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In the world of business, not all deals are what they seem.
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Fortunes rise, empires crumble, all with the stroke of a pen Mergers, acquisitions, hostile takeovers.
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Welcome to Mergers, she Wrote, where we examine strategies and stories behind the biggest deals in business, because in M&A, the real risks are the ones you don't take.
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Welcome back to Merger, she Wrote.
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I'm your host, paloma Goggins, the owner of Nocturnal Legal, and today I have a treat because my guest is a certified public accountant who purchased another accounting firm and she is going to give us the lowdown on all the things that you should be looking for, regardless of the type of business that you're buying, from a diligence and financial standpoint.
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Jessica, welcome to the podcast.
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Thank you so much for being my guest today.
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Thanks, paloma.
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So Jessica Golden is the managing partner of Kramer and Golden Public Accounting Group, which is a full-service accounting and tax practice serving businesses and individuals.
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She's headquartered in Phoenix, but she lives full-time in Hawaii.
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Well, right now, 50% of the time, that's true, that's true.
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Jessica's been spending a lot of time here, also working on the business flip-flopping between the two states, so I'd love to kick off this episode by just covering some basics.
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Which is what attracted you to buying the business that you bought originally?
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Well, so I think like we can take a step back with, like, how do you even find a business to buy?
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Because I think a lot of people, including myself, when I started this process, like I had no idea that this whole thing was even out there.
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So, like the fact that there's these broker websites that just list all kinds of businesses for sale, whether it's an accounting firm or like a pool- cleaning business or a restaurant or like whatever, whatever kind of business you could possibly ever want to buy.
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You know there's these broker websites out there that just have like listings of, like potential companies that are for sale and there's these business brokers like essentially like real estate brokers that work on buying and selling or, you know, selling these businesses for owners.
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So I didn't even know that world was out there and I kind of stumbled across it in my search for something outside of the corporate world.
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You know, just wanting to be my own boss, but so I looked at a bunch of different firms and just to give a little bit more background, you know, when you find a like a listing that you like on one of these websites, you know you kind of like put in for more information, you sign like a boilerplate NDA and you get like a little bit more information back, but it's all like anonymous, right, like you don't even know what, what firm you're looking at, who the seller is or whatever.
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So I would say I looked at, maybe like, or I put in for more information on, maybe like 10 to 15 different firms and well, I mean I feel like, if you're going to, well, it's funny because the one that I ended up buying was the very first one I looked at.
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Go figure, but I felt like I really needed to like explore everything that was out there before I made such a big investment.
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Right, and I don't know what you've kind of seen like in the deals that you've worked on, but like I got a pretty wide range of additional information in response, where, you know, sometimes it's like one paragraph and a little bit of financial data and like sometimes it's 15 page like almost like marketing materials, yeah, and I feel like as that kind of tells a lot about the seller, like what you get back from them, right, or how much effort are they putting into this, and kind of first impressions go a long way.
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So not to say that I didn't look at ones that had, like you know, just a little bit of information, but the one I didn't end up buying like had like a probably like a 15 page like report that you know gave a lot of information about like what type of clients there are, how many employees there are, like what kind of tax returns they did, and like more in-depth financial information.
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So, but something that was really important to me was finding a firm that had like high quality earnings Cause there's a lot of different types of accounting firms out there and some of them are doing, you know, a thousand returns for two hundred dollars, or some are doing, you know you know a hundred returns for two thousand dollars each, and that's a huge difference.
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So your goal was quality over quantity yeah, absolutely, and not to say that, like you know, you know either way you're ending up with the same gross revenue.
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But are you busy all year long?
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Because maybe those simple returns are all going to be done before April 15th and then the rest of the year is really slow.
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But if you have more complex returns, then maybe those people have businesses and those businesses have tax returns and those businesses need bookkeeping services and those individuals need tax planning throughout the year.
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So I think looking at like how much revenue do you have throughout the year is just as important as looking at total overall revenue for the year, especially if you have employees, right?
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Because, like, how do you pay your employees in October if all your tax returns are done by April?
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You have to have some really strong financial capabilities to be like.
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I'm not spending every dime in my bank account because I have to have reserves.
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But also you need stuff for them to do.
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They can't just sit around and do nothing.
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I mean, in some ways I feel like a cycl.
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Um, you know, there's a broker I know in the Valley, uh, Ryan Gipple, who does accounting practices and his, his business being a broker is very seasonal and he loves it.
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But to your point, I don't know, you'd have.
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You'd be like, okay, employees, just sit around and wait.
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Let's time to do some scanning for the next eight months.
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Oh no, yeah Well, and that's that's very true.
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And to your point originally, what you were saying with the packet that comes with the.
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I think sometimes it could be a reflection of how much information the the seller, has prepared in advance or been able to pull together about their business prior to putting it for sale.
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But I also think it can be a reflection of the broker as well and how much time and energy they want to spend leading up to listing the business.
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And I almost feel like in some instances and it's not always true, but when a broker feels like the deal the business isn't going to sell for very much or it's not that good of a business, they'll put in less effort.
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Oh yeah, I mean because I'm assuming they're getting some sort of percentage of the sales price right.
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Of course, just like a real estate broker would do, but also it's not attracting potential buyers either.
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No, no yeah it's a vicious cycle, a negative feedback loop.
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But yeah, there are some brokers that will use confidential information memorandums, which is like SIM C-I-M, to give you this big pamphlet of information which, to your point, I think it gives you the confidence to at least submit a ladder of intent, even though it's not binding.
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A lot of times people put money down in escrow.
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Even if's refundable, it's still scary to go through that process.
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So or I mean even selling that or signing that loi was a big step, especially when you don't even know, like, what the firm is blind commitment yeah, you have, like you, you kind of have some information, but you are seeing like such a small picture or like slice of the picture.
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Um, so yeah, just I think from a comfort level standpoint, like having that additional information just makes you feel more comfortable to take that next step for sure.
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Um, and another big thing for me was like the transition aspect of it, because I mean, like you know, having your own you know legal firm, that's a very client facing client relationship type business and you know accounting is the same way.
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So I feel like there's different schools of thought where they're.
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You know some people believe you should just have like a quick and clean cut over, like the sooner the better, say goodbye to the owner.
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The new owner comes in and you know you just have to forge those relationship with the client.
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And then you know, other people think that the transition can be like longer, I mean, and for me I felt more comfortable with just like a longer transition period and in the this case, in the firm that I chose, myself and the seller, we just clicked like right away.
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We worked together really good, we wanted to be partners going forward and that was essentially her succession plan into retirement, into a couple years.
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So that's what worked well for us and we felt it worked for us, our clients and our employees the best.
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And that's hard to find when you're looking for an accounting firm and probably any business Cause I would think a lot of owners like they want to sell and get out right, for whatever reason it is.
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A hundred percent Now I feel like it's not necessarily that the majority of sellers are in retirement mode, but you know, I do think the bulk of people who have successful businesses that are exiting are in that phase where they want to wind down or they want to be done.
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And unfortunately, I do think that there's too many sellers that exist out there that should have sold earlier, because then they could have had the stamina or the the desire to stay on and make the transition more seamless.
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Because, to your your point, I mean a lot of accounting acquisitions, just for whatever reason, they do include some form of earn out or adjustment to the purchase price based on post-closing revenues.
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And what better way to make sure that, as a seller, you're getting a majority of that revenue post-closing than to stay on for a period post?
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Well, exactly, and I mean like, and I'm assuming the reason why those types of things are worked into the deal is because you're so afraid that the clients are going to leave right?
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Yes, absolutely.
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A lot of people are with.
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You know it's a trusted financial advisor.
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You know, if you don't have that trust, what's to stop them from going somewhere else?
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Because essentially they're starting over with someone new anyways.
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A hundred percent.
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No, I that you know.
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I think professional services to me also encompasses physician practices, and we see that a lot.
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You know that specific problem.
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Anytime you're in a service-based industry, you have that exact same problem.
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And I was working, you know, with an individual who was looking towards selling and the nature of their practice was predominantly female patients, and the one buyer that they found and were trying to essentially secure to move forward was a male physician and all I could think of was why like this isn't the right.
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Yeah, like, and and I just I think in something that's so personal, um, to have had a female physician for the last 20 plus years, to then be told I'm retiring, here's a male physician to take over.
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I can guess that the attrition rate for that specific instance would be exceptionally high.
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Yeah, agreed.
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So I think this idea of right fit buyer and also feeling burnt out I mean, if you start earlier, you also have runway, so that if you're finding the wrong buyer, you have time to continue looking, so that you're not just square peg round hole.
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Yeah, absolutely, and I think, um, in our case, um, like that was obviously very important to her as a seller to find the right buyer, and I know she said she talked to a lot of different people, but I think that, us being very similar and we clicked like so, like right off the bat, like it, just it just kind of worked, you know, and it made her feel more comfortable about handing over this business that she spent her life building you know, Um, and she wanted her clients to be in good hands too.
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Yeah, I think key takeaway from that piece of her conversation is the chemistry matters.
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Yeah, absolutely I was thinking.
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I, you know, I do such complex um thinking throughout my day that my husband always gives me.
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You know shit about how I watched just the worst television at night Mine too.
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So, uh, we have that in common.
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But yeah, I've just, I want to shut my brain off and nothing is better than you know, reality television that requires no brain usage, and I was thinking as you were describing this you know, getting the SIM, getting very little information, putting in your LOI and getting like essentially married to this business.
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To go through with diligence is like love is blind, like the Netflix show, where they're like picking people based on some very limited information behind a wall and then you have to make sure it works after you decide to get engaged.
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But it's, it's true, the LOI is kind of the same.
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You know, you're deciding to get engaged and see how it works after you get into the nitty gritty of life, which is diligence in this case.
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Yeah, my metaphor has run away from me, but I think that it's really.
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It's kind of accurate.
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You're really kind of going into it a little bit blind, and I think that that's an awesome takeaway from this conversation for anybody who's listening that is thinking about selling or preparing to sell or maybe already listed and they're not getting good, you know, bites on on their listing is maybe you need to reconsider what you have posted and what you're sharing.
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Right, because it is.
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It is scary.
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Even if it's non-binding, it's big steps yeah, and if your broker maybe isn't preparing the right materials, maybe it's time to find a new one.
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Maybe you need a new broker.
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Maybe you need to put your broker's feet to the fire because you probably already signed a binding contract.
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All right, so can you.
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I think, in this process, one of the things you and I wanted to talk about today is the financing piece of it.
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You've had one lender on Merger.
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She wrote kind of talking about the basics, but would love to hear from your perspective on this process, from a buyer's perspective, you know.
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Walk us through this.
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What did this look like?
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How did you start down that path?
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And we can get into some of the more detail as you go.
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Okay, so as a background, you know, we have a family owned business besides this one where I've I've dealt with, you know, getting SB financing or other small business loans and we had just used like a local bank and I wouldn't say it was like the best experience and we used the bank cause it was, I guess, convenient.
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I'm I don't know.
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But so when I was going into this process, of course, like we mentioned, I lived in Hawaii.
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I'm not going to use a local Hawaii bank to buy an accounting firm in Arizona.
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I don't even know, probably not.
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So I mean, I was just kind of trying to do some research online like what's the best way to get an SBA loan.
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An SBA loan, which is what I ended up using, was an SBA loan.
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But there's a lot of like online matching tools and I think there's even on like the, the SBA website, where you can put in your information and they'll supposedly like match you with interested lenders.
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But as I was kind of walking through that process, I felt like it was just like really overwhelming and kind of like more of like a sales tactic type thing, where it's like I don't have time to like meet with like 10 different banks and give them all the same information because all of them want something right to bought the deal.
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So it was just like I felt like it was very overwhelming.
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And I don't even remember how I came across this guy at this point, because this was like over a year ago at this point.
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But I ended up using like an SBA loan broker and that's all he does is he finds deals and he essentially like matches that party with a bank.
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So you know him and I connected.
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I told him a little bit about the firm that I was looking at.
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We talked a little bit about the finances of it and like the story, because that's really what it is.
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It's like making a story and selling it to the bank, right, so they want to invest in that deal, and that's all I had to do.
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And then he came back to me and said okay, I have this bank, here are the terms like this is what we can do, and it's not like you have like an approval at that point, but they at least, like, will give you kind of like an informal nod, you know, before you go down the process of providing their very lengthy list of requests.
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You know, so it feels good going into into it, like you're not doing all of that work for nothing.
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Over and over too.
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Yeah, yeah.
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Yeah, Cause it's just.
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I mean, even coming from a finance background, I felt like it was overwhelming.
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I mean, I had a full-time job at that time also you know, so I didn't have you know a hundred percent of my time to devote to finding the perfect bank and you know what all of the terms are like pretty similar when we're talking about these SBA loans.
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You like might get like a quarter of a percent difference like on your spread, but like we're not talking like big difference in terms.
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So, with that in mind because I do know, I guess, from people trying to shop SBA loans in the past, that they've come back and said pretty much like there's no movement or there's very little movement in the people that they've talked to there's no movement or there's very little movement in the people that they've talked to when the broker that you utilized kind of came back with like a match, do you know what the reasoning was behind the match?
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Or did they give you multiple options and you got a chance to like speak with them?
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No, he just came back with like the match.
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With like one, yes, and honestly I'm like I don't even care, it's fine.
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Those terms sound fine to me.
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You know, that's wild Because at the end of the day, like all of the terms are like pretty similar.
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Yeah, um, but to be fair, we actually didn't end up going with that bank, so we ended up going with another bank, um, and it was kind of like far along in the process.
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But what ended up happening was there was like one cpa on the board of that bank who just could not fathom running a CPA firm like hybrid or like somewhat remotely.
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So he wouldn't sign up on the deal, so we did have to start over with a new bank, but I don't think that that's the norm in most situations.
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But yeah, no, it wasn't like.
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He presented me with like a list.
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Here's like the different terms.
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I just and I didn't ask honestly like this term seemed fine to me, so I'm just like let's go.
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I think that's fascinating.
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I I knew about the idea that you're painting a picture financially, because it's no different than when you're buying a home.
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You have to paint the picture of here's the job, here's our assets, here's all the stuff that makes us capable of paying for this loan.
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And in a lot of ways it's kind of strange because it's not so black and white like everybody thinks.
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So I sort of understood and knew that probably it would be the same with any sort of business or commercial loan.
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But to hear that a single person put the kibosh on this, deal One person.
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And I guess, like the question I have based on that story is is there usually a CPA in the background making decisions?
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I think it was just happened well okay, so most banks have some sort of like border investment committee that will do like the final sign off.
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So this was like, unfortunately, like pretty far along in the process, so all of like the bank people had already signed off on it, so it was just going to the final approval and I think it just happened to be that he was a CPA on the board.
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I don't know if that's the norm.
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That was like his background.
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Yeah, that just happened to be like.
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You know, he owned his own CPA firm and was on the board of this bank and, you know, was part of the committee that had the final say on like what the bank.
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That's really fascinating.
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Yeah, it goes through us.
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So it was an unfortunate turn of events, but, as you know, this deal was a really long process so we had plenty of time to find a new bank.
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Yeah, no, that's wild.
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Well, and I was going to say too, one thing that's unique to buying an accounting practice is you do have hard deadlines, not hard deadlines for the acquisition itself, but hard deadlines in the tax world that play an important role on when you want to acquire, because can you imagine buying and then heading right into, like the deadline?
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Oh, no, yeah, absolutely not.
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So I feel like your story is no, yeah, absolutely not.
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So I feel like your story is also a good kind of warning to people that, like you know, if you had something in your mind and you don't make it work within the time frame like you might be pushing, especially in an accounting practice or some other business where the deadline you know is for whatever that industry is is more specific to an like maybe a month or two, or maybe more or another quarter any side, any sort of business that's cyclical like that, and I mean in our case it was like a year.
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I mean we, we set that from the outset because I was also working for a publicly traded company so we had a lot of SEC deadlines and all kinds of other stuff audit deadlines.
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So between both of our deadlines that was just realistically what would work for us.
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And we were both willing to just kind of be like, OK, we're in it for the long haul, but also the timing.
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You can lose sight of things too right, Things can slip.
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And you're like, okay, we're in for the long haul, but it also, you know, like the timing.
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You know you can lose sight of things too right, Like things can slip, and you're like, oh, we have so much time for that, we don't need to pay attention to that right now.
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But I felt that whole year we were always doing something.
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No, absolutely.
00:21:30.336 --> 00:21:40.650
I like to use the like college syllabus example as like how people let things not feel like they're important or like things that you know.
00:21:40.650 --> 00:21:46.113
You look at the syllabus for a class that starts and you're like, oh, there's a giant paper due at the end of the semester.
00:21:46.334 --> 00:21:55.535
There's no reason to get started on it in the first month of your semester and then all of a sudden you wake up and you've got like less than 30 days to write this like 25 page paper.
00:21:55.535 --> 00:22:04.990
And I feel like that happens all the time in the deal world, where people think they have plenty of time and it just slips through the cracks, especially to your point.
00:22:04.990 --> 00:22:12.951
Buyer is working full time and their regular job this acquisition is their foray into owning their own business.
00:22:12.951 --> 00:22:20.163
Balancing that is is a full-time job in and of itself, but also the seller.
00:22:20.163 --> 00:22:22.413
I feel like a lot of people don't realize that.
00:22:22.413 --> 00:22:29.657
You know, collecting all of the materials to share with the buyer for the diligence process could be a full-time job for them.
00:22:30.018 --> 00:22:41.776
Trying to operate their business while also doing all of that and helping them through the diligence process, having not done it prior to, like getting the LOI under contract was like that.
00:22:41.776 --> 00:22:55.365
I mean, I've seen, unfortunately, some businesses where they've got staff that they are like yeah, all of our contracts are in paper form and they're in the copy room making scans for days and they're not doing their regular jobs.
00:22:55.365 --> 00:22:58.931
So things are falling behind and it just gets really messy.
00:22:58.931 --> 00:23:31.182
And the one kind of big underlying factor that I tell people is like if you are diverting your people and your staff, or even you and you're the person calling all the shots in your business from a daily operational standpoint, doing diligence, for example, does that hurt your revenue in the months leading up to closing and does that impact a post-closing adjustment or an adjustment to your purchase price, because your balance sheet that you recently provided them at closing is now a little bit tanked or a little bit less?
00:23:31.182 --> 00:23:33.597
You know things to consider, I guess.
00:23:34.309 --> 00:23:37.981
Or even client relations that have slipped during that time.
00:23:39.153 --> 00:23:40.698
Lose a big client in the process.
00:23:40.698 --> 00:23:50.605
Yeah Well, and I was going to say, too, this idea of providing all the information for the financial piece of this.
00:23:50.605 --> 00:23:53.614
I mean, looking back on this process.
00:23:53.614 --> 00:23:58.823
You know how much time and energy I mean from cause.
00:23:58.823 --> 00:24:02.961
I see how much time and energy, but you know how much extra time did you spend?
00:24:02.961 --> 00:24:04.067
Were you working on the weekends?
00:24:04.067 --> 00:24:05.412
Were you working after hours?
00:24:06.012 --> 00:24:09.240
That's like the story of my life Paloma weekends and after hours.
00:24:09.300 --> 00:24:11.836
But yes, a hundred percent, it's just I mean cause.
00:24:11.896 --> 00:24:16.352
I was working during the day and in the evenings on the weekend on my regular job, you know.
00:24:16.352 --> 00:24:18.316
So it was all on top of that right.
00:24:19.356 --> 00:24:23.423
But I mean, I'm sure you've seen the list from these banks, but it's long.
00:24:23.423 --> 00:24:27.439
They want a lot of things, whether and it's not just all from the seller right.
00:24:27.439 --> 00:24:32.398
Of course, you need to give historical financials historical tax returns for, you know, usually three years.
00:24:32.398 --> 00:24:35.313
But they also want future projections.
00:24:35.313 --> 00:24:37.336
They also want a business plan.
00:24:37.336 --> 00:24:44.321
They want personal financial information, which is basically like putting together your own personal balance sheet.
00:24:44.321 --> 00:25:02.782
But when you it doesn't sound like a lot to say that, but when you're having to look up like every single like credit card, bank account, investment, 401k, the value of your home, the value of your mortgage or like the balance on your mortgage it's a lot to look up and then to update multiple times throughout the process too.
00:25:02.782 --> 00:25:09.772
So there is a lot of information that the bank wants like as part of these part of the approval process.
00:25:09.834 --> 00:25:12.679
So it did take quite a bit of time on my part.
00:25:12.679 --> 00:25:17.194
I mean, I have a financial background, so I felt like it was.
00:25:17.194 --> 00:25:17.997
It didn't.
00:25:17.997 --> 00:25:20.122
It wasn't anything hard, it was just time.
00:25:20.122 --> 00:25:29.580
Yeah, but I think for somebody who doesn't have a financial background it could be a lot more time and a lot more struggle to get to like what you need.
00:25:29.580 --> 00:25:38.059
Um, I don't mean I don't know what you've seen on deals that are not CPA related, like your buyers, like what kind of stuff they're going through, but I would imagine it's a lot of work for them.
00:25:39.141 --> 00:25:57.241
For sure, I think, to your point, having two accountants working together is like the powerhouse of getting things moved along from a financial standpoint and and you know, as you've said you know both in passing and as we've been talking about like having an accountant as someone that's providing the financials.
00:25:57.241 --> 00:25:59.951
It's much more sound, it's much more put together.
00:25:59.951 --> 00:26:07.733
But I think you know one thing you said, which is a really solid point, is like okay, they're asking for projections.
00:26:07.733 --> 00:26:12.791
Was that something that the seller provided you with, something you created?
00:26:12.791 --> 00:26:20.684
So I think that can really depend on the deal, and I think there's a lot of deals that get hung up.
00:26:21.750 --> 00:26:55.281
Financing gets delayed, the closing gets delayed because the financials that a lender asks for they're so unprepared to provide, because their books are a mess to start with, so they almost have to do like forensic accounting to just build their books in the first place and then they can go back and I've seen a lot of businesses that list realize they're in really poor shape, maybe with a broker that didn't give them the real skinny, which is like anybody who's not a full cash buyer is going to need way more information than this.
00:26:55.281 --> 00:26:58.634
But so that's fascinating.
00:26:58.634 --> 00:27:00.480
So you put together the projections.
00:27:00.480 --> 00:27:02.032
What about the business plan?
00:27:02.233 --> 00:27:03.436
Did the lender put that together too.
00:27:03.436 --> 00:27:04.398
Okay.
00:27:04.398 --> 00:27:20.356
So the broker that I use he actually offers like a full service package where he'll do it all for you, for a price, of course, Um, but he straight out told me he's like you do not need my services, you can fully do this yourself, you know, cause, whatever he saw, that I had already provided to him.
00:27:21.679 --> 00:27:29.500
So, like you said, historical financial statements and having ones that are actually accurate and reliable is the key.
00:27:29.500 --> 00:27:34.558
So the seller has to have that in place and you're going to need like three years is what I mean.
00:27:34.558 --> 00:27:49.160
I've seen three years is pretty standard and I wanted to see them, and I think even the bank asked for the monthly, like I wanted to see it month by month for three years, because you want to see trends right, especially when it's a cyclical business.
00:27:49.180 --> 00:27:56.002
You want to see what kind of revenue you're earning on, like maybe, the downturns, but also that helps you with your projections too.
00:27:56.002 --> 00:27:57.173
So, like I.
00:27:57.173 --> 00:27:59.442
But then you also have to understand, you know, okay.
00:27:59.442 --> 00:28:03.582
So what are some of the items that are maybe non-recurring?
00:28:03.582 --> 00:28:08.819
What are some of the items that the seller is adding back in, like their seller discretionary earnings calculation?
00:28:08.819 --> 00:28:11.336
Is the lease transferable?
00:28:11.336 --> 00:28:16.017
Are you going to have a big jump in lease costs If you have employee turnover?
00:28:16.017 --> 00:28:18.674
Is it going to cost you a lot more to hire new employees?
00:28:18.674 --> 00:28:20.740
Like, what are the employees getting paid right now?
00:28:20.740 --> 00:28:23.030
Is it market above, market below market?
00:28:23.030 --> 00:28:23.834
You know where are you at.
