The Wize Way

Episode 164: Should You Sell to Private Equity? What Firm Owners Must Know

• Wize Mentoring for Accountants and Bookkeepers • Season 2 • Episode 162

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In this episode of The Wize Way Podcast for Accountants and Bookkeepers, Brenton Ward and Jamie Johns unpack the rising trend of private equity firms targeting accounting practices. 

Discover the five key factors every firm owner should consider before selling. Also, explore the mindset shifts required to lead through growth and why the ability to pause before reacting is a game-changer. 

So, if you're thinking about selling or want to know what makes your firm attractive to buyers, this one’s essential listening.

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PS: Whenever you’re ready… here are the fastest 4 ways we can help you fix and grow your accounting firm:

1. Take the Wize Accountants Scale Scorecard – Find out your potential to scale and the next steps you should follow – Start Your Scorecard

2. Download our famous Wize Freedom Strategy Map for FREE - Find out the 96 projects every firm owner must implement to build a $5M+ firm that can run without them - Download here

2. Need to Hire right now? Book a 1:1 FREE discovery call with our WizeTalent hiring coaches to help find your next team member the Wize Way – Click Here

4. Book a 1:1 Wize Discovery Session – Spend 30mins with our Wize CEO, Jamie Johns, a $7M firm owner who is ready to give you his entire business plan to build a firm that can run without you – Find out more here

Brenton Ward:

Welcome to The Wize Way Podcast, the show for accounting and bookkeeping firm owners who want more time, profit, and freedom, and a business that can run without them. I'm Bren Ward, your host, and each week, we deep dive into the real stories, proven strategies, and battle-tested tools from successful firm owners. Just like you, our Wize Mentors want to share their journey of how they've scaled and systemized their way to freedom. So you can, too. If you're stuck in the grind or you're ready to scale smarter, this is your blueprint. Let's get into the episode.

Brenton Ward:

Jamie. Welcome back to the show. How are you?

Jamie Johns:

Yeah, I'm good, Brent. How are you today? How are you? Yeah, I'm good, brent. How are you today?

Brenton Ward:

Doing great, thank you. The sun is shining through my window in Dublin, so that means it's going to be a good day. What's been the highlight of your week?

Jamie Johns:

Oh, mate, where do I start? You know, trying to grow an accounting firm. And mentoring always keeps you on your toes and recruiting and retention, and yeah, there's so much happening in the industry.

Brenton Ward:

You've created an image in my head with a comment you made this week. So I just see you all in cricket pads with a cricket bat, and you said every day you're just getting the ball bowled at you, and you just bat the next one away, bat the next one.

Jamie Johns:

That's a good one. Yeah, like problem there, solve this, you solve that there, you know. So, wouldn't have it any other way. I wouldn't have it anyway; that's the way it is. Yeah, like and, you can either sort of have a whinge about the problems or you can actually come up with solutions.

Brenton Ward:

I've got a specific uh topic of discussion we'll talk to you today on. But just to touch on that a little bit, when you're at the sort of level of growth that you guys are at with sky now more people, more clients, more problems, more challenges it comes back to that point that we harp on is the the internal victory, the private victory piece, and how important that is. Like you're in a game, like if you were who you were 10 years ago, trying to face the challenges you're facing now and hadn't worked on that. In a game piece. Like what? What are your reflections on that? I don't know if there's any specific lessons or things to be taught, but I just want to just want to touch on that for a second uh, well, yeah, look, I think.

Jamie Johns:

I think the experiences that you have and the hardships and difficulties are the things that ultimately shape you. So, in a certain way, you want to sort of welcome, you want to welcome the difficulties.

Jamie Johns:

I know that sounds a bit, you know, crazy to say, but I think you know experience is what you get when you don't get what you want, like experience. And you know, you sort of have to learn to fail fast. Elon Musk is a pretty controversial figure, of course, uh, but look how many times the guy fails, look how many rockets have exploded.

Brenton Ward:

Yeah, you know, being totally okay with it because he knows it's part of the process, or they've been scored in one piece that's right, yeah, so how would I cope 10 years ago?

Jamie Johns:

Well, hopefully, 10 years ago, you know, I wouldn't have some of the bigger problems. But to you tend to, and particularly when you're going, you know, when you're going for bigger goals too. You know, you've always got to talk about some of your problems in the context of what you're trying to achieve yeah so you know, if you're quite happy with where you're at and you haven't got any problems and you're just cruising along, then you know, don't?

Jamie Johns:

You don't tend to have too much stress, but we all know, Brenton, that it's outside your, you know that circle of comfort zone. It's outside that comfort zone where you do the growth, you know. And outside that circle of comfort, is it uncomfortable? Too right. It is true right, it can be uncomfortable. It's where you don't want to be.

Brenton Ward:

You know prolonged, you know prolonged stress, prolonged stress that goes on for weeks and months, yeah, let's face it, that'll kill you yeah, and and not to say, with what I'm about to say, that you were guilty of this, but, I I noticed this in you when you make decisions, when you have a challenge thrown at you, your ability to put a pause or put space between the stimulus and the response, the challenge and the reaction to the challenge. Has that been learned, or where has the importance of that for you come from?

Jamie Johns:

Yeah, definitely been learned. I have to say learned, yeah, like myself 10 years ago, 20 years ago, you know, almost have an immediate sort of reaction between the stimulus, the problem and then sort of the response um, but I think maybe it's coming with mature age uh, I'm not sure, but it also comes with learning as well, and it's really important to do, to do take a pause 100%. It's hard to, though, isn't it like?

Jamie Johns:

Because I think you know, because of our emotions, absolutely it's hard because of our emotions, and I think the other. The other thing is, too, it's really easy to judge. You know, there's a lot of great leadership is about the ability to look at facts and about the ability to look at other people's opinions and other people's perspectives. And I think I was like pretty guilty of that in the old days. These days, I tend to sort of question everything first. You know, you know what the facts are, what's the perspective of this, know what's the perspective of this person and what's the perspective of that person, and maybe a third person, and then it's just so easy to judge. And the reason it's easy to judge is that it doesn't take any work. Yeah, let's face it, it doesn't take any work or time to judge. It doesn't take any work or time to judge.

Jamie Johns:

And you can tend to sort of really, you can tend to really isolate your thinking, and isolate people when you just think everything's black and white, you know. And one of the areas, and this is, for example, like one of the things we do at Wize Mentoring, is we encourage firm owners, and even in my own firm is to do an exit interview. Yeah, and so one of the things I commonly see in exit interview is like the employee trying to express an opinion, their perspective, as honestly as they can, and then when that feedback, you know, in the exit interview, goes back to the owner of the business, they, you know, sometimes you can see they, you know, disagree with everything and like it's like no, none of that's my fault. So whenever I see like none of that's my fault, like you know, my little red flag goes up. So that stimulus between you know, because we all probably think we're the best boss in the world. I think the ego tells us that but when you sort of see that type of response that no, none of that's right what that person said, then it's sort of time, I think, to get a second opinion, have a sounding board, because often we're so close to these type of problems in our business, and exit Interview is just one of them, because there's always a different perspective.

Jamie Johns:

There's always, I find, as a leader and as an individual, there's always a time to be vulnerable and there's always a time to improve, even if it's just 1%. You know, and you know small things are little things, and the small things add up. So you know, as you know, Brenton, the book 7 Habits of Highly Effective People, habit 1 is being proactive, and Dr Stephen Covey actually talks in Habit 1 extensively about the stimulus and then the response, and that there's a space in between. And that's a habit to learn. You know, that's a habit to learn to stop and say, well, hey, let's get the other person's opinion, let's do, you know, let's seek some facts, let's get some results, let's do some research. What really happens here? So I think that's good. Leadership is to take things slow, and the bigger the decision, the more you want to sleep on it too.

Brenton Ward:

And just a quick one, we found that firm owners who have a documented, clear, written business plan grow 60% faster than those who don't. We've just launched WizeGPS. Wize GPS gives you that plan. In just eight weeks, with expert guidance and zero fluff, you walk away with a proven, results-driven growth plan for your firm. It's how hundreds of Wize firms have broken through and scaled to build a business that runs without them. If you'd like to see how that plan could be applied to your firm and what those eight weeks look like in a little bit more detail, head over to the show notes and click on the links to find out more. All right, let's get back into the episode.

Jamie Johns:

You know, like another example, Brenton is, recently I've had a few two or three firm owners asking me about whether they should sell out to private equity. You know, and that's very typical, pretty much in Australia, like you know, should I sell my firm out to private equity? What are the pros? What are the cons? You know that type of decision talk about stimulus to response, you know, definitely get a couple of opinions.

Brenton Ward:

You know, don't rush that decision, so let's dive into that a little bit because it is becoming more common. Let's dive into that a little bit, because it is becoming more of a common conversation in the industry at the moment. In your experience over the last since starting Sky Accountants, you know, 20 plus years, have PE firms had the appetite that you're currently seeing to invest in public practice accounting firms? Or where is this trend coming from, do you think? Where should we start this conversation?

Jamie Johns:

Oh well, you know you could probably use Warren Buffett as an example. I'm pretty sure anyone listening to this can do their own research. But I'm pretty sure Warren Buffett, you know, being one of the richest people in the world investors owns H and R Block. So you know, Warren Buffett will look for a good return on investment. He'll look for stability, business as a stability. He'll look for recurring, often a sort of type of annuity income, and you know, h&r block or tax returns is a classic one of that.

Jamie Johns:

And as the years pass on, you know private equity firms have probably been attracted to the account and industry, probably because of a number of reasons. In my research, one is because the you know, the normal accountant is really part of the great wealth transfer. So if anyone's listening is not aware of what the great wealth transfer is, you need to check that out, because there's been no greater time in history that more wealth will be passed from one generation to the next in the next 10 years. So rolled up into that is obviously accounting firms. And the fact is, if you run an accounting firm, well, you know, you can make a 25% bidder. That's a pretty good return.

Jamie Johns:

Healthy return compared to other industries, mate. And you know, like it's illegal not to do your tax return. It's illegal not to do your BAS. So you know, an accounting firm or bookkeeping firm is almost recession-proof. So, where is everyone going to invest their money? You know, in these geopolitical ups and downs, tariff-on, tariff-off. You know, Donald Trump, times you want to put your money somewhere?

Brenton Ward:

The tariff switch under the Donald Trump era. You want to put your money somewhere? The tariff switch on the wall?

Jamie Johns:

Yeah, you want to put money where it's stable.

Brenton Ward:

Yeah, so talk to us about that from a firm owner's perspective. You get approached by a PE firm, a private equity firm, and they show some interest in your firm. What are some of the things you'd be thinking about? What are some of the questions you think firm owners should be starting to ask as to whether they should entertain it or not.

Jamie Johns:

Look, there's probably about you know three of three to five sort of core factors, and one is your lifestyle. So you know, number one would be, you know question, how old you are in your career or business journey. And you know, do you? And what I mean by lifestyle, Brenton, is if you sell out the private equity, then often there'll be an earn- out. Often there's an earn- out, for sure, and that might be five days a week. And if they want you to stay on longer often they can they will often ask you to stay on longer.

Jamie Johns:

You've then got to sort of consider the long-term implications of you know, well, could I go to four days a week? Could I go three days a week, or does that mean I have to be five days a week? So just remember, you're moving. You're really in a lot of cases, you're really moving from that situation where you're the boss and, while you might have a lot of pressure on you, you still have a degree of autonomy and flexibility that you can mingle with. You know your personal and professional life, so it wouldn't be definitely lifestyle and also, you know, mixed into that would be sort of where you are in your career. So you know, are you 60 and really looking to take stock and slow down and live your life more freely, particularly if money is not an issue?

Jamie Johns:

You've got to remember, with these private equity offers, they're often, you know, 1.5. I've seen a lot of like and they're very attractive offers. They can often be, you know, 1.5, you know, potentially two times dollar for dollar, so they can be very attractive. So you know, so you've got to consider, is it the money that you need? You ?

Brenton Ward:

know, do you need the money.

Jamie Johns:

Yeah that's really know, the money? The first one's lifestyle, you know. The third one You too, is you, as a majority owner or partner, sell out to private equity, how does that affect the ability of the remaining equity holders to That Um, you know, is it the price? Is it the private equity's goal to to grow it? But do they have the skills to grow it? You know, are you expected to grow it? So the third thing is how does it affect your business partners?

Jamie Johns:

yeah, you know and and and um, so they're, they're the work, of main big picture rocks around. Um, you know, uh, whether you walk, accept private run, equity or not, and you've got to remember if you sell it to private equity, whether it's 50 or more. Uh, that the fourth factor I would say is really, uh, control. question, So they might say, you've got control, but don't you know, be critical, you know, and, and probably the the fifth factor is you, you definitely want some type of get out clause, because if you're selling out to someone you don't know or you've never worked with, and let's just say that it doesn't work out the first six months or 12 months, like what's the exit strategy?

Jamie Johns:

Okay, that's really important because you know, it may not work and you know it's the old saying that you should sort of crawl, walk and run or you should date, you know decision- before you get married. And if is, sell know, to private equity, just with the owners that I've spoken to, like you've got to ask the question how well do I really know these people? And don't forget, private equity is often focused on dollars. It's a numbers game. It's a numbers game. They're probably very successful, very focused on the numbers, and how will that affect the firm's culture?

Brenton Ward:

Yeah, yeah, and that's the point I wanted to touch on with you is how much weight around the potential to affect good, firm's culture, the firm's people, that comes into your sort of decision making process for that, because it is you know it would be. Even though may say maintain what you're doing, keep your culture, there has to be an impact on it, so factoring that into the equation.

Jamie Johns:

You and it seems to be all rosy when the figures are good. No one seems to complain when the figures are good but how does the private equity leadership manage you and manage the key leaders in your firm when the abita starts going south, for example, because, um you know, someone's decided to resign?

Jamie Johns:

So, you know, some like there's all sorts of life events that happens there's there's deaths, there's marriages, there's divorces and and you are some, we all know, that staff are the central thing to operate a successful canning firm and it's often a test of, you know, the leadership's fortitude when things go the wrong way. You know, and you know it's important to know who you're going into business with and then making sure that, if you become worse enemies, that you know how to unravel it.

Brenton Ward:

Oh, say you want to entertain and criterion actually be attractive enough for a PE firm to knock on your door. What criterion do you think some of the things that need to be in place to make you attractive as a firm for them to have a really good look at you?

Jamie Johns:

Oh look, it's probably really a criteria of what the PE firms are looking for. So they've probably got a criteria, ipo, say, of return on investment, the EBITDA, for example, and just sheer size might be a factor in that as well. So the firms that I've spoken to and like even I've been approached at Sky Accountants as well from a private equity firm, so I think it's going to stack up from you know, your size, the EBITDA, and where they're looking to geographically expand as well. So a lot of the private equity firms they are looking to expand nationally as well, and it's not just the big cities either. It's you know countries, area and larger accounting groups that they're looking at as well.

Brenton Ward:

Oh do think is the play of the PE guys? Is it thing, to firms and roll them up an ipo or like what do you think their play is with it, other than seeing a good return on investment? investment P

Jamie Johns:

oh well it'll, I think, at the of that sort of to, to roll them up into one um. And obviously the you know the owners, the private equity firms, their mandate, they'll have investors. So you know, a massive driving factor is return on investment. I mean, you know, monetary-wise, you know money follows where the return is the greatest. And I think accounting firms are just so attractive, like Warren Buffett, that you know they're sort of recession-proof. The return on investment's good when they're run well. So I think it's just a natural factor that they'll try and roll up as many as they can. And you know, and not always, obviously buy out 100%, but take a stake, yeah, so take a 50% stake in the business as well. And you know it can be more than 50 percent um. So again, just be careful there. It can be 50 percent um. I haven't really seen it where it's been under 50 percent to make it worthwhile for the pe firm.

Brenton Ward:

And you know you mentioned that there um. The valuations that they're putting on firms are pretty attractive, and I've seen I've seen that even over this side of the world as well. You know you're talking one and a half to even two and a half times um revenue and that like that's. That is attractive. But what do you think those sort of valuations that these guys are coming in and putting on, what do you think that's going to do to the general valuation of the market and businesses in the industry over the next five years?

Jamie Johns:

Yeah, I think it'll push them up? Yeah, I think it'll push them up, to be honest. I mean, where I've seen they're offering those type of offers is where the firm does have, you know, has a substantial EBITDA.

Jamie Johns:

So you know, to sort of give everyone, I guess, a quick sort of lesson in this, if you know, if you've got a, to give you a standard here, brenton, like if you've got a million dollars in fees and that firm's making $250,000 in EBITDA and you know you've bought that firm's vote at dollar EBITDA for dollar, well that's a 25% return on investment.

Jamie Johns:

Pe firms are really looking for that type of return on investment and also I've seen higher. So you know they'll offer great prices, but often where the abit is 30 or 35. So you know, once a firm sort of gets above to a million dollars in fees, firms can be often valued, uh, based on the evita and not just the old. You know the old scale is like, you know, oh, you know it's a dollar for dollar for fees, yeah, but that what I've seen is where a firm is sort of doing more than a million, offer fees, yeah, but what I've seen is where a firm is sort of doing more than a million and then the EBIT is more than 25%, then you know then that multiple of one just goes to 1.5 or 2, you know, and often it can be quite a large firm as well. So, yeah, so it's also based on performance. It's not just an arbitrary figure that they're. You know they're pulling out of the sky.

Brenton Ward:

And just generally speaking, in the market of M&As. In moment, you know we're talking about the wealth transfer. The average age of a, I think, a firm owner practitioner at the moment, I think, is like 56, 57. So the next 10 years is going to be very interesting in terms of transfer of ownership of firms and transfer of wealth within the industry, as you mentioned, um, it's very busy so supply and demand.

Brenton Ward:

The supply is seemingly going to increase with that transfer. Where, what? What do you see on the demand side? Has it never been greater? Is it kind of as it has been for the last few years? Where do you see that going?

Jamie Johns:

Yeah, look, it's probably the busiest that I've seen in my career and I've been in the industry for a good 20 years now. There's certainly a lot of firms for sale, but in saying that, the demand's there as well. So the demand's there too, particularly so for well-managed, organised firms that have their technology together. They've got a certain level of leadership team that's put together. The firms that might sell so fast are obviously, for example, you know they might be still paper-based, they, you know they're not in the cloud. You know things are done manually and the owner of the firm just hasn't kept with the times sort of thing. And often you'll see the owner of the firm is quite removed and staff doing most of it, which can often mean that the abitter in the firm, um, for someone taking over isn't that attractive. So you sort of get a bit of everything rolled up into that. Because you know, if you talk about the baby boomers the, I think the you know, I think the baby boomers sort of in this whole process, um around about now, say, if you look it up around, say 64 roughly years of age, you know as they talk about, you know the age group of where their baby boomers sit, from 64 to 75, whatever it is. So you know.

Jamie Johns:

So you might have found that a lot of accountants have got out before you know, perhaps they've turned or sold their You they've turned or sold their equity before they've turned 64 but arguably say what I've seen is where they're still.

Jamie Johns:

You know, they're still operating, still in the business from 64 to say, 75 and perhaps they're a sole trader. Um, you know, it's only natural that they may not be up with the latest technology and they may not be paperless and they still might still have the old you know compactor in the corner with the latest technology and they may not be paperless and they still might still have the old you know compactor in the corner with the filing cabinets and that type of thing. Yeah, so those firms, if you're looking at buying them, that's what you're prepared to have to transition from paperless and then also the tech side of it too. So often you know they've got the server in the office and then you know, so that can be all reflected in the ultimate price and also the terms as well. But I would say the industry is very active. There's a lot of buyers more than I would say you know, 10 years ago that are looking to consolidate. I think the industry is going through a consolidation at the moment.

Brenton Ward:

Okay, and from your perspective, perspective at sky, are these conversations attractive enough to entertain them? Or you get that cricket bat out and bat it away and keep, keep moving oh no, look, I think for anyone listening.

Jamie Johns:

You know there's four ways to grow your firm. You know the first way is referrals. The second way is additional work from existing clients and you can roll that up with advertising and marketing and you can call that organic growth if you like. You can call that organic growth and it might be 10%. And if you chug along at 5% or 10% growth, it can often take years I mean years to get to a certain revenue and income level for the owners compared to acquiring firms yes, you'll take what's the old compound interest rule if you get us, because I used to do this financial planning.

Brenton Ward:

If you get a return of seven percent, it takes 10 years to double your money double your yeah, so that makes sense.

Jamie Johns:

But yeah, certainly acquiring a parcel of fees are what we at Wise often call a tuck-in.

Brenton Ward:

Yep.

Jamie Johns:

Yeah so.

Brenton Ward:

All right Brent I think that's a really interesting insight. It definitely seems to be If of a regular conversation with firms getting the knock on the door from PE firms. So we're getting the knock on the door from them. Now. Financial planning firms are wanting to snap up accounting firms. We've getting the knock on the door from them now. Financial planning firms are wanting to to snap up accounting firms. We've got the wealth transfer, so there's a lot of activity in the space yeah, and like a star yeah and like a star.

Brenton Ward:

We'll talk about that now, everyone, thanks. Thanks for sharing your insights on that, Jamie. If anyone wants to talk more about that or wants to pick Jamie's brains on M&As, reach out to us, and we can certainly connect you. But really appreciate the insights and am looking forward to the next episode.

Jamie Johns:

Thanks, Brent, good to be

Brenton Ward:

Okay. Bye for now, everyone.

Brenton Ward:

Thanks for tuning in to this episode of The Wize Way Podcast. If today's episode sparked an idea or helped you see things differently, please don't forget to leave us a review. And if you haven't subscribed to the podcast on your favorite platform yet, please go ahead and do that as well. Let's continue the conversation here through YouTube or any other social platforms that you can find us on. And just remember, if you're not a subscriber, our weekly Friday tip newsletter. You can get that to your inbox every week. Going forward, whether you're starting out or scaling up, you don't have to do it alone. Let's build a business that works for you, the Wize Way. See you in the next episode.