The Accounting Podcast

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Blake Oliver: [00:00:10] Hello everyone, and welcome back to the show. I'm Blake Oliver, and I'm joined today by Brannon Poe of Poe Advisors. Brannon, welcome to the show. Thank you. Blake, it's good to be on Poe Group advisors, I should say. And Poe Group is, uh, specializes in brokering accounting firms. You started in 2003. So you've been doing this for a while. Brannon. I imagine you have, uh, had quite a few clients, quite a few deals you've put together. Do you have any idea roughly of of how many you've done?

Brannon Poe: [00:00:41] I think we're probably north of 500 now. So, yeah.

Blake Oliver: [00:00:46] So you've seen a lot of firms, uh, all different kinds, I imagine. And what I'm really interested in talking to you today about is, uh, traditional firms versus subscription firms. And there's a lot to unpack in those definitions. But when I think of a traditional firm, the first thing that comes to mind is billing hourly after the fact. And when I think of subscription firm, I think of fixed fees priced upfront, paid in advance. Did I get that right, or is there anything you want to add to it?

Brannon Poe: [00:01:20] Yeah, the only thing I would add is, um, you know, when I think of a traditional firm, I also think of a brick and mortar practice. Yeah, I think a lot what I've noticed on cloud firms or virtual firms is that a lot of them are, uh, subscription based. And, uh, so just that little distinction there. Yeah.

Blake Oliver: [00:01:45] Yeah, that makes a lot of sense. Yeah. My firm, we were fixed fee. We were totally virtual. We could work anywhere, clients anywhere. And and that made a huge difference for us in terms of just our costs. Right? Our our profit margin was so much higher because we didn't have all this overhead of a physical office. And I imagine that makes these virtual subscription firms more valuable than the traditional ones they do.

Brannon Poe: [00:02:11] And, you know, when we're talking about valuation, I think just for context, there are a lot of factors that that play into value, as you might imagine. And we like to think of it in terms of like number of potential buyers. So if you have a lot of buyers, you're going to get a higher price, higher valuation, probably better terms at closing than if you have very few buyers in the marketplace for your practice. So when you when you look at like one of the main factors is location. So if you have a traditional brick and mortar firm and you're in a rural location, let's say you might have very few buyers because very few people want to move to wherever that practice is and live in that community. So, uh, location becomes a big factor in valuation. And you look at the virtual model or the cloud model, and your market for is is really nationwide. You know, we sell we sell cloud firms, uh, from people all over the country.

Blake Oliver: [00:03:12] So so give me an idea of what you're talking about. If I am brick and mortar. How many buyers might I have versus if I'm virtual?

Brannon Poe: [00:03:22] Well, it's not uncommon for us when we market a cloud firm to have a couple of hundred inquiries. And in a major metropolitan area, we might have 50 or 60 inquiries on a on a. On a nice firm. Got it. And then in a rural area, sometimes we're lucky if we have ten inquiries. Mhm. If it's very rural. Um, and there are other things that definitely play into it. Cash flow to owner, the mix of services, your fee quality, your owner dependency, how many hours the owner works in the practice, your growth trajectory. So we look at all of those things. And so it's it is a difficult to isolate a single factor and say okay, this factor is going to have a 30% increase in valuation or you kind of have to look and every practice is different. Every, you know, there's varying factors, um, that you have to kind of consider them all together. Yeah.

Blake Oliver: [00:04:21] So it's not as simple as I would like it to be where we could just say, you bill hourly. It's you know this multiple you bill subscription. It's this multiple all I don't.

Brannon Poe: [00:04:31] Think it's yeah.

Blake Oliver: [00:04:31] All other things held the same. You know I.

Brannon Poe: [00:04:34] Wish I could yeah I wish I could isolate it I mean like, it's just it's so hard I could have two exact firms and those things might be different, but there might be some other variables that are. So, you know, there's just so much and I will say, like, I see so much variation in how firms are built. Like the model, the business model can be so different. The profit margins can be so different. Um. I, you know, people say, well, what's the average profitability of a practice? And my answer is like, do you really want to go for average? Because it's not very good, you know.

Blake Oliver: [00:05:08] So tell me now I gotta know what is average.

Brannon Poe: [00:05:11] Well, it depends on the size of the practice too. Like what? What tends to happen is your profitability is going to be naturally higher when you're small single owner. The owner is doing a lot of their production. Uh, when you hire and you scale up and the owner production becomes less of the driving force of the practice, then the margin tends to come down as the practice grows.

Blake Oliver: [00:05:35] I've seen that, um, I can't remember where I saw that. It was a survey of firms by size and profitability. Per employee, and you could see that when it was just one person, one say CPA. Very profitable actually. It's a it's great to be a solo CPA. And then as they start hiring the graph, the chart starts to go into this valley. Yeah. And it hits this like low point in between 1 and 10 or even towards ten. And then as you get above like ten people it finally starts to go up again. And so you really have to like hire ten people before you get back to where you were with one person.

Brannon Poe: [00:06:17] Yeah. That can that can certainly be a pretty common experience that ferm owners go through as they grow is like, you have this this valley of, you know, less the struggle. It's a struggle to go from. I think the hardest part is like go from like a million to like 3 million. That's a really hard, uh, and that's why I like acquisition can be smart for someone in that, in that size range. Because then you get you get that growth quickly and you don't have to suffer through it.

Blake Oliver: [00:06:46] Okay. So it seems like, um, I'm learning that. The hourly billing versus the fixed fees is a factor, but it's not necessarily the most important factor, and it's never considered by itself. You mentioned being remote virtual. That's an important thing for the number of buyers, because that drives up the price, because you have more people competing for buying your firm. What else would you put at the top of the list of things that firm owners should do in advance of a sale, if they want to maximize the value?

Brannon Poe: [00:07:19] So I always tell people like, okay, I've got two metrics. If you focus on these two two metrics alone, you will increase the value of your firm. If you can move move these in the right direction. Cash flow to owner is probably the number one. And that makes sense. People more people want profitable firms. Uh, I can find buyers that can find financing for more firms if they're profitable. So, um, let's explain this. Yeah. Cash flow.

Blake Oliver: [00:07:48] To owner. So what that means above the owner's compensation as, uh, as a professional, what you would pay them as an employee? It's their the cash they take out of the business as, like the owner. Is that right?

Brannon Poe: [00:08:05] And very simply, the way we calculate it is we take the profit and loss statement from the tax return. So we have we have the you have to look at historical numbers. Um, um, you can look at a current year PNL if something's growing really fast, but you look at 12 months, what's the profit of the business? What are you showing on your tax return? Let's add back the owner's salary. Let's add back interest. Depreciation. Let's add back any owner discretionary expenses. Like if you're running your automobile through the through the company. If you've got a salary of a child, for example, or a spouse, that's not really market rate. Um, if you're let's say you own your building and you're, uh, charging more rent than fair market value, we would add that back, like there's a lot of those little add backs. So when you get to the bottom, we call that cash flow to owner.

Blake Oliver: [00:08:58] Okay. So it includes the owner's car. It's basically owner's total compensation.

Brannon Poe: [00:09:03] Total compensation. Exactly.

Blake Oliver: [00:09:06] And and considering their role as a as delivering services.

Brannon Poe: [00:09:12] Correct. So it's yes it's what they're taking from the business. And you know under I would say a million and a half a really good target for smaller firms is 50%. If you can figure out how to net at least half of what you're grossing, that's a very, you know, half or better is strong cash flow.

Blake Oliver: [00:09:32] Knowing that it includes all those other like, fringe type benefits. Correct? Yeah. Okay. Got it.

Brannon Poe: [00:09:38] Correct. And then owner hours is the other thing. If you want the owner hours to be lower, lower is better.

Blake Oliver: [00:09:45] Right. And that's because the buyer wants to know that they can replace you.

Brannon Poe: [00:09:50] Correct. And and my argument for subscription pricing or value pricing is that it will move the needle on those two metrics in a profound way.

Blake Oliver: [00:10:00] Got it. So it's not it's an, it's a, it's a means to an end.

Brannon Poe: [00:10:05] It is. And and you know, I did a podcast with, um, a marketing agency that focuses on CPA firm in the CPA firm space. And, you know, he asked me about the value of the brand and things like that. It's the same sort of idea here is like the brand has value in that it attracts good clients and they pay, uh, good fees and your profit goes up. That's what buyers are looking at. They're looking at those results, not what is creating those results necessarily. Um, now, if you have very good systems in place, if you have very, uh, a very tried and true subscription model. In other words, you didn't just roll this model out. You've been on these clients have been on this pricing structure for a while. You've got to a good track record. You're able to grow the business, uh, profitably then. That's going to be very attractive to a buyer.

Blake Oliver: [00:11:09] So we've got two metrics to pay attention to cash to owner and owner's hours. We want cash to owner to go up, ideally to 50%. And we want owner's hours to go down to what's a good benchmark?

Brannon Poe: [00:11:25] I mean, at least under 2000. But I have seen, uh, virtual firms that are very well systematized get into the, you know, four and 500 mark for an owner. So you're creating a real business at that point? And are those.

Blake Oliver: [00:11:41] Hours like client work hours.

Brannon Poe: [00:11:44] A mix of of client work? Um, you know, business management, it's just a mix of all sorts of things. Yeah. Typically, though, when someone's when someone's really down to that 500 mark, they're not really doing any client work.

Blake Oliver: [00:11:59] Yeah. Yeah. It would be very difficult to do client work and run the business if you're only doing 500 hours. Okay. That's great to know. Okay. And then what's the spread on valuations these days? I've heard it can be quite wide.

Brannon Poe: [00:12:15] It is. It's very wide. So for a traditional firm, the sort of rule of thumb in the industry is A1X multiple one times annual gross revenue. And yet you know that holds up fairly well. You know, in a fire sale situation you might have. $0.50 on the dollar. You know, for a really, you know, if there's a health problem with the seller or um, and then on.

Blake Oliver: [00:12:42] The owner passes away.

Brannon Poe: [00:12:44] Right, right. So fire sale situation could be very low like that. And then, you know, you see really high quality firms that are traditional but have good fees, good profitability, um, for a cash deal, not a, not a seller finance deal or an earn out type of deal for a cash deal. We see prices in the, you know, 1.2 to 1.4 range for for a very well operated firm in a in a good metropolitan area. Um, and then you get the, the outliers, which are virtual firms that are highly systematic, systematized, that are not owner dependent and they're profitable. And we see multiples of 1.4 to all the way up to two on the high end. For a cash deal. For a cash deal?

Blake Oliver: [00:13:36] Yeah. So. So there's the spread. There is. If you have a fire sale situation for a traditional ferm. Could be $0.50 on the dollar. And if you are a really well systematized virtual subscription ferm, you could be getting two times your annual revenue with.

Brannon Poe: [00:13:55] As long as the two times. Just to be clear, that's a rare multiple for a. It's got to be profitable with low owner hours and systematized and virtual.

Blake Oliver: [00:14:07] And when you say systematized, I assume that means good technology is in place. How important is technology in these deals?

Brannon Poe: [00:14:16] Well, I think, you know, in a, in a firm that's cloud and has a lot of potential to scale. The systems are very important. And if you've the systems and the team are important, you know how important it depends on who the buyer is I think um. Mean, some buyers already have really good systems and so they can roll a practice into their existing structure. Uh, so the systems aren't, uh, I see.

Blake Oliver: [00:14:45] Right. There's a lot of buyers who just want to roll up your firm into theirs. They don't really care about your specific tech because they're just going to. Put you onto.

Brannon Poe: [00:14:54] Theirs. They're gonna put you on theirs. So. But the team is very important because capacity is very important. As you know, the the industry is a little short on staff right now.

Blake Oliver: [00:15:03] So, uh, just just a tidbit.

Brannon Poe: [00:15:05] Just, just just a little bit a smidgen. Yeah.

Blake Oliver: [00:15:09] Wow. So. So, uh. What about, uh, an example? You know, there's there's. Do you have an example in your experience of a owner who made a strategic decision, like decided to really change their firm and ended up having, like, a great outcome?

Brannon Poe: [00:15:26] Well, um, yeah, I've got a I got a few of those. I mean, we had, um, so I don't know if you know this or not, but we have a coaching program called Accounting Practice Academy, which is a virtual program for Ferm owners or administrators. And, uh, I had a I had a traditional firm in brick and mortar firm. It was a really interesting use case because when when the seller came to me, it was a husband and wife team. He wasn't sure if he was ready to sell or not. He was feeling burned out. He was working a lot of hours. Um, and, and I said, well, you know, it's a hard decision. The timing of the decision is the hardest thing you have to decide. I said, but if you're feeling burned out, maybe if you address that, maybe you could work another 5 or 10 years, maybe you'd want to. And so, um, he agreed to take our accounting practice academy and. When they came to the into the program, they were doing about 1.2 million in revenue, and they were cash flow in about 600 K, which is a pretty good metric for two partners, though the husband and wife two partner firm the.

Blake Oliver: [00:16:40] Cash to the partner 600 K for both partners. Yeah, right.

Brannon Poe: [00:16:44] For both partners. So um married.

Blake Oliver: [00:16:47] Couple. So that's not bad, right?

Brannon Poe: [00:16:48] Not bad. And it was I mean it was a it was a good firm. It had good clients, had a pretty good team. And so they went through our program. The first thing they did was and the first thing we usually have to address is capacity because firms don't have it. And so there if you're feeling burned out, it's probably because you're overworked. So they ended up letting go of about 100 clients. So that was kind of the first phase of their implementation. And then they rolled out packaged based value pricing subscription, not 100% of their clients, but like to their recurring bookkeeping monthly revenue clients. Um, and they also rolled out some pretty significant price increases. So they go through the program. It seems to be working well. And oh, they also rolled out some light advisory work. So some of those packages included some advisory work. And. I get a call in December. They took the program this summer. The following December, he calls me. He says, you know, it was great, but I have decided I really am ready to sell. So we put the firm on the market for like a 1.5 million on a 1.2 revenue.

Brannon Poe: [00:18:00] Ferm. We get an offer in January. Goes under contract. So I think everything's good. And then I got a call back from him. Um, in March. And he says, I think we need to let this deal collapse. And I said, oh, what's going on? Why do you why do you want to do that? He goes, well, first of all, the buyers missed the deadline. So we have an easy out and all the things that we implemented last year, we're projecting we're going to do probably 1.6 or 1.7 million in revenue, and we're working way less, and we've given our employees a raise. And just about all the top line revenues fall into the bottom. And so we we went back to market at almost 2 million, and we sold it for all cash later that year. So wow, these changes, these changes in your pricing structure. And I feel like I tell people, hey, if you don't like your practice, keep increasing the prices until you like your practice.

Blake Oliver: [00:19:03] Sounds so simple when you put it that way.

Brannon Poe: [00:19:05] It's very simple. But, uh, but it also works like, I think that's one of the biggest levers that accountants have is that that pricing lever.

Blake Oliver: [00:19:13] It really is. But it's painful to do. It's hard to do it. I've been there myself, but it's also the solution to so many problems in our profession. I was just on, uh, talking with. David Leary on one of our recent episodes, and we were going over this survey of mostly large accounting firms. And how many hours do the staff work? And this is reported by the staff. So, you know, it's pretty accurate. And there's a lot of like senior staff working 50 hours a week. And I'm thinking to myself, the firm could solve this really easily just by increasing prices by 20 to 30%. Mhm. Right. And if 20 to 30% of your work goes away now you're at 40 hours. Problem solved. Right. So so it's kind of funny how as accountants I feel like we should understand economics but.

Brannon Poe: [00:20:08] Well yeah. What's interesting, what's interesting about that, Blake, is I've had clients go up 20, 30, 40% and they don't lose clients. They don't lose any clients.

Blake Oliver: [00:20:19] Yeah. That's that's a great that's a great problem to have.

Brannon Poe: [00:20:22] So so you I tell people like, if you really don't want the client, you're going to have to fire the client.

Blake Oliver: [00:20:28] I don't know, Brannon. Maybe I should, uh, this might be part of your academy or something, but I'm feeling like maybe I should just start a consulting practice where all I do is I go into firms, and I just raise their prices for them, you know?

Brannon Poe: [00:20:40] Hey, you'd be busy. You'd have plenty of work doing that.

Blake Oliver: [00:20:44] And, uh, just take a cut of the action. They're like George Clooney in that, uh, that movie where he goes and fires people. Right? But instead of firing the employees, I'm firing the clients. Yeah. You know. Well, Brannon, it's been great talking to you. I learned so much. Um, anything else you want to add before we wrap it up?

Brannon Poe: [00:21:02] No. Um, you know, if if, uh, firms are interested, I do have a book that we. Oh, yeah. Yeah. Tell us about your book.

Blake Oliver: [00:21:11] Tell us about your book and the Academy.

Brannon Poe: [00:21:13] So this is, um, this is basically like the playbook on. This is like a mini explanation of what academy is. It's called prepare your CPA firm for a sale. You can get it at our website which is Powergrip advisors.com/prepare. And uh, it's a nice little introduction to to the concepts. Um, none of these concepts are really all that difficult, you know, Blake, I mean, you you it does. It sounds very simple and it is simple, but it's hard. Um, yeah, but it doesn't.

Blake Oliver: [00:21:50] Happen overnight, right? You have to do it deliberately over time.

Brannon Poe: [00:21:53] And you have to keep doing it. You know, you have to keep experimenting with prices. Even if you're on a subscription model, you're going to have to increase prices periodically. And that needs to be something that needs to be a skill that you develop. Yeah. Um.

Blake Oliver: [00:22:08] So yeah. So that website is Po group advisors.com/prepare go get the book.

Brannon Poe: [00:22:17] Is the book.

Blake Oliver: [00:22:18] That's great. Um well thanks for coming on the show and giving us some insight into all of this. I hope it helps our accounting firm owners in the audience and those who may want to own one someday get the most, uh, for all their hard work.

Brannon Poe: [00:22:32] Yeah. Thank you. Blake.