Speaker 1: How are firms actually valued? Obviously the client list is involved, but it’s hard to determine when we’re going to sell or potentially going to acquire, what are the different elements of value or valuation gets put into that, and how can firms start to wrap their head around the different levers that determine the value of their firm?

Speaker 2: Well that’s a great question and probably one of the most … the three most frequently asked questions that we get are, what’s the multiple, what’s the multiple, and what’s the multiple. First of all, let me just preface this by saying, an accounting firm is not valued like a traditional asset sale. It’s valued very, very differently. Too many people get focused on what is the valuation, what is the multiple. The multiple is the effect. What you’ve got to recognize at first is the cause. And there are a number of factors that influence how a firm is valued. First and foremost, how much cash is upfront? If any. If any cash is upfront. For instance, and what I mean by that … I’m operating a tax firm and I merge with a bigger firm in August, probably 90% of my collections will have been done by May. So that person may have to operate my firm at a loss until next tax season. So obviously that’s going to … if they give me some money upfront, that’s obviously going to affect the multiple.

Second is, the length of the payout period. You also have to figure in client retention. All these things are the cause and the end result will be the multiple. So as far as … you could also say, any kind of business, location, location, location. People say, “Well, what are multiples going for in New York versus Idaho?” And again, what I would say is, the larger the market your firm is in, say, in New York or Chicago or Los Angeles, the higher your multiple will probably be. If you’re the only firm 20 miles outside of Boise,

Idaho, you’re probably not going to see … one time you’re probably going to see about .6, .7 as far as multiple of gross revenues.
So there’s a lot of factors that go into a valuation. So instead of … Too many people get too fixated on the valuation, rather than exploring the underlying reasons of why they want to merge in the first place. And that’s a whole nother discussion.

Speaker 1: Yeah, and I want to dig in. There’s a point you made and I want to dig into it here in just a second. You mentioned location, retention, cash, the period, the timing of the sell. You have these .6, .7 multiples, 1-time-1-x. So what’s … just to get an idea of range and help us kind of understand and I think about this more. What’s been the lowest, more or less, and what’s been the highest, and then maybe we can dig into the characteristics that drove those multiples.

Speaker 2: Well, I was going to say the … 10 years ago, it probably wasn’t uncommon to get one-and-a-half, one-and-a-quarter. Was seldom seeing anything over 1.1 or 1.2, and those are in major markets like New York or Chicago. We’re dealing with some firms in some rural areas in Midwest, we’re seeing .5, .6. So, again, location is critical. Also, some other factors that go into it, maybe a firm with a specialty niche might command a higher multiple despite the location. We’re working with a smaller firm in the New England area at this moment, they have a very, very sophisticated IT department. They do a lot of penetration testing and things of that nature. So they are going to command a little higher multiple, than say, a firm that does type 1 tax and audit work. So that could also affect your multiple as well.

Speaker 1: And that multiple, just to be clear, is that on overall revenue or …

Speaker 2: Yeah. Gross revenue. Gross revenues, never on profit. So that’s what that number is predicated on, yes.

Speaker 1: How do you approach this topic of retaining your staff, and then I’m very curious of some tactical things that you’ve implemented, as a firm, to reinforce the retention of your team?

Speaker 2: Yeah, no. It is something we do spend and me in particular spend a ton of time thinking about and caring about. I think Joe said it best. You know, he and I in our cultures are very similar. It’s kind of neat to share with like-minded folks. We can always look toward Biblical principles, just look at it and say you know what, treating people how you want to be treated is incredibly important. A lot of times people will turn to comp, and say, “Well, comp is the issue.” Maslow, several decades ago, put together his hierarchy of needs. Once people’s base needs are met, it’s more than that.

We believe fundamentally in a couple of things. One is really caring about people. Not just caring about them. I could care a lot about, for example my assistant [Caitlyn 00:01:09]. I could care a lot about her, but if I don’t ever spend any time with her, how does she know? It’s not what I think in my head, and what I read about and study in theory; it’s actually more about what I do. There’s no better way … From a client’s point of view, if you want to grow clients, in your client relationships, you want your organization to grow; spending time with your clients is huge.

Then, most importantly from a cultural standpoint, spending time with our team on an individual basis, getting to know them better, what makes them tick; and everybody’s going to be a little bit different. What motivates [Chet 00:01:47] isn’t what’s going to motivate Caitlyn. The only way I know that is if I spend time with her one-on-one, and I listen. I ask good questions, I show that I care, I build that trusting relationship. Then once I do that, then I can figure out what drives her. What does she want to be in life?

The other core thing that we look at inside of our firm, as a foundational element, is ultimately we’re trying to help our clients, our community, and each other get from where we are to where we want to be. We think a lot about we’re at point A, and we’re heading towards point B; and we’re never going to get to point B, because it’s going to keep changing. The only way I know what someone really wants is to spend time with them, and ask, and then listen. Once we develop that relationship, they know that I truly care about them and their success in life more than I care about my own. They know that if there’s something I can do to help them, and they bring it up, I’m going to do everything I can to help them get to their path.

We spend a lot of time talking about that. We really … Once their base needs and [comps 00:02:53], and we treat everybody fair, and we … It’s funny here in [Jose 00:02:56] about competing with the rates in which we pay our people in the CPA world. It truly becomes more about that. You know, money only takes you so far. High quality work/life balance is really important, and it’s an issue for us; but I think most importantly is really taking the time, investing the time, and truly demonstrating that you care. I can’t emphasize that enough. It’s so, so important. From a leadership standpoint, I have to do that first. If I do that and I demonstrate it, then there’s a trickle down effect throughout our firm.

If I get really busy, I’m closed off, people don’t see me spending time and investing in our team; they’re going to struggle to do that throughout our whole firm. We don’t always like to look at it this way, but it truly is a function; us and how we behave and what we demonstrate to other people. From a leadership standpoint,culture,motivating folks, retaining talent; fundamentally we believe that it starts with spending time with them, and listening, and demonstrating that you care. Then when they say or they need help, or they’re struggling with something; do what you can to make it happen for them.

Speaker 1: Yeah.

Speaker 2: That’s just been a big part of our culture.

Speaker 1: Tim you mentioned it, so I want to give you the opportunity and then obviously Jodie can speak to this as well before we wrap up, was, Tim, you wanted to make a point on communication conflict accountability. I’ll just kind of … That’s such a big topic area. We get a lot of questions around that. Sometimes those three things I just mentioned are items people don’t really want to talk about even though they’re so important. Wherever you want to take that phrase, we can have as we have, as we have the last three or four minutes here we can jump into that and of course I want to gie you guys the opportunity to tell how people can connect with you after this panel.

Tim: Sure. I just wanted to come back to it because one of the things in our firm, what we use to try to just run the firm, we call them, “Operating Agreements.” It’s basically, you can say it’s a handbook, but it’s really more of a how we’re going to live with each other when we go through it. We’ve developed a Communication Agreement, a Conflict Resolution Agreement, a Decision Making Agreement, an Accountability Agreement, an Attendance Agreement, and they’re all just [inaudible 00:01:03]… It may sound like this is, “Oh my gosh. How voluminous.” It’s a three page document that basically is the infrastructure with how we live, work, and communicate with each other.

Our firm for example, we define conflict as a difference of opinion. We know that good things can’t happen without people communicating and we’ve got … There are times when disagreements may elevate to poor behavior but we have built into the system how we resolve those things.

What I have found, and one of the greatest things is that it eliminates gossip, it eliminates people creating their own teams, or tribes, or silos, whatever you want to call them. I’ll be happy when we do share our information. I can share a guidelines or a template that we use not only with our firm, but other clients just to help them get started with these discussions. In just in the last six, seven years in our firm that we’ve had this, it’s been wonderful. We don’t have a lot of gossip or b.s. going on.

Speaker 1: Just a quick tactical follow-up question and I’ll ask Tim first, and I am very curious for Jody’s response as well, which is what is your cadence for strategic planning. Is this twice a year, is it July, is it December, is it one day, is it three and a half weeks, what is the time that you set aside to make sure that you’re outlining these goals? We’ll go with Tim first, and then pass it over to Jody.

Tim: Sure, I want to go back and visit, if we have time, when we talked about before, how do we hold our people accountable, and communicating and talking about conflict, because I’d like to speak to that, but as it relates to the cadence in our firm what we do, and I used to think it was cheesy when people would go and oh, we’re gonna have a firm retreat. Well, it’s only cheesy if you don’t do anything. If you just go there [inaudible 00:00:56], and you don’t follow-up on it. We build our budget and we define success for a particular year, and we call it [inaudible 00:01:06], it’s a consulting thing that we offer our clients and addition to doing it to ourselves, so we define what want them to be here to look at and what are the three to five things that we need to focus on to be successful in that particular year. We check in again in June, and then we have partner meetings two times, they’re bi-weekly, and we have firm meetings once a month to keep everybody in the loop, because everybody that works in the firm participates in some [inaudible 00:01:35] focus that we have, and that allows everybody to keep it engaged in what we’re doing. If we meet all our objectives, then we, at the end of the year, in addition to bonuses, we take a big trip.

Speaker 1: Oh nice, nice, and Jody what’s your cadence for putting together the strategic meetings and how do you operate those, and what time of the year do you typically do those in? Jody: I would say every morning when I dump out all of my ideas on my partner’s desk and I say okay, what are we gonna attack, no, because I’m that entrepreneur who would do 25,000 different things if I could, and so what we do is we dump them all out, and then we just revisit them, I’ll say weekly, monthly, whatever, and we prioritize them. It’s really part of the everyday strategy with us. It’s just part of our culture, is that we’re changing and moving, and I don’t necessarily believe you can handle a five-year plan anymore because I think in my world, it’s just crazy how many opportunities come my way and we’re always facilitating through them, so I know where my end game is per se, but I have no idea what road I’m gonna take to get there, and so we just keep it all out there and aha and we just keep prioritizing and reorganizing.

Speaker 1: Yeah, and that’s aha.il, I think some people are asking about that.

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Interviewer: Do you guys do part-time hires? How do you kind of approach that topic area?

Chet: Yeah, we do. Some of our best team members are part-time. They work in our virtual office. We have some part-timers that maybe … because we’ve been really open-minded and flexible and because we’ve done that, we’ve been able to retain some high quality talent. So, let’s say, for example, we have a great team member, her name is Courtney, and she just had her third child. She works on a reduced schedule. Had we not been flexible, we wouldn’t have Courtney on our team. And Courtney is a key part of our firm. She is excellent. She’s great with clients. She’s just a really strong person. If we were rigid and didn’t allow that part-time flexibility, I don’t know she’s be on our team today. And so that’s kind of driving force for us. It is nice to have that part-time, flexible work environment.

Now, the struggles with that are – is how do you customize that to each person? That’s become one of our challenges – is that you want to be very fair and create the opportunities for a lot of people who want to go part-time. But is part-time 20 hours a week, 25, 32, 36? And how does that affect benefits? So, our struggle’s been – is how do we still allow that flexible work environment, the part-time opportunity, but how do we not have it be so custom and all over the page? It’s been kind of hard for us, from an HR standpoint, to stay fair and be consistent. So, that’s one of the things that we’re working through as a firm. But one of the best things I feel like we do is allowed for that part-time and flexible work environment. It’s been really good for our firm to do that.

Interviewer: Quick follow-up question on part-time because somebody mentioned that, while somebody’s part-time, they might not respond to the client requests as quickly as we want them to. So, I imagine in that part-time scenario, they might work Monday, Tuesday, client submits something Thursday, they don’t hear back till the following Monday. I’m assuming that’s the case. That might be a process question of then how you handle requests that come in. We talked with somebody yesterday about having that centralized inbox, requests@, or questions@, and that’s kind of shared resource or whatever it may be or … But, so when you hire part-time, do you look at the structure of X hours per day, or are these Monday and Wednesday and then what happens is somebody sends a request Thursday, and they don’t hear back till the following Monday?How do you kind of juggle that and then, again, I want Joe to jump in here in just a second.

Chet: Yeah. No, that’s always the challenge and people’s hesitancy to allow people to go part-time. We have kind of unwritten rule around here that every e-mail and phone call gets responded to within 24 hours. And so, over time, we’ve consistently delivered on that, not perfectly, but we’ve consistently delivered on that. And so our clients have developed a trust in that. And not always are they expecting immediate turnaround, except for payroll. Payroll’s the one department of our firm where there are areas … We have to make sure they’re backed up if they’re gone, someone’s covering for them. A lot of times, like in a Hiring and Managing CPA Part Timers.
Courtney for example, the clients that she works with, we have a lot of open communication with and so they kind of know her work the environment. If she’s going to be out for a period of day, she will check her e-mail intermittently. She’s a manager inside of our firm, so she has a higher work role. So, a lot of it becomes communication with the client and they know, but then consistently being able to deliver on, “Okay, if they need something, they know that I’ll respond to them within 24 hours.” And if there’s something where they can’t or they’re going to be out for a longer period of time, then they’ll check their e-mail intermittently or have someone else cover for them.

Interviewer: Yeah. And it also made me realize, I put one up earlier today, so if anybody tries to e-mail me, this is what you’ll see. Having an auto-responder for the days that you’re out. Obviously then there’s the reminder to put the auto-responder for the days you’re out, so you can say, “For something urgent, go to these resources, do this or that.” I also like the idea of just setting expectations of, “Okay, if you submit a request outside of this time zone, either send it straight to here or just know that I’m out every Thursday or whatever it may be.” So there’s a lot of context to that as well. Joe, how does it work at Two Roads? Do you hire part-time people or is it always full-time? Have you hired part-time in the past, had any issues with that? What’s been your take on kind of the part-time management world?

Joe: Yeah, yeah. Chet, it kind of sounds like we’re cut from the same cloth in many ways. We should have a chat after this. Yeah, we’re the same way. We hire part-time. We have our own Courtney’s in-house. I’d say we’re looking for people who can work 30 to 40 hours. We’ve just found there’s this immense talent pool of typically stay-at-home moms who might have been in the CPA world and they don’t want that lifestyle for their growing families. And so we’ve been able to create this kind of stay-at-home work environment. Again, results-only work environment is huge because we only manage the product that they’re producing.
But one way we’ve kind of gotten around the part-time is when we’re hiring, we only hire people who are cultural fits, that really believe in what we’re trying to do. And one of those ways is we just ask every team member to be responsive a lot like Chet’s firm. From 9 to 5, we want you responsive. Now, that could be taking the kids to school in the morning. Or that could be picking them up at three o’clock. Just have your phone on you, be available for phone calls. If you see a fiery e-mail, just shoot back quick e-mail on your phone that says, “Hey, I see it, I hear ya, I’m going to get to this.” And a lot of its expectations.

Our clients know who we are. They know who we hire. They know we care about them. We’ve got one employee that’s just amazing. In the interview process, she said, “I have one stipulation. And it’s why I’ve turned down some other jobs.” She said, “Thursdays is the day with my mom. I want to go bowling. I want to be in the bowling league with my mom. I won’t be responsive basically until two on Thursdays, if that’s okay.” I’m like, “Absolutely. Of course. Just make sure your clients know.” And it’s kind of fun thing that her client load knows, “Man, Donna’s unavailable because she’s bowling with her mom. How cool is that?” But I know she’s going to send me that e-mail at two that says, “I’m done bowling. I’m back to work.” I think it comes down to culture and the expectations.