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This week on How2Exit:

E162: Reconciled CEO, Michael Ly Shares Lessons Learned from Acquiring Accounting Firms - Watch Here

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About The Guest(s):  Michael Ly is the CEO of Reconciled, a company that provides bookkeeping and accounting services to small businesses and startups. With a background in accounting and finance, Michael has built his company through mergers and acquisitions, gaining valuable experience in the process.

Summary: Michael Ly, CEO of Reconciled, shares his journey in the accounting industry and how he built his company through mergers and acquisitions. He discusses the challenges and lessons learned from acquiring other firms and offers advice for business owners looking to buy or sell a business. Michael emphasizes the importance of seeking help and advice from others, highlighting the generosity of people in sharing their knowledge and experiences. He also stresses the value of reaching out to industry experts and business owners for guidance and insights.

Key Takeaways:

• Building a successful accounting firm requires providing affordable, accessible, and predictable bookkeeping services to small business owners.

• Acquiring other firms can be a strategic way to grow and expand your business, but it requires careful planning and integration.

• The transition period after an acquisition is crucial and should be given sufficient time to ensure a smooth integration and cultural alignment.

• Seeking help and advice from experienced professionals and industry experts is essential when navigating the complexities of mergers and acquisitions.

Article:

How to Successfully Navigate Mergers and Acquisitions in the Accounting Industry

As the CEO of Reconciled, a leading provider of virtual bookkeeping and accounting services, Michael has had the opportunity to navigate the world of mergers and acquisitions (M&A) in the accounting industry. Over the years, He has learned valuable lessons and gained insights that can help small business owners and entrepreneurs successfully buy or sell a business. In this article, we will share his experiences and provide guidance on how to navigate the M&A process in the accounting industry.

The Challenges of Accounting in Small Businesses

Accounting is a critical function for any business, but it is often overlooked or neglected in small businesses. Many small business owners rely on outdated methods, such as keeping receipts in a shoebox or using Excel spreadsheets, to manage their finances. This lack of proper accounting practices can lead to inefficiencies, errors, and missed opportunities for growth.

Recognizing this common problem, Michael founded Reconciled in 2016 with the goal of providing affordable, accessible, and predictable bookkeeping services to small business owners. Our mission is to streamline financial processes, prepare businesses for growth, and help them make informed decisions based on accurate and up-to-date financial data.

From Accountant to Entrepreneur

Michael's journey in the accounting industry began at a young age. Michael started working in accounting at 16 and continued to gain experience in various roles throughout his career. After studying accounting and business at Arizona State University, He joined a local accounting firm and later became the CFO of a company in Seattle, Washington.

In 2011,  Michael and his wife moved to Burlington, Vermont, where he continued to work with small businesses and startups as a consultant and interim CFO. It was during this time that I noticed a common problem among small businesses - the lack of trained accountants. Most small businesses relied on untrained individuals, such as the owner or a spouse, to handle their accounting needs. This led to inconsistencies, errors, and a lack of financial visibility.

Driven by his passion for helping small businesses succeed, Michael launched Reconciled in 2016. Our goal was to provide an affordable, accessible, and predictable bookkeeping service that all small business owners could access. We focused on leveraging technology and remote work to deliver high-quality accounting services to our clients.

The Power of Mergers and Acquisitions: Growing Through Integration

In the accounting industry, most firms are small and struggle to grow beyond a certain revenue threshold. This is often due to the mindset of accountants, who see themselves primarily as accountants rather than business owners or entrepreneurs. As a result, many accounting firms remain small, with limited capacity to serve more clients or expand their services.

Recognizing this challenge, Michael decided to pursue a growth strategy through mergers and acquisitions. In 2020, he developed a thesis and playbook for acquiring smaller accounting firms and began actively reaching out to potential sellers. Michael hired a buying broker and leveraged his network in the industry to identify potential acquisition targets.

The first acquisition we completed was in November 2020, when we acquired a firm in Tallahassee, Florida. This acquisition allowed us to test our integration process and prove our model. Since then, we have completed two more acquisitions and are actively pursuing additional opportunities.

The Importance of Preparation and Integration

Through the process of acquiring and integrating accounting firms, Michael has learned valuable lessons that can help others navigate the M&A process. One of the most important lessons is the need for thorough preparation and alignment with your team. When acquiring a firm, it is crucial to ensure that your team is on the same page and understands the purpose and goals of the acquisition.

Michael Ly emphasizes the importance of preparation and alignment, stating, "I underestimated the amount of time and preparation  His team needed to fully align with the acquisition. he also underestimated the resistance to change that can arise when integrating a new culture and way of doing things. To mitigate these risks, it is essential to provide ample time for integration and clearly communicate the expectations and timelines to all parties involved."

Another important lesson is the need to get the previous owner out of the business as quickly as possible. While the previous owner may have valuable insights and knowledge, their presence can hinder culture change and impede the growth of the business. It is crucial to set clear expectations and timelines for the transition and ensure that the previous owner is fully committed to exiting the business.

The Future of Reconciled: Empowering Small Businesses and Entrepreneurs

Looking ahead, our vision for Reconciled is to serve 10,000 small businesses and entrepreneurs across the country on a monthly basis. We aim to impact 100,000 jobs in the communities where these businesses operate. By providing affordable and accessible bookkeeping and accounting services, we want to become the go-to brand in the industry and help small businesses thrive.

To achieve this vision, we will continue to focus on organic growth and strategic acquisitions. We will leverage our expertise in mergers and acquisitions to identify opportunities that align with our mission and values. By expanding our service offerings and investing in technology, we aim to provide comprehensive financial solutions that meet the evolving needs of small businesses.

In conclusion, navigating mergers and acquisitions in the accounting industry requires careful planning, preparation, and alignment with your team. By seeking help and guidance from experienced professionals, small business owners and entrepreneurs can successfully navigate the M&A process and position their businesses for growth. With the right strategy and mindset, the future is bright for those who embrace the opportunities that mergers and acquisitions present.

If you are interested in learning more about navigating mergers and acquisitions in the accounting industry or have any questions, feel free to reach out to me on LinkedIn.  Michael is always happy to connect and provide guidance. Remember, getting help and seeking advice from others who have gone through the process can make a significant difference in your success. Don't be afraid to reach out and start the conversation.

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E163: M&A Through The Eyes of The Strategic Acquirer with Scott Kaeser - Watch Here

About The Guest(s): 

Scott Kaeser is the Chief Development Officer for Tarian Security. With over 15 years of experience in corporate development and mergers and acquisitions, Scott specializes in acquiring and integrating security companies into Tarian Security's portfolio. He has a background in corporate finance and management consulting, and has successfully completed over 30 acquisitions in the security industry.

Summary: 

Scott Kaeser, Chief Development Officer for Tarian Security, shares his insights on the world of strategic acquisitions and mergers in the security industry. He discusses his background in corporate finance and management consulting, and how he got started in the security industry. Scott explains the role of a Chief Development Officer and the process of acquiring and integrating security companies into Tarian Security. He emphasizes the importance of due diligence, communication, and trust in successful acquisitions. Scott also highlights the challenges and opportunities in the security industry, and the factors that make a security company an attractive target for acquisition.

Key Takeaways:

• The security industry is a $30 billion industry in the US, with over 10,000 security companies.

• Tarian Security focuses on acquiring security companies with annual revenues ranging from $5 million to $10 million.

• The profit margins in the security industry are typically around 10%, making it a highly competitive and cost-sensitive business.

• Tarian Security differentiates itself by providing excellent customer service and investing in its employees and management team.

• Sellers should be honest and transparent during the acquisition process, as trust and open communication are crucial for a successful transaction.

Quotes:

• "The need for security continues to grow, and the role of a security officer is becoming more critical and valued in our society." - Scott Kaeser

• "Be honest with the buyer and build a good partnership based on trust and transparency." - Scott Kaeser

Article:

How to Build a Successful Security Business: Insights from a Strategic Acquirer

Note: This article is based on a transcript from an interview with Scott Kaeser, Chief Development Officer for Tarian Security.

Introduction

The security industry is a rapidly growing sector, with an estimated worth of $30 billion in the United States alone. As the demand for security services continues to rise, many small to medium-sized security companies are looking for opportunities to grow and expand their businesses. In this thought leadership article, we will explore the insights and experiences of Scott Kaeser, a strategic acquirer in the security industry, to understand the key factors that contribute to building a successful security business.

The Role of a Strategic Acquirer

As the Chief Development Officer for Tarian Security, Scott Kaeser is responsible for acquiring and integrating other security companies into the Tarian Security brand. His role involves deal origination, due diligence, negotiation, and integration of acquired businesses. With over 15 years of experience in corporate development and mergers and acquisitions, Scott brings a unique perspective to the table as a strategic acquirer in the security industry.

Key Themes Explored

Throughout the interview, several key themes emerged that shed light on the challenges and opportunities in the security industry. These themes include:

1. The Fragmented Nature of the Security Industry: With over 10,000 security companies in the United States, the industry is highly fragmented. Many small and medium-sized security businesses are started by individuals with a background in the military or law enforcement. This fragmentation creates opportunities for strategic acquirers like Tarian Security to consolidate the market and build a larger, more competitive business.

2. The Importance of Human Capital: While technology plays a role in the security industry, the foundation of any successful security business is the manned security officer. Scott emphasizes the value of well-trained, professional security officers who can provide proactive security services to clients. Tarian Security focuses on building a strong team of security officers and investing in their training and development.

3. The Rigorous Due Diligence Process: Acquiring a security company involves a rigorous due diligence process to ensure that the target company is a good fit for Tarian Security. This process includes financial and legal due diligence, as well as background checks and employee verification. Scott emphasizes the importance of transparency and honesty during this process to build trust between the buyer and the seller.

4. The Challenges of Profit Margins: The security industry operates on relatively low profit margins, typically around 10%. This is due to the competitive nature of the industry and the labor-intensive nature of security services. Scott highlights the importance of cost containment and operational efficiency to maintain profitability in the security business.

Implications and Potential Impact

The insights shared by Scott Kaeser provide valuable lessons for security business owners and potential sellers. By understanding the challenges and opportunities in the industry, security companies can position themselves for growth and success. The fragmented nature of the industry presents opportunities for strategic acquisitions and consolidation, while the focus on human capital and operational excellence can differentiate a security business from its competitors.

The rigorous due diligence process and emphasis on transparency and honesty underscore the importance of building trust between buyers and sellers in the security industry. Sellers who are considering an exit should be prepared for the demands of the due diligence process and the need to provide accurate and comprehensive information about their business.

The challenges of maintaining profitability in the security industry highlight the need for cost containment and operational efficiency. Security companies must carefully manage their expenses and find ways to differentiate themselves from competitors to maintain healthy profit margins.

Conclusion and Future Outlook

The security industry presents both challenges and opportunities for business owners and potential sellers. Strategic acquirers like Tarian Security play a crucial role in consolidating the market and building larger, more competitive businesses. By focusing on human capital, operational excellence, and cost containment, security companies can position themselves for growth and success in a highly competitive industry.

As the demand for security services continues to rise, the future outlook for the industry is promising. However, security companies must adapt to changing market dynamics and invest in technology and innovation to stay ahead of the competition. By leveraging the insights and experiences of strategic acquirers like Tarian Security, security businesses can navigate the challenges and seize the opportunities in the evolving security landscape.

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DEEPER: "Unlocking Wealth in SMB M&A: The Game-Changing Impact of QSBS" -

by Ronald Skelton - Leaning heavily on chatGPT

In the intricate tapestry of small and medium-sized business (SMB) mergers and acquisitions (M&A), a lesser-known yet potent thread weaves its way through the narrative – the Qualified Small Business Stock (QSBS). Under Section 1202 of the Internal Revenue Code, QSBS offers significant tax benefits that can transform an ordinary M&A deal into a financially advantageous venture for sellers, buyers, and outside investors. This article delves into how each of these players can leverage QSBS to their benefit, turning an M&A transaction into a triple win.

QSBS: An Overview and Its Unmatched Benefits

QSBS was created to spur investment in small businesses, the backbone of the American economy. It allows sellers to exclude up to 100% of capital gains from federal taxes on the sale of their business stocks, provided certain criteria are met. These criteria include a $50 million gross asset cap at the time of stock issuance, a five-year holding period, and the company being engaged in a qualified active business.

$10 million or 10x basis can be excluded from capital gains of a sell of the shares held as QSBS.

For sellers, this translates to potentially saving millions in taxes – a substantial boon when divesting a business. But it's not just sellers who stand to gain.

The Seller's Perspective: Capitalizing on Tax Breaks

For a business owner looking to sell, QSBS offers an unparalleled opportunity. Take, for example, the owner of a tech startup who's nurtured their business for over five years. Upon selling, they can exclude a significant portion of the capital gains, thereby reaping the rewards of their hard work and investment without the hefty tax bill. This tax break can make selling the business more appealing, and in some cases, even expedite the decision to sell.

However, the path to maximizing QSBS benefits can be strewn with challenges, such as ensuring eligibility and navigating the complex tax code. Professional advice from financial advisors and tax experts becomes indispensable in these scenarios.

The Buyer's Angle: Navigating QSBS for Strategic Acquisitions

From the buyer's perspective, understanding QSBS is crucial for strategic deal structuring. Buyers aiming to acquire a QSBS-eligible business must recognize the tax benefits as a crucial component of the seller's decision-making process. It often means that sellers may prefer stock sales over asset sales, influencing the deal's structure and negotiations.

Additionally, buyers need to consider the long-term implications of their acquisition strategy. Acquiring a business with QSBS-eligible stock can be a strategic move, offering potential future tax advantages if they decide to sell. However, this requires careful planning and a deep understanding of the QSBS criteria.

From my understanding, in order for the stock to be QSBS, you had to have purchased a company from an asset sale acquisition. I’m sure you can see where this can cause a conflict if both parties are trying to utilize this tax advantage.

Outside Investors: Playing the QSBS Card

For venture capitalists, private equity firms, angel investors, or any outside investor you may bring in, QSBS is a golden ticket to boosting investment attractiveness. By investing in businesses that qualify for QSBS, these investors can enhance their returns through the tax advantages it offers. This aspect makes QSBS-eligible businesses highly desirable investment targets.

Outside investors also play a critical role in advising and structuring deals to maintain QSBS eligibility, ensuring that the benefits are preserved through the investment and eventual exit stages. Their expertise can be invaluable in navigating the complexities of QSBS and structuring deals to maximize returns.

The Balancing Act in M&A Negotiations

The interplay of interests in SMB M&A transactions involving QSBS can be complex. Sellers seek to maximize their tax benefits, while buyers must navigate these waters to strike a deal that makes financial and strategic sense. Negotiations often revolve around maintaining QSBS eligibility, with both parties needing to understand the implications fully.

As a buyer looking to take advantage of QSBS it appears it’s better to by LLCs where the owner isn’t looking to use this advantage as an asset purchase into a C-Corp SPV (special purpose vehicle) while consulting a tax advisor specialized in QSBS.

Conclusion

In conclusion, QSBS creates a unique win-win-win scenario in the SMB M&A arena. Sellers benefit from significant tax savings, buyers can leverage these benefits for strategic acquisitions, and outside investors find enhanced value in QSBS-eligible companies. This trifecta of advantages underlines the importance of QSBS in shaping smarter, more lucrative M&A strategies.

As the M&A landscape continues to evolve, the role of QSBS is expected to become even more prominent. Its ability to turn a standard business transaction into a financially advantageous deal cannot be overstated. For sellers, it's about reaping the rewards of their entrepreneurial journey without a hefty tax burden. For buyers, it's an opportunity to acquire valuable assets with an eye on future tax efficiency. And for investors, it's about finding those hidden gems that promise not just good returns but smarter, tax-advantaged ones.

The key to successfully navigating QSBS, however, lies in understanding its complexities and staying ahead of regulatory changes. This requires not only a keen eye on the market but also the guidance of experienced professionals who can navigate the intricate tax laws and structure deals that maximize QSBS benefits.

As we look ahead, QSBS stands out as a shining example of how targeted tax incentives can stimulate investment in small businesses, fuel entrepreneurial ventures, and create a more dynamic and prosperous business landscape. Whether you are a seller planning your exit, a buyer strategizing your next acquisition, or an investor looking for your next big win, QSBS is a tool that deserves careful consideration and strategic implementation in your M&A playbook.

Recap: Benefits:

1. Capital Gains Tax Exclusion: Up to 100% exclusion on gains from the sale of QSBS, subject to specific conditions.

2. Increased Investment Appeal: Makes eligible small businesses more attractive to investors due to the potential tax benefits.

Requirements:

1. Qualified Small Business: Must be a C corporation with gross assets of $50 million or less at the time of stock issuance. And maintain gross assets below $50 million.

2. Original Issuance: The stock must be acquired at original issuance directly from the company.

3. Holding Period: The stock must be held for at least five years.

4. Active Business Requirement: The company must be engaged in an eligible active trade or business.

5. Exclusions: Certain industries, like finance and professional services, are excluded from qualifying.