ira rosenbloom: with m&a, nobody wants a fixer-upper

buyers want sellers who invest in the long game.

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the disruptors
with liz farr
for 卡塔尔世界杯常规比赛时间

ira rosenbloom has been working in the m&a space for accounting firms for over a decade and says it’s a complicated and exciting time in the m&a space today. “we’re seeing a lot of things that make sense, and a lot of things that are frustrating because they make sense, and a lot of things that make no sense,” he said.

staffing problems on both sides are forcing buyers to be far more selective about the firms they consider buying.

see also: the seller’s guide to getting the best price for your firm

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today’s buyers are different in many ways than the sellers. first, rosenbloom explained, baby boomer sellers tend to like to talk to people, while the younger generations looking to buy firms are “more selective in their communication.” younger buyers tend to be more entrepreneurial, and “the more that the seller comes across as an entrepreneur, the more interested the buyer is going to be in what’s going on,” he added. buyers are also interested in firms making a break with old methodologies and sellers who “want to invest in the long game,” rosenbloom said.

another trend rosenbloom sees is mergers of similar-sized firms, driven less by the need for a founder to exit than by the possibility of building a bigger, more progressive firm that’s more appealing to younger employees. economies of scale allow these firms to hire hr directors and marketing directors to take pressure off partners. however, “bringing that to a happy and complete resolution in terms of a closing is extremely difficult, much more difficult than having a small firm merge into a large firm,” rosenbloom said.

he added that an outsider’s perspective on a firm can be helpful. sellers may see problems in their firms that an outside observer might consider to be opportunities. conversely, a seller might think they’re sitting on a goldmine, but that’s only because they work a significant number of hours.

10 more takeaways from ira rosenbloom

1. nobody’s interested in a fixer-upper. there’s not enough labor or capacity to take that on.
2. a byproduct of the post-covid world is that people are more open to opportunities outside of their nearby geography. big firms are interested in establishing a presence in a new area, while smaller firms want access to talent.
3. smaller firms in rural areas may have a higher concentration of revenue in their top clients, which can pose a risk for the acquirer if a big client leaves. consequently, the larger clients may be valued separately, with higher values and extended payout periods.
4. firms that don’t want to pay for the technology will end up paying for it anyways since acquiring firms will build that into their price. the learning curve may be better if the successor does the tech upgrade.
5. firms with aging and dwindling client bases may be appealing to as a way to pick up new staff, but only if the staff will be able to handle technology and change.
6. internal succession planning begins on the first day the new hire joins the firm. firms that bring new hires quickly into the entrepreneurial culture and into leadership have fewer problems with retention and succession.
7. as a seller, think about missing capabilities that an acquisition could provide. look for synergies or ways the newly combined firm could be better.
8. while there’s a community of people who are excited by change, there’s a bigger community of people who shake in their boots about change. buyers need to manage the transition in ways that keep people calm and reduce anxiety.
9. buyers are looking for several things:
   • discounts – the volume in the marketplace is driving prices down
   • niches, which can be lines of service or types of clients
   • they want practices that will add something to their firm
   • specific metrics
10. metrics of interest to buyers include:

    

    • average achieved rate per hour
    • production per employee
    • profitability, but this will be normalized to consider senior staff who work many hours
    • return on investment

 

more about ira rosenbloom

before founding optimum strategies in 2010, rosenbloom served as managing partner of a mid-sized regional firm, practice director for a national firm, and as a regional partner in a national cpa m&a advisory firm, among other positions. he has served in important professional leadership positions as a member of the aicpa management of accounting practice committee and the board of trustees of the new jersey society of cpas (njscpa). in demand as a speaker and author, rosenbloom regularly contributes to industry and general business associations, publications, and websites, including accounting today, cpa practice advisor, macpa, picpa, vscpa, cpa leadership institute, and the philadelphia business journal. rosenbloom graduated cum laude from new york university with a bachelor of science degree in economics and received his master of science degree in accounting with honors from northeastern university.

transcript
(transcripts are made available as soon as possible. they are not fully edited for grammar or spelling.)

liz farr
welcome to accounting disrupter conversations. i’m your host liz farr from 卡塔尔世界杯常规比赛时间. my guest today is ira rosenbloom, chief operating executive at optimum strategies, llc. how are you today, ira?

ira rosenbloom
i am great. and i’m delighted to spend time with you and your listeners.

liz farr
well, great. on today’s podcast, we’re switching direction a bit to look at what is happening in the m&a world. so, ira, what are you seeing today in mergers and acquisitions?

ira rosenbloom
well, we’re seeing a lot of things, we’re seeing a lot of things that make sense and a lot of things that are frustrating because they make sense. and a lot of things that make no sense. so it’s a, a very, very intense time for the m&a community, those professionals like myself, who spend a fair amount of time navigating their way through m&a. and, you know, the forces at work are, in many cases, not unfamiliar, the big force that gets a lot of attention, is the fact that there are numbers and numbers of baby boomers who are looking for a way out, or they’re looking for a better way. and there are too many of them at the same time rushing for the door. so there is a sizable number of cpas, who are looking to find someone to marry, because they don’t have the solution internally. and that’s not that they don’t have confidence in their team. they have a lot of confidence in their team. but their team may not be interested in being owners or being owners to the level that’s necessary to allow the partners who are the founders are the more senior people to retire out. so there is a huge inventory, and a huge curiosity on behalf of folks who are somewhere between 60 and 75 years old, who are trying to find their way. so so that’s one force that’s at work. and then you have the other side of the equation, which would be the acquirers and the acquirers are saying to themselves? well, we have this situation, which is all about our staff challenge is not to say that the folks who are the boomers looking for an answer, don’t have them. but the acquirers when they’re looking at opportunity. they know that the other side has staffing problems, and they have their own staffing problems. so the acquirers are now becoming even more selective than they were a couple of years back, they can be selective because there’s more inventory. but now they’re scaling of what they’re going to look for, has taken on a very, very precise type of approach, which is, again, a complexity or a shift. and then you have in the acquirer community, a growing number of firms who have been joined by private equity in terms of their capital. so that goes, firms have different motivations. and those firms, perhaps have some solutions on the staffing side, but at the same token, they have a sense of pressure to invest capital. so they’re gonna look out for certain opportunities that could coincide with what other buyers are looking for, depending on the size of the firm, or could take them into a different place of competition where they’re only competing with other firms that have private equity, or they’re competing with very, very large firms who would find another solution. so we’re seeing all these forces at work, which really defines heightened selectivity, and a need to be ultra creative in how you get yourself in front of somebody. and ultimately, how does the deal get papered and completed, nobody does a deal with people they don’t like. so that yardstick has been there forever. but there’s a lot of people to like, as i said, there’s a lot of baby boomers out there. and let’s remember the baby boom generation is a generation that actually likes to speak to people. they like to engage with people. they’re easy to like other generations tend to be a little bit more withdrawn or they’re more selective in their communication. so how do you marry those generations together is also a very big challenge. so that the baby boomer, who’s now fortunate to sit in front of a firm that has a lot of resources, sits back and says, well, who’s going to take over these accounts? and now they begin to see these people? and they say, well, it’s good that you have these people. but i think we’re going to have some hurdle points here, when again, no, it’s never ever been a perfect transition throughout the years. but these different generations, and the fact that today’s generation of young people have a different sense of priorities, further complicates how these transactions can get done. so it’s a complicated time. it’s an exciting time. you asked, i hope i delivered an answer that your listeners don’t get frustrated by.

liz farr
that’s, that’s a good answer. and, and i’m intrigued by all of what you’re saying about how it’s very different from the past that we have all these baby boomers who are ready to retire. and we’ve got another generation who has different desires in a firm in a different kind of personality structure. and i do remember, working in a firm where the founder was a baby boomer, he founded his firm in the 60s. and he was the most gregarious man i’ve ever known. everybody in the business community knew him. and he was well respected. so. so i do see that this is a little bit different from the past where it might have been more equal parties coming together is, is that what you’re seeing? well, i

ira rosenbloom
well, i would tell you that in the last few years, because of the challenges around staffing, some initiatives have moved forward whereby firms of comparable size, who let’s just say, prototypically, in my example, they both would be $3 million firms, they both would be $5 million firms, they both would be $10 million firms are more than ever before exploring the option of combining forces. and the combination is not driven towards the exit of the founding or the senior partner, there will be somebody in the mix, who’s going to retire. but the combination is driven towards how are we going to become more appealing in the marketplace. because what they have come to see is there is not as much interest in working for a small firm, as there isn’t working for a larger firm, and that produce prototypically, the larger firm has had the reputation of being more progressive having more options and opportunities. so therefore, they can be a better magnet. so there is an increasing trend for like size firms to explore. bringing that to a happy and complete resolution in terms of a closing is extremely difficult, much more difficult than having a small firm merge into a large firm. and you know how the two organizations can rally around a different platforms and finding out and reaching consensus on which is the right road, we should take on our processing of returns and financial statements, and hr development, etc, etc. it creates, you know, a lot of effort that has to go into it for a group of people who have no time, because they’re so stretched, they don’t have people to do the work, they’ve got to do it themselves. and it’s a great idea, and i applaud it. but it’s got to be very well structured in terms of how you go about doing it. and i’ve done it several times, with some really excellent results. and those results that i say are excellent, come after the marriage has been consummated, you know, we did a great job of talking but their responsibility is to actually put this thing into into good form. and you know, there are economies of scale. and a larger firm can have an hr director and a marketing director and things that will take some of the pressure off of the partner group to allow them to spend more time with their clients to allow them to do what they do best and many many wonderful cpas would be the first to tell you we’re not so good at hr, and we’re not so good at marketing. but i might be a great rainmaker, but don’t ask me how i did it. you know, sort of like some of the best chefs in the world are in your in different homes in your neighborhood, but don’t ask them the recipe because they just do it the same way all the time.

liz farr
that’s right. and i think it’s very interesting you bring up the mergers of, like size firms is being something new to make something that is more appealing to the next buyer think that’s very interesting. now now, are you seeing any differences in parts of the country? you know, are there? are there differences between urban, rural, coastal and midwest?

ira rosenbloom
well, i will tell you that there’s always been differences between parts of the country, the differences are oftentimes tied to the financial metrics that are going to support the terms of the transaction. and in different parts of the country, a compensation is different billing rates are different, etc, etc. so there’s always been differences in the financial terms. now, an interesting dynamic, which is becoming exciting, is a byproduct of the covid. world is an extended virtual and remote, you know, environment. so if i years ago said to somebody in philadelphia, how about a great practice in the suburbs of cleveland, they would say, you’re off your mind, i can’t do that i need to be somewhere where i can drive, etcetera, etcetera, in a short period of time. today, that answer is not so quick to say you’re off your mind, the answer is, well, let me think about that. what can we do? so when you talk about the changes, demographically, these boundaries are coming down. and it’s all because the access to technology and the success of technology makes it possible for firms to more comfortably align with firms that are not geographically convenient. now, the largest firms look at geography and say, where’s the win for us, we want to have a position in that market. smaller firms aren’t necessarily driven towards a position in that market, especially a market hundreds and hundreds of miles away from them. but they are driven to talent. and so how can i get access to that talent? i will tell you this, that in working with some of my larger clients who have offices throughout the country, there are offices that they rely on nearly exclusively to support the bigger offices that they find it easier to find talent. but it’s not noted as a major business hub. but there are people who grow up in that area want to return to that area, there are good hardworking people. so that is clearly a newer component of how m&a is taking hold. and again, it wouldn’t have happened without these advances in technology. and yes, it wouldn’t happen because covid made firms feel comfortable with it, the technology could have been there. but the need to become comfortable with it is a byproduct of the covid. world. and so yes, there have been valuation differences there will be. but the interest now in potentially going outside of your initial geographic comfort zone is very, very real. and there’s always been a difference between urban and rural, again, because there tend to be smaller firms in the rural areas. and if the smaller firm has a large concentration within it’s large clients. so for example, if i’ve got a million and a half revenue firm, and 30, or 40% of their clients come from their top 10 clients, there’s some risk over there that what happens if i lose one of them, which in the urban areas, you don’t tend to see that kind of cluster. i mean, the other side of it is they may have too many clients. but that’s a topic for a different conversation, right? but but that does create those issues. that’s why there’s always valuation or different issues where you may look at it. and this is an important concept in general, when a firm has a good representation of large clients, the successor may not be off by saying we want to value the larger clients differently than we want to value the smaller clients. and we may actually value them higher, but we want to have a more extended payout for them because we think the risk is there. and i think that that is part of what we’re now seeing and part of what the baby boomers have to be prepared for, so that they can make the deal more appealing to the successor, they have to understand the risk elements. the fact that the baby boomer has handled this account for 15 or 20 years, and has the client quote unquote, eating out of the palm of their hand? well, that’s a great hope that the successor will do and be able to continue on with, but there’s no assurance. and so you’ve got to be able to create a situation where they have a vested interest in keeping it. and that’s a reality in today’s market where, you know, how do you how do you create situations where the baby boomer can get the deal done? that’s one of them, where you have to think about alternative valuations for different types of clients in the mix.

liz farr
when i’m when i’m especially intrigued by is that one thing you didn’t mention, and i’ve heard from other m&a people is that these small rural firms, if they’re not tech savvy, they’re not going to find any buyers. i’m gonna try that. and it doesn’t have to be a rural firm.

ira rosenbloom
there are firms throughout the entire country, who are not tech savvy, unfortunately, you’d be surprised at where they’re located. so i don’t think geography has anything to do with it. i think it’s the approach to the workspace that has a lot to do with it. and those people are at a huge disadvantage there. i have been in conversation with two firms that you know, are nice sized firms, they’re each doing $3 million, and they’re not in rural areas. and they’re not paperless firms. they’re not really highly, highly technologically focused. and that’s a big disadvantage, the next firm is going to have to build that into the equation. and you know, they’re going to share that, while the firm who didn’t do it may not have done it, because they didn’t like the price of doing it, which you will hear they’re going to pay for it anyway. because the next room is going to say, well, we’ve got to normalize that we’ve got to build it into the p&l, we’re just not going to, you’re not a not for profit that we’re going to write you a check and say we’re going to do it for you. so they’re going to pay one way or the other. now, the learning curve will be much better if the successor does it than if they had to do it on their own. no question about it. but technology. and that’s again, the technology is the magnet that allows you to go beyond your boundaries, that technology. if it’s not there, it could be a deal killer, because what is also very real today is nobody’s interested in a fixer upper. were years ago, somebody might say, you know what, i can steal that farm, they’ve got three wonderful clients. and the rest of it, we can bring up to a certain level, there’s not enough labor and not enough capacity to take on a fixer upper. i have to be something extraordinarily exciting for somebody to do that. and that’s where this technology on is a huge problem for folks if they’re that far behind. and if they’re more towards in their 70s versus their 60s, these people have a huge pressure against them.

liz farr
i saw that firsthand. few years before i left practice, i was i joined a small firm an itty bitty firm, were the sole owner, the previous sole owner was still doing everything with paper. but they had the technology to do everything paperless. so the new owner brought me in to develop paperless processes to do everything. well, the old owner stayed on for a couple of years. but anything that i had prepared paperless he couldn’t understand. he he would just kind of take my word for it that yeah, okay. i can’t make sense out of this. i can’t see where anything is. i can’t i don’t understand. and so eventually he just kind of faded off. yeah, but it, it is tough to do that.

ira rosenbloom
really, the hardest will be and those folks who, you know, decided to stick around through their 70s oftentimes, it’s because they are so much in love with their client base. they love interacting, that they’ve not built much of a hobby for themselves. so if they can’t adapt, and now all of a sudden they don’t fit in. it’s a very sad final chapter for them. very sad.

liz farr
yeah, yeah, i had conversations with a couple of older cpas, maybe 10 years ago, about what would they do when they retired? and some of them, were really unsure about what they would do if they were not coming into the office every day to work. yeah. because that that was their life.

ira rosenbloom
and it’s interesting you say that, because i’ve done many transactions, where the firm looking for succession had previously retired out a partner. and the arrangement they have with that partner was you always have an office anytime you want to come in, you come in, so the successor had an honor, as well. not that that is a financial commitment, but it is an emotional, and an i’ll call it stabilization commitment. and i’ve been involved with those. sure. yeah. any any particular size? no, just make sure this person has an office. so i relate to it very well.

liz farr
now, what are buyers or successors within a firm? what are they looking for today?

ira rosenbloom
well, number one, they’re looking for discounts. they’re looking for, you know, great value. so there’s a lot of folks because there’s a tremendous amount of inventory, entering the market, figuring i could steal something now, where years ago, the pricing may not have been as appealing. so i wasn’t an interested buyer. so there are people looking to steal. that’s one. two the folks who aren’t prototypically always looking to acquire who are not, quote unquote steelers are very much looking for niches, and four lines of service and four types of clients. so that they’re motivated by the entrepreneurial advantage, that’s going to come by adding a firm to their practice, some firms who have historically been acquires and then acquire is because they found it to be the easiest way to grow their business, they, they didn’t want to invest in marketing, they didn’t have confidence in marketing nor themselves. so they said, hey, we’ll buy a practice, we’ll keep x percent, which typically in a good merger, it’s 90%, the at least of what you’re going to retain, show me a marketer who can get 90% of my opportunities, right? you can’t. so those people are out there still looking. but there are things they’re not interested in. so you know, they’re not interested in a very sizable 1040 practice, unless the 1040s are over a certain level of complexity and a certain fee structure. they’re interested in a 1040 practice, if they’re the acquirer is in the financial services area. so are they going to pick up something that’s going to be a creative to their lines of strength, that’s important to them, and are they going to pick up something that’s going to give them a whole new area of strength that they’ve wanted, but they either haven’t had the time to get involved with, or they’ve gotten involved with in a very, very small fashion. that’s what’s driving the buyers today, that’s what’s going to get them excited. but it all starts with the metrics, if the buyer is not seeing a set of metrics that are within the wheelhouse of what they think, is the right kind of firm, they’re going to walk away, it doesn’t matter. because as i told you, the startup is not what excuse me that fixer upper is not what they’re looking for, it would have to be some unbelievable niche that they thought they could capitalize on rapidly. so the metrics are the opening component, that’s the key to the situation. and then they’re going to go from there. and that’s, of course, the easiest way to filter these opportunities. before i even go to the point that do i like you, let me see your numbers, i could like you, but let me look at the numbers, i can go through them in a couple of hours and make that decision. so and the other part of it is buyers are looking for things that with no pun intended, are not going to be ultra taxing to their existing staff. so what is it that the staffs not going to turn around and say, are you crazy? we can’t keep up with what we’re doing. and now you’ve added more to the equation. so you have to have a story. that’s more than a story. it’s got to be reality. no, we brought that on, and it’s only going to make your life easier, or you’re going to find that they have people now that’s another nuance where to the extent that there’s a firm out there looking for succession, and their client base has started to dwindle because of an aging clientele which that can goes hand in hand, generally with aging partners, but clients who are a are aging. and if there’s staff there, then the advantage is going to be to the acquirer. and we did pick up staff who have capacity, because that firm was losing clients that would excite, again, the competence of the staff, their ability to handle technology and change is really going to be critical. but those would be very appealing to the buyers. and for the buyer to be able to pick up a firm that would allow them to expand the platform of their business. for example, if they said, if we had x amount more clients, we could justify offshoring work. or we could justify having an hr director, that’s another motivation to the buyer. but they’re going to be very, very focused on the culture, especially if it’s about bringing in an hr director versus offshoring. so those buttons are very real for the buyer. but it is very much focused on where’s the advantage coming to me in terms of clients in terms of lines of service, starting with a very healthy margin in terms of those metrics? that’s what the buyers are looking for?

liz farr
yeah. well, specifically, what kind of metrics do buyers look for?

ira rosenbloom
well, the buyers are going to be looking for a couple of things. one, they’re going to be looking at, what is the average achieved rate per hour? what what is that firm generating? they’re going to then look at what is the production per employee, so that there’s a sense of, you know, what’s coming in the door? and how profitable is that firm? there are many smaller firms that, on the face of it, and in reality, are very profitable. but they’re very profitable, because the partners work, insane hours, right. and some of the more senior staff work insane hours, because the younger people would never do that. so that profitability is going to be normalized, and the successor firm is going to put a lot of thought into, is that firm ready to convert its behavior? because, well, you’re tired, and you’re going to tell me you’re tired, because you’ve worked 1900 or 2200 hours chargeable for the last 10 years. it doesn’t mean you’re really prepared to change, it means you need a change. and so these cultures on the other side, have to be convinced that you’re going to work along and by the way, you’re prepared to make less money. so let’s just say you say, that’s it, my doctor told me, i cannot continue this way. and i agree with him or her. but then the acquirer is gonna say, well, yeah, so your profitability in large part was because you work like two people, we’re gonna go out and actually hire that person, or we have that person, or we’re going to send it off shore. but you can’t make what you used to make before. so that metric is now going to come back to the other side, it’s been a while there’s profit here, what’s the normalized profit. and when all is said and done, what’s the return on investment that the acquirer is going to make? the acquirer is going to look or the acquirer should look at the top 20% of the clients of the firm that they’re going to acquire, and sit back and say, can we grow those relationships at a greater pace than we can grow our own relationships? or even at a similar pace? if the answer is no, that we can grow them at a slower? what are we adding to the firm unless they have some expertise, or some line of service that we’re desperate to have? so that metric is going to evolve in their analysis. and that’s where this really comes to the rubber hits the road. i say this all the time. m&a, the m stands for money, the a stands for advantage. that’s what makes the world go round.

liz farr
that’s very true. and i find it very interesting that people are looking at how many hours the owners work in how many hours does seniors put in? because certainly, people coming up below the note are younger than us. they’re not going to work that many hours.

ira rosenbloom
no, and that’s the reality and the larger firms, especially the largest ones, they’ve already seen that reality and they’re trying to find a model that will work well. so that people don’t leave the firm and don’t leave the profession. i mean, we have so many younger people who opt out of public accounting to go into private rather quickly. so, yes, so how do you change that, and it’s really all about coming off of the emphasis of ours, which for that smaller farm is a very hard transition, that it’s not an easy thing for them for the larger firm they’ve advanced. so the advantage to the smaller firm is that you can help us preserve our staff, which that staff is important to the clients, you know, not to diminish the role of the partner, which is extremely important. but the staff meets with the client or interacts with the client much more frequently a business client than the partner does. so, when you talk about retention in a merger, which is again, why you’re doing this, to me, the other side wants to make money if there’s a loss of clients, there’s, there’s a problem with making money. well, you get to that we want to have staff stick around so that the clients feel a sense of comfort. and that’s a very important reality.

liz farr
it’s very true. now, what about succession within a family?

ira rosenbloom
well, very, very intriguing. area. number one, i will tell you, that there still are a fair number of cpa firms that are very, very disciplined about nepotism, and they wouldn’t have that as a possibility. so, you know, there’s a good school of thought that would applaud that. there are folks who don’t have that. and a lot of times, smaller farms are more likely to have family as part of the farm. if it’s a sole proprietor, or a very small partnership, and family is involved, the question becomes complicated, because while the two founders may get along, if it’s okay for me, to have my child in the business, it’s okay for you to have your child in the business to write, will they get along? so you just don’t have the issue of, okay, irish kids coming in your kid wants to be a an actor, so they don’t want to become an accountant? that’s great. well, how’s it we’re going to work out, here’s all the other staff going to accept them, etcetera, etcetera, that, then you complicate it, because of other people are involved. that’s a big complication. if the firm has multiple partners more than, you know, a handful of partners, then the question is, will that create a sense of pressure on this family member to succeed, that’s beyond expectations that the other partners hold this person to a set of standards that’s even higher than what they have as high standards for somebody else to be partner. and that’s not also not an unusual circumstance, because the truth of the matter is, they never wanted that kid to be in the business to begin with. so they, you know, they find a way to make it miserable. so i would tell you that if you’re talking about a world, where it is likely for the next generation, to perpetuate the originators from, it’s going to more likely than not be a firm, where there’s probably at the most 25 or 30 people in the organization, that would be the most fertile type of environment. but it’s far from a guarantee. there’s all kinds of pressures, no different than any other family business, the differential that i would say is in a prototypical family business, if there were siblings, who were children to the founder, you know, there would be interest by many people potentially, of getting into the business or latching on to the cash flow of the business. accounting has not always been the most sexy area for people to want to be involved with. so siblings are not likely to say, i want to be in the business as well, again, to pass the exam has been a very difficult thing, even in the old days. so you know, that piece of siblings contesting to be part of the perpetuation of the business that’s not there. but really having somebody who’s been groomed to take it on, and putting them through the right type of training and coaching. it takes a very special founder to do that. i recently was involved with a situation which was not a small firm, it was about 35 people. and the founder did not train that next person. but the founder knew that when he did the deal, he would step away as the managing partner and ask the next group to make their child the managing partner. and the next group said, well, if you have confidence in them, we have confidence in the interview them, etc, etc, nowhere near, ready for the job. so you’ve got to say, if you’re that founder, and if you’re that child, i want you to treat me like a stranger. and if you are going to have a stranger evolve, you should send them for coaching, you should send them for training. and you should get some type of facilitator in here, so that we can create a transaction or a transition that meets strong business sense, not family sense. and the more that the transition is structured, as if it were a arm’s length business matter, maybe the pricing is a little bit more lenient. but there should be pricing that is going to measure up for a successful type of transition. but today, especially because the founders typically are in that baby boom, ilk, who are used to working lots and lots of hours. it’s that next generation that will sit there and say, i don’t want this dad, this isn’t or mom, i don’t want it because i saw what you do. i might do it. but i’d have to do it so differently. i don’t know if it makes sense. and that’s very, very complicated. it takes a special family to be able to make it happen. and you need less disruption. so you don’t want to have many other partners there. and this person has to not only be held to the right standards, but the staff has to believe that there was no favoritism, that they also had the same opportunity. it’s a very hard thing to do. does it happen? yes, does it fail more often than it happens?

liz farr
your your answer is not surprising, considering what i saw in public practice. where there were sometimes family members in a firm who just were not really suited for it. and i also think that your emphasis on grooming the next generation, that should apply whether you are whether it’s a family member, or whether it’s a whole lot of unrelated people, i think it’s never too early to begin grooming the next generation to take over.

ira rosenbloom
i think the firms that really are passionate about succession planning and passionate about internal succession planning. realize that succession planning starts on the first day that the hire joins the firm, whether it be someone right out of school, or whether somebody who’s got many, many years of experience, you have to bring them in to the entrepreneurial culture and to the management platform. asap. it’s never too early. the firm’s that do that and motivate and excite people at an early age have less difficulty retaining and having a an appealing succession program. again, not perfect. this is not about perfection. this is about good functional, operational progress. and if you took the survey of smaller firms in particular, and said, would your preference be to do an internal succession or an external succession? hands down? it’s going to be internal. that’s exactly what they want. but, you know, how do they make that happen? oftentimes, yes, they’re stressed for time. so if you’re stressed for time, which makes a lot of sense, are you prepared to take money out of the business and invest in somebody else who will have the time that’s their profession, their coach, or a trainer? and they’ll train that other person, we get it, you can’t break away? but if the answer is no to both, then just be ready for that external succession and start earlier than ever before? because the competition to get to the root to the other side is that much greater. so you know, how often do folks sit back and look at their business like a business? not often enough.

liz farr
no, no, i’ve heard had the same conversation with other people that one thing that accountants tend not to be good at is looking at their business like it is a business.

ira rosenbloom
yeah, but they give great advice to their clients. and that’s why the clients come back. and you know, there’s some just hall of fame partners and future partners and cpa firms, and the ranks could be larger. if there was the his ability to sit back and look at the business as an entrepreneur does, and not just as a provider of service. big difference.

liz farr
yeah, those are very, very different. and it’s the entrepreneurial bent that i think, is kind of missing in a lot of maybe not the baby boomers, because they did have that entrepreneurial bent and the service emphasis. but some of the people coming up behind them, who maybe didn’t really inherent, that entrepreneurial view of looking at a firm, that this was a service, you provided, not necessarily a business that you ran, that happened to provide accounting services,

ira rosenbloom
no question about it. and a lot of those boomers and the generation next after them, just were looking at really good client service people that made the yardstick for promotion to partner business was coming in, they didn’t need them to be rainmakers. they didn’t need them to think about what’s the next thing that client would need and want. and so they turned, that’s part of their own internal succession problem, where they built a model that wasn’t able to really take them out. but they were able to do a great job with the clients. and so today, some of the bigger firms have also because they’re entrepreneurs said, what’s in our best interest, picking up another cpa firm, or picking up an ally business? so should we pick up an hr consulting business? should we pick up a cyber business? should we pick up a due diligence type of business, because that’s in our best interest, ultimately, we’ll be less dependent on people who don’t want to do compliance, and will have a different type of person and will have a healthier business. larger firms can pivot that way. smaller firms can’t. but a smaller firm can align with a larger firm, who would then pivot because they could say we have the critical mass to make it interesting to that outsourced accounting organization to that cyborg, etc, etc. and that also is a very real trend in the recent years, where firms, as you see in the headlines of the newspapers, the accounting, newspapers, more and more on a regular basis, are acquiring businesses that are not accounting businesses, they support the accounting businesses, and that trend is only going to increase.

liz farr
i think it’s an it’s an exciting time for accounting. yeah. now, what are some things that firm owners should do to enhance the value and desirability of their firm?

ira rosenbloom
well, the first thing they need to do is start sooner than ever before. so it’s just too competitive out there. and what i mean by that also is it’s not just the seller, it’s also the buyer, you don’t know where this competition is going to come from. so you need to look very appealing. and today, there’s private equity options, tomorrow, they’ll be some other option that’s going to come out there, that if you’re a buyer looking for a particular farm, you have to stand out. so you’ve got to be able to look at yourself sooner than before. if you thought five years from now, you really want to be an acquirer. it’s interesting, the rosenberg survey said, amongst their respondents, a huge number of them expect to be involved in acquisition in the next three years, larger firms being more prolific with it, but it’s a significant thing. so start sooner than ever, because there’s going to be a lot of competition for that. since nobody wants a fixer upper, the person looking for succession has to do their own fixing before they come to the table. they can’t fix everything up. but again, i would say to you no different than in the old days, when someone wanted to sell their home, they brought in a broker to do some type of assessment. and the broker would say to them, you know, if you paint the bathroom and take care of stuff in the kitchen, you can get 15 or $20,000 more for the home, you need to have an expert come in here and look at your metrics and tell you what you need to try to elevate towards, because the opening door is metrics. and so the firm needs to take a very, very hard look at their metrics and see where that stacks up. same thing on the buyer side, i will tell you that there are many small firms who are ultra profitable because they work their tails off and they’ll look at the other products and well how come you’re not as profitable as we are? well the bigger firm has to be able to show them why they’re a better business because they aren’t as profitable. so you’ve got to be have to have in prepared your proposition for excellence. and that’s what you need to know the seller also oh, needs to be able to extrapolate out the potential that could come. so they would look at their practice before any conversation and say, you know, if we had the ability to do valuation work, if we had the ability to do cost segregation work in house, there could be an extra, so many hundreds of 1000s of dollars of, of revenue that would come in, you want the other side to know that you don’t want to wait for the question you want to say, we’ve thought about this. and this is part of our motivation, we’re leaving money on the table. the more that the seller comes across as an entrepreneur, the more interested the buyer is going to be in what’s going on, the healthier the numbers, the more important, the likelihood of being able to be successful, being ready to be more accepting of deal terms that create more incentive, that are not just a continuation of the old methodology, that show that what’s important to the seller is not just about continuing to make money as if they were in the past that they see the long game, and they want to invest in the long game. so long as that there are some controls on the risk, the sellers have to be prepared to do that. they need to understand how far they’re willing to go. but they need to be prepared to say, you know what, what’s most important to me is to see this practice grow. i don’t need to make what i made before, i don’t want to be, you know, on the poverty highs, but i’m willing to take this back. if together, we can do something. now this is an example of firms that are really exit oriented in that conversation. if you’re two firms joining together, where there’s no exit orientation, it’s a whole different conversation as to how you’re going to make your cells appealing and where the synergies are coming from. so the buyer has to be looking at what is the roi for them in this transaction? and does the seller in the early part of the conversation, convey the information to allow the buyer to make a quick decision, they’re going to have to do their due diligence, there’s no question about it. but the more information, the more impressive you can be at the early part of the investigation process, the more likely you are to come to the finish line on the buyer side, the more you can make the seller comfortable, that the change is not going to be as unnerving, as the seller is worried about, there’s always going to be change. and there’s a community of people who wake up every day and are excited by change. and there’s a bigger community that shakes in their boots about change. so the buyer has to be ready with the program that makes it common comfortable. and so you’ve got to think about what the legs of the transition will be. when the buyer says, we don’t have the people today. but over the next two years, we’re going to go out and get the people that makes anxiety fly off the table for the seller. so the buyer has to sit back and know, what are they capable of managing. now, that’s what they’ve got to do up front. and it’s okay to do smaller deals, you don’t while it might be sexier and more exciting to do a 50 person transaction than a 15 person transaction. the name of the game is to do the right transaction. and not anything other than that what’s right for the players, the buyer has to be prepared to know what they can comfortably deliver. so that the buyer can exceed expectations. that’s crucial for the buyer. and for the seller, the seller has to be in a condition where the buyers can say, we’re going to be able to exceed the expectations. and it’s going to be a win win. putting money on the table for everybody and creating advantage for everybody back to my m&a.

liz farr
that’s that’s all very encouraging, you know, and i like what you say about both sides needing to think about what will happen after we inked the deal.

ira rosenbloom
it’s all about the future. it’s not about the past.

liz farr
yeah, yeah. you’ve got to be thinking about how will we service these clients? do we even have the expertise? do we have the capacity? can we do this? does this make sense? that’s all that’s all really good stuff. now, what do you see for the future? well, is it gonna be the same?

ira rosenbloom
i think that m&a is here to stay. i think that there will be a group of people who will make a decision that they’re not m&a comfortable, and they’ll work until they’ve made x amount of dollars. and, and that’ll be that that do, i think that will be a larger group of people. not really, i think that what’s going to happen is that transactions will just be done differently. and that just like over the 25 past years, there’s been a trend and a cycle, we’re going to have cycles that will be more active and less active, but m&a is going to be here. and the emphasis on people being able to take something small, and taking that for themselves. so a lot of the very exciting new businesses that have percolated for accounting, in terms of client accounting services, has been taking a dimension of an accounting firm. and just focusing on that, i think that we’re going to see much more of the dimensional approach. and therefore, parsing out a line of business, it might be that i’m an accounting firm that has five different service lines. and at the end of the day, i may have to walk away from two. but these other three are great. and those are the three that i’m going to capitalize either to stay in, or to actually merge into. but these other two, they’re just not as marketable. and i think that’s what we’re going to be seeing is a lot of dimensional approaches to what’s at the core of that practice. and to me, you monetize that by making it bigger. but in the beginning, it starts out small, and a lot of the smaller practices have the core elements for the dimensional isation of the business. and i think that was going to happen. i also think that the younger people who are not interested in the crazy hours, but are interested in making a lot of money, get very excited by the dimensionless ation of the profession. and they’re more apt to now come out of the woodwork and potentially become buyers of smaller firms, or lines of business. and if those lines of businesses don’t require a cpa next to it, i think we’re gonna have a whole new group of acquirers coming out of this, i can’t speak to private equity, it’s too new. and they themselves have to sit back and see what the results are. but if i go to the conventional buyers and sellers, who never had private equity at their disposal, i think this game is going to continue at a so many needs, but it’s going to morph in different directions, and there’s gonna be a lot of packaging, and a lot of different dimensions that move forward. and that’s part of the excitement of what i do, it’s finding the creativity, to find the gold, where it might be very much buried under a lot of dirt, there are advantages, you just have to be able to hunt for them. and there’s somebody always interested in an advantage.

liz farr
well, i think, keying in on the advantages is the perfect place to end our conversation, ira. because we always want to look for the marketing and the advantages of what you’re doing. there’s always gold buried there somewhere.

ira rosenbloom
it’s unusual not to have the gold, i can tell you that it’s always the case. but it’s always the case, that it’s hard for the entrepreneur who’s looking for succession to objectively see what they have, oftentimes what they look at, they say, oh, look at all these problems. and an outsider comes in there and says these are not problems. these are opportunities, or somebody comes in look how well we’re doing like the person who’s netting 65% because they’re working significantly. and an outsider comes in and say no, this is not the goldmine you think it is, right? so, but there is an advantage because these clients are accustomed to paying a lot of money. and that’s the advantage that you have. so how do you know the language you need to engage with an expert who’s going to know the language know what the market is striving for? and know where the next step looks to be coming. that’s why you need to turn to folks like myself, and you know, get some perspective and protect yourself because like the clients of the cpa firms go to their cpa for the knowledge and the the expertise.

liz farr
well, i agree with you there. and i want to thank you so much ira for taking the time out of your busy m&a schedule to talk to me. now if listeners want to connect with you, what’s the best way to find you?

ira rosenbloom
well, i would certainly encourage them to email me directly ira at optimum strategy. dot com. that is the best way to find me. our website, ww dot optimum strategies.com. i’m on linkedin, people will know me as the merger masters. so you might be able to google that as well. i’m highly visible in the mid atlantic states. and i’m very proud of that. we’ve got a lot of wonderful firms here. but, you know, i’m easy to find, but directly i read optimum strategies. i am one of those folks who does work seven days a week, not all day, but i do take a look seven days. so if there’s something you want, don’t be bashful, seven days. works for me. all right.

liz farr
well, thank you very much. it was great talking to you today.

ira rosenbloom
thank you. it’s been a privilege and a lot of fun.

 

 

 

 

posted on july 7, 2023