Summary 

Michael Ly reveals how he built Reconciled from the ground up and then acquired 3 more accounting firms. Discover his secrets to scaling with outsourced accounting, cold email outreach, and using tech to streamline the workload. He uncovers the biggest challenges in the accounting industry today—AI, fewer grads, and more. Michael shares insights on finding capital partners, integrating firms, keeping clients and staff happy, and how to grow even bigger by adding services and moving upstream.

Takeaways Here are the bullet points for your YouTube descriptions:
- The accounting industry is facing challenges from macro forces, including a decline in accounting graduates and the rise of AI applications.
- Reconciled specializes in outsourced accounting and online bookkeeping for lifestyle small businesses.
- Cold email outreach has proven to be an effective client acquisition strategy.
- Technology is essential in managing workloads and improving productivity within the accounting industry.
- Finding the right capital partner is key when acquiring accounting firms.
- Retaining employees and clients during transitions can be challenging; a longer transition period helps with retention.
- Despite advances, the accounting market remains heavily reliant on local services, with AI tools primarily benefiting solopreneurs and smaller businesses.
- Expanding services to include CFO advisory and tax planning increases the value and margins of accounting firms.
- Accounting firms are attractive for financing due to their predictability and stability.
- The ongoing need for local accounting services and the complexity of the tax code ensure continued demand for accounting professionals.

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Transcript:

Kajabi Course Video DRG (00:01.2)
Welcome to Top &A Entrepreneurs. Today my guest is Michael Lee from Reconciled. Michael has purchased three accounting firms and we're going to talk about how that process went, what it looked like, how he acquired them. But we're also going to talk about the industry because I used to work into it, sold a Quick Quick as Enterprise Solutions package. They control about 80, 85 % of the market. But the industry is getting squeezed by some macro forces. One is

You know, the accounting firms, they're not graduating as many accountants today. There's a drop, four to 6 % drop. Accountants are growing older and they're retiring because of the workload, work -life experience. But also you're seeing forces from AI. There's at least five applications out there that I know of. They're starting to nibble on Intuit, QuickBooks, Little Market Share. So welcome to the show, Michael.

How are ya?

Michael Ly (01:00.509)
Good, good, nice to meet you.

Kajabi Course Video DRG (01:02.448)
Yeah, so first of all, we're both in Arizona, which is very cool, and it's gonna be over 100 degrees today for anybody those in 50 degrees in New York or somewhere. So let's talk about your acquisitions first and where you were before and then why you decided to buy an accounting firm and then how that process went.

Michael Ly (01:23.337)
Yeah, so I started Reconciled back in 2016 and I started it from a little town called Burlington, Vermont. I actually split time between Vermont and Arizona quite a bit. So I started, started back in 2016 in Burlington, Vermont and grew the business organically from 2016 till 2020. So the first five years of the business,

Kajabi Course Video DRG (01:34.564)
Yeah, yeah.

Michael Ly (01:46.857)
There wasn't even a thought about acquisition really. didn't really cross my mind. I I dabbled a little bit on conversations with firm owners, but didn't really take it seriously until 2020. Grew organically. Once we're really on a path to get past a couple million in revenue, I began putting a playbook together and a thesis around accounting from roll -up. And there were a few people talking about that, but not a lot. It wasn't like common in the industry. And it wasn't common for firm owners to be

to go out with a plan of trying to acquire multiple firms, let alone their first one. So I began doing that. And of course, what happened in 2020, the pandemic hit and I began realizing, okay, this might be a right opportunity time for something like Reconciled to bring the capabilities we had built as a modern firm, but go and find more traditional firm to acquire and convert them into our modern tech stack and our modern business practice.

So I began working on that in 2020.

Kajabi Course Video DRG (02:48.208)
Let me stop you real quick and just ask you about what are your firm specializes in? Because there's bookkeeping, there's CPA work, there's EA, IRS work, there's payroll, there's all kinds of things an accountant can do. What is your firm focus on?

Michael Ly (03:06.121)
Yeah. So my background has always been inside private companies. I'd never went into public accounting. So I started out as a bookkeeper in high school and then climbed my way up to the CFO role in my, in my twenties. So that's really been the focus of Reconciled. We started out at what traditionally is called CAS, but I refer to it as, you know, outsourced accounting or online bookkeeping. And that's probably 70 % of our revenue source is, is that core basic function of outsourced online bookkeeping and accounting.

And then we do some advisory work, which would be controller and CFO level work. That's probably about 20 % of our revenue. And then the remaining amount is tax preparation and a little bit of HR services. So we really are a traditional firm, Cast Shop, client accounting services shop as a whole company, providing that for hundreds of small businesses across the country.

Kajabi Course Video DRG (03:58.352)
Yeah. And your bookkeeping is that, tell me a little bit about your ideal customer avatar. What the size of, you know, the industry, et cetera.

Michael Ly (04:08.105)
Yeah, most of our customers and our ICP is really focused on lifestyle small businesses. They're growing generally at the cost of living rate. A greater than 5 % or even 10 % year would be extraordinary for a lifestyle small business. Generally started by one or a couple, a married couple, and they've probably been in business at least five years or more. And so they're gonna be an established business already.

They've likely done the accounting or bookkeeping on their own in -house, or maybe they have a front office receptionist or one of the spouses is doing it. Now they want to upgrade their game. Maybe they're going go off there for their first SBA loan or their first acquisition. They're going to stop funding the business on just credit cards and their retirement. And they're now going to work with their bank. And so they need actual formal financials. So oftentimes they've never outsourced. They've never really worked outside of just a tax accountant. They never really worked with an outsourced provider.

We're often the first outsource provider to ever reach out to them and they're not shopping. You know, most of the clients we have, they're not shopping for a solution. They're more like, I'm kind of annoyed that I spend the weekends doing this on my own or I'd like to get more out of my front office receptionist. She really can't, she's not trained. Let's consider a solution like Reconciled. So we're often the first and only solution they're talking to. And it's all about our sales process and earning their trust in the beginning.

So that's really our ICP is lifestyle small businesses. We do have some larger nonprofits as well. Most Main Street businesses like restaurants, retail stores, they can't afford our service. They're more used to like $15, $20 an hour, Sally or Bob coming to their store once a week, grabbing their receipts and then going back home. That's not our ICP at all. And then fast growing startups are also not our ICP. We do have some of those as well, but

Kajabi Course Video DRG (05:49.594)
Yeah, yeah.

Michael Ly (05:56.787)
There are other providers that specialize in focus on startups that are raising money. And we have some of those, but that's not really RICP either.

Kajabi Course Video DRG (06:04.048)
Yeah. So how do you, this is two part kind of two part question. How do you find these clients? Cause I could create this avatar of a husband and wife team. She's not an accountant. She's not a bookkeeper. They create their own chart of accounts. The books aren't balanced and there's really the integrity of the books is questionable. you accept that when you get those. So how do you attract these clients? I mean, do you do a lot of PPC? Do you a lot of, you know, social media? What do you do?

Michael Ly (06:34.217)
So historically, really up until today, we've been primarily focused on cold email outreach. So we actually use a cold email outreach system that lets us find CEOs, presidents, CEOs, founders of small businesses within a certain size and in certain geographic areas of the country. We actually target what I call B -class states and cities and C -class state and cities.

So we're not targeting like Boston, Silicon Valley, New York city. We're really targeting towns in Texas, towns in Arizona, towns in Vermont, New Hampshire, you New England, Florida, where the makeup of the economy is almost all small business. And we're able to target industries as well. And so we really highly target and focus and do cold email outreach. And you'd be surprised how many people respond to cold email outreach. And when I started doing it, I didn't think it would work.

Kajabi Course Video DRG (07:08.655)
Yeah, yeah.

Michael Ly (07:31.165)
because I get cold email all the time and I never respond. But oftentimes it's because it's targeting me for things that I don't need, right? I don't need Viagra. I don't need a software developer in India. I don't need a cold caller in Philippines, right? But with bookkeeping and accounting services, everyone needs it. It's a small business owner. It's a matter of when they need it and if you're catching them at the right time.

And because there's up to 30 million plus small businesses in the U S and they're, you know, and, and, and a million and a half that are starting every year, it's been a record number since the pandemic, a million and a half new businesses starting every year. You have more news, new small businesses starting every year that all, you know, a batch of them or a lot, most of them need bookkeeping services. So we happen to just catch those low hanging fruit in the cold email process.

Kajabi Course Video DRG (08:02.448)
30 million. Yeah.

Kajabi Course Video DRG (08:24.538)
Yeah. I have to comment about this because I deployed a dealer origination team to find me companies for acquisition, for e -commerce, and it didn't work because we learned, know, like the quick lesson was, is they don't want to get found. They're not even registered on ICANN. They're not on Yelp. They're not anywhere else, but offline businesses, they want to get found. They want to get found on Google Maps.

Yelp, everywhere else. So getting their information, getting their email with all the technology out there is a lot easier than it was for e -commerce, offline businesses. Yeah.

Michael Ly (09:01.235)
Correct. Yeah. Offline business, they're trying to market themselves, right? You're exactly right. They want customers to come to them. So their contact information is publicly available everywhere. And then if not that, you think about how many chamber websites are publicly listing every member of their chamber. And those are generally local businesses that are trying to build a community based customer base. So you can scrape those. And there are services out there that have scraped all of that publicly available information.

Kajabi Course Video DRG (09:05.156)
Yeah.

Kajabi Course Video DRG (09:29.839)
Yeah, that's you can do a hunter IO. There's about 10 of those out there. Yeah.

Michael Ly (09:31.497)
Yeah, exactly. Exactly. Yeah. And it's just a matter of sequencing it, right? Making sure the messaging is right and hitting people at the right time and the right need. And so my best guess is at any given moment and any given day or week, a hundred thousand small businesses have some kind of need or transition in their accounting needs, right? And because there's so many businesses, even if it's 10 ,000.

have those. So it's a matter of hitting them at the right time and being top of mind when their need comes up.

Kajabi Course Video DRG (10:01.988)
Yeah. Got it. I got a question for you. So you get these new clients and you know, it's, it's not, adding new clients is not like, software where a hundred, you know, customers costs the same thing as a thousand customers doing it. You know, it's just, it's a linear model. What you bring somebody on and do you hire somebody locally or do you outsource it to Philippines or India, you know, where everybody does gap counting anyway? Yeah.

Michael Ly (10:12.486)
Right.

Michael Ly (10:28.425)
Yeah, so thankfully, because of technology, because of the technology we've implemented and the business model we've implemented, we've hired accounting professionals from all over the US. So we have accounting professionals and thinking about a dozen states that work from home. And then about two and a half years ago, as a hedge against the labor problems that were happening in the US, you mentioned the accountants retiring. Well, during the pandemic, 300 ,000 accountants left the industry.

So that from top to bottom, that CPAs, bookkeepers, CFOs, they left the industry and not just from retirement, but also just from being sick of the industry or wanting a career change or lifestyle change or, you know, unfortunately COVID deaths as well. Right. So CPAs left the industry, accounts left the industry. That's a huge percentage. So we started hedging and started looking for vendor partners in bilingual countries, south of us, Spanish speaking countries.

Kajabi Course Video DRG (10:54.896)
Yikes.

Michael Ly (11:23.217)
Mexico, Central America, South America. And we landed on Argentina as our top choice and where the talent pool was highly educated, very bilingual, almost same time zone, just only an hour ahead of East Coast time. So asking them to work West Coast time or East Coast time was very easy to do. And finding the talent pool there was very easy because the unemployment rate in a lot of these Spanish -speaking countries is high. And remote work is high, being above

Kajabi Course Video DRG (11:48.4)
Well, what's high? What is high? Well, when we say high, you know, here is 6%, there could be 30%, right?

Michael Ly (11:52.201)
Yeah, above 6%. Yeah. Yeah, anything above 6 % is going to be considered high compared to the US, right? So, you know, we've had historically low unemployment for a long time, and accounting and finance has been the lowest of all the industries historically for the past 20 years. So even normal companies, there's just a regular small business can't find an accountant, let alone an accounting firm. So we started hedging, finding accounting and bookkeeping professionals in Argentina. Now we got 10 professionals down there through, through.

two different vendor partners. So it's been great for us to be able to do that and offer remote work even in other countries. And what's great in it's like a central South America, it's still not common. Remote work's not common. So to get that and to work for a US company is a really big prestigious thing, which is awesome. Yeah.

Kajabi Course Video DRG (12:38.0)
Yeah. So it's just math from there, right? You get a client on, it's a thousand dollars a month, just as an example. And then they have to clean up the chart of accounts, get the books balanced, et cetera. you have outsourced that to Argentina, which is $120. So I'm just making math. So you just keep going up and then using technology to manage all that.

Michael Ly (12:46.483)
Yeah.

Michael Ly (12:58.631)
Yeah, you just keep going up, you know. Yeah, there's a ratio of client or revenue management to Bookkeeper and we have that internally tracked. And then we use tools like Carbon to track our workflow and to measure productivity. And we use tools like Combine .ly, which is a new AI tool that measures communication with customers and how fast our teams are responding. And the QuickBooks Online account and platform that allows us to assign work.

at a signed client access. So we've definitely leveraged technology internally to do all that. And, it is, it is still labor intensive and technology has continued to get better and better, but there's still a human component very much in the accounting space. So right now I don't know of a single firm. and I know a lot of them that are growing and are big like me or bigger, and they're still using humans and there's only so much technology still can do even the ones that supposedly say AI.

That that still can do because of the way accounting is done here because we still have a check writing system in the US You know a billion check. Yeah garbage and garbage out exactly and so Until the banking system the IRS system the check system gets updated We're still gonna need human beings validating confirming a lot of a lot of items

Kajabi Course Video DRG (14:03.842)
That's garbage in, garbage out, right? Yeah.

Kajabi Course Video DRG (14:14.5)
Yeah. What's the big headache with that? Do you have to double check somebody's work with somebody else or what?

Michael Ly (14:22.963)
No, that's not the issue. The issue is that the banking system is monopolized. The banking, know, the thousands of banks in the U S are monopolized by a handful of bank core operating systems like Jack Henry, Pfizer, et cetera. And those systems only feed a certain amount of data to accounting systems. So, you know, the innovation QuickBooks did and other account systems did was when they started connecting. Yeah. The credit card. Well, that data coming in is very limited.

Kajabi Course Video DRG (14:46.71)
Connecting with Bank of America, Wells Fargo, etc.

Michael Ly (14:52.187)
And so even though the data is there, it might read Starbucks, but then other vendors might not read anything. It might just say PayPal. Well, PayPal for what? Right. Or it might be a manual check. It says check five one six two. Yeah. So what does it mean? Right. So you still need something to validate and AI is not powerful enough yet to go and just read those manual checks. It's not, it's just not there. Or to know, what was this PayPal entry for?

Kajabi Course Video DRG (15:01.986)
Yeah.

It says miscellaneous.

Michael Ly (15:19.473)
So because we have thousands and thousands of banks and credit cards, credit unions still and credit card companies, and we still have systems that don't connect through these bank fees. They're small credit unions. You cannot get it downloaded in QuickBooks Online. So that's the reality of the US business. And until we centralize like the UK, Australia, Canada has where they've got five or six banks only and they've got one monopolized software system that does everything. Yeah.

Kajabi Course Video DRG (15:34.628)
Yeah.

Kajabi Course Video DRG (15:46.394)
You know, I have to point something out. my kids football team, we went up to South Mountain and I went to go get a hot dog and drink and they only took two types of payment. A pay app or cash. Yeah. They didn't take a credit card or anything like a debit card or anything like that. It was a pay app or credit. So you're in a situation where you can't download that chart of accounts in your QuickBooks. Yeah.

Michael Ly (16:01.789)
Yep. Exactly. Yeah, exactly.

Michael Ly (16:09.258)
Exactly.

Michael Ly (16:14.469)
No, you can't. Yeah. And a lot of the pay ops aren't actually, aren't playing, aren't having done well in connecting with these systems yet. Right. So, you know, how do you really do it? You know, for example, if you have an app on the Apple store, try to get that data. It is, it is challenging. Right. So some of these people don't realize the back ends of these systems, even though they've been out for a while, still don't play with each other. Well, they still have metalware that.

Kajabi Course Video DRG (16:22.479)
Yeah.

Kajabi Course Video DRG (16:31.822)
Yeah.

Kajabi Course Video DRG (16:38.362)
Well, there's FTC requirements as far as the coding and the security around that that just most people can't meet. Yeah. Yeah.

Michael Ly (16:44.492)
Right. Exactly. So that's the reality. And so the US, with how large of a market, mean, we're 300, 400 million people, 30 million businesses. Our business number is larger than the size of Canada as a population and three times the size of Australia. So we're such a huge market. Automating this away is going to take a long time. And for a while,

Kajabi Course Video DRG (17:00.4)
Yeah.

Michael Ly (17:09.479)
The AI that was coming out was my joke is it was really Asian intelligence. It was a room full of Asian people entering data in the Philippines or India. That's the joke I had. So now it's hard to convince accountants that the real AI coming out is actually real because there's really few players that are actually applying generative AI to real applications right now.

Kajabi Course Video DRG (17:28.88)
Yeah, and this is all with new applications. We'll talk about this a little bit. I don't want to go into mergers, but when Intuit or QuickBooks has an 85 % market share, it's usually people that are not leaving QuickBooks and they're unsatisfied with it because the transaction costs are too high. It's usually brand new apps for new startups that just you gain shareholder that way and then you build on top of that. Yeah.

Michael Ly (17:53.033)
Correct. Correct. Exactly. Yeah.

Kajabi Course Video DRG (17:56.912)
So let's talk about your, your acquisitions and when that started. mean, when did that thought come to your head and go, you know what? can probably grow twice as fast with a startup or I'm buying a company. Yeah.

Michael Ly (18:06.697)
Yeah, yeah. early, yeah, early 2020, I began doing that. And I was visiting my family. I was still living in Vermont, mainly visiting my family here in Arizona.

Kajabi Course Video DRG (18:15.94)
By the way, I used to live in upstate New York, Plattsburgh. So I was in Vermont all the time. Yeah. Yeah.

Michael Ly (18:18.927)
there you go. Yeah. Yeah. So, you know, Burlington and and so I, I spent time thinking through this acquisition strategy, putting together a playbook. And then it was a matter of, you know, fighting capital and capital partner debt or finding the firm to buy. I had to kind of work on both. And then I partnered with a buy side broker who had represented another firm in doing a lot of their acquisitions.

And he, found out he was leaving that. And so I partnered with him and he began doing the outreach work with me. And so we began reaching out to firms to see, see who was available for sale. And he actually brought the first deal to me. was a small firm in Tallahassee, Florida. And I was looking at firms that were fairly traditional, but had majority bookkeeping minority tax services. I was okay if it was the minority percentage of it, no compliance, no audit or test services.

and nothing that required a CPA. So as long as it was bookkeeping and tax preparation, it was fine. So we found that firm, got to know him, off -market deal. Off -market deal wasn't public, right? And that's what the advantage of having a buy -side corp -deb team or buy -side broker is, is you can find privately listed deals, proprietary deals. And he had talked to this individual when he was previously representing the other firm.

Kajabi Course Video DRG (19:22.02)
Was that on market deal or an off market deal? It was an off market deal. Yeah.

Michael Ly (19:42.505)
followed up to see if he was for sale this time and said it was. So we started getting to know each other and we closed by November 2020 of that year. So it was fairly quick from starting with the buy side broker around June, July, and then closing November 1st, 2020. There are a variety of reasons, but most owners and for him especially, it was a matter of I'm wanting to do something else. I'm wanting to go into, know, semi retirement. And what you find with most sellers is

Kajabi Course Video DRG (19:48.986)
Yeah.

Kajabi Course Video DRG (19:55.032)
And why was he motivated to sell?

Michael Ly (20:10.747)
If they're in their late 50s, early 60s, they want to semi -retire, but they still want to kind of do some tax work on the side, maybe some CFO work on the side. And almost every seller that I've bought from has been at that case. They've been close to retirement, but they know they're going to be bored if they just stop work altogether during retirement. So they're going to do some friends tax, friends and family tax returns. They're going to do CFO work, help some business owners in their community. But from running a firm, having staff, having the big operation they've had.

of about, you know, usually around a million dollars a year is what I was looking at at the time. And all three firms were that, were that time. Top line. Yeah. Million top line. Yeah. So all three firms I bought were around that, you know, give or take a few a hundred thousand around that size had staff had a local office and almost every seller to own the office they were in. So they had been in business long enough to buy the office they were in and rent it out to their, to their firm.

Kajabi Course Video DRG (20:44.256)
A million in net income or a million on top line?

Michael Ly (21:08.297)
So that was the kind of common theme that I found and continue to find when I look at firms to buy is there's this kind of place around a million, a million and a half where firm owners stop, they kind of grow to that size after 15, 20 years. They get comfortable with their EBITDA being around 30, 40 % of the year.

Kajabi Course Video DRG (21:26.672)
Well, let me interrupt on this one because this is, if you're first time watching this show and you're looking to buy a CPA firm, you should go to the five accounting firm brokerages and get a SIM like PO accounting and you will see, you know, a million dollars revenue and common to see 50 % net income. It's a very, very profitable industry. But the weird thing about it is, is that the sell for one

Michael Ly (21:39.624)
Yeah.

Kajabi Course Video DRG (21:53.488)
to 1 .2 kind of multiples of sales. That's where they're stuck at. I don't know why nobody's been able to answer that for me. So yeah.

Michael Ly (21:55.453)
Yes. Yes.

Michael Ly (22:01.865)
Well, I think think I think a big answer to that is if you look at the reason why the SDE is that big is the owner still doing a lot of billable work. Right. They're inside. They're they're not just working in on the business. They're in the business. They're doing a lot of it. So you ultimately, you know, for me, I actually was looking for a lower SDE. I was comfortable with the lower SDE of 25 to 35 percent because that told me, OK, the owner has transitioned out of doing a lot of the work.

Kajabi Course Video DRG (22:11.278)
Yeah, they're inside. They're inside the business.

Michael Ly (22:30.447)
and they're doing sales or maybe they're just signing returns and that's it. It was important for me that the owner themselves didn't have a lot of billable work themselves. That was really important because it was because then otherwise it's like well I have to figure out who to replace them with right and that's that's not easy to do especially if the owner has a lot of relationships.

Kajabi Course Video DRG (22:47.728)
It's like, hey, how do you, on Chicago Bullets, how do you replace Michael Jordan? Well, we could do it. We'll rebuild in the first next two years. No problem. Yeah.

Michael Ly (22:51.977)
Yeah, exactly. Yeah, It's very, very hard. especially for a non -CPA, non -EA, how do you come in and replace a CPA's relationship and work? Very, very difficult. yeah, they have high. Yeah, exactly. Yeah, so it's high SDE, yes, but a lot of it is if you take the owner out of it, if you extract it, there really is SDE of like 25, 35%, right? So that's what you got to think about.

Kajabi Course Video DRG (23:04.976)
Yeah. And usually it's like 10, 20 years of relationships.

Michael Ly (23:21.397)
It's how to find the right firm. So I was looking for firms where the owner really is doing sales and the owner's doing some customer service triage and recruiting, but they've gotten themselves out of a lot of the billable work. That was a really big deal for me.

Kajabi Course Video DRG (23:33.796)
Yeah. And how did you buy that? Did you just go through the SBA process or did you go, hey, I'll buy out a net profits kind of a seller financing?

Michael Ly (23:42.313)
Yeah, so all three deals I did SBA or non -SBA commercial debt. So I was able to go and raise that. found lenders that were willing to work with me. The first deal was non -SBA. The second deal was SBA. And then the third deal was non -SBA. And so that was super helpful. And obviously, from 2020 to 2022, that's the time period I closed all three firms. It was actually easy to borrow money because

Kajabi Course Video DRG (23:48.172)
-huh.

Kajabi Course Video DRG (24:14.448)
6%. Yeah, 5%. Actually, I just saw something from Heather Anderson. She got two loans for SBA 7A, but with real estate at 5 .5. Yeah.

Michael Ly (24:26.256)
Right, right, right. If you do it with real estate, it's actually even better. Because you can go in the 504, SPA 504 plan. So it's really great.

Kajabi Course Video DRG (24:30.117)
Yeah.

Kajabi Course Video DRG (24:37.38)
Yeah. So are you full? You have enough on your plate or what does that look like? You digested three firms in a period of, you know, two years. And what did that look like? I mean, because a lot of people don't talk about the integration and what happens afterwards. Was it too much, too little to what, what was it?

Michael Ly (24:56.649)
Yeah, well, if you can imagine, it's a lot of work, right? And so at some point you have to like pause and go, OK, let's focus on integration. The second thing that happened is interest rates within a 12 month time span more than doubled. Right. So we went from on the seven eight program, we went from five and a quarter percent to over 11 percent on the seven eight program. So that was undoable. And then I because I had borrowed the amount I've done on the three firms.

You can only reach a max borrowing capacity of five million. Right. And so at some point it's like, okay, I have to stop borrowing and figure out what I want to do next. I also, we also reach a size where we want to start looking at bigger firms to buy now because we had bought three firms at a million and we had, you know, so half our revenue is basically made up of those firms and half our revenue is made up of the organic growth that we've done. So at some point it's like, okay, we want to look up up market.

Kajabi Course Video DRG (25:27.354)
Yeah, five million.

Michael Ly (25:53.875)
Well, now we need to find a capital partner. we've been in since since since integrating the last firm, we've been talking to potential capital partners, integrating those firms into our own practice, trying to consolidate our operations and then evaluating bigger firms to buy. that's better. Yeah, exactly. Well, yeah, so you really add to eventually to start to sell to a strategic buyer or private equity. That would be the goal. Yeah, correct.

Kajabi Course Video DRG (26:09.252)
because your goal is to what? To grow this to a multiples expansion and sell it to private equity or a larger company?

Kajabi Course Video DRG (26:23.246)
And you're going to do this for how long? You're a young guy. Yeah.

Michael Ly (26:26.077)
Yeah, I'm a young guy, I never imagined, I've had the business for eight and half years. I never imagined owning it forever. So I can imagine over the next few years, seeing a transaction happen in the next few years and then helping the new owner, new buyer grow it until I'm ready to be done.

Kajabi Course Video DRG (26:45.37)
Yeah. And outsourcing all that new work. mean, what were the hiccups there to kind of the landmines you didn't see and, you know, digesting that it was the bones were too big.

Michael Ly (26:55.539)
Yeah.

Michael Ly (26:59.785)
Yeah, think the two things that surprised me the most was one is the employees of the firms are buying. Because I got the client list and I hired all the employees. It is completely unpredictable how they're going to react. And most employees at firms that have grown very slow over 10, 15, 20 years, most of them hate change. That's why they've been at these firms, these slower growing firms.

they hate change. So with the first firm, we try to aggressively do the transition over 90 day period, we try to

Kajabi Course Video DRG (27:36.656)
Did the owner tell them after the sale or prep them a little bit before the sale?

Michael Ly (27:41.605)
Almost in almost every case, you're never going to, you're never going to have the employees know that a sales occurring until, until the day of close, the week of close. Okay. Because there's a big risk for the seller to tell their employees that they're selling the firm. And then the deal doesn't close. Right. That's a huge risk. Now they've tipped their hat off to their employees and potentially could lose some of them who don't want to work for a new owner. So in almost every instance.

Two out of the three I never met or talked to or we never notified the selling employees. That was not part of the deal. And on the third deal, I did get to meet the employees beforehand because the owner wanted that to happen. But that's rare. That's very, very rare and almost never happens. So the surprising thing was employees don't want to move as fast as you think they want to because they've got to still continue to do their accounting work. But now they've got to learn your systems.

and get onto your payroll and to your benefits and learn your culture and change. It's hard. It's hard, especially in accounting and for accountants. It's just part of the nature of a lot of people who go into accounting is they don't like change. They don't want change to happen. so that was a big surprise. The second one was the sellers think they know their employees even after all the years of them working with them. They don't. Probably 50 % of the things I was told about the selling employees was completely wrong.

Kajabi Course Video DRG (28:40.752)
Change, change is hard, yeah.

Kajabi Course Video DRG (29:07.888)
What do you mean? Can you give me an example?

Michael Ly (29:07.961)
and completely involved. example would be, yeah, they're going to love the new opportunity. And then you find out like they never wanted to work for anybody else but the seller.

Kajabi Course Video DRG (29:21.296)
I'm not gonna, I'm not gonna go work for Arizona Sun Devil. You can't really, I'm not like they said pack 12 or pack 20, whatever it is. Yeah.

Michael Ly (29:24.105)
Exactly. Yeah. Or or I've had sellers, I've had sellers, employees say, I'm upset that the owner didn't get my permission to sell the firm. And it's like, you don't own any of the firm. don't even you're not even an owner. You know, or I've known this. I've known the owner for 20 years. We say next to each other at church for a long time. Why wouldn't he tell me, you know, so just the shock and the upset being upset.

Kajabi Course Video DRG (29:50.67)
Yeah.

Michael Ly (29:52.669)
And you go, this is a really, really weird thing. So, and then the seller saying like, yeah, they're going to love the change. They're going to love it. Right. Or the seller saying they don't want to work from home. They always want to stay at an office. And you realize they've never been offered to work from home. And so you offer and they go, that's actually great. I want to work from home. Right. So the selling, the selling owners, accounting firm owners, they often actually don't know anything. They don't know their employees that well, even if the employees have.

Kajabi Course Video DRG (30:21.114)
So you just don't make any decision based upon what the seller says. You just kind of leave it like, hey, let's, we're prepared to call an audible on this, whatever it looks like. Yeah. Yeah.

Michael Ly (30:25.553)
Let's take a great assault. Yeah, you have to. have to. You take a great assault and you go, OK, it's a case by case basis. And you've got to just play it by ear and realize, whatever they say, it's just like going on a date. Of course, they're going to tell you what you want to hear. They're going to make their firm sound amazing. But you've got to be ready for chaos. You've got to be ready for anything to happen. And then the clients, the same thing with the clients is, yeah.

Kajabi Course Video DRG (30:51.664)
Yeah, let me ask you about the clients. And I just want to set this up because I had a buddy that's wrote a book about buying accounting firms and we looked at an accounting firm, I think it was in Blight, California. The guy was 80 years old doing it. And we asked him, what we wanted to find out was how he got his customers. So he'd go around the town and do the rotary and the Kiwanis club. then we goes, okay, we have to, what if he leaves? Like he got all these clients because of a relationship.

Michael Ly (31:18.547)
Yeah. Right.

Kajabi Course Video DRG (31:20.912)
What happens if he leaves? We put a risk factor of almost losing 50 % of the clients. What's your experience? You bought three accounting firms. What happened?

Michael Ly (31:27.515)
Yeah, yeah, yeah. Yeah. So in a situation like that, the highest risk factor is the proportion of staff you lose is proportional to the clients are going to lose. Because if you well, we bought remember we bought firms that where the owner was not was no longer doing a lot of the billable work, but the staff are. So I mean, the staff holds the relationships. Okay.

Kajabi Course Video DRG (31:43.846)
really?

Michael Ly (31:56.497)
And for the clients, as long as their experience with their staff, with their assigned bookkeeper staff member doesn't change, they honestly don't know who owns, they don't know or care who owns the firm because the owner's not doing the one holding the relationship. So for us, it was a matter of we need to keep and retain the employees. So with the first firm, you know, we, we didn't, we didn't do a great job retaining the employees because we, we transitioned, we tried to transition so fast, right? We just didn't know. But the second and third firms,

Kajabi Course Video DRG (32:21.296)
Cause you didn't know.

Michael Ly (32:25.129)
We actually did a good job of actually increasing revenue over that first 12 to 24 months.

Kajabi Course Video DRG (32:29.776)
Did you, what did you do to keep those employees, which is directly connected to the.

Michael Ly (32:33.556)
We took a much longer transition period time, much, much longer. So that was super, super helpful for us.

Kajabi Course Video DRG (32:40.154)
Did you sign them to contracts or something or agreements? Did you sign a, get them to sign agreements or contracts to stay longer or what? The employees. Yeah.

Michael Ly (32:42.791)
Say that again.

Michael Ly (32:49.225)
The employees? No, no, no, no. We just took the transition period longer, right? So transitioning them longer. So instead of trying to say, hey, it's going to be a 90 day transition period, it was more like a nine month transition period, right? And that allowed them to learn our system slower, not pressure them to get on our different systems as fast as we wanted to. Now, was it annoying for us? Yes. Was it, do we have to have a lot of patients? Yes. But it retained more revenue.

Kajabi Course Video DRG (32:54.158)
okay.

Kajabi Course Video DRG (33:01.836)
Okay, okay, great.

Kajabi Course Video DRG (33:16.304)
cost a lot more to get new customers.

Michael Ly (33:18.065)
Right, right. It retained the employees that increased revenue and increased the customer retention. And that's really, really a focus. So you want to work with the firm and the firm employees that you're buying to go what's going to be comfortable. Because ultimately, them churning is proportion related to customers churning. That's what's really important.

Kajabi Course Video DRG (33:36.56)
Yeah. Yeah. So do you have any plans for 2023, 2024 growth through acquisition?

Michael Ly (33:42.185)
Well, 23 is gone, done. So 24, 24 and 25, yes, we do. And we're working on a couple right now. And so yeah, we're focused on that. Obviously, you know, anytime you work on deals, they can go, they can go any direction. So, you know, we're hoping knock on wood for a couple more deals to happen this year and early next year. But we'll, we'll, we'll announce those when those get done.

Kajabi Course Video DRG (34:04.528)
So what does the magic number look like if you move up the PE pyramid on the multiple? So usually it's a 1 .1 to 1 .2 of anything like a million dollars sales. What revenue in EBITDA do you need to be at for you to get a bump in multiple before you sell? Because that's the goal, right? That's why you're going bigger.

Michael Ly (34:26.505)
Yeah, so really the the only the minimum number to really be in P's purview is you want to be at 2 million EBITDA and above. Right. So just to even like start the conversation with the large majority of PE groups and strategic buyers, you want to be at 2 million above an EBITDA and you want it to be a healthy 2 million that that that that is stable. Yeah.

Kajabi Course Video DRG (34:51.472)
that they can run their own because usually it's just an office of two people, right? Yeah.

Michael Ly (34:54.985)
Right, right, right, exactly. So 2 million EBITDA is really important. And right now, if you look at what PE is paying for and buyers are paying for in the market, at 2 million EBITDA, you could start at five to six times EBITDA multiple for the sale. And you might even go up to seven to eight times on the sale. So it's really that 2 million EBITDA number you want to hit before you go out there and start marketing.

Kajabi Course Video DRG (35:15.482)
Mm

Kajabi Course Video DRG (35:22.308)
Yeah, you get on the radar with that. I suspect it might be a little bit larger though for Titar looking at the bigger PE firms. they're going to get a fit.

Michael Ly (35:31.465)
If you're looking at really, really big PE firms, I mean, you're seeing deals in the public 100 accounting firms, right? Right, right, right. So the reality is most of the market is smaller accounting firms. And so you have quite a number of PE firms still trying to find their first platform, but they still have a mandate of staying above two million in EBITDA.

Kajabi Course Video DRG (35:36.176)
There's only $3 ,000 billion, so yeah, it's less.

Kajabi Course Video DRG (35:54.032)
Yeah. So let's go on to the state of the market. I used to work for Intuit and they control 85 at one point. I think it was 93 % of the market until FreshBooks and a bunch of other things come in. But there's some forces from all sides. they're not graduating as many accountants, a 4 % 6 % drop. More accountants are leaving because they're getting older. They're not being replaced. And you have at least

five AI applications kind of nibbling on Intuit's market share. Where is this going? it, you know, I always thought that Google pay per click, Google AdWords was lose market share. It hasn't, right? They have a dominant position and Intuit's been able to do a pretty good job of keeping that position for going on 20 years now. Yeah. Where's this going? Yeah.

Michael Ly (36:48.649)
Yeah. Yeah. I mean, their, their, their, their innovation to QuickBooks online was huge and they still have a large market, a lot of market share to capture a lot of businesses that capture on that product and on that platform, both us and globally. So there's a huge opportunity for them. So I think I'm not worried about the AI applications right now for the next five to 10 years. I think they will compete at the bottom end of the market, meaning there there's still a large amount of solopreneurs.

Uber drivers, consultants, marketing specialists, you know, those sole entrepreneurs that aren't using accounting software. There's a large part of that market that the AI tools will serve and they have such small amount of transactions where an AI tool is good enough. Right. But I still think the large part of the market that QuickBooks online can serve and QuickBooks and Intuit can serve is still going to be entrenched by QuickBooks.

And it's going to be service providers like us who are going to innovate and innovate. And the labor arbitrage really is outsourcing. I think that's a big part of it is finding labor globally that you can leverage with the U .S. market. So even though 300 ,000 accountants left during the pandemic and not enough accounts are graduating, there are are markets across the world, graduating accounting professionals. Argentina is graduating them all the time. There's other South American countries graduating all the time.

The Philippines is growing and growing and growing with bookkeeping and accounting professionals and outsourcing centers. So is India. So the reality is you can find that labor in other places. And as long as there are younger firm owners starting firms like me, like at my age, starting more and more and more, we're going to be able to do labor arbitrage. And we're going to be more comfortable with that. And there's easier and better options to do that every single day coming out.

I think AI becomes real and a real threat to us and firms like us in the next five, 10 years maybe. But I think it's a way to see. And I've seen a lot of these tools that you're talking about. I've actually personally invested in a couple of tools as well that actually help firms like us displace the manual bookkeeping work we're doing, automate that, and allow our team members to go up market with services. And I still think there's a

Michael Ly (39:07.629)
huge opportunity on going up market to the controller and CFO level, which still hasn't been replaced by AI. So personal firm owner to firm advisor to client advising still has a huge opportunity and business owners still want that.

Kajabi Course Video DRG (39:23.204)
Yeah. So, so you mentioned this earlier. First of all, it has to do with garbage in garbage out, getting the data. Cause it doesn't matter how AI does. They can tell you the wrong advice, the direction. You know, I happen to know, I used to refer to it Intuit's down here. They, they are adding more and more AI to QuickBooks. They know it, they see it. But if the books aren't balanced, if there's no integrity, those the AI can't

Michael Ly (39:45.053)
Yes.

Kajabi Course Video DRG (39:52.442)
can only help, it'll actually make the problem worse if you don't have balanced books, if you don't have good clean books.

Michael Ly (39:59.657)
Yeah, confirmation is still needs to be there still needs to be moving, confirming items and then for the client, know, accounting still has fit into the realm. I call it the local services you buy still locally, even though you could do a lot of stuff virtually, right? So most of us, we still want to see a doctor in person, even though 95 % of what you do at a doctor. Yeah, and you can do that virtually. You can literally get on a virtual call, they prescribe cold medicine. You're good.

Kajabi Course Video DRG (40:20.688)
Fissures and succession, yeah, yeah.

Michael Ly (40:27.913)
But what do we do? We still go to a doctor in person to get prescribed medicine. Your financial advisor, most of us still have a financial advisor locally. Your counselor, you can go to BetterHelp or other tools, but we still want to see a counselor in person. Accounting is one of those still those things where most of us, our initial accountant or the accountant we want to work with is local. And then after you see them and meet them, you go, okay, that's great. And I think it's this psychological behavior that's still embedded in the American public that until that,

behavior changes, we still want that local. So that's why accounting providers and accounting professionals, unless you literally can't find a local provider and you have to go out of market, a lot of us are still going to shop for that. So that I think mixed with the fact that AI tools still aren't there yet is going to keep accountants employed. And then on the other side, from a tax perspective, tax services

Because the IRS code continues to get added to, gets more complex until that's simplified, which it probably never will be likely ever.

Kajabi Course Video DRG (41:32.698)
Well, TurboTax is AI right now. It's pretty amazing. Yeah.

Michael Ly (41:36.369)
Yeah, from a tax preparation standpoint at the basic level. But if you want tax planning, you're sophisticated business. You go to tax advisor. And that's just the reality of who you go to.

Kajabi Course Video DRG (41:47.344)
Yeah. Let me, let me set up another question here. I have a friend that just sold her accounting firm to a private equity guy who's doing a roll up. He looked at over 502 firms and the reason he picked hers was she had great systems in place, a really high margin, 75 % net income because she moved upstream to add services like asset management and some advising. Is that, is that what they're talking about upstream?

that you need to be adding to these because of the pressures on the market.

Michael Ly (42:20.179)
Well, there's definitely a part of the market that's financial planning, wealth advising, know, asset management to there. That's a whole different market. That's a whole different service stream. And there are firms doing that. That's not the majority of firms, right? Upmarket, when they talk about it, they talk about actual CFO level advice, tax planning advice, tax strategy advice, R &D tax credit advice, right? All the tax credits. That's upmarket. And those are way higher margin services and higher value for a lot of clients.

Kajabi Course Video DRG (42:29.253)
Yeah.

Michael Ly (42:49.629)
Right. And so that that those are things that a lot of firms are doing right now. Most firms, most CPAs are glorified tax preparers. They're just preparing returns. And you're right. And most firms aren't even charging TurboTax prices, which is sad to see. And so when TurboTax is has figured out the model and frankly, they produce a good product. I've used them personally for tax preparation for my own returns personally. It's a good product. It's very convenient. And yeah.

Kajabi Course Video DRG (42:50.212)
Yeah.

Michael Ly (43:18.665)
Are they gonna miss five, 10 % of things? Well, so are most tax preparers, right? So the reality is, that is like, real human being is perfect.

Kajabi Course Video DRG (43:25.466)
Yeah, and so that five percent is made up in your donations to Goodwill.

Michael Ly (43:29.961)
Right, right, right. Exactly. Yeah. So the reality is like most CPA firms and most taxpaying firms aren't producing a good convenient product like TurboTax. They have a good product and it meets the majority, I'd say at least of the 1040 services out there. And they just started into the business services. Yeah, exactly. most of the firms, most business owners out there still want to work with a firm and they still want to get advice. They still want strategy. They still want to know where should I park money?

Kajabi Course Video DRG (43:40.186)
Mm

Kajabi Course Video DRG (43:46.468)
Lacer, something like that. Yeah.

Michael Ly (43:59.369)
How do I take advantage of the highest tax deductions? How do I combine the business and personal? So that is a reality.

Kajabi Course Video DRG (44:05.872)
So you're the advice, there's two things I'm looking for. So, or trying to understand. If you move upstream and you add services like business consulting where, hey, here's how to create a more effective outturning assets in the cashflow, effective, efficiency, et cetera. And then there's the advice that you can add on, which is like, well, you did a great job of building your company. This is what you do with the cash.

Michael Ly (44:24.627)
Right.

Kajabi Course Video DRG (44:34.786)
or this is how you hide the cash or pay less taxes. Yeah.

Michael Ly (44:37.703)
or a variety of areas there, Invest account, whatever, there's a variety of areas there and different firms go different directions with that, correct.

Kajabi Course Video DRG (44:44.668)
Are you going that direction? Which way are you going on this one? Are you just buying more accounting firms? Yeah.

Michael Ly (44:48.061)
Yeah, we've been buying more accounting firms. We're continuing to grow in our bookkeeping services. That's our core business. And again, businesses still need bookkeeping services. And there's still so many businesses that need it. So we continue to grow in that as well. But we're also adding CFO. We also have continued to grow in our CFO advisory service. so those are our biggest growth areas.

Kajabi Course Video DRG (45:11.514)
Yeah. You know, it's funny that you're in this accounting industry, but most businesses that are bought and sold today are, you manufacturing or service -based and their books are just ugly. They're never clean, anything, but you go look and try to go buy an accounting firm, million dollar accounting firm. Their books are beautiful. They're always balanced. Right. There's an accountant running, right? So you have all this.

Michael Ly (45:31.495)
Right. Yeah. Well, it's an accountant running it, right? So they're going to do the book, right?

Kajabi Course Video DRG (45:38.404)
figuring out to do and a risk to take, you assign some kind of risk level to it. This one you go, yeah, I know exactly what you're making. I know what you're, you know, like, yeah.

Michael Ly (45:45.085)
Right. Right. Exactly. Yeah. You're in, I'm in the business and then I'm buying a business that I'm in. Right. So it's very comfortable with it. Right. You're right. When you're looking at non -accounting businesses, who's doing the books? Are the books right? Are they accurate? Yeah. And the quality of earnings is only going to go so far in validating that stuff. that, you know, outside of a full, full on gut audit, you're only going to get some level of certainty. So you have to assign risk and protect your downside and the deal. Yeah.

Kajabi Course Video DRG (45:56.258)
It's the husband and wife or something. It's just some bookkeeper. That's not, yeah.

Kajabi Course Video DRG (46:13.914)
Yeah. And then you put that risk into the asset purchase agreement, some kind of, yeah, that's cool. Yeah.

Michael Ly (46:18.153)
Correct. Correct. Yeah. Yeah. Yeah. So for us, even on an SBA deal, you could protect your downside risk by holding back some of the purchase and doling that out, even if it's through SBA, doing that 12 months later and tying it to revenue. Right? So you can protect your downside there. You can do a seller's note. You can do an earn out. There's a variety of ways. can do a subordinated seller's note to the SBA loan. So there's a variety of ways to do it, even with the accounting firms. And accounting firms,

If you own a firm, there are banks and financiers willing to do 100 % financing. If you're in the business already, you won't buy it. Yeah. Exactly. Exactly. So they figured out the predictability of accounting firms, the stability of accounting firms and accounting firms to buy is there. So the banks have figured out how to finance.

Kajabi Course Video DRG (46:53.68)
Yeah, the first three NIC codes, if you're the same thing, they'll do 100%. Yeah.

Kajabi Course Video DRG (47:09.232)
Yeah. So let me go back to your buy box. You found out that if you go look at a million dollar one at a top line, you will look for a lower net income number margin because if the individual has started to work himself out of the business versus a 50%, which is looks fantastic, but that's a telltale sign that they're still in the business and yeah.

Michael Ly (47:26.12)
Correct, right.

Michael Ly (47:32.777)
Correct. Yeah. I mean, it's rare to find an owner that's been around 20 years and they're outsourcing everything to India and the Philippines. And that's why they have 50 percent, 75 percent S .D .E. It's almost always, yeah, I'm billing a million of, I'm billing almost all the million or I'm billing half of this. it's like, well, OK, if you stop, there's a problem. So I would rather speak to a firm owner that has 25 percent, 30 percent S .D .E. and they're just doing sales. And that's a great sign of.

Kajabi Course Video DRG (47:51.833)
Yeah.

Kajabi Course Video DRG (47:59.086)
Yeah. Do you get a better valuation on that?

Michael Ly (48:03.209)
Well, sometimes you can get a valuation of, again, 0 .8 times revenue to 1 times revenues, generally, the range that I've been able to pay for the firm's rent.

Kajabi Course Video DRG (48:10.198)
Yeah. Cool. Well, Michael, thank you so much for the time. I appreciate it. You cleared some things up for me.

Michael Ly (48:16.445)
Yeah, definitely. awesome. Yeah. Thanks for having me on. Appreciate it.