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. Today I'm chatting with Matthew May.

He's a CPA who works with technology companies and he's the president of Acuity, a U. S. based accounting firm.

[00:00:35] Matthew Soundbyte: So we've thought a lot about who our ideal clients are since then and like the big takeaways because you do a big portmortem on this. Like we've realized at Acuity, if the clients don't use Slack, we probably shouldn't accept them as clients.

Uh, I don't know why we, we, we, we evaluated all kinds of things and like Slack users, for whatever reason, line up with the kind of clients that we do well with.

[00:01:04] Meryl Intro: Today we are talking about acquisitions and we're gonna be breaking down two specific transactions where Matthew took the lead. The first was a firm where Acuity.

acquired the clients and some of the team moved across and the exiting partner retired. We talked through why Acuity became interested in acquiring other firms, how they generate deal flow and then we go into the specifics of this first transaction and the factors they considered in deciding to move forward with this option or this opportunity compared to others and why ultimately it wasn't the outcome.

that they had hoped for. The next transaction was slightly different and in this case, another firm actually merged with Acuity. So Pat and Scotty Shah from Catching Clouds, actually an e commerce accounting firm, uh, so one that we're familiar with in the e commerce world, merged with Acuity and in that situation, Again, their team and clients came over and Scott and Patty became partners at Acuity.

So we talk about the pros and cons and challenges with those different approaches. We also had an interesting conversation about Acuity's unique approach to employee conversation, which allows team members to share in the risks and rewards of the business. And also why Acuity leverages sales professionals rather than accountants to handle the sales function.

And how they use this stuff, not just to close leads, but to actually generate them for the business. All that and more coming right up on the Lifestyle Accountant Show.

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Meryl:  Hey Matthew, welcome to the show. We were chatting pre-recording and you mentioned that you've just got back from holidays.

[00:03:43] Matthew: I did. As you say, I was on holiday for a week. I disconnected and went to St. Lucia for seven days with my family. It was the first family vacation we had in four years. I guess we've been spending our time going to see other family and nothing, just the four of us in four years.

Crazy. Well, welcome back. Thanks.

[00:04:03] Meryl: So, Matthew, could you start by sharing a little bit about your background and a bit about Acuity?

[00:04:08] Matthew: Sure. Well, um, I guess I'm, I'm the product of a small business owner family. Uh, so I grew up in a small business. My dad had his small business for 30 years, so I grew up sweeping warehouses and, uh, in a steel business in the, on the border of the Texas Mexico border.

I'm, I'm in the U. S., sorry folks, uh, so, uh, I grew up, I grew up here all my life. Uh, from there I went to university, uh, went to a college in, at Baylor University in, in, in the middle of Texas. And then I went the typical route Big Four. Took a break in the.com days to do a startup. We sold that startup like within 18 months and I stayed on with a really big company that bought us for a while, and then I came back to public accounting like a lunatic, and went on to make partner at a kind of a mid-tier firm, a top 25 firm in the US So bad.

$200 million firm. Then about 10 years ago, 10 years ago, on June 1st, I, uh, decided to go and join, uh, this guy named Kenji Kermode, who's a lunatic at Acuity, and we decided we're gonna take over the world. And that's kind of my origin story.

[00:05:12] Meryl: Amazing. And so what was the story of join joining Kenji? I believe that he had already started Acuity, and then you were joining a phone that had been around for, I think something like, nine years?

[00:05:23] Matthew: Yeah, eight or nine years. I think oh four is when Kenji and, uh, again, a guy named Stewart, um, co-founded, uh, acuity. And, uh, they made it a, it was called a Acuity c f o at the time, and it was a C F O for hire business. You know, back when that wasn't cool, you know, in 2004, they, they, um, went out and quickly grew to about a 10 person firm.

Um, it was about a million bucks in revenue. Um, they kind of stayed there for eight years. Part of my origin story was when his partner left to go work for a client, deciding he didn't want to be a firm owner anymore. I think a lot of firm owners can associate with that after eight years. And, uh, uh, Kenji and I had become friends because I was a partner, like I said, at a different accounting firm and we had worked together.

I'd refer business to them. They referred it to us, but more than anything, we're really good friends. And uh, he was about six months into doing this by himself and um, I joked to people that he got drunk one day and asked me if I wanted to join him and we put it together over a Mexican food restaurant in about two hours.

The, the deal to, for me to acquire half of a cutie. So that was kind of how I got into it.

[00:06:33] Meryl: Wow, two hours. That's amazing. So had Kenji already had conversations and done the deal with Stuart to buy him out and he was the sole owner of the firm at that time or were you having to negotiate with Stuart as well?

[00:06:47] Matthew: No, I kind of had, well he had done, Stuart was just very graceful and wanted Acuity to succeed so like many of us know, you know, there's not a lot of cash in our businesses at all times so he had done a seller note. Um, for Kenji. Uh, so part of me buying Acuity was taking over that seller note.

[00:07:05] Meryl: Could you just describe what a seller note is for some of the listeners may not know?

[00:07:08] Matthew: Yeah. So one of the ways to facilitate an acquisition that's not uncommon in these acquisitions or the acquisitions that I've been a part of is for the person doing the selling to facilitate that. Using a loan, uh, some kind of loan typically secured by the shares or the member interest or whatever form you have your equity in the company usually secures that and, um, Uh, you have different, way different, you can have all kinds of different structures like you can imagine with loans, but the one that Stuart had put in place, Was a very, um, when I learned a lot from because it was very aligning from an incentive perspective is if the company did really well and had really good cash flows, the payments accelerated and inversely, if the company was struggling, it allowed us to decrease the payments, um, so that, um, the company would survive.

So he was very interested in seeing the company thrive, not just getting his money out of it, and it ended up aligning, um, both him and us, uh, long term. So it was a really great structure for us, and it allowed us to kind of get into the business, and it was the mechanism I used, because I assumed that note from Kenji.

Um. For, for, for my initial acquisition, that was how I bought the practice, you know?

[00:08:28] Meryl: I mean, it sounds incredible that you were able to nut out those key terms in two hours. Kenji was the, he was the original owner. He put in a fair bit of sweat equity. He'd been there for eight or nine years already. So did you come on as a minority partner or what did that process look like?

[00:08:44] Matthew: Yeah, I mean, I thought that he would want that. So I, my first offer to him was that I have. 49 and a half percent of the company. And that was a deal breaker for him. So he said, I needed to have a 50, 50 ownership. Uh, he and his previous partner didn't have the same ownership and he said it created disalignment over the years.

Over those eight years, it created a bit of frustration and. Because you do put so much energy into it. So we actually had this odd thing where I was like, no, I need 49%. And he was like, nah, I think you need 50. I mean, that's kind of how the negotiation went. It was really kind of silly how smoothly we were, how well we were just really aligned, which in reflection, because we were so aligned, I feel like has contributed part to our success because we really did think through these things.

And the fact that it was easy. Didn't mean that we weren't diligent. Um, I was a little naive, but on, on how to run a business, but I'd never run a business before, um, really, by myself. Or, I mean, one of the things that people should think about when they're doing this is it's really hard to run a business, so having somebody that had done it for eight years as a partner was like a huge advantage. Uh, coming in. So it took a bunch of the unknown out of it for me.

[00:10:01] Meryl: There's an earlier episode of the Lifestyle Accountant show where I shared my original breakup story with my first co-founder. And one of the, one of the biggest challenges we had, we were We weren't our age was similar, but we were in different stages of life because he had a wife and child and I had no mortgage and just wanted to take bigger risks and grow, grow, grow and reinvest money back into the business.

And so that actually caused some challenges for us because we wanted, we were at different stages of life, even though we were a similar age, how, how did you find that with Kenji in terms of.

[00:10:43] Matthew: Yeah, I think it's, it's definitely something people should emphasize more when they're evaluating partnerships. Um, it was one of the main factors of our success that we had initial alignment. And then we didn't, we haven't lost that alignment for a decade. So we've been partners ten years now. So, um, the big things that I thought about were those things.

Uh, our, our oldest children were the same age at the time. Uh, our oldest children were, were each ten. Um, they were eight years away from going to college. And, um, when people think, oh, that's interesting. Well, if you think of some of the stressors that you have. in your life, like when kids go to college, it's a huge financial stressor.

Um, whether you've saved for it or not, I don't care. Like, it's a huge financial stressor, and that's a big change. Um, the other thing that neither of us bought another house, um, within that time frame, like we're still in the same houses that we're in, so we didn't change our lifestyle. And, um, as Kenji says, we both out kicked our coverage.

Both of our spouses have had crazy, wonderful careers in this time and not have any setbacks at all. Um, and having a second income in your house is a huge benefit as a business owner when your cashflow can go negative and sideways. So having a significant, you know, our, both of our spouses. You say second incomes, they're, they're significant contributors.

There's years where they make more than us, you know, so, um, it's, it's, uh, that's been, that's been very aligning. Yeah, I know you know it, but like, unless you've lived it and seen it with other people, you, you just see how. I feel very fortunate that we stayed aligned because it's very, very difficult to unwind partnerships all the time and it's just very difficult.

[00:12:38] Meryl: So let's pick up the story after you came on, you joined Kenji at Acuity, the business was doing about a million dollars in revenue and had 10 employees. I think you were significantly bigger than that now. I think when we were chatting in Vegas last year, I think you had something like 150 people. What does the business look like now?

[00:12:56] Matthew: Yeah, the business looks like 150 people. Um, last year we had our first eight figure revenue year, so we were just above, I think we were like 10. 7 million, 10. 8, somewhere in that, in, uh, revenue. And, uh, 150 people in five countries. It's, um, it's quite a different business, uh, than we had back then.

Especially, I mean, for first eight years it had been the same business for Kenji, so, um. And when he reflects on it, also, I think it's an interesting perspective. Um, I've kind of always known growth here, every year that we've been here. Um, now we go through plateaus just like everybody else, but every year has been very interesting.

[00:13:31] Meryl: So we're going to be talking about acquisitions. Before we get into that, would you say that the driver of growth has been acquisitions, or would you put it down to something else? What would you say is, has been the key to that kind of growth?

[00:13:42] Matthew: Uh, the key for our growth has been focus and alignment on how we built our compensation arrangements and how we focused on niching.

Uh, I think in particular, or at least identifying customers that we work well with and want to work with. So that's been probably the key. We didn't do, uh, acquisition until we were about six or seven million in revenue. So somewhere around there, about five or six million, maybe. is when we, we did our first one.

So, uh, so the key was definitely that,

[00:14:16] Meryl: I think. I can relate to the, the niching, or as we say in Australia, the niching. I've definitely experienced that too, when we made that move with B Ninjas to move. Just into e commerce from when we were, we started off very broad in the, in the first year. It was any kind of business, sign writers, lawyers, anything.

And so I would, I put that down to our, both our growth, but also that impacted or improved our profit margins too, doing that. The, the compensate, I want to just quickly touch on what you mentioned about the compensation strategy. That sounds interesting too. Can you expand a little bit on, on how you're, you're doing that?

[00:14:52] Matthew: Sure. Well, one of the keys to our success, and we've been through several downturns and upturns, is we were one of, had to be one of the first firms that really embraced remote, flexible, So the, the, the give that our employees gave back to us was because they told us they want flexible flexibility overall else.

And we were like, well, if we have to do flexibility, we have to figure out compensation plans that are nonstandard. So we came up with variable compensation plans. So most everybody's an employee, but they still are variably compensated based on the amount of work that they're producing. Um, so compensation is highly aligned to deliverable here.

Um, so when we've gone through fluctuations, our employees have shared in the ups and downs of that. So we probably have lower margins than other people, but our employees share in the risk reward. of kind of the ups and downs of the business.

[00:15:45] Meryl: So say if I was a bookkeeper at Acuity and I had a portfolio of 10 clients, do you mean that if I then took on an 11th client and my workload increased that my compensation would increase?

Is it like a fixed amount plus some variable component?

[00:15:59] Matthew: No, there's no fixed amount for most people, so it's just a variable amount. So like on the 11th client, you get more and the 12th client, you get more the 13th client, and after you hit a compensation level and workload that you want, you just stop accepting clients, which is kind of an odd dynamic.

There's very few accounting firms where that I've ever been a part of where the staff have such control over their workload. So they have the ability to stay. No, I'm full based on. My family right now, right?

[00:16:29] Meryl: This is interesting. So, I've thought about this before. And we've, so one of the metrics we measure is MRR, so monthly recurring revenue compared to employee cost.

To see, because that's an indication of how productive they are and how much revenue they can generate compared to the wage that you pay. But I've never found a way, we haven't actually salary to that. And the challenges I had when I was thinking through how to do this was that the, the bookkeeper or the accountant generally doesn't have control over the scope of the engagement.

So they could get given a bad deal that's been scoped badly, or they could. If they've got a different salesperson, they could get a great deal where the pricing is higher for a similar amount of work. So that was something that's not in their control, which actually has a big impact on, yes, their productivity has an impact, but that probably has the biggest impact is how well the job is scoped.

[00:17:25] Matthew: Yeah, that's where that decision to compensate people that way has driven how we created sales. And driven how we have literally about a, I think we have like 98 SKUs of products at Acuity. So our products for people that are, so we have two compensation models, we have like product compensation and then we have hourly compensation because I still can't figure out how to productize controller and CFO services.

And if anybody tells me they can, I'd love to get them for an hour on a podcast. But, um, for the bookkeepers. Um, we have those 98 SKUs at a transaction volume level, which should help them navigate that also because of their compensation policy. We never had to do account management because a bookkeeper would say, Hey, this is over scope.

And they would reach back to us and we would be able to upsell because if they didn't upsell, they wouldn't get compensated. I think in a lot of firms, you have this problem where people just do all this extra work because they're on salary. The client's asking and that's the easiest thing to do when our model were more aligned.

So people have to raise their hand. It's been an interesting, it's let us be lazy in some areas, unfortunately, but we're trying to improve those areas now as we're bigger.

[00:18:36] Meryl: I can see that it really creates those incentives for the person that's doing the work. to put their hand up to say, Hey, scopes changed, transaction volumes increased.

This is taking longer or even maybe to push back with the client a bit more to say, Hey, the way we're doing it at the moment, it's not efficient. I need you to use this other app, um, upload your receipts here or whatever it is to make that whole process run more smoothly. So that's interesting and also forces you to be more productized in rather than having being lazy with the scoping.

Actually thinking through and defining and then getting the buy in from the team that yes, that's a fair price for the amount of work because I imagine they'd be pushing back if it's not.

[00:19:14] Matthew: That's correct. So we had this kind of pricing tenuousness on both sides. We had a two sided pricing experiment, right?

Uh, because you have to have people doing the work and, and, and doing, and, um, people buying the work demonstrating that there, there is actual value there, you know, when people pay for it, but that you can serve it. So I, I've always thought that helped make us more sustainable as a company, but just like anything, you know, when it's going well, people are raising their hand when it's going poorly, the people are just telling the clients, no, we can't do that.

Versus, yes, we can do it, you just have to re scope and pay for it. Like, that's a harder conversation than, no, that's out of scope. So, you know, it's not perfect. There's no perfect system. We're all people, so, and when you're in the people business, that's how that works.

[00:20:02] Meryl: And just one other question related.

to this. Who handles those, the fee conversations with clients? I think I recall having a conversation that some of your initial sales work is handled by sales people, not accountants. Do they handle these re scoping conversations too? Can you explain how that component of the business works? How

[00:20:20] Matthew: our, how our structure works is we have um, our sales people only touch it on the front end.

So, and our sales people are not, if they have a technical question, they can bring in one of the team leads or the head of our quality control team participates a lot or one of our industry experts to sit in on the call for a partial call. But we need the salespeople to run the process, right? They need to close the deal. They need to follow up.

They need to be salespeople. After that, after it's handed off, it goes to what we call an ops manager. Some people call them onboarding managers, but ours have Session. More, the more hats than that. So that onboarding manager will then also be their ops manager, and their ops manager will get them onto the platform, get them, make sure that they get people assigned to their account, but they also triage tickets.

So if a client or. If a staff member raises a upsell, it goes to that team. But right now that's about a seven person team.

[00:21:21] Meryl: Did you have any pushback around sales? So having sales people handling sales? The reason I ask, cause again, I've thought about this, but never done it. Because I think if you're selling products, so if you were selling software or you're selling an e commerce business, but there's, there's some level where you want to talk.

Talk to someone, a salesperson is the perfect fit for that there. If you've read the, if you've read the book built to sell, they bring in a salesperson rather than having the relationship consulting type sales approach where all you need this or we can solve that problem. We can change our scope and do this outside of what we normally do.

And salespeople don't generally do that if they're just selling a product. But I think, well, my thing is that. When someone wants a specialist advisor that they want to talk to the advisor, not to the salesperson. So how do you get around that?

[00:22:08] Matthew: We haven't had that experience, and we've just held the line on it.

So one of our theories is that if you want to create enterprise value in your firm, Like if you want the firm to be worth anything, it has to be able to work independently of you. So the last thing most firm owners do is let go of sales. And I understand some of the reason for that. It was one of, it was a very difficult thing to let go of.

One of the most difficult things to let go of. And it is a hard thing to train in accounting. But what I realized, um, and a lot of people could count up in this is like, Oh, I can close. Like when I'm doing a sales call, because I used to do the sales calls, I could close between 50 and 75% of the deals, right?

Well, when they look at my salesperson's close rate, it's closer to like 17% to 30%, depending on the month. But what they're not taking into consideration is like, when I got busy, I wouldn't follow up with people. I wouldn't, I dropped the ball and I wasn't counting those people in my close rate. And he is, I just think it's interesting, but it was more philosophical for us.

Like we wanted to prove that sales worked and the, the, the random way we do it, you'll appreciate this is, uh, since Kenji and I both live in Atlanta, we don't let the sales team call on Atlanta for the first year and a half, they had to sell not on our relationships. Like we weren't resting on, Hey, I know Kenji, I know Matthew, like there was no layups.

We wanted to know if it could work. Nobody knows you, you're just selling the firm. That's it. So that was our experiment. That was very interesting.

[00:23:38] Meryl: So you're saying they're not just order takers where the sale comes in and they just have to have the call and close the deal. You're saying they had to go out and generate leads as well?

[00:23:47] Matthew: So most of our sales team generates leads. So we have four people that are dedicated to just generating leads and setting appointments with the sales people, trying to identify people in our target markets. We have four target markets. Um, And get them on the phone call with our salespeople and then they have to run the process.

First call, second call, close, proposal, whatever, whatever that process becomes. Yeah, very, very interesting.

[00:24:13] Meryl: That could be a topic for a whole podcast. I have so many questions for you, but we're here for acquisitions. So, so I will stop, but my, my head is spinning. I'm thinking of so many, yeah, it's sparked a lot of, a lot of questions.

[00:24:29] Matthew: Yeah, our sales team is not one that most people are comfortable trying out.

[00:24:42] AD ROLL

Meryl: So let's move on to acquisitions. Sure. I believe the first acquisition was buying a small firm where the partner wanted to retire. But could you talk through maybe a little bit of the backstory of when you even, when and why you even started to think about acquisitions as a strategy?

[00:26:23] Matthew: The reason why we thought of acquisitions as a strategy at 5 million, we plateaued.

So, you know, whenever you plateau as an entrepreneur, like you have everything on the table. And even before we plateaued, we were just growing so fast, we didn't have time to think about it. But when we were plateauing, we had time to think about it and say, should we do this? And Canada and that was the time where at 5 million is when the calls really pick up on the venture capital and the private equity side too.

So like they're calling and saying, Hey, are you interested in being part of our roll up or do you want to roll this up? And like for those who don't know, roll up is in other industries, they bought a bunch of plumbing companies and you smashed them to one company and put a back office in place that that's common for them.

So could that be done? Theoretically at an accounting firm was kind of like the existential question. I think people are still going through that. So many people had talked to us about it. We were interested in at least exploring it. So we put a page on our website, because we're idiots, that says merge with Acuity.

Like, do you want to merge with Acuity? Like, fill out this form. True story. So we would just talk to people who filled out the form. That was like totally inbound. I would talk to people, fill out the form, we would talk about it. We'd have a podcast ourselves, so we'd talk about stupid stuff we were doing.

And that's how the first one came about. There was an entrepreneur, firm owner, running a great firm in New Hampshire, part of PASBA, which is a great industry group here in town. Great numbers, had been doing it forever and was interested in, um, figuring out next chapter, right? Like a lot of the firm owners are right now.

So, that's how that came about as an inbound web form. Wow. It was COVID.

[00:28:10] Matthew: When I hear other people that are talking about doing deals, they say, oh, deal flow, that's a major problem we've got to solve. Deal flow. And it sounds like, oh, just got to put a form on your website and away you got to put a form on your website and have a podcast where you say stupid stuff and drink beer with people.

[00:28:27] Meryl: So what did it, what did the process look like from there? So the guy filled out the form, you had an initial call?

[00:28:34] Matthew: Yeah, so I've done probably about since that form's been up, I've probably been, I've done somewhere between 25 and 40 like first calls with people and the first call just to be an expectation setting call and also get a sense for what they are, what their expectations are, why they filled out the form, um, relative size of their, Practice, relative number of staff, kind of why they're thinking about doing stuff, timeline, and just make tons of notes.

So I just make lots of notes. Then I'll usually leave them the next step, give them lots of information about Acuity, like what we're thinking about doing, why we're thinking about doing mergers, why we're thinking about doing acquisitions, how we think about the world in that sense. And if it's interesting to you, we would always tell them, I always tell everybody, you sleep on this, like, this is not a light decision.

If you're interested in this, let me know these things. And there's usually like a handful of items. I can't remember what they were with Van, uh, who's the name of the owner at, uh, Counting House, which was the firm in, uh, New Hampshire. And then we would go from there. Um, then the next call would get a little deeper than we would move, then we would.

After a few calls and something that we're kind of interested in, we do some diligence, preliminary diligence that that might be looking at financial statements. If you ever go to PASPA, they have great data. So like every PASPA firm I've ever seen has just really insightful data on all their margins and people, and they just really.

Everybody I've met there runs really tight ships, so we had all the data that we needed to make the decision, um, and then it kind of gets down to a point. You don't really want to go more than a month or two because you're wasting everybody's time if you don't get serious or just stop it and you. Rough out a letter of intent.

I'm crazy, so I, I'm the one that writes our letter of intents and stuff like that. So I wrote out the letter of intent and like the spreadsheet showing how things would work and all that kind of stuff. And that was, that was the next step, I guess. And then from there, he decided he wanted to do it. Then we got a lawyer involved really late.

Um, a lawyer helped write all the legal documents. And then we kind of went from there.

[00:30:43] Meryl: And how far before this deal with Van, how far along the process had you got with, because it sounds like you had a lot of conversations, initial conversations, had you got to the letter of intent stage or the diligent stage with anyone else before getting to this point with Van?

[00:30:59] Matthew: Uh, we had, we had done a couple of aqua hires with folks, but nothing that really had any kind of assets or employees, or no more than five clients had come over with the two aqua hires we had done, so there's no real compensation. And then with Van, I'm trying to think, we had never gotten to letter intent phase, no.

We had gotten a little bit down the road with a couple people on diligence, like we had shared, like financials. Both way. Um, we had received financials from probably four or five firms. That feels pretty serious when you're sharing financials, I feel like.

[00:31:31] Meryl: And what was it in particular about Van's firm that made it attractive?

Did you, I imagine you had some criteria of things that you were looking for. Can you share a bit about that?

[00:31:40] Matthew: Yeah, we were really interested in, well, first of all, we're interested to see if we had the skill set to do an acquisition. That was a huge factor. Going into the first acquisition was a bit of ego and interest in seeing if we could do it.

Um, the second thing is we had a thesis which turned out to be incorrect that brick and mortar small business shops in regional areas would be similar. enough for us and the entrepreneurs we served to be a vertical. So we thought like, you know, e coms are vertical. We thought like basically mom and pop shop, New Hampshire could be a vertical that we could replicate.

That ended up being wrong. Location based. Verticals are very difficult with a remote firm from an expectation perspective, just from problem solving when people are used to, especially for 30 years, picking up the phone or walking down the street or doing some stuff. So we had a thesis on SMB, mom and pop shops that could be a vertical.

We wanted to do an acquisition to see if we had the muscle, like we could develop that muscle memory internally to do it. And we were super curious about the economics of doing acquisition versus our sales team, which I've described a little bit, um, which is highly efficient.

[00:33:03] Meryl: So Ben's business, it kind of met the criteria you wanted.

Part of it was you're curious and you wanted to, to. Try it out and see, so how did it go? What was the process once you brought lawyers in? Do you have any lessons there from listeners that might be interested in acquisitions? And then let's get on to the, after that we'll talk transition.

[00:33:22] Matthew: Yeah, I mean, I think key deal points are really important.

So I was really focused in the first one on, for the first time ever, a deal I did was Maximizing value for acuity and not aligning incentives for both parties. I don't know if that makes sense for you, but when you, like, when you're thinking about these, like, you can get into business mode really quick in acquisitions and not think about alignment, right?

So he was willing to do seller financing. Uh, for a majority of the, the purchase. So we made some down payment and did seller financing, but not uncommon in these deals is a retention component for the customers, right? And I thought of that initially as alignment, like if he retains the customers, you know, he gets more money.

That's great. What I didn't consider. was that created an enormous amount of stress for him. And he was the person that we were dependent on to make these transition efforts. We had planned on an 18 month transition. And this earn out had, it was a, was a substantial piece of the equation, uh, of the acquisition.

And you would think, great, Matthew protected acuity. But what I ended up doing was creating so much stress in the seller that it made it untenable for him. And he's a great human being like but he had this would have been his baby for 30 years and I've now put him under the stress of he doesn't have control of the company more now that we do and he's in charge of making sure all this stuff happens or these bad financial things happen to him because he had set this price in his head and so every client that left is like.

Penalty for him versus, you know, doing some math early on saying, okay, 15% is going to turn and anything above that's going to be great. Anything below that's going to hurt, but like, it was like he was seeing it drop down. Right. So I was really naive about that. It really has made me gun shy. I'm doing kind of these are now kind of deals and definitely on the other side, ever taking an earn out if we ever think about that, that was just, that was probably the.

Biggest deal term like I learned so much from the can say I want a tough lesson like I learned so much from that one like it was very formative for us on how we think about combining companies, acquisitions, mergers, whatever you want to talk about it that I would always do it again. Um, it was the biggest financial Mistake I've ever made at Acuity probably from a cost perspective from also a time and distraction perspective.

So that says a lot because we learned a lot. That means, um, from that, but the things we learn like other people probably have to fail before they'll learn is. Acquisitions are probably in this industry not the best mechanisms for customer acquisition. So if you're using customer acquisition metrics, um, there's more efficient ways to acquire customers.

The other thing that we learned was your ideal client profile, which is like who you target you want to work with, you need to, in an acquisition, review for that more than almost anything else. So you have to have a, an understanding of who you serve well to be able to do an acquisition and you have to have some humbleness in that you don't serve some people well.

I'll give you an example like the firm had a rule, which I thought nothing of at the time, where you pick up the phone on the second ring. Well, I don't have a, I'm in a remote environment at Acuity. Like there's no phone, there's no, there's nobody manning the phones. So like after 30 years of being trained that somebody's going to pick up on the second ring, like I'm putting my staff in a position of failure.

Like they're going to fail. Like the expectations of those, all 60 of those clients at some point over the next year. Because you're not going to pick up the phone on the second ring. It's just crazy. So we've thought a lot about like. who our ideal clients are since then and like the big takeaways, because you do a big portmortem on this.

Like we've realized at Acuity, if the clients don't use Slack, we probably shouldn't accept them as clients. I don't know why. We evaluated all kinds of things and like Slack users, for whatever reason, line up with the kind of clients. That we do well with.

[00:37:44] Meryl: That's interesting. It's probably a reflection of them embracing remote work and being comfortable not needing to pick up the phone or to drop by your office.

I mean, that would be my takeaway from your comment there.

[00:37:54] Matthew: Right. So there's lots of things embedded in there. They're tech forward, they're, they're, they're accepted remote work. They probably deal with other people on a remote basis. Like you don't have to train them on how to deal with you. So there's a lot, there's a couple other profiles we have in there, but that one's a key one now for us and, and, and that mom and pop shop, that is not like my dad does not use slack, like he would be a terrible client for us.

[00:38:22] Meryl: Right. And so it was that hard to migrate those clients with a different set of expectations. It sounds like a different text stack into. The environment in Acuity where you work remotely, you have team members all spread out all around America, but around the world, how did that transition go?

[00:38:40] Matthew: It wasn't as bad as you think, because most of them didn't care what GL they were on.

So, but we moved all of them from QuickBooks Desktop to, to Xero, and they didn't really care. Because, I mean, they just didn't care. They didn't, never looked at their books. Like, they just got reports from people. So, that wasn't the hard part. The hard part was communication cadences, expectation setting.

People were like dropping off physical checks at the office, so the office staff could take them to the bank. Don't ask me why, like, like that doesn't even make any sense. Like they could just go to the bank or like you can take a picture. Like as a business owner, if you can't reconcile that there are people still that won't online deposit checks, like you really, like that was my naivete level.

Indiligence, right? Like I had this expectation of course, everybody will be fine with taking a picture of the checks and online deposit. I'm not driving them to the office so we could drive them to the bank. Like that doesn't make any sense.

[00:39:41] Meryl: When I'm hearing that I'm thinking how, cause it sounds like this business was making okay margins, but I'm thinking how are they making okay margins if they're having to do work like that?

[00:39:51] Matthew: They, they were very methodical, man, this guy was a great business person, great business person, very methodical, watched their margins carefully, priced on a project basis versus, you know, product basis like we do. It, it just, they have better margins than us. So like, that was like part of the interest, right?

You wanted to see how that worked, right? It's just, uh, I don't know. It may be counterintuitive, but they had it down.

[00:40:21] Meryl: You mentioned that you did a comparison afterwards as part of the retrospective of if an accounting firm wants to grow, is it better to acquire clients or is it better to use other sales tactics and you described earlier your sales team.

And so was the outcome, what did that analysis look like? And it sounds like the outcome actually is acquisitions isn't the best way to grow.

[00:40:42] Matthew: Yeah, we thought, um, it's about 40% less expensive. For us to do it internally. Wow. So somewhere 30 to 40%. So it's, it's significant. Especially when you factor in, in any acquisition, you're going to lose clients and churn and stuff like that.

So it's probably right at 40% less for us to have acquired those in house.

[00:41:05] Meryl: So it sounds like acquisitions aren't super attractive, but then here we are. There's, there's another opportunity that lands in your lap and I believe, well, in fact, I've, I've met the, the couple that merged with, into Acuity and I'd love to hear that story too.

[00:41:20] Matthew: Yeah. I mean, um, so the way we got in e commerce is through a merger. Right? You know, luckily, um, when Patty and Scott called and said they were thinking about combining with somebody, they kind of were at a threshold, uh, in a client size where they either needed more infrastructure and do management and stuff like that, or They needed to just, um, find their clients a home or something like that.

Kenji known Patty forever because Kenji knows everybody. My partner is kind of on the, he's the external facing partner in the ecosystem. So he had met Patty, uh, years before. And so we had a relationship with her. So it was very different, uh, her coming to us than Van, who's somebody we didn't know and just filled out a form on our website.

Um, that was a completely different situation. In that situation, we knew what we were really good at at that point. Uh, so we were about, uh, seven and a half, eight million dollar practice at the time when we did, um, the Catching Clouds merger. And we had had the experience already of accounting house, so we knew which kind of clients worked well with us, which didn't.

They were a zero shop. Exclusively, which really helped, right? So that's like, okay, if the clients are going to let me be on zero, like that's checking the box with the clients and we're progressive, right? But again, we had already concluded that the thesis was you don't acquire for customers. So then why do you acquire?

So Patty's known in the industry and Scott as well. Well, Scott's known like for e commerce, Patty's kind of known for process, right? So a new vertical is interesting to us. Always, you know, anything you can do to expand and grow and compete with Bean Ninjas. So just to make us adversaries, everybody can tell we're real big adversaries.

So it came down to how do we do process? Like, how, where do we rank that in our skill sets, uh, in e commerce as the ad, that's a no brainer ad, right? And then what are we, what are they bad at, right? What, what aren't they good at, like, from, from, from that perspective? So, there's a completely different Approach.

I also took the lessons from the acquisition prior and said, okay, when we do a merger doc, like I want this to be aligned, right? I want this to create alignment. We're not trying to make the best deal for acuity possible. So we created a deal. And the way we did that was Kenji and I did it at that time.

We did a deal where we created more alignment with the ownership team. So we added RCOO as an owner at the time, and Patty and Scott came on and we did a non cash deal. We're all gonna, we all believe in this vision. We kind of outlined what we thought that meant, where are each of us fit into that. So there were five of us to think about.

At that point and what we were good at, bad at, and we just had some really candid discussions, which included flying to Denver and we're there where they live and talking about our kids and and all the kind of fun stuff that go on. But that's how that started.

[00:44:24] AD ROLL

Meryl: And how did that transition go? It sounds like the reason for the deal was different. You applied some lessons and really thought about alignment. It's been a year, a year and a half, two years, something like that since that merger and how did that transition process go?

[00:46:17] Matthew: I think it went really well.

Scott's actually left the firm now to do consulting on a smaller, like he wants to be, you know, in a smaller environment where he can do more consulting for e comm and stuff like that. And in a bigger organization, we're kind of. Beholden to running the big organization. So from, I think the biggest takeaway from that was like if you're doing this with multiple people, the likelihood that everybody's gonna, like the big company, is pretty low or not like it.

I mean, everybody likes everybody, but like that it's gonna be your highest and best use and what you really are interested in after the dust settles and everything's kind of humming along. 'cause we were. You know, hummed at 10 million in revenue last year and so that was a very successful combination of skills and talents and things like that.

I think that was the biggest lesson from that one was that, um, things change, dynamics change. Um, for me, the biggest thing changed was like we had to kind of professionalize Acuit a little more. I had more other owners involved. Kenji and I had gotten to a comfort level. Over eight years, we're, I don't know, we're a little lax on several things.

Um, we, we had some agreements on how, you know, what's business versus pleasure, you know, kind of stuff, what runs through the business and stuff like that. And we've really tightened that up. But it was time to tighten that up, we're a real company, right? Um, so, but there's still a change, and still kind of different.

Um, so we feel, we feel a little, I don't know if that's the right way to say it. It's definitely different. Partners is really, it's as different, difficult as adjusting to Kenji, uh, which I didn't expect.

[00:48:05] Meryl: I can see how having more partners creates more accountability and could create some more professionalism.

I can see it would be a shock too if you and Kenji have just, you've been friends a long time. You're probably in sync after working together for so long and decision making with two people I think is a lot faster than three people or four or then five. Try to get five consensus with five people who are all owners.

I think in my experience getting bigger groups of people to agree on something can take a lot more negotiation and time. What does that process look like? It sounds like you have different roles, but I'd love to hear more about that.

[00:48:41] Matthew: Yeah. The other thing was we had created the environment that Kenji had originally, which was not everybody had the same ownership percentage, so that was a new dynamic to me that I wasn't prepared for in many ways.

I don't know how to articulate that. Like it, you know, because we had an $8 million company, you know, and they hit a million, you know, revenue company, so we were combining. Two companies that were different sizes, right? So, I had never had the experience. Kenji had had it before where we had people with different ownership percentages and so decision making wasn't like, we try to be collaborative with all five of us, but at the end of the day when you have to make a decision, like We had agreed Kenji was the CEO.

We had different spots on our organizational chart that we were sitting in. That's really different if you've been running your business differently. I had been doing it for eight years. You know, Patty and Scott had been doing it for longer. And Kenji had been even longer than that. So, like, there's all kinds of different things.

And we're pulling an employee into the ownership team who had been with us for, I think, seven years at that time. She had more familiarity with us than... Patty and Scott did. So it was just a, it was just an interesting dynamic. And, um, we tried to do as much collaborative as possible. We experimented with cadences, with meeting every week, meeting every two weeks.

One on ones, not one on ones. Like, who does one on ones with who? Does everybody do a one on one with Kenji? Like, how does this work? And you just kind of fumble around and try to figure out what works for you. Ultimately, where we landed, we're now in the middle of doing an EOS implementation. Um, because as part of the professionalization and some of the challenges with having multiple owners and things like that, you have to create some explicit accountabilities.

And I don't know if anybody's seen EOS, but that's a whole other topic. We could do a whole season on EOS implementations, probably, but, um, that really, that process really helped us identify like. Who does what, who's in charge of what decisions, and kind of a little bit helped us in the areas we were still struggling a year and a half later with who makes what decisions.

[00:50:51] Meryl: Well, where to from here, so you've done the, you've joined, you're bought into Acuity, you've done the one acquisition of the New Hampshire firm, you've had a merger. What's next? Do you think there's any more acquisitions on the table?

[00:51:04] Matthew: Um, I hope so. I hope so. I, I, I don't think, I think it'd be interesting in the next couple of years to see what happens with this private equity stuff coming into accounting firms.

There's clearly, in the analysis we've done with investment bankers and talking to people in the industry, There's a clearly and with other there's clearly a different value unlocking at 20 million in revenue. So do we have the capacity to get to 20 million or, um, we're halfway there. It only took us 20 years.

So, um, uh, in 20 more years we can get there. So there's, there's that kind of milestone we're looking at and saying, Oh, can we do that ourselves? Um, but there's also all these firms that have taken private equity that We might be a complimentary piece to so I think if we we have to start transition planning ourselves as well Uh, i'm the youngest of the partners of all the five of us So and i'm 48 this year and so We have to start planning so I I can see an acquisition if we decide to go at it and for the long term Um, some kind of merger with, with some, somebody that, that either, obviously we're working on it, developing internally, but if, if people that, have an interest in running a firm our size, want to come in, um, and, and do that, that would be interesting.

Obviously being on the other side of a merger would be interesting at some point. Um, if somebody larger than us wanted to do something. All the private equity firms that have talked to us, have wanted to grow too fast for us to do the private equity thing, and do the mergers that way, everybody wants us to get to 100 million revenue.

horizon that is just super unreasonable. That's just a different skill set from what we like doing, which is kind of just having fun doing experiments and just turning through acquisitions and rolling through integrations is not necessarily in our sweet spot. But I don't know. Maybe we'll do them. Maybe we won't.

I don't know. I'll never say never.

[00:53:09] Meryl: Amazing. Well, Matthew, it's been awesome having you on the podcast. Uh, I've, I've learned a lot listening to not only the acquisition stories, but just some of the elements of how you're running Acuity too. So if listeners are interested to get in touch with you, I know you've got a podcast.

Could you share maybe where they could go to find that? Or where they could connect with you.

[00:53:29] Matthew: Yeah, I wouldn't wish our podcast on anybody . Uh, but I'm the, I'm the tech c p A on Twitter or LinkedIn, the tech c p a, you can, uh, catch up with me in there. Uh, there's a fun YouTube channel for that. Um, and, uh, if you, Connect with me, just be aware that marketing is making me do shorts all the time now, so you'll see stupid videos of me popping up LinkedIn and Twitter and stuff like that.

Our podcast is called Drink While You Think, if you have an interest in listening to that. But bring a beer, it's going to be needed. Awesome. Thanks, I watch. No sweat. Thanks for having me.

[00:54:09] Meryl Outro: Wow. I really enjoyed this conversation with Matthew. I was so curious to hear about Matthew's experience, first with the acquisition and then next with the merger. But I also enjoyed our side conversation about employee compensation and building out his sales team. A few of Matthew's comments about the acquisitions stood out to me.

One, that it's really hard to change client expectations and behavior. So, it's important as part of the deal process to take the time to understand how they're being serviced. And the example he gave of these clients of bricks and with

Acuity being a remote first firm, it was very difficult to meet those expectations. He also talked about aligning incentives with the deal terms. So, I guess it makes sense to have a clawback or a retention clause where you're acquiring clients. But if you can't find alignment with the deal terms between you and the other party, then it's possible that the transition isn't going to go well.

The third reflection of mine was around the merger. And, um, Matthew in the early parts of the podcast talked about why he and Kenji thought it was important for them to be 50 50 partners and to have, so to have equal ownership interests really. And hearing that, how that changed now that they've brought additional partners into the business and the way that having different levels of ownership can impact decision making.