progressive firms are the key to the future of the profession.
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the disruptors
with liz farr
the world of m&a is full of disruption, distraction, and disorientation these days, says ira rosenbloom, ceo of optimum strategies. while the headlines focus on private equity’s increasing role in cpa firm acquisitions, two new types of acquirers are playing a bigger role: family offices and wealth management.
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these different participants are disrupting “the more traditional marketplace, which for years has been driven by two cpa firms getting together that had a lot in common, except one was larger and the other one was smaller,” says rosenbloom. “i just think that what we’ve seen is there’s not one approach that works for everybody. we’re seeing dimension now. we’re seeing a whole bunch of choices.”
while the private equity firms have deliberately chosen their targets, “the difficulty is that the audience doesn’t understand that they’re not the target for private equity,” says rosenbloom. according to rosenbloom, private equity is most interested in profitable and progressive firms because “they can help them in a very, very energetic fashion” to have significant results quickly.
according to rosenbloom, progressive firms are defined by a menu of services that includes consulting and non-traditional services. they also have a value-oriented billing structure and an offshore emphasis. they offer well-defined career paths with leadership and professional development programs that begin soon after hire. a progressive firm also recognizes that it is not “just a manufacturer of service” but is a vital part of the business community. they also use technology to automate tasks and open up creative thinking processes.
rosenbloom notes that these qualities are also “key to the future of the profession.”
wealth management firms look at cpa firms’ acquisitions differently. while they certainly have a profit motive, “their focus is we know how we make money. we make money by getting more clients who use our services for wealth management,” says rosenbloom. their ideal target might be a tax-driven cpa firm with 2-5 partners.
rosenbloom believes we will see more non-cpas leading and owning cpa firms in the future. he also anticipates the return of the $5 to $10 million firm to regions where they have disappeared, “but with a mission statement that’s different from their current mission statement.” while there will always be a place for mega-profitable and niche firms, the secret to perpetuating “that average, wonderful firm” will be “being open to a more broad-skilled ownership group” that includes administrative, marketing, technology, and operations specialists. “you’d be surprised at some of the great ideas that come from them that take the heat off of some of the more traditional owners of a firm.”
14 key takeaways
- even though private equity firms are most interested in highly profitable firms with progressive business structures, they don’t always know enough about their targets. this can lead to a parting of the ways when both sides realize it won’t be a good marriage.
- pe firms are looking for firms in the $5 million and greater range, so two smaller firms at $2 million each could combine and grow a bit to intentionally become a target.
- transactions between large pe firms that infuse cash into extremely large cpa firms make the headlines. the pe firms want to make money, while the cpa firms want the additional capital so they can better serve their clients and staff.
- firm demographics also play a role. the founders’ group may be excited about the cash payout, and a younger group may see the additional capital as a way to keep the firm going in the long haul. however, younger partners may not be interested in sharing ownership with outsiders after working for years to build that firm.
- a smaller subset of pe firms is rolling up several smaller firms to create bigger firms. however, that requires rolling up many firms to get the kind of return pe wants.
- larger firms can be more attractive to younger people because they have the technology, the offshore talent, and the high-paying clients that allow team members to work fewer hours.
- larger firms are likely to do things differently than the smaller firms they acquire. while that different way isn’t always better, the small firm needs to park its ego if the bigger firm isn’t open to change.
- instead of starting negotiations with multiples and compensation, it’s better to start with the cultural and transition aspects of integration since these are the make or break parts of the transaction.
- discuss all concerns upfront. both sides will have fears and anxieties that need to be addressed. this is key for determining whether there will be a cultural fit.
- larger firms that acquire a smaller firm are using different incentives to inspire members of the smaller firm to be vested in success. they want people who will roll up their sleeves and work hard.
- firms must be prepared to put cash on the table to compete as buyers with pe buyers. they can also emphasize that the acquired firm will have more of a voice in the future firm without the unknown role that a pe owner will have.
- after an acquisition, clients don’t always feel comfortable with a bigger firm and may leave. this is an opportunity for another firm to pick up a $100,000 client and fire their lower 10% of clients, who may, in turn, be gold for another firm.
- to assess a culture match with a prospective m&a partner, spend time with the leadership of the different niche areas and with the future leaders of those areas, not just with the managing partner.
- the numbers are the easy part of m&a. the harder part is assessing culture fit.
more about ira rosenbloom
ira rosenbloom, cpa (inactive), the merger & succession solver?, is an expert accounting firm merger advisor who helps cpa firms of $1 million to $20 million in the mid-atlantic region evaluate and complete m&a transactions and achieve their goals. for many firms, this starts with determining which side of the deal table they want to sit on—buyer or seller. for firms that have already decided to align upwards, rosenbloom has the expertise and resources to help determine whether private equity, a pe-infused cpa firm, a non-traditional investor, or a traditional investor will be the optimal succession partner. as coe of optimum strategies, which he founded in 2010, rosenbloom specializes in cpa firm m&a and accounting practice succession planning. he offers firm leaders objective and proven guidance, advising on firm combinations, optimizing competitive advantage, improving performance and profitability metrics, deal structuring, and integration processes to maximize client and staff retention. rosenbloom is a respected leader in the accounting community across the mid-atlantic region, known for his ability to motivate internally and externally for strong bottom-line results.
transcript
(transcripts are made available as soon as possible. they are not fully edited for grammar or spelling.)
liz farr
welcome to accounting disruptor conversations. i’m your host. liz farr from 卡塔尔世界杯常规比赛时间. and my guest today is ira rosenblum, ceo of optimum strategies. how are you doing today? ira,
ira rosenbloom
we’re doing great. good to be with you. liz, thank you for inviting me. well,
liz farr
this is the what, the third time you’ve been on here and and that’s great, because you always have a lot of really interesting things to tell our my listeners and to share with the audience. well,
ira rosenbloom
now you’re raising the bar very high. we’ll see if we can meet it. well,
liz farr
i have no doubt that you will. thank you. yeah. now tell me, ira, what is new in m a since the last time we talked? well,
ira rosenbloom
a lot is new, but to capture it in a way that would be, i think, meaningful to your listeners, would be that the world today in m and a is a world full of disruption and distraction and disorientation. so it’s become much more complicated to proceed with your m and a transactions. that doesn’t mean they don’t happen. they are happening, but there are just so many different dimensions now that it becomes a longer and oftentimes more belaboring type of effort that has to be pursued. so we are living in some very, very challenging times as it relates to figuring out the right pathway that being said, you know, there are players that haven’t been here before. so the the headlines have been heavily loaded with information about private equity and how private equity is looking to become even more of a player within the cpa world. but at the same token, there are other players who are also interested in in the space. and so you’ve got family offices that are trying to figure out how they can play a role. you have wealth management companies who, years ago, made noise about this, and now they’re coming back into the game. and so on the grander scale, there are different participants, which serves to disrupt the more traditional marketplace, which for years has been driven by two cpa firms getting together that had a lot in common, except one was larger and the other one was smaller. that that certainly is a transaction that happens doesn’t always grab the same headlines. that’s the private equity ones that do.
liz farr
oh, interesting. now you mentioned some of the new players who were showing some interest in merging or acquiring cpa firms. but interest doesn’t always equate to deals getting done. so what are what changes are you seeing in the kinds of deals that actually are being consummated?
ira rosenbloom
well, i think that private equity has been very deliberate about the kind of targets that excite them, and that sort of whittles down the audience. the difficulty is that the audience doesn’t understand that they’re not the target for private equity. and despite the fact that many of these private equity organizations have a strong development component, they don’t know enough about the targets either. so time gets invested in exploration where the exploration is going to lead to a parting of the ways, because it’s really not a good marriage. and so to the extent that the private equity group and the people who are on that list are working with an expert like myself, then the filtering can happen and time can be put to preciously important use. but the private equity people do know what they want. they are heavily focused on very, very profitable or. organizations who are also very progressive in their business model, the more profitable, the better the transaction can be for the owners of the firm that are potentially going to align, and the more progressive, the better it is for the private equity organization, because their dollars can be put to very good use so that they can encourage and facilitate the cpa firm investing in not only other cpa firms and other forms of talent, but investing in ally types of businesses, whether it be human resource, types of companies, cyber types of companies, any type of business that can support the clientele of a cpa firm is what would be on the shopping list of the private equity organization. so they need to align with with firms that are comfortable being aggressive and being proactive, and of course, that’s a whittling mechanism in and of itself. so the headlines that we’ve been seeing are heavily about large private equity organizations who are enormously successful with so many of their investments infusing capital into extremely large accounting firms, which would have the platform for the private equity group to make money, because the private equity firm is interested in making money, and the cpa firm is interested in having the capital to take better care of its clients at the same token, depending upon the makeup of that cpa firm, there could be a disparity in the demographics. and you could have a founders group who are enormously excited about the amount of cash that they can get, and you may have a younger group who would say, i’m in this for the long haul, and i’m very excited because the capital will be there to take us through the long haul. but you could also have a younger group of partners who’ve said, i’ve worked all these years. i want this company to be mine. i don’t want to have these outsiders as my partners. so from the standpoint of how private equity is invading the market. they are really very comfortable with the larger firms and the larger firms who are significantly profitable, who are ultra progressive, who have taken important steps forward with technology, important steps forward with offshoring their work. important steps forward with the diversity of their workforce, so that they can help them in a very, very energetic fashion and financial fashion, move rapidly and have some significant results. so that’s been the primary type of private equity organization that has made the headlines and has made the big investments. there are also private equity organizations that have taken the pathway of rolling up several cpa firms and creating their own collaborative or trying to create their own cooperative. that’s a smaller group of people, there’s a lot of noise about that happening. and clearly, in order for a private equity organization to get the kind of return that they’re going to want, they need to roll up a lot of firms. and so it creates a lot of pressure within the marketplace where you have these roll up organizations looking to acquire firms, and you have the pe infused cpa firms who have to direct it from their pe partner go out there and get some more businesses. and so there’s a lot of people knocking on the same door, but again, i come back and say, not enough homework necessarily being done. so there’s a lot of wasted time. and that’s where i come to the point of distraction, where there’s a lot of firms who read these headlines and think, oh, my god, look at this kind of money. and the fact of the matter is, yeah, look at that kind of money, but you’re not going to be the right mate. you’re not going to show the right kind of numbers, whether it’s because your profitability isn’t there, your volume isn’t there, your niches aren’t there, and that’s been an interference that is not in the best interest of many of the smaller firms, because when they’re taking their time talking with these private equity groups, they’re not taking the time to talk to the better match, and that better match is now down the road with another firm. so as i say, it’s made it complicated. the private equity firms have also progressed in the way that they do their transactions. they’re learning as they go as well, because there’s a lot to learn. and. as they tuck in more firms, and certainly, the valuations have changed. the market in terms of interest rates has changed over the last number of years, but the concept that they use is still the same concept where they’re providing capital, they’re allowing partners to take money off the table up front, but in return for that, partners make less money on a cash flow basis as they go, creating the deep incentive for them all to work together to build an amazingly talented organization. but that’s why that progressivity and that energy level is so important, and that’s been what the private equity marriages, the good marriages, are all about that the other players, for example, the wealth management companies, they’re looking at it differently. they certainly want to make money, but their their focus is we know how we make money. we make money by getting more clients who use our services for wealth management, a very different approach than a private equity group that’s looking to create this massive umbrella. now the wealth management company may not reject that, but that’s not their primary motivation. they know what they do well they and they want to do more of that. so aligning with a very strong, tax driven cpa firm is well within the parameters of a wealth management company. and as a result, wealth management companies that decide to invest or purchase a cpa firm or more apt to buy some of the more mainstream cpa firms, those firms that may have two to five partners would register very quickly on the hit list for a wealth management company versus two to five partners. certainly at two partners, they’re not private equity profile types of firms, unless there’s something ultra unique about them. but when it comes to the two to five in the wealth management side, absolutely, when it comes to the private equity side, it’s really a return on investment type of situation, and that’s a very different animal altogether. and of course, their methodology of investing would be different as well. and sometimes what they do is they they go through the back door of actually parking their money with the private equity organization, versus the family office going directly. so you know, you’ve got all this stuff going on, which is very exciting and very interesting, but at the end of the day, the vast majority of cpa firms aren’t going to fit into those three. they may fit a little bit more so in the wealth management side, so they have to align with the more traditional provider, but those traditional providers will feel the competition from those three other sources, and so these traditional providers have to find a way to distinguish themselves so that they can win what it is they want to win, no different than the other game. there’s competition, and i think that that is good, because at the end of the day, an important message to accounting firms is, this is a great business. these are very smart people who want to invest along with you, because they understand how great the business can be, and that is a very exciting component of where we are today, that while years ago, people viewed the accountants as the people behind the green eyeshades, it’s all about the green it’s about the money that can be made. it’s not about the eye shades. and i think that that is a very telling fact. and the more profitable these cpa firms are that are looking for alignment, the greater their options are. and that’s extremely exciting.
liz farr
that is exciting and, and i like you know, the way that you you explain what the different purchasers are looking for, what the different merging partners are looking for, and, and i’m also think that this is the interest in accounting firms should spark us to realize what a gold mine we’re sitting on. you know, that accounting can be so much more than what we have created in the past, you know, from the legacy firms where they just did the traditional tax returns, bookkeeping and maybe some a&a work, to something that can really serve people and really. we demand much higher compensation for the services. i think that that is something that you know we we should look at that as as a reflection that we are not seeing of the value that we bring to the table,
ira rosenbloom
well, the outsiders are seeing it, and you’re absolutely right. and you know, some of the more old school people are too modest to see it, but they understand the value of what they do from the standpoint of appreciation. they don’t always attach themselves to the value from the standpoint of billing rates and fees, right? but once you have an outside investor, or once you have a bigger partner, you learn fast, because they force feed you to learn. the interesting thing that is really so critical in today’s m a market is the personnel side of this, where you know the industry itself, in total, does not have enough people around to do the work. so the the attraction of smaller firms to larger firms that have progressed with artificial intelligence that have a significant offshore presence is really, really dynamic when, when i sit with the firm looking for alignment, their complaints start with, we don’t have enough people. we have tons of business, and there’s no way we’re going to find enough people. we need to align ourselves with the shop. and then when you talk to the bigger firms, they say, we don’t have enough people here either, but we’ve got a solution, and that solution is x, and there’s no experimenting where, if the smaller firm says, yeah, sure, i’m going to start doing this, it’s going to take them three to four years to get a model going that they’re going to be comfortable with, where these large organizations, they could have 50 people abroad, they could have hundreds of people abroad that are helping them. those firms have a huge leg up, and they’re a very important magnet. and now, from the standpoint of younger people wanting to come into the profession, these bigger firms can comfortably say to younger people, hey, you don’t have to put in 1800 charge hours. we’re looking for 1400 to 1500 because we’ve got the technology. we’ve got the people abroad, we’ve got clients who are going to pay us our value. and that’s an important shift. you, as always, have hammered a very important point when it comes to value, and even more so, cost control to the extent that you can create that gross profit. and now have younger people say, this is a profession that pays well because it can pay well. now you’re going to hopefully find more people wanting to, you know, align with the accounting world, whether they be prototypical cpas or they be analysts, and that’s something again, when it comes to the diversity of the population of people in our profession, the bigger firms have done a better job with that, because they can so smaller firms have to find the bigger answer. bigger is better. the question is, how big is too big, but bigger is better. there’s no question from the standpoint of having the comfort zone of moving the work, the comfort zone of keeping your people happy, bigger is better. and to the extent that smaller firms know that the pe firms or the acquirers are looking to tuck in firms starting at 5 million or 10 million, well, if you can put together two $2 million firms, and they grow a little bit now you make that hit list, and that’s another reality in today’s world where smaller firms are joining forces for the purpose of ultimately getting into another horizon, but improving in between. and that’s a reality when you say what’s changed, more and more firms are interested in that. the other thing that is so significant right now is, and this is certainly a pe driven concept, but the accounting firms, the larger firms, are very much interested in having the smaller firms have skin in the game, so they want to incentivize these smaller firms to be good partners with them, where, years ago, they would say, hey, last year, you did 2 million and you made $450,000 or 850,000 you do the same. 2 million, that’s what you’re going to get. and everything else, you know, we take off the table or we get, no they want. they’re now creating models. where people are actually vested in becoming real partners, whether they be equity or non equity. they want people who are going to roll up their sleeves, unless someone’s a year or two away from retirement, but they want the people really to be vested in the success and not look at it as we just sold out and again, that’s what that private equity world is all about. you’re going to make less as you’ve got some money up front, but you’re going to make less for a couple of years in cash flow. but we’re building the equity, and more and more of the more traditional deals are looking at incentives, using ladders and other types of techniques to incentivize and motivate and level the playing field a bit, because there are so many firms looking to sell that the buyers, rightfully so, are more selective, and what they’re bringing in have to be firms that there’s an energy level around, and it’s not about, oh yeah, we’ll try to do that. yeah, that’s great. now we’re going to help you be sure you try to do that by having some important skin in the game at the same token, because there are acquirers who can put down cash, there is a more frequent conversation in and around a commitment to a minimum purchase price, but a huge incentive for someone to go beyond that. and i think that those are very important features, features that i think are good for deal making, and features that i expect will continue in 2025 as we proceed
liz farr
well, that all sounds very encouraging to me now. now you mentioned headlines, and recently, citron cooperman made headlines when they became the first top 25 cpa firm that actually went through a second generation of pe acquisition, and in their case, blackstone acquired new mountain capital’s stake. so what does this transaction mean for the future of pe and accounting? well,
ira rosenbloom
i think it’s very exciting. it’s very encouraging. what i will say is that citron cooperman was one of the first to have a private equity partner. so one could say that their partner got in at the right time. and i’ve had many clients who’ve told me they make money on the day they buy the asset. they don’t make money on the day they sold the asset because they bought the right asset. and i think that the investment clearly, these folks who now have sold their piece to blackrock, they sold it out at a profit. i’m nobody knows the particulars, but there’s no doubt in my mind that there was a profit. they got in at the right time, and and they worked collaboratively. and what’s so impressive is working on the foundation that there is a profit. blackstone came in here, and they see an even bigger horizon to come out of this. so they’re able to capitalize off of the great success that took place already, and they’re in it to make even more money. so the the the bullishness about the market is very exciting. again, it’s the bullishness about a progressive and and bigger is better type of machine. and i think that that is exciting because more and more larger cpa firms will fit within the wheelhouse of other private equity. how this, you know, trickles down to the more conventional firm? is always a wait and see type of thing, because the private equity, the blackrocks of the world, are going to say to other folks, well, you’ve got to go out and spend that money and so, but you got to spend it wisely, and they’ve got to meet our criteria. and so what happens if they can’t buy other cpa firms? what do they do with that money? how do they invest that money? and and that may make these cpa firms much better businesses, meaning the ones they invested in. but it doesn’t necessarily open the door for these smaller firms and and that’s where you have to be mindful that you know you belong where you belong, and once these bigger deals are done, the other reaction is many times clients don’t feel comfortable with the new firm. doesn’t mean they’re justified, it just means they don’t feel comfortable. so a client who was part of a pe infused firm that was a nice size client is now available to be client of somebody else, and that makes that other firm an even more exciting firm, because it’s the byproduct. product of the pe and i think that that’s very good for the profession as well, so long as you have the talent and the courage to right size your own firm and say, hey, we just picked up $100,000 fee, or $100,000 client. are we prepared to fire our lower 10% who might become gold to some other firm. so i think there’s going to be a nice amount of that shifting, and we’ve seen it already, and i think that that’s really good overall for the economy. but again, you’ve got to be the right firm at the right time, and that, to me, also speaks volumes to does, does a potential client leave $100 million firm to go to a $2 million firm? not all the time do they leave to go to a ten million farm? they might. so, you know, that’s where you have to be positioned in the right way. and i think it’s exciting that outsiders are now coming in at that second level and saying we’re comfortable even at the second level to come in here, because we think the opportunity is great. we see huge momentum. but they selected a player that can do much more than your prototypical, you know, average cpa firm by far.
liz farr
that’s that’s exactly right. and you know, something that you you’ve mentioned in a few times already, are some of the things that make pe make a firm more attractive, a better match for a pe firm than what they than what they would be with other firms. and one thing that you mentioned was that the firms that pe is interested in are the progressive firms. so how do you how would you characterize progressive?
ira rosenbloom
well, i think progressive comes across in a couple of ways. number one, it’s the menu of services that the firm provides. that’s not to say that a very solid, compliance based firm doesn’t ultimately become part of a pe you know, organization, but that’s not the highest part of their ranking. so having a meaty option in the way of consulting services and non traditional services is a reflection of a progressive organization. having a value oriented billing structure is a reflection of a progressive organization having a an offshore emphasis is a progressive organization having leadership development that is throughout the organization that it’s not something that is captured when the candidate is two years away from what they the organization thinks is the right amount of seniority to be asked to become a partner, but one that starts when the employees have had two years worth of experience in the firm. that kind of personal development is a progressive organization, having career paths that are well mapped out, is a definition of a progressive organization, and having a firm that is very, very present in its marketplace, that has a defined place, whether it be in the charitable world, in the civic world, that recognizes that it is not just a manufacturer of service, but it’s a vital part of the stature and the stamina of the business community. that is what is a progressive profile.
liz farr
well, those all sound like much better places to work than the traditional legacy firms that follow the old model. so i think that making yourself progressive not only opens the door to more options for acquisition, but it also makes the firm more attractive as a place for the scarce talent.
ira rosenbloom
well, there’s no question about that, and i do know that by being progressive, it also opens your opportunities as a firm to different types of clients who want to see their accountant be a progressive culture and a progressive organization. and that is also exciting, that you can have more intriguing clientele which would be more stimulating to your partners and to your staff. so progressivity is is key to the to the private equity world, and it’s really key to the future of the profession, and the need for the profession to continue to access technology goes hand in hand with its ability to be more progressive, so that you can free people up to not be bogged down in tasks that can be more automated, and open their mind to things that are not automated, the creative thinking process about the due diligence in and around the transaction, the feasibility of moving forward in a particular area, the complexities of tax law and retooling people who really got bogged down in an area and were too comfortable in that area, and now you can provoke them to do something else, and that’s part of how you re engineer a firm period where, if you can’t get enough people coming in, how do you take your existing people and get them to be more involved with tasks that they didn’t do before? because they’re bright people and they enjoy working for you, or the answer is, you got to free them up from all this other stuff, and and the bigger firms can do that a lot easier. but it doesn’t mean that medium sized firms can’t do that, and shouldn’t do that, and perhaps they collaborate with somebody else so they can create some of those economies of scale, so that, you know, collectively, they can have their own offshore group, but if they did it on their own, it would be a difficult thing to do, but they don’t necessarily have to merge up into another firm. they can collaborate with somebody else. there’s a lot of creativity that can be at hand, but it takes progressive leadership to want to do that as well, and sometimes the easier answer is just to align up. and i certainly don’t disrespect that. i just think that what we’ve seen is there’s not one approach that works for everybody. we’re seeing dimension now. we’re seeing a whole bunch of choices, and you need to control it, but at the end, at the same time, you need to experience it so that you’re sure that this next step, which is a very important step, is one that’s been well vetted and properly positioned for all parties. and if, and if i’m representing the acquirer, i want that to be the case. the last thing we want is somebody joining who’s got anxiety and concerns and is not motivated and excited about being here. that doesn’t mean they should think that everything’s going to be perfect, because it’s not. but if they’re coming in thinking, well, you know, i really should have done the deal with somebody else. that’s not a happy situation,
liz farr
that’s exactly right now, what, what do you think that conventional that is the non pe infused firms? what do they need to do in order to compete as buyers with the pe based buyers?
ira rosenbloom
well, i think there’s a couple of things. one, they have to be prepared to put some cash on the table, because the pe firm will put cash on the table. i think what they position is a a better shot for the firm that’s going to join into the larger firm, to actually have a voice and to see their role be something they understand there’s a question mark that exists when firms are talking to pe, where there’s this unknown, disguised partner that we don’t know that’s having all of these conversations, and they may be brilliant, but we don’t know them. where, if you’re going to join a conventional firm. you may not know that person, per se, but you know everything about them because they’re a cpa, just like you are. so there is an initial comfort zone that goes between cpa to cpa, and that is an important advantage putting cash on the table, because for so many years and for the future, m and a is all about money and advantage. that’s clearly the case. but how do you actually actualize that? it’s through a comfort zone. so you put some money down up front, and then people have to feel that they are going to have a real role, or a defined role, or less of an anxiety and less unknown features. and i think that that is a very real part of competing with the pe based organization. the other thing is, if it’s a pe infused cpa firm. okay, well, then there’s this hidden player that nobody knows. if it’s a roll up of pe firms, then people sit back and say, well, you know, where is the depth of talent that we’re going to get? we have a lot of international issues. is there somebody in the roll up who knows international? maybe, maybe not. if you’re merging into one of these pe infused ones, yeah, they know international. they know salt. so if you’re competing against the roll up, then the more you have that meets the day to day needs of that cpa firm, and the more you can speak that cpas language, you’re going to have a pretty solid way of being ultra competitive against that roll up strategy. so the conventional firms by being who they are, but infusing some dollars and providing opportunity and creating a mentoring type of world where it’s like kind to like kind. that’s how they are going to be competitive. understanding the marketplace that they’re going to go into is really competitive as well. the other thing that’s so important here, and this is something to be seen with the private equity companies, telling their partners, you got to spend all this money. the cpa firm that’s infused says, i got to go out there and buy a lot of firms. how quickly can they integrate those firms? how comfortably can they do it? because the key to success is the integration that you’re going to have. you don’t want to lose the clients, and you don’t want to lose the staff, where some of these more traditional firms, they don’t have the same pressure. they don’t have to do two deal, 10 deals a year. they could do two deals a year. and that integration means a lot, and i think that that’s a competitive advantage that they can play off on, because the prototypical cpa firm partner is going to be somewhat conservative and highly concerned about this next step. so i think that those are ways that the more traditional acquirer can be very competitive in the marketplace. does it work all the time? no, it doesn’t work all the time for the private equity either, but it’s a matter of what’s your batting average, and i think those are the assets that the more traditional firm would put into play and would be able to succeed with, especially because they understand the player and to the extent that they’ve done their homework on the marketplace, that’s really important. you know, i was involved with a transaction where a particular large firm wanted to expand its presence in a particular region. they did their homework. they knew what they wanted, they understood that market, and it could make that other firm that they ultimately acquired extremely comfortable is like, hey, you really do want this versus you want us for the money. okay, nobody’s against the money, but the question is, what will the pain be afterwards? versus, oh no, you really understand this. so the integration and the transition is likely to be much more fluid and much more comfortable because they do. they’re on the ground. they know what’s going on, versus development people who you know, their mission is to find names and numbers. they don’t necessarily know what’s going on on the ground.
liz farr
that’s right, you know and and something you mentioned, you know that a successful joining of firms or joining of resources, whether it’s pe or another firm or wealth management, is that you want to make sure you keep the talent and you keep the clients. so it seems to me, on my discussions with a lot of other cpa firm leaders, is that a big part of how you retain both clients and people is through developing a culture. so when you’re talking to prospective partners in a purchase or an acquisition, how do you assess the culture match between different partners? so
ira rosenbloom
it’s not an easy thing to do, especially with large organizations. and this concept, as you say, exists, no matter whether it’s private equity or a large cpa firm. and i see this all the time. you know, whoever is the chair of the outreach process, call it the managing partner of the larger firm, he or she is going to be stewarding these conversations with with this smaller firm, and there could be great synergy and great chemistry, and the conversation will come to so how long is your term as the managing partner, and how many terms do you want to serve? and so at some point in these conversations, you recognize that the overall culture is really important. the fact that you hit it off with this managing partner or that committee is certainly positive, but you may see these people four times a year. what about the rank and file? and that’s where it’s so important to spend a lot of time up front in conversation, not only with the firms that have already merged in, but with the leadership of the particular niche areas. these larger firms are driven by niches, and so you are going to fall within some niche or some service area, and so it’s important for those partners to not only meet the current leaders, but the future leaders, and that has to be done early out in these conversations. i say this routinely. the numbers are the easiest part of the transaction. one pe firm isn’t going to pay 20% more than another pe firm and one big firm isn’t going to pay 20% more. they’re all within a particular range, but the culture and the deliverables and the integration, those are really important phenomenons, and to the extent that somebody tells you as a potential merger mate, that we’ve got a system, and it works great. i’m happy to know they have a system, but i know enough to know it never works great all the time. they’re going to be laws and there’s going to be hiccups, and that’s the conversation that has to happen, not only with the firm that’s already merged in, but with those partners in those leadership areas. and i think there is a lot of change. there’s no question about it that the larger firm is going to do things differently. the larger firm may do things differently, but it may not be better. the smaller firm has to be able to park that ego and that pride in the parking lot and never bring it back in the fact that they used to do something in such a way and they won an award for it. it’s interesting, but the bigger firm will evaluate it, and if they don’t accept it, you have to be able to move on, and these conversations have to happen early on in the introductory phase. and i encourage that to be the case. don’t start off with what’s the multiple going to be and what’s my comp going to be. get an idea, but go right to all these cultural and integration and transition issues, because that’s the make or break part of the transaction, and determining how you’ll be comfortable and and while the smaller firm is going to be intrigued by all the offshore work, it’s not going to be comfortable for them to go to their clients and talk to them about it well, find out how it was done and find out what kind of hiccups the other firm had, so you can be comfortable. that’s probably the largest change. it’s the one that the smaller firm is is most well aware of but most frightened of. and so how do you get over your anxieties? that’s where some both sides are going to have some concerns. get those concerns out up front and deal with them, and then move forward. and that’s the only way you really can understand, you know, whether there’s a cultural fit here, you’re never going to meet everybody in the organization. you got to meet enough people to get a sense of getting enough of a picture in, in moving forward. and as you pointed out, it wouldn’t matter what firm you were meeting, what size you’ve got to meet enough critical mass,
liz farr
that’s right, and and that makes that, that emphasis on talking to a lot of other people in a firm, makes it much harder for a lot of the the kind of stealth acquisitions to happen, where you find out, you come into work on monday and you surprise, surprise where now we’re no longer bob jones and company. we’re now bob jones and lisa smith and company. so you know, and and i know that a lot of firm owners are reluctant to be fully transparent during the process, because they may be afraid that if word gets out, their best people will flee.
ira rosenbloom
so their best people are pretty smart people, and my experience has been that their best people have a pretty good feel for the fact that somebody’s in conversation with somebody, and whether you have them always at the diner and you never have them in the in the office, at some point, there’s some shift in body language. there’s something that sets them in thought that there’s going to be a change, and the sooner you can bring them into the awareness, the better. now, in a smaller firm, you’re going to feel much more vulnerable. you’re going to feel, oh, my god, if i told that manager and they didn’t like it, they’re going to leave. and if i don’t have a deal with this firm, i just lost my best person because i was, you know, forthcoming. there’s a fine line there. you’ve got to do it when you have an element of confidence at the same token. if it’s two small firms getting together, you’re never going to get to square to sign that piece of paper unless everybody gets to know each other. if it’s a smaller firm and a larger firm, it’s going to be the more senior people, and you’re going to if they are not keepers. you need to know that everybody needs to know it, and you’ve got to be able to understand the magnitude of the change. and my experience has been that more often than not, there’s encouragement, not discouragement. it doesn’t mean it’s 100% but those people that you were concerned about see the positivity more so than the negativity. they understand there’s going to be change, but they view it as good change. they don’t view it as bad change. and oftentimes, when they’re merging into a bigger firm, they make more money, too. so there’s an incentive, at least in the near term, for them to do that. and if we go down the pathway of private equity, not that this whole conversation should be it, but, but it consumes a lot of conversation. the private equity groups are able to provide a certain type of incentive to employees, to allow them to vest in ownership units or in a prototypical firm that doesn’t exist. it’s not there. so, you know, that could be very motivational to somebody’s manager in a $5 million firm. he could say, well, i’d have to work another five years, and then i have to buy in, et cetera, et cetera. these people next year, if i do x, y and z, i’m going to get so many units. and that’s certainly an attraction. so the people are not stupid. they know. they hear even from the recruiters, the recruiters who try to create a little anxiety will tell me, you know what’s going on out there. so there’s a lot of information that the partner group just doesn’t think is out there, but it’s out there
liz farr
that’s very true, very true. and now we’ve seen a lot of changes in the kind of deals that have been happening lately. you know, what do you see for the future? you know, both pe side and wealth management. you know, not just what’s happening now, but what do you think is going to be happening down the road? well,
ira rosenbloom
i think that niches are going to become even more valuable and even more of a focus, and i think the premium for the niche practice is going to grow because there is more pe infused firms who are going to be competing for the same firms, and they’re going to raise the bar. so i think niches are going to become even more valuable than they’ve been in the past. i think that smaller firms are going to have to find different types of partnerships that it’s not going to be enough to say, i’m going to knock on the door of that 10 and $20 million firm and they’re going to take me in. it’s more and more obvious that they’re not and that either they’re waiting for that pe situation or they’re going to do something to build their own firm to remain independent, where they don’t have to deal with the unknown. so i think smaller firms are going to have to find either like kind small firms or create different types of strategic alliances to proceed. and i think that what you’re going to find is also more non cpa leadership and ownership in cpa firms, because there are going to be firms that will be appealing to investors, slash producers, and just like. and these pe organizations have an alternate form of practice where the audit work is done by cpas and owned by the cpa firm, but the rest of it is not many of these smaller firms have next to no attest practice. so they’re going to be able to create a vehicle whereby they can have non cpas become their owners and and these are young and talented and highly technologically oriented people. i think that’s going to be a more growing component of succession planning than it’s been in the past, because the doors are going to close. there’s going to be things that won’t happen. and so i see those as being important shifts in the next several years. and i think firms are just going to become more and more competitive on the better, and more and more selective on the average, and that may mean that some of these averages will pull together and become the next $20 million firm. i do think that we will see that in the next three years, the the re-emergence of the five to 10 million firm in these regions where they have disappeared in many of the regions. i do think they’re going to re emerge, but with a mission statement that’s different than their current mission statement. i think that that is going to be the case because it’s a great business, and you need to be able to monetize it, but you can’t monetize it in the same old way. you got to monetize it in a different way. and i think that that’s part of the key a different group of people playing a role. if you look at cas, which has been an enormously important facet of the cpa industry, and one of the more rapidly growing components, the prototypical cas leader is not a cpa. they’re some type of financial consultant or some type of financial technician analyst, and they do a great job, and they’ve got people skills, and they become partners. so we’ve got to the smaller firms have to latch on to what works for the bigger firms and make that happen so that they will be able to focus in a different way on their succession. it’s it’s not going to be business as usual. call that 10 and $20 million firm, and it’s going to get done. i think it’s be much more selective. there’s always going to be a place for a profitable firm, there’s always going to be a place for a mega profitable firm. there’s always going to be a place for for the right niche firm. but it’s making that average, wonderful firm perpetuate. and i think that comes by being creative, collaborative, and creating these relationships, and being open minded to a more broad, skilled ownership group, including the administrative group, the marketing professional and the chief operating professional and the technology technological professor, all should have a stake in the company, and you’d be surprised at some of the great ideas that come from them, that take the heat off of some of the more traditional owners of a farm.
liz farr
well, you have painted such an optimistic and exciting view of the future for me, you know, and and i am excited to see even part of what you have hoped for come true. i really like the idea of niches and different kinds of people in the ownership group and bringing in more creativity, more collaboration, because i think that a lot of that has been lacking in many of the traditional firms, but the new firms, the people i talk to, they are fully onboard with everything that you are saying. so i think we’ve got a great future ahead of us.
ira rosenbloom
i agree, and i’m looking forward to more dialog as we move forward about good and bad. there’s no perfect component, but it’s a really wonderful space to be in. i’ve been in it for a good number of years. i expect to continue. and from the standpoint of where the main street accounting firms are, i think there’s just so much excitement out there. and yes, it’s great to see other people interested and praising the beauty of the accounting industry as the right place to invest in. yeah.
liz farr
yeah, that’s right, and i think that that’s a perfect way to wrap up our conversation. now i want to thank you so much for coming back ira and sharing your wisdom and your insights with the listeners here. now, if listeners want to connect with you. what is the best way to find you? so
ira rosenbloom
they could find me by going to optimumstrategies.com, and that would be my website, but they can call me at 215-694-8084, that phone is on too often. it’s there for people to reach me, happy to talk, and very excited about where we go from here. thank you.