Who's Really the BOSS?

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

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

Marcus Dillon: Hey, thanks for having me back.

Rachel Dillon: We are recording this. It's coming out much later, but we are recording this the week that our youngest child graduates high school. So this week, um, for me has been full of emotion, I would say. Uh, and work getting prepared for her party and making sure that things are in place for having people over and in town, um, for [00:01:00] this weekend.

Marcus Dillon: Yeah. Um. Those emotions, you just got to bottle them up and push them way down deep inside, like, um. That's probably not the best advice. If somebody.

Rachel Dillon: It really. It really hit me yesterday when I put together her k through 12 first day of school pictures into like a banner that we hung um, inside the house, getting ready for her party. And so I had all of those saved, like in an album on my phone, [00:01:30] and then just sent them to Walgreens. And when I got those back and I'm like, going through each one and putting them on the little banner and I'm like, oh my goodness. Like, how did this happen so fast? How did it go so quickly? And I, I think I had those same feelings with Kinley two years ago, but there was still one more behind her, right? Like, now we're done. Like, this is our last kid here in the house. And so we will be [00:02:00] empty nesters. For real? For real in just a few months. Weeks? I don't even know. It's going to go quick.

Marcus Dillon: Yeah, it'll go quick. But, you know, we've done a great job of celebrating each season. Um, those of y'all that listen to this and know us, I think, you know, we're looking ahead to what's possible. And we've had a lot of friends that have gone through this stage before us, um, give us words of advice and encouragement and it's good. You know, I think the, the memories, the, the [00:02:30] emotional part, you know, of, like the next few days and weeks are good. Um, and overall, like, just being happy and content with, with the chapters that led us to this point.

Rachel Dillon: Yeah. All right. So not talking a whole episode about Avery, though, we did invite her to record with us and she conveniently had swim practice, of course, at the time that she needed to be here to record. So we hope to have. We had Kinley [00:03:00] on once before on an episode. We hope to grab Avery and have her come talk about, you know, just whatever she wants to share about. She's a pretty amazing kid. So what are we what are we talking about today?

Marcus Dillon: Yeah, I think, um, you know, what we saw coming out of the recharge event and, um, you know, we touched on that in a previous episode. One of the highlights for most people was just having an open conversation about M&A. Um, so [00:03:30] part of that, we just wanted to continue here today. Um, there's a lot of voices in this space right now. And, um, we don't want to be just one more voice. Right? Like that's not our intention in this. Our intention is to provide a little bit of clarity, um, a resource, if you will, of, um, just good data, um, good information. Uh, we have a lot of friends talking about stage of life. You know, we have a lot of friends that have [00:04:00] built businesses, built firms and are having succession events, um, be fulfilled. We have other friends that are growing through acquisition and, um, looking at different opportunities to expand their impact. Dba is one of those, right? Um, that's kind of where we're at in this stage of our career and just want to have an open conversation. I know that there were a lot of friends that came up after the event with maybe more questions than [00:04:30] answers, but I think we're going to go through that. We're going to walk through that together and go find those answers, uh, for those friends. So you were there. Um, you hear me talk a lot about M&A and also going to let people in to what goes on in my head and the ping pong of life that is probably happening between my two ears. As far as just everything that's rattling around up there and all the opportunities that exist and just talk through options. So based [00:05:00] on that, I guess, what were you walking away from with the event, with that session that we need to share with listeners who may not have been there, but then also begin new conversations with people who were there?

Rachel Dillon: Yeah. I don't want to say misconceptions, but I do want to say what new opportunities exist or what new learning. So a lot of times [00:05:30] things are put out into the online digital world, um, or talked about as far as multiples of firms, as far as what firms, um, buyers, not necessarily firms. It's not always another firm that's accounting firm that's buying accounting firms. And so what are they kind of looking for? I think those are really where, uh, I find value is just [00:06:00] staying as current as possible with what's happening, because things are changing daily and new opportunities, new deal structures, um, new values are being placed that I know that you're learning about. And so I think that's really helpful for others to hear as well.

Marcus Dillon: Yeah, I think you can. What we have to do. We talked about, you know, earnings uh, epoch and EBITDA, you know, and the difference between those and how ultimately [00:06:30] a lot of these deals are being valued on EBITDA, which in our industry we still like reconcile it back to what is the multiple on top line growth or top line gross receipts. And, you know, firms are run completely different, um, in their service lines, their revenue may be made up completely different. So a lot of that is driving the variation of these multiples, right? So historically one x times gross revenue has always been like [00:07:00] this baseline for our industry. And what we're seeing now is if that revenue base, if the acquiring firm, if the buyer is really just interested in a client block, if they're not buying processes or really, um, a built out team or something unique within that business that one X does hold. And whenever you talk through, uh, inorganic growth and strategies, they're A1X multiple. [00:07:30] Most of us that have well built firms and well built machines, we can take A1X acquisition and do really well on it.

Marcus Dillon: And it provides an ROI, probably in year four. Um, depending on your financing, depending on what you bought it for. Um, so it's not that long of a period before you really start making revenue back up on that firm. And obviously there's different ways to finance it and draw it out longer. But still, I think ROI is within a few years, which [00:08:00] for most business acquisitions, you know, um, whether it's entrepreneurship through acquisition or growth through acquisition, most industries don't see a return on investment that quick. So that's one side, right? And you really have to evaluate if you've built a business that revolves around you. Maybe it's a lifestyle business. It was only able to grow up, um, to the lid that you placed on it. You were the the leadership lid, so to speak, and it couldn't grow past that lid. [00:08:30] Those are the ones that are valued at what we've always historically seen. Now, if you have a different business, one with processes and people and engines, so to speak, that's different. That's completely different.

Rachel Dillon: I had a question for you about kind of the one times. And you mentioned a client block. What is happening? Tell me, because I know you see a lot of deals, a lot of opportunities. And part of that [00:09:00] is just because you're interested in it. And so you pay attention. You look for things. Right. So you are looking at different websites. You are paying attention to emails that come in. You are looking at social media posts or news headlines. So part of it is that you are just very interested in looking at it, talking with other people, um, people who are doing M&A [00:09:30] side and other accounting firm owners. And so just kind of learning that way for that block of clients, that's the one times revenue. What then is happening to that owner like the seller, the seller's team, their software, their building. What's happening to all of that other stuff? Are they staying in business and just running a portion and and selling part, or is it more of those [00:10:00] are typically like a 1 or 2 person firm, and those two people are now retiring or looking for other opportunities?

Marcus Dillon: Yeah. Um, my first response would be, uh, what's happening is whatever the buyer wants to happen, you know, I think, um, those, those firms at sale give up control, um, and about decisions that are made after sale. And what happens to the clients, those clients, that's what's that's what's acquired. [00:10:30] That's what the buyer is hoping will fill up the funnel and, um, you know, either alleviate excess capacity or be able to built upon, um, with upsell, cross sell opportunities. Client Makeups can also be filtered through. Obviously, that's part of our story. And seeing who fits within our model and then exiting those who do not fit us. Because just like with anything, you're going to get a mixed bag, you're going to get great clients and you're going to get good [00:11:00] clients. You're going to get bad clients. Um, so just grading those pretty quick and making decisions. Team members no different. Right. Who's going to be able to assimilate in the way you do things? So, um, you know, our experience with that is you have to do 30, 60, 90 day reviews on team members after acquisition, just like you would with anything. And, you know, it's such a it's so competitive right now to get great talent.

Marcus Dillon: Um, and you could acquire great [00:11:30] talent in an acquisition. But just like the clients you may get great, you may get good, and you may get bad. Most likely the bad talent has always been bad talent. Uh, or there's been skill gaps or knowledge gaps, and the previous owner was just maybe on autopilot and didn't want to make hard decisions. So for the acquirer, for the buyer, it's your job to make those hard decisions, right? Because you don't have that luxury, especially if you have a partner or a banknote to [00:12:00] be able to carry somebody, especially carry somebody that's not performing at the level you want them to perform. So. So those are some of the things in those one x very, very limited control after the sale. It's likely um, culture, identity, things like that are likely going to weave in, um, to a bigger, a bigger firm, another business. Um, you may have somebody that comes out of the woodwork and has taken a flier, [00:12:30] you know, on, on your business and kind of an MBA type that may want to come in and run it as is, but even that they're going to make changes after year one.

Rachel Dillon: Yeah.

Marcus Dillon: So that's, that's the base. Right. Like that's what, um, we grew up in, right? I would say, like, that's what we grew up in all the way up until about three years ago, really two years ago. And things started to shift and evolve with those big firms doing what they're doing and, um, taking big dollars, big investments from, uh, different players, different [00:13:00] people. And maybe they did that for, uh, different reasons. So maybe they had some unfunded partner retirement liabilities on the books that that was able to take those funds and exit the partners. Uh, in another way, maybe it was to invest in technology and people and things that are buzzwords and, you know, spun up, um, in different ways. So those dollars eventually started to trickle down. And, uh, [00:13:30] what we're seeing now is 5 million and up or really, um, now targets for all levels. We've even seen some as low as, you know, in the million. Um, as far as a tuck in being really done, well. So revenue revenue really has revenue base has been all over the board and maybe even non a nonfactor for some firms, ones that are like so niche focused or so profitable. Um, [00:14:00] it's almost like an acqui hire sometimes where if a firm really wants to develop a niche specialty in something, um, and they see a smaller firm and they can go acquire the firm, acquire clients, but also get great team member, great leader for that new, uh, division. We're seeing that too. Um, and the hope, I mean, the hope for that person is that, you know, they are given this platform of resources and that they're able to go about life [00:14:30] and business, uh, with a little bit different of a toolbox and skill set than they would remaining, um, completely independent or on their own.

Rachel Dillon: So we're looking at an opportunity that has an acqui hire. That means there are key team members. Um, given the nature of the hiring challenges in the accounting industry, I would assume that those come with a little bit more value. If [00:15:00] they have both clients and team members that an acquiring a buying firm is looking at taking on.

Marcus Dillon: Yeah, an acqui hire. Um, typically you're focused on the owner, not team members that are non owners because those non owner team members could could leave. Um you really don't have sure you could like do some contracts and different things. But what you're really going after is the owner. There's more control after the purchase on what an owner can [00:15:30] or can't do. And um, if they're going to continue to do what they've been doing and building, um, and you can give them a better outcome by joining together, then it makes sense. Um, and there's, there's some of those opportunities we're seeing. We're seeing some really cool, um, smaller firms merge in and like, really create an impact, uh, within bigger firms.

Rachel Dillon: So what are owners in that [00:16:00] scenario accepting? Like what are they accepting what what terms what cash upfront are they accepting. Um, what not cash upfront. Are they accepting what percentage of ownership are they giving up and control. And what does that look like? What are some of the things that you've seen that have actually happened or have been discussed, um, where an owner goes into like an employee position?

Marcus Dillon: Yeah, [00:16:30] I think, um, if an owner would be going from owner to employee, there would be some cash, to give consideration for what they built or what they brought over, or a, um, you know, a more creative compensation structure on the other side, maybe there's a component of commission or, you know, book, so to speak. Um, but typically owners come in with some type of equity role where they would, um, either stock swap or kind [00:17:00] of be a partner or director in the new entity, um, or a new firm that they're now a part of. And sometimes that happens without any, any cash at close. It's just, hey, there's this new, new opportunity and maybe they're incentivized for growing and that's how they're paid, uh, on the other side. So a lot of people may take that route if they've built a business and they're tired of the administrative burdens that come along with the business, they've just figured out that they're not wired from a risk tolerance to do this alone [00:17:30] any longer. Um, the other piece there is that, um, some of these firms, you know, some, some, some CPA firms do really well. And let's say average firm owner compensation could be north of $1 million. And this person is only making about 500,000 now. But there is this opportunity to essentially double their annual income by joining with this bigger group and moving along that fast track, you know, fast tracking that compensation. So [00:18:00] that's sometimes what we see. And in those scenarios there may not be any cash given at close.

Rachel Dillon: Would you accept that type of a deal?

Marcus Dillon: I've built something different. Um, so I don't think that I would accept that deal. Um, it would have to be very unique, and there would have to be a lot of cash on the other side of that.

Rachel Dillon: Yeah. It just it's kind of hard for me to wrap my mind around of, like, people who have worked so hard. I have seen, you know, how hard our team has [00:18:30] worked, how hard you have worked to build this. And what are some of the opportunities where people have said, yes, that that is what I want. On the other side of that, I know how hard it is to run all of the things within the business that aren't client work, right? At the end of the day, sometimes the client work is the easiest thing to do in running a business. Um, and oftentimes while owners go back into that seat. Right, because that's the easy thing that they're really good at and can get [00:19:00] out. Whereas all of the other parts of running a business, um, that's not as easy and straightforward as maybe just getting some client work out the door. So any any specifics that you've seen where that has been a really good like a, a specific size firm, what it looked like and what opportunity that they accepted to no longer be the owner or. Yeah, [00:19:30] the sole owner of the business.

Marcus Dillon: The ones that I've seen are in that 500 to 1 million range where, um, the, the owner really knows that they're the limiting factor to growth. And maybe they have realized they don't want to do it the same way they've done it. They would rather partner with somebody the who not how, you know, methodology that has now, you know, been brought more to light. Because as you mature, your mind expands on what is options. Um, it should always lead [00:20:00] to just more opportunity. Um, and some, some people, you know, they, they don't want to do the hours anymore. They want a team around them. But then they also don't know. They know that they're the biggest factor in in limiting that growth. So it's a very mature decision, you know. And we've seen those um, we've seen friends make those decisions where it's just, hey, I want to go not be completely responsible. I want to be able to take time off and delegate things fully. Um, you know, as owners, we're not able [00:20:30] to turn it off for the most part, any time of year. And so yeah, I think it's having those those paths done a little bit differently. Um, yeah.

Rachel Dillon: What's something to pay attention to as you take on that employee role or partner merge into that firm, get acquired by that firm, um, as the owner, so that you do have that option to kind of pull back a little bit from the business. What what [00:21:00] is something really important that people need to pay attention to?

Marcus Dillon: Yeah. If I, if I were being pursued and, um, we'll talk some, some funny, um, things that have happened here in the recent past. Um, if I were to be pursued in like, it would make sense that we would roll in. Um, I would want to be really clear about my contract, my employment contract, and what that looks like. And if I was terminated for cause or without cause, what that would look like. Um, so that's one and then two, [00:21:30] uh, budget. You know, like, if I'm leading a division, like, what does the team around me look like? Um, because the funny thing is, uh, in the last few weeks, I've been offered multiple jobs because I am in I am I am always asking questions. I'm in various rooms with firms and business and M&A, um, just learning. And I've been offered at least two jobs, uh, directly and said, hey, would you come run this? One of them was like, you can still own DBA. You can [00:22:00] still, you know, be a part of collective. But we would really like you to take point on this and, and pray on it. And I'm like, I could probably pull that off. Um, but I don't know that I'm called to do that. So, um, but yeah, I think if if it were me, I would be looking at what's the budget? Because as soon as I accept that role, speaking for myself, they're going to realize how big of a fraud I was and that I, I individually can't do anything. And so if I'm accepting something, I've got to know that I've got budget for my [00:22:30] whole team, or to build out a team around me so that we are successful in this next chapter. And if you don't do that, you could be grinding it out for somebody else and be in a worse situation. And so those are the two things that I would look at. I would look at my contract, what I really agree to termination clauses. But then also, um, what budget, what what I'm responsible for.

Rachel Dillon: Yeah. I think the other one there too, that's always top of mind for me is [00:23:00] um, within that contract is what retention or new business like, what you're expected to do. Um, as far as retaining the business that you already have, which in our case, that's like a non-issue. Those are relationships that we hold. So not a big deal. But if you had a specific growth goals or metrics that you had to hit in order to be compensated, I think that's another one. Depending on what role you're wanting to [00:23:30] fill and just being real clear on what you're wanting to do and what you're being expected to do. So I think those are things that I also think about with you being offered jobs, different places.

Marcus Dillon: Yeah, I was always hoping that they would offer you a job and that I would become a trophy husband. Um, maybe anytime. Right at this stage of life, uh, would be really nice, but, um. Yeah. So. So we've talked through, you know, obviously the the [00:24:00] client book sales, the aqua hire, um, the other one that everybody's wrestling with and we're helping some friends out are people that have truly built businesses, right. Like they stand alone business. Uh, the owner participates in as much as they want to. Probably more than they want to, but they don't really. There's work going out the door without the owner being involved. And that's that's what we've created at DBA and collective. And that's what a lot of our friends have created. And part of that just comes [00:24:30] after you reach a certain revenue size that you're able to build out budgets for team members, that can kind of take point and not even just help you, but be responsible for client work and be responsible for different areas of the business. So let's like just let's throw out a number $5 million firm. Um, what we're seeing there is, you know, there is $5 million of top line revenue coming in. Um, if it's a healthy business and it's got earnings before owner comp of, let's [00:25:00] say, 40%. So quick math, that's $2 million.

Marcus Dillon: Um, what we're seeing is those, those firms, um, have more options than they ever have in the past. And those firms can go be absorbed by a firm by by another larger firm like, you know, a guppy. Um, and they could just roll right in, or they could become a part of a private equity backed platform where maybe this firm is valued at a [00:25:30] certain point and you can go and take part in, um, you know, just some back office services and all the fun that comes along with that. You can also participate in equity on the other side of that. And what is growth projection for that platform group? Um, what I would say there is we're seeing valuations on, let's say, a $5 million firm anywhere, if we're valuing it on EBITDA, anywhere from 4 to [00:26:00] 6 x. Like that's what we're seeing. Like that's where we're helping friends work through. So you've got this $5 million firm that all of a sudden somebody in the market to pay 8 million, maybe ten. But you're not going to get ten at close. You're going to get ten potentially. Right. And so, um, you know, a part of that valuation is based on the value of your firm today. Like what it could produce, what it can do.

Marcus Dillon: It's historical. [00:26:30] And that's that's typically the cash component. What we're seeing in a lot of these private equity backed platforms is like a 7030 split. So they take the value. I'm just using round numbers, which is 10 million. Um, that's A2X for all the old school people that have to think that way. It's A2X on top, top line gross revenue multiple, which a lot of us would have been happy with years ago. Right. Like it would have been outstanding because we were always told that our businesses were worth one x. So now you've got this two x multiple. Um, [00:27:00] obviously those are two different firms. The one that is trading at one, the one that is trading at two, they are not the same owner is involved as, you know, just as much as they want to be. Um, team is in place, process is in place, sales function is in place. Just different things. Uh, engines, if you will, are turned on. So using the round numbers, um, let's say 10 million. Let's say there's a 7030 split. 7 million could be the cash component. That could be the part that, um, this is your cash component. [00:27:30] A part of that will be paid at close. That may be 50% of the 7 million. So 3.5 million. That could be as much as 70% paid at close.

Marcus Dillon: Um, I can't do the math that fast, uh, without a calculator. So maybe closer to 5,000,004.9, if that's how the math works. Um, what happens there? 2 to 5 years is the payout on that remaining part of the 7 million that cash component? What happened to 3 million? [00:28:00] Right. Like, oh, I thought you said I was worth 10 million. Well, you're 3 million that that rolled forward. And we're going to talk all about the benefits of what that 3 million could become, right? So that 3 million equity role could grow into another 15 million. And I've seen that time and time again and I hope people get it. Where we're going to take that equity role and we're going to say it's going to have A5X multiple on it. So then all of a [00:28:30] sudden we went from, hey, your business is worth ten. But really at the end of the day this deal is worth seven plus 15, right? And so then it's like you start losing yourself and you're like, okay, so any any time we start to help, help friends review these deals, we start really looking at what their what their plan is, what their goals are. If their goal is truly to exit the business and retire within two years, we probably want to get [00:29:00] as much cash up front and we're going to be less worried about the equity component.

Marcus Dillon: Um, a lot of private equity groups or these platforms want you to participate in the equity because they want to keep you around, but they're also looking for ways to, you know, adjust your sales price. So we see a component of if if revenue did not come over, if if your growth started to slip in in in organic ways, this doesn't take into account any acquisition [00:29:30] that you're doing. If you said you were good for 5 million, but you only brought in for the next year, we're changing the calculation. There may be some clawback. You're not getting what we originally said, and that's all part of the agreement. The other thing that's added into this total payout could actually be the compensation that they pay you to do your job after the sale. So a lot of times you have to separate out, like, I'm going to have to go work somewhere if [00:30:00] you want to work that 250,000, that 300,000 that you're showing, that's really a part of the sale. I've got to work to get that right. And then if you own the building, that rent, we're going to pay you. We've seen that also added in as like total consideration for for buying your firm, and you just have to be able to separate out and really quickly feel out.

Marcus Dillon: Um, what what you feel good with. And for me, compensation, rent, things like that. I have to work [00:30:30] for that money. The property that we own has to work for that money, or it's got a market value that is not consideration for the business of mine that you're trying to buy. And, you know, the the variety of deals. It's all over the place. We we started reviewing these years ago for clients in the dental space and the vet space. Um, MSPs, you know, kind of went before us, so many of our friends and different professional service industries. And now it's just kind of finally come full circle with accounting. [00:31:00] And, um, what I would say, I know you probably have a lot of questions. What I would say when you're dealing with private equity backed platforms or any type of, um, strategic buyer, private equity, they are professional buyers of business, and so they have a much deeper understanding, a much deeper bench than you as an individual business owner ever will. And you may have a great team around you, but just [00:31:30] know that you're up against a lot. Whenever you've got professional buyers that do this every day, and you may only do this once in your lifetime.

Rachel Dillon: Yeah. And so I think that that may be part of the reason that we see people are getting eight, ten, 12 times saying multiples like that could potentially be based on like future equity events that would happen that are potential not guaranteed. [00:32:00] Right. Correct. So really more realistic is if you have a certain type of business, you can pretty much guarantee that your value is one times revenue. And if you have built a different type of business that can operate without you. Then you can get closer to two times top line revenue. But the crazy multiples are either very, very special deals that don't happen very [00:32:30] often, or they may be taken into account a future potential, um, earning opportunity that may or may not happen.

Marcus Dillon: Yeah. So to to everybody that is intrigued by this. Like I am right. Um, once you once you put your toe in the water, it's amazing how fast other people come out of the water. Like trying to find you. Um, we have a friend who, um, just put her toe in the water and let only a few people know. [00:33:00] She ended up with 6 or 7 loyes, um, within weeks. And now she's got to make the decision which one works the best for her, or, you know, I was honestly talking to her, and she was like, you know, if I'm going to work five more years, I can go improve my business over the next two and then go back out to market that much more educated and get better offers. And so I say, you know, my response is totally like, you can you can definitely do that. The market may change, right? Like [00:33:30] there may be other elements at play. Values could go up, values could go down. So you just have to be okay with that. But but it is that realization like if I'm not done today, like running a great business, a good profitable lean business is still the best plan for owning a business or selling a business and valuing it. So making the hard decisions throughout still wins over, um, you know, doing things [00:34:00] just for that next buyer.

Marcus Dillon: And it's funny because, um, you know, when we were at the event, there was a question that came in on the marketing, um, one that why would I even invest in a marketing campaign and sales funnels and do all this business development. If I'm planning to sell my business in 1 to 2 years. And I thought that was a great question that came in, it gave us an opportunity to answer it as I would as an acquirer and and honestly, as an acquirer, somebody that's looking to buy your business, [00:34:30] I want to buy one that's got leads coming in. I want to buy one that's got healthy sales function. I don't know that I want to buy one that hasn't accepted a new client in 2 to 3 years. I don't know that I want to buy one that makes it so hard to do business, because as a buyer, I've got to step into that business and either put into place a sales engine or restart the engine that you've turned off. And who knows how long that can be, because I'm going in and assimilating [00:35:00] clients that fit my model, and knowing not all of your clients are going to fit.

Rachel Dillon: What are some of the areas of Offers that seller owner sellers need to be aware of where terms could change, potentially in the future from what you thought you were buying at close. So they're reading through the agreements and the offer and all of their terms. Where are some of those [00:35:30] things hidden that the buyer has more control and can change the terms later down the road?

Marcus Dillon: Yeah. Um, you give up so much control after the sale. And that's why if you're really focused on money at close, that deal is structured a little bit different. Um, the the other thing is personal guarantees. If you were working with, uh, maybe a smaller firm or an individual, um, maybe there would be some personal guarantees on the note [00:36:00] portion, but probably not on any equity roll. Uh, equity roll is just like any other investment in the market. It could perform or it could not. And there's going to be bad deals. There's going to be great deals. And all the due diligence, all the advice you get along the way is hopefully going to lead you to being on the positive and not the negative. So some of what we're seeing in these deals, um, there's, you know, these professional buyers, they're looking to recalculate purchase price after the [00:36:30] acquisition. Um, hopefully not intentionally because that would be, um, you know, just deceitful. Um, but if they can adjust the purchase price a year or two after the fact because you're not performing, they're going to take advantage of that, and it's given them insurance to make sure that you do perform. So you may work just as hard or harder than you've ever worked for yourself before on the other side of the transaction to make sure you hit those goals. And, um, in some of the deals that [00:37:00] we've reviewed, organic growth, um, had to be at 10% or higher for five years to really Maximize the the value that they laid out. They also wanted EBITDA. So EBITDA after adding back in officer pay of 40%. And just most of us that have run firms and businesses know that it's really hard to, let's say, go from $5 million with a 10% organic growth and maintain 40% [00:37:30] EBITDA, and to do that for five years.

Marcus Dillon: You know, that puts you out closer, 8 to $10 million. And for you to achieve 40% bottom line growth without huge investments in infrastructure team along the way. Um, I hope it works out for you. You know, I think that you may have a year where you have to recalculate and redo things. How much is that one year going to hurt you in your valuation that you agreed agreed to? So, um, that's that's just all of these [00:38:00] deals are just a little bit different. I think what we saw in the dental space and in the vet space is you had some really great key players that built up just number of offices where they were able to kind of create almost a templated offer, depending on where you were stage of life. If you were really a retiring physician, it was option A, and it really it was kind of templated. If you were a physician that was willing to stay on past the deal and you had a lot more years of growth in your career. [00:38:30] It was a different option. And obviously the second option where you're going to stay and have multiple years of additional, um, you know, earning potential for the acquirer, then you're incentivized different ways, right. And you could have different stock options, different ways that you could make money in that deal. But if you're just a retiring physician and they want to go into that market or they want to acquire your your client base, that was pretty cut and dry. And, um, you know, after two years, you're you're done. And [00:39:00] there's no additional pop or second bite of the apple, if you will. Unless you're working in the business.

Rachel Dillon: Yeah. Well, let's talk about we mentioned.

Rachel Dillon: In a previous episode that multiple episodes of the podcast that we are growing through, uh, strategic acquisition, inorganic growth, um, that we are looking to acquire firms. We did acquire a firm in Saint Louis. Um, but we also did something maybe a little less traditional as far [00:39:30] as looking for opportunities in Fort Worth. And so Fort Worth is a market our daughters are close to. They're in college, one in Fort Worth and one in Waco. And so, um, really wanted to potentially even move ourselves to that area, but definitely wanted to have, um, an investment in that community. And so we mailed out and I say we you wrote letters and mailed out letters to firms in the area that [00:40:00] how did you how did you decide on who you would send a letter to?

Marcus Dillon: Yeah, I pulled a list. I was able to, um, go to the state website, look at licensed CPA firms and the zip codes where I wanted to target, and then cross-reference that with maybe the age of the main owner or partner and then developed a list that way. Um, you know, if I did that for client work, I think it would be a lot more successful than, uh, we are on the organic side, but. [00:40:30] But I've done that before. Um, that's how we originally acquired the first acquisition in 2011. Uh, I wrote letters in 2010, I believe, uh, prayed over those letters. They got in the right hands. I got job offers. And I also got opportunities to review, um, returns or review firms that were for sale, uh, that maybe weren't on the open market. So we did.

Rachel Dillon: So.

Marcus Dillon: Oh, go ahead.

Rachel Dillon: We did. Yeah. You did it again.

Marcus Dillon: Mailed them in December [00:41:00] and then did another round in April to land on the desks of partners. April 15th?

Rachel Dillon: Yes.

Rachel Dillon: So after the December, did you get any response to the December letters?

Marcus Dillon: Yeah. We got we sent about 100 letters and we got 3 to 5, um, people connecting on LinkedIn, people emailing me, texting me, um, you know, letting letting me know they got the letter. And then also that they, you [00:41:30] know, were committed through this tax season and wanted to wanted to visit after tax season. So that was the first seed that was planted. The second letter, uh, went out to roughly another hundred, the same hundred. And some of those that reached out, I put personal notes in, you know, um, and sent those out. And from that batch we received, uh, probably double the, the touch points, maybe 6 to 8. So, you know, improvement, [00:42:00] 100% improvement on that. And what I would say, the other thing we're noticing whenever you become a buyer and hold your hand up, other things, you know, come to you. Right. Like people, uh, notice, you know, they follow it along and they maybe want to join in to part of the story. Maybe that means, you know, merging in. Maybe that means this is their succession event, and they think that we would, um, be really good stewards of the business that they, that they built. And [00:42:30] that's that's great. We love that. We we love how that happens naturally. So some of that has also happened, right. In addition to like just the letters and the searches that we put out on that side. So all that to say, like there are a variety of different ways, you don't have to rely just on the brokers or the lists that have, um, firms that are for sale. It's just like buying a house, you know, and you can go up and down streets that you want to live on mail letters, [00:43:00] knock on doors. It's kind of weird if you knock on the door now, but, um, there are different ways to get in the neighborhood.

Rachel Dillon: Yeah, absolutely. So that has led to, um, meeting some great people to meeting some new firms, some that, you know, could be potential opportunities in the future, others that have built great firms, maybe not great for us, um, but great for them. They've figured some things out. We got to have [00:43:30] a really fun conversation with a firm in Fort Worth. Um, actually, today, right before we started recording, um, and just getting to learn more about what people are doing, how they're doing it, um, and kind of learning about who they serve, uh, is really, really interesting and fun. Definitely. Whenever you find things that are in common. And of course, when there are things that are different or outside of Maybe we've already lived through the the challenges [00:44:00] that come with running a business that way. Um, it's definitely just a great opportunity to learn what other people are doing.

Marcus Dillon: Yeah, I think that we have a unique perspective. We we provide empathy, uh, that maybe others do not because we had that firm. Right. So, um, we started out a certain way. We were maybe stuck a decade behind, um, and had to move into the future. [00:44:30] Right. And so some of the firms that we're talking to aren't where we're at today. And, you know, they don't have to be. And I think some of those are the ones that are fun just to encourage and get to know. And hey, here's an option you can look at. Uh, we'd love to continue to talk, but here's what I here's what I see in you. And, um, here's how we can be of service, whether it's just encouragement and and being friends Or here's somebody you need to go talk to. Right. And you may be a perfect [00:45:00] fit for this situation. So, um, but yeah, like the one today, it was it was so great to be invited in to that firm and hear, uh, and them share their story about how they built, what they built and who they've attracted along the way, and the team that they care for and just the client base, too.

Marcus Dillon: I think, um, you know, it's everybody, um, kind of creates and curates these firms of, of people at the end of the day. And in this situation, there were already the succession plan was there [00:45:30] like, um, and they thought that maybe we brought something to the table. And it was just it was it was positioning and letting them know, hey, as a as an outsider, like you're there, you don't need me. Like, you don't need what we bring to the table. You already have all the components of this of a successful succession event on this call. Um, and, you know, it's just it's like, hey, what's the next step? Here's how you go. I mean, there were junior partners and a senior partner and things like that. So it's just [00:46:00] us encouraging people on how to take that step and look at for what's the best for their business. I feel, um, I feel it's a privilege to be invited into those rooms and be able to to kind of pull back the curtain on some of these firms. So, um, yeah, it's it's life giving.

Rachel Dillon: I think what stood out to me the most was that these, um, these partners again, like founder or, you know, [00:46:30] owner partner, senior partner, junior partner in this conversation, were ready to give up ownership and equity to have some guidance, uh, a little bit more expertise and some accountability, like just additional support of their firm when there are Consultants and advisors and networks of peers out there who are doing that day [00:47:00] in and day out for each other. And so really, of course, we are not trying to sell them or anyone else on collective by DBA. But I was just thinking, wow, you're really about to give up equity in what you've all of them have worked hard to build and are continuing to build, and they're not the partners, the junior partner, for sure. They're not going anywhere. They're ready to they're staying around and they're building it. They are young and, um, [00:47:30] just educating them on the opportunities of how we used, uh, one on one advisory relationship to help us mold and grow DBA into what it is today, how we have surrounded ourselves in mastermind groups with other accounting firm owners, talking through the challenges and building those relationships where we can pick up the phone and say, hey, I don't know, I have this client who brought me this and needs help with this, but [00:48:00] I've never done it and be okay with, um, supporting them in that way and calling on friends to help.

Marcus Dillon: Yeah. No, you're. Couldn't have said it better. Um, so one, you know, we just opened that invitation to maybe you're listening to this today and you have questions about M&A. Like, I spend way too much of my waking hours, uh, learning about this stuff, and I even I didn't tell you this, but I was like, maybe I just need to go back to school. Maybe I need to go back and, you know, get an investment banking degree. [00:48:30] Um, the University of Chicago Booth School of Business. Apparently, they have a course on how to buy and manage accounting firms and do a private equity backed roll up, because if you pay attention to the people on these and look at their LinkedIn, look at their college, uh, Booth School of Business. You see some Harvard guys every once in a while, and, you know, you may be there to prove out this MBA thesis that they had that now they're trying to employ. [00:49:00] But, uh, but all, you know, all joking aside, uh, we really do count it a privilege. And, uh, we're thankful for the friends that have trusted us enough to help guide them throughout their business ownership and their firm ownership. And then all the way through, seeing them, uh, really exit on their own terms. And I would just leave everybody, um, today, um, all of these are unique. Um, and they're just as unique as you are. And you [00:49:30] have to find the right one that works for you. And you, um, you can't compare yourself to others. Um, we set it a lot this past week at the recharge event. That, uh, comparison is the thief of joy, right? And so I would just encourage anybody that's going down this path to find the right one for you. Find the advisors that will help you dissect and know you best, and ask you the hard questions, so that you don't have [00:50:00] to live through a hard, um, hard assimilation process after the deal is done.

Rachel Dillon: Yeah, I think we are part of an amazing industry where accountants really do want to help each other. Um, most of the time they want to help each other for free, right? They don't even value what they're sharing. That is so valuable. Um, but there are there are good people. There are trustworthy people that can offer advice [00:50:30] or at least tell you what they've done or seen in the past can share. Everybody's willing to share what not to do, like avoid this mistake I made this mistake. Don't make this mistake on your own. Um, and then also share advice that they know and have experienced. So definitely our industry is probably one of the best at sharing. So finding the right community and network of peers, um, as support as owners and leaders of firms is, I [00:51:00] think, pivotal. Um, it has been everything to DBA and to our success and where we are now.

Marcus Dillon: All right. Well, thanks so much for leading the conversation. Uh, I can't wait to have, um, you know, this kind of conversation again in the near future, I'm sure, as it always continues to bubble up as a good one.

Rachel Dillon: Absolutely. See you on the next.

Rachel Dillon: Thanks for listening to this episode. If you enjoyed the conversation and want to learn more, be sure to visit collective. [00:51:30] 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 soon!