you start out, when you began, you didn't have employees in all of these states, and sometimes your same employees in one state and moves to the next, or I believe in your circumstance, you, um, you know, a lot of my clients had [00:10:00] employees who kind of went to different places during the pandemic and stayed there. And, you know, they never really meant to move permanently. So you never undertook that analysis. But here it's been a couple of years. So are you compliant with all of those state laws because the state, um, the state that the employee resides in is the, the law that controls, not the state that the company is in. And then the other thing is 7216 are you familiar at all with the [00:10:30] exciting, exciting.

Marcus Dillon: Go go ahead and give the listeners a little bit of background.

Sara Sharp: So there's a real lack of compliance with this, kind of notice and consent requirement that accountants or tax preparers are under relating to when they use any contractor. So a lot of times people realize it for the first time when they're looking to, um, start working with overseas labor. But it applies even if you're not. It applies just to [00:11:00] contractor. And so if you're taking in information for somebody and you're using a contractor, um, to help you process or prepare tax preparer information, you're under section 7216, which is a notice requirement that you're supposed to give to all of your clients. That's really detailed. You have to look at it. It says exactly what it's supposed to say. It has to be on its own page. It has to have a signature. It has to have a term limit. There's all these really specific things. I hardly ever see them. So nobody is complying. And, [00:11:30] um, you're supposed to get that signed in advance with like detail about who you're going to be using as a contractor from all of your clients. And half my clients don't even get engagement letters. So they're not they're not going to, you know, they're not getting that for sure. Um, and what's really interesting to me about it is it specifically articulates that there's criminal penalties for failure to comply, which just I thought, you know, maybe they should have put a little bit of marketing into education instead of going straight to criminal penalties [00:12:00] for that one. Yeah.

Marcus Dillon: That's that's, uh, now that you've scared everybody, you know, I think part of it is we, we've gone down the 7216 path, and we now require them across the board, all engagement letters. They're a part of that, um, electronic signature process. Even the 7216 have places where you have to stop and sign or initial separately from just, you know, throwing it into an engagement letter process. So hopefully we're covered. And, [00:12:30] you know, the thing there is the few years we've been doing that, um, you you build up the thought, like, all clients are going to push back on this. And, you know, the fact is, like we sent out over I mean, 500 a year. So hundreds of these engagement letters clients just click click click click click. And they don't they don't pay attention. So I think just having that consent, we haven't had one awkward conversation. Um, so that was just all built up in our mind. And [00:13:00] so yeah, the 7216 the compliance as mentioned, you know, a lot of our team members were Texas. We always thought Texas law, you know, dominates. You know, Texas can be its own country. You know. So we always thought we could trump, uh, local laws. But that's not the case. And especially in states like Colorado, which are very familiar with there's some unique, um, language and things to navigate. So that was what we kind of had to true up, you know, this time around. [00:13:30]

Sara Sharp: I'm glad to hear that though about the response from clients. It's just often people are worried about it and they'll just not comply because they're worried about the pushback.

Marcus Dillon: No it's not. It's it's the awkward conversation is easier to have than the criminal penalty conversation. So let's go there. Right.

Rachel Dillon: Yeah. That just leads right back to that advice of having that hard conversation at the beginning versus having a really hard conversation when you have to say [00:14:00] why you can no longer be their CPA anymore. I think when we originally engaged you, Sarah, that we were wanting to look at our PTO policy. And so which is part of our handbook, and I think that you brought to light more areas than we even realized needed to be updated for compliance to be in compliance. And so we were looking at PTO because at a couple [00:14:30] of our events that we had with the collective community, we were talking to other firm owners who their states may require it or they may choose to do it, but their part time team members qualify for PTO. Whereas in Texas, our part time team members, that that was up to us. That was our decision. And so that's what really I think spurred the whole conversation was we just started looking at options for how can we continue to compensate [00:15:00] and increase the benefits to our team members, because we don't want them to be poached by now? These other firms that we call friends, right. And so that was just the tiny start to where this whole, um, kind of engagement led to.

Sara Sharp: Think I just created all kinds of problems to solve.

Rachel Dillon: Well, I think it's interesting because we, um, we didn't intend to hire people in multiple states. That wasn't necessarily a [00:15:30] thought. Say, back in. Definitely not in 2011, but not even as recent as 2018. The thought was never we didn't really think about having a virtual firm with employees nationwide or overseas and with Covid, with some of our team members moving out, with going virtual and having the opportunity to just open up our talent pool that much more. So our [00:16:00] response to that was, well, we are now in multiple states. We'll sign up for a Po and that will cover us. Then we don't have to worry about anything. The Po is responsible for making sure we're in compliance. And you know, all we have to do is make sure we're paying people and giving them time off, you know? And so I think that, um, that too is you think you're doing the right thing or you think you're putting measures in place to keep [00:16:30] you compliant. But the reality is there's still a lot of things to pay attention to when you're a small business owner.

Sara Sharp: It's the right thing to do. I mean, if you had come to me and said, we've got this Excel spreadsheet, we're using it to as a back end of our payroll, I would have said, oh my gosh, get a P.O. And so that was definitely the first choice. Um, P.o.s. also have handbooks and documents like that, and I've looked at a lot of them and they're not terrible. But the general rule [00:17:00] is you don't want to promise something in your handbook that you weren't, uh, legally obligated to do. Um, unless you do it on purpose. So, um, a lot of times what happens is people will pull handbooks specifically off of the internet and get all of this additional obligation on themselves from whatever company they took it from. And then now they are contractually obligated to live up to that. They've just created a whole bunch of new laws for themselves. And so that's the kind of the [00:17:30] line you're trying to ride. And I know it's tricky. I think I can see how you get there.

Marcus Dillon: Yeah. And the other thing is just like what makes sense as far as company wide right. You know, you're balancing out multiple states. So you don't want to make it weird for one team member versus another. And you just want to make sure. So I know even one of those last decisions we made was, you know, the use it or lose it as far as like PTO and pay like some states, you can't you can't lose it, right? Like they require [00:18:00] you to pay it. So that's not really a employer decision. It's a state decision.

Sara Sharp: And that's a that's true in a lot of states. And um, that's a common very specific to accounting and tax practice issue too. Under the umbrella of PTO is the concept of PTO banking. And you know, so it's like or it's called other overtime Banking program. I've seen a lot of them, and almost uniformly not [00:18:30] actually allowed under any state law. So it's essentially, you know, people will say, and it's so tax practice. Why? Because you are asking people to work overtime in March, and you don't need them to work overtime or even 40 hours a week in June. So you just say, hey, instead of paying you that time and a half right now, you can just use this time later. And it makes all the sense in the world, but usually it winds up running afoul of overtime requirements.

Marcus Dillon: Common [00:19:00] sense and state law typically don't agree, is what you're saying? Yeah. Um, well, no, that's great. And that's context. I mean, obviously that's one of the projects you've helped us with. The second is, you know, as DBA, uh, Rachel and I are owners and, you know, by default, because we are married in the state of Texas. Um, one of the other pieces that we've investigated is how to bring other people into ownership, and not necessarily [00:19:30] burden them or their family with cutting a check and becoming a partner in the traditional sense. So we started having those conversations with you about like, hey, what do you see even as alternatives to this, to care for key team members, um, you know, while they're here. And then if there is a succession plan or something that does occur, that they are a part of that event as well. So that kind of led us to, you know, some of the things that we created, um, in DBA for [00:20:00] a couple of team members to kind of participate in, you know, the future of DBA and what that could look like. But you want to talk a little bit about what you're seeing in the market as far as like alternatives to just that old school partner model. And what's exciting you about that?

Sara Sharp: It is it is fun. I think I get a more, uh, varied cross section of this then most people involved in this industry, because I'm not just a broker who's dealing with third party transactions or a banker who's doing finance [00:20:30] transactions. I do all of them. So I do have some that are the kind of classic thing people envision, I think still where they run their business. They train up a junior partner. The junior partner is ready one day to buy them out and does so for, you know, 20% of their equity. In the next year, there's 20 more percent. And then, you know, I have seen that happen. But, um, uh, you know, I'm, I'm from Tennessee and there's a lot of lakes there, and it's and there's a lot [00:21:00] of time in that type of transaction where you have one foot on the boat and one foot on the dock, and so, so many things can go wrong. There's five years where things fall apart. So I've seen a lot of people who start going down that road, and it just doesn't work out the way they intended. Maybe they're not as ready as they thought to let go of the reins, which is really common. Or maybe you know, the buyer is all of a sudden just completely overwhelmed by the responsibility and not interested in it. And then un teasing [00:21:30] that apart when you're partway through it is really messy.

Sara Sharp: So, you know, it does make me more interested in more flexible solutions like what we did with DBA. So, um, you know, lots of different options. But generally when you're aligning your incentives with your employees and you want to treat them like they're an owner, and then there's what we did, which is called a phantom equity plan or a phantom ownership plan. And it's kind of a more complicated way [00:22:00] of saying, hey, you know, we're going to treat you as economically as though you are a 1% owner of the company. And we're going to keep that in mind for distributions, maybe, or for a change of control. If I do get bought out by a third party, you're going to participate in that cash that comes into the company as though you were a 1% owner. But they're not buying in. They're not having to be on. They call it the cat table. You know, the capitalization table lists all the owners of the company, [00:22:30] so they don't have all of those attendant obligations. And you as a company don't have to deal with. Okay, well, now they've gone and they've left and they're still stuck being an owner of the company, which is an issue that happens constantly where people have an old employee stuck on their cap table.

Marcus Dillon: Yeah, I think I've had friends that were, you know, admitted as minority partners that had to navigate their exit, um, just because it did not, um, evolve like they were hoping [00:23:00] it would. And that's an awkward conversation. And then also, you see people that have an ownership percentage and then some other life event happens. Um, maybe it's a divorce, maybe it's something else that's related to family and that disrupts the business. And so part of those, you know, just life circumstances are why you could keep things a little bit simpler. You said complex, but I'm like, I think we made it as simple as we could. Um, the.

Sara Sharp: Simplest solution for the problem, for sure. [00:23:30]

Marcus Dillon: Yeah. And the you know, at the end of the day, it's there's a few different ways to, you know, typically the people that you want to care for and that you want along the ride. Um, they may not even have the funds to be able to buy in. Right. Because now our valuations as firms continue to go up, especially in this market, which are really nice if you're ever going to cash that in. But if you're not going to cash that in and you know somebody is looking to buy in at market rates, that's just a higher elevated [00:24:00] price for them to even come in at. And then the other option is, you know, sometimes you'll do like this internal loan thing where you like run it through payroll and then you're deducting that from like their loan balance. And that's like super weird and complicated. And then what if that person leaves and, you know, it's just. How do you make it make sense?

Sara Sharp: And I've had that happen. I've structured ones that way. The way you're describing where it's, you know, a somebody buying in and they execute a note in in lieu [00:24:30] of note payments each year, the amount they would have gotten by distribution go to pay out the note payment. And then your one foot on the boat and one foot on the dock. And then all of a sudden somebody gets sick or divorced to your point or wants to move or, you know, whatever happens and everything falls apart, falls straight in the water.

Marcus Dillon: That's great analogy.

Rachel Dillon: Just to give a little bit of context for our situation, for our story and why, um, why [00:25:00] we chose to do that and give that additional compensation to these team members. Marcus, will you tell a little bit about kind of what initiated this thought for you? Why did you decide to explore options for Leslie and Amy.

Marcus Dillon: Yeah. So, um, we knew that we had the right people on the bus. And I think what we are seeing, even in team sizes of where we're at as 15, even if we, let's say, double it to 30 team [00:25:30] members, we've got to create opportunities and incentives to keep the team members that we are focused on retaining, including leadership who can help drive the change and really help us lead through the next chapter of DBA. So that was how can we do that in ways to incentivize them for growth, for the value that they bring? You know, Leslie, she doesn't even work full time. So it was one of those it's not an hour requirement like, hey, you put in more [00:26:00] hours. Like, that's old school butts and seats type thinking, and that's not where we're at anymore. So it was like, how do you compensate somebody for the value they bring? And it's not necessarily directly tied to hours. Um, and then the same on Amy's side, even though she's full time. But she's director of ops, and I need her to be thinking about how do we really take this optimize and then continue to move forward, continue to experiment and continue to evolve? So those are the pieces that ultimately led us to identifying ways [00:26:30] to open up ownership and open it up in a way that we felt comfortable where we were protecting others and protecting ourselves. In case some of those, um, external, you know, catastrophes, I would say happen, whether it's sickness, divorce, moving and in a virtual world that doesn't matter. But, um, but yeah, like, that's the context there. And I think just like John Maxwell would say, like you are the lid on your leadership. We don't want to be the lid on like the ownership of DBA anymore and [00:27:00] kind of with open hands. See where this really goes with partners hand in hand.

Sara Sharp: Yeah, I think that's one of maybe the most attractive parts of the arrangement is that it has the effect of kind of leading the recipient into being able to view the company as though they're an owner, which is a really important cognitive shift for an employee to take, especially one who might never have run their own business before. So they get, you [00:27:30] know, employees. We all started usually as an employee, and you're myopic as to your own responsibilities, and you might not have your eyes open for opportunity or you're, you know, looking at the profit margin of the entire business as long as your bonus is secure. But this allows the the recipients to start taking that next logical step in viewing things like they have a vested interest. Yeah. Yeah.

Marcus Dillon: And then the other if there is a succession event, we we know that likely we would [00:28:00] want them to be a part of that succession event. And so it's just, um, reward for that too. Um, you know, just all the value that they brought to the team over that time period, and we want them to win in anything, just like we would win, as you know, majority owners. And that's ultimately how you care for for team members and people that you know you value along the way.

Sara Sharp: Yeah.

Rachel Dillon: And our relationship with our [00:28:30] leadership team, they actually have full authority. They help make every decision they see every financial. They know all of the intimate details of the business anyway, because they started treating this business as their own years ago. And so I think it was that natural step of not that they raised their hand and asked to be owners or where do I go from here? But more of us realizing they're already they already [00:29:00] treat this as if they are owners. They are already looking for ways to grow and improve this business, whether they're compensated additionally or not. So for us, it was more recognizing their level of engagement and their level of ownership without even having ownership and then trying to really match that and give them additional opportunity.

Sara Sharp: That's perfect. You guys have built something really great.

Marcus Dillon: Yeah. Well, and that's, you know, kind of the next step [00:29:30] and where DBA is is going. You know, it's everybody has their core focus on leadership team. And you know, even with where we're headed as far as like some of the acquisition opportunities, both organic and inorganic that we're evaluating. Um, I know that that is right within your line of sight right now. I'm sure if you look at your desk, you've got multiple deals or desktop, you know, we're in a we're not in a paper environment anymore. Um, but why don't you kind of, you know, with some of the time we [00:30:00] have remaining tell tell us what's, you know, what's keeping you busy these days with all these deals.

Sara Sharp: Oh, sure. So it's busy season, and my busy season is like the negative space of tax season. So when everybody.

Marcus Dillon: Comes up for air and figures out what life should really look.

Sara Sharp: Like, well, if you're calm right now, I'm not. So, um, but that does kind of free up my ski season, so I like that. Um, so I am doing, uh, probably, I think [00:30:30] ultimately might close 60, uh, deals this year, which is great. And, and everybody's just, uh, they're all 5 million and below, um, this year. So it's small, uh, businesses selling to big monoliths or to private equity or family funds or whatever you might have, and then lots of just organic folks growth by acquisition, kind of targeting their, um, uh, their competition and bringing them in, which is really [00:31:00] exciting. Um, so about 20% of my clients are the sellers and 80% are the buyers right now. Approximately. So I'm I'm very fair because it's hard to make too hard of a claim one way and then argue the exact opposite point at any given time. And so I think there's probably more acquisition interest than there has been in years past. Part of it is, you know, the headline stuff you see of an aging profession. And it was 75% [00:31:30] of the members of the AICPA are over 65 or what have you. That is true. But also I really think that, um, there's a lot of market pressure because real estate is so expensive that, um, investment can't really cash flow, uh, real estate as easily. And they start shifting into just general business acquisition. So a lot of people come to me and they say I was agnostic as to my industry, and now I want to buy an accounting practice, which [00:32:00] is a riot.

Marcus Dillon: Yeah, accountants are cool for the time being.

Sara Sharp: Well, yeah. You know, there's a lot of influencers out there that are promoting the concept of buy a boring business that'll cash flow and, um, that's, you know, you get it. But I'll talk to somebody who's out of Manhattan, has never had a driver's license a day in their life, and they have an offer in on an HVAC company in Texas that has a fleet of 20 trucks. And you think you're not prepared for this? So [00:32:30] my dad was a general contractor. And so I specifically think you're not going to how are you going to you have opera tickets, how are you going to relate to your workforce? And, um, however, that same buyer will all of a sudden look at an accounting practice and go, yeah, I understand bookkeeping, I understand office culture, I get copiers and printers and scanners and hey, I'm actually feeling really comfortable with this. So, um, there's a lot of, uh, interest outside of the profession on accounting practices as [00:33:00] an asset.

Marcus Dillon: Yeah. And especially if you're that family office, if you already have other businesses in your portfolio, how cool is it to employ your own accounting firm to do that work?

Sara Sharp: Exactly. You look at your expense column and it's all bookkeeping, so. Yeah. You know, if you can pick up a bookkeeping vertical, it's it's a little bit of a no brainer, but it does push the valuations pretty high. So. Yeah.

Marcus Dillon: And I love the fact that you shared a lot of your deals. Or most of your deals are 5 million and under because [00:33:30] that's where we sit. That's where a lot of our friends sit as well. So you did mention like who the buyers are. Right. So it's anywhere from private equity is now dipping below into this $5 million market. Family offices. Yes. Anything else kind of interesting that you've seen this year that you have never seen before?

Sara Sharp: Oh, gosh. I mean, private equity definitely came in. I've seen a lot less seller financing on deals than I did in years [00:34:00] past, which is crazy because SBA loans are the most common financing vehicle still for the acquisition of these practices, and SBA seven day loans are 5 million and below. So it's kind of perfect for the industry. And they are the rate is high right now. So 1,011%. Um, and that really has an impact on uh, which practices could sell because you can't get the loan if you don't have enough cash flow to service the debt. [00:34:30] Um, so all of a sudden a different type of firm metric, and people are fixated more on the margin of the acquisition target, which is a no brainer. But, you know, accounting was kind of stuck in this old way of looking at it, where it was one times gross revenue for a long time is this weird illusion that everyone had as what the valuation of their practice was and nobody paid attention to profit for a while. And that's a really important part of a business. [00:35:00]

Marcus Dillon: Oh, it's pretty important. You know, speaking from the accountants in the room, right? Yeah. Well, so what are you seeing on the deals that you have seen as far as the multiples and all of that good stuff? If we're looking at on like, obviously if it's being driven by EBITDA and then what could that relate to as far as if you were to take the traditional metric of gross?

Sara Sharp: Yeah, that's a good question. So sometimes they correlate and sometimes they don't. I am seeing [00:35:30] and it depends on whether you're adjusting your EBITDA. So if you have to replace the owner is is a really key question as to what your profit looks like, because the owner's salary is a pretty big add back. So people are for the first time attaching their multiples to adjusted EBITDA or to seller discretionary earnings. And those multiples are going four to even eight x SD, which [00:36:00] is crazy compared to, you know, the past. Um, and sometimes that is about one x, but sometimes it's 2 or 3. So it can be all over the place. Uh, gross revenue. So um, and then also I think that we're, as a general buyer pool, starting to understand the nuances of the different firms with a lot more gradation than in the past. It used to be if they have an office lease, they're a brick and mortar, and if [00:36:30] they don't, they're cloud based. And cloud based is the word. Um, and I don't even know what that means. I mean, everything is cloud based now, right? Every single. Hopefully not all of them. There's a there's a handful that aren't. But, you know, most things are cloud based. Um, and so now people are asking more specific questions to attach that multiple. So it's going okay. Well maybe you're four x SD, but you know, do you have an email relationship with your clients? If not, I'm how am I going [00:37:00] to step into the, you know, the shoes of this firm? How am I possibly going to run it? And, you know, that type of question gets really asked a lot more. How many people come in and drop off their paperwork in person? Um, you know, if if the answer is none, you're going to trade for a lot higher. Sure. Well that's.

Rachel Dillon: Awesome. Thank you. Thank you for sharing that. I know a lot of people are very interested in that specific information. And so that is a lot of the conversations. It may [00:37:30] be age range of people that we talk with, um, and hang around. But also I think it's just interesting to know kind of what your business is worth and what potential is if you decided, you know, to make a change for whatever reason. Um, Sarah, you are so closely tied and connected to accountants these days. And though you're not an accountant. Um, what are you most excited about for the future of the accounting industry?

Sara Sharp: Oh, it's a [00:38:00] very exciting time. So I think I have more young sellers this year than I've had in the past. I think they see the multiple and they're interested in rolling that forward in a bigger capacity. So, um, rollover equity is entering the scene and um, it historically. So there's a couple I think it's really interesting, a couple kind of cultural disconnects that I'm always, um, trying to bridge. One is private equity coming into, you know, a brick and mortar [00:38:30] Main Street business. Right. Wall Street to Main Street. They're like, oh, we've got roll over equity, and the Main Street business owner doesn't want your rollover equity. They just want cash because they're trying to like take their biggest asset, their firm and get that money out and diversify. So rollover equity is the opposite of what they're interested in usually. But now people are understanding it more and sellers are often in their 30s and they have, you know, worked really [00:39:00] hard for ten years and they see what the future looks like and they're ready to take off the mantle of ownership and become associated with it, kind of bigger platform. And that's really fun to watch. I think, you know, the biggest trend. The other kind of gap that I'm constantly translating between is probably the biggest cultural divide in the industry, which is age. So there's a real, real, real big difference between my oldest client right now, who's 91, and the way, you know, [00:39:30] he sees his business. And my youngest buyer this year, who was 23, you know, very, very different ways of looking at the world. And in bridging that gap is is quite a challenge. But one of the things that is somewhat ubiquitous is younger folks don't want to work the hours that they saw the older folks work, and they're not as willing to take, um, take their life quality down to the level that [00:40:00] some of the predecessors were. And I think that it's causing them to be more efficient, to raise rates, to run business more cleverly. Um, and that's that's very interesting to me.

Marcus Dillon: So that's great background, great context. I think the variety of deals we'll see, like there won't always be those 91 year old guys, you know, selling their firms, right? They're going to hopefully cash out at an all time high. Um, but I also don't see this slowing down. And you probably don't either in the next few years. Um, [00:40:30] what if you were in the position and you're currently running a firm, and maybe you have no intention to do a succession event or an exit or bring on a strategic partner, what are things that you see firms doing that are the smartest move.

Sara Sharp: Oh, gosh. I mean, the preservation of your quality of life, I think is is everything right now. So there's a lot of coaches and training programs, and you guys have a phenomenal resource for this. That's just making [00:41:00] sure that people are pacing themselves. When you have that kind of, um, you can burn out pretty hard when you have a tax practice and you're not taking care of yourself. And so I think that's the smartest thing. Um, the business levers that are associated with that are outsourcing overseas labor where you can um, certainly and increasing rates, you know, they say to increase your rates, um, like five for every five clients [00:41:30] you offer the increased rate. If five say yes, you increase them 10% more until you start getting nos. Right? I don't know, a single accounting practice that does that. I don't do it either. So I'm not taking my own advice. Nice. So. But that's the way to do it. You got more margin. You don't have to take as many clients. Your quality of life is going to be better. If your quality of life is good, you're not probably going to want to sell your practice because you're having a great time running it.

Marcus Dillon: Yeah, unless, you know, everything's for sale for a certain price, right? You know, I think that's the [00:42:00] end all. Be all. Um, so I think the other interesting thing is these buyers that you're working with, about 80% of your, you know, deals, you're representing a buyer. Um, are they actually running the firm on the other side of it, or are they more of a strategic partner in just an investment on the other side of it?

Sara Sharp: The ones that work with me are often operators as well. Okay. So I've worked with family offices and private equity on acquisitions, but usually they wind up having counsel on [00:42:30] the inside. And so and there's also a lot of uh, like kind of strategic investor type financial buyers who want to I mean, all of them are desperate to buy a firm where the seller will stay around and run it, which the numbers don't really work out to make that a very reasonable ask. So I try to counsel my buyers. You know, they'll say, I don't know anything about this, but I want to buy it. And you keep doing what you've been doing.

Marcus Dillon: So yeah. [00:43:00] And because you work so closely with private equity and maybe know how they think better than accountants, what what type of return are they really looking at as far as a minimum. Um, if they invest $1 million, what are they really looking for percentage wise to to gain off that million?

Sara Sharp: I wish I knew. It feels so opaque sometimes because what I've learned is going on behind the scenes from time to time. Is it designated funds [00:43:30] that they have to use by a certain period of time? And that is a really unpredictable market pressure, because you'll have folks who come in and they've got investor money quite literally burning a hole in their pocket, and they lose it if they don't spend it on something by the end of the year. So it's almost not about the return for them. It's about spending the money sometimes.

Marcus Dillon: That's crazy. Yeah. And, you know, just given my background, we evaluate a lot of deals. And I would say even out of the last five that [00:44:00] I've looked at, two of them just aren't even profitable. Like, and it just makes zero sense. Like that. Like one, I'm not going to buy a profitable business. This isn't technology or software as a service. It's, you know, professional services. So, um, it's amazing and I'm sure someone will buy that business and it's not profitable.

Sara Sharp: They absolutely. I have a couple deals right now where the target is in no way profitable. And, um, it, you know, sometimes they get picked up in a very strategic way by [00:44:30] like, wealth advisors and investment advisory and just to cross-sell. And that's the only interest. So they don't care if you're losing money every single day, as long as you get a couple of clients to move over and add to their assets under management. They're happy as a clam. So yeah, and like my grandmother always said, there's a lid for every pot. And even if you've got a not profitable business, it can. It really is. There is somebody out there who will be just absolutely thrilled with it. So yeah.

Marcus Dillon: Well [00:45:00] hopefully that gives hope to a lot of listeners out there that are very profitable. You know, the people that we hang out with, it's almost like you have to tell them to install team members to take less profit because like, that's the other that's the other side of the spectrum, right? You know, I'm turning 50% profit, but you are the main production entity of the of the business. So it's a balance. And I think what we're seeing is hopefully on [00:45:30] the other side of this, better balanced firms that are running more like businesses that we advise, and hopefully we can take our own advice along the way.

Sara Sharp: That's what I was just thinking. I should probably reflect on that for my own firm. Yeah.

Rachel Dillon: This has been a great conversation, Sarah. Thank you so much for joining us. Thank you for helping DBA and collective, but also for sharing with all of the listeners as well.

Sara Sharp: Well, thank you both for having me. And thank you for doing what you're [00:46:00] doing for the industry. I think it's phenomenal. It's such a good resource. I keep sending it to my other clients and it's great.

Rachel Dillon: Thanks for listening to this episode. If you enjoyed the conversation and want to learn more, be sure to visit collective CPA. You can schedule a meeting directly with me, Rachel by clicking on the Contact Us page. Be sure to subscribe, like, and share so you don't miss any future episodes. We look forward to connecting with you [00:46:30] soon!

The Evolution of Accounting Firm Deals
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