Who's Really the BOSS?

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Rachel Dillon: This is Who's Really the Boss, a podcast for accounting firm leaders who want to grow with intention and lead with purpose. I'm Rachel Dolan, and along with my husband, Marcus Dolan, we share real stories from our accounting firm, Practical firm growth strategies, and the tools you need to lead your clients, your team, and your life well. Welcome back to another episode [00:00:30] of Who's Really the Boss podcast.

Marcus Dillon: Hey, thanks for coming back.

Rachel Dillon: And we have a very special guest joining us today, Eric Rabinovitch. Welcome, Eric.

Eric Rabinovich: Thank you so much, Rachel and Marcus. Appreciate you having me today. Hey, man, thanks for joining us. It's going to be a fun conversation. Uh, your wisdom on, uh, just banking and the process and acquisitions and all that fun stuff. I could have used more advice, um, in my earlier days, probably even more advice today. So excited [00:01:00] to learn from you. Uh, if you wouldn't mind, Eric, just giving a brief kind of intro to yourself and then we'll jump in. Yeah. Appreciate it. Thank you again. So for, uh, for everyone who does not know me, my name is Eric Rabinovich. Uh, you want just the professional or a little personal?

Rachel Dillon: We love all of it. We'll take it.

Eric Rabinovich: All. Um, well, so I'm based in Washington, D.C.. Uh, I've been here for about 15 years. I grew up in the Boston area, though, um, I do have [00:01:30] some roots to Texas, though. My older brother lives in Austin. And, uh, interesting timing today is actually my grandmother. I'm fortunate enough to still have a living grandparent. Uh, today is her 95th birthday, so I had a chance to call her and family's, uh, important to me, but, um, yeah, partner and I live in DC. We love to foster senior pets, uh, adopt and foster, um, very passionate about travel. I'm on my third passport. [00:02:00] And yeah, I'm very passionate about small business as well. So very excited to get into it and learn a little bit from you both as well. You, you've bought several firms. Um, so I would love to learn, you know, a little bit about how you structured those. And so we'll get into all of it.

Marcus Dillon: Yeah, we'll share only the, the mistakes. So, uh, that's more of what we have to share, uh, than the win. So, but it'll be fun.

Rachel Dillon: Yeah, absolutely. Um, Eric and [00:02:30] Marcus said he would like to learn from your wisdom. And so we ask every guest, what is the best piece of advice you've ever received? So will you share with our listeners about the best piece of advice you've ever received?

Eric Rabinovich: I will, I have to clean it up. I think this is a family, uh, you know, family friendly program. Uh, but the best piece of advice was actually the CEO from where I used to work until last year at Live Oak Bank. And [00:03:00] they have a whole booklet of what they call isms that they hand out. So there's actually a lot of others I could go through, but one in particular has stayed with me. And it's if you have to eat something very unpleasant, don't nibble. And it's stuck with me. I think it's just a good way to think about dealing with adversity, you know? And there's other forms of this to pull off the band aid. But basically, don't wait. Don't hold off in [00:03:30] confronting challenges and ignoring problems. And, you know, I think, I think you can apply it in so many different facets in life. So that's the one thing that stuck with me.

Marcus Dillon: Yeah. That's great. Uh, it reminds me of the book Radical Candor. And, you know, just some of the stories that you reflect on and you're like, oh yeah, I wish I would have done that. Uh, I would have saved me a lot of heartache, um, earlier on.

Eric Rabinovich: So yeah. And I think you can learn from other people's, you know, wisdom by, [00:04:00] you know, things they've learned the hard way too. And that's, you know, that's, I think it translates. Yeah. For sure.

Marcus Dillon: Awesome.

Rachel Dillon: Well, super prominent in the accounting industry, maybe other industries as well. Um, but M&A activity seems to be a hot topic and not leaving the industry. So we're recording this in September 2026. Um, M&A activity has been a hot topic [00:04:30] for quite a bit now. And so sometimes we think, oh, this is just a cycle. It's going to drop off. Um, I don't think it's going anywhere for a while. And so you and Marcus were actually talking, um, just having a conversation between the two of you, which encouraged us to invite you to be a guest here. So, Marcus, do you want to give a little bit of background about y'all's Conversation. And then, Eric, we can kind of go into some questions with you as well.

Marcus Dillon: Yeah. Um, part, [00:05:00] you know, friends like Eric, um, we just love to learn from and, you know, whether it's, hey, how are you seeing things evolve structures that that's been part of the biggest evolution in the last three years with, uh, new types of capital coming into our space. Uh, love to talk about like valuations and where those are in the current market. And, uh, just like we've told clients, we'll tell like friends and peers, like if you want to know what your business is worth, go ask a banker what they'll lend on it. Um, so that's [00:05:30] an easy way to get a valuation. Uh, it's an easy, cost effective way to get an evaluation. So, Eric, you know, we always just kind of keep friends close and it's like, hey, what are you seeing? Like, what should we be aware of? And even how some firm owners, leaders are thinking about things like alternative practice structures, a very real thing. Uh, as you have team members now and a CPA firm who aren't CPAs that are really good, and maybe once upon a time would have been considered like an alternative [00:06:00] owner, uh, a non CPA owner. And even that, like you ask the bigger question, do we need to be a licensed CPA firm anymore? And what would the buyer look like if we weren't a licensed CPA firm? So all of those things, like friends like Eric are great. Um, you know, just pulse check of what's going on in the industry and friends, thankfully, we've always had friends that have come to us because we've done some M&A over the last 15 years, but also it's just like, hey, what are you seeing? [00:06:30] I have this opportunity or I want to pursue this. Um, we've thankfully been in, in that seat of advisor for some friends. And so I always like to share wisdom from our friends too.

Eric Rabinovich: Yeah.

Rachel Dillon: Eric, you have, um, kind of a unique stance or a unique position in that you work with and think about firms that are in a little bit different of a revenue range, maybe than what's highlighted on LinkedIn or highlighted in the news articles. [00:07:00] And so will you give a little bit of context around that of who you really enjoy working with, who you actually work with, what you are passionate about, kind of looking at and making possibilities.

Eric Rabinovich: Yeah. Of course. Happy to expand on that. So I focus on accounting and tax or I should say just professional services. It happens to be mostly accounting and tax, but occasionally that'll also include independent insurance agents, wealth management firms. Um, but look, [00:07:30] I come from small business lending. And so I know small business can be defined in slightly different ways depending on who you ask. To me, most of the transactions I work on, they top out. And these are unusual. This is, you know, it does happen, but the upper limit would be like 7 or 8 million. The average is probably about 7 or 800,000. So in terms of the size of the firms that I usually work with, they're doing anywhere from [00:08:00] a few hundred thousand in revenue up to five plus million. But most often it's in that 500 to 500 K to 1 million range. Um, the reason for those numbers are twofold. One is you've got the SBA program, which is the product that most small businesses look to. There's other options. So I don't want to make it sound like that's the only option. But when, when a small business is buying a firm, that's usually the first type of product or [00:08:30] option they'll talk to, and it'll usually be through their local bank down the street or where they have a business checking account. Um, so that's number one for, for why, you know, that's the range. But also like, if you look at the bell curve, if there, if it's true that there's roughly 100 000 accounting and tax firms in the United States. The vast majority of them are going to fall in that 300,000 to 700,000 range. That that's the meat of the [00:09:00] bell curve. And then once you start getting into, you know, 1 million, 2 million, that's actually, you know, several standard deviations away from from the median. So, um, but yeah, that's, that's where I tend to focus. I'm not, you know, working with private equity, not that there's anything wrong with private equity, but I don't typically work on those types of transactions.

Marcus Dillon: Yeah. Well, and I think it's professional services and now accounting industry like those ranges hold. But it just in general small business in America [00:09:30] is that bell curve, I believe as well. Right.

Eric Rabinovich: Yeah, exactly. 100%.

Marcus Dillon: Yeah. And while while the CBI's Grant Thornton Mega-merger gets the, you know, front page news, um, feed on LinkedIn, that's not that's not the majority of transactions that occur, uh, in our world anyway.

Eric Rabinovich: Exactly. And so this was the first year I went to scaling new heights, uh, down in Orlando. And, [00:10:00] uh, Joe Woodard made an interesting point during one of the, I think it was lunch, uh, one of the, the days there. And he stated how if you look at the IPA's top 500 list they put out every year, uh, I think this year, if you looked at the 500th firm on that list and they tell you what the annual revenue is for each firm on there, but the 500. And it's probably safe to say that it there's a lot of firms that [00:10:30] don't participate. And so it's probably, let's just say it's the thousandth largest firm in the United States. If they're doing around 6 million in revenue. I mean, that gives you a perspective of where everyone else falls, right? So that's exactly right.

Marcus Dillon: No, it's it's spot on, man. And I noticed that too. And, um, you know, that IPA 500, that number 500 that was right above 6 million as soon as CBS and Grant consolidate and they move up to one, that person's 4.99 [00:11:00] and invite somebody new onto that list. So it's, it's interesting what's happening, especially in that top 100 bucket. Um, but like you said, it doesn't, it doesn't impact a lot of who we are or our friends or people who are listening today. Um, it's always great banter, you know, to kind of know what's going on, but, um, but yeah, like would love to dive in and speak a little bit more about like who we get to serve and who we get to do life with.

Rachel Dillon: Yeah, for sure. We have, um, we [00:11:30] have a lot of listeners and a lot of friends, um, within collective and just in the industry that they, they find it challenging, they reach a point where they're just below A million in revenue. And there they have their eye set on. They want to hit that watermark of 1 million top line revenue. And so, um, as we think about that, we're thinking about bringing additional revenue in, not necessarily [00:12:00] spending money, but why should those firms particularly be looking at maybe acquiring a firm? Why should that even be a possibility? Maybe on their list.

Eric Rabinovich: Yeah, it's a wonderful question. And and just it might be an odd way to answer initially, but I do want to start by saying it's not the right move for a lot of people just because others are doing it just because it sounds interesting. I mean, it's a big decision, right? I think [00:12:30] buying a small business isn't just about growth. It's about culture. It's about fit. It's about scale. Do you have the systems, the people to do it, the wherewithal? Um, so it is important that people understand. You know, before you really consider doing it, just talk to folks who have done it. Evaluate, put yourself in their shoes. Does this make sense? I think to answer the question for why you would want to consider it, I think you alluded to it, which is as you grow, especially [00:13:00] as you reach, you know, year five, six and beyond, naturally you're you're going to enter a different life cycle or stage of, of your business life cycle. You know, in the beginning, it's normal to grow 50% year over year or 100% year over year. That's normal. If you're starting from zero and then you know, you've got 50 K in the first year, and then now you're at 100 K, that's going to stall out. You're not going to be able to continue and sustain that pace of growth over time. And so I [00:13:30] think naturally what happens is when you start to get to 1,000,002 million, it's it's okay to continue to grow organically.

Eric Rabinovich: I don't think there's anything wrong with that. There's always new ways you can, you know, bolster growth, whether it's niching down or, you know, merging. I mean, there's a lot of different ways you can grow, you know, marketing. There's some fabulous, you know, lead gen firms that specialize working with accounting and tax companies. But the point [00:14:00] is you're probably going to reach some level of plateau. And again, that's fine. I don't want to make it sound like growth is you don't have to grow. There's nothing wrong with reaching a certain cruising altitude and just being happy with that. I think that should be celebrated. There's nothing wrong with that at all. But if someone does want to think about another way or a novel way to grow, I think acquisition can be a fabulous lever. And the demographics, by the way, right now in the market, [00:14:30] I think are very favorable, meaning a lot of CPAs who own firms, they're getting up there in age and I'm sure I'm not saying anything that isn't well known in the industry. But you know, now, five years ago, AICPA put that old statistic out about how in the next ten years, you know, 75% of CPAs are going to reach retirement age. Well, it's been about half of that time. And yeah, you know, people are living longer. [00:15:00] Uh, so the firms have to go somewhere. I think it's a tragedy. Like, one of the things I hate to see is an owner who doesn't know that, you know, he or she has an asset that is valuable and people will pay for it, and they don't really plan for their succession.

Eric Rabinovich: And they just shut down and they just, you know, hand folks off to other colleagues or former colleagues or, um, I've seen that happen before, but, you know, to be able to [00:15:30] step in and buy that firm, uh, especially if you have a firm yourself right now where you already have cash flow, you have processes in place, you have people. What might be a surprise to some is you could potentially do that without even putting any of your own cash in. Yeah. And again, I'm not making it sound like just because you can do that does not mean you should. But it's a really powerful option, right? You can potentially go buy a firm and literally double [00:16:00] overnight and not have to put any of your own capital in. I'm not trying to oversimplify it. There's a lot that you need to do, and it's probably going to be one of the hardest things you will do, but it's also a wonderful tool. If it works, if it fits, if you know it's right, if it's the right, uh, seller, do you have that right level of trust and rapport and, you know, the right culture, all of those things have to align. But yeah, I do think it's a really awesome option if it makes sense for the individual.

Rachel Dillon: Yeah, [00:16:30] I'll, I'll echo that, um, from, from a different perspective, from the firm owner perspective. I actually talked with a business development sales expert. We'll call him and was asking him, what are accounting firms? What are our best options for growth? And we were talking about organic growth. And he really just told me, you know, all of these things that I'm sharing as far as marketing, marketing plans, [00:17:00] hiring people, outsourcing things, turning on paid ads, turning on some type of lead gen service. All of these things take so much time. So if you're looking to grow, like I think he said, in less than a year, right? You want to have a significant amount of growth in under a year. Then you need to look at acquisition. You need to look at inorganic growth. That's going to be your only option because all of these other [00:17:30] things that you're going to turn on are going to take six months before you see anything, and at least a year before you see significant gain from that. So as we think about all of these organic clients that are coming in for our firms, you know, on a weekly monthly basis, that's years and years of work built up over time.

Rachel Dillon: So to think that we can just throw money at something and clients are going to start jumping in to [00:18:00] our firms, our online form fills or into our inboxes. That's not, uh, that's not a realistic way to think about it. So like you said, it may be the hardest thing you ever do as far as acquire a firm, because sometimes the fastest solution isn't the easiest solution long term. Um, but if it is something where you are looking to try something different that you haven't done before, or try something different to get [00:18:30] over a plateau that you might be at, um, that was actually recommended by someone who was not a bank, not somebody who was trying to lend money, or someone who was trying to get a deal done. They were, um, completely unbiased from that respect. So totally echo your sentiment there of that's a very good option for people who are looking to increase revenue, um, without going through kind of a year long process with a lot of investment, um, and time of waiting. [00:19:00] Yeah.

Marcus Dillon: That's really good. I think, uh, the term that's thrown out there is the silver tsunami, right? Like all the boomers that have to do something with these businesses, not just accounting, but are now coming on the market or will in the very near future, uh, solving for that. The interesting thing is, even if you take like our 15 year journey of leading a firm and the different M&A that we've done in 2011, at the age of 28, we started up this [00:19:30] process and I was working in a firm, probably on the partner track, but had no idea I was on the partner track. There was not great communication in that, uh, what my future held there. And so I started to look outside the firm for opportunities. I started to do a, um, a search fund, if you will, before that was even cool. And, um, did, did some, looked at all the broker listings, kind of did my own search. Um, at that time, you know, in 2011, found [00:20:00] an older CPA that was retiring. He had already listed his, um, practice for sale once, took it off the market because he went through some health scare and then kind of came back. Um, I had actually written letters to CPAs of firm owners that I, you know, kind of identified. And he was one of those CPAs. And so even in that it was a $400,000 acquisition, um, we were really just looking to replace my income. And I see that [00:20:30] a lot now. L it's cyclical in in the world that we're in, because you have some of these firms that are merging together, it's just not conducive to where this person's career path could go.

Marcus Dillon: So then they go out and they want to buy a 250, 500,000, $700,000 firm with the goal just to replace their salary, maybe create more revenue, maybe create more flexibility. That was us 15 years ago. Right? So that's option one. Option two. The the most recent [00:21:00] acquisitions that we've done were because we came upon this hurdle. And for us it was 3 million was that hurdle and was like, we don't want to do this anymore based on like the roles that we have today, we want to bring in additional team members and we want to break through this $3 million hurdle faster than organic growth will allow. And so we identified acquisition as being able to do that, that IP, a top five, top 500, it showed organic growth was around 8%. [00:21:30] You couple in M&A, it's more than 20. So even the largest firms are doing this. So no different than where we're at. But let's talk about option one because that's kind of in line with the silver tsunami. This is where we were 15 years ago. Somebody that's coming out of the job market was a senior manager at a firm looking to start their own business. They've identified a $400,000 client block, small firm. That's just it fits [00:22:00] on everything that they can do. What options exist for that 28 year old and how should they prepare for that $400,000 acquisition?

Eric Rabinovich: Yeah, so I would say the first option for them is probably going to be seller financing. So you. I will say this is in my experience and observations of the marketplace, I think it's less common to find. I think, by the way, the reason it's less common is because sellers know they're getting calls from brokers. [00:22:30] They're they're seeing their other sellers, you know, walk off into the sunset, so to speak, and getting large paydays. But I think they, they, they know what they can get. But it's not always the best option to, to work with a bank. And so, you know, you have to find a seller willing to do it. And then you have to agree on terms that work for both you and for them. But being able to get seller financing, if you find it is a wonderful tool, you don't have to deal with the bank and [00:23:00] all of that underwriting. Usually the terms are a little more friendly insofar as you can have your like the amount you pay the seller, it could potentially be based on a percentage of receipts each year. So, you know, it doesn't matter if you know, it's a slower year, it's a better year. It's going to be a percent. You don't have to stress about, okay, my monthly payment is, you know, X amount every month.

Eric Rabinovich: What if it's a slow month? Mhm. Mhm. So so that's, that's a good option for [00:23:30] folks if they can find it. I think the if is doing a lot of work in that sentence, but I've seen it done. It is, it is possible. Um, I think more realistically, more common. What ends up happening is you go get bank financing. And SBA is one option. You could potentially find conventional financing, uh, through a local bank. The big difference between SBA versus conventional is going to be you'll put [00:24:00] more cash in if it's a conventional non SBA loan, not a bad thing if you have the cash, right. Lower debt, lower monthly payment. The other part that can be a challenge is the term of the loan is shorter. So a conventional M&A loan, non SBA you'll probably find terms between 5 to 7 years. There are some lenders who will maybe go up to eight 910. There's not a lot of them. You just have to know the right lender. With SBA, the [00:24:30] benefit is it's a ten year term, so the monthly payment will be lower because it's getting stretched over a longer period of time. And you don't have to put in as much cash so you can get up to 90% financing 95, if you count the fact that half of the 10% equity that's required can actually come from the seller.

Eric Rabinovich: If if the seller agrees for for the seller note, it has to be on standby for the life of the SBA loan. So if you can get the seller to agree [00:25:00] to that and a lot of them will agree to it, um, brokers know what buyers, you know, requirements are for these SBA lenders. So they tend to work within those confines. So you could potentially go buy that 400 zero zero $0 firm to use your example, for about 200 $0 out of pocket. And then the seller has a $20,000 loan for the remainder. And you know that 40 K, that's the 10%. Obviously, we're using simple numbers and rounding here. You have to account for [00:25:30] working capital and all that. But I think some folks might be surprised to hear that, you know, you can go buy a $400,000 firm for, for 20,000. I mean, and I don't want to make light of the fact that if you're 28, you know, 20,000 is a lot of money. You have to save that up. You might have student loans and, you know, cost of living is going up and all those things. But but it's more accessible, I think, than some people realize.

Marcus Dillon: Yeah, no, that's great. And I remember those days. So I started that process at like 26, 27 [00:26:00] just because out of frustration and, you know, knowing that I wanted to kind of own a business started looking at what options. So I actually went to the broker and said, hey, how can I get pre-approved? Like who, who am I going to need to know once I find a firm? Because I felt like it was very similar back then. You would find a firm and unless you were really ready to jump on it. There wasn't like a ton of negotiation. That firm wasn't going to be available forever. So you had to do almost [00:26:30] like a pre-approval process, like you were going to do for a home. Um, you know, as a family, we were also preparing for it. So it was like trying to knock out the debts that we could build a better credit score because you're going to personally guarantee the loan and all that fun stuff. And then like you said, you're going to need some type of down payment ours in that ours was exactly 10%. So we needed a $40,000 down payment, $40,000 was the seller note. And then the bank financed 80%, and it was a $320,000 [00:27:00] loan through a bank that we were introduced to through the broker. But obviously, we didn't go through the broker for the transaction. So what does that look like today? Is it very similar where you want to make sure that you kind of have your ducks in a row, you have this pre-approval ready to go process. So when the right firm does come up, you are ready to move 100%.

Eric Rabinovich: You're you're spot on. A lot of what you just described and what you went through, I would [00:27:30] say, hasn't changed tremendously. But what has changed is it's a lot more competitive, I think, meaning there's a lot more buyers out there and maybe not as much for, you know, the three, the four, the $500,000 books. As you move up that value chain and you're looking at larger, more sophisticated firms, the level of buyers in the market are I think they're at its all time highs. It's a it's a seller's market, truly, but that makes it even more critical to do exactly [00:28:00] what you're getting at, which is preparing, you know, how do you make yourself stand out? You know, talking to the lenders early, understanding what they need, what do you need to present to be able to get approval? Um, and then, you know, being able to go to, if you just put yourself in the shoes of the seller or really if it's a brokered deal, their broker who's acting as that intermediary. If you have two buyers and it's probably more realistic to say they have like 100, [00:28:30] and I'm not exaggerating in some cases, but just in a simplistic scenario, two buyers, one is saying, hey, I'm interested in the firm, you know, here's my offer. And then in the other, it's you who you've gone to the bank, you have a pre-qualification letter. You already filled out the personal financial statement and you're preemptively including that showing the broker, hey, I have I'm good for the cash. Here's, you know, a clip of my brokerage or my bank statement. [00:29:00] You're going to look a lot better and more prepared. And that's sort of differentiation matters when you're competing with, you know, 40, 50 plus other buyers out there. And so it is important to do the work upfront. And, um, and I think it doesn't guarantee anything, but all you can do is control the variables that that you control. But that's the best way, I think, to help yourself stand out.

Marcus Dillon: Yeah. And just being ready to show up day one. Hungry, right. I think the other thing [00:29:30] that, um, was in our favor at that time was there were no other clients that we were serving at that time. So we were able to jump right in and solve for that owner having a clean exit. And I know as sellers, they think about, okay, I'm going to sell it. If I go to this private equity and I'm going to tuck in, I'm an additional office, I have to go work for them for a little bit of time. Versus if you have this person who you joked 100, 100 potential buyers, but you know, ETA or [00:30:00] entrepreneurship through acquisition is so popular in a lot of the business schools now. And it's, you know, not necessarily 2 to $5 million. They're buying businesses all over the place and, you know, doing roll up strategies and all of that. So, um, there are a lot more educated buyers than there ever have been in this market, which is really it's just interesting. That's who you're competing against if you are a buyer.

Eric Rabinovich: Yeah. Agreed. There's there's a there's investor backed buyers. Um, I mean, yeah, roll ups, [00:30:30] like almost call it, I call it micro PE where, you know, it might be a firm just like yourself, but you know, they've, they have like a acquisition arm where they're just going out and gobbling up, you know, three, 4 or $500,000 books over time. But yeah, it's, it's an interesting marketplace for for sure. It's evolved a lot. I'm sure over the last 15 years that you've been in it, and certainly I've been lending to the market for about five years now. Um, I've been in SBA lending broadly for 15, [00:31:00] but accounting and tax in particular for about five. And it's even in that time frame, it's been very different now compared to five years ago.

Marcus Dillon: You know, it's funny that we think that this time is different and that it's moving so much faster and that it but so many similarities from what it was 15 years ago as well. They're just maybe more more educated buyers in the market. But I remember a lot of the same, um, back then, especially at that seat, just wanting it to happen so [00:31:30] much. And I see that it's just the cycle of now people leaving the firms because there was a, a big combination in these top 500 firms. And this person doesn't want what that means. And then they, they figure out that they're more valuable to themselves and their family on their own versus working as a senior manager for five, ten years until they have the right options. So, Rachel, do you have anything to weigh in there because you live through that as well. So maybe you have a different, uh, [00:32:00] you have a different perspective.

Rachel Dillon: Yeah, no, I was just thinking about, um, an email that came through from the author of Atomic habits and, uh, one of his points, and that was probably today because today's Thursday as we're recording. But one of his points was that the level of enthusiasm significantly increases the level of opportunity. So thinking about the preparedness and how much you wanted that to work in all of those [00:32:30] types of things. Um, as far as kind of the age, and I will say you are still newer in the, in your career and in the industry at 26, 27, 28 years old. And so, um, I think that that opened up, right? A lot of opportunity to get started and then to continue to grow. But Eric, when we think about, uh, a firm owner or current firm owner who wants to buy another firm and they are going through a [00:33:00] bank, they're not just purchasing it outright. What does the bank actually underwriting for them?

Eric Rabinovich: Yeah. So this, I wish this was more common Knowledge and I don't know why. It's. I don't know if it's a combination of. Gatekeeping or maybe banks just. I mean, certainly when you go to a bank's website. You know, they'll tell you what products they have, but they don't tell you what you know. Hoops you have to go through to, to get them [00:33:30] right. So you can't look up on a bank's website. What's your minimum debt service coverage ratio or, you know, tell us your credit box. But but the fact is they're pretty similar from bank to bank and even more so, I would say. In the SBA world, where there is one governing set of rules that every SBA lender has to follow. Now, I will also say that even within the context of that one set of rules, there are different interpretations. And so it's not it's [00:34:00] certainly not monolithic. You could take one deal to ten different lenders and get 15 different answers. Five of them might say, yes. The other five, you know, you might get a few maybes, but Nonetheless, the rules are the same and consistent. And what they're really going to look at. I'd say the number one most important thing, but there are multiple. But I'll start with the debt service coverage ratio. And I start with that because everything else could be perfect. But [00:34:30] if that isn't at or above what the minimum debt service coverage ratio is and all that, that term simply means it's the cash that's available to cover the debt. That's what the banks looking at does the business you want to buy with the loan we're going to give you, does it generate enough cash flow at or above this minimum ratio? And I'll explain it in a second, uh, to cover the debt and then some.

Eric Rabinovich: And that's really the most important question. I do [00:35:00] want to stress that there's other things that come into play, but you want to start with that because again, if that isn't at that minimum or higher, the other stuff doesn't matter. It doesn't matter how much they like you. It doesn't matter how much collateral you have. The SBA program, it's a cash flow based lending program. So you have to start with that. So 1.25 is the general minimum. One thing I'll mention, by the way, is we're recording in early September. [00:35:30] On October 1st this year, a new set of rules takes effect, which changes some of the rules that have been in effect for about the last month, year and a half since, I think July 1st of 25. And that's normal. The SBA changes the rules up every couple of years. So there's nothing crazy going on here, but it does shift the rules a little bit. What might have worked on September 30th, you have to tweak the deal structure for it to work with [00:36:00] these new rules. But I wouldn't say anything too radical is changing. It's really, if anything, the SBA is making things a little more conservative and dealing with some of the higher default rates that we've seen over the last five years. Um, and so, so let's go back to debt service coverage ratio. So let's just take that 400 zero zero $0 sized firm. Um, and Marcus, I think you said the loan amount for you was about 320.

Marcus Dillon: Yeah, it was 80%.

Eric Rabinovich: Yeah. [00:36:30] So if you take 320,000 and you, you could pull up any simple loan calculator, um, online because there's only really three numbers you need to use. It's the loan amount. It's the term of the loan and it's the interest rate. And so if you pull up a simple I'm just using loan. I use calculator.net. Really simple website. But if I, if I plop in 320 000 for the loan amount, [00:37:00] it's a ten year term and the interest rate is usually prime plus two. So today the prime rate is 75%. So add two. That's 8.75. The monthly payment on that comes out to about $4,000. That's the monthly payment. So let's annualize it. So you know, four times 12 it's going to come out to about 48,000. And that's the principal and interest. The bank will call that your annual [00:37:30] debt service. Yeah. All right. So if most banks want to see that you're clearing a 1.25 debt service coverage ratio, they want to see that for every dollar you're paying them, there's $1.25. So you can just take that 48,000 and multiply it by 1.25. You'll get 60,000. So the simple takeaway is to meet or exceed that minimum DSR number on a $320,000 loan, the bank [00:38:00] will need to see the businesses generating 60,000. And you can apply that on, you know, any loan amount you want, but like that 1.25 number is is the most important number at the end of the day. I'll pause there. But you know that it is that simple.

Marcus Dillon: Well, you know, I think I was so fortunate to be able to do that. Um, you know, go into business ownership so young because then it helped, you know, advise clients on different acquisitions. And, um, [00:38:30] you know, even in that sense, the $400,000 practice really should be paying the family, plus having about 60 to $75,000 of excess cash to really make the bank feel comfortable or, you know, Rachel taught during this time in our, uh, our family. And so, you know, we could have really lived off of her salary and, um, all that fun stuff as a young family, but still, we were just looking to replace the wage [00:39:00] income from my previous employment. Right. And so like, that was the goal during that time, Obviously it was a lot easier to use somebody else's capital, both a mix of, you know, the seller's 4000 plus the bank's 320. And it was it was an easy call at that point. If you fast forward, you know, a lot of our friends where it's even what we did like to break through the 3 million and to get to a $5 million revenue firm and have the budget for team members, that a $5 million [00:39:30] firm allows us just thinking through, you know, the difference there. We did one acquisition where it was there was seller financing, and then I used capital of the firm and myself to to solve for that. And then I was like, you know, if we do another one of these, especially a larger one of these, I don't want to tie up my own capital, you know, and we've got other stakeholders in the business, other team members that are participating. So what does that look like? Do I lend money to the business? So we actually, you know, at [00:40:00] that time, the second time around, we were like, no, we're going to go Do a portion seller, then we're going to do a portion with a bank.

Marcus Dillon: And we were able to do a $1.5 million firm. Um, did a down payment with the bank of 120,000. The bank lent us the other 480, so 600, 000. And then the rest was seller note and it was quick seller notes. It wasn't like somebody was financing it for 30 years, but they were fast. [00:40:30] Every year you're paying a third, a third, a third, pretty much so. But we were able to close $1.5 million acquisition with really only 120,000 cash out of pocket. And so they were able to look at our existing business. And, you know, obviously there's no debt on that existing business. They were looking at the cash flow of a $3 million firm factoring in growth, saying at a $5 million firm, what would that look like? So let's think through that because we have a lot of friends that get maybe [00:41:00] stuck at right at 2 million And they're like, what options do I have? I need to bring on a director of tax, a director of accounting. I can't do this anymore. And organically, if we're going to go that route, I have to take a pay cut in order to afford these people that I want to do life with. So a lot of people at 2 million, 3 million start looking at acquisitions of $1 million. So what's the what's the difference in that scenario? And what options even exist from a lending perspective, [00:41:30] whenever you come together and bring two businesses like that together.

Eric Rabinovich: So the, the biggest benefit you'll realize as an existing firm owner, and going back to my point about the rule changes that take effect in October, the. There's this notion of an expansion. So the SBA. And just to be clear, if you don't meet the definition of an expansion, that's fine. It doesn't mean you can't buy another business and acquire. That way. It just means [00:42:00] you do have to solve for that 10% equity. But if you meet the definition of an expansion, which is generally that you've been in business for at least two fiscal years, and it's the same. This is one of the the benefits in the rule changes, but the NAICs code, that six digit code that we all see on the top of our, uh, 1120 or 1065 returns, it had to previously. So up until September 30th to be an expansion, you have [00:42:30] to meet pretty much all six digits based off what the buyer's return shows and then what the, you know, your as an existing firm, what you show starting in October, it's just the first four digits. Yeah, I think they call it the subsector, the NAICs family, but it means that it doesn't have to be as precise of a match. And if so, if you meet that definition of an expansion, you can get it's at the discretion of the lender. So they have to approve it. [00:43:00] But if they can get comfortable with it, you could get up to 100% financing and not have to put any cash down. Now, I want to be really clear about this, that that is a lot of leverage. And just because you can do that does not mean you should. The numbers have to make sense.

Eric Rabinovich: It has to just be something that when you look at the numbers, you know, the math pencils out and all of that. But that's a wonderful option to have, which is only available for [00:43:30] existing home owners who are looking to buy. And if you meet that, if you meet that definition. But again, even if you don't, you can still do it the way we described for that first example where you're just coming, even if you're doing it as an individual, as a first time buyer, you can do that as a firm owner. You just have to make sure you're, you're solving for that, that, that 10% equity. But here's the other benefit to your point as an existing owner. The bank gets to look at all [00:44:00] of the cash flow. So the fact that you're already running a firm generating profit, that's going to help you, right? It'll help. It actually allows you to have more flexibility in the size of the firm you buy. There's going to be more cash flow, meaning you'll be able to support a higher purchase price. Right? So it just opens up more doors. Ultimately, the bank still has to be comfortable with it. But but that is the the big [00:44:30] benefit. You know, you have a slight advantage as an existing firm owner. Um, not to mention all of the qualitative elements to where you already have team, you know, staff in place processes, tech reputation, probably some kind of, you know, customer acquisition, uh, process and system in place. So that all I think separates. I mean, it's easier to do it for the second and third time than the first time. Well that's good.

Marcus Dillon: Well, and those changes, October 1st. That's interesting because you see, you see firms [00:45:00] in the market like nickels calling and what they're building. And you see people who are taking a CPA firm, what was once a legacy CPA firm and bolting on insurance or RIA or some other type of consulting. And so it's just more of a professional services company business versus going further into accounting and tax, especially if there's a hedge against the accounting and tax stuff that could phase out with technology. Um, it really, it really opens [00:45:30] up additional opportunities post October 1st that, that.

Eric Rabinovich: Uh, the fact that you bring that up and you mentioned alternative practice structures earlier, we are seeing more sophisticated buyers and that includes non CPA buyers, but it also includes one of the trends I want to confirm that I'm seeing that you just brought up are non it's actually coming from two different sides. So accounting and tax firms expanding outside of accounting and tax [00:46:00] into insurance or wealth management, but also the opposite. You could be an insurance agent expanding into accounting and tax or a wealth management firm. I think I'm seeing that honestly, the most developed, the most common emerging trend is either accounting and tax firms wanting to get into wealth or vice versa. Now that's easier said than done. It's a highly regulated industry as is, you know, being a CPA. And so there's [00:46:30] a whole set of licensing risks that you have to make sure you're familiar with and that you can clear and make sure that the, you know, the bank is comfortable with that as well. But that is things where that's exactly where you see accounting or sorry, alternative practice structures come into play. But the arbitrage you can realize from doing that is actually quite remarkable because I don't know if you're aware of this, but the sales multiple of a wealth management firm, when you [00:47:00] compare it to what a typical accounting and tax firm does, it's orders of magnitude higher. So the benefit from an accounting and tax firm expanding into that new line of business can be actually it can drastically increase your ultimate, you know, exit price and enterprise value should you want to exit and sell at some point in the future. Yep.

Rachel Dillon: Yeah, that's that's great. Um, great to know as we come up on closing [00:47:30] out the episode, we like to leave people with some practical advice as well as additional information. I'm sure they have heard a lot of things that they might have not been familiar with, or might have been hearing for the very first time. Um, if someone listening thinks they want to acquire a practice in the next 1 to 2 two years. What would you suggest they start doing this month or. Or do this month?

Eric Rabinovich: So I [00:48:00] would recommend a few things. One is if this is your first time doing this, if you've not bought a firm before, you'd be surprised at how forthcoming folks are. If you just ask them about their experience. So talk to folks who have done this before. Um, usually you'll learn something you didn't know. It'll help you prepare. So I do think just the point I made earlier about making sure it's the right move for you. I [00:48:30] wasn't just saying that. I think you really and this is a great way to do it, but like, you know, talk to someone who's gone through the process. Ask them what they regretted, what they wish they knew now, or you know then that they know now. Um, but then the other thing is if you're really serious about it, you know, you want to, it's all the, the basic things you want to make sure your finances are in order. You know, maybe hold off on a massive purchase that's going to drastically impact your Fico score. You know, banks are [00:49:00] going to look at all of this stuff when you formally apply.

Eric Rabinovich: Um, obviously if you're thinking a year or two down the road, you've got some time, but, um, I think also just understanding where you are today and what can you afford, you know, actually build, like build the scenario that, you know, works and also disqualify scenarios that based off where you are today aren't realistic. If you only, for example, if you only have $50,000 [00:49:30] of cash saved up and your dream is to go buy a $5 million firm, well, that's, that's probably going to be hard to do, right? If you do that, if you solve, you know, work backwards from that 10% equity injection, a $5 million firm, you're solving for 500,000. And so, you know, just understanding what the limitations are. Um, and I really like the point Marcus made earlier, which is, you know, talk to your local bank. You [00:50:00] know, banks generally don't charge you like lawyers do by the hour. So you'll get a lot of free education. And, you know, you might also have a wonderful resource for the time you're ready to start moving and, and going after a firm.

Marcus Dillon: And I think about Eric, you know, like one of the best things that I ever did was ask the broker who the lender was that would, you know, be the best person to talk to. Because we didn't source the firm through the broker, we were able to go direct to the lender [00:50:30] after we identified the firm. So now you can be that person for a lot of people, right. And so I think that's the goal in, um, you know, our conversations and then obviously bringing it on to the podcast and being able to share it that way is because we've seen what you've been able to do, you know, for friends and peers and believe that you can be that person. If people do have questions, if they do want, hey, can you help me just look through this and like hash [00:51:00] it out. And I think you've, you've put put yourself in that position for a lot of people. So I don't want to downplay that. That could be you.

Eric Rabinovich: Yeah, yeah. I don't think I actually mentioned what I, what I do, but you're absolutely right. I basically do the same thing I did when I worked at a bank, but I'm a loan broker. I'm a debt advisor. So I will help. Yeah.

Marcus Dillon: Independent. Right. So you can, you know, where as opposed to just a banker who works for a bank can only work [00:51:30] with what they've got in their own toolbox. You're able to know you brought up the ten different banks and the 15 different options, right? So I think your independence also allows you to really help that potential firm owner a little bit better than just being a banker.

Eric Rabinovich: That's that's that's right. And I would also add, I generally get paid a referral fee from the bank where I end up taking the deal to. So my incentive is to be very direct [00:52:00] early with someone because I'm not getting paid unless I can actually help them get a deal transacted. So, and I don't I say that to emphasize the fact that if there's an issue or something that's going to be glaring, we're going to discover that very early and partly to make sure we're not wasting time. But also, you know, I used to I used to work at PwC as a I was on their advisory team, [00:52:30] but I have still that consultants mindset. And I'm very interested in trying to get past like, if there's an issue, how do we fix it? What, what are what do we need to do? So that a no or a maybe turns into a yes? And that's generally my approach. But yeah, I love taking a look at, you know, deals and helping folks think through what makes sense, what are the options? Um, but yeah, I appreciate you bringing that up.

Marcus Dillon: Yeah.

Rachel Dillon: Eric, you've been so generous to, um, allow [00:53:00] people to contact you after they've listened or if they found this episode, will you tell us how people can contact you afterwards and what will be included with the show notes?

Eric Rabinovich: Yeah, of course. So I don't really use social media all that much. I don't have a Facebook or Twitter or, uh, or Instagram, but I do have LinkedIn. So reach out on LinkedIn. Um, and my website is SBA loan.com. Uh, [00:53:30] and my email is erik@sba.com. But, um, I'm even willing to put my phone number out there, but I might regret that. So.

Rachel Dillon: Well, I think, uh, a lot of us hang out on LinkedIn. So that's probably easy. And if not, email is just as great or finding you through your website. So I think those are perfect. And thank you for offering that up to people just to help them stay educated and prepared and ready for whatever that next deal they might want to do [00:54:00] is.

Eric Rabinovich: Yeah. My pleasure. I genuinely enjoy it.

Marcus Dillon: All right. Well, hey, thanks so much today for joining and all the stories and wisdom and look forward to the next conversation. Rachel, thanks for leading it.

Rachel Dillon: All right. Thanks, guys.

Marcus Dillon: Yeah.

Eric Rabinovich: Thank you both. Take care.

Rachel Dillon: Thanks for listening to this episode. If you enjoyed the conversation and want to learn more, be sure to visit collective dot CPA. You can schedule a meeting directly with me, [00:54:30] 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.