The State of Accounting Firm M&A: Insights from Allan Koltin and Timothy McHugh

0:15 Introduction Hi, I'm Russell Shapiro and I'm here today with Alan Carlton and Tim McHugh and I'm really excited you guys are here. These are two of the most influential people in the accounting firm M&A world and I'm Russell Shapiro. As I mentioned, I'm a part at Levenfeld, Pearlstein, and I focus my practice on professional services firms, mostly accounting firm work. 0:38 My 2 guests today have done a preponderance of the work and sort of big M&A deals in the accounting firm world. So again, thank you guys for coming here today. Allen doesn't need too much of an introduction neither there's Tim Allen's a consultant. Professional service firms in practice, growth, practice management, human capital and M&A is particularly focused in the accounting industry and recognized by Accounting Today is the second most influential person in the accounting industry for several years running. 1:09 Tim McHugh is a partner managing director at William Blair. He's based in Chicago. He's been there for over 20 years. Prior to being a managing director, he was an equity researcher and also worked at the Federal Reserve. 1:24 So again, thank you guys for being here. We're going to talk about the state of accounting from MNA, valuations, activity, future. Then we're going to sort of end with sort of a teaser on what's going to happen with law firms. 1:43 Is M&A activity in the accounting firm market continuing at the same level as in the past? Let's start off with a question that is actually lower on the list, which is sort of activity in the market. Like how much activity is there? I've been doing this with you guys for like 5 years now. We live for longer than five years, but five years when PE came in, which is about five years ago now a little more, really supercharged the M&A activity. 2:05 I'm always waiting for it to slow down. I'm like, well, next year's going to, you know, this year's great, next year's going to suck, OK? But that never seems to happen. But I still have in my mind like one day it's going to happen anyway we can get to the one day later. But like what's happening now? What's happening third and fourth quarter 2026? 2:26 Tim, do you want to? 2:27 Speaker 2 You can go ahead. You're at the center of. 2:29 Speaker 3 Everything. Yeah, it, it, it has been a insane is, is probably the capturing word of what has gone on in the last five years. Every morning I we wake up and see something that we said we've never seen before. 2:45 I think in the big picture, the lab experiment, private equity entering the accounting profession has been validated and we're on a run rate where there's now 50 platforms in all different shapes and sizes. I used to say 31 flavors, it's now 50 flavors and they're all different and they're all the same. 3:04 So it comes in all kinds of shapes and sizes. We're getting calls today still from private equity firms, sovereign wealth funds, individual investors, billionaires that want to invest in. My message to them is I sort of wish you'd called me in 21 or 22 or 23. 3:21 By 24, it was getting crowded. But you know, Tim has been in this with professional service firms in other professions like insurance brokerage and wealth management. And those are 25 years later and they're still going. So it, it seems the accountant in general is a little bit of a naysayer, hourglass, half empty. 3:45 Steady Eddie doesn't like change. And that lab experiment today, the facts don't lie. I don't know of a platform out there that if we could say to the private equity firm or the accounting from, hey, we can roll the clock back, you can get your money back. 4:01 I don't know one that would say I'm in. So it seems to be working if that's what you're asking. Yeah. 4:07 Speaker 1 Let me let me say the question a little bit different way for Tim is just how much activity is there right now? 4:13 Speaker 3 Yeah, I mean as. 4:14 Speaker 1 Compared to last year, last quarter or or whatever period, not not before five years, but as compared to last year, like how is 2026, is there the same amount of activity, is activity different? 4:26 Speaker 2 I think there's a lot of activity. I, I'm not sure, it's probably hard to say it's more or less because there's been a lot of activity for the last several years. So it continues quite frankly, you know, maybe a couple months where it seems to slow down maybe. 4:41 But generally speaking it, it's pretty constant. As you said, there's a lot of platforms now and, and many of those will be approaching where they think about the second bite, the liquidity events that will be before. And there's still many accounting firms that are thinking for the first time, should I bring someone in? 5:00 And they're certainly, you know, a little bit. And I think this will increase over time consolidation between the firms that that is starting to, to take place as well. And so, you know, it's, it's a big industry. There are a lot of firms and, and so there's a pretty steady flow of, of activity. 5:18 I, I'm not sure I'd say it's more or less than last year, but it, it was a lot last year and it's a lot this year still. All right. 5:29 What is happening with valuations? Well, let's then talk a little bit about valuations. So sort of valuations, let's start off the valuations in as a whole, in the aggregate, OK? And we'll get into what makes one for more valuable than another in a minute. But just in terms of the aggregate multiple, OK, is it going up? 5:48 Is it going down? Is it leveled off? Does it depend on the size of the firm? You know, just sort of give your view on that. 5:58 Speaker 2 I'm happy to. I think the, you know, the average is probably not changed significantly. You know, you went through a period where many of the early deals were at a slightly lower multiple as competition for assets just continue to build. 6:14 It seemed like every three to six months that, that, that average market multiple kind of went up a little bit and it's settled kind of in into a, a, a, a certain level of period. What I would say is 6 months ago, I think you would have seen maybe more like 12 months ago the every platform traded for a very similar price there. 6:35 There was not a lot of variance. They seem to all, everyone knew the market multiple and everyone knew what they wanted to pay. And and that's what you saw people show up with in terms of platforms at least separate discussion for tuck in M&A, but for platforms that was certainly the case. 6:51 I think in the last six months, you certainly have seen a lot more variance, right. So the average might still be in the similar range, but you've seen some premiums, some people who have stretched a couple turns above the average. You've seen some of the fall below it. And that variance I think certainly topics like AI and just as people have gotten to know the space, space more has, you know brought a little bit more scrutiny. 7:14 And so you've got some platforms that, you know, probably for various performance reasons or you know, business mixed reasons are are skewing a little lower and some who are the top tier firms are skewing a bit higher than than the average. 7:30 So I'd still say that, you know, maybe generally within a turn or so, the average is not that dissimilar, but the variance is bigger. And, and so the there, there's more examples of premium outcomes relative to the average and, and some that are a bit lower than than the average. 7:50 What are the characteristics of firms seeing valuations at the top, middle, and lower segments of the market? What firms are at the top end of the range? What are those firms look like and what is that range? What are in the middle OK and what are on on the lower side? And you can differentiate or not between tuck insurance and platforms. 8:06 So. So who's getting a 16 and who's getting an 8? OK. 8:10 Speaker 3 You almost have to set up a matrix because you have tuck insurance, you have platforms, you have first round, you have flip and second round. And I would give a generic answer to this question as follows. 8:26 There's three kinds of firms. There's elite. Elite means great firm, great organic growth, great profitability, great leadership, great market, very good. Is all those things just not quite elite? And then there's the catch all. 8:42 We call it good. Good could also be a catch all for average. I believe that those firms Dr. the multiple as much as anything. I think sometimes we think the market dictates it, but I think it's the grade of firms on the things that matter. 8:59 All of that said, when this party started in October of 2021, God, it's five years already. And 11 was a number. And then someone said, well, it really was 10 1/2. Well, it really was 10. 9:15 You know, it was somewhere around there 'cause nobody knew. And the one that went first sort of set a bar. And then we watched it move up a little. And I'm talking about platform foundation firms. We saw a 12. We said, wow, how's that possible? Then we saw a 13. 9:31 And then we saw a dynamic as we went from the heavyweights, the top 25 to the middle weights. Heavyweights are called 800 million and above. Middle weights are 200 million to 800 million. And then I'm not going to use the word lightweight, we'll call it welterweight, 10 million to 200 million. 9:51 We saw the 1st shift where firms started to say we're going to go with a smaller firm because it's easier to take an 80 million and get to 160 of revenue or 160 to 3:20. And then we saw some of the big firms on the bigger stage almost go in a penalty box because they already were over a billion or 2 billion. 10:13 How will a $3 billion firm get to 6 billion? How will the 1 billion get to 2 billion? That may be a harder climb then $160 million firm getting to 320 tuck insurance moving away from the platform to the tuck in. 10:30 When this started, rarefied air for a tuck in was an 8 elite was 8. Very good with seven, good with six. In today's world, Tuck Insurance are now going at between 9:00 and 11:00. 10:46 If they're a great firm with great leadership, with great organic growth, great profitability, great market, great niches, great potential to scale. So I almost think the market doesn't set it. I think the greater firm says it to some degree. 11:02 Speaker 2 I think the other dynamic on tokens, I would, I agree with all that is what's the EBITDA, right? And and certainly first platforms too, right? Buyers, you know, whether private equity or strategic buying a tuck and are very attuned to the issue of what's the incentive model going forward, right? 11:20 You can create whatever EBITDA you want by applying A scrape that's bigger or smaller and that creates obviously a bigger scrape, creates more upfront proceeds, more dollars, but also creates more risk to the ongoing success of the firm. There has been a trend where I think tuck insurance increasingly have, you know, elevated in a bigger and bigger way the margin profile that they're trying to sell. 11:46 What is the best approach to determining what the scrape should be in a deal? If you're advising a PE firm, OK, and you're analyzing a target's numbers, OK, how do you think about how much scrape there should be and where do you see the range of scrape, OK, in terms of percentage of sort of owners total comp, OK, I used to say it was 35%, but I'm curious as to about what you think it is. 12:09 And but more importantly, like do you see that being played with more? And I think you just said you do. And I'm curious of how you see that playing out and how you analyze that. 12:18 Speaker 2 I think you see being played a little bit more in the Tuck insurance versus the platforms, but there's, there's more variance. And Ellen, when I'm done you, you certainly have a perspective on this. The, you know, if philosophically you're separating out, you know, a market based compensation versus a return on equity that as a partner you are receiving because you have not sold that, that, that essentially that that equity to to someone else. 12:44 You know, in practice that's harder right there still subjectivity, but philosophically that's what you're trying to do. So you when, when you work with companies, you try and break them away from the how much can I sell? How much can I do right? Cuz there's, you know, as I said, there's an inherent balance between ongoing risk profile of the business and ability to continue to attract and retain talent at the compensation levels you're, you're setting versus, you know, maximizing upfront proceeds. 13:11 If that's what you're trying to, trying to do. It's not singular. I think, you know, profitability of firm will matter. There are some very profitable firms where a 35% scrape may be reasonable and there's somewhere that's a very aggressive right. And so you look at percentage of revenue or you know, partner comp as a percentage of revenue, you look at absolute dollars. 13:33 What's the average partner comp? You have to consider the markets they're playing in when you do that 'cause it's very different if you're in New York versus if you're in, you know, you know, a rural market or a suburban market until you, you balance that. And then, yeah, you, you also look at the percentage change that people are doing. 13:50 People also look very carefully at where it's happening because it's not necessarily uniform how it's being applied within the partner base. It's, it might be very different to someone late in their career versus if you are affecting people that are younger partners and so forth. And so it's a, it's not a simple one metric. 14:09 It's a combination of those things that people look at. But. 14:12 Speaker 3 Curious. Yeah, Yeah, It, it, it, there's so much that goes into this that it, it, it, it gets really complex at sometimes. You obviously know Jack Colton, he's a young associate with you, but we he's got a brother Brian Colton who joined us with five years of Southside M&A and he brought some terms that I had not seen before. 14:33 Because when we take an initial call with a firm, if we could only ask one question. The question is what's your average equity partner comp? Not that there's not more questions, but if there's nothing to scape scrape, if using the inside public accounting, the IPA benchmarking survey, if you're in the bottom quartile of that survey, that means your average equity partner comp is probably under 400,000 a partner and therefore there's nothing to scrape. 14:59 And you probably, if you want to explore M&A, you're probably better off going with what we call a mere mortal, a successful firm that doesn't look or care about EBITDA because it's a different kind of deal. But if you want to go down the path, Brian Colton will often say to me, Dad, there's there's an opportunity. 15:21 I said, no, they don't make any money. He says, Dad, have you ever heard of something called manufactured EBITDA, artificial EBITDA? I go, what are you talking about? And he says, look, there's synergistic savings that the buyer is getting and what we're going to need to do is get the buyer to donate some of that synergistic saving and we're going to artificially create EBITDA beyond the partner scrapes. 15:47 Speaker 1 It's like a pro forma. 15:49 Speaker 3 Yeah, yeah. Or look, here's what we're going to do a year from today. We'll come back in a year when our EBITDA is higher to which the astute buyer says no, we're going to have a double bite. You're going to get one at closing. And if you do what you say you can do, you'll get a second bite at the end of 2027. 16:09 Speaker 1 Thank you for that. Let's go to another example though, which is the opposite end of the spectrum. Let's say I'm in a small firm and there's three partners and we're all making $4 million a year. Can we scrape 75%? 16:22 Speaker 3 So if can I jump on that, because we had, we had that exact dynamic $28 million firm with three Equity Partners. They were making 5 million, four million and three million. So what is that 12 million? Oh, and they all happen to be in their mid 60s. 16:37 One wanted to retire in a year, one wanted two years and one wanted five years. And the buyer who ended up doing the deal, we came to them and said they're fine to work for $1,000,000 each and turn over 9 million of EBITDA. 16:54 Remember, this is a $28 million firm. Well, 9 million of EBITDA times an 8 multiple, which was the standard then would make it a $72 million enterprise value on a $28 million firm. Now that just wasn't going to happen. 17:12 They ended up coming in, you know, with a $7,000,000 EBITDA because the buyer, it appears the buyer has these imaginary goal posts. I would never say that these valuations are done as a multiple of revenue, but on the in the top 200 world, where is it that we see something trade over 2 times of revenue, maybe 2 1/2 now you know we've worked on some where they've gone at four or five times revenue, but that was an $8 million firm and that was a $17 million firm, different scenario. 17:50 Speaker 2 OK. I think fundamentally a buyer is an astute buyer at least is asking the replacement cost question, right. And so in that example, it's the, you know, if you, God forbid you don't get hit by a bus, what it, what am I going to have to go pay in the marketplace for that replacement? 18:10 If I have to go hire another partner to come in and generate the same level of revenue, produce the same things internally, what is that market compensation, right? That that's really what they're, they're answering because you know, they're going to try and sell to someone else. If you're retiring in three years, they need to know for that same level of compensation, they can sustain that earnings stream. 18:30 And so it's really the replacement cost. So someone making four millionaire, they extracting that much of access returns as an equity owner, maybe they'd have to ask the question, can I go in the example, go for $1,000,000 and find someone else that can come in and produce what you're producing? 18:46 If yes, then it might be justifiable. If not, then they're going to say I don't believe the EBITDA. 18:57 How has rollover equity from the first round of accounting M&A deals faired? How are newer deals expected to appreciate? Let's talk a little bit about rollover equity and appreciation. Talk first about how it's appreciated since for the first deals, OK? And then let's talk about how a new deal would appreciate, how you think about new deals given that valuations are higher than they were five years ago. 19:20 Is the appreciation potential the same? So let's talk about rollover, sort of history of how well the rollover has done in these deals and then your view going forward, Tim, if you want to start? 19:33 Speaker 2 Sure. Listen, the the base case for a private equity from their underwriting that their business model is to underwrite to a 2 1/2 to three times return generally speaking. And that's what they're targeting. Many of the early deals exceeded those right, partly because there's been a valuation uplift to to the entry point that some of them had. 19:52 But quite frankly they just also, you know, other levers growing the business through organic growth, margin expansion in M&A have all combined to help deliver some very strong earnings growth for for many of these platforms. So if they've had Mark or multiple expansion on top of that, then they've really done well. 20:12 It's varied in each case, probably not, you know, don't want to share anyone else's information, but there's many that have well exceeded that three times return and and people have done done quite well. You know, the new deals are still being underwritten. Private equity is not coming in and underwriting them now with a 1 1/2 times return that they're still fundamentally looking and assessing how is their strategy and opportunity to to generate a 2 1/2 to three times return on each investment that they're making. 20:42 And I think it helps that all the generally speaking the platforms that have been done, many of them haven't exited yet. But from a just growth of the EBITDA base, I think people are feeling pretty optimistic about the returns flow generate relative to what they underwrote when they did these deals. 20:59 Speaker 3 Yeah. And the the market is moving what what success was the find that in 2223, you know, if you take three that have flipped A heavyweight Citroen Cooperman from New Mountain Capital to Blackstone in the middle weight division, Smith and Howard from Broadsky to having a senior DPG. 21:21 Thank you. And in the welterweight take Prosperity Partners from Unity Partners over to Lightyear Capital, those all had success at a time where there were only four or five or six platforms out there and any great firm in any market that wanted to do something could command a top dollar. 21:43 And there was a ton, I would guess 67% of the increase in EBITDA was not because of organic. It was because of the EBITDA that these Uber successful firms had and merged in. In today's world now you got 15 players in each of those weight classes. 22:02 So private equity world I think is now asking the question is, is, is the party over? Like how are all the firms that could have been merged in? And if we can't duplicate that success via M&A, is there enough organic growth? 22:17 Unfortunately, organic growth in most accounting firms, there's always exceptions, has gone from the world of double digits in 2020 to 2023 today, single digits, some even single digits, talking about four, five, 6%. So the universe has changed. 22:36 But you know, I'll come back to that. That guiding light of a successful firm can name the market of what they want in terms of what they want to get. We also have this dynamic again, that is now showing up more and more where firms are talking the, the, the, the, the seller is asking the question, how do we know you won't be tucked in? 23:04 Because it's just human math. There's 4550 platforms. There won't be that number in 2345 years. And many of them will come together. And you know, if a welterweight can't grow to be a middle weight, they usually get eaten by the heavyweight. 23:21 Speaker 1 We're going to get into that. You've answered about three other questions that we have. Good. I'm going to go to the state of the debt market now. 23:34 What is the current state of the debt market being used to fund new platforms? I would in this place in the AII think probably about six months ago, it seemed like some of the finance sources, the debt finance sources were getting a little anxious about AI. Tell me if you think that's right and tell me if you think that's calmed down or in, in general, what is the state of the debt market to fund these new platforms? 23:57 They said they're going to be new platforms, which there will be some still. 24:02 Speaker 2 So AI certainly caused, you know, equity and debt markets to, to think harder about everything for, for a while as that generally eased a little bit, yes. But I, I'd be hard pressed to think you go 10 minutes into any meeting without debating AI and what it means for, for any business and, and the strategy. 24:18 So it's certainly still paramount out there. I think it probably, you know, eased a little bit at the extreme ends of the debt spectrum. I would say most of the firms aren't operating at the extreme ends of the debt spectrum. 24:35 Most of the new platforms have not taken as much leverage as quite frankly they could get. Many of the early platforms were financed around 4 or 4 1/2 times, you know leverage even as markets would support more. I think through M&A and through growth, many of them have moved up that spectrum a bit. 24:53 So it's more what's the quantum inability to finance M&A and how how high can I go with with probably that leverage as I go along. And then it's a little bit more of a discussion on the larger transactions, right? And the second bike transactions where where it's out there. 25:10 So far, I don't think it's really drastically changed the market that the, the debts probably got a little more expensive for a period over the summer. Quantum was probably slightly less. But again, many of the new, new, new platforms weren't going to the extreme. 25:27 They weren't looking for six turns of leverage there. The levels they're looking at, generally speaking, many, many of the lenders were still very comfortable lending there. The other dynamic which Alan touched on besides the number of platforms and, and how that impacts how many private equity from already invested lenders have a lot of exposure to this market now across platforms. 25:48 So there is some element of certain lenders, you know, feel somewhat full with, with how much they've went in the space. But all that being said, I I I haven't seen that be an impediment to deals or a big swing on valuations. 26:05 Speaker 1 Thank you. 26:06 Speaker 3 And I, I do want to come back if we can, to roll over equity what you were asking about before, because I think there was a, a important piece of that we didn't cover. Tim addressed the, the debt market and everything going on. I, I, I think the big aha moment we saw this year, and it was sometime around March or April. 26:23 I'm not sure why, but it may have been that AI finally became a reality. And I know we'll talk about it later, but I've never seen something so pronounced. It's almost like our are US politics. Are you a Democrat or Republican? There was hourglass half empty, half of the private equity market that was interested in the accounting profession. 26:45 To use the words of Mark Cuban many years ago, this will be the next industry to be exploited. They said we're out and we said why are you out? They said AI. Don't you realize what it's going to do to the accounting profession? Tell me more. Well, if you're a $50 million firm and 80% of your practice is compliance, the market is going to reprice it. 27:08 You know, we saw this on the big stage with KPMGKPMG's auditors are Grant Thornton. And what did KPMG say at the Wall Street Journal picked up on? We know you're using AI, so we'd and it's costing you a lot less to get this done. So whatever you were charging us, maybe your proposal should be half of that. 27:26 When it's compliance or commodity driven work, the history tells us that the market reprices it. So half the firm said we're out. What did the other half of the private equity group say? We're doubling down because yes, we're going to take the margin and it's going to get compressed, but it's not going to get compressed by how much more profit we're going to get and our ability to cross sell other services into the market. 27:56 And now you're seeing firms actually beginning to lead with AI as they're differentiating edge. 28:03 Speaker 1 So you're saying though that private equity sort of held different views. I do want to get in what you think AI is in a minute, but I just want to hold off on where you guys think that's going to go. 28:14 Speaker 3 My experience is private equity is a divided house. I, I've even had them go as far as to say, you know, everybody talks about audit. Well, let's go to the other end because that's a regulatory thing and there's some protections they'll have there. Let's go to CAS, outsourced accounting. 28:29 That's the easiest thing to put AI in and maybe taxes second, you know, but what we've also seen is there's a labeling now of most private equity firms don't are not as enamored with public company audit. 28:46 I mean, if you pull Grant Thornton out of it, I don't know, 98% of the revenue has been private company audit. China audits for sure that that we have to sell one of those off crypto. People get scared about crypto because of FTX and you know what happened there. 29:05 Some even talk about cannabis that they don't want to be in. So Can you imagine if you're a firm that has all these segments, you're probably not going to do a private equity deal. I'll Markham who got close and ended up going away of Cbiz. 29:21 So crazy, crazy. Can can we go a little to back to rollover city? Is that OK please because I'd love to get your thoughts on this. 29:34 How are the sellers evaluating potential financial partners? You know, we call this the gift that keeps giving and us accountants are always so skeptical when we we grew up in a generation that our stock in our accounting firm is a worthless asset. Matter of fact on our personal financial statement when we had our accounting firm, I would never put the value because I never believed I'd ever see a dollar of it. 29:57 So the gap of getting somebody, I say you're not selling your business, it's a, it's a equity exchange. You're taking worthless equity that of the accounting firm. And when you tell them now that if you look at the platforms out there, the stock moves about a point a year. 30:16 So if it's three years, one point O could be 3 point O, if it's five years, one point O could be 5. They look at you sort of cross eyed, like what are you talking about? You know, But now there's enough flips that have gone on and they're like saying, my gosh, I never thought the stock could actually appreciate like it has. 30:39 It's now becoming a factor in the seller's decision of who they go with. They're almost wearing the hat of an investment advisor and looking at those firms and say, let's just pretend we've got $10 million to invest in any one of these. 30:55 Which one do we think has life? Which one has the best chance of getting a return? This has never, ever been a factor in an accounting from Deal before. 31:08 Speaker 1 Oh, we've seen, I've seen that where people think about how their rollover might appreciate in which firm may in which platform it may appreciate more, which which firm that may be already PE sponsored that it may appreciate more. 31:25 Speaker 2 Think you see it even more in the second bite, like the second transaction. I think it's certainly a factor in the first one and we've had clients who have who have opted for what was not the highest bid because they thought they were a better partner. I think there's also a lens on the first deal where there's a little bit more waiting to just cultural strategic alignment, who's going to be, you know, less disruptive when you're doing that first deal. 31:47 They're also thinking about value creation, but that has even more. 31:51 Speaker 1 Importance. I see it more in tuck insurance. 31:53 Speaker 2 I I think the second one for sure tuck insurance and then the second bite, you know, they've seen that the equity can go up at least in theory, right. And we've seen this across professional services. When you do, that's that second transaction or third transaction and it becomes real, right? 32:09 It's not just a paper trail that someone's gotten saying, hey, your equity is worth two or three times more than when you first did the deal. They're they're also able to sell half, keep half and go forward. That the even institutionally the way people behave afterwards is, you know, that equity also takes on a whole new life because, because it's, it's something they've actually gotten proceeds from. 32:31 And it's, it's any first transaction, typically you're selling 51 to 60%, not on average, right? So you're, you know, rounding it, you're selling half, keep in half. And so that, that upside in that equity, who's going to be the right partner for you to, to drive that value creation is just as important as the cash you're getting on day one. 32:51 If if you're if, if you really believe in in that future opportunity. 32:55 Speaker 3 And if you do it by age, where the older group is going to take more cash because they're not going to be there as much for the building, the younger ones are really the one that have to fall in love with the role. 33:06 Speaker 1 Over equity. All right, let me get a few more questions then we could circle back with any final thoughts. 33:17 What are the key economic trends in the industry? Let's talk a little bit about just what's happening in the business of accounting. You mentioned organic growth before. Sort of what are the economic trends? What is the organic growth going on right now? I'll, I'll, I'll ask you on that one first. 33:34 Speaker 3 You know, I hate to give answers in averages. You know, the, the word average by definition is the meeting point of the best of the worst with the worst of the best. It it to me, it's an it's almost a meaningless thing sometimes because there are still firms today commanding double digit organic growth. 33:54 But part of that can be the geography, part of that can be the industry or service line, part of it can just be being blessed with amazing rain makers. So, but but if you look at averages and saw what happened and that climb like this that took place and call it 21, 2021 to 2024, there were different variables going on. 34:18 Capacity caused accounting firms to get rid of crappy clients or double the rates and keep them. And firms went like this because they finally got religion and realized they were a cheap date all these years and the client clients rewarded them by paying those fees. 34:36 I don't know that that raising of fees in years 2024 to 2027 is going to have that same lift as you're seeing literally almost every day today. Advisory practices appear to be slowing down a bit. Massive layoffs at firms of all sizes. 34:54 So the we call it the golden age of public accounting. If you couldn't grow and make money between 2020 and 2025, you might want to think about another industry to go into. Yeah. 35:13 How have the assumptions PE firms use for underwriting deals changed? Let me ask you in a different way to you, Tim, when PE firms are underwriting deals, OK? Have the assumptions they've used on organic growth changed in the last few years? 35:26 Speaker 2 Slightly, I think their assumptions on margins and M&A also have changed a bit too, right? If you boil it down to three main levers, no doubt even just go beyond accounting, professional services in general, if you will, price, volume analysis is the first question you get on, on every deal, right? 35:42 Because the period Allen described there is generally a very across the US, you know, multiple sectors, but certainly across every type of professional services, the bill rate, the price increase that you got was elevated versus history, right? And so people are very focused on dissecting that when they look at a company of what's the mix of, you know, about a volume metric and a price driven metric and, and thinking about that question. 36:07 Yeah, there's a period, you know, several years ago you saw a lot of, you know, 910% growth. Today you see a lot more mid single digits with some exceptions that that are still at the higher level and some some lower level there. There's a, you know, on average several points lower. 36:24 I do think on the other side, as I mentioned, the, the margin expansion has been probably better than people expected. I think as people have gotten into these businesses, the ability to manage a more like a business, the behavior of people as they saw, you know, every dollar I save goes to my equity value. 36:41 Maybe I'll think twice about how we operate and how we organize ourselves. The benefits of technology as well flowing through that margin. I think on average there's been more, you know, margin expansion. And so you know, net, net, they they, they, they, they weigh each of those. 36:57 They're probably are assuming a little bit lower organic growth. I think some of them are probably a little bit more optimistic on, on, you know, margin expansion and M&A has gotten a little more expensive. But people it, it's, you hear a lot shatter. It's so hard, it's so competitive. 37:13 If people keep getting deals done, they keep growing through them at the end of the day and the synergies out of them are, are very robust, particularly the the mid and larger cap transactions that there are meaningful synergies people are are realizing from. 37:29 So the value creation ultimately that people are are getting to it's, it's maybe slightly different than they might underwrite and they might underwrite it slightly different today, but but they're still getting to good returns all right. 37:40 Speaker 1 Let's go to the AI. 37:41 Speaker 3 Question, but but just go ahead one the the psyche of the accountant. Here's how it's changed in five years. I, as an accountant, want to make as much money as I can, and I expect you'll clear the cash register out at the end of the year. 37:57 Don't talk to me about synergistic strategic investments if it's coming out of my pocket and today? Oh, and I have worthless stock. Whatever I whatever I bought, I'll get it back when I retire. 38:12 Today. The psyche is they talk about the Carter report. If I'm saying it right, it's the quarterly valuation of the firm and they're watching their investment in real time appreciate and that means a lot. And the psyche today is, you know what, I just want to make a a good living. 38:33 Then I want my wealth to get created through the equity appreciation. And I'm 45 years old and I'm looking at maybe four or five different monetizations. It's a brand new ball game. And you're talking about when was the profession found at 1887. 38:50 You're talking about undoing 140 years of a brain thinking a certain way where it is today. 38:58 Speaker 1 All right. 39:03 What is the current thinking about whether AI will increase or shrink margins in the industry? Let's go to the AI question. You know, will it increase margins? Will it shrink margins like like what's going to what what no one knows. OK, OK, use the half the PE firms are like this is going to be bad for accounting. The other half are this is going to be great. OK, curious as to your views. 39:22 Speaker 2 I, I think there's a scrutiny, there's a lot of different opinions, I will say. And there, there's probably a third category of PE which says, you know, if you discount the multiple a couple turns, I'm OK with it, right, which is, you know, debate, but that there's, there's certainly the bifurcated view amongst them. 39:39 No one really knows. I, I think there's a very different lens of scrutiny around the billing model, right? And, and so the fixed fee parts of the business are viewed as, you know, much less at risk. If you got time and materials or hourly billing models, you're viewed it as more at risk right now and more, more scrutiny on that. 39:59 We can debate tax. Is it really hourly or is it kind of fixed fee that there's often a, a debate on what, what that really is at the end of the day to a client. But you know, that's where the scrutiny is. And that, that I, I probably do think it's going to help the, the industry. 40:16 I I think there's. You don't. No one really knows. There was a debate on outsourcing 10 years ago, 20 years ago probably on. You're going to have to give that savings back to the client as as you move some of your resources to offshore locations at that much cheaper prices. 40:32 Prices didn't go down at that point. What will you see that way in this, you know, next 10 years? You know, there's probably something to it, but I I wouldn't claim to have the crystal ball. 40:44 Speaker 3 The next three years will have more change than the last five years. If the three of us were back in three years, I don't think we'll recognize quite what it's going to look like. And let me give you just two touch points. 41:00 The first one and you're seeing already on the big stage with the BIG4 accounting firms saying less is more, 15% of the partners are being asked to take early retirement or go from being an equity partner to an income partner or newly created managing director role. 41:16 What they now have come to realize is AI is not to just get the mundane at the lower level. It's going all the way through the food chain so that by September 2029, accountants will no longer prepare financial statements. 41:33 They'll no longer prepare tax returns. Whoa. I'm a partner. I built 1200 hours, 1000 of 1000 of my 1200 hours are making the sausage. What are you talking about? Well, what's going to happen is there'll be three kinds of partners. 41:50 There will be the partner that is already the client advisor. Where's this all going? We have to go from pounding our chest that we're the client's most trusted advisor and now we have to get to the client's most valuable advisor. So if you have the skill set to advise and plan with clients, hold their hands and deliver more value, the client won't care how you make the sausage. 42:16 The middle third does it on the back of a napkin when they're asked to do it. I think we have to change our continuing professional education to things like how to how to talk about strategic growth, how to talk about profit improvement, how to talk and coach Aceo of a business, new skills that we've always said we were ordained to do, but we never had the time to do. 42:39 But there's AI don't call it a bottom third, but there's a third that are just technical grinders. And unless they have a unique industry specialization, I think we're going to see major reductions in numbers of partners and revenue per equity partner go through the roof. 42:58 Not for all, but I think this is going to be the first time in the history of the profession where I hate to use this term. Big winners, big losers. I don't want to say that, but we're going to have major separation and those that can seize the moment of AI and not just a global AI package, but one that cuts itself down to industry and service line and then have the array of products around them. 43:25 I think they're going to go like this. The ones that don't have it, I worry about it. OK. All right. 43:32 Speaker 1 Let me do this because we're coming near the end of our time. Let me ask each of you to say anything else you wanted to want to on the accounting firm world. Then I'm going to ask you a law firm question. Anything you want to add or that you missed in terms of thinking through accounting firms and the M&A and, and where we're at in the cycle and all that kind of stuff? 43:50 Speaker 3 I'd love to ask a question that Tim, because he calls on the public markets, C Biz and Grant Thornton to, let's assume that that goes through. 44:06 Is there an IPO market for the next round of flips? There's been a lot of commentary that the next slip for many of the counting firms may not be an IPO and to which I say, why would you say that? And they said, well, look at what happened to C Biz. I said I'm, I'm not sure that that had anything to do with this. 44:24 C Biz was a startup in 1997. Somehow they grew to $3 billion. You know, you miss a quarterly earnings report and you reforecast and the stock goes like this. But I'd love to hear, Tim, your thoughts on some of these larger deals, whether it's called car rigs in Ingram or Baker Tilly. 44:46 Will they potentially be an IPO? Is there an IPO market for that next round of flips? 44:55 Speaker 2 Yeah. I, I think, I think you sure answer is yes. I think there will be I in the not speaking to any of the individual companies plans, but the market I believe public markets will be receptive to these firms. I think, you know there's various points in time where C biz was valued very highly in the public markets. 45:14 I think there's points of time where they were not that was partly driven by performance and, and, and various, you know, communication that, that, that the market perceived right or wrong and that that does happen in the public markets. There are other related businesses performing very well, trading very well in the public markets right now. 45:35 And so I, I, you know, and, and you go back over history, there are other professional services firms that have done quite well and continue to trade at, at very good prices in the public markets. And so I think the profile of the larger firms could be very attractive to the extent they decide to go down that path. 45:51 Now there there's various other options and alternatives, There's pros and cons to being in the public markets, but I think, you know, the market would be receptive and positive on many of those businesses if that's what they decide is the best pathway for them. 46:14 Will PE investment in the legal industry be as pervasive as it has been in the accounting industry? Let's go to law firm. So like I'm a partner in law firm and and I'm interested in this subject and I want to get it done multiple on some big scrape number that's more than 35% I thought. 46:25 Speaker 3 You were a great firm, weren't you? At least like. 46:28 Speaker 1 What do you think? Is it going to happen in the law firm world in a broad based way like it's happened in accounting, meaning commercial for all kinds of firms? You know, M Law 100, small firms, medium firms, commercial firms. 46:44 We know what's happening in Pi. That's definitely the case. Anyway, I'm just throwing it out there seeing what you guys think. 46:53 Speaker 2 Happy to start. I think there will certainly be activity. I mean, we've, we've transacted on three law firm MSO transactions already on the sell side, none of them personal injury firms, 2 of them were this year, one was previously we, we are talking, you know what with a number of other firms around opportunity around that. 47:15 So I, I certainly think there's going to continue to be activity in that market. The, the business model is different, right? And, and the incentives for how they, it would impact your growth strategy, what you would execute on it is a bit different, right? So there's different factors. 47:31 There's also a lot more variety. I mean, we say law firms, right? Just blanket, I think there's probably as much as every accounting firm, it has their own identity and the different service mix there, there's a lot more similarity there. Then if you're in the law firm, you're talking about an insurance defense focus firm versus a mass tort firm versus a traditional corporate law firm, right? 47:54 They're, they're very different models and also very different size spectrums, right? And so I think the way each of them would approach it and honestly the investment characteristics and that would appeal or not appeal to private equity vary quite a bit when you get dig into the individual law firms. 48:13 So, you know, short answer is yes, I think there will be activity, but you know, it will that activity, it might not be uniform across different types of law firms out there. So we'll see. 48:28 Speaker 1 All right. Alan, do you have a view on this? Will it be as pervasive? I guess that's what I'm trying to get. 48:33 Speaker 3 At let let me begin just with a plug because you and your team have become market leaders and representing law firms that are going away private equity. Kudos to you after owning a space in the accounting profession and seizing the moment with with your brother and in the legal profession. 48:51 For me, the biggest differentiator these being people, businesses is this first wave that we're seeing. The ethics of a lawyer still in 48 states says if you leave, the client has the right to follow you. 49:07 In the accounting profession, when when you get when you have your payday on these deals, you sign a A235 year non compete. And if you maybe didn't get a lot of proceeds, you're at least locked down with a 2 year non solicit that you can't touch directly or indirectly any client if you leave and start a competing organization. 49:27 So that is a fundamental, I don't want to call it flaw, but it is something that forces the change of the structure. So we're not going to give as much cash upfront. We're going to give more rollover equity and you're going to vest it. And if you choose to leave after getting your check, guess what, you just left behind a lot of value. 49:48 So the structure of these deals for sure will be different. And then you've got just some of these, I don't want to call them annoying things, but different things on non attorney ownership, which has caused the setup of the MSO much akin to the alternative practice structure of the accounting profession. 50:06 I believe if we sat here five years from today, the number of law firms that have gone the way of private equity will look the same. When my friends in the legal profession call and say, I said, look, just learn the accounting rofession Causeway. 50:22 It's going to repeat itself with some tweaks and modifications, but you'll look no different five years from today. O Russell, you better get out there and get a private equity deal done for your firm. 50:34 Speaker 1 Thank you, Alan. 50:35 Speaker 3 Because it won't be here forever. 50:37 Speaker 1 OK. All right. I won't touch that one given I have a number of partners here that will be viewing this. Well, thank you guys very much. This was excellent. Really appreciate your time today. 50:49 Speaker 2 Thanks for having. 50:50 Speaker 3 Thank you. Thanks so much. Thanks. 50:51 Speaker 1 Guys.