merge to make a better business.
this is a preview. the complete 1-hour video episode, with commentary and transcript, is first available exclusively to pro members.
the disruptors
with liz farr
ira rosenbloom has worked in m&a with accounting firms for years, but things are changing today. the community of buyers is shrinking, so firms are being more selective about with whom they partner. rosenbloom is also seeing more creativity in transactions, and acquiring firms are looking closer at the clients they may be adding.
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“we’re bringing in more clients. are they the right clients?” he asks. “and if we bring in clients from this other firm, and we do some cutting, how do we let that other firm earn some money back?”
a growing community of acquirers has also been successful with offshoring work, which can make a merger more exciting for the acquired firm by moving the basic work off their plates to, as rosenbloom puts it, “make your life a better life.”
“because now you’re not saddled with this kind of basic work,” he explains. “you have the opportunity either to work less or to now work on some things that are much more intellectually stimulating.”
however, in addition to balancing the workload, the culture also has to work. maintaining a solid culture in a hybrid or fully virtual firm can be a challenge in mergers. rosenbloom suggests firm leaders make the effort to individually check in with the new people regularly over the first 90 days, which he says can be “a game changer.” it’s also a game changer when leaders are quick to release the people who are not a good fit. “and the sooner somebody knows that, the better,” rosenbloom says. “because otherwise, the rumors start floating through the entire firm. and that’s bad, especially when it’s a virtual world.”
at their core, rosenbloom says, every merger is about money, so many firms welcome the additional resources from collaboration with private equity firms. they believe “that capital will allow them to buy better talent, or pay more for talent be more competitive in the marketplace, and therefore take their platform to a higher level,” he explains. the hope is that the additional resources will help create a better future for the profession.
firms with multiple partners of different ages face different challenges when private equity makes an offer. while partners in their 60s may be quite happy to walk away with substantial cash, the younger ones may not be so enthusiastic because they may be waiting to lead the firm and “to have the opportunity to put their imprint on it” and have been “waiting for that founding generation to take their finger off the button.” but if they take private equity money, the younger partners may lose that opportunity.
9 more takeaways
- private equity firms are beginning to acquire groups of similar-sized firms and combine them into one bigger firm.
- consider implementing a buddy system and a check-in process for mergers. using an outside service that will retain confidentiality can reduce the intimidation new people may feel if they fear speaking up honestly will cost them their jobs.
- if you’re going to do a merger, do it to make a better business.
- doing your work well isn’t enough of a differentiator. for a successful sale, your firm needs to bring something special to the table. that something special can be expertise, reputation, referrals, or entrepreneurialism.
- be your own best salesperson in meetings to merge. be confident about showing the other side what your firm can offer. give the other firm a reason to want to talk more.
- if you’re five years out from a merger, consider adding expertise in forensic accounting.
- talk early about the operational changes required to integrate firms. what are the processes for getting the work done and keeping clients happy? what is the culture like?
- buyers are looking for easy solutions, not complicated situations. how can you make it easy for the buyer? if you make it easy for the buyer, you’re also making it easy for yourself.
- we have a generational shift in managing partners who are managing their firms differently than the previous generation. these younger managing partners will likely approach m&a less from a top line perspective and more from an impact perspective. instead of making the decision on their own, they may try to build consensus for the deal.
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 disruptor conversations. i’m your host liz farr from 卡塔尔世界杯常规比赛时间. my guest today is a returning guest, ira rosenbloom, chief operating executive at optimum strategies. how are you today, ira?
ira rosenbloom
i am terrific. liz, great to spend time with you.
liz farr
thank you very much. now, i want to ask you, you know, you specialize in merger and acquisition for accounting firms. so what is new since the last time we talked a couple of months ago?
ira rosenbloom
well, a lot is new. and it continues to be very provocative and exciting. i would say clearly, in terms of where the headlines are, you know, outlined, we’re seeing more activity by private equity organizations. and the interesting twist is that while private equity is not new to the cpa community, they started investing a couple of years ago, what is new is the new iteration that’s coming out, where private equity funds are actually trying to roll up. many cpa firms into its own special entity, as contrasted with making a significant investment in a very, very large cpa firm, and letting that cpa firm go out and acquire firms. there are a couple of private equity funds that have targeted a series of firms not too disparate in size, to build their own critical mass and to develop their own infrastructure. and to use that type of model. so were the initial investors were looking at the largest of cpa firms, this new breed or this different breed, would be looking at firms that could be in that 10 to $50 million range, which are not small firms, but they’re not in the hundreds of billions. and so that is definitely a difference from the last time we spoke. the other thing that is a difference is that we’re seeing and hearing more about money management companies, investment advisory firms, being aggressive about buying tax compliance firms, they’re, they’re not interested in being in the attest business, they can’t be in the attest business. it’s a little complicated, but more and more of the money management community is getting excited about and interested in, in purchasing tax compliance companies. so that those are, you know, some of the more glamorous components of the m&a world. and then if you go back to the traditional world of m&a, which has been here forever and ever between, you know, a small firm looking for some type of exit or escape, and a larger firm looking to grow its revenue base, what we’re seeing is that it’s much easier to get a small deal done, meaning a firm that has a small proprietor, a sole proprietor, i should say, and perhaps one partner versus the multiple partner deals, the bigger the firm, the more complex it is to get a transaction done. the smaller the firm, the easier that it becomes to get a transaction done. so i would say that those are some very relevant changes in the last time we spoke.
liz farr
well, those are those are pretty exciting. now we talked about a couple of weeks ago, briefly, and you mentioned that you had seen some changes in the kinds of deals that were getting done.
ira rosenbloom
so what we’re seeing is, it’s a community of buyers, that is shrinking. and a buyer community is shrinking, in large part due to some very exciting aspects of the world of business, where cpa firm organic growth has been extremely strong. so we’re in the past, firms would be looking to acquire a firm to add some bulk to the top line. they don’t need that as their motivation. so it now makes them much more selective about what they’re going to do in tandem with the labor situation is much worse today than it was the last time we spoke. so if we’re bringing in new business, or we’re expanding our client base because our existing clients are growing and turning to us for more help, and we’ve got a staff that’s already stressed out, we have to be extremely selective about what we take in. and we now have to structure transactions differently, because of the conditions that we have. so that gets back to smaller deals getting done, that gets back to more specialty firms being at the forefront of the transactions. and then, you know, the more traditional very good cpa firm that has some outstanding clients, the ownership groups, they didn’t get any younger in the last group last year that we spoke. so what’s now happening is that there needs to be more of an incentive deal structure. because the economics are difficult, and the larger firm has to build in the replacement component and the risk component that they may not be able to replace that person. so they’re going to ask potentially, again, in these larger deals, for the ownership group to potentially defer some part of their comp, or change the makeup so that the buyout component is is much more appealing than it would have been three years ago. but the current comp component is, is more of a compromise situation, so that we can get this marriage going. because otherwise the bigger firm has too many roadblocks, it’s got too many difficulties. that being said, the incentive to that next generation is becoming important too. so if the smaller farm is looking to merge up into the larger farm, oftentimes you have to dangle a carrot so that that younger generation will stay on, or on the acquiring side, you have to motivate their managers to want to work these types of accounts. and in the right situation, which, you know, hopefully there are more of them than otherwise, the stimulation of having more interesting clients allows for the firm’s to collectively sit back and right size, their practice. and that’s all part of this whole creativity. we’re bringing in more clients, are they the right clients, and if we bring in clients from this other firm, and we do some cutting, how do we let that other firm earn some money back from some other event, because in order for this to get started, we had to do some cutting. so there’s a lot more creativity, it is much more difficult to get these three partner plus firm transactions completed in general.
liz farr
that makes sense. and last week, i was at quickbooks connect, and went to a session about buying and selling firms. and one of the things that one of the panelists mentioned, was the need to make sure that the talent from the acquired firm came with that, that transaction that you couldn’t possibly take on more clients unless you brought in the talent.
ira rosenbloom
well, the interesting piece and again, now you have to focus on who is that acquirer. there’s a growing community of acquirers who have done very well with offshoring work. so to the extent that that acquirer has a methodology of moving work into somebody else’s pocket, it actually makes it more exciting for the staff of the firm that’s joining up forces with the larger firm to join. because quickly, the larger firm can say, i’m going to take a lot of this basic stuff that you’ve been forced to do, and i’m going to move it away. and i’m going to make your life a better life. because now you’re not saddled with this kind of basic work, you have the opportunity either to work less, or to now work on some things that are much more intellectually stimulating. and that’s very, very powerful to get a transaction done, from the standpoint of how that bigger firm is going to differentiate itself from other bigger firms, and entice, that the managers and the staff at the smaller firm to stick around, they’ve been chomping at the bit to have less stress and less of a tax season intensity. if the next group can make that happen. they’re going to be on board with at least for the first year, then the onus is on the buyer to prove that it’s the right place to be. and that’s a cultural conversation heavily, but the ability to lighten the load and what i call load management. load management is very big. it’s not just big in basketball, it’s big in accounting, you got to have load man.
liz farr
absolutely. and something you touched on was something else that the panelists talked about was the cultural fit that one of the panelists that that one of the firm’s she acquired, had been in talks with about a dozen other firms to be acquired. and hers was the firm that the seller chose, because of the cultural fit. are you seeing things like that?
ira rosenbloom
your culture, for the last five years has been a very, very relevant part of moving a deal forward. nobody wants to move into an environment where they’re just not going to feel comfortable. the difficult component now is because we have either hybrid environments, or we have pretty much fully virtual environments. how do you have a culture that sticks, that’s a very hard thing to move forward with. and again, some firms are much better at it than others. but years ago, we were all in the same office, or now i’m going to drive to the office that’s 10 miles away instead of five miles away. but now we’re not all in that same office. and, and having that really click is really difficult. and it does create issues, when you’re looking to create that merger where the new farm or the smaller farm doesn’t have that same luxury of building the bonds, it places a lot of stress on the bigger farm, to come up with a buddy system and a check in process, and even use outsiders. who would be that check in source because the new people are intimidated, they’re gonna feel if i tell you the truth, you’ll fire me. so i’m going to tell somebody else and it’ll remain confidential. this is a very big hill that has to be climbed. and of course, the larger the firm, the more capable they are of accommodating these type of outside resources. and generally speaking, the better they are at preserving a culture by that virtual world, the smaller problems, it’s very difficult. and sometimes people make a decision on a culture. and unfortunately, they learned six months later that that was not what it was. patched to be.
liz farr
yes, i, i understand that completely out there. there’s a big difference between having a beautifully articulated mission and vision and purpose, and actually living that as a part of the way that the firm functions.
ira rosenbloom
no question. and, and i think some of the smaller firms, again, a lot of the attention goes to the top 100 firms and but they do some really tremendous things. and that’s great. but there are many more firms that aren’t part of the top 100, the vast majority of cpa firms are smaller firms. and it’s when the leadership of that smaller firm, or the bigger of the two smaller firms goes out of its way to call the new group of people and check in with them so that the managing partner and the head of the tax department head of the audit department are communicating with these new staff, people who are joining forces, that goes a long way that makes these new people feel extremely comfortable. and that’s on top of whatever buddy system, they may have. that and not every managing partner is comfortable doing that, but when they are and when they are good with it. and they do it in that first 90 day period with regularity. it’s a game changer. it really is. and at some points, it’s going to be a game changer to say it’s not going to work, you know, we’re trying you’re trying, we’ve given us a great, you know, attempt, it’s not a good fit, this particular person is just not going to be here. and the sooner somebody knows that the better. because otherwise, the rumors start floating through the entire firm. and that’s bad, especially when it’s a virtual world. when it’s not virtual. you can control that a lot bit.
liz farr
yeah, yeah, i can see that. and i think it’s really important to establish the expectations up front for how communication will happen.
ira rosenbloom
feedback is really important. you know, it’s one thing to orient people. it’s another thing for someone to feel comfortable coming back with follow up questions and sharing their anxieties. every person who transacts this type of transaction comes to the table with some type of anxiety. do the smaller firm is thinking about all the changes that are going to go on? and will the staff stay? and the larger firm is thinking about? will my staff really accept all of these other people? and will they think that the firm is changing too rapidly? so there’s always some type of anxiety? the question is, is it out of hand? or is it being managed properly?
liz farr
that’s absolutely correct. yeah, the i was in a very small firm, several years ago, that got merged into a bigger firm. and it turned out to not be a great cultural fit. so within, i’d say, nine months, all of us from that small firm were gone. now, some didn’t even move over. wow. so
ira rosenbloom
that’s so foreign people got to do their homework ahead of time. and this is, unfortunately, the mantra of cpas, when they go to their first meeting with another firm, is to think about the financial piece, which is certainly extreme. i will never minimize it. and i have huge respect for it. but the component of compatibility, trumps-no pun intended- the financial piece, if we can’t have compatibility, or adequate compatibility, we’re never going to see those financial components that we are trying to negotiate. so upfront, people really have to understand where are we compatible? where are we uncompetitive and compatible? and, and how are we going to bridge that gap. and if we can’t bridge that gap, who cares about the finances, and this is what i encourage so many people before they take the step, whether it’s an experienced buyer, or an inexperienced buyer, whether it’s a seller who’s acquired on their own, and now they’re going to sell to somebody else, take the time to understand what makes each organization hum, take the time to talk about what the vision is going to be, you should be doing this for good business purpose. yes, i understand. you want to get some liquidity, and you monetize your asset. but if this is not for the right business purpose, you’re not going to see the potential on the financial side. and so you really got to make that the focal point of your early meetings, so that people can get an idea that this will make sense to so many in our organization isn’t going to be perfect. no, there. there’s rarely the situation where everybody is happy, and everybody stays there forever and ever. that’s what they make movies about.
liz farr
that is true. but this is the cpa world. and so it’s not it’s a little bit different than the hollywood movies. that is. yeah. now at the beginning, you mentioned private equity firms, and how there was this new approach where they were buying up groups of smaller firms and rolling them all up. now now, one thing that kind of stuck in my mind, as you were talking about that was, well, how are they going to manage all the processes, or they’re going to figure that out, because the processes or lack of standard processes will make or break affirm,
ira rosenbloom
though this is a very, very challenging piece of what they’re trying to achieve. and you’re talking about some very bright people who have invested in some mega businesses along the way, these are not $10 million funds, these are funds of funds. and some of them have a very deliberate action plan, where they’re planning what they’re going to slice off at what point in time. so the first piece is going to be that infrastructure, how are we going to have that common infrastructure? and how are we going to provide the kind of resources to our collaborative that they’ve been striving for for? so in one case, i believe one private equity group as it was pulling together, its core group of firms also went out and acquired a offshore entity with accounting personnel in it, which will now be captive to this group. so they would say to them, okay, folks, this was your biggest problem. you didn’t have enough people. we took care of that for you. and now, how are we going to move into the tax return preparation and the best practices, they take a step back, and they say we want the head of the tax department of these three firms to get together and recommend things for them. so there’s some combination of branding. it’s not that this whole entity is necessarily known as abc private equity, in as much as there’s pieces that are known as that. and then each firm still has its own independent flavor. but certain other things are highly consistent. and depending upon how much attest work is in this collaborative of firms, that’s going to be a challenge that they have to figure out how they’re going to manage that. but they will. and they’ll make the investment upfront because they have tons of money to do it with. so long as they can see that they’re going to get the return on investment to make this work. and you know, they can’t by the attest function, but they can be very creative about how they get resources someplace. so somebody can have that attests function done. so this is a very real oh, called disrupter, that is in many cases, a noise factor to cpa firms where they say, oh, but i heard you know, this could happen. even those firms that are rolling up, cpa firms have to digest what they have, they’re not going out there and rolling up, you know, three regional players, and then saying three months later, now you guys go out and pick up three $3 million firms, there’s a process that they have to go through. and i think year two, will be much more of a telling story for these roll up folks than your want. and in total, you know, no private equity firm has experienced the liquidation moment as it relates to their investment in a cpa firm. so, you know, the jury’s still out as to whether any of these geniuses make the right decision on doing it. having been a part of conversations with cpa firms who were approached by the private equity group, i know enough to know that the majority of folks are flattered, but they’re really not interested in a partner who is going to tell them strongly what to do, they don’t want an outsider, the money is nice, but their independence means a lot to them. and they’re not prepared to have this outsider have that kind of influence with them, and therefore they’ll walk away. but that being said, they are finding companies who would do it, who probably appreciate the advice, and, and see the world differently than many other cpas.
liz farr
just as all this is all really fascinating, you know, so so it sounds like these firms that are rolled up, they retain their own little identity. but there’s this, this overall owner who kind of drills down and tells all the little satellites, you know, they’re how to operate, you know, i would imagine, it would be things like we need a gross profit margin of x percent. we need retention rates of, you know, y percent we need, you know, they would put in the metrics that they would want to see
ira rosenbloom
not only the metrics, but they are also going to be proposing the software in the system to capture these metrics. so then, you know, they look at the world very differently, whether you want to call it real time or not. and this is all great, it’s very progressive. but you have to be prepared for that kind of, you know, i’m going to use the word advice for that kind of input. and most cpa firms are not, they’re just, you know, focused on what they do very well, which is to take care of clients, and cpas make a very nice living people in private equity make extraordinary livings, there’s a very big difference between a nice living and an extraordinary living.
liz farr
yeah. and so is it the promise of this extraordinary living, that excites many accounting firm owners, the idea that maybe they could make more or
ira rosenbloom
i think that, you know, money is a very important factor. and as i say, in many cases, you know, those of us who are young enough to remember jerry maguire, the movie show me the money. so, you know, every merger is about money. and for some people, the money is a bigger stimulant than others. i think that what the firm’s who have collaborated with private equity believe, is that they’re going to have access to capital that their own partner group wouldn’t be too comfortable leaving behind, and that capital will allow them to buy better talent, or pay more for talent be more competitive in the marketplace, and therefore take their platform to a higher level. not that they’re going to turn away the pay day when and if that happens. but it’s all about what is the future of the profession are we going to have the right kind of resources to do that. and, and not to say that a $5 million firm doesn’t want the best tax people, and the best audit people they do. but they’re typically not bidding on the same person that a 20, or a 50, or $100 million firm is, they may lose them because somebody else have bid them within their contract. so therefore, for them to take the private equity, they don’t have the same long view, it’s the bigger firm that is competing, and needs to take this longer view. and i think that having access to that capital is important, having access to technology, and the best practices that come from some of the other portfolio companies that they have, is better appreciated by firms of a certain size, than i’ll call your common, you know, main street accounting firm, or community accounting firm, it’s not that they wouldn’t respect it, they just can’t appreciate it, or put it into use the same way as some of these others can. and i’m sure some of them have, you know, artificial artificial intelligence, portfolio companies are major investments, which will spill back over to help these bigger firms.
liz farr
right, you know, and and the technology component also is important. you know, in accounting, there is certainly technology that is profession specific, and we need the tax prep software, we need the gl software, we need something to manage our work papers. but there are other areas like workflow and proposals, and payment methods, those are all things that, you know, we may think that accountants have unique problems. but there are other industries that have the same issues that have solved them in much more elegant ways.
ira rosenbloom
and that’s part of how the private equity company, in part is going to earn its return on investment, when they create more of a technological bent, and they displace human capital with technological capital. and those differences of several points in the p&l are very meaningful.
liz farr
absolutely. now, now, we’ve talked a lot about, you know, private equity, you know, what would be some of the year we’ve talked about some of the positives in some of the negatives of private equity investments, you know, a positive would be access to capital, and a con would be lot potential loss of control. so what are some other pros and cons that you can think?
ira rosenbloom
well, i again, i think that the ability to interface with leaders of other industry, and to tap that and ultimately cultivate, perhaps a different ownership structure within the cpa firm, so that people don’t have to wait 12 years to own a piece of the cpa firm, and you could lock them in sooner or make them interested in in owning pieces sooner, certainly private equity, could support something like that. and again, if if people are the big challenge, which pretty much every survey, no matter what size firm tells you, then what we can do to beat off the competition from amongst other cpa firms, as well as private industry or a public company, then the private equity is going to make that feasible for us. so certainly, that, and again, it’s feasible, if you’re the right candidate for that private equity money, but the vast majority of cpa firms aren’t or they’re going to be the tuck into something larger, which could be very appealing if i were an owner in my mid to late 60s, and i could transact with a firm that has private equity money, and i would walk away with substantial cash upfront, and then get paid out over a three to five year period as a seller. i could be very excited about that. but what about the rest of my team? i don’t know if they’re going to be and that’s often the schism that you have when you have a group group that may have three to five partners, two or three of them are in that mid to late 60s, and then the others in their 50s. those guys that are especially the ones in their 40s, and 30s, they’re not necessarily sold on this, because they wanted to lead the farm, they wanted to have the opportunity to put their imprint on it, they’ve been only waiting for that founding generation to take their finger off the button. so it is that that’s really, really important. and the other thing that i think, has happened, we’ve been in a wonderfully strong business climate from the standpoint of revenue and profitability. so despite the fact that wages have gone up, there, the firms have become much more profitable, they’ve been raising their rates. so younger people, if they really are partner motivated and in the partner group, might even want to have the chance to make their own money and have nobody tell them what to do. and in the private equity world, you’re gonna lose that identity when they become, in general, when a smaller firm merges into 100, or a 2 million 100 million dollar firm. whether there’s private equity or not, the fear of the smaller firm is we’re going to be a bunch of notebooks, which, you know, the right situation, that’s not the case, but it could happen.
liz farr
yeah, yeah. and i’ve talked to enough small, firm owners or owners of small firms, who are really forging a different path forward. and they’re really putting their own imprint on how they want to operate as a company. and they’re looking at it not just as a practice, how will i practice as a as a cpa? but what kind of business do i want to lead?
ira rosenbloom
that is such a powerful statement, and i appreciate your saying it because it triggered my point in the following area. for the last number of years, when firms would be in conversation with a larger firm, the larger firm quickly would say, and how many 1040s do you have, and the more 1040s, the bigger the frown on the acquirers side, they didn’t want 1040s, which there are many reasons why they don’t. what we’re now seeing is because these investment oriented firms, won tax practices, there are now outlets to take some of these 1040 clients and sell them off before you get the frown from somebody else. and there’s a growing group of younger people, 30-somethings and late 20-somethings who have said, i don’t want to be part of a big group, i’m okay preparing 1040s i want to do that. and i want to do financial planning. and i want to do money management, and i want to sell insurance. so little boutiques are being, you know, created with the proper licensing. and it’s now a important solution for housing these 1040s and making it easier for firms to move in one direction and creating an enterprise for somebody else who wants to have that mission statement, where they’re taking care of the financial well being of families or of individuals of particular definition. this is something that’s now bubbling up. and i think it’s really, really wonderful that it’s happening. so it you know, contours nicely to what you said about what you heard what people are trying to do younger people are looking to make a difference. and looking to put their own imprint on it, not to disrespect what the bigger firm has done. they need to do it differently. and this is just an example of how they do it. as well as the whole area of cas big firms, you know, every survey tells you it’s one of the most rapidly if not the most rapidly growing line of service and the big firm. but many of them got there by acquiring small firm, or their competition are small firms, or somebody who worked in the cas of a larger firm, loves taking themselves away from it knows they can do the work and they can find 10 clients very quickly. it’s like buying 10 bottles of water, and they do it. so that’s another place where the younger people are finding comfort. and here’s the other piece of the equation, which is a huge problem for the profession. to do tax prep, and to do cas you don’t have to have the cpa next to your name. now, better, absolutely. there’s a lot of clout and value. but to do cas, generally speaking, the customer or the client is not going to ask you for your cpa or not. and there are many 1040s you could do with a climate of people. you’re an enrolled agent. you know what i think you could prepare a return better than that fancy firm down the block luck. so it’s it’s taking the reason to pursue the exam a way to which i’m not saying it’s a good thing, but it is helpful towards moving pieces of cpa firms, and figuring out how clients are going to get taken care of.
liz farr
right. and i think that that’s something that often gets forgotten and overlooked in our discussions about how to improve your top line. and your bottom line is, you know, what happens to these clients who are maybe not the most desirable or the most profitable? and what happens with them? where did they go. and
ira rosenbloom
in some cases, there’s some entrepreneur who’s only too happy to have them, and they’re gold, to that firm, and to you, they’re junk. so you know, that’s the beauty of capitalism. but if you don’t have motivated people who want to do the work, then it’s not going to happen. but you can create these little bubbles, and the younger people, many of them are not necessarily oriented, to build their own 50 person firm, they’re happy to have 10 people, they’re happy to be able to work with a team. and they’ll build a 10 person, unit, small business, the heart of america, same thing evolving through these different service avenues of public accounting, but not necessarily with the cpa going along with it.
liz farr
yeah, you know, i know quite a few firm owners who are not cpas, and maybe not even eas, but they have learned enough to master you know, tax prep, bookkeeping, cfo services, have services, you know, whatever their specialty is, you know, it’s only audit that really needs the cpa anymore.
ira rosenbloom
and thank god for that, at least, there’s some reason that you know, is out there as our unique selling proposition is that that is the piece. but in terms of, you know, keeping non cpas as part of a cpa firm, i think many of the larger firms, you know, we’re out of the box, and they’re thinking to hire kids right out of school, who had no background in accounting, and taught them, you know, things that would allow them to work and be very functional on a cpa firm. and then as it progressed, some of these larger firms, who have nothing to do with private equity made the decision to create an entity for the attest, and an entity for the advisory, so that those people who will never pass the exam because either they’ve never got the school for it, or they’ll never pass, it can be owners and partners in the advisory piece, and have nothing to do with the attest piece. and that’s okay, you’re going to keep people that way. so i think it’s an example of people being disruptive, and being progressive, for the betterment of their business. and that’s why i say if you’re going to do a merger, do it to make it a better business. and if in your world, you can’t accommodate somebody who’s a non cpa to be your partner for a variety of reasons, but the next player can and therefore, that person will stay. that’s an important component to the decision making process.
liz farr
absolutely, you know, it’s, it’s, you know, the multifactor problem that has to be solved when you’re looking at at a merger or an acquisition. now, now, if a firm is thinking about being acquired, what are some things that they can do to make their firm more desirable?
ira rosenbloom
well, i think there’s a couple of things that you know, or the reality today. one, there are too many firms looking for some type of solution, because there’s not enough of a solution internally. so differentiating has to go along with desirability. and as i said earlier, i could have a cpa firm that has some really wonderful clients. very diverse, we don’t do anything special, but whatever we do, we do well. unfortunately, that’s not a differentiator. and someone’s going to look at that and say, respect, love it. your top clients are great. but there’s not enough glamour here, but we’ll take it because we see the ability to grow it. but we’re going to need to structure the deal differently. it’s those firms that have the differentiators about him, the niches, the extraordinarily value added components of the work that they do. those differentiators are really powerful. and those firms that are right size because not, if i said to you tomorrow, you’re five years away from doing a deal, go out and become a forensics firm, because that’s the hottest thing in the in the market today. it’s not going to happen, you can’t do that. so you’ve got to work with what you’ve got. and you’ve got to be able to be your best salesperson. i go back to what i said earlier about that first meeting, where it’s about show me the money. no, it’s really about where’s the beef. and the firm who’s there, the small firm has to very confidently but not in an arrogant way, say, this is what we bring to the table. we bring this expertise, we bring this reputation, we bring x amount of referrals out that we couldn’t do i had a situation just recently that we’re involved with. and it’s a two and a half million dollar firm that’s going to potentially merge into a $50 million from $50 million firms got a lot of lines of service that the smaller firm doesn’t have. and i and the smaller firm said and when we turned away clients, i said, well, how many did you turn away this year? a half a million of revenue. wow, that shows you how highly regarded this small firm was. and it’s not that small. but that’s a big number to turn away. and then how much are you referring out for other services, a little bit less than that. so you have to be able to articulate to that next person, why you’re a great business. and the entrepreneurialism is going to be the differentiator in terms of where you’re at. otherwise, it’s going to be unless you have that unique line, it’s going to be hard and most cpa firms don’t have that. but they are a wonderful business, you’ve got to be able to come forward at the first meeting and give the other party the reason to want to talk to you more. so you’ve got to show them where the beef is. at the same token, the buyer has to sit there and be able to indicate to you why you’re the right match for them, that what you’re bringing, will turn into revenue for everybody versus, oh, that sounds really great. we don’t do any of that stuff, which is nice, but you don’t do it. so what will be the plan to get it done. that’s where these early conversations are really important. and so you got to be your best salesperson. the other thing that’s really very unfortunate. and again, it’s always because the cpas think numbers first, they don’t put enough time into understanding the kind of operational change that may be in front of them. and then when they hear about it, they begin to get anxious. talk about that upfront. number one, what you’re imagining may not even be the case, it may not be as traumatic or it might be traumatic. let’s talk about it. let’s see how we can get you to overcome that, again, is that a type of cultural component? there’s no question. it’s a division of culture. and that operational change. it’s not just about which software you’re going to use, it’s a process. how do we how quickly does work, move out? how is work assigned? what happens if a client is unhappy? all these types of things you’ve got to discuss up front so that you can understand and most of these people or they don’t understand what that integration process will be. and they don’t understand the stages that go into negotiating a deal. it’s very interesting, they may have guided a client of theirs to a transaction. and it was i answered that tax question. i helped them with the due diligence. but they didn’t necessarily look at the composite of functions that went into the negotiating, and the actual completion of the document. oftentimes, they they had that client of theirs relied on an attorney, you they need to sit with someone like myself, who’s going to walk them through everything and say, look, this is the reasonable amount of time, it takes between meeting number one and meeting number two, this is the reasonable amount of time it takes this is the kind of data you have to have available. and it has to look in this kind of form. and if it doesn’t, there’s too many other people they can talk to the buyers are not looking for complicated situations, they’re looking for easy situations. so how you going to make it easy for them. and if you made it easy for them, you’re going to make it easy for yourself. so people don’t prepare far enough. and they don’t put enough attention to all these real details and addressing their own fears. fear is very normal. it’s very natural. address them early. let’s see if we could figure it out. and maybe you need a couple more years to get it done because they’re just things that you have to clean up first. like, somebody’s trying to sell their home, they may have to paint it first before they sell it, it could be a beautiful home. but it’s a little outdated, or it’s a little stale. so and that’s where folks just don’t prepare far enough in advance. and then they sit back and say, but i have a great business. how come? how come? i’m not getting multiple offers?
liz farr
right, you know, one of the one of the firms that i’ve written content for only in this last tax filing season, move to paperless work papers. wow. yeah. wow. yeah. yeah. and you know, it’s a great firm.
ira rosenbloom
yeah. outstanding clients, and great, great people. but, you know, if i’m a buyer, and i’m looking at that firm, versus one that’s been doing it for five to 10 years, we’re talking to the one for five to 10 years first. too much. there’s, there’s a reason why you didn’t do it. and it’s sending me, you know, a bad sign.
liz farr
absolutely, absolutely. now, now, are there any differences in firm preparation groundwork? are there any differences between whether you’re looking for private equity or to be acquired by a new owner? are there any differences?
ira rosenbloom
well, i think if you’re in the private equity world, look, they’re motivated by a return on investment, they’re completely metric driven, not to say that a larger cpa firm doesn’t want to make money they absolutely do is about making money. but the private equity firm is going, you’re gonna have to be able to show them where the upselling is, where the ability to introduce the technology is, so that that bottom line number, within two years can be radically different on a pro forma basis, when you’re talking about merging from one cpa firm to another, unfortunately, they don’t frequently enough, come up with a timeline to say bye, bye, when should we be seeing this kind of result. but for them, it’s really about where is the common ground of client to the private equity firm, they don’t, they don’t have any clout. but cpa firms is the common ground of client and the approach to client engagement. and so understanding what firms of a particular size and brand are looking for, allows you to determine whether or not that’s a conversation for you to have or not, because if you know that that firm has an average client, you know, in fees of $20,000, and yours is 10. there’s a disconnect. if you know that they primarily do real estate and you have 5% real estate, there’s a disconnect. so you’ve got to understand what the marketplace is. and work around that. again, you can’t flip the switch easily overnight, and say i’m going to take my average fee from 10,000 to 20. but you might be able to work on some of your larger clients and get that representation of client to be a bigger percentage of your firm, which might make somebody else more comfortable. if it’s a larger firm, it’s a smaller firm, they might get very nervous about it. so that kind of work you can do, you need to have an expert come in there. this is a data driven process as much as i talk about where’s the money, the first filter is going to be all about data, data that really exists, and data that could be the future potential, which gets back to the referrals out the referrals in and if the larger firm, you know, does so many of these lines of service that you’re referring out, the larger firm can sit there and say, well, you refer it out 300,000 with our sales team, we could turn it into 600,000. that’s the kind of stuff that’s very meaningful between cpa firm to cpa firm. on the private equity side, their markers are very different markers. and, again, i don’t know that it, you know, the majority of cpa firms are really the right candidate, with the exception of the tuck ins that could come if feasible. but the firm that’s acquiring that custom entity with the partners in their mid 60s, has to love that client base because they’re putting real cash down. so you know, they got to believe that those clients are the right kind of clients for them. because anything could go wrong with somebody at a certain age.
liz farr
absolutely. yeah, we’ve talked a lot about what’s going on now. i want you to put your hands on your crystal ball now ira and try to look into the future. what do you use? see, as something coming, that a firm owner could start now to get ready for,
ira rosenbloom
i think that what we’re going to see is more of the money management firms entering the space. and this is not about the old time american express, this could be some local money management firm that manages $200 million, or manages 100 million, they’re going to say, we’d like to add another 200 clients. and we’d like to create that by buying those clients from you. or we’d like you to come in and manage that division for us. so i think that this is going to become much more of a real factor in the accounting space, i think that the aspect of younger people, bubbling up boutiques, is going to become much more of an issue. as i said, it’s starting, i think it’s going to become significant. i think, all accountants love the c word control. so this gives them the ability to be in control, and i don’t, i don’t have to be accountable to anybody and i, you know, mergers and acquisitions, they’re not for everybody. and there are some people who are great with accountability. and some people will fight it, but they still turn out to be great partners. that’s okay. but then there are other people that it’s like, going to be torture, and it’s never gonna go. so finding these little vested interests, i think are going to be very, very realistic in the future of the transactions. and what i can’t give you any type of clarity on because it’s just not my window. is artificial intelligence. where is that going to take this entire profession? it’s going to take it to a lot of very exciting places. and does that now open the door for a whole new group of owners and operators? probably yes. but i just don’t know what that is. i do think that the advisory services, which is the pitch of the aicpa and the pitch of the larger firms, you know, so many surveys are talking about the need to really go in that direction, i think that you’re going to find a bunch of advisory firms that are going to have little accounting bubbles in them, that they’re going to be heavily advisory, but they’re going to tuck in some type of unique accounting component, which could be the aspect of little units of cpa firms us breaking away and joining forces with that bigger advisory firm, especially on the transaction advisory side. and even the aspect of family business and the transference of family business from one generation to the next, i think these bubbles of boutique are going to become very real, and many small things will come out of it, small businesses will come out of it. but the bigger firms are going to be very disruptive. and they may pick up three of those smaller businesses and make a bigger property for a local cpa firm, because now they can’t even have access to that provider anymore. that’s the advantage that the firm has, and the private equity firm. they got the money, and that is honey.
liz farr
yeah, money speaks gaps on i have no doubt about that.
ira rosenbloom
that’s what i think is going to be the case. the other thing that i think is going to continue to tell the story is we’ve seen generational shift now in the managing partner. so there’s a new breed a new generation of managing partners, who number one, see managing a cpa firm differently. number two, see work balanced differently or work routine differently. and their approach to m&a is radically different than the prior generations approach to m&a. and as these managing partners take their seats, we’re going to see their preference in m&a, which is yet to show its hand. but it has to contour to how they just are changing the daily operation of their cpa firm. and they’re not going to be driven to the top line. most likely, like the prior generation, the top line was a very big component that fueled the m&a. these old managing partners are going to be in line with what you described before, which is what is our mission? can we make that impact? and will we be happy with the impact that we make? and that’s different than then the top line and having happy clients?
liz farr
yes, that’s very, very different. yeah, for some of the firm owners i’ve spoken to it’s not so much the top line, but the bottom line that matters
ira rosenbloom
it matters. and for some, it’s, it’s about what are we to our community, we make a very good living. but we would like to take a piece of that, and invest in something for our community, invest in a school, invest in a neighborhood, create scholarship. so yes, you have to have the profitability for it. but it is coming out of that partners pocket, or it’s coming out of the community’s pocket. and that’s how they’re making a difference. they’re not doing it just to retain their employees. oh, that they liked that. so we’ll do it. no, they believe in it, which is not necessarily how the prior generation looked at their place in the business world. right.
liz farr
right. right, yeah, at a firm where i spent quite a few years, our commitment to the community was that if we were chosen to be on the board of a not for profit, then we could include the time we spent on that in our billable hour quota for the week, which is a very different kind of contribution than actually writing checks. and investing in the community, that’s a very different proposition.
ira rosenbloom
very different. and again, going back to the concept of load management, how much can one person take on and be proud of the outcome. and that’s a really important yardstick to have. and my level of pride may be different than your level of pride. but we need to be proud of what we’ve done. and this is taking hold more and more in the next generation of managing partner. and as i say, it’s going to flavor all the transactions that come forward from this point forward. and what degree of latitude that managing partner has to get the deal done. in many cases, the prior managing partner had a lot of authority. the next managing partner either doesn’t get it because they weren’t a partner for as long or doesn’t want it, they want to build the consensus, and said, even if i had it, i’m not going to use it, i want to make sure that this is everybody’s idea with the previous managing partners and say, are you nuts, i’m gonna go out there and try to build consensus. no, i’m gonna do what i want. so this shift is very real. and it’s something to be watched and appreciated. and if you’re a seller, you need to have an expert who’s going to orient you as to what’s going on in your backyard, and in two other backyards, so that you can be positioned to succeed in negotiating. and i think it’s important that those folks who are looking to sell have to recognize that the buyers do have a lot of opportunity. and what they’re not interested in doing is wasting their time. so they may have a meeting with you to hear that you’re not sure. but when you have the second meeting, you can’t tell them, we’re still not sure if we’re going to do a deal or not. they’re not interested in window shoppers, they’re interested in, in strongly committed transactional lists, whether they’ll be the right solution is another story. so you have a very limited opportunity to get your education, get it. and then when you’re really serious, go back don’t don’t create ill will, because that’s not going to work to your advantage. time is very critical. and you’ve got to get an expert to get you trained and ready. and the same thing holds true for the buyer. if the buyer can’t communicate their vision succinctly and powerfully enough, you’re not going to get the the acquisition that you want. because that person has come back and say, i didn’t understand what they said i i just confused. it’s got to be very potent, you only get one chance for a first impression. and you got to use it well.
liz farr
absolutely. well, i think that that that is a perfect note to end our conversation on that, that you’ve got to be quick, concise, clear and direct about what you want, and what you’re looking for. i want to thank you so much, ira for talking to me, and sharing your wisdom with our audience.