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Episode Info: can do to make [00:05:30] sure that I do get the most out of my firm when I sell; that I do find that buyer and get the top valuation? Curtis Cochran: When you sell, or when you start? There's a big difference between. Shannon Hay: Gap in between. Blake Oliver: You're telling me that I need to think about the exit from the beginning? Curtis Cochran: Correct. Correct. Blake Oliver: What do I need to be thinking about? Curtis Cochran: You have to be thinking about ... First of all, whatever you're gonna start with, if you think you need a 500K, triple that. You want 1.5 million. You have to find ... If you think 500K? Nah, you [00:06:00] triple that. Blake Oliver: Okay. Curtis Cochran: That's the first thing. The second thing is you have to build systems that keep you, the owner, away from the house- excuse me, away from the business, and into your house - your relationships, your family. You've even mentioned that on your talk up there about the family and so forth. That's the big one. The big one is to create the systems that will allow buyers to come in, and look, and say, "Hey, this guy has a system. We can buy him out, and the [00:06:30] system runs itself." That's what you do from the beginning. Blake Oliver: Got it. Curtis Cochran: From the beginning. Blake Oliver: I am not in my business. Curtis Cochran: Right. Blake Oliver: It will function without me. Curtis Cochran: Absolutely. Absolutely. Blake Oliver: Awesome.  David Leary: That makes sense. One thing we've had a discussion around - I think we've talked about it on the podcast before, and it's always hot on Twitter - is this concept of if you have just desktop clients; your clients are not in the cloud, people will pay you less for your firm. Is this true, or is [00:07:00] this something that we're just making up and arguing on Twitter? Do you guys actually see this in numbers of offers? Like, a client's less valuable, if they're still stuck in the desktop world, and they're not migrated to the cloud? Shannon Hay: I think there's so many variables that come into valuing a firm that ... That's always the number-one question everyone always asks: "What's the multiple? What's my firm worth?" It's such a complex answer. There's generalities. You could set a general number and say it's a certain number of times gross revenues, but really, it comes [00:07:30] down to appeal. If you're in Nowhere, Wyoming, your firm's not gonna be worth the same as if it was in downtown Los Angeles. If you don't have cloud-based accounting, your firm is gonna be worth less than a firm that does have cloud-based accounting. If you have a seasoned staff, that's gonna make your firm worth more. If you have systematic approaches, like if you're using modern technology, artificial intelligence, or bot-keeping, or things along those lines, that's gonna create more value, because it's separating ... The [00:08:00] practice starts to manage itself through those systematic ... Talking about getting away from that, getting to the house. That creates a greater value, obviously; a greater appeal, because, as a buyer, I want something to be as smooth as possible for me, so I don't have to implement those things. If they're already implemented, they're in place, that creates great value for me. Blake Oliver: I hear you saying that it does have an impact, but it's part of a overall assessment. That you couldn't really say ... Maybe [00:08:30] I could put this to you - it's a tough question to ask - let's say you have two firms, all things being equal, but one has modern technology. They've moved into the latest tech. The other one is still using 20-year-old tech. They're still on on-prem desktop systems that don't allow for remote access, that sorta thing. Can you tell me what the penalty is if I didn't move? Curtis Cochran: I can answer this. No [00:09:00] two firms are alike, period. Whether tech, or no tech, it's about culture. It's what you bring to the table. You might have somebody that's just tech-driven, and they're a poor culture. But then you have someone that's not, and they have an excellent culture. People wanna come and work for their firm. Two businesses are never alike, and when it comes to an evaluation, it's [00:09:30] an art; it's not a science.  As Shannon mentioned, there's just so many variables. There's moving parts to it. You might have 10 moving parts in one business and only six in another; doesn't make one more valuable than another. It just means that you have more moving parts. It's really fascinating, and that's why I've done this for 30 years. I'm sure Shannon's been there, too. There's just no way to create some kind of a science. I call [00:10:00] my own business E4 Math-losophy, because it's just a philosophy. There's math in there, but it's a philosophy.  Blake Oliver: Let's talk about the numbers, because I think a lot of firm owners- Shannon Hay: Care about the numbers. Blake Oliver: -care about, like, what is the multiple?  Shannon Hay: Sure. Yeah. What is the multiple? Blake Oliver: What's the multiple? Shannon Hay: What's the multiple; that's right.  David Leary: Not in this industry? Not the accountants. Blake Oliver: These days, what is the range of ... I understand that most firms are valued based on multiple of gross revenue-  [00:10:30] Shannon Hay: Typically, yes. That's correct. Blake Oliver: Typically, right? Which is how we did it for mine. Let's say I've got a $ 1 million firm, just for simplicity. What is the range of multiples that you're seeing? What's the lowest I might get, and what is the most I might get? Shannon Hay: Circumstantial, I would say that the lowest you would get ... What are the variables that's creating that low quality, that low offering, that low price? Usually, it's gonna be rural. Usually it's going to be where is the seller at? Are they selling because [00:11:00] they're ill? Are they retiring? Are they gonna be involved in the transition? What's their engagement, post-transaction? Again, I could go on, and on, and on with all the variables. If I'm gonna shoot a number out there, I'm gonna say anywhere from 0.8, 0.7 all the way up to 1.3.  Blake Oliver: That's a pretty big spread. Shannon Hay: It's a broad spread. For example, Nowhere, Wyoming, again, that probably is gonna be less than a one multiple; wherein, San Francisco, for example, you're probably gonna get a 1.3, 1.2 multiple, [00:11:30] just because the demand. I was gonna make the analogy of what is your home worth? Zillow's gonna tell you one thing; your realtor's gonna tell you another; and then, the appraisal is gonna come along, and they're gonna say a third thing. Really, what it comes down to, at the end of the day, is how much is someone willing to pay for it? Blake Oliver: That's interesting. It sounds the market for accounting firms  is still very local, right?  Curtis Cochran: I wanted to touch on what you were talking about, too, Blake. You have a gross revenue [00:12:00] of a million. Two companies - gross, $1 million - but what's their annual cash flow? That's a big [cross talk] Blake Oliver: The profitability. Curtis Cochran: Absolutely. Shannon Hay: That's gonna drive the multiple.  Curtis Cochran: One business might have a cash flow of 300K. Another one, 100. Well, there is a big difference between what you're doing inside the walls of that business, through your company, and your culture, and all of that stuff, so the annual cash flow is huge. Shannon Hay: At the end of [00:12:30] the day, that's gonna drive deal structure. Curtis Cochran: Absolutely. Shannon Hay: As a bank, I'm not gonna be willing to finance the 100K bottom line, because there's not enough left over, today, to service the debt that you're gonna take on to buy the business, as well as pay yourself as an owner. If you were buying a firm, I would want to know, as a bank, that I'm supporting you in a endeavor that's going to be beneficial to you. I don't wanna put you in a situation that's gonna be a hardship for you. I wanna know, at the end of the day, the net income is there to support the debt, [00:13:00] and then support you, personally, as an owner. Curtis Cochran: That is so good, because that's why you'd call us first, because then you know what buyers are looking for through the years. You're looking for net income. Shannon Hay: Yeah. Curtis Cochran: You're definitely looking for that. Blake Oliver: That makes sense. Curtis Cochran: Yeah, absolutely.  David Leary: Who's selling firms? Is it the majority is people that want to retire, or get out of their firm, or is it young startups, like Blake, who grew his firm and sold his firm? Shannon Hay: I would say the majority of the sellers I see, retirement is the primary reason. [00:13:30] A lot of times, though, you're also seeing where it's a change of lifestyle. They're wanting to go from no longer being the manager, or firm owner; maybe they're wanting to ... Maybe they've done some consulting in their practice, and they only wanna focus on consulting now. Or maybe they really like the audit side of their business, and they only wanna do audits, so they wanna sell everything else that's non-audit. It varies greatly, but I would say the majority are baby boomers looking to retire; making [00:14:00] their exit strategy. That's the majority of the sellers. David Leary: Who's buying these firms? Curtis Cochran: That's a great question, because I don't know if it's the millennials that are buying those firms. And I'm just saying [crosstalk]  Shannon Hay: No. I wouldn't argue that. Blake Oliver: We've got too much student debt- Shannon Hay: Yeah, that's true. Blake Oliver: -and then, we're trying to buy houses. Shannon Hay: That's right.  Curtis Cochran: Absolutely true. A lot of it is someone, another company, that's trying to grow their business. That's really who's buying these businesses. [00:14:30] Shannon Hay: Yeah. My best transaction is an existing firm growing through acquisition- Curtis Cochran: Absolutely. Shannon Hay: -because they have the wherewithal to offset any attrition risk that could happen. There's also a large efficiencies of scale that starts to occur, because, generally, you're not gonna have two rent payments; you're not gonna have two software payments. You're gonna have these ... You're gonna minimize; you're gonna take away a certain level of expenses, which increases the bottom-line benefit [cross talk]  Mergers, really, honestly, [00:15:00] tends to be the ideal transaction. Curtis Cochran: Absolutely. Blake Oliver: My most recent gig in public accounting was at Armanino, which is the fastest-growing accounting firm in the country. The way that it's growing is a lot through acquisition; rolling up 50-person firms into the 1,000-staff firm that it now is. It's probably even bigger than it was a few years ago, when I left. Shannon Hay: You've seen the same with alliances, too, like the BDO and the RSMs of the world. They're folding [00:15:30] those firms in and creating efficiencies that wouldn't exist otherwise and bringing benefit to their owners and partners that are involved. Blake Oliver: The big benefit that we saw at Armanino is the ability to sell additional services- Shannon Hay: That's right. Blake Oliver: -to a captive audience. Shannon Hay: That's right. Blake Oliver: You bring in a small firm that was only doing tax; not even doing audit, a lot of them, right?  Shannon Hay: Yeah. Blake Oliver: Now, suddenly, you've got consulting, technology, outsourced accounting- Shannon Hay: Investment advisory. Blake Oliver: -investment. We had a wealth management division. Now, the whole menu is there, and the clients are like- Shannon Hay: I [00:16:00] would say that the industry is starting to demand that, where you're having more of an Amazon mentality, where it's "I want to be able to one-stop shop everything,. Blake Oliver: One-stop shop, yeah.  Shannon Hay:  I don't wanna have to go to three different people for three different levels of service. I want-  David Leary: That's QuickBooks Live [cross talk] all at once. Shannon Hay: All at the once. That's right. Blake Oliver: Do you guys see the future being more mid-sized firms, and the smaller firms, or less small firms, given that trend, or do you think there'll still be ..." Do you see the mix changing [00:16:30] at all? Curtis Cochran: I don't see it here in America. I think that Land of the Freedom and capitalization ... People are starting up businesses left and right, still to this day. Shannon Hay: Yeah. Curtis Cochran: It's a little harder, maybe, but yet you have some angel investors out there, investment groups, that have lots of cash that are willing to put it back into America. You really do. Shannon Hay: I'm starting to see a lot of entrepreneurial-spirited [00:17:00] individuals that recognize consolidation as a method to wealth building. You have an individual that might have a small firm; say that it's only doing $200,000 a year, and they leverage that equity into another purchase of another book of business that's doing $200,000 a year, and they're duplicating that process over, and over, and over again; implementing systems, adding technology, managing staff accordingly. Then what started as a $200,000 practice is now a $2 million practice going to $4 million practice. Blake Oliver: And if you do it right- [00:17:30] Shannon Hay: That's right. Blake Oliver: -you can finance the whole thing out of the current cash flow. Shannon Hay: That's correct. Curtis Cochran: Yes. Yes. Yes.  Blake Oliver: That's the beautiful thing- Shannon Hay: Leveraged capital. Curtis Cochran: Leverage capital, yep. Blake Oliver: If you wanna start a business in this country, everyone is focusing on those 10X, 100X tech-startup exits. That's a one-in-a-100 kinda thing, but-  Curtis Cochran: Yeah. Shannon Hay: Unicorn. Isn't that the proper term [cross talk] Blake Oliver: Yeah. There's not a lot of outcomes. I'm in the tech world now, so I'm very aware of the probabilities of that, as is David. But an accounting [00:18:00] firm, man, it's almost like you have to try to screw it up. If you have a knack for customer service, and you know what you're doing above a certain baseline, there's so much demand for this. Curtis Cochran: Yes. Shannon Hay: Agreed. Then you couple that with adding additional services, as you're talking about, suddenly, you bring wealth management into an accounting firm, or you bring an audit, or a consulting side of that business. It's a game-changer. Blake Oliver: Would you say it is a seller's market or a buyer's market these days, if [00:18:30] I made you choose? Curtis Cochran: Get that ... If I had to choose one or the other? Blake Oliver: Yeah. Curtis Cochran: I'd say a buyer's market, if I had to say one. Shannon Hay: Really? Curtis Cochran: Only because you have some baby boomers ready to retire and get out of the market. That means that there will be a flood of businesses available, which might give you an opportunity for the market to drop a little bit [cross talk] for the sellers to actually get in. That's just my opinion-  Blake Oliver: Supply and demand, right? Curtis Cochran: -yeah, supply and demand. It's very simple. I [00:19:00] would say buyers, but, of course, just like economics, I've got another 50 percent that'd disagree with me. Blake Oliver: Well, and like you said, it's local, right? It depends on where you are in the country. Curtis Cochran: Absolutely. Shannon Hay: My personal opinion - we're in the midst of a shift right now. Currently, I would still say it's a seller's market. Not to argue or disagree [cross talk] but I do think that there's still a pent-up demand for people that wanna acquire, wanna own, wanna buy, wanna merge up. But I do believe ... We jokingly refer to it as the silver tsunami. When [00:19:30] is it coming? When's it going to occur? I still don't believe it's here yet. I still don't believe the boomers have made a decision to exit. The ones that don't have a plan, they're almost holding on rather than executing on a plan. Blake Oliver: Right. Curtis Cochran: Oh, that's so true. Blake Oliver: Well, that could just delay this for a long time, until we've run off a cliff, right? Because people aren't selling, because they're holding on, thinking "I can get more," but they're not-. Shannon Hay: They're not. Blake Oliver: Eventually, they're not. It's just like with a house. Eventually, if the market's, you can't wait [00:20:00] any longer. You gotta sell. You gotta move, right?  Shannon Hay: I would say the majority of why a lot of them held on was probably post-'08. Maybe they were gonna sell in '13, but they lost so much in '08 that they're not in a position where they're ready to go yet. So, now they're holding on, and it's '19. Curtis Cochran: Good point. Shannon Hay: It's time to make a decision. David Leary: I think those people that are stuck, if you wanna call it that, they're just kinda stuck ... I've talked to younger accountants who think it's cheaper for them to just market at their clients and steal their clients without buying the firm. Blake Oliver: Yeah, we actually have talked with a number of folks, like myself, who are millennials, [00:20:30] who started their own firms ... They've never acquired anyone. They're not at that point, but they've gotten big. I said, "Hey, would you think about acquiring some firms from some retiring CPAs and just integrating that book of business into your practice?" The answer that they give me is, "Hell, no! I'd rather just steal their clients ..." [cross talk]  David Leary: -just steal their A clients. Just handpick them. Shannon Hay: Look at search engine optimization, technology; but then, [00:21:00] you've got on top of that, now let's couple it with Facebook marketing, LinkedIn, Instagram - all the technology bases that are ... It's basically, in a sense, free advertising, if you just hit them in a place where they're not being hit. I'm surprised, still, at the number of selling firms that have weak website presence, or even weak web presence to begin with like [crosstalk] Blake Oliver: -or no website at all. There's a stat - I can't remember the number, but there's a shocking number of firms ... Actually, just a shocking number of businesses, in general, in this country- Shannon Hay: That don't have websites. Blake Oliver: -that don't even have a website, and [00:21:30] that- Curtis Cochran: Baby boomers. Blake Oliver: -Yelp is their website. Shannon Hay: Yeah. Blake Oliver: It would be interesting to see a demographic survey of that [crosstalk]  Shannon Hay: What the age group is of those that don't and those that do. Blake Oliver: I feel we do a lot of baby-boomer bashing, and millennial bashing, but I think a lot of this is not as stark as it seems. Shannon Hay: It's so good to be Gen X. I don't have to ... I just fall right in the middle of all [crosstalk]  Blake Oliver: We just ignore you. We're like, "Who is this guy?" Shannon Hay: Gen What?  David Leary: What do I do if I have not been thinking about this for 30 years in [00:22:00] my career? I'm now at some crossover. I'm thinking of retiring soon. Maybe my firm ... I'm only getting $100,000 of revenue [cross talk] cash flow-   Blake Oliver: Yeah. Curtis, we didn't- I didn't come to you at the beginning. I come into you closer to the end. David Leary: Yeah. What do I do? What's my emergency plan? Is there like a, "Hey, do these three things, and you might be able to turn a corner ..."? Curtis Cochran: I get that all the time. All the time. By then, it's almost too late, because [00:22:30] your market share's dropped. Revenue might have dropped. But the biggest thing is - that I talk to anybody that wants to exit - the psychology of it. Because, they've opened up this business. They've been working 30-40 years. "What am I gonna do?" They'll say, "Yeah. I'm gonna retire on the beach ..." No, because you've been growing this thing for 30-40 years, but when it starts to dip a little bit, you [00:23:00] have to get out. They just don't know when to get out, if they don't have an exit strategy. If they haven't talked to me, or Shannon, or anybody that specializes in this kinda thing, they have to think psychologically to exit. If they haven't spoken with Shannon, or myself, or somebody that's in exit planning, they need to immediately. Shannon Hay: I would echo that. If [00:23:30] you don't have a plan now, seek the advice of a professional. There are a number of wonderful professionals out there that this is all they do, all day, every day. I would encourage you ... Even on the banking side, I'm more than happy to have that conversation of what's that look for you? How do you position yourself to be ideal for acquisition or merger? Again, echoing the growth model, you never want to wait til your revenues are dropping. It's that's too late at that point, because then [00:24:00] you become unattractive, unfinanceable, or even ... If I'm a buyer, what am I buying? Am I buying something that's dying? It's not gonna make any sense to me as a buyer. I wanna look at something and see year-over-year growth; it doesn't have to be major growth; minimal growth; just some growth, and year-over-year revenue. Curtis Cochran: Buyers look for not what you did yesterday. They wanna know what they can do tomorrow. That's really [00:24:30] the essence of it. When they look at it, they say, "Can I take this company from $2 million revenue to $4 million revenue? Is it possible?" So, if you're dropping in revenue, it doesn't look good for you. David Leary: There's no signs of that, yeah.  Curtis Cochran: There's no signs. In the laws of physics, a body in motion stays in motion. It's as simple as that. They have to seek expert advice, like you mentioned, Shannon [cross talk]  David Leary: Early as possible, it sounds like. Curtis Cochran: Absolutely. David Leary: It sounds like if it's too late, that's a heartbreaking conversation [cross talk]  Shannon Hay: It is. Curtis Cochran: It's [00:25:00] painful. It's a fire sale. What do you do? You tell them, "Hey ..."  Shannon Hay: As a lender, it's impossible to tell a seller that their business isn't even a financeable transaction. How painful is that? "I'm not even worthy of being [what I call] a bankable trade." Curtis Cochran: Right, and they really think it's the bank's fault. Really, they really do. They think, "Oh, you ..." It's ... No. Shannon Hay: "They're picking on me, or they just don't like me," or what have you. No. Curtis Cochran: Exactly, and it' not even the case. Not even the case. Shannon Hay: No. No. David Leary: That's interesting, because there's tons of blog [00:25:30] posts you see out there, like "How to Start a Bookkeeping Practice in Five Steps." Nobody ever mentions, "Start planning your exit strategy," or, "Talk to experts ..." [crosstalk] ... Blake Oliver: No. No one ever talks about that. Curtis Cochran: Not even; not even.  Blake Oliver: I haven't been doing this for that long, but 10 years is a long time for me to go and really hear very little discussion whatsoever in the small-business/small-firm space about exit strategy.  Curtis Cochran: It's like when you're 21. When you're 21 or 22, you get outta college, and now we're gonna talk about going [00:26:00] to the grave. Well, you're young. That's not gonna happen!  Shannon Hay: Yeah. You don't wanna hear that. Curtis Cochran: "I don't wanna hear that. Exit strategy? What are you talking about?" It's the same principle. That's when they should, because then they understand all the variables, all the moving parts coming to the exit and what a buyer really is looking for. That's the key is what a buyer's looking for.  Shannon Hay: I think one thing that we haven't really talked about is partners, or colleagues, or who are you mentoring to be your succession-  Blake Oliver: Succession planning? [00:26:30] Yeah. Shannon Hay: We're really talking about- Blake Oliver: I read a lot about the lack of it. Shannon Hay: A lot of excuses are, "Well, the talent doesn't exist." I think that's more of a you're looking out the window and not in the mirror kind of factor. Are you judging that, or is that a truth? Again, even if that's not the case, there's still a whole acquisition market out there that's biting to take advantage, and give you a good value for your firm, as long as [00:27:00] it's in the right position. Curtis Cochran: Those that are listening to this podcast, Wall Street Journal, probably about two or three years ago, mentioned that less than 25 percent of all companies - major players, too - have an exit strategy. Don't be alarmed- Shannon Hay: Beat yourself up. Curtis Cochran: -yeah, and beat yourself up, because even your major players, they don't think of exits. They're trying to grow the business. They're not thinking about buyers, and even partners. They're just thinking about [00:27:30] growing the business. So, don't beat yourself up if you don't have an exit strategy, but I would actually seek one, ASAP.  Shannon Hay: That's right. Blake Oliver: Is there anything else you guys would like to discuss before I wrap things up? Anything I missed?  Shannon Hay: This was great. Again, I just encourage everyone to seek advice; seek the help of experts. They're out there. We're willing to help. I know Curtis is. Curtis Cochran: Absolutely. Shannon Hay: I'm willing to help. I don't know if you're gonna give our contact information, but more than happy to take a phone call, take an email, schedule some time, talk about [00:28:00] what that looks like, whether you're a seller or whether you're a buyer - interested on both sides of the coin. Curtis Cochran: The education part, Blake, is ... That's what we're here for. Free consultation. It's not gonna cost you a dime to talk to us about these things. Just like this podcast, it's excellent. Blake Oliver: Speaking of your contact information, Curtis, what's the best way for people who are interested in your services - you could remind us again what your specialty is here - What do you do? How can people reach [00:28:30] you, if they're interested in talking to you? Curtis Cochran: Again, I specialize in the four E's, which is, it doesn't matter if you're entering or whether you're gonna exit, you can call me; email me. The best contact is Cochran, my last name, consulting at Yahoo.com (cochranconsulting@yahoo.com) You can email me, and then I can give you a call, and we can have a free consultation over the phone wherever you're at. Blake Oliver: We'll have your contact information in the show notes. How about you, Shannon? Shannon Hay: Again, all I do, all day, every day, is finance the acquisition [00:29:00] of accounting firms. If you're on either side of that transaction, I'm more than happy to have a conversation. Best way to reach me is via email. Shannon.Hay - H-A-Y - @LiveOak.bank. You can always reach me on my cell at 614-648-9199. But, email first, and then we can set up a time to talk. Blake Oliver: Do you do you finance acquisitions all over the country or ...? Shannon Hay: I do. All 50 states. Blake Oliver: All right, Great.  Shannon Hay: Yeah. Blake Oliver: And as always, you can reach me on Twitter. I am @BlakeTOliver. And [00:29:30] how about you, David? David Leary: I'm @DavidLeary. Shannon Hay: I forgot my Twitter. Blake Oliver: Oh, yeah, well, tell us. Shannon Hay: It's @ShannonHayLOB. Blake Oliver: @ShannonHayLOB. All right, I'm gonna follow you on Twitter. Shannon Hay: Thanks. Likewise. Blake Oliver: Thank you guys both so much. Thank you, Curtis. Thank you, Shannon. Shannon Hay: Appreciate it. Curtis Cochran: Appreciate it. Thank you. David Leary: I'm thinking about selling my firm. Blake Oliver: You gotta build one first [cross talk] David Leary: -but I know what that first step is - to think about selling the firm. Shannon Hay: There you go.  Blake Oliver: There you go.  .........
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