Behind the Buyouts: Houlihan's Hughes on Accounting Firm M&A

Hello and welcome to Behind the Biods, the Deals podcast where we speak to private equity and venture capital practitioners about their deals and deal making. I'm your host, Nikita Sathirajoo, Chief Reporter at the Deal. We have with us today Patrick Hughes, Head of Accounting Services at Holy Hen Low Key. Easier to talk to us about the state of accounting M&A in 2026. Patrick, thanks so much for joining us. Thanks for having me. I'm excited to be here. Great. Well, I'd love to start with talking about your career leading up to Holy Hen. You've worn a few different hats as I understand it. So tell us a little bit about that. Sure. I've spent the better part of the last 20 years in probably what I would describe as middle market M&A. Sometimes upper middle market M&A depends on how you define it. I started my career as a cell site analyst working for Harris Williams and Co, which is kind of a sponsor focused investment bank that a lot of your listeners. I'm sure familiar with. I was in the 2007 analyst class and password two years to 2009. And I wound up in a restructuring stent, which was a little bit unexpected like the rest of us in the economy, but joined a boutique restructuring advisory firm called Phoenix Management had quartered outside of Philly, which was where I'm from originally. So it made a lot of sense in my sort of personal life configuration figured I'd stay for a year and be at a buyout shop and stayed for five and wound up staying in financial restructuring. And I think it's a bit longer, but was a great experience and can talk about how that informs perspectives on understanding credit and recovery as folks go through LBOs and leverage transactions. In 2014, I was invited slash recruited to join the restructuring practice at Grand Thornton and the person who led the restructuring practice at that time is currently the CEO of the firm has been a mentor and friend to me. It was a nice long ramp to the firm I had moved to New York in 2010 to help open the New York office for Phoenix Management, which was recently sold to J.F. Stull, by the way. Grand Thornton service line guy was basically the investment banker in the firm. Grand Thornton corporate finance kind of an analog to KPMG corporate finance just smaller. Did some good work for clients was appreciated by the firm, I think, and was invited to take over corporate development, meaning acquisitions, partnerships, the old works in 2017 timeframe. My wife and I relocated to Chicago, which is where the firms headquartered. I got to work very closely with three or four different CEOs at GT advise the board completed a number of acquisitions we. Devested a few practices which I think we're going to talk a little bit about, but how do you need vantage point pre and post covid frankly. So how accounting firms and I'll say large professional. Artnerships writ large were. Navigating just change in the workplace right and this is pre and post covid which seems like a long time ago now. Through that journey. Had a lot more depth in my experience certainly within professional services. I started in a services group as an analyst, but I think I thought of myself as a generalist really until probably the time I left GT, which was at the end of 2021. We'll talk a little bit I think about the deals that got us there, but suffice it to say. The left grand for the end of 2021, which was when we had completed banker selection. To sell the firm which I need to talk about now because it's done, but that was when that process started and. I knew I probably wouldn't stick around for the whole period of getting those partner votes selling the firm which took I think three years. So didn't want to just have undo access without being intellectually honest with my peers. I also saw what was coming in the industry right so at that point. Talking about my next employer, Eisner, Amper. Had been acquired or invested in by tower for capital partners. It was the first of a kind. Private equity investment and the CPA firm through the alternative practice structure. We had been talking about, and you take on new capital at GT for a long time, there was I think a well-earned premise that you couldn't do this. And once it happened, the industry ran through the door to this and the sales are all kind of publicly noted at this point. So we went from five years ago, folks believing that you couldn't do this at all to more than half of the top 100 firms I think are owned by private equity at this point and going fast still. The Eisner opportunity was great. So I was recruited by recruiting for own. Interviewed with the managing partners and tower broke folks. Their goal was to do fast-paced M&A. And we did. So I started at Eisner boots on the ground January of 24. We completed something like 15 acquisitions inside of 22 months. The firm crippled in profitability. It more than doubled in revenue. And I think we onboarded something like 2000 FTEs in that time frame. Great financial success. Towerbrook has since realized a return on that through a continuation vehicle. I believe Carlisle up invest was kind of the anchor to. And that was completed last month. I think it was announced late last year. So again, sort of had a front row seat to the trade taking shape in a unique way. One of the things that I observed in that chair as head of acquisition buying these firms was that many of the firms. Certainly the majority, if not all of those firms, were independently advised. Or I might say under advised. And a few of those transactions were presizable, at least relative to my professional experience. Certainly there was room for a professional investment bank to be advising these firms. There wasn't an industry group to my knowledge in banking covering accounting services were at least fully dedicated to it. Because the trade just didn't exist before. There were a few pockets and a few banks that cover it through either. Professional services business services white collar, especially consulting. People have a person who's sort of moon lighting with this. And they approached the head of investment banking at full hand Loki and a handful of other boutiques about this concept. And we started a green field effort here at HL in April of 24. So just over two years now and it's been a rocket ship. So one of the reasons to come to HL and not just the plug HL, but the industry focus. And then we have a couple of transactions from call it 200 million of enterprise value to 2 billion. It's where they're mid market trade. This is going to be here for a long time. We're the best bank equipped to handle that. I think we've got 180 services bankers around the world. We are working on global mandates that happen to be global or have a global dimension to them. We're a buyer consultant and again, an advisor. I think that one of the things I really enjoy. And it hopefully comes through our conversation. But I like talking about these things. I think because I've got a lot of earned and lived experience and lessons that I think are applicable. And I'm passionate about it on that basis because I've spent a lot of time working with really good and interesting people that are trying to advance the profession. So that's who I am. That's sort of my journey to getting here or skipping a lot. I really appreciate that. I think the one thing I'm curious about is if you can maybe talk about some of the deals you've advised on in recent years. At Lohan Loki. That's something you can mention publicly. I'd love to hear some of those deals as well. Sure. We were the sell side advisor on the sale of Cooper Perry to the equity last year was to shy of a billion dollar trade UK based accountancy. Great client. Great firm. They're going to have tremendous success. We can talk a little bit about the UK and your own. It care to it. It really is global. I think the European side is maybe two, three years ahead of the US on the regulatory configurations and how to make room to make investments in these kinds of firms. So that was a terrific trade. It was sort of a market leading multiple great outcome for clients. We advised two of the what I refer to as kind of main street aggregators. So these are the new companies that are out buying sub 10 million dollar revenue accounting firms around the country. So whoever did your dad's taxes or your uncle's taxes or whatever you know, Gary at the store. These are those firms. Right. What's shocking in some sense is the size of that tail and market at least to me and I'll get back to the transactions in a second, but there are probably. I'm sure there are more, but the firms that were close to that have done this maybe the largest ones that I'm aware of are ascend, which was owned by Alpine. and free PA, which was a client of ours. advise them on a $250 million delayed drawed term loan, which they could use to fund acquisitions. We advised align accounting partners, which is doing the same thing. We help them secure $100 million delayed draw term loan with per-gall sage-mott last year. And they've been putting that to get use to give you a perspective on the size of those firms. I think the largest one is over $100 million of EBITDA on the way to $150 million. And there are several that are over $50 million of EBITDA. So these are companies that really didn't exist four years ago. So the rate of growth, which has largely been built on acquisitions, is tremendous. We have advised a number of funds on the buy side sometimes through completion of a transaction, sometimes the runner up. But we've advised on a lot of the global enterprise trades that are out there without getting into too much detail about who they are. We are selling a top 50 US firm right now that we've got kind of second round bids on. I'm selling part of a global network in North America, outside of the United States or Canada, let's say. We are selling the fifth largest restructuring firm in Australia, which is also the 15th or 16th largest accounting firm just happens to be a related service. And then there's the rise of what folks are referring to as OCFO, office of the CFO, trade, they're OCFO firms. Those are really operational finance and accounting firms to my thinking. But they're caught up in this too and their valuations have appreciated, I think, business owners are thinking about the valuation multiples that have crept up on the CPA trade and how that affects consulting firms, IT services firms that have the same clients and sort of have a similar business model. We touch so much of that right. So with 180 services bankers at HL, I don't know how many IT services bankers we have, but it's dozens right. So we see their trades, the strategic set that I cover is interested in their deals. So we have tremendous visibility really into real-time bidding and very powerful for clients frankly. Well, that's fantastic. And I kind of want to go back a little bit. Maybe when you were talking about your career and the trajectory there and that kind of alliance with how the accounting services world has also evolved, maybe I want to go back to when the gates really open for private equity investment like what the turning point was. And if you could talk about your experience at GT and the kind of deals that you were doing there leading up to this kind of Eisner and Towerbrook investment, I'd love to know more about that as well, kind of the history there. Yeah. So why didn't this trade exist? Why did bankers miss it? I think they did largely, you know, and what do you do about that going forward? First, I sort of came by this problem honestly. So when I took responsibility for the acquisition function at Grant Thornton, a few of us were working diligently on making our pitch to business owners, founder owners, sponsor back businesses that were attractive to us. We wanted to be a more attractive buyer. And that takes the form of are you an attractive platform? And what are you willing to spend? And accounting firms beyond GT certainly had this problem and in some sense still do, which is they've never really been thought of as the cool buyer or the cool firm. I hope that's not new information to people. But it's true, right? So like if you're going to sell your business to a top 30-ish accounting firm that's got somebody's name on the door versus Microsoft or pick a strategic right with some public equity and stock options and growth is anthropic going to buy and I kind of like that kind of stuff gets people read up a little bit. So the logical thing to do when you're trying to catch up probably is to overpay for things or pay more than others might who cat to bridge that gap. Now large accounting partnerships, global ones, similar to GT and including GT back then certainly GT now can do what they want. We may have had the financial wherewithal, meaning the cash or the access to liquidity to pay the purchase prices associated with big ticket auctions. The internal accounting and I'll say like the business of our business which is an expression used by some of these firms was still prohibitive for some kind of housekeeping issues or plumbing issues. Let's talk about the business model for a second. So partnerships, large partnerships that don't have outside capital, how do they pay their partners, how do they create value for their shareholders which are their partners typically equity partners. It's just through the free cash flow of the business in a given year and the way that firms are kept the ability for the firms to make investment is to account for the depreciation and amortization of things before distributions to shareholders are made. This usually capex which is pretty light inside a human capital business but something that would be a big ticket item would be an acquisition. So if you spent 500 million dollars on an acquisition, the firm and I'm doing this simply but would depreciate that over 10 years on a straight line basis. That's sort of the maximum allowable period which means in the first year after that acquisition was completed 50 million dollars of depreciation ticket my math works would hit the P&L or the L and unless that the acquired business delivered that 50 million dollars in free cash flow in that year, it would be extremely dilutive to the earrings of the firm and that would have reverberations to the earrings of the partners that own it. And by the way, the managing partners particularly the large firms are not traditional CEOs in the sense that they get to do what they want and control the firm. These decisions, they're largely elected officials and they're certainly influential and they have things that they're in control of. This would be an example of something that's beyond their control. So the problem is do we make a big capital investment to buy let's say a cyber security implementation firm that provides a next gen solution and keeps the firm relevant for the next 20 years. Or do we just keep paying ourselves and keep everybody happy, right? And that really is a challenge for some of the firms. What do you do about it? If you can't solve that problem, well, there was an article in circulation back then that's probably still relevant. I think it was a McKinsey or an HBS kind of a piece, but engine one, engine two was the concept Mike McGuire who's the CEO of GT at the time sort of reference this and it was let's use engine one, which is the business which is calf flowing everything in our course solutions and let's use engine two to speculate. And really the question was, well, how do we pay for the fuel for engine two? And the answer became we can't take it outside capital from private equity seemingly. Maybe we can raise some debt. And then if you can't do those things or if it's not enough, maybe we should sell some stuff. And a few of the firms have pursued investors, GT's no exception. We sold the public sector of business to guide us, which was formerly PWC's public sector advisory business. You know, that comes with challenges and complexity as well. But that was fundamentally the problem that we were all trying to solve and kind of bang our head against the wall and actually then COVID, right, which was hugely disruptive to how we all work and everybody had to reconfigure what that was going to mean. Press pause. We continued to make I'll say, tactical acquisitions as a pertained to GT and building advisory and acquiring clients through acquisitions of books of business, talent, small consultancies, but not the kind of transformational stuff that you see today with buying stacks. There was announcement this morning that there was the big implementer acquired or buying up the map. And that's because they have a capital from New Mountain to do it and the flexibility of reconfiguring the firm, which has been done. So again, why wasn't this as it is now? Why was the perception the way that it was? There are some technical dimensions to this. One is the very large firms provide public company audits and they're often more formally referred to as attestation. These are engagements that are sort of regulated by the PCA OB, which is the public company accounting oversight board, I believe. But the nuance with that, and I'm pretty sure that this was a reverberation from Sarbanes Oxley, a pointy five years later. But Arthur Anderson went away because of Anoron and WorldCom, fraud. It took down the whole firm. The lesson in that that's still durable for today, one of the consequences as a fallout of that was public company attestations, most engagements with accounting firms is a huge generalization, but pretty true. Do not have limitations of liability provisions on those engagements. So if you commit fraud on an audit for a public company and retail investors lose their life savings as a result, it's fair game to go after the firm. that were responsible for those things or should have been responsible for those things. Typical engagements in professional services have caps on limitation of the liability. So if you perform a service, I charge you $100,000 for a consulting report. It's bad. You know, your recourse to me is typically the fees that I charge you and collected were a multiple of that, but it's at most two, three times that. There's a cap to it. You can define the risk. When you've unquantifiable risk, then lenders can't lend. So if a lender, just a traditional bank wanted to lend not to a big four, but let's say like a top 20 firm, they're still going to come up with this issue of do I get primed so to speak in a bankruptcy or something else? And that's really not possible or it's an untenable position. The leverage is the base layer of the cake for equity investors, right? So if lenders can't lend investors probably aren't investing equity dollars, you could have that, but it would be very unusual. The other thing that was perceived to be true was that non-CPAs couldn't own a controlling interest of a CPA firm. And this is true for all professional practices, I think, for largely true. So dentists, doctors, office insurance brokers, wealth managers have all had some of this and the law firms will go through this on ethics review too when that investment cycle gets going in full bore, which is, you know, sort of happening live. But those licenses are what insulate the firm a bit and there are a couple ways around it. One is you could invest less than 50% and you don't control the firm. If you own 49%, you have control of the bore. Regulators might interpret that as certainly. So could you own 45% and have a second investor join you that's friendly and own 10% and then manage your roles 45%, so it's 45%, 45%, 10? So how the first generation trades took shape, more people doing this, more lawyers looking at it, the more sophisticated the structures become, mostly being serviced by fears of loans being made to inner company entities and all this stuff. In short, my experience is the firms had regulated the whole firm as if all engagements, all scopes were potentially subject to this threshold of uncap limitations liability on behalf of the firm, which was arresting to the firms. It sort of didn't matter because everything was status quo and there wasn't outside influence from private equity. Well, now there is, right? So people need to sort of get on with things. But once that was solved, solely at a station engagements go into the attest entity. They have a CEO of the attest entity of a board. So many of these companies have multiple CEOs. That could be confusing. It's really the CEO of the accounting entity and then the CEO of the firm, right? And the CEO of the firm is what matters now. That's what private equity firms are investing in. And there are other things about the operating entities now that are different that we could get into just like how they pay people, delivery model, and you have engagement letters that are aligned with client outcomes or not. So it's kind of a new day in that respect. The first trade, as I mentioned, was Eisner, Amper, and Towerbrook. That took place not Cobra of 21. The second one that I'm aware of is Citron. And that was New Mountain. I think that took place in March or April of 22. And there was sort of a pause and then a whole second wave. And the pause wasn't people pausing to be reflective. It was people realizing that this was possible and going, "Oh, we better figure this out." And then it took a year to 18 months. And I think that that's largely the cycle. So now we're living in a world where people used to think that it wasn't possible. We found out that it was, it happened. It kept happening. It's brought in. Let's talk about the firms for a second, like the internal part of the firm too. So why are they doing this? If you own shares in an accounting partnership or any partnership, really, that's sort of a closed shareholder pool, you can't just go in your e-trade account and sell your shares, for instance. You can't go back to the firm for redemption. It would be unusual, I think, to get alone against your assets. It would be awkward. So when I used to talk to business owners as a buyer, I'd sometimes talk about the structures of our equity as cash and not cash. Like, here's the cash part and here's the not cash part. And the not cash part finance folks like myself like to talk about, hey, in three years, this could be worth more than the first part. And I think for people who just never have seen that, it's cash and not cash. So let's come back to that. At the end of the year, all accounting firms have their own monetary policies, whether they realize it or not. Sometimes they appreciate the values of the shares and sometimes they don't. Oftentimes they don't. So for an average CPA partner, let's say a 25-year partner in a firm, a big firm, maybe they buy their shares for $10 when they become partner and they sell them back to the firm at retirement and they'll have more of them because they earn them or paid for them. But they might be worth $10 when they sell them back to the firm. That's sort of an extraordinary fact, right? For a 25-year-old asset. Now, your return on investment are the cash was that occur while you hold those shares, but those shares are really a right to those dividends in the old model. And their value is carried at something like three to five times what we would call EBITDA for any one of these businesses. The first generation trades that I've referenced took place at 10 times EBITDA. So that's two to three times more than what I just described in its cash. It's not paper worth. Today, many of these firms are trading mid to high teens. So the gap has widened. And I would say because the trade has been established, the regulatory specter is sort of gone. So people know that these structures are highly achievable. There are precedents in the market. They sort of know where they should be priced. By the way, I've already said, a lot of those first generation trades were sort of under advised in my view. So now you got bankers coming in and really creating competition through processes that are driving multiples as well. There's another dimension to this, which is all of these firms had pensions. So the reason why you become a partner and stay for 25 years, aside from loving what you do, is you get a pension at the end of it. And it's pretty good, right? Like most of us don't have pensions anymore. But in the alternative practice structure conversions, those pensions are being paid off. And it's a really good thing for the partners because it's an open secret. But most if not all of those pensions are completely unfunded. So they're the requirements of the future cashflow generation of the firm into the future. So the firm needs to exist in your retirement for that all to be paid. And by the way, future partners, not yet partners are going to be paying that pension back. So it was a structural problem inside the firms now. It's basically been replaced by leverage, hate out, zero of the balance sheet, stop with the accruing benefits and just turn these into traditional corporations, which is what's been done. Now, that's all big surgery on firms and like how the firm works and how the piping of the firms work. There's a model for converting them. There's a model for buying and selling them after a platform's been established with a sponsor. And there have been a handful of exits, right? So Citroen Cooperman, which was acquired by New Mountain Capital, is now owned by Blackstone. It was sold last year. I think the publicly reported multiple on that was 15 times EBITDA, which is just a huge outcome. I think it may have been a little bit better than that from also gossip. But huge print demonstrated that you can invest in and exit to a sponsor. My former firm, Eisner, completed their continuation vehicle. That valuation was I think more than 4x, where they bought it. Right. So these things have performed. And I think there's plenty of opportunity to continue that. The trades, as I shared with you previously, like I feel like we're just starting to live in the age of consequences, if you will, of now what, right? Like we're three, four years into this, what's coming next? A few of the other firms that have been purchased, I'll say in the 2022 to 2023 window, are now coming to market. And they've done quite well themselves. And then we're also seeing relocation in the market from people that can invest in software technology now because of cloud or spectres of AI. And we'll talk more about AI, of course. There's so much change coming now that these firms who have taken the capital and have done the structural things to change how the economics of the firm work, are really at the point where they need to be married to how to we future proof the firms, given all the change and development we're seeing with technologies and delivery models. And as I've said, there's an constituency of never PE people that own these businesses. And I understand that impulse. It's probably well or. and some instances. However, my punchline on this would be, if you believe that capital is a strategic resource, which it is, then not having it in the face of your competitors having it, I mean, you're just setting a shot clock on the next big thing the firm's going to have to do. Whether that becomes being absorbed by a larger firm in a way that you didn't plan for or bleeding out on talent, whatever the case may be, these things are coming. And I expect that we'll start to see some of them arrive in the market kind of real time. No, I really love that. And obviously, I want to talk about AI because I feel like that's one of the things that you have to take capital, maybe in some ways to remain competitive in the world that's evolving with AI. So maybe if we could talk a little bit about how you see artificial intelligence changing these companies and what that's going to look like for some of the how their models work in general moving forward. Yeah, it's the topic of the day of the year, last two years, maybe this might be deeply uninteresting to lots of people, but I just spent like two hours at the Verizon store this morning in multi factor authentication. It's a long time. It's a long time. And I called ahead and you know, like these tools while they are interesting and while they're good for a single application or a single use case when they start interfacing with other ecosystems and users and then demand for computing on a cloud environment goes up. I've seen a lot of them. I use some of them. I haven't seen anything yet in my travels where I'm like, oh, this actually is going to displace us. And maybe the Verizon store is a bad example. Like it's frivolous, but everyone's talking about how easy things are going to become and my experiences were sort of building a lot of bureaucracy and sludge that organizations are going to have to deal with as a result of the adoption of all these new tools, which are amazing tools, right? Operationalizing AI is a must, I guess for all businesses, especially those that have the reputation of accounting, which is I think from the outside in and maybe the further away you go from the profession, people have a view like a care could cherish you of accounts. And that's a person with like a pocket protector and a calculator and they're just, you know, they get a green visor and they're doing your taxes. It's not really what accountants do anymore. Maybe they used to. I have seen accountants bust out physical calculations and they love it. They love their ledgers and some of them do these things. And it's good. It's efficient works. I hosted a panel at our one HL conference last week and the topic was AI Disruption Zone, Colin the Bill Blair. The Bill Blair is the business model for accounting firms. So let's revisit that as AI automates the tasks, maybe say the computational tasks or the process oriented tasks. That should create efficiencies. And if it were just computers talking to computers, like I think that maybe there was hope for more efficiency. But the truth is you need a human being with a license as a CPA right now to provide these services. You hire tax professionally. You want a tax for Russia. You hire an auditor. You want an auditor. What do you pay an auditor to do? What do you pay a tax professional to do? Let's talk about that. Tax is easy because most of us air taxes are tried to. There's a really good tax AI tool out there. It's called turbo tax and it's existed for three years. Right. This isn't no. It's probably not AI. We're talking about everything that's on a computer right now. I can say I and much of it is not. The tax tools are screen capture and they work because most tax deliverables are associated with tax forms. So if a form is very easy to automate things, you know, filling and not filling out a form. If the form changes, if it evolves, if you're in a special circumstance, if you're in multi or periods, if you're in multi venues, that creates new complexity. Right. So is the tool built for that? So when else have to check it? Are you licensed to use this product on these markets? You know, there's sort of like a limitless pile of what if questions. And we've already talked about how risk averse accountants are to begin with. So the notion that folks are just going to say like, okay, like clouds handling this now or not. And maybe clouds about example because there was an announcement from big firm about using cloud today. So one of the takeaways from the panel discussion that I hosted, I had a managing partner of a top 20 firm. I asked the question, what's to prevent someone, one person from creating a totally virtual accounting firm and have 10,000 clients and make a billion dollars theoretically. And the practitioners on the panel, including this one person, sort of laughed it off and lots of people laughed stuff off and are wrong. But the response was what was interesting. And the response was, my clients don't aim me to do their taxes. They pay me to answer the phone when I have an issue, right? And that issue could be financial. It could be, hey, I need to buy a house. My kids are going to college. I'm behind on my savings. I'm getting divorced. My dad just died. We need to handle the estate. Like, these are highly personal things. And the idea that you would do that without a person seems very strange. And I think even if you could automate all of the functions that you're calling on that person to do, you'd still want the person to sort of hear you out and be your therapist and your coach and your dad. You know, like all of those things that we do for our clients are the things that accountants do for their client, particularly partners who are, you know, this trusted advisor status. And I was really struck by that response because I wasn't thinking about that, but I should have been. And of course, that's what people are paying for, right? It's accountability, it's responsiveness. It's if something occurs, I know that someone's going to take care of this the right way, even if they're using tools to do it. Now, let's talk about the outcome about first of all, if a client calls you about, you know, getting their kid out of jail on the middle of the night, which was actually the example used, who do I call, get me a lawyer, do you know the sheriff, like that kind of stuff? You probably don't send that client an invoice for that, right? You don't build them for the hour. It's just part of what you do, right? And there's a balance of trade. And that sort of speaks to that model. I think it's relevant because if you think about the delivery side of the business, so, okay, you manage the relationship, but ultimately there's a job to do. And can you automate that? Brooms that use the billable hour accounting programs, law firms, consultancies, you know, lots of other businesses. But anybody that uses that and your job, the process of your job is automatable, meaning it can be done faster. You are fundamentally cannibalizing your own revenue by using these tools. It's just definitionally true. So you have a couple of options in the face of that one, do nothing to raise your rates, breathe, figure out a rate for the computer on an hourly basis that's going to look crazy, right? It's like $10 million an hour and then you get a $27 bill or something for the bit second computing that it takes. So I don't think any of those are viable and our business investment banking, wealth management, there are some other examples, insurance, the price of our services are indexed to value. So if we advise on a transaction, we're paid some basis points times the total value of the deal. And if that deal is a $500 million deal today, 20 years ago, that might have been $100 million business or something and just kind of index for inflation and growth and everything else. That's great for bankers because we don't have to worry about increasing our hourly rate every time inflation goes up. But many accountants, many accounting firms have this problem where they become economists for one day a year and call their clients up and say, hey, like inflation, excluding petro is actually up this. And that's why we have to take our prices up 8%. And there's a $25,000 service charge for technology or engagement letters. It's like the clients wouldn't have paid for it, but you're touching them and you're reminding them what you're charging them for what you're doing. And so that is a flaw in my view without having those escalators in there. Fixed fee or value based billing solves for some of this potentially. I think it is what's coming for the industry and it's probably a mix of a fixed fee with options for a query. And so this is going to look more like your car wash menu. perhaps on scoping, then what's it cost to take my car through there, right? And you wait to the end and you don't know what it's going to cost. And maybe you pay it, maybe you don't. Like that's kind of the model today. The nice thing for firms should be when they move to fixed fee or value-based filling, the scoping of the engagements, the profitability of those engagements and therefore by extension of profitability of the firms, stands to become dramatically larger. So if you can process all this work with fewer people and you're going to go to fixed fee pricing, now you're in productization of services, you can be taking a subscription. I saw it, shout out to Williams Marston, which is a respected firm that provides operational accounting, and asset accounting services. They just launched last week what they're calling last, which is finance as a service. And I think that that's a signal of what's to come, which is you're going to get subscription-based services from your finance and accounting folks. And depending on what the need is, some people just need an account and help them with payroll and books and records or tax purposes. Some people need SAP implementations and large accelerated filer capabilities. It's a spectrum, but the firms that have the highest bill rates, which are the large firms, sort of suffer from this challenge. I won't say it's a problem, but it's a challenge, which is, they're also the most incentivized to keep billing those high rates. And if we move to a value-based model and you don't get pricing right, you can really get hurt potentially on engagement margin because you're indexing costs based on a person's time, which is a proxy for their salary. That's sort of easy to understand. But you make that up because that person has utilization, bills time, you know what that is. You know how profitable or unprofitable that one employee is or cohort of people within a practice. That gets harder to measure with AI and then fix B and value-based billing, which is another reason why I think firms may be resistant to adopt and the firms that adopt too fast may miss something along the way. Let's talk about investors, perception of AI for a second. And that's a lot of plumbing of accounting firms and speculation from me, but it's my personal opinion, by the way, that this likely will be the worst time. And we look back five years now. We're going to say like, geez, like beginning of summer, 2020, 26 was about as bad as it was for people's perception of what AI was going to do. I can be very wrong about that, but I'm not being open about it. Why? I've talked about the tools not being as developed as they should be or as much as they purport to be the head of Microsoft AI yesterday, said all one college jobs will be replaced in 12 to 18 months. This is careless and wrong than lots of other things. But this is the hysteria that's out there. The lens through which investors are coming to this are either it's helping the business. AI will be a catalyst for this business long into the future or it's not. And whatever my experience is anyway, whatever the view of that person is or the group of people, like if you thought this was a good business yesterday, you probably think AI is going to help it. And if you thought it was maybe not such a great business, you probably are telling yourself, well, AI is going to kill this. And it's just an easy way to say no to stuff. My other experience is people who don't build time for living don't like to spend time on things that they don't get paid to do. So that's private equity. I also think people don't like to lose their jobs over making incorrect decisions. And the level of uncertainty is so high that it's pretty much made it binary. So there are investable businesses and uninvestable businesses. There are fewer investable businesses sitting here this morning based on the specter of AI, I believe. Then uninvestable businesses, we've seen really good businesses for going the shelf. And it's not no. It's just we got to wait and see what this is going to look like. I expect by the way that people are probably missing opportunities for value by not being a little bit more courageous or convicted in the face of some of the trending. But that's the market backdrop. I think some people are using it as a tactic to potentially bid a little bit lower for things than they would have six months ago. That can be risky because there are plenty of people who use to invest in software and pay software multiple future businesses that aren't that are now investing in professional services. And 16 times might look cheap to a certain set of firm. Right? So we're seeing rotation of capital come into the space simultaneously. And it's copy, see, basically, because you've got all these cross currents. But the accountant and accounting services aren't going anywhere. Incredibly durable. The firms unclear. There will always be an accounting firm. There will always be lots of them. Those firms are going to be different in five years than they are today. And you can already look at it in the top 50 reporting from the inside public accounting or accounting today, but they're changing. And some of the firms I mentioned that are aggregators are in the top 20 now. It's just sort of fascinating. They're large mergers taking place. They're going to be winners. They're going to be losers. There will be additional consolidation. I think the firms are actually competing with AI. So the firm is servicing its partners and its people that are making revenue for the firm. That's the trade. And if it costs, whatever it costs to be a partner at this firm, which is you kick whatever percentage of your revenues to the house, and you do that on cloud, can you do that on something else without it? And then you'll get into like, so what? So like some people will. And then again, remember that you're dealing with a population of people who are by nature sort of incredibly risk averse. And like the idea of having a firm and like the idea of having a paycheck and health insurance and all these other things. So the firm is the organizing principle of these things, but it's not what customers are paying for, but for a handful of exceptions with really top brands. So you're talking big for your public company, large accelerated file, or you're going to want a big forer, just what it is. If you're in a flagship fund or a full-o company, you're probably going to have a big forer, that's not going anywhere. But a level down or two, I'm not sure what the brands mean to folks. And particularly as the deliverables all start to look similar. It's actually a great opportunity for some of these challenger firms, smaller firms. If you think about firms in the 200 to 500 neighborhood of those lists that are sub 20 million revenue or have been, they're typically built for the practitioner by the practitioner. So they have a book of business. They have a workload that they're comfortable with. They hire people when they feel like they want to grow and they shrink their practices when they want to travel more, spend more time with their kids. If you can automate the delivery of a lot within those businesses, those businesses stand to get a lot bigger, a lot faster and probably provide a lot of value and utility to mainstream consumers. And I think that's a net good. And that's a really virtuous use of AI that sort of helps people. I'm going to talk to the demand side of this too briefly. But if you think about supply demand, fundamental economics of this AI, to me, is a supply side shock. And just an introduction of an enormous amount of production capacity. And we all think it's free, basically free for now. So we'll see if that continues to be true. That should mean a few things for price disolocation and what people do in response to it. But on the customer side, demand, I think, is completely unchanged and probably actually has gone up. So now they're using all these tools and they need help using them. And they need help making sense of the reporting that these things are shooting out at light speed. And we need to figure out what the footnotes were and did anybody see the model that informed the PowerPoint, the Cloud Bill? We've got some lived experience. I'll just say in my own practice area where I've seen people aggregate multiple tools. And then the outcome is an analyst saying, well, can I export all that into Excel? Because I want to manipulate it. And they do. And they're big files. And then they manipulate it and do something else. And so it doesn't stop people from taking these things down, creating bespoke analyses, putting them back up, and introducing additional confusion and bureaucracy. I go through all that to say the kinds of consultants that accounting firms hire are typically associated with workflow processes. And that's 100% of what integrating AI is going to be. And it feels like we're going to be living in 100% adoption across the economy. So people are going to need training. People are going to need provisioning. People are going to need harmonization across apps and devices and servers. and behind VPNs and we haven't even begun to talk about data privacy as it pertains to accounting firms. And if you've got people's personal tax information, corporate tax information, audit information, public company, books and records, you can't put this stuff in AI. You shouldn't. We'll have examples of people doing it that shouldn't because it's been made very easy to do it. But we may wind up in a world where I think we're living in it now, which is, hey, we have this machine that can do all these things that you're actually not allowed to use it for what you want to use it for. And there's probably some sensibility into that. It's not as though people have licenses to operate commercial AI, our plan operators are trained. We're just sort of giving everybody these tools and seeing what happens with them. So I got lots of reasons to believe we're at Picasd area. This should create more work for people. It should make the firms much more profitable. It should make the life of the accountant more enjoyable, which I hope is true for folks out there. But I also think with pricing and focus, the firms that have transacted across this last four to five year vintage where it didn't exist. Now it does. And the firms never had leverage. Now they do. I think for some firms, it's going to be a little bit more challenging. They're just going to have to watch what they're doing or they're going to have to grow that much faster, become that much more profitable because they've got a clear debt from the LBO. All right, so exits are a good way to do that. There's lots of financial instrumenting that folks can pursue, but eventually it's going to come down to business performance to get these companies to the next part of their journey, which is going to be new leadership and new teams and all that kind of stuff. Yeah. So I guess my last question would be if you could sum up what the next couple of years are going to look like in terms of deal flow and exits, especially with the 28 election kind of looming. I'd love to hear what you think that's going to look like as well. Yeah, of course. I'm a bit of a political in my personal life. And I worry about the 2028 election for all of us. I feel like when I talk to people and events, sponsor calls, sometimes I feel like I'm the only person talking about it. Maybe I should take that as a cue. We don't want to think about it. So people will make decisions this summer as to whether or not they're going to hire a bank and launch. On Labor Day, I told you it takes 18 months. From the moment you decide to sell an accounting firm to actually sell an accounting firm, leave accounting firms out of it for a second because this affects everybody. But it takes a while to sell these private partnerships. I think January 2nd or 3rd, 2028, the new cycle is going to be 100% about the US presidential election. And I think it's going to be arresting the parts of our economy. We'll just leave that as it is. But if that were true or even somewhat true, and I think it's been really true for the last, let's go back through 08 cycles. So it's been a lot. What does that mean for your ability to get out of a portfolio company right now? It feels like there's about 15 months in my judgment to take a business, hire an advisor, do your QV, do your market studies, do the fireside prep that we all need to do now to sell these businesses, get bids, have management digest it, and not have a huge crosswind that would be really disruptive and turbulent because we're in a lot of policy issues on the table. I suspect there will be an enormous wave of closed deals in the back half of 26 as a result. And I think 2027 will be a record year for everybody on that basis, ending some new information. But I do believe interest rates are 20 or higher. They've got one direction to go and that's down. We're in the midst of a global conflict that's got energy resources, grout and center, energy prices are as high as they've been. That's unlikely to persist for years, maybe quarter or two more, but these things generally get solved. So you get a FedCut, you get some international conflict resolution, there should be a nice window in the back half of this year in the early part of next before things get turbulent again from my perspective. There are a lot of really good companies out there that are looking to come to market. And there are a lot of good companies that have been put on the shelf, frankly, because of the hysteria, round AI that would like to be sold or sort of ready for a new partner. But need to get out of this window of uncertainty. So I think those things coming together should create a bloom of deal activity. And that's without even referencing the record whole times and everything else, right? So he's got these firms to sell that got to sell them and it feels like this is the time to do it. Thank you so much for that great conversation Patrick, I really appreciate it. My pleasure, have a good day. This is the Cadessa Therajou, Chief reporter for the deal. 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