In this discussion, the team analyzes a CPA and wealth management business up for sale in the southwestern U.S. The business, valued at $3 million, is co-owned by two partners: Beth, a CPA seeking retirement, and Ken, a financial planner willing to remain post-sale. The company boasts a strong customer base, 85% recurring revenue, and 15 employees. However, the valuation is deemed overestimated, with a more realistic range between $1.6 and $1.9 million based on standard industry multiples.

Beth’s desire for an upfront payment and Ken’s preference to stay on pose challenges for structuring the deal. Potential options include an SBA 7(a) loan, a 50/50 partnership buyout, or an annuity deal. An annuity approach, offering a consistent payout over time, is highlighted as a flexible solution, particularly to meet Beth’s financial goals while keeping Ken engaged in the business. The SBA loan route is also viable but complex, given Ken’s ongoing involvement.

The wealth management aspect, though a smaller portion of the business, presents growth potential and complements the CPA services. Buyers are advised to ensure a seamless transition by addressing client retention concerns and securing a six-month handover period from Beth. The deal is further bolstered by strong cash flow and limited working capital requirements.

Experts on the call praise the deal’s strategic fit and financial feasibility. They emphasize the importance of structuring the deal to ensure Beth and Ken’s production contributions are accounted for while leveraging recurring revenue streams. The annuity model receives unanimous approval for balancing seller satisfaction and buyer affordability.

Concluding the discussion, the deal is hailed as a “golden buzzer” opportunity. The combination of recurring revenue, low working capital needs, and growth potential makes it an attractive acquisition, especially with creative structuring options like annuities or SBA loans.

Full Transcript:

Alright. Let’s deals. Let me start off. I always read the disclaimer for the first deal.

It’s important if this is your deals. I think we got Zafrina, we’ve got, Renato, and we got Jordan up today. So those are the three deals. They usually all on the call.

I’m not sure about Jordan, but I know Zafrina and Renato are here. So, if your deal’s on the call, we’re not really providing advice to specific individuals working on specific acquisitions. You know, it’s a twenty minute discussion, twenty five minute discussion. And so the purpose of this call is to observe how experienced dealmakers look at new opportunities, the questions they form, and the strategies they might potentially pursue.

If we were going to develop a, you know, actionable acquisition plan, it would require a lot more in-depth information on the target companies and on the sellers too that we’re able to review on these calls. So a little bit of a disclaimer. Right? This isn’t formal advice, but a lot of the time, people get some really good ideas from the discussion.

So let’s put together the numbers here. We’ll stop one second on the simple model. In case anybody wants to grab a screen cap of that, I’ll make this a little bit bigger here on the notes. This is the free nest deal.

If you close one last quarter, maybe you should gonna close another one this quarter. I’ll go down here and take a look. Oh, no. I can make this a little bit bigger.

Let me get that out of the way so I can adjust the size of this because I know some people are on laptops and it is tough. So this is an accounting tax benefit administration and wealth management business. So there’s definitely a couple of interesting wrinkles.

Customer mix, a small business and individuals.

This business is located in the US, down in the southwest. It was founded in twenty ten, so twelve years old. They trade on a regional basis. The business has been sale for three months, so it hasn’t been listed for that long.

Ask price is three million. That’s kind of interesting. I’m gonna say a little bit more, in terms of how they came up with that three million. No property in this deal.

Now the ownership story is kind of the interesting part of this deal because it’s owned by two people. Beth is sixty three, Ken is forty nine. So a big kind of age divide there right away. Beth is a baby boomer, you know, the gas tank is pretty much empty.

She’s had a good run. She’s looking for a way out. Ken, he’s only forty nine, so he’s not necessarily in that position at all. Both of them own fifty percent of this business.

Now Beth is an accountant. She’s a CPA, so she handles the accounting and tax side of the business. Ken is a certified financial planner. He handles the benefits and the wealth management side of the business.

Like I said, Beth is burned out. She wants to exit the business. She wants to either retire or do something else, but, yeah, she’s just kind of sort of hit hit her limit. Put it that way.

Ken is fine with continuing the business after it is sold, so he has no problem sticking around. Now, Beth started the accounting side of this business, Ken bought the wealth management business, and then they merged the two of them together. And the motivation for the sale, Beth needs a change of scenery. A legacy is important to the sellers.

They have good long term clients who they are close to. They wanna see current service levels maintained. There are fifteen employees working in this business, not quite at full operating capacity, but close. Maybe room for, you know, five percent growth before you would need to add some resources.

Now the business is split pretty evenly because, you know, best taking care of accounting and tax, that’s forty plus fifteen, that’s fifty five. Ten is looking after wealth management and the benefit plan, that’s forty five. So it’s about a fifty five forty five split. About eighty five percent of the revenue is repeat or recurring revenue. There is a difference between that and we’ve talked about.

To my mind, repeat business are just customers buying more than once. Recurring revenue is really all part of the same contract that generates revenue year after year after year. And so, they didn’t distinguish between those, but I would assume most of it is repeat type business. But on the wealth management side, some of it would be recurring as well.

Now there is an opportunity to grow the wealth management business nationally, but the fastest growing part of the business is the accounting area. And here’s the big problem. Wealth management firms typically sell at a higher multiple than accounting firms. You know, the typical accounting firm, they typically sell by revenue anywhere from eighty percent of revenue up to maybe, you know, a hundred and twenty five percent of revenue somewhere in there.

Obviously, there are exceptions either end of the extreme. That’s sort of a typical multiple. Wealth management firms, I know Carl knows a lot of bottoms, so I’m really interested in hearing what he has to say about this. They do sell at a much higher multiple part of it because of that recurring revenue.

Now Beth wants most of the money upfront. I mean, so an SBA deal might be possible, but then we have to deal with Ken, who doesn’t necessarily wanna leave, and could stick around, but there’s SBA rules against that as an employee. We could look at a ten ninety nine contractor situation. Zafrina and I had a nine one one call about this week.

We were throwing around a bunch of ideas. One of the things I’m just gonna throw in here before I throw this over to Carl, you know, because Safranio was saying, you know, how do we how do we compensate Ken? Right? And this is a big problem when we have people, one staying in the in the business, one leaving.

Right? Because, you you know, the the person who is staying has to be the performance of the business up to this point in time. Plus, they have to be compensated for the growth of the business, you know, going forward. So my suggestion was, and this is just conceptually for anybody here who’s dealing with this, and when I the way I structure this when I’m working on deals where this scenario comes up and it does fairly frequently, is you kinda have to split Ken into two people.

You know, there’s seller Ken. Right? And seller Ken has to be treated exactly the same as seller Beth. Right?

So the compensation for ten has to be thought of as two different people. The seller ten gets treated the same way as seller Beth. But owner ten, going forward, gets treated exactly the same way as you do as an owner. Alright?

So ten has to be treated both the same. He’s supposed to compensate it for the business up until now and treated the same way as Beth, and he has to be, you know, part of the business going forward, and then he’s treated exactly the same as the other owners going forward. And when you do that, it’s a little easier to conceptualize the, the compensation. Now Beth wants most of the money upfront, like I said.

So we we talked about SBA. Google reviews are great. Five out of five on ten reviews. I got the sense that the MUD score on this is slightly above average, which means I have a feeling Beth wants to sell this business more than the average person wants to.

So Beth is feeling some, you know, some real motivation. I don’t think it’s kinda distressed or, you know, based in terms of some specific date where, you know, things have to change for Beth. But, yeah, she wants out. So I’d give give it a slightly above average MUD score.

And so as we can see, the SDE is pretty good in this business. There’s obviously the issue of how these people are currently compensated, whether it’s included, whether it isn’t. If you add back the owner’s salary, I’m assuming that’s for both of them. If, you you know, Ken should stay, then we have to make the make the adjustment, etcetera.

But I know, Carl, you know a ton ton about the wealth management space. Yeah. And so what do you think of this business, half accounting, half wealth management?

Yeah. So this is a really solid business for for sure.

Having an accountancy practice that leads into wealth management is actually a really solid strategy because obviously accountants, CPAs, they’re trusted by their clients so when they’re getting tax advice, etc, normally a CPA firm would send a client down the street to a wealth management firm and get a referral fee. Keeping it in house is really really good. In fact, I think if you own a CPA firm, acquiring a wealth management practice is is a phenomenal bolt on acquisition. So, I think with this business, the wealth management piece is not enough of the revenue mix to really quantify it kind of at that level. So the biggest problem with this deal though, it’s the only problem really, is it’s over valley. There’s no way that this business is worth three million dollars.

As we mentioned before, most businesses in the world value whether at a multiple of profit or multiple of SDE, but there are some industries where multiples of revenue are more common. CPA firms, law firms, architectural practices, any kind of high end, highly licensed professional services business tends to sell for a multiple of revenue, and this is what would happen. So, even if you, you know, if you look at a multiple of revenue, current revenue, you know, this business will be worth one point nine say.

If you take the SDE and you add back, say, a hundred thousand dollars for a GM to run the business for you, that averages out over the three years at about five hundred twenty five thousand. So three, three and a half multiple, which would be about right would get you to that one point nine million dollar level. So I think this business is worth, between one point six and one point nine, million.

There’s there’s a little bit of a shareholder loan, so maybe there’s a hundred thousand or a ninety three thousand dollar adjustment there, which you would, you know, you would take into account. You’d also, Zisfree, don’t wanna look at the unearned revenue as a current liability.

So that’s cash that they’ve received, I’m guessing, that they haven’t delivered the work for. So I may be trying to adjust for that as well.

Plenty of cash in this business, a little bit of a lack of working capital. We normally work on two months revenue, as working caps, so you’ve been probably looking at around three seventy or so working capital. But accounting firms tend to have a really strong cash conversion cycle, which is really, really good. And if you look at the accounts receivables, that tells the story.

So normally, a b to b business would be, running at around sixty days. So you’d be looking at AR, generally at around three hundred and fifty thousand dollars four hundred thousand dollars So they’re getting paid very, very quickly. And what you tend to find a lot now in CPA firms is they they they’ll tend to take a client, they’ll look at the scope of work required over the year. Let’s say, you know, five thousand dollars or whatever of work, it’s like them to get billed.

They’ll chunk it up into a monthly payment, so the customer is just paying monthly whether that work’s getting performed or not. That’s certainly what I do with my, accountants both in Australia, in England, and in the United States as well. They don’t send me a big invoice at the end of the year and then I pay it on thirty days or whatever. I pay kind of monthly.

So for that reason, a business like this won’t need a lot of working capital. So I’m not worried about that.

So the two issues there’s only two issues in this deal. Right? One is valuation. We’ll get to that in a minute.

The second is how much production do these guys do in the business. Right? So you got two partners in a professional services firm. You’ve got Beth and Ken.

I’d be interest the first question that I would ask is if you look at the one point eight million dollars worth of billing worth of revenue, how much of that revenue was personally delivered by those two partners. Right? Because that could be an issue. If if if Beth wants to come run and she’s billed half a million dollars of that revenue, then that’s a problem.

Because, if Beth leaves, those clients might say, well, okay. Now is the time. You know, we’ve got to look for another, another CPA firm. Yes.

There’ll be a handover. Yes. You get to meet all these people. Yes. It’s a continuity of trading.

Blah blah blah. But, there will be some, there will be some churn of that revenue. So you’ve gotta look look at things like that.

And so that’s Carl, one of the things that Franny was wondering about, I’d love to get your take on this, is how you deal with these fifty fifty type situations where one wants to leave, one wants to stay.

Yeah. I mean, the SBA is gonna be really hard to structure that, but both wants most of her money upfront.

Yeah. You’ve read my mind. So that that comes down to point two, which is the deal structure. So I think there’s three deal structures that could potentially work on this deal. I think the first thing, John, you alluded to it, it’d be an SBA seven a deal where Beth completely checks out and Ken stays on a ten ninety nine.

That’s technically only really allowed for one year, but I’ve seen lots of cases where that contract just gets rolled over, and, you know, the SBA just kind of looked the other way.

So that’s possibly a solution. That’s not what I would do, by the way. The second option, I think, potentially could be a fifty fifty deal where you buy Beth out, you partner with Ken, and then you’re buying fifty percent of the equity for say nine hundred thousand which could be, you’d probably need twenty percent down. So you’d need the same amount of equity to do that deal as you want to do the full seven a by the way.

You’d only need ten percent on the seven a loan which would be one hundred and eighty. You’d need twenty percent on a fifty fifty deal which would be one hundred and eighty. And then you could get a a matched cash flow lend which is done sda, and then they wouldn’t care who stays and who doesn’t. That could be an option.

But the problem with something like that is like why doesn’t Ken if Ken wants to stay, why isn’t he buying out there? Right? And I’ll tell you why. If you’re a partner in a business already and you wanna buy out your other partner, you can do it with the SBA on a seven a loan with zero equity cash in the deal.

You don’t need to put any equity into the deal if you’re already a partner. The SBA will take your existing shares as yours get in the game. So for Ken, for Ken to turn around and say, look, Let’s do a deal on a seven a loan. There’s no financial risk to me by doing it.

I can’t believe that’s not happened. So that then tells me, is he looking for cash out? Is he looking to exit the business and stay? Does he want some money?

Otherwise, I think he’d be buying the other side out. So that’s something to consider. But for me, I would do an an annuity deal on. So my two offers would either be the SBA or the fifty fifty is offer one, and my parallel offer at the same time would be, look, the this is worth three million dollars.

Firms like this are worth on average a 1x revenue.

We’ve been to the bank. You know, the SBA wouldn’t give this deal at three million. They just wouldn’t. They they tap out at two million on this deal in my opinion as would a normal cash flow lender. Any investor that you’d wanna get for the closing payment, whether it’s me or Kings of Deals or whether it’s any other angel investor or family office in the country. They’re not gonna pay more than two million dollars, on a pro rata basis.

So if if three million is the magic number for her, if it’s an ego number as I call it, could you not do a ten year annuity deal at three hundred thousand dollars a year?

So that’s where I’m at with valuation.

I’m more concerned about the production of those two people.

If they are massively part of the production, I think you’d need to make some adjustments and maybe have an earn out in place. Again, that would kind of kill an SBA seven a loan. I’m sure you’re gonna get really creative with warrants and all those different things. So I do like the deal. I think wealth management is definitely a bolt on or a way to scale that up, But I would be, I would be angling more to an annuity deal on them.

Okay. I don’t see as a free I thought you’re going to be, but that’s, that’s fine. Yeah.

Go get your Are you Hey there.

Everybody. I don’t see you on the list. Hey.

Happy Thanksgiving. Happy Thanksgiving.

Glad your ears are fair.

I didn’t didn’t see you on the list.

I usually go to the bottom for Zed, but, I guess you’re tucked away somewhere else. So, yeah, I’d love to get your take on Carl’s Amensa and any questions you might have.

Okay. Yes. Thank you, John. Happy Thanksgiving, everyone.

One of the reasons I like that deal is because of the wealth management and the benefit plan. I am a licensed investment adviser, but most of my wealth management plan financial planning, I had it outsourced. So that would help me bring those money those assets back in. Ninety eighty percent to ninety percent is actually monthly recurring. So all the things are recurring and then get paid at the beginning of the month. So they don’t have any AR. That’s why.

What I like one of the thing about that is, what I did what I I’ve been speaking with them, which has been very interesting. At the lot event in every I heard Cal said give two offers. So what I did was I give them two an offer with two. So I gave them one offer as, an annuity bill at two point six. So the way I put it is two five zero eight four two five point one zero. And then I gave them an other offer of an NPA deal with two one seven eight eight two nine point two eight with a thirty percent debt of finance.

So when I did that, the it was funny because the broker called me and said, I’m just curious. How did you get your numbers from? I’m not questioning it, but how did you get it? So I said we have a formula we used, and that’s what he tells us.

So that’s why. So I guess having the point, you know, whatever kinda threw him out. So, anyway, I spoke with them. And, strangely enough, the one of the owners that wanted the NDA deal is now looking to do an annuity as well.

So, hopefully, they come back with me with some answers. Because, one, she looking at she wanna close before the end of the year. Two, she looking at the tax liability if she does. And three, with the other seller wanting to stay in the business and if you would have them out.

So that, I kind of favorably not see. So I’m waiting for them.

Right. I love that. I love that. So, one other thing just to mention in this. Now now if you do this as a bolt on acquisition to to your existing company, right, the SBA would not make you put in the ten percent. Let me tell you why. The SBA has a, specific type of loan for existing business owners.

And if you’re doing what they call an expansion acquisition, right, they use your existing company as what they call other uses of cash. Right? I’ve never done this, but, a lot of my students in CEO have have done it. So when you put bolt ons with the SBA, you don’t need to put the ten percent in.

It’s an eighty excuse me. It’s an eighty twenty deal structure. So eighty percent SBA financing, twenty percent, seller note. So if you did have to go down the SBA route, bear that in mind.

And what you can do with SBA is, as I said, you can have this rolling ten ninety nine agreement with the with with the gentleman. You’re I’m not a lawyer. Your lawyer will tell you that’s not allowed, but it happens. Right?

I’ve seen it happen tons and tons of times, and I’ve done it myself in a in an SBA deal. And the guys in his third one year contract nobody knows any different, but I’m not a lawyer so I’m not you know trying to pretend I am. The other thing that you can do as well with an SBA deal is you can manufacture both an earn out and a retained piece of seller ownership. The earn out is in that one year ten ninety nine contract you can put a bonus structure in there, which will allow for a percentage of revenue or a percentage of STE above a certain level.

And then I don’t know if you remember the partnership and the equity training I did all back in July when I was in Florida, and I talked about something called a warrant.

So a warrant is like a it’s like a share option where it it’s it’s a piece of paper between you and the owner that if you sell the business in the future at a certain level, they can have a little piece of that ownership. And those documents don’t form part of the deal. It’s called the it’s called the deal bible. Those documents don’t form part of the deal bible that is all signed off by by the SBA.

So there’s a lot of kind of things you can do with SBA loans now where where, you know, you can get around all these things, but I definitely agree with you that I don’t know what to do, is the way to go on this.

We got new. So sorry.

And go ahead.

So the, yeah, Kyle. I I requested a thirty percent Stella.

I’m gonna get a hundred percent because of my business. I’ve already been preapproved AB. But because I wanted her to have done getting the United States thirty percent over ten years, just that she can have something to go with and have a guarantee for two million dollars revenue for the the next two years. So that’s how I can describe. That’s right. To ask question on production, they do have, manager. And according to the TPA, right now, about twenty percent of the clients she’s in directly, the others, being managed by the accounting and the tax manager.

Okay. I’d I would ask for a six month handover with her, and I’d make sure that all of her clients you are personally introduced to and those relationships are are transferred. That would be a requirement. I’d build that into the deal.

You know, I’m doing that at the moment on a deal, where the owner is very, very much the brand.

But I think if you do that and you can get an annuity deal away, this is a really, really good deal. It’s a great deal anyway.

It’s just if you can fix the production issue and you can get newest deal on this, this is a phenomenal acquisition for you. And I still think it works as a seven a loan, if you do it as a bolt because then you don’t need any capital. You can just do the deal. And like you said, you’ve already been approved.

So it’s phenomenal that the the power of deal making is thrown into a negotiation with different options. Right? And this two offer strategy that we’ve talked about a lot, if you, you know, you’ve got the you’ve got the funding lined up for both of those, you know, you’re in a phenomenal position, when it comes to negotiation. So, but, but you you’ve done deals before.

You’re a master at this now. I called you the queen of the annuity deal because you’ve done one before. You know how to do it. I remember when we talked about it, they said, we’ll never go for an annuity deal.

They did. Now you’re like, I’m going into every deal as an annuity deal. And that that confidence you have will breed into the deal and into the seller. So Hey.

The train master’s gotta jump in here. We’re almost forty five minutes into the call. We’ve been on one deal. We still have forty five minutes to do two more.

So It’s a great deal. But I know it’s fantastic. I had I had a great chat with Zafrina about it. I I I think this is in the bag.

I think she’s gonna own this company.

Hey. You know? It’s gone. Could we get could we get thirty seconds each from Dave Vario and Britney Farrell? Because they’re both CPA ninjas.

I would love to do that, but let’s keep it to thirty seconds so we got at least some runway for deals two and three. Let’s start with Britney. Love to hear.

I love this business. I would do it every day of the week directly.

You was. I thought you were.

I’m, like, salivating. I’m like, I need to bribe something. You’re like, cut me in on this. But no, especially with her wealth management.

She does the amazing plan. Not only is she a CPA, but she’s already got the credentials, with the wealth management. So she’s just gonna bring that level of comfort to the, to the buyers too to say, hey, look, we’re gonna be able to make sure that your clients have no loss of continuity here because I’ve got all these potentials and yeah, I love that she’s got the annuity deal. Just amazing.

Love it. Way to go Safrina.

Thanks, Thanks, Britney. Let’s hear from David Barrio.

Yeah. I agree. I think that’s, it’s a fantastic deal. I I would jump all over it, especially with the, the annuity deal.

It’s just it’s poised to, really add some growth. So a fantastic job. If if seriously, right, if if if you can do an annuity deal on this, this is a golden buzzer deal. This is a golden buzzer deal for an annuity, in my opinion.

So phenomenal.

I I know what I need on this call. I need bumper music. Anybody in the radio business? I need I need bumper music here.

No. We used to own a we used to own a radio business.

We could have a jingle tonight. I called Paul.

I called Paul up and ask ask him if he’s got some bumper music for me.

No. That’s a great deal, Suprina. Yeah.

Great job.

Absolutely. Thank you.

So, Joe, for all for all the newbies on the call, that’s what a stellar deal looks like.

That’s what an absolutely brilliant deal looks like. It’s in your way. The numbers check out, and, you know, just two little things to think about.