Episode Transcript

Please note this transcript was generated by AI and contains errors including missing and misspelled words.

[00:00:00] Meryl Intro: Hi there and welcome to the podcast. I'm your host, Meryl Johnston. The Lifestyle Accountant Show exists to help today's accounting firm owners build successful firms while also living a healthy, happy life without sacrificing sleep, your weekends or time with loved ones. We're back today with another conversation with Jason Andrew from Arbor Group.

If you didn't listen to last week's episode, I recommend you go back and give that a listen. We talked about Jason's experience starting SBO Financial and his evolution from not getting paid for the first couple of years to hiring a CEO to run that business and what Jason's role looks like today. We talk about SBO Financial launching a tax division and the structure that they used with that.

And the pros and cons of roll ups within the accounting industry and why accounting firm acquisitions can fail. And that's actually a nice lead into today's conversation, which is all about acquisition opportunities in the accounting industry. I'll reintroduce Jason in case you didn't listen to last week's episode.

Jason is a chartered accountant and founder of the Arbor Group, a hold co of financial services businesses ranging from accounting and tax services, funds management, and corporate advisory. His personal mission and passion is to improve the financial literacy of entrepreneurs and executives and change the current worldview of the accounting profession.

[00:01:31] Jason Sound Byte: By definition of venture capital. Um, you know, they're, they're, they're investing in moonshot startups. Things that will be highly disruptive, uh, will, will displace, incumbents, will, and, and provide huge, enormous billion dollar returns for their share, for their, um, LPs or their, their investors. Um, where accounting firms are almost the complete opposite of that.

They're like, hard, very hard to disrupt accounting firms, despite what apps, uh, will say that they might do that one day. But, uh, you know, everyone needs a tax return done, um, it's a government mandated kind of revenue stream.

[00:02:06] Meryl Intro: Today we’re talking about the Arbor Group's strategy to partner with accounting firms.

Why a bookkeeping or accounting firm owner might benefit from selling down a 40 to 60% stake in their firm. How Jason would finance these deals. And I also asked about where this strategy fits with, with the Arbor Group. I know Jason and Rowan have a venture capital fund. And accounting firms don't typically fit the brief for venture capital investments.

So Jason goes into explaining where acquisitions in accounting firms fit with their overall strategy. He deconstructs the Kelly Group strategy and how they structure accounting firm acquisitions. And we wrap up by discussing whether it's better to increase revenue for your accounting firm via acquisitions or sales and marketing.

All that and more coming right up on the Lifestyle Accountant Show.

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[00:03:55] Meryl: You mentioned that you might not agree with the rebrand strategies. So, what would, what would your version of this look like?  

[00:04:03] Jason: It's a really good question. So, we debate this a lot because one idea is that you, you know, Merger firm or buy firm, whatever, wanna call it by, by a chunk of a firm and rebrand it, you know, S B O, right?

So make the whole thing SBO, change the core values of the team. Tell all the clients that, hey, we're changing name, we're joining this, this company. And I think that what we came to the conclusion is that SBO has a quite a unique brand differentiator. Like we, a lot of our clients are in tech or, or digital.

So they're demographic of our clients are Gen Y, gen X. Um, found all their businesses. They're growing quickly. They're doing 30, 40% growth every year in terms of their business size. They, they, their expectations are very high. Uh, I think all clients expectations are high, but we find that our clients have particularly high expectations because.

They demand more, um, because of just the era that we've grown up in where we expect everything instantly, right? Like you can order something on Amazon and it can be delivered literally the same day, right? So we expect queries to be answered ASAP. We expect emails to be, you know, they want to use us as their chat, chat bot in addition to their account.

So, um, yeah, quite a unique bunch of folks, which are hard because I'm the same, I'm wired the same way. But, you know, if we were to, Then, you know, partner a buyer in a more traditional accounting practice down the road who service high net wealth individuals or folks who are more boomers, as an example, you know, applying that same mandate to them, um, they might not gel in terms of values, the way we do business.

Uh, offshoring is a classic one. So, a lot of accounting, traditional accounting firms don't. of, um, offshore staff or international staff outside of Australia, uh, because of, you know, maybe the clients are old school and, and we'll say old school but don't, don't necessarily agree with whatever the reasons are behind offshoring jobs or taking, taking jobs off, off Australians.

Um, so they may not align with those, those values or the way we do business. And so that, that, that creates risk that they'll leave. And or, um, yeah, and that's, that's a goodwill, but it literally walks out the door if you disrupt that. So, our view is like, well, why do you even need to change the name? Like, why change the brand?

And I think it comes back to, is there, is there goodwill in the corporate name? Is there, is there goodwill in the brand? And going to the big four, like certainly larger corporates. rely on the big four accounting firms like KPMG, EY, Deloitte, WC because they want that stamp of approval. Like you worked in audit, like most large companies want a big four logo or a big six logo on their financial report because if anything goes wrong.

They can say to the CFA, hey, like something went wrong, but hey, PWC signed off on it. Like, it's like, it can't be that bad. Like, don't fire me because like these guys did it and it wasn't me. Then it's not them. They wouldn't take a risk on getting a small, you know, upstart, small accounting firm to do to audit BHP's financials, right?

Like no one wants to sign up to that risk, right? So, you want you... So, the big four brands are there for a reason because... But I think that's for corporates, right? They're done for... For small businesses, I think most people would agree that. I don't really care what the brand or company you work for. It really depends on the relationship that you have with the key people within the business.

And, um, and as long as they do the work and they get it done, they're the high quality and they've got someone they can talk to and who's kind of aligned with their business and they can trust. Although that matters more than what logo, um, that they're working for, right? So that's our assertion behind it, hence why we've been not too fussy on the brand.

That, that's, this is all theory at the moment. We haven't actually tested it, but we are in the midst of. Oh god, secondly, there's also a downside, I think it's probably what I raised, the downside of having a unified brand as we know with, as you can see with PRBC and the whole, uh, what's happening with that.

Like, again, my wife now works in government. And she's not even governed, she's a non government, works for a non government owned entity. They've literally put a ban on all work done through PRVC. Like, they've actually turned, the bookkeeper tried to pay an invoice, um, for some work, consulting work that PRVC did, like, before the scandal.

And they couldn't actually pay the invoice because their billing code had been blocked out of their ERP system. Isn't that crazy? So, we can see the... On the other flip side, what brand damage can be done if there is a couple of lone wolves or, you know, a couple of lone partners doing some unethical slash dodgy shit and, and ramifications that can have onto the rest of the business.

Um, and that, that's the extreme example, but a real and, um, recent case study that we can see what, what can go wrong.

[00:08:39] Meryl: So it sounds like you've been thinking this through and potentially about to get started and there's a lot, the listeners of this show are accountants and accounting firm owners. So maybe there's some interest there, reach out to Jason if that's something you are interested in.

But what, what would be the pitch for the accounting firm owner or the bookkeeping firm owner? What, why would they want to sell, sell down 40 to 60% of their equity?

[00:09:02] Jason: Yes. It's a good question. So we, you know, as I know myself, you know, we're, we're still. early in our journey and I think we've done okay. We've, we've done, like, I was, I was chatting to different business brokers about, you know, like, what interest is there for, you know, people to sell business.

Like, why would people sell their accounting practice, right? I think you need to answer that question first. The first one is usually succession. So, usually, it's older partners who are looking for, um, an exit strategy or a retirement or transition strategy because they want to hang up their boots one day, right?

And so, that's usually one reason. Um, I think the other reason is not necessarily a succession strategy, but more for maybe a partner or an accountant who's kind of set their own shop. They've done it for three or four years, but they just can't get past the threshold. And typically, what I learned chatting to these different accounting brokers is that there is actually a small...

There's only a... There's actually, surprisingly, a small amount of accounting firms that actually do more than a million dollars of turnover and fees. A lot of them are doing sub a mil. And I was asking, like, why is that? And one of the first reasons is why is a lot of them just aren't optimizing to be a business.

They're just happy to be, you know, a one or two person partner firm and they're happy to, you know, work with the clients that they get to choose. But fundamentally, I still have a job, like, I'll be frank when I say that if they go on Like they don't get paid because no one's doing the work unless they might have a couple of accountants.

But really, all the risk still sits with that principle, right? So they're kind of like highly paid freelancers. That's a great income. That's a great living. But again, it doesn't necessarily give you lifestyle design if that's what you're optimizing for. You can't disappear for six months and go backpacking or, you know, even the Europe holiday with the kids because the business is still dependent on you.

In addition to that, talent attraction, like how do you find staff, like who's, you know, unless you've had old colleagues that might want to work with you, it's going to be difficult to attract young, new talent in a sole practitioner firm, right? Unless you have some edge, um, quite challenging because most of the grads will...

There's already a talent shortage, there's already a skill shortage in the accounting profession. Most of them will empirically go to a bigger firm with brand. How do you compete with that? And it's hard to, um, particularly if they don't have the infrastructure to support. support at a graduate program.

Um, and then the second part of it, well, the third element of that is, oh, can you, sorry, go back to the question. Why, why don't they get that past a million dollars is maybe they just don't know how to, you know, I think that a lot of accountants by nature are technicians and that's totally fine. I'm a technician as well, but to be a business owner, as you know, Meryl, it's, it's a different mindset.

And so the skills you need to, to run a business or own a business and operate a business are very different to actually doing the work. And I think that that's been a criticism of a lot of accountants offering business advisory services where, you know, they, they're advising business owners who have been doing business operating businesses for decades, um, you know, suddenly their accountants say, Hey, I can help you scale.

Um, it's like, Oh, what do you know about scaling a company? Have you done it yourself? Like, Oh, no, I know how to read a P& L balance sheet. Like, that's not the same thing. So I think that's a, that is a, that's a real. common criticism, I guess, of our, of our industry. I mean, I'm, I'm in that bucket as well. So, I think that it's, it's the idea is that, hey, Focus on what you're really great at, which is like servicing clients, building a great team, and let us give you some support, like help, let us help you, um, you know, roll out some systems, infrastructure, let's, let's work together to build a playbook to attract great talent and build, make it a repeatable system.

Let's work together on building personal brands to... Um, improve your sales and marketing initiatives like again, our business growth has been purely organic and based off sales and marketing and social media. Like it's, it's not, it's a very replicable strategy. Like every business, every small business does the same strategy.

But for some reason, a lot of accounting firms don't have a sales and marketing engine. And for whatever reason, I don't know, again, it could be personal, could be because I don't have time to. So it's, it's about partnering with someone who Can bring that skill set and and that infrastructure and those resources, but also have aligned incentives to help both of us grow.

That's kind of the idea behind it. Again, this is all like just me fleshing ideas out, but um, we we think that that that's the the value add. And I guess the second, the third element of that is Again, we've built a firm with no tax compliance. We're very, like, tax compliance is less than 5% of our total revenue.

Um, like, where most accounting firms have the opposite. Like, most of their revenue is tax compliance. So, we think that there's blue sky for us to grow in SBO, but also, we can roll out the SBO playbook into, um, firms that we partner with and, and grow top line team and ultimately profit, um, between us.

[00:13:45] Meryl: Interesting. The second point, so the first point that you mentioned around accounting firms wanting an exit strategy, that makes sense. I think there's a group of accounting firm owners who would be heading into retirement in the next 10 to 15 years. And then the second point, now I've thought about it, that makes sense too.

I see a lot of chatter in some of the accounting Facebook groups and in their communities about accountants who aren't enjoying running their firms anymore. They've maybe been very accommodating for their clients and have found it difficult to remove themselves from the client relationship, from the work, from doing all kinds of different things for different people, and have stopped enjoying running the business of their accounting firm.

So, what you're describing could be an interesting opportunity. for them in doing the work that they do enjoy and having someone provide support and some infrastructure.

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[00:15:29] Jason: I think the, the accounting firm path is lonely as well, like again, I started the business with my business partner and if I didn't have Rowan, um, I, I would have given up easily and it's very lonely. So, I think the idea of working together with a group of peers and I think there's, we're on probably the same Facebook groups, there's a really strong community in the accounting profession where everyone's very open and collaborative about sharing ideas and whatnot.

I think be able to build a community of, of owners as well, who all have, um, vested interest in growing together. I think that's a very powerful form of, of, um, of community, which, which only has benefits. I can't see any downside of, of being part of something like that. Um, so I think that's another, another reason.

[00:16:10] Meryl: Have you thought about how you might finance these deals?

[00:16:13] Jason: Yeah, we have. So, we, we've done a, a few financing, um, Um, we've done deals before and, uh, you know, the question is how much of it's equity slash cash, how much is, is maybe finance or deferred payment or, you know, debt. I think it's really case by case basis and it depends on, um, risk appetite for both people.

I think typically in, in these type of small business acquisitions, there is a component of debt. So, um, typically, so let's talk about Kelly Partners model, right, because that's a, that's something we can talk about the public and you can go in there. They've got an ASX and download the financial statements if you want to have a look if you're interested.

But basically, what they'll do is they say, cool, let's say they buy a, they find a firm doing 2 million of revenue, right? The first, the first thing you need to understand or how do you price it, like how do I value an accounting firm? The going rate, um, depending who you talk to is between, it's a multiple of fees as opposed to profit.

Because in theory, they should be the same like the economics of the accounting firm should be fairly standard across all businesses. I think for those interested, I think typically it's rule of thirds for professional services. So your P& L, one third is your wages or cost of sales. One third is overheads and then one third is profit.

So you're looking at somewhere between 25% to 30% EBITDA, um, for a fully operational, like mature accounting firm. That's, that's kind of what the budget is looking at. So, on that basis, for 2 million fee base, you typically value it at like one times revenue. That seems to be the going rate. So, let's just say the accounting firm is valued at a price of 2 million.

Um, so, Brett Kelly, he's only going to buy half of that business or 51%. That's about 50%. So, 2 million enterprise value, but purchase price goes to a million dollars. They're going to buy 50% of the share, the cap table. And then, of that million dollars, there's a thing called retention. So, what that means is, Let's just talk from Brett's side.

When he buys a business, the risk with services businesses is that you buy the company, similar to what happened to my days at KTHK Haworth, you know, you buy the business and then the principals get lazy, they take their foot off the operational excellence of the firm and then a bunch of clients leave, right?

So because you're pricing the business based on revenue, you want to make sure that those clients hang around for a period at least so you can get... Because you paid for it. So, you should get that revenue back to you in some way. So, there is a retention calculation, which is typically, I've heard from Brett and a few other people who have been sold to Brett, it's between 25 to 30%.

So, of the what they're buying, a million dollars of the 50% that they're buying, 700k will be paid up front and call it... And then 300k or the 30% would be... The retention bonus paid after two years. So it's kind of like an earn out. So you, so long as after two year period that the clients have hung around, you'll get that 30% deferred payment, but they have to hang around.

So there's kind of a short term incentive for the principal of one selling out to keep those clients. Make sure they're happy and they hang around. So that's, so really when you think about it, they only, Brent only needs 700k cash up front to buy this firm. But then there's a leverage component. So, when I say leverage, that's debt.

So, the most banks will lend about 350k of, um, of the business to, of the fee base. So, they'll, so Brett will go to the bank, um, Macquarie 350k. And that's going to be paid over five years at an X amount of interest rate. And then, so really, Brett only needs 350K of equity or cash down, um, to buy a million dollars of fees.

Um, so that, that's his equity component. So that, that's typically how Brett would structure it. I think ours would potentially be similar or maybe a little bit different, um, with the retention because, you know, where we've got more alignment potentially. with our owners because of our value add that we bring.

So, and there's less risk of these people leaving or the clients leaving. So, maybe the retention might be smaller, but it's all, it's all negotiated at the end of the day.

[00:20:10] Meryl: So, I think in the past, I wouldn't necessarily think of accounting firms as the most obvious choice of business to invest in. And I know you and Rowan have a venture capital arm.

I listened to your podcast actually with him about describing the business of venture capital, which was great. We'll link that up in the show notes. With the venture capital firm, you'll. Looking at investing in a range of different businesses, are accounting firms attractive enough that they kind of meet your criteria there or is this completely separate to what's happening there?

[00:20:37] Jason: Yeah. The short answer is no and I'll explain why. So when you don't see, so Blackbird Ventures as an example, like there's the big, big tier, you know, their big household name in venture capital in Australia. They're not going and buying accounting firms, they're not buying vets, they're not buying like sweaty services businesses.

And there's a reason for that. Um, it's just, they just don't have, they don't start very quickly. Like, so what Blackbird, by definition of venture capital, um, you know, they're, they're, they're investing in moonshot startups. Things that will be highly disruptive, uh, will, will displace incumbents, will, and, and provide huge, enormous billion dollar returns for their share, for their, um, LPs or their investors.

Um, where accounting firms are almost the complete opposite of that. They're like, hard, very hard to disrupt accounting firms, despite what apps, uh, will say that they might do that one day. But, uh, you know, everyone needs a tax return done, um, it's a government mandated kind of revenue stream, uh, for, for most people.

It's very hard to disrupt accountants, right? And, and almost, you're betting for that, right? As a, as a private investor, like, again, come back to investment strategy. The venture capital, if, if there was a, some sort of disruptive AI that could displace accountants and just like, you know, the right should be had yours, the small business accountant that will no longer exist by using X, Y, Z, AI, tax, GPT, tax, GPT will disrupt your relationship with accounts.

You don't need people. What a waste of time. Phone calls, um, dealing with shitty invoices that you never signed up for all this crap. Don't worry about it. Tax GVT will get you covered. Um, and it's only for 10 bucks a month, right? That is a very disruptive piece of tech. So long as it, you know, it was real.

Um, that's something that a venture capital would invest in because it would, it's there to displace the incumbents and would own the market so much that the valuation would be in the billions of dollars because you're essentially disrupting a billion dollar industry which is accounting and tax services, right?

Um, so all the value goes into that company and then that's how someone like Blacko would get their returns. For them to invest in the accounting firm, it's like just not in their mandate. They're not going to get billion dollar outcomes by rolling up accounting firms. You're just not. Even like Kellen Partners, they've rolled up I think like 60 accounting firms, maybe a lot more than that.

But they're only... Their market cap is 200 billion. Like, it's still not venture scale. On the other hand, private and private equity, which are more about, um, Yeah, rolling up, doing, there's common for private equity firms to do roll ups or acquisition kind of style plays similar to this. It's more in their wheelhouse because it's, it's predictable, it's a boring business, it's maybe uncommon for people to do and, and.

But that being said, there still needs to be an edge, like there still needs to be an edge of why someone would do this. And like anyone can go and buy a business, um, it's, it's actually not that difficult to go and buy a business, but very difficult to run a business as you know, and very difficult to then earn an outsized return of that investments.

Like what else can you do to this business to make it grow faster, improve profit, um, you know, realize more financial value outside of just. The, the business that was already returning outside the profits that we generate anyway. So there still needs to be some sort of secret sauce or competitive advantage that you can bring to the play to, to the, to the acquisition.

Otherwise, anyone, everyone would do it, right? I mean, everyone, anyone could technically go and buy a plumbing business down the road at three or four times profit and run that. But as they know, like if all the plumbers decide to quit. Um, I'll sabotage your business like you kind of screw if you don't know how to do plumbing like you can't screw so you can take the business.

Um, and yes, there's a lot of risk but, um, the returns are there if you know how, if you know what you're doing.

[00:24:17] Meryl: Yeah, I like how you described that. So you've got, there's a VC arm in one part of the Arbor group and then it sounds like there's more like a private equity. Um, and that is, that's the area where you're looking at the accounting firms, the car washers, the, yeah. Yeah, the boring businesses.

[00:24:33] Jason: Yeah, yeah. Boring, boring businesses that ideally would not be disrupted. Or maybe they are more mature, boring businesses, but we bring an edge to it, which might be, hey, adding bookkeeping and financial management services to a tax practice or it's a car wash where they're still using coins and there's no subscriptions and it's a really terrible digital experience.

Like maybe there's a digital layer that we can bring to a more matured boring business which helps it to either streamline operations or grow top line or improve the customer experience to generate higher revenue and therefore profit. So there still needs to be some sort of hands on component to improve it which is I guess what private equity is.

It's like a bunch of investors. And operators who go in with a thesis where they'll say, well, I think, I think your returns are here. When you're at the industry benchmark of profit is here. I think we can get it to from X to Y through these activities. And that's where they'll get hands on themselves to, to realize, um, that do those things to realize those returns.

[00:25:29] Meryl: It's interesting hearing you describe that where there's an episode that will be released just before yours, the guy called Matthew May from Acuity. And their strategy is acquisitions of accounting firm or one of the strategies they've been testing is acquisitions of accounting firms, but that's to grow their revenue base.

So he was doing some analysis around, they have a sales team too with non accountants that do sales and business development. And does he get a better return from his sales team or from acquiring accounting firms? And he's not done that many acquisitions so far, but so far the numbers are saying that he's got better returns from his sales team.

[00:26:04] Jason: Yeah, I agree. Acquisitions. 100%. You will always... I think we've gone through the same exercise because you can do a hypothetical. You don't actually need to buy the firms. You can say, well, average, average going right for an accounting firm is one times revenue. We have a sales team or we have Simon and we have a marketing team.

The payback period on organic sales is much higher than buying your revenue. Because if you think about it just mathematically, if, if we pay... Say you employ a salesperson for 10, 000 a month. If they close... Their monthly salary in a 10, 000 a month client for bookkeeping, financial management, tax, which is, you know, not hard, I wouldn't say hard to do, but it's very achievable, um, for the right profile and the right client.

Like, they've covered their salary basically for the entire year, more than, right? Yeah. Um, and, but that's only one month of the year, but ideally they should be doing two or three of those every month. And so that 100, 000 that you pay them, and there's a commission, but parked outside, there's 100, 000 That should, in theory, generate 400, 000 of revenue, at least, of annual revenue, right?

That should be just benchmark. And so that payback period is obviously a lot faster than buying a dollar of annual fees. Um, so I think it always will be for sales and marketing. But that being said, acquiring a client is, is a very slow sales process. It's a long sales cycle. As you know, it's a very relationship driven activity.

Um, a lot of the clients that we close have been through years of content, years of trust building, just word of mouth and referrals. So it doesn't happen. It's not as if, You know, compare that to some of your eCommerce clients where they throw an ad up on Facebook. Hey, buy my 10 widget like, you know, it's only 10 bucks.

Cool. I can buy that. It's risk free. It's only 10. Whatever. They'll instantly get a sale most of the time that you can define that ROAS or the return ad spends pretty quickly. But for... You know, services businesses, particularly accounting services where it's high trust, high touch, um, you know, not high risk, but high stakes if it gets, if something goes wrong.

Um, it, you know, look, hence the sales cycle is long because business owners need to make sure that they're making the switch. If we're going to make the switch, they need to make sure that they trust the service and there's a long term partner there. Because the last thing, because switching costs for accounting firms are quite high.

Not, practically, they're not high, but for the business owner, I think it, It's like, Oh, I have to change accountant. Re educate this new person on everything I've done throughout the, the gremlins and the skeletons I've got in the closet, which maybe the old accountant kind of buried under the, under the, uh, the rug.

So there's a, there's a bunch of things. People hate changing their accountants, but, um, so hence why it's a, it's a slower sales cycle.

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[00:29:42] Jason: No, not really. If anyone wants to kind of riff on the idea of a partnership, yeah, I'd love to hear from you.

We're still exploring things ourselves. So if you've got ideas or whatever, I'm very open to hearing feedback from everyone.

[00:29:54] Meryl: And where's the best place for listeners to get in touch with you?

[00:29:58] Jason: Uh, LinkedIn is probably the best spot so just um, I'm sure it's in the show notes but just search Jason Andrew on LinkedIn and you'll be able to find me.

[00:30:06] Meryl: Awesome, thanks so much for stopping by

[00:30:07] Jason: Jason. Thanks Meryl, it's been fun.

[00:30:13] Meryl outro: What a pleasure to continue my conversation with Jason Andrew. about acquisition opportunities in the accounting space. Here are a couple of highlights from my perspective. Hearing Jason talk about why he wouldn't rebrand a firm he acquired, particularly if they had a different demographic of client or different values to his firm.

and the risk for potential brand damage. PWC scandal, anyone? It was also interesting hearing him articulate the reasons why a bookkeeping or accounting firm owner might benefit from selling 40 to 60% of their business. And Jason mentioned that often it is succession planning, but accounting firm owners, they can also face other challenges like a talent shortage, systemizing their business.

Not having a sales and marketing engine, and these are all problems that the Ava group could help with a quick ask from me. If you are enjoying listening to the podcast, then it would be amazing if you could leave a five star review and a comment on whatever podcast platform you're listening to. So whether that's Apple podcast, Google, I'd really appreciate that.

Thanks everyone. And chat to you again next week.