How to Sell Your CPA Firm

Bob Lewis: Today's session is really about how to sell your CPA firm. It's a little more to it than just that. The panelists we have here are all involved in some form of training CPA firms through the complete merger and acquisition process, to the financing of a deal so there's not much anybody in this room has not seen. Although with that said, there's always a new frontier that seems to pop up somewhere along the line. For those of you who aren't interested in selling, maybe looking at a succession, maybe looking to be the acquisition side, the information we're going to share today will cover both sides of the coin in this. With that said, couple of small housekeeping things. If could just look at the bottom, there's a Q and A box at the bottom of the screen. We're taking questions live so if anybody has questions, please fire them away in the Q and A box, we'll be able to answer them. If you want to use the chat box, that's fine too. I'll answer that one live. Are you recording today's session? Yes, we are. Our first question has already come through and we're live and recording. All right, with that said, let's go to the next slide. I'll introduce the panelists. We're going to start with myself since it's easy. I'm Bob Lewis, I'm the president of the Visionary Group. We exclusively support the CPA profession, have done so for 27 years now. We do a significant amount of merger and acquisitions, succession planning and we help firms with their organic growth overall. We're very deeply involved in this profession. We speak nationally and the people that I'm tied to here, this is how I've met them all over the years. With that said, I'm going to shift over to Phil. Phil, please introduce yourself. Phil Whitman.

Phil Whitman: Well, thank you so much, Bob and I appreciate your inviting me to participate on this panel. Some of you out there might think, wow, that's kind of weird, Phil and Bob are competitors. But like you guys in the CPA firm arena, we are very friendly competitors. Yes, there's some overlap we do share. I'm the CEO of what used to be Whitman Business Advisors, now Whitman Transition Advisors. We help CPA firms with growth and as a matter of fact, we use the Visionary Group whenever we have a firm that needs their chief growth officer strategy. In other areas, we are very active in recruiting so we help firms get CPA firm talent at all levels and we do merger and acquisition. I'm here maybe to learn a little bit more from Bob, who has become a tremendous strategic partner. Thanks again for having me here, Bob.

Bob Lewis: There's plenty of room for everybody, Phil. Phil and I have a, an arrangement where we just try and make the right things happen for firms. With that said, I'm going to introduce you over to Bruce Warren. Bruce, Bruce represents our financing arm and some other interesting things, take it away.

Bruce Warren: Hi, I'm Bruce Warren, vice president at Oak Street Funding, which is a division of First Financial Bank. As Bob said, I'm a lender, direct lender portfolio. We specialize, well I specialize personally in accounting firms and investment advisory firms. I've been here for about seven years now but been lending to accounting firms for 12 years. I'm the guy that originates, puts together and vets and delivers on financing for these acquisitions and successions and partner buy ins. We have those product lines for accounting firms. That's Mr. Bruce Warren.

Bob Lewis: Okay. More from Bruce later. Our next panelist Peter Fontaine. Peter brings the interesting aspect of the legal side of the house for CPA firms. Peter, explain your background and take it away.

Peter Fontaine: Again, thanks Bob. Peter Fontaine, I'm manager partner of NewGate Law. All our firm does is work with CPA firms. Probably 40% of our business is related to M and A, 30% or so is related to partnership agreements, entity agreements and the last 30% is a little bit of this and a little bit of that, fair amount of regulatory work. I started NewGate a few years ago with some other people that I've known for quite a while. Before that I was general counsel at RSM. Before that general counsel at American Express Tax and business Services. And last but not least before that, assistant general counsel at Arthur Anderson and actually am still a partner there, interestingly enough. All in all, about 25 years working exclusively with accountants. Very exciting, lawyers and accountants, it doesn't get much better than that I don't think.

Bob Lewis: One thing Peter undersells himself is he structured a significant number of deals, M and A deals over the years, a large number and plus partnership agreements and unfortunately, occasionally some disputes that arise. Our last panelist, but our least is John Leonetti. John is with the International Exit Planning Association. He's got a different twist on this. He does a lot of the training on how to get companies ready to sell and also represents some on the investment banking side. But John, I'll let you take it and explain your background.

John Leonetti: Thank you, Bob. And thanks for having me on the panel. It's great to be here. We're in our 15th year at the IEPA. Some know us as Pinnacle Equity Solutions. I guess in short, my business card is this book called, Exiting Your Business, Protecting Your Wealth. That came out about 14 years ago and it had a very simple message in it that business owners can prepare before they sell and get a better result. And to help the market, we branched into two different businesses. One of them does training and certification for advisors like CPAs, to be of assistance, to help their business owners. And we also are SEC, FINRA licensed investment bankers who handle transactions as well. We see both sides of it. What we like to say is that we practice what we preach. We follow the system in our book that we teach through the association and the certified business exit consultant designation. And then we take our experiences in the market working with panelists that we have here today and bring those experiences back into the training so it creates a cycle of education and reinforcement as well as a nice international network of advisors that leverage each other's skills. Thrilled to be here. Thank you for the invitation.

Bob Lewis: One of the things that I see when we're doing transaction, I suspect Phil and the rest have it as well is, often the firms that are looking to either do an exit or do an acquisition, have some limited experience in this market and don't know what questions they ask, how to structure the deal, how to identify and find a deal. With John's perspective on the training side, he's really more focused more so not on CPA firms, more on helping maybe a CPA firm help their clients get ready for this. There's a lot to it that is simple to get to once you understand it but without that knowledge, it can be quite a gap and quite a challenge to make it a deal to go through. We're going to go just back to our main screen at this point and start with our questions. There will be no other slides or PowerPoints here. Abi, can you? Thank you. All right, with that said, we're going to start on activities and drivers. How intense has the M and A activity been? What is motivating both buyers and sellers? Phil, we're going to start with you on this one. Who's muted as well. We're off to a great start.

Phil Whitman: Here we go. At least once a day, someone has to tell me," You're on mute." But thanks, Bob. Lots of motivation and I guess I'll start with some firms once they entered COVID, had challenges deploying a virtual workforce. As I'm chatting about workforce, I believe the number one thing that I hear from firms when I meet with them is there are no staff out there. I'm having trouble finding staff. And obviously this has been a boon to out shoring or offshoring or white shoring. Everyone's coming up with a different name for it. But in any event, people are our most important assets and so many firms are telling me," I can't take on another client. I don't want our service to suffer." And now, truth be told the large firms also have challenges hiring all the talent that they need. However, their challenge is a little bit less intense as it is if you're a small, solo practitioner or a very small firm. One of the things, and just a takeaway for everyone, would you prefer to pay a recruiter or a talent acquisition company 25% of believe it or not, senior accountants in the New York City area are now getting a 100,000 a year. Imagine that, someone with three to four years of experience getting a 100,000. If you need to replace one of them, it's going to cost you 25,000. Take care of your people. But there are so many things. I'll flip it back to you, Bob because I don't want to go scroll through everything. I want other people to have an opportunity to chat as well.

Bob Lewis: Appreciate that. Bruce, what are your thoughts? What's really driving most of the buyers? Bruce sees the back end of these deals before they get funded and it's a little different perspective. Bruce?

Bruce Warren: What's driving most of these [M&A deals] in our space, in the lending space is succession and acquisitions. And succession being part of buy ins or internal people being promoted up through the ranks and taking over larger chunks of ownership. But it's usually a 50/ 50 split that we see between succession and acquisitions at this point. And the drivers on the buy side is typically wanting to get into different geographies, different products, services that they don't have right now. But another one I'm noticing a lot of is they're trying to get good staff because they're having hiring problems right now. We're trying to target firms that could compliment them on staff. And the sellers of course, they're just trying to figure out ways to exit or to have people internally succeed at this point.

Bob Lewis: Conversely add on to that, you mentioned the point about succession being a driver. We actually did 20 deals last year. We've done four this month already and a fifth one closing next Monday. Every single one of those deals, when we peel back the layers, ties back to a succession problem. Every single one. And I know that there are some firms that do mergers and acquisitions because of other strategic reasons but the main driver seems to be more succession. Peter, your thoughts?

Peter Fontaine: Yeah, sure Bob. Thanks. I have seen sort of this gradual shift from a place where firms are focused on growing revenue on the buy side, just getting bigger and on the sell side, monetizing the owner's interest in the firm for succession planning. But I've seen this shift a little bit, a greater focus on growth and planning for the future. What we see, firms are out there, even firms that are trying to sell, they have the problems that have already been articulated. They don't have people, they don't have resources, they don't have capital and the same issue with the buyers. They're looking for people, they're looking for new opportunities to grow in different spaces. And they're looking for opportunities to grow in different geographies. If you look at a lot of the New York metro firms, they're all very, very active on the West Coast because they want to grow their West Coast presence. I'm sure that Phil and Bob, you see it all the time. I would say, really what is driving a lot of this is a focus on future growth, as opposed to just growing revenue or monetizing interest. Even firm that have got good succession plans, they're selling because they need capital and they need talent.

Bob Lewis: Other part is diversification. One of the drivers is increasing their consulting footprint, which is we're actually creating a lot of acquisition of consulting firms in this marketplace for CPA firms because that's how they're growing their advisory sector. If no one has any other comments, I'll move to the next question. By the way audience, feel free to ask a question on anything and we will answer it or at least attempt to. What are firm's selling for? I'm going to take this one and run with it. I know Phil can answer this as well and everyone else but we're going to kind of give it one shot and look, the average selling point that we look at, we start the conversation at a multiple of one times revenue. There are other ways to calculate it. It could be the basis of the last three years of a partner's average income but the core is a starting point of one times. You're going to see firms solve for as low as 0.7. You see firms sulf for less but quite frankly, I wouldn't really touch a firm if it's under 0. 7, unless there's something really tied to it. And maybe as high as 1. 2. Now with that said, value is a very elusive question. Two $10 million firms both having a 35% drop to their bottom line before partner take are not necessarily equal. They may have different foundational investments. They may have a different bench. They may have different niches that they're involved in. They may have more advisory or more shifted away. There's all kinds of variables that come into play here but that's the typical starting point. The cash in the market right now from private equity, which we're going to touch on a little bit later is starting to impact cash up front on deals, kind of all across the board. It's a bit of a mix and we can get into financing and cash up front on deal, which of course is what Bruce talks about. But value is right in that zone right now. Will let value change? It could. John, what do you see in the non- CPA profession? What's a typical value in your company base?

John Leonetti: Yeah, thanks Bob. First, it shouldn't go without saying that 2021 was a record year in general M and A across the board. CPA firms I believe, are also part of that general activity. And that's an important perspective. What you mentioned about one time revenue in the non- CPA world, we would call a multiple of EBITDA, earnings before interest, taxes, depreciation, amortization. Not all businesses sell that way but many do as a standard. One times, for example, easy math, 20% net income margin, EBITDA margin is a five multiple to get back five times the 20%. What we saw on the market last year generally, is a tremendous amount of dry powder or capital, creating that huge demand. But interestingly, there's a limited supply of quality businesses to come to market and whenever you have that basic economic 101 disparity between demand and supply, you're going to see price going up or as we're commonly seeing in the media today, inflation or in the economy today, inflation. As you said, Bob, valuation is a range. In today's market, non- CPA general market, we're seeing an average of private equity group deals at seven times EBITDA. And that's a historic high. And there are companies that report this data just over seven times since they've been measuring it. But to your point, you have to remember then, average has many that are above and many that are below. There is that range. And to your point, Bob, on the variations, for those who understand valuation, valuation is simply the prophecy or the forecast for future cash flow and the risk associated, the perceived risk associated with it. Different buyers bring different perceptions of what will happen and that drives value as does supply and demand. Today, at least in 2021, we can easily characterize the market as robust and all signs seem to point to 2022 continuing to be robust for a variety of reasons we'll get into. Thank you.

Bob Lewis: Would any of you like to comment on any of this? Or should we move to the next question?

Peter Fontaine: I'm glad that John brought up EBITDA because typically in the accounting industry, it's always been a multiple of revenues. I'll say it, over sort of the past year, we've done at least three deals that have been based on earnings as opposed to based on a multiple of revenue because I think that finally people are getting it, that what's on the top doesn't really matter if the bottom line is not that good. Which makes the conversation a little bit more complicated because then you have to go figure out what goes in the middle between earnings in the bottom and revenue on the top and a big conversation. It just makes the deal more complicated trying to figure out what goes in the middle of the sandwich.

Bob Lewis: Report Phil, please.

Phil Whitman: Thanks. Peter, I think you're spot on. We've been seeing a lot more firms looking to recast their financial statements and actually look at themselves more like a business. For example, if you're a partner in a CPA firm in New York where perhaps average partner income is around$ 700,000 a year, I think the way you really have to look at that is the reality is most partners' work could be replaced at a high water mark of a$250, 000 young partner. I think really what you need to do, you need to look at your firm and you need to say," Partner compensation is 250," or some other number you select. And if you're making 700,000 a year, the balance of that is a distributional profits. You can artificially or normalizing create an EBIDA for yourselves and then calculate, well, what kind of multiple are you really getting if you're selling it one time, gross revenue? And as John said, multiples, we typically have not done a great job in the CPA firm arena of presenting ourselves. And I'd say CPA firms typically sell for a lower multiple than other businesses. I don't think CPA firms are getting a multiple of seven, which means that there are businesses out there that are getting multiples of 10, 10X. We introduced an insurance guy that we work with to a private equity group that was doing a roll up. He had a small business, he was maybe netting to himself 500, 000. They wrote him a check for$ 5 million. He had no idea his business was worth that much. I think as a CPA firm, there's a reason why private equity all of a sudden is invading this space. Because they're buying it a pretty low multiple and they're going to build and grow these things and sell it off at a much higher multiple.

Peter Fontaine: Exactly. And it's interesting, Phil, you should bring that. Again, kind of rolling forward a little bit on the private equity but if private equity's involved, it's EBIDA, it's EBIDA, it's EBIDA. That's what they focus on. That bottom right hand corner is what matters to those investors. Not what's on the top.

Bob Lewis: And the concept of this whole is how to sell your firm. I want to touch one more point on the value that you have to really look at two other elements, which are a little bit intangible here. What's the perceived value by both the buyer and the seller? Which is often a gap. Often a gap caused by education or some misinformation. But the other part is what's the need? If you have a buyer with a high need to get into a market or get into a niche, that can increase your value, even though your financials may not be quite where it needs to be. The other part too, which a lot of firms make mistakes on I think is when you look to acquire, they're looking to acquire themselves. And if they're a high performing, high functioning firm, the opportunity to acquire a firm that maybe hasn't gotten to that level that you're at is actually a much more intense value opportunity for that firm to acquire. Just keep some of those things in mind when you're looking at, how do you structure either looking to sell or when you're looking to acquire, what the drivers are and how that would fit into your longterm strategy but perceived value is the key. We're going to get into some emotional things later too, which is also the crazy factor you can't always control, but that's it. We'll move on to the next question, which is really kind of a key one, we're going to hear from everybody in this. Increase and decrease value, what are buyers looking for that impact value? Give some examples of ideas that increase value and decrease value inside a CPA firm. And I have thousands of them so I'm going to stop and turn this over right now, go back to Bruce. Bruce?

Bruce Warren: I should have jumped in on last question because what we look at like everyone was harping on is the EBIDA. We're looking at cash flow to fund senior debt, seller debt, just to make sure that it meets our guidelines as a lender. One of the key metrics we use is something called funded debt to EBIDA, which gives us a multiple of that profitability for how much we can lend. The more profitable a firm, the better for our standpoint because we obviously get paid back and so does a seller. When a buyer's coming in, one of the things that they're going to see from a selling side is add backs or alterations to maybe some expenses that are going to push that number up. We just want to make sure that those are in line with what they expect from when they merge the firms. If there is lease or employees that are being riffed, potentially. Expenses that could potentially push that EBITDA number up or the profitability. These are things that we think they need to be really pointed out on the buyer side just to make sure that they're on the same page from communication. Depth of management is also a thing that can affect value. We want to make sure, like you mentioned before about the bench. Is there going to be enough people there for the work or vice versa? Or is there too many people there for the work? From a value standpoint, that's what we're staring at to manage expenses.

Bob Lewis: Okay. Peter.

Peter Fontaine: Yeah, I would go back I think in terms of what increases value, I'll go back to my first comment which is I think buyers are looking for new service opportunities, they're looking for people, they're looking for geography, they're looking for highly experienced experts in sometimes arcane areas, particularly in tax and they're looking for a client base. And if firm's got that then they're much more attractive. It's sort of obvious the flip side, if you don't have that you're less attractive. But I would go back to something that John mentioned very early on and I think the quality of the firm, how well has it managed? How much has been invested in things like IT, training, the development of the staff? And how's the firm operated? What's their AR? What's their WIP look like? Are they out 180 days on a big number of clients? Are they a well managed firm? And I think that buyers are looking at the quality of the management and the kind of people that they're bringing in who are going to be able to continue to be in some kind of a role with the company.

Bob Lewis: Perfect. Phil?

Phil Whitman: Yeah. Sure. I think when we work with clients, some of the things have already been mentioned that are of high value. I think if I were to say here's the top five, number one, most of our clients are going to look at the average collected rate, the ACR. And for those of you out there that don't know how to calculate it, just take your total collected revenues, if you're on a cash basis, and divide it by the total number of hours it takes you to produce those collected fees and that would be your average collected rate per hour. 200 is usually a really great number. We have some firms, obviously we work with, that are considerably lower than that. Some of our larger buyers won't touch a firm if the ACR is a 160 or lower. Others look at those as great opportunities as fixer uppers with a couple of offshoring, outsourcing technological enhancements can make that ACR increase rather quickly. ACR, I think niches, as Peter had mentioned, geography and as Bruce said, that bench, that talent. We were working with one firm and they said," Wow, looks like a great opportunity. It's two partners and 32 people. We could get rid of all their clients and we can take all those 34 people and deploy them on our higher and more valuable, more important." Now, no one's going to do that. No one wants to lose their client base but talent, some firms are only doing deals because it's going to get them additional talent.

Peter Fontaine: Yeah, absolutely Phil. We see the same thing. People is really floated to the top of the list here in terms of driving deals.

Phil Whitman: Now if I can just to interject and my thoughts are, and everyone is going to say," Phil Whitman is crazy," when I make this comment.

Bob Lewis: We knew that before though, Phil.

Peter Fontaine: Yeah, exactly. We said that before.

Phil Whitman: Absolutely. Peter knew it, Bruce knew it, Bob knew it. John who I just met is going to get to know that. But not to be contrarian but for all you firms that are out there that are saying there aren't people out there, yes, there are less people that have gone into the accounting profession and in CPA firms and yes, the big four burned them out and after three years they go into private because they think that's what public accounting is all about. They don't know about the red carpet that's smaller and mid- sized firms have rolled out to them. Here's where those people are. They're sitting in a seat at another firm and they have no idea that a better opportunity for them exists and accountants by their very nature, are very complacent and they'll be happy to sit in that seat until someone taps them on the shoulder and says," Hey, you're never going to be the number one because the number one guy is two years older than you." Well, you know what? Recruiters had it easy for the past 10 years or even more because they would put a job ad up and people would apply to it. That's not really recruiting. An executive recruiter will go in and target that person that you're looking for and it's an extraction process. But you need to have someone like Bob help you share that great story, why they should lift their butt out of that seat and come across the street or somewhere else to join your firm.

Bob Lewis: With that said, hold on, Peter. Phil is, we've just identified is either the most loved or most hated professional on this call from partners and firms because he's stealing him from one and putting him into another. Peter, go ahead.

Peter Fontaine: Yeah. I was going to say, Phil, it's interesting you should bring that up because we have seen a major uptick in the work that we do in terms with restrictive covenants, both on the side of enforcing them and trying to avoid them for exactly the reason that you just said is that people are moving from one firm to next because they realize that A they can and B that they're not happy and they should go someplace else if they're not happy. We've had a huge uptick in it.

Bob Lewis: John, what do you see from your perspective on increasing decreasing value in an opportunity?

John Leonetti: Right. Not specific to CPA firms but generally speaking, we like to talk to business owners in terms of the concept that we call transferrable value. In other words, anybody could put a valuation on a business and business owners of all shapes and sizes and markets and industries come to us and say," Okay, what do you think I'm worth?" And we say," Well, if you're looking to sell, I can answer that very clearly. You're worth what somebody will pay you to acquire you. Let's an agree to that and then let's agree that you may or may not know who that person is today or who that buyer is." What we want to do is we want to ask questions in terms of transferrable value and what would prevent the business from transferring successfully? And we'll get some of these things. But generally speaking, in terms of exit planning, we have three silos that we like to compartmentalize the conversation to help get successful exits. The first silo is the owner or the owner's personal readiness. Are they really ready to move on and monetize this asset? The second of course is the company, is the company ready to transition? And then the third silo is what are the market conditions? Already referenced, market conditions are robust. The question becomes, how ready is the company to be transferred? And how ready is the owner to go through the emotional journey of changing ownership and dealing with the identity that's wrapped in the business and so on and so forth? And I'll touch on some of these points in some of the later questions but in short, we're looking at transferable value and things that could prevent that from happening and that'll come up in the later questions.

Peter Fontaine: Okay. I want to throw three things in, specific to CPA firms in terms of value. One of the first things we look at when we look at an opportunity is the number of 1040s that they do, the volume and the average fee and the minimum fee. Well, I'll tell you why that's such a critical thing. That almost tells me about the pricing and the pricing strategy for your entire firm from that one answer. If I see a firm doing a ton of 1040s at a low market rate or even maybe a mid- market rate, their focus is wrong, their pricing is probably all wrong and it's probably a bit of a mess all the way through. Second thing we look at is the number of billable hours at a partner level. One of the ways to increase profitability, makes you firm look more valuable, if that partner is billing 2, 500 hours a year. I have heard astronomical numbers of up to 4, 000. I routinely hear 3, 000 billable, not charge time, billable hours. When we see a firm pushing 2, 000 billable hours for partner, profitability should be high. If it's not astronomically high, then you have to question how the billing structure works and what type of clients they have. The third thing is, and one of the core things we look at outside the 1040s, first thing we look at is what's the revenue per professional head? If I have a $10 million firm with 50 accounting related professionals, eliminate your admin people, I've got $200, 000 revenue per head. We've seen firms as high as five, almost 600. We see a lot of firms a little under 200. We've seen firms at the 150, 120. When I see a firm that's below 200, starts to raise the red flag. If I see a firm that's operating at 300, it sounds great but then you have to peel it back and look and go, they're getting to 300 because I have partners billing 2, 200 hours a year. I've gotten a leverage of my space and how do I transfer that value upward? That's something you need to look at if you're looking to sell. That's a big thing you need to look at in terms of the appetite of the potential buyer. With that said, I'm going to move on to book value. And I think Phil, let's just you and I handle this one. I look, what's the average size book an equity partner should have? If I've got that$ 10 million firm and I've got five equity partners, I've got an average equity book of 2 million. Phil, what do you see in that equity range, where the markets going at least? And I realize a larger firm will have a little larger book.

Phil Whitman: Yeah. I was actually kind of blown away when I had conversations with some of our clients, some of our larger clients. It used to be that if I brought a lateral partner with a book of business and if he had a million dollar book of business, it was no problem with him admitting him as an equity partner. A lot of those firms have certainly gone well above $2 million book and there's one firm that I'm working with that has told me that their average, if they took the number of equity partners and divided it by the entire revenue of the firm, it's about six million per partner, which to me is astronomical.

Bob Lewis: High number.

Phil Whitman: We're not talking about a big four firm here, which if they don't bring in$ 5 million of new business a year, they're not doing really well. But then again, we all know that if you're a big four firm, they're buying the firm. If you're not at a big four firm, they're buying you. It's a lot harder for someone in the big four to transition into a middle market firm because they don't usually have that name behind them. And a lot of firms make mistakes thinking, I got a great guy who's 60, who just retired from the big four and he was a huge business developer. Frequently they flop in midsize firms but I'm thinking probably anywhere today, two to six million. But what are you seeing, Bob?

Bob Lewis: I would probably go a little, the highest I've heard is five, by the way. I haven't heard six yet but there's always a new story. I'm seeing more in the two to two and a half is the norm but here's where I want to bring this back. If you have not a$ 10 million firm, say you got a$ 2 million firm, and your$ 2 million firm has got four equity partners in there, I got$500, 000 equity per book. Now I realize the ownership may vary but the problem is if all four of those people want to come over and merge up as equity partners into a firm of any size, it's not going to work. Even going into a$ 2 million firm going into a five or$ 8 million firm, they're going to have a hard time assigning equity partners at a$ 500, 000 at a limit because it doesn't work. There's a flip side to this too. It's not just the equity per partner, it's the managed book per partner. That's another number. I may have zero book to bring to the table and even zero equity but I'm an income partner and I'm going to manage a book. My managed book in most firms has to be at least one and a half to two and a half million dollars. I may be an income partner but I have to manage a book of business otherwise there's no value in me doing that. When you look at merging upward, you have to look at these factors and be kind of cognizant that not everybody's going to come over as a partner and not everybody's even come over as an income partner and be aware of that when you're making a transition.

Phil Whitman: Now Bob, I would think though, and perhaps you would agree, but I'd like to know, obviously if someone has a unique niche or specialty, a firm will certainly consider you with less than that in regard to bringing you on as an equity partner, if it's something that they are really looking to build and have challenges with that.

Bob Lewis: You brought up a good point. Remember we talked a little bit earlier about perceived value. In that situation, I may have an under performing firm. Metrics may not be there but there's something that they need, that perceived value by that potential acquirer, can change the entire value formula. It doesn't necessarily have to be a mathematical formula. Any other thoughts or comments before I move on to the next question? I'm going to talk about timeline. I'm going to flip the flow here a little bit. Peter, you've been quiet for a few minutes. I know you're an attorney, it's hard for an attorney to be quiet at all. What's a typical timeline for a transaction? How long does it take? Three days? Four days from start to finish?

Peter Fontaine: I guess it depends on when you measure it. Some of them take years and I go back to what John had said, a lot of firms are not ready. They're not committed to doing a transaction and they're just kind of putting their toe in the water but nonetheless they're entertaining LOIs or letters of intent of intent or memorandums of understanding. It can go on for years. And we have clients that have gone on for years with their M and A activity. But I would say that just to put a time on it, I think 90 days from the time you sign an LOI to the time you close is about right. And I know a lot of people try to rush them but that's about right. Sixties is probably the minimum.

Bob Lewis: I'm going to go to Bruce on this question. Bruce refining the question just a little bit, let's assume that I actually have two interested parties and we've put the two parties together and day one is they're having their first meeting. What's a typical timeline you maybe see from when that first meeting happens to when a close actually happens?

Bruce Warren: That's a big wide variance there. I could speak specifically to my timeframe as a lender.

Bob Lewis: Well let's go, let's hear that first. Let's hear your timeframe.

Bruce Warren: A pretty standard deal with me will go anywhere from 30 to 45 days from application to funding. And that's for a pretty simple transaction where the buyers and sellers are organized from a documentation standpoint, their ducks are in a row and their APAs are clean, asset purchase agreement. That's for us, it's typically 30 to 45 days. Now, if you want to talk from the first time they meet, again as someone mentioned, I've seen some go as long as a year. And that's just because either they're not communicating correctly or if it's multiple partner firm buying another multiple partner firm, maybe one of them isn't on board. And these are variables that you can't count on or understand and especially if they don't want to execute one of my documents. Maybe one of the four, if there's four partners. But it's a wide variance.

Bob Lewis: This is also where you see the education process coming to play. If you have a more educated firm who's done something in a repeated level, that's going to shorten that timeline.

Bruce Warren: Absolutely.

Bob Lewis: If both parties are inexperienced in doing this, it drags on and often it drags on because they don't know what questions to ask. One of the things we like to do in an opportunity is immediately surface what I call deal killers. Either unrealistic expectations, I want to get them set. And so they're all on the same page because you don't want to be seven meetings into this thing and this is great and then somebody says," Well, I want to double my comp and work for 10 more years and I want 1. 8 equity value times multiple." That should all flush out in the first. First meeting should be all about culture, second meeting should be all about, where are we at? How's this going to fit in? And then you get an NDA signed and you start looking at the numbers and then you start moving it to the next stage. With that said, I'm going to move on to Bruce. Wait, we already hit Bruce. Phil, what are your thoughts on this, Phil?

Phil Whitman: Sure. We have what we call our famous 26 hour close on one transaction but it was easy because it was a solo guy and he had an audit starting a Wednesday and needed to deploy a bunch of people that he didn't have. Then we can move on to where in death transactions typically are a lot shorter. We had one transaction that a practitioner in Chicago died at his death 63 on March 13th. There was no one to take over the supervisory experience because none of the CPAs in the firm were certified in the state of Illinois. And in six days we introduced them to five firms and on a seventh day they selected a firm. Obviously we needed to wait to get letters testamentary, but the deal, the LOI was inked in a week. Beyond that, the shortest deal we've done has been 90 days. And actually Mr. Peter Fontaine did the legal work and that included his legal work getting from start to finish. Start being first meeting, finish being announcing to the world. But that is really quick. On average, I typically tell people and it depends what time of year you're starting the meetings. We're still having meetings right now but we know we're going to pause during the months of February, March and April and we're going to pick it back up again in May and maybe we hope to close by 12/31. There's no magic behind a 1/ 1 start date. I think people like to race towards that. We're accountants. We can figure it out regardless what day a transaction closes. But I would say six months on the short side, on the long six to 24 months or even longer in some cases.

Peter Fontaine: Years.

Bob Lewis: John, any thoughts on the non- CPA business timelines? We're looking at a typical six to 18 month window? What's the kind of a window we see?

John Leonetti: Yep. Non- CPA, general operating businesses take longer. There's you have to understand the relationship between the owner and the company, the relationship between the company and the market and then you have to package it up and sell the story. The industry average just 210 days or seven months, that's across all markets, all segments. Just to give a data point, last year we closed a transaction from launch to close in a day under four months. That was quick. We also last year closed a deal that took 30 months because COVID was a substantial delay to that transaction. Next month we'll close one that'll take five and a half months. Now important to mention, the four month deal that client did a year of consulting and planning with us so there was a little bit of an asterisk next to that one. To Bruce's point, it wasn't when we first met them, it was kind of launch to close. That's the industry average but I oftentimes think of Forrest Gump and his quote on a box of chocolates, we take to market and sometimes you just don't know what you're going to get because you just haven't gotten into diligence and seen what's under the hood. The more you can do in advance to learn about the business, the smoother the process goes.

Bob Lewis: With that, just going to move onto the next question in interest of time. We're going to about age retirement, I'm just going to hit that real quick. Ballpark across the board we see about 65 is the standard in most firms. That doesn't mean you have to stop working but typically in most firms it's 65 you have to turn in your equity ownership and then you start either a different career based on the whims of both the firm and the individual who is at that point. All of that said, always exceptions to of the rule but sometimes the bigger the firm, the less the exceptions are able to be had. I'm going to just skip onto that one and move onto deal structure.

Peter Fontaine: Bob can I just make one comment on this?

Bob Lewis: Sure.

Peter Fontaine: What we're seeing an uptick in is in these practice continuation agreements, the sole proprietor basically are saying," I'm not really planning on retiring but in the event that I die become permanently disabled," as Phil mentioned before," I got some place to send my clients." We're seeing an uptick in that, in the PCA.

Bob Lewis: I notice practice continuation agreements and this may be my own bias, I literally hate them. I don't see how most firms are going to step in, in March and take over when they're already strapped for their own business. I think they're difficult to pull off. It's kind of like getting halfway down the aisle and saying," I don't really want to commit." I think that's something if you're looking to sell or you're looking to put these practice continuation agreements in place, you got to remember those have to be executed often in difficult times. Just keep that in mind. But that's my opinion. Others may have a different one. I'm going to move on to deal structure in interest of time. What does a typical deal structure look like? Phil, is it 150% cash up front day one? If anybody on this panel would be happy to take all of that work.

Phil Whitman: Yeah, we have a lot of clients that would sign up for that deal today. Unfortunately not a reality. We see a variation. Some transactions are based upon collected fees. Especially when you have someone that's exiting, it might be, we've done deals where we put together a hybrid where there's a certain guaranteed piece and the balance is based upon collected fees so it's more of a shared risk between buyer and seller. Most of the larger firms that we look at, every firm may have their unique way of doing it. And especially now and I know we're going to talk about private equity in a moment, that's totally changed the ground rules for CPA firm M and A because it's forcing firms that are not private equity owned to bring some level of cash to the table when they do a transaction to remain competitive. And we have seen some of our larger clients do some cash up front. It's not that hard, reach out to Bruce Warren and term out for five years, a million in or$ 2 million and you got the cash and you certainly in six months will have the cash flow to afford that. Anyone that walks away because a seller is looking for some cash up front, I think you need to rethink that strategy. But deal structure, I've seen everything from your firm is worth 10 million. We're going to give you 10 million of equity, rack it up amongst your partners however you want. And we're going to book it to your capital. We're going to book it as buying a client list and voila, that's the equity that you have in the firm. And then what they'll do is they'll just say," Okay, you're 10 million. We were 90 million, you're 10% of the firm, you now have 10% of that." Very simple, which is kind of crazy because to Bob's point, I think in Bob's example, he said you got a$ 10 million firm and a$ 10 million firm. They're both dropping the same amount to the bottom line. They're not the same firm. I would say basing it on top line revenue, you got a$ 10 million firm and you got a$ 10 million firm. Well, one of those$ 10 million firms drops 50% to the bottom line and the other drops 22% to the bottom line and if you're just going based on top line revenue and booking that, a$ 10 million firm is not a$ 10 million firm is not a$ 10 million firm. I think ultimately you need to be more business focused and what are the real earnings? What is the EBIDA or available cash to distribute to owners?

Bob Lewis: And then explore the drivers. In Phil's example why the ones that were 22% or even 50%. Understand the drivers as to why it was one at 22 and one to 50%? Which also impacts value because the one at 22% may be leveraging and investing back in their business or one at 55% maybe the guys doing the 2,000, 2, 500 billable hours, which is not replaceable and it's not a 55% valued firm at that point. What we see in deal structure, the first point everybody wants to do is I'm going to pay you let's just say multiple of one times and I'm going to pay you based on collections over four to five years. That's been a norm for a long time. The answer to a lot of the sellers are, well, why would I do that deal because you're buying me with my own cash? The answer to that is every single deal they're buying you with your own cash. It's just a question of when you're ready to leave. And in that situation, if you go, if I just stayed four more years, I could make the same amount of money or more then you're not ready to leave. The question is when do you want exit and move on to the next stage of your life? And when do you want to reduce some of the risk? That's what you have to look at. The issue about getting cash up front, going back to one of the things that Phil mentioned with Bruce. Let's just say I have a$10 million firm and they want the 40% cash upfront. Bruce has to come up with$ 4 million. He's got an endless bag of cash, by the way, just endless. Bruce what is it? Aren't you in the trillions of lending capability?

Bruce Warren: Of course, yeah, that's right.

Bob Lewis: If I take Bruce's$ 4 million in cash and apply it to Peter's firm that I'm purchasing, now I've got$ 6 million I have to buy out for Peter for the rest of his firm. I have to run Peter's firm down to basically 40% of revenue before I really run into any risk. And if that's the case, I've done really poor due diligence for management of the firm. Plus I think Bruce, how long can I finance that$ 4 million? What period of time?

Bruce Warren: Typically up to 10 years.

Bob Lewis: I'm going to just knock off all the interest and carrying charges but I take$ 4 million and divide that by 10, I got$400, 000. You can add on whatever the appropriate number is for carrying costs of interest. I'm now taking instead of taking$ 4 million, I'm only applying 500, 000 maybe for the first year in my cost. That changes the game and the cash flow a little bit too. Sometimes financing it in cash can actually improve your cash flow on the deal rather than over to four to five year structure. Just something to think about. Bruce, any other thoughts on deal structure for this one?

Bruce Warren: Just from a lending standpoint, when I see deals come in, obviously they're looking for some down payment financing. I see requests anywhere from 25 to 70% down. Deals under a million, typically have a higher requirement for down payment because the sellers wants just to get out. Deals over a million have a lot more emphasis on retention or earn outs, just to make sure that transition happens well and that book comes over. In our case, that's what we're looking for. Everyone's got to have skin in the game because that's our collateral is the actual practice. And then you wanted me to mention too about the partner buy in. On smaller firms, for partners that are buying in, let's say up to 10% of the firm, we can lend up to 90%, for example. And then on larger firms, we had a new product coming out for the top 100 CPA firms. We could actually lend a 100% to new upcoming partners. Not too many firms do those in the country but it's just kind of a nice option for these CPA firms to have lending capability for that.

Bob Lewis: And to be clear, we aren't selling products here but I actually asked Bruce to bring that point up because it's a unique product that they developed to be able to fund equity partner buy in for the younger partners. We're running really short on time. I'm going to answer a question.

Peter Fontaine: Bob, if I can just take one.

Bob Lewis: Sure.

Peter Fontaine: It'll only take 30 seconds. We see a lot of what I would call fruit salad in terms of deal structure. You've got the younger people who going to go into the new firm as an equity partner. You've got the sort of people in the middle that may go in as an income partner. And you've got the sort of more retiring folks that they're going to basically be employees for some period of time and get compensation and get a payout, either simultaneously or two years after the leave. One of the structuring challenges is how to mush that all together and actually get a deal that makes sense to everybody.

Bob Lewis: Is that what all the law schooling got you to the word mushing?

Peter Fontaine: I've been doing it so long, it's mushing. I've been doing it so long, Bob, that I've forgotten most of everything I know about the law.

Bob Lewis: All right. We're going to touch on private equity and just I guess, Peter, can you touch on private equity for just a minute and then we can maybe move on, we're running a little short on time. I want to get the last couple questions in.

Peter Fontaine: I guess we've seen a lot in accounting today in other journals with respect to private equity and how property equity's getting into it. It's certainly clearly to the case. We were involved in one of the transactions, it involved private equity. I'm not really sure where all this is heading. I think that what we are seeing is though the private equity investments have been in the larger firms but it's a little bit like the food chain. These larger firms have been charged to go find other smaller firms and even smaller firms. I think you were going to see the private equity get rippled down into even the smallest of firms because it's kind of the way that it works. And these deals are interesting structures. There's usually some cash, there's an assumption of liability and some equity to the partners and the PE firm. And I'm not exactly sure how these as Phil mentioned before, how they monetize, the PE firms monetize their interest, but I think they've got to figure it out. I think they have it figured out, we're just not really sure what it is.

Bob Lewis: We've got six minutes left. I know that PEs a really important thing here for what's all over the news right now. But right now the private equity is still really being played at a higher firm level and is to Peter's point, it'll get driven down but we're going to see how that works out. On the other side of the house with John, private equity's been active in the sale of a traditional company for a long time. I want to talk about deal killers. And John, I'm going to start with you because you've been a little quiet for a minute. I think I had to skip one of your questions. Sorry. Discuss a common deal killer in an opportunity that you hit. Can you do it in 30 seconds or less?

John Leonetti: Yeah, I'll be brief. There's the two leading categories of why deals don't successfully go through. Is number one, the owner has an inflated and unrealistic expectation of value.

Bob Lewis: Has never happened, Peter. Never. Never.

John Leonetti: There are many subpoints to that but it was once said that the owner has a steel umbilical cord tied to their business. They've become anesthetized to the risk. They can't see the risk objectively the way an outsider does. Therefore, they see less risk. They think the value is higher. Why wouldn't anybody want to own this? This is a windfall. They don't appreciate the transferable value issues and the risk. That's number one. Number two is the business doesn't continue to perform well during the process. The owner gets distracted and the business starts to slide. And then Bruce will call up and say," Hey, the numbers don't look according to forecast. Maybe we need to rethink the amount we're lending or lending at all. Is performance really there?" Those are the two leading categories what we typically see that are killers are the books aren't in order or there's something wrong on the leadership team beyond that.

Bob Lewis: Okay. Peter, give me a deal killer.

Peter Fontaine: Deal killer I would say is lack of consensus among the sellers, among the partners. Again, going back to sort of my fruit salad analogy, you have older partners who are saying," I don't really care. I just want to get out. I want to get monetized." You got the younger partners, not particularly liking the prospects that all this sudden they're no longer in charge of their practice. They may have to take a haircut in comp, et cetera, et cetera. The lack of consensus early on about what the deal structure is going to be and what the impact is going to be on everybody to me has scuttled more deals.

Bob Lewis: Okay. I'm going to jump ahead. We're almost out of time. I'm going to jump ahead and do one here real quick. Here's a deal killer. I've got a firm in California that wanted to sell. Actually they wanted to merge out. The owners were 72 and 80. It was a good firm, profitable. Their only contingency was they wanted to merge in and be equity partners for 10 more years each. That is a deal killer. And not one that I've heard one time, multiple times, you have to have a sense of reality when you do this or you may as well not bother. We do have a question but I'm going to ask I'll hold that off. Phil, your thought on a quick deal killer.

Phil Whitman: Yeah, sure. An actual live opportunity that we were working on. We've got a top 100 firm meeting with probably someone just outside or just inside the G400, a$ 12 million dollar firm and governance is going to end up being an issue because our managing partner of the$ 12 million firm is the same age as the managing partner of the 100 plus million dollar firm and he would like a leadership role and it appears that all a leadership roles in that larger firm are currently occupied. Governance.

Bob Lewis: Along that line, we had an opportunity that got killed because the value on the firm was established and the partnership team came back and said," We found another updated partnership agreement that said, if we're so selling to an outside firm, the value is it up by 25%." Deal was ready to close and they tried to increase it to 25%. That said, Bruce, deal killer. What do you got? What is important to you?

Bruce Warren: Mine's pretty fast and easy. Just reverse of what Peter's is. If we have multiple partner deals, the communication among them usually will kill a deal if there's not communication with what they're buying. I've seen a deal last year, I put one example down, four partner firm buying a two partner firm. The two partners were going to roll equity and become minority owners in the combined firm. One of the partners didn't understand that in the deal. When we got close to closing, he's like," Yeah, I'm not signing any of this." That killed our deal.

Bob Lewis: Okay. Question from the audience was it appears that the way the PE will be driven down to the smaller firms is when a larger firm does a private equity transaction, then they're going to look at divesting and buying smaller firms and putting it up into the umbrella. I just wanted to throw that out as an option. Last question, 30 seconds or less, actually probably 20 seconds or less and I'll start. What do you consider the most important thing to sell or exit? My comment's very simple. Get outside help, whether it's somebody on this panel or somewhere else, get somebody who knows what they're talking about to help you. Don't hire an attorney who does real estate closings help you figure out how to do this deal. Phil.

Phil Whitman: Well, I'm sorry you stole my thunder. I was just going to say it a little bit of a different way. I was going to say for most of you, this is something that you'll do one time. While if you're acquiring, you might become a serial acquirer but if you're exiting, you're going to do it once and you need to do it the right way. Why not pick up the phone? And I know this sounds self serving. Call Bob Lewis, call Peter Fontaine, call someone on this panel because this is what we do every day. This is our lives. And you know what? It will be worth its weight in gold.

Bob Lewis: And we've screwed up many times, to get to a rat. We understand that. Peter, time's basically up, what do you got? Five seconds.

Peter Fontaine: The exact same thing, have a strategy, be committed, stick to the strategy and get people who really have done this before to help you out so that you're not learning as you go along.

Bob Lewis: Bruce.

Bruce Warren: Get the financial house in order.

Bob Lewis: Awesome. John.

John Leonetti: From those people you hire, gain what might be the most valuable, which is their perspective. Have a proper perspective on what lays ahead of you and a resource to lean on as bumps in the road occur, because they will. Thank you.

Bob Lewis: With that said, appreciate everyone's time today. This is recorded. You can share this with the world. I'm sure you'll want to and you'll hear more from us sometime in the future, I think at least most of us. We're pretty involved in this. Talk to you more during 2022. Thank you for your time today.

Peter Fontaine: Thank you.

Bruce Warren: Thank you.

John Leonetti: Pleasure being with all of you.

Peter Fontaine: Bye bye.