The Art of Buying Accounting Firms: People First, Economics Second

Welcome to the Accounting for Innovation podcast where we explore cutting edge strategies and insights into the world of accounting and finance. Presented by Decimal and the Radical cba, each episode dives deep into industry trends. Whether you're a seasoned professional or a budding entrepreneur, join us as we unpack key concepts and share practical tips to drive success. Welcome to the Accounting for Innovation podcast. I'm Jody Paytar, the Radical cpa. And I've been at the forefront of innovation in the accounting industry for over 15 years. My co host, Matt Tate is the CEO of Decimal, one of the fastest growing accounting companies in the country and an accounting innovator. And I'm really excited today to get back to our second conversation on mergers and acquisitions. So our first episode was around being a seller to an M and A, and now I'm excited to talk to Matt all today about what it's like to be a buyer and what you're looking at when you're thinking about acquiring firms and what that looks like. So Matt, let's just start with like the basics. Why do you even want to buy firms as opposed to growing organically?

I think you look at it, there are a couple decisions to make in wanting to buy. Number one is it's a great way to grow and it's a great way to grow your client base and to bring in new clients. But I think most importantly, it's a great way to bring in new team members. And when we look at our, and we've made two acquisitions. We bought KPMG Spark from kpmg and we bought Fact, the reporting software's bookkeeping business. So we've done two carve outs and we look at it as a people first, an economic second decision, and it helps us grow. And I really love the economics of acquisitions too. But that's really our third reason behind doing it is the economic side. So we like to grow and we really love the people side.

Yeah, I think that's so key when you think about like acquiring things. And I know lots of, lots of firms are struggling with talent and so they're thinking about using M and A for talent as well. So, okay, so how do you get started? Like, how do you pick what firms you're gonna buy? Or like, where do you, where do you even begin? There's like a bazillion firms in, in the country.

There are tons. And I think, you know, we've been a little weird because our, our acquisitions have been entirely opportunistic in both cases for us. We were approached by KPMG and they asked if we wanted to buy Spark from them. We'd been taking some of their employees through hiring and, and then taking some of the bigger clients through just organic growth. And. And they basically called and said, hey, do you want the whole thing? And. And then factor was another similar thing where the FACTA team called us, they said, hey, we want to focus on the tech. We'd love to sell the services. Are you interested? So to me, that actually gets to the first strategy for growth, which is just get to know people, spend time in the industry, spend time getting to know people, going to conferences, doing things like this, like, really get yourself out there, and it's really important. And we've done this well at decimal to build your brand. We are a very authentic brand. We are a very. We're a brand very focused on flexibility and output. And, and that means that people come to us. And then the other thing that you're trying to do is you need to set your ideal profile for growth. So I'll use decimal as an example where when we look at growth, we want to be able to service a hundred percent of the clients remotely. So that right there knocks off a big chunk of the accounting firms out there, much less, thanks to Covid. And that's why I think it's a really great time for us to be in the market. Acquiring is. We want that. And then number two, you start to look at the employee base and you think, like, who would be a great fit on the culture and on the team? Like, your company has a culture, and when you do an acquisition, that acquisition will either complement your culture or, or it will change your culture for the good or the bad. And that's when we really think about the culture of the firm, the culture of the company that we're looking to acquire. And so I think you're. You're number one. You want to just get to know people, because the best deals you and I talked in our last episode. From a seller perspective, having a good advisor or broker can be very helpful as a buyer. I love deals that don't have a broker. They're much cheaper for me, much easier to do, and they have a tendency to focus on the people first. And the economics become a big part of it. They always are. But I like to start with the people. And we are weird in the sense that we spend more time on the people side and slow deals down because of it. But I think that's what you're really looking for is. Is a cultural fit, because there are lots of things that the economics work, right?

And so then too when you're thinking about this potential target, like how do you figure out their cultures? How do you, how as a, as a buyer, how do you know that like this is going to work? Because economics, their numbers are numbers, right? Like numbers are numbers, right? So how do you know that like this is the right firm or you know that, that, that it's going to be successful? Because I think that's the thing is, is you want it, you don't want to invest all this time and effort and then at the end all those clients lean, right? Like that's not good for anyone. So how do you know that these culture fits? Like you have a checklist or like leave it to the accountant to say, right, checklist. But how do you know? Or is it just a feel?

No. So it's yes and no. I mean, here's what. Let's talk about the stages of a deal really quickly because I think it's important to understand what stages occur in a deal. First you negotiate a letter of intent and that loi outlines the key terms of a deal. Then you have a diligence period. And during that diligence period is where you dive into the economics and you get to run your diligence however you want. Now most people look at diligence as a financial only perspective. Decimal. What I do is we write into our letter of intent that we will get to spend time with every employee that will be joining us at decimal. And so what we did in KPMG Spark's acquisition was we actually ran every single KPMG Spark Employee 3 through, through a three interview process. We got to know each and every single employee as if we were hiring them. And then the third interview was, hey, you've now spent time with quite a few people from decimal. Interview us, ask us about our culture, ask us about our business and we'll bring whoever you want into that meeting. And so we did a dual interview process and we really, that was when it locked in for us that like you said, the economics, the economics of a deal is an equation. Every business that wants to acquire creates their own equation. And what is going to be a successful or profitable deal. And that equation is what it is. But the people side that interviewing, writing that into the deal is a big part of what we do. And we did it with the fact that team as well, where we wanted to really get to know people. And then the other perspective, because you did mention the clients on the KPMG Spark deal, for instance, as it became clear that we were definitely going to close. We actually started to have joint conversations with some of the bigger clients that KPMG Spark had to let them know before the deal got announced with a press release that it was happening. So they weren't surprised. So we really built that trust because a deal making process is very much about building trust and you start building that in the loi and you continue to build upon it during diligence and then you hope it's good enough so that when you make the acquisition and you close and look the big deal is you transfer money, then that that trust is good enough that the continuation is working well.

Yeah, I think that's critical too. I know, like even on, on my side when we were, when I was selling, like I had those conversations with our largest clients too independent of everything because I wanted to make sure that they were going right, like, because again, if the client base doesn't transfer and then you, the person who's getting acquired doesn't get paid out. So it's in everybody's best interest to make sure that everything is aligned and everyone moves together as the deal happens. So I really, I really like this culture piece because I think it's key. Right. So when you think of due diligence, what are you looking for beyond culture? Like as far as like how their financial statements look or especially being that you're. And maybe because you're, I'll say, based in technology, you're on the innovative side. Right. If you were to acquire more of an old school practice, how does an old school practice look more exciting to you? Right.

So it looks very exciting to me by the way. And the reason is, is because it is an economic gain. And one of the things that I'm looking for is I know that at my company and we don't, we are not a firm. We do not call ourselves a firm. We are a company. At my company, we very much move people to a margin target that we have and we do that while also creating a really wonderful client experience. And so when I look at each firm, I, I'm looking at what is the client type? Are they the type of business that we already work with or within the continuum of those businesses? So will they be a fit to what we're already doing? Are they paying somewhat similar to fees? And as we look at the operations of the business or of the firm that we're acquiring, can we get the same marginal jump? And in a lot of cases we can improve margins by upwards of 20% and that's an astronomical leap. That means that my payback period on the acquisition is really fast, which means that I can use the same cash eight to 12 months later to do it again. And so that's part of the economics that I'm looking for, is can I do two things? One, are they a good fit? Then Two, can I improve margins operationally? And three, can I upsell? So, like Facta, for instance, didn't do tax. Well, decimal does do tax. So all of a sudden all of the acquired clients become an upsell potential for tax and maybe our bill pay and some of our other services. And so I'm looking at increasing the total revenue of each client, increasing the margins of each client, and maintaining or improving retention. So those are all of the things that we're looking at as part of that equation is, hey, we want to make sure the people that work in the firm or in the business are going to stay and be a good fit. Because that is one of the biggest, the biggest problems in retention is transitions of people. Every firm, every professional services company deals with that. You lose somebody, it puts those clients at risk. So if I can keep retention, keep the right team, and then also improve margins, also improve upsell opportunities, that is a really good deal.

Yeah, I love that approach because. And I love that you're laying it out because I think a lot of people like you go into this acquisition process and you don't necessarily have a formula or like understanding of it. So. So thank you for laying it out so smartly. So, okay, so let's say the deal happened, we're good, everybody signed, the money got wired, we had our celebratory wine at ten o' clock in the morning. That's what I did. When I sold that. That was in a, in a paper cup. That was our, that was our big celebration. And, and now it's like, okay, now what do we do? Right? Like, it's so funny because it's like this, all this intense stuff happening and then this deal happens and then you're like, okay, now what do I do? Right? So now what happens to make sure that like it's transitioned or how as a buyer, how are you thinking about now actually integrating this new team into your, into your space. And when I say space, meaning I know you're remote, but into like kind of this culture, into this operating, this operating procedures.

So that's where we'll go back to two things. One, people, and then two, speed. So speed. Move as slowly as you need to. You don't have to go Fast. You don't make changes very quickly. The first thing that you're doing is reassuring your acquired clients that everything will be okay. So that is, I think, the first thing that we do. So first thing we've done in literally both acquisitions with the bigger clients is I immediately reached out as the CEO of Decimal and offered to hop on and ask them to hop on a 15 minute call where I could tell them about Decimal, tell them about our company and our philosophy if we hadn't already met with them, and reassure them that nothing was going to change. Talk about how we were going to do the transition and give a timeline for that transition is usually like three to 12 months, depending on what's going on. So we set clear expectations and boundaries. I also bring my coo because what I want to do is I want to give them an escalation point where if they're worried, they can call the owner. If they're worried, they can call the boss. They have that full escalation point all the way up through me. So we sit down and have those meetings with each one of the clients after we have, and by the way, during diligence, we are building our transition plan. So we do not wire money or sign a deal until we have a fully agreed upon lockdown transition plan. Once we have that in place, we're ready to go and transfer the money, which means that immediately our team starts helping and augmenting whatever the acquired team is so that realistically these clients are getting double the help that they've ever gotten. And like, they're getting just loved all over. And then we get them into our way of doing things over that three to 12 months. And it just depends on what's happening. And, and we don't increase prices, we don't do anything. Our goal is just to really make them feel comfortable and safe and that we will be a really good solution. And we talk that our goal is to prove how awesome we are and how great the experience will be as quickly as possible. So it's trust building. And we do that through showing the work and then through sitting down with ownership to really show value.

And okay, so now like, and now you've acquired these firms, right? So let's say six months in, like, you know, we've gone through this transition plan. We feel like things are good. Do you think, or through your experience, has this worked successfully or do you find that like, you have like one person who doesn't fit or like, and, and how do you deal with it? Right? Like, how do you deal with the post merger, that it's not the whole merger, right? Or it's not the whole thing that kind of didn't work, right? And maybe yours have been a hundred percent wonderful. But let's just say, like, there's one piece of it that didn't work the way you expected it to or how you wanted it to. How do you go back and kind of adjust for it or change or like, what. What are the next steps? Cause I think, you know, no decision is ever final. You can always make a new decision, right? So a hundred percent. The question is, is now, like, what do you do if it's not perfect after the fact?

So there are a couple of things that I'm doing as a CYA through this whole process. Number one, when we make an acquisition and do those interviews with people during the diligence period before we sign the deal, we may decide that we're not bringing everybody with us. And so we've already built that into our transition plan because we've run them through the decimal interview process. So I'm okay running that. And. And I think that's a good first thing. Second thing is, as part of our transition process, like I've said, even when we bring people in, we augment them with the decimal T. And part of the reason for that is I am going to force a transition. I am untethering these clients over 12 months from the firm or people that they started with into decimal. So I may like the people, but I'm untethering that client relationship because I want every client to think of my relationship is with decimal, not with Jody, not with Matt. So we are untethering that to create the experience as decimal. And so we're creating additional points of contact and relationship drivers over the course of that time to untether that, because I think that's really, really important for the flexibility and growth of the business. And the second thing is, we are very clear about what it takes to be successful at decimal and who is a successful decimal team member. And I don't care if you got acquired or if you didn't, you will live up to that. Because if not, everybody else wonders why. And so if we have to let somebody go, even if there's risk, we're always okay doing that because it's the right thing to do for the decimal team that is doing the right thing.

No, I think that's really important because I think everybody thinks about the merger. They think everyone gets excited about the deal. Right? Like, the deal is so exciting and Then it's like, okay, but now like you have to deal with the after effects of the deal. And you know, word on the street, when you talk to all these people who've been through M and A and whatever, it's like the synergies don't always equal what the expectation was. Right. And then how do you deal with the after effects? And I think that's what many firm owners are concerned with, right. Like when they're going into being acquired, like they want to make sure that, like they're making the right decision and they want to make sure their buyer is like going to facilitate that. Right. And make sure that the, the economics work for everyone. Because again, it doesn't matter if you merge or you get acquired if everything falls apart after the fact. And, and it, oh, a hundred percent. It's interesting because as I hear many of these people speak on stage about their ways of going out after acquisition. All I keep thinking of like, oh my good, like, oh my goodness, like, don't.

It's going to be a net. Well, and you know, one of the things we talked about when we were talking about your story and I ended the episode by saying, always do what you say you're going to do. And I think that's really important from my perspective as a buyer, which is I want to build out a plan for these people that I'm bringing in. Maybe it's a three year plan. Hey, here's where I think you're going to be a practice lead. Your career is going to grow. Here is what I'm going to do for you, and here's what I'm going to ask for you from you in return. And if you do these things, here's where we get to. And as long as I continue to adhere to that and build that reputation up, then it becomes a really great place to land. It's not for everybody. And I really think a lot of firms that do acquiring make the mistake of thinking we'll just make it work later. That's a really bad idea. And it's a huge risk not only to that acquisition, but to all the people that are already at your firm saying what the hell did they just do? And I've seen that occur in accounting firms that I've been around where they just did an acquisition because they thought they had to. And I remember one firm that I was with the kickoff of the year. Hey, our theme for this year, our entire goal is to not get acquired. By the way, two years later, they totally got acquired. So that did not work out well for them. And it's a horrible theme, but like that's a bad idea, Right?

Right. And I think it's really important too, when you think about it, is I think what people forget about mergers and acquisitions is the partners are the ones making the decision. Right. And for many of them, they are concerned about their team, depending on how big. I think most partners are concerned about their team and where they land. But I think the big thing to think about is the employees of the company are not part of that decision. They may have, some of them may have a little bit of input, but most of them are not part of that decision. And so you've just disrupted their whole world because they like worked for one company and then like on the next day they're working for another company. Right. And even if they've gone through this diligence in this thing, and I think that's something to remember if you're a buyer or a seller is your, your team is, it's happening to them, they're not choosing it. Whereas when you're the partner, you're making that decision. And like me, I made the decision for a very real reason, that I was ready. Right. And like things versus the employees, they're just coming along. Right. And it's not their decision. And I think that's, that's the one thing that I think always gets lost in all these M and A conversations is how the team is going to react or how the team will adjust. Because the, it was an outside force that happened to them and some of them, like they're going to be in the new place and it's going to be amazing and they're in a better place. But for some of them, it may not be. I mean, maybe they wanted to work in a, in a firm with only, you know, five people. And now we've been merged into a firm that has 200 people. Right. Like, I don't care how great that 200 people firm is. If you're used to like working with five people and that's the size of firm you want to work in, that 200 person firm is never going to fit.

When we made the acquisition from kpmg, there were two or three people that left because they wanted to work at KPMG and work their way up through the KPMG tax department, that's totally fine. And I think the biggest thing and my biggest takeaway before we close out today's episode is think of acquisitions as a people first game. And if you do that you'll always be much better for it because the equation is the equation and the economics will always be what they are. So with that, Jody, thank you. And thank you for tuning in to the Accounting for Innovation podcast. Brian, to you by Decimal and the Radical cpa. You can find more episodes of the Accounting for Innovation podcast wherever you listen to podcasts. And don't forget to pick up Jody's new book, Radical Pricing how to Optimize Profits, Delight Clients and Build a Top Value Firm. And as always, Jody and I would love to connect on LinkedIn. Thank you.