Episode 114 | Mapping Out An Exit Strategy To Sell Your Firm With Fred Stein

 

Are you planning on selling your firm? Is your firm sellable? Have you mapped out your exit strategy already? In this episode, Fred Stein, the Tax Director of BQ Tax and Accounting Ltd., provides insights on how to do just that. Fred breaks down the crucial information you need to know if you want to sell your firm and make your firm a more attractive acquisition. From creating processes and procedures to avoid handholding your clients to removing the owners from the processes to make the firm more valuable, Fred gives fresh insights that will strengthen your exit strategy. Tune in to not miss out!

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Mapping Out An Exit Strategy To Sell Your Firm With Fred Stein

We have a very special guest. Our special guest is a CPA and an EA. After graduating from SUNY with a BS in Accounting, he became a CPA 30-plus years ago. After working with a few firms to gain experience, he started his own practice in New York in 1995. He is now the Tax Director of BQ Tax and Accounting Ltd., where he specializes in tax planning and tax controversy resolution, as well as apprenticing other EAs, but his practice is all-encompassing. In 2017, he began to expand his business and now has offices in Texas, Missouri, New York, Virginia, and California, where he now resides.  

Before we welcome our special guest to the show, I’ve been helping accounting and tax firm owners have more freedom with their time and money, and also get paid first and upfront and confidently charge the fees they know they deserve. I know that our system works and that I can help you create the firm you’ve always wanted and dreamed of, but it’s up to you to take that next step.

Head on over to TheAbundantCall.com to book a free session with myself and my team, and we’ll go over three things. 1) Where your firm is at right now and the things that are keeping you stuck. 2) Where you want your firm and your life to be, to ensure you are paid first, avoiding all the pitfalls along the way, and saving you a ton of money in the process. 3) We’ll cover the exact next steps you can take to double your firm revenue right now.

Every one of our success stories has started with this call, and it’s turned into more confidence, charging premium fees, doubling and tripling top-line revenue, eliminating burnout and feeling excited about your work, and being in control of your future. Book a call right now at TheAbundantCall.com, and we look forward to speaking with some of you soon. Now, let’s welcome our special guest, Fred Stein, to the show. Welcome to the show.

Thank you for having me.

Thank you so much for being here. It’s an honor to have you here. I love the topic that we’re talking about, which is all of the things that someone might need to know if they want to sell their firm. I know that’s an exit strategy of many of my clients that I’ve worked with here at the Abundant Accountant and from people that have also sent me messages asking for more knowledge and insights around selling a practice to maybe even someone like you. Before we get started, why don’t you share who you are and what you do? I’ve already done your bio, but I always think it’s better to come from you directly.

I’ve been doing this for over 30 years now. When we were young, we envisioned the type of firm we want to run because our bosses used to drive us down when we first started out with those 80-hour work weeks. I swore never to have a firm like that. Me and my buddy Dave would sit around and have beers afterward, and picture what we would do if we had our own firms. I was lucky enough to do that where we have a firm where our staff doesn’t work overtime.

I’m not working more than 50 hours during the work week. During the pandemic, that was a little different. Now that we’ve gotten out of that, we’re going back towards a more balanced lifestyle. We encourage our contractors to do the same. We encourage our employees to do the same. That’s what we’ve built.

You’ve built it by acquiring other people’s firms when they were miserable on the breaking point at the verge of like, “What am I doing here?” You’ve made some acquisitions through that process. It’d be great if we could talk about some of those areas that you see if someone is looking to buy or sell their firm. For most in the audience here, they might be on the buying side like you in order to start their business, but it might be someone on the selling side where they’ve had their firm for 15 or 20 years and they’re over it. They’re sick of it. They don’t like the admin side, and that’s their exit strategy. What do you think the firm should expect when selling and looking to find buyers such as someone like you?

Those overworked, very tired, and can’t stand it anymore owners are my exact target audience. Those are the ones we look for. One thing I like to let them know is you don’t end tax season and decide to sell. That is not the way you sell your practice. When you’re selling your practice, you need to look 2 or 3 years down the line, sometimes 5. We’ve been running our firms the same way for 10, 15, or 20 years. Our firm and the way we run it may not be sellable if certain things aren’t in place. You need to get your clients used to fees going up every single year. There are so many accountants out there that do not raise their fees every year.

You don't end tax season and decide to sell. That is not the way you sell your practice. Click To Tweet

That’s my favorite topic but I know it’s not a topic of this episode, but keep going.

There are a bunch of different things. If you’re not using engagement letters or if you’re not using organizers, you need to have your clients start doing them so that your firm becomes a firm that somebody like me is willing to buy. If you don’t use engagement letters or organizers, I’m not even going to look at you. Those become the clients that don’t want the change. Those are the clients that are going to walk away and leave and cause a lot of headaches for the buyer.

The sellers that are tired, we find they don’t want to get out of doing taxes or doing accounting or whatever it is they’re doing. They’re tired of the headaches because they’re too much in the admin. They’re too much with the billing and the other parts that we all hate. When I first started, I didn’t like that either. I took less money by making Tioni my business partner. She handles the entire admin side and allows me to focus on tax. I’ve had that feeling of dread that I want to get out of this.

Share with us the process that you went through with one of your acquisitions. That firm owner being tired, where were they mentally in that state? How long did the process take to make the acquisition? Did that firm owner stay on? What were some of the motivators of the seller that you met at maybe one of your first acquisitions? We can focus on one example for today. It’d be great to go through a real transaction in a real-life scenario.

Three or four years ago, on Facebook, Kathleen was the owner of a firm in Missouri. She had inherited her firm from her father who was that longtime tax person who never raised the rates and the prices were extremely low. It’s probably a deal that I would not do now, but we did then and I’m glad that we did. We learned quite a bit about this. Kathleen is a great tax person but not a good business person administrator. She hated that side. She hated the conflict with the clients and said, “We got to raise your fees.”

She asked us to buy it and it was a small firm, and we did. She stayed on. It’s not that she wanted to quit. She just couldn’t handle what she was doing. Bringing her on, we took over her clients. They didn’t use engagement. They didn’t use organizers. We slowly got them used to that. Some of them left because, in Missouri, they didn’t like the big New York firm or the big law California firm, even though we stressed we were upstate. We lost probably about 20%, but the fees were raised and Kathleen now stayed on and she’s a critical part of my review team and my preparing team. She’s a great person and she’s making more money now working for us with the raised fees than when she owned it

Without the stress of the parts of the business that she didn’t enjoy running.

She loves it now. She’s happier now. This is what we bring to those people. We eliminate your administrative headache. We bring you a team of people that’s eager to help you with the clients. You don’t need to go chase them down. We have our admin staff that can do that. It eliminates all the things that we hate about the profession. It allows us to do things we like to do.

How did you structure that deal with Kathleen?

I have a seller’s guide that we give to all of our prospects that spells a lot of this out. The way we do almost all of our deals is we are going to pay you 25% a year for four years of whatever we collect. As we raise our fees, you get 25% of that new fee. Many sellers will say, “Here’s what I took in. My firm revenue last year was $200,000. You’re going to pay me $20,000 with some retainage.” That’s a lot of tracking. We take the easy way out. We’re going to pay you 25% a year for 4 years, 33% a year for 3 years, and whatever we get and whatever we keep, you get your share.

For the firm owner that might be looking for a quick payout. This will be paid over time but not too long of a time. How did you meet Kathleen? I think you mentioned Facebook. What was that first encounter like? Did she reach out to you or did she post something about being aggravated, frustrated, and wanting to shut it down? What was that conversation like? What do you recommend for a firm owner that might be interested in selling to do in that process?

I don’t specifically remember how I got in touch with Kathleen or how she got in touch with me. On a daily basis, everybody in some of the Facebook groups talks about leaving, selling, and what to do.

Every day, Fred?

Pretty much every day because I get tagged at all these. People know who I am. They know that I buy or that I can bring you together with somebody else who may want to buy. I get tagged a lot and I have tax practitioners who will pay me consulting fees to work with them on structuring a deal on walking through the due diligence of what they need to do to get that deal done. We got in touch with Kathleen and we started messaging back and forth. Over a month or so, we decided to structure the deal. I think the deal was sealed when her husband saw our About Us page and saw that we are not the typical accounting firm and said, “You need to be with these guys.”

He was relieved. He said, “I’m going to get my wife back. My happy wife that is not so stressed out and not so overworked.” Probably she was underpaid, and now she’s making more. She has the support, team, and structure around her. That’s helpful. When you structured this deal with her, I know that you are either doing 25% over 4 years or 33% over 3 years. Is there anything that they get on the front end?

Absolutely. They always get a down payment. There always has to be some earnest money. We typically give about 10% of the expected sales price down. If it’s a four-year deal, let’s pretend we gave them $20,000 down, then that $20,000 gets split into the four payments. That’s our first payment each year. The first $5,000 of commission or sales price, we already paid you. Once you get to $5,001, that’s when you start getting your purchase money. In almost all of the acquisitions we have done, the owners have stayed with us, and then they get paid their commission for the work that they do.

 

Are they also on payroll as well so that they’re an employee or a contractor of the company?

They’re contractors and/or employees. They have their option, depending on the situation. If they fit the contractor rules, we’ll make them a contractor. If they don’t, we’ll make them an employee, but they’re still paid on commission. It’s all production-based.

They’re still an entrepreneur at heart. What do you feel for yourself, Fred, and from what you’ve seen makes a firm a more attractive acquisition? Is there anything that would increase the stakes to the seller that they could be focusing on now? Especially when it comes to advisory work, tax planning, and some of those bigger ticket items, what do you feel that you’ve seen over the last 30 years?

What do you think would make it more attractive for you as the buyer? That might not be your target market on an acquisition, but in general, if there’s a firm owner that is looking to make this their exit retirement plan strategy, what would that look like? What have you seen that would make it a more attractive acquisition for a buyer? It might not be your target niche of someone who’s totally struggling, but someone who’s looking to make that exit in the next five years and sell their firm.

We have two different types of acquisitions. We’re talking about the sole practitioner who is just them and maybe a receptionist or somebody who has a few people that are working for them. They may have a team of 4 or 5 people working for them. The most valuable firms are those firms where the owner is removed from the process. That’s something that I’m working on for myself and my own firm. I’m finally removed from doing tax prep other than a few clients that I like to work with. I get to do other stuff. With me removed, I have a whole staff that somebody can come in and it’s self-running. They don’t have to do a lot of work.

The most valuable firms are those firms where the owner is removed from the process. Click To Tweet

You need to get away from being that handholding for the clients constantly. They need to be able to talk to somebody else. If it’s just you, then they only want to deal with you. You need to migrate them away from that. If you’re not using engagement letters, that’s a must. If you’re not using organizers, that is a must. As we’ve talked about before, you must raise your rates every year and get them to that perfect price point that makes it more valuable to sell.

Is the percentage payout the same for your situation? Have you seen it in other acquisitions where maybe there’s a higher amount to the seller? They’ve already increased fees and they have more valuable clients. They’ve stepped away. They’re not handholding as much and they’ve prepared themselves for a successful exit.

Those that do that 3 to 5-year timeframe to sell and do things right, and remove themselves primarily from the practice that has it running smoothly, you can look at 1.2 to 1.5 times annual revenue for a firm like that. If your prices are more than mine, and I’ve bought firms where the prices are higher price point than mine, I will go to 1.2% for those without even thinking. If they’re 100% virtual, that makes things a lot more valuable. We deal with hybrid offices. We don’t care if you have an office, we’ll come in and we’ll buy it. We’ll take over the lease. If you’re virtual, you’re more valuable.

They’re less overhead, fewer expenses, and more net income. It makes sense. This is fantastic, Fred. Thank you so much for your insights. I’ve been asked this a couple of times, but when firm owners are looking to sell their firm in the future as an exit strategy, and I know you recommend starting preparing 3 to 5 years before you want to do that and start removing yourself and doing all the things you spoke about. Do you work with brokers? Do you recommend they work with brokers? Do you recommend they post in Facebook groups to find people like yourself?

What are the different ways for them to put out there to the market, “I’m ready to exit. I’m ready to sell my practice?” What are those ways that you would recommend? I think you said you and Kathleen met on Facebook or something like that, but how do you meet your acquisition or the clients that you’re buying their firms right now? What are the different mediums on how someone can market themselves?

Brokers are definitely one way. I have made all of my acquisitions through networking and/or Facebook. I’ve got most of my contractor employees through Facebook and/or Twitter. Brokers have a spot. Brokers are going to pump up and want you to get a lot more because they want to get their fees. For larger firms, that might be a better way to go. For smaller firms under $500,000 or under $700,000, you may not need to do that. You can save yourself some fees.

If you post on Facebook or on social media, you’re going to have a bunch of other young eager tax people wanting to talk to you. When you need those other people is when you’re not sure how the process goes. We guide our clients through processes. We need that person to do it for us. Most importantly, if you do buy something, get a true legal contract. Work with lawyers and spend that $2,000 to $4,000 you have to spend to get that contract written upright because it’s important to have that done.

 

What do you see for the future of this industry? I’ve seen some articles that there’s a shortage of firm owners. There’s a shortage of accountants, CPAs, and EAs for all the different taxpayers out there. A lot of firms are cutting back their client list and working with less people, increasing the fees, and improving quality versus quantity. Based on this buying and selling of firms, where do you see the industry in the next 12 to 24 months?

I think we’re going to see a hybrid situation. People have always had niche practices, and that works great. You have to look at what you want to build. I could probably make a lot more money if I slimmed down and went into a niche practice and did that. We’re looking to build something that’s going to grow. It’s going to last. We like to teach the younger tax people how to properly do taxes.

There are so many out there that go out and hang their shingle and it’s horrible. We’re a training organization. We also act as a home for the wayward or those people that need to piece together other income. They want to go out on their own, but they don’t have enough money to do it. In a firm like mine, you can have your own practice. You can come in and work for me 5, 10, or 20 hours a week to make that other income until you don’t need to work for me anymore.

Leverage it if they don’t have the capital.

A lot of them going to go like that. You’re going to see firms getting larger. The way to do that is we need to get rid of the old traditional way of, “I need them in my office. I need to watch over them.” If you have to watch over a professional that’s working for you, then you shouldn’t be hiring them. We went remote way before the pandemic even started simply because I was planning on moving and my partner moved away. We’re not even at our home base. We’re both in different parts of the country.

If you have to watch over a professional that's working for you, then you shouldn't be hiring them. Click To Tweet

Where are you at and where is your partner at?

My home office is based in upstate New York in a small town called Cobleskill. She had moved about two hours away to Syracuse, where she’s living with her husband and I have moved to Northern California. We do have a team of very good admin people that are there. That’s more important than anything if you are going to sell your firm. I can find tax people. Good admin people are what you need to get.

I feel like good tax people for a lot of the clients who are in our Abundant Accountant family right now are also having a hard time. It’s hard to find great talent anywhere, but with higher prices and less volume and not being so tired and exhausted like Kathleen was, you can find people when you preach like you who aren’t working more than 50 hours a week. You’re preaching lifestyle and you’re preaching that you can work and enjoy your career and your life and not have to feel like a bulldozer that’s been run over, totally burnt out, working endless hours, and not having a life. That’s where it becomes hard to find good talent.

I’ve never seen that whole, “It’s a badge of honor on working eighteen-hour days.” I never saw that. I never wanted that.

I never saw it either. It doesn’t make any sense to me. If I can work 4 to 6 hours a day, I’m very content. I feel like a contribution. I feel like I’ve supported the industry and all you guys out there, firm owners, who want to make more revenue but not work so hard and enjoy your life and enjoy the fruits of your labor. You get to help your clients at a higher level too because you’re not stressed out and you’re not tired and exhausted. Fred, that goes back to what you were sharing earlier. There are a lot of tax people that don’t do good work.

If you’re tired all the time, your brain can’t function. It’s important to have good rest, take care of your health, and do all these things that most people and most firm owners are putting to the side. That’s secondary. It’s like an airplane. You got to put on your oxygen mask first before you can put on a child’s mask. Until we all put our own oxygen masks on first, it’s going to be hard to support and find good talent in other people as well.

Our main oxygen mask, as you’ve said, is an extension. Many don’t want to use extensions. We let clients know that an extension is not a bad thing. If you don’t have your stuff in by March 1st, guess what? You might go on an extension. Business returns. You don’t want us doing your business return when people are working 12 to 14-hour days because then they’re going to be tired. They’re going to make mistakes. You’re going to go on extension and we’re going to work with you after April 15th, when we can put the time in and give you the guidance that you need.

We’ll do tax planning throughout the year, so that’s not the problem. The actual return, unless it’s a need, we don’t need to get it done early. A lot of tax people don’t talk to the clients and find out if it’s a need or a want. That’s the first thing we say when they ask for a tax return. Do you need it or is this a check off your list? If it’s checking off your list, you can wait.

Thank you so much, Fred, for being here with us on the show. It’s an honor to have you here talking about the different things firm owners need to consider if they’re looking to sell the firm. Also, for someone who might be wanting to acquire like you’ve been doing, or for someone who wants a proper exit strategy to get 1.2 to 1.5 their revenue. Is there anything that we didn’t talk about that you want to share that is important for a firm owner to put into action and to put into practice to have the best success possible?

The main thing that we look at in all of our acquisitions is the culture of the firm that we’re buying. We want to make sure that what they’re doing fits in with our culture or that it can be modified to come to our culture. When I look to buy from someone, especially someone who may be working for me afterward, I want to make sure that I like that person I’m buying from. I don’t mind sitting across from them at Thanksgiving dinner. I can pass them the mashed potatoes and have a good conversation with them. Those are the types of sales that have gone the best for me.

Culture and people. There was a saying and I can’t remember what it was, but as you said, you want to be able to sit across the table at Thanksgiving and be enjoying the mashed potatoes and the dessert and the endless hours of conversation. I think it was Oprah or one of them who said, “If you were to travel across the country, who would you want in your car for the whole drive from California to New York?” That should be who you’re thinking about when you’re buying or selling your firm. How would you want to work with that person and also enjoy your non-working time with them?

That will definitely decrease the level of burnout. We do the same thing with our employees and contractors. We pick people that we like and we enjoy being around that we can have conversations with. That makes it less work and more fun during the day. It’s very important.

 

Thank you again so much for being here with us on the show. Fred, if someone doesn’t see you on Twitter or Facebook, what’s another way they can get in touch with you if they want to consult with you on an acquisition, both for a buyer and a seller? There might be a buyer that wants to follow in your footsteps or there might be a seller that’s like, “I’m ready to put my 2 to 3 or 5-year plan together.” What’s the best way for them to get in touch with you?

They can email me at Fred@BQTaxPro.com.

Thank you again, Fred, for being here with us. It was an honor to have you. It was a great discussion. I’m so happy that everything is going well with Kathleen, and that others have also seen success, peace, light, more life, and more money.

It was a pleasure on my part as well. I look forward to listening to this in the future.

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Thank you so much for joining Fred and me on another amazing episode. For those of you that are considering an exit strategy of selling your firm, think about clearly what Fred had to say and remove yourself from the process, not handholding your client, stepping away and creating those processes and procedures, and doing this 3 to 5 years before you truly want to sell.

I know that there are so many of you that want that as your exit strategy and entrance into retirement. It is possible for you. You just have to get started right now. For those of you that are fed up, sick and tired of the way things are going and don’t want to make a change and hate all the admin work, then give Fred a call. I have been helping firm owners have more freedom and time and money, get paid upfront, and confidently charge the fees that you know you deserve.

I know that we have a system that works and I can help you create the firm you’ve always wanted and have it ready for sale so you do get a 1.2 to 1.5 multiple, but it’s up to you to take that next step. Head on over to TheAbundantCall.com to book your free session with my team and me. We’ll cover a few things like where your firm is at right now, where you need to go, and the exact next steps that you need to take to make this happen.

Each one of our success stories has started with this call. It has turned into more confidence, charging premium fees, doubling top-line revenue, and increasing monthly reoccurring revenue if you have ongoing services like monthly bookkeeping, accounting, and CFO services. Also, ultimately, feel excited about your work and your firm once again. Book a call at TheAbundantCall.com. If you’re fed up and don’t want to change anything, then give Fred a call or send him an email. It was an honor to be here with you on this episode. I look forward to being with you on the next one.

 

Important Links

• BQ Tax and Accounting Ltd.
• TheAbundantCall.com
• Fred@BQTaxPro.com

 

About Fred Stein

Fred Stein is a CPA and an Enrolled Agent. After graduating from SUNY – Oswego with a BS in Accounting, he became a CPA 30 plus years ago. After working for a few firms to gain experience, he started his own practice in New York in 1995. He is the tax director of BQ Tax and Accounting, LTD, where he specializes in tax planning and tax controversy resolution, as well as apprenticing EAs, but his practice is all encompassing. In 2017, he began to expand his business and now has offices in Texas, Missouri, New York, Virginia and California, where he now resides.