E153: Patrick Dichter Shares Lessons Learned from Acquiring Accounting Firms

[00:00:00] Ronald Skelton: Hello and welcome to the How to Exit podcast. Today I'm here with Patrick Dichter and he is the owner of Appletree Business Services. I don't know if you like, what the title you're using. I should ask that before the show. He's the owner, CEO, founder. But you're the man in charge of the show over there.

[00:00:16] So I think we'll just go with that. All right. So, thank you for being here today. We always start off with the origin story. Kind of how did you get started in this? I always joke around. Hey, you were born, now you ended up on a show about mergers and acquisitions. Can you fill out the little gap in between? So, how did you end up on an M and A show?

[00:00:31] Patrick Dichter: Okay. Yeah, it was a winding road. I went to college, studied business in French, and then I got my MBA and I went down a sales path. So during college, I did door to door sales to pay for college. And then I became a sales manager at a digital marketing startup. Did that for seven years serving small business and love that.

[00:00:51] And then I spent three years doing small business coaching and consulting. And all these new clients that would come in for consulting had terrible books and we couldn't really do anything, until we understood their numbers. And so we'd refer them out. They'd get good bookkeeping and it was transformational.

[00:01:06] And I started to hear about people that buy small businesses. And I was like, what if I buy an accounting firm instead of referring all this work out? And that's what I did. So I went and looked for an accounting firm to buy and I bought Apple tree about 18 months ago. So I closed at the end of 2021. And I've done a couple other tuck-ins since then.

[00:01:25] Yeah, here we are. So I'm running and growing a small business accounting firm that does quality bookkeeping and tax for small business. And happen to work with a lot of people who are buying businesses as well. 

[00:01:36] Ronald Skelton: That's awesome. So, you're not a CPA by trade, right? Now you've employed probably CPAs. That's an interesting path. I have to ask because, I have an internal bias towards sales guys. And was it vacuums or knives?

[00:01:50] Patrick Dichter: I was on books. Yeah, like Pre K early learning stuff up to like SAT and ACT prep. The main product was like a, almost like a modern encyclopedia that helped kids save time with homework. So I did that for four summers. 

[00:02:04] Ronald Skelton: In our lifetime? I mean, if you think about it? you're younger than I am.

[00:02:07] People basically don't buy books anymore. I say that I got books stacked all around me, but I'm old. That said, a lot of these days,you go to the door knocking on now and tell him he's going to sell them an encyclopedia like, well, they'll just wave their phone at you, wouldn't they?

[00:02:19] Patrick Dichter: They still do it. There's still kids in the program. They sell, there's an internet component to it, but, yeah, it's wild. 

[00:02:24] Ronald Skelton: Some of the best business, the reason I had a bias towards it, some of the best business people I have ever met and honestly a couple of times some of the crookedest, but are all to cut their teeth in either cutco or what's the rainbow vac or something like that the really expensive vacuum.

[00:02:40] So, you're safe. You're you were doing books. There's a 50 50 chance inside of there, but usually they're really good at sales. That is a tough gig. Matter of fact, I used to play poker a lot, and I had a small business that was going one day. And I was sitting there playing poker in a tournament, and this guy brought this kid over.

[00:02:54] He bought this kid's way into the tournament, and the kid sat beside me, and his boss sat behind him the whole time. And I was like, what do you do? And he goes, well, I'm a sales guy. I was like, is that your boss? He's like, yeah, because usually boyfriend and girlfriend who sweats you, there's a person, they call it a sweater, somebody that sits right behind you.

[00:03:10] It's like, what is this? This is California. But I was thinking, why is this dude sitting over shoulder? He goes, that's my boss, man. He backs me and everything. I'm his top sales guy. I'm like, what do you sell? And he's like knives. And then I cut, go. And he's like, yeah.

[00:03:21] We're chatting. We're playing cards, of course. And, I'm pretty good at card cards. Like before I knocked this kid out, I want to find something out. Like you're doing five figures a year now? He goes, I'm doing high six figures a year, like commission wise. I was like, Cool.

[00:03:32] You want a better job? And his boss is upset. And they're like, that's why I'm sitting here. You leave him alone. He's running me off. I was like, I said, I have two opportunities. For there's one, a little startup I'm working on and the company I work for is a software sales and, it'll put you in a shirt and a tie.

[00:03:47] But if you can sell knives, you can sell software. Like that's some of the best salespeople I've ever seen in my life. Especially people that make it in that realm. 

[00:03:55] Patrick Dichter: Yeah, it's so hard and definitely prepared me for buying a small business, because you learn to control your attitude and control what you can. And,

[00:04:03] Ronald Skelton: You learn it's a numbers game. You got to go out and talk to people. You got to make those relationships. You got to build that rapport. And, click the nose. Like they say, some of the books out there go for no. That's just, it's just part of the process. You can't be a canvassing salesman, a door to door sales guy of any product that's successful and not have the thick skin it takes to be in business, right?

[00:04:22] They lose those guys in the first 30 days. Kudos to you that you actually made it in that realm for a while. Let's go to the next thing. what was the first acquisition? You bought, Apple tree business services. 

[00:04:32] What was the, in the sales world, the sale cycle, like how long did it take from the time you met them to the time it took to close it? 

[00:04:41] Patrick Dichter: So I'll give you a longer answer. I ended up doing my own proprietary outreach because there's brokers in the accounting space and they just wouldn't interact with me because I'm not a CPA.

[00:04:52] As much as I tried to sell my experience on my MBA they were just like, Oh, you're not a CPA. Like, no. So I ended up doing my own cold email outreach and created my own campaign. So my first email to Steve, the seller was probably in September and,we closed December 31st. So, four or five months of talking and negotiations and getting.

[00:05:12] Ronald Skelton: That's pretty fast. Not super fast, but it's not, I don't think it closed any faster with a broker or somebody else involved. Everybody like, yeah, you can close with 30. Nah, I've never seen that. I mean, I've interviewed over 170 people at this point. If you really get to the truth of it, it takes 180 days, on average to get something done. 

[00:05:29] Especially if you start involving things like SBA loans and stuff. Can you give me a scale wise, you don't have to give me the exact number. I know a lot of that stuff for proprietary and I didn't get permission beforehand to ask you like how big the company was, but it was a six figure seven figures.

[00:05:43] Can you give me that range or?

[00:05:44] Patrick Dichter: Sure. The year prior it was, 1. 2 million in revenue and 330, 000 of SDE. 

[00:05:50] Ronald Skelton: A lot of the, we were talking about this before the show. A lot of these advisors tell you that's too small. What do you think about that?

[00:05:56] Patrick Dichter: I think that can be a good rule of thumb for a lot of people.

[00:05:59] I knew that I was buying small and I was okay with that. And the reason I was okay with that is because I knew that I could, or I was confident that I could grow it. And, there's not many good accounting firms that come up for sale. So you kind of have to, play ball with what's there, right?

[00:06:14] So most of the accounting firms that are, six, 700, a million of SDE or even EBITDA, they don't sell because they're great businesses. Or if they do sell they're selling to PE for, six to eight times and you'll never be able to compete. So I was betting on the fact that I'd be able to grow it. 

[00:06:31] Ronald Skelton: Okay. And then, you did two follow on acquisitions after that?

[00:06:35] Patrick Dichter: Uhuh. 

[00:06:36] Ronald Skelton: Were they about the same size, much smaller or somewhere in the middle? 

[00:06:39] Patrick Dichter: Yeah, smaller. So did another one like, maybe six months later. That was much smaller and then did a, third one that was like two thirds that size, a couple of months after that.

[00:06:50] Ronald Skelton: So now you've got them all combined underneath the single brand. What was integration like?

[00:06:55] Patrick Dichter: Integration sucks. The second one was a very similar style firm. So it was actually in our association. So like, very similar tech stack and pricing and like just whole model. So that one was like kind of a slightly different tech, slightly different client.

[00:07:10] And actually having to like onboard every single client again, get acquainted, build their trust. So, I'm grateful that I did those and they definitely catapulted us forward, but I have a little bit of PTSD on, integration and acquisition.

[00:07:23] So, if you're going to do additional ones, you just know that, right? So now my mindset is kind of flipped where I'm very, very picky about, if I were to do any more acquisitions, it has to be a total bullseye fit in terms of like similar style firms, similar tech stack. Otherwise I just, I wouldn't touch it.

[00:07:40] Ronald Skelton: Well, and in your world, like in my world of tech stack is different between like, I buy media assets and newsletters and stuff like that. If somebody's using ghosts and I'm using beehive and another person is using, like I have some still on sub stack, that's not hard to move because I'm not moving.

[00:07:59] My clients never see it technically, right? They might see it if they, they happen to have bookmarked the URL that's not masked. Like I have my own domains attached to these things, but if they happen to click on something and subs, I can see the sub stack, but it's very, very low impact. When you have a different tech stack inside of the CPA firms, the interaction with the clients change, right?

[00:08:19] Everything changes because they're, 

[00:08:21] Patrick Dichter: Clients, it's staff, it's procedures, and they're all intertwined, right? You take two different CPA firms, they could both serve a plumber and there's bookkeeping software, there's tax software, there's practice management software.

[00:08:35] You have all the integrations between payroll software and your bookkeeping software. If most of that tech doesn't align, you just know you're in for like a brutal integration to try to.

[00:08:46] Ronald Skelton: What is the current tech stack you use? I mean, I'm old school, right?

[00:08:50] So I know there's QuickBooks and there's another one, but there's got to be like all these other, I remember Peachtree. Is that old enough? Are they still around? 

[00:09:01] Patrick Dichter: Yeah, we're probably 80 percent QuickBooks online for bookkeeping. We have 20 percent that are on Xero. Our tax software is UltraTax. Most of our payroll is on Gusto now. Our practice management tool, which is kind of like an ERP for accounting is Canopy.

[00:09:15] So those are the big ones. I probably have 20 other SaaS subscriptions that I use, but if somebody's talking like main tech stack, those are the main ones. 

[00:09:22] Ronald Skelton: That's really eye opening, because I kind of expected you, were talking the difference between QuickBooks and Xero, right?

[00:09:28] Or, I didn't realize there were a whole mixture of these different applications I had. So that makes it a lot more complex because, you see a good firm out there and they happen to be using QuickBooks like you on 80 percent of their stuff, but every other piece of the alignment are missing. It's not like you're trying to match the key, the core technology to another acquisition.

[00:09:49] You got a whole jigsaw puzzle put together for you and you got to figure out everybody who out there, who out there has my jigsaw puzzle that's fairly close to this, right? It's okay. If one piece, one of the small minor pieces has moved around a little bit but, you don't want to try to realign, 10 of the 18 pieces you got going on. 10 of the 20 pieces.

[00:10:08] It's funny cause I didn't know that about accounting firms. I always just kind of assumed, I'm still one of those business owners. I send everything away and expect it to get done and come back, right. 

[00:10:16] Patrick Dichter: The other thing too is, accounts don't like change, right? So if you're going to go through an integration, you're really bugging them. So yeah.

[00:10:24] Ronald Skelton: I do this, accountants always have the, I'm doing it this way because it's the right and legal way. Well, okay. Well, there's a lot of different like, that's one thing I know about accounting. Like after reviewing books, after books, after books, or, financials, after financial. That financials for probably small businesses that I've been looking at.

[00:10:41] I take them back to, a friend who's a forensic CPA, who's retired. And when beginning, I would say, okay, what's wrong with this one? It doesn't look like any of the others. I'm like, I have a master's degree too. And I, my accounting experiences, they made me take two accounting classes in my undergrad and one of my undergrad degrees.

[00:10:57] And they made me take two in my MBA. That's the extent of my accounting. So I would look at these and go, why are these so different? Which one of them is doing it wrong? She's like, yeah, they're both okay. There's nothing wrong with you though. And I'm like, they don't line up. Yeah, they're just two different industries. 

[00:11:09] They do things slightly different. This one's doing accrual. This one's like, okay, I know I need an accountant involved in everything I do just because and I'm still learning that space and I'm in like, I need to spend more time learning it. So I just get so acclimated to things when I see something awkward. I'd know whether it's right or wrong.

[00:11:23] But I think that this is one of those spaces where, there's one set of laws but it does in different ways, anything can be done. 

[00:11:32] Patrick Dichter: Yeah, that, that was one of the biggest surprises. I thought tax was more black and white and it's very gray. You can ask five different tax pros one question and they'll give you five different answers so.

[00:11:44] Ronald Skelton: Like I had a tax attorney on here a few weeks ago and he's like, I said something on the show and he's like, yeah. I said, well, my guy said, you can't do that. He goes, he can't do that, but I can do it all day long. He just doesn't know what, like when he even came out, and I know another tax guy that does this.

[00:11:56] It's like when you do certain things, you just put the code on the return. I guess there's a, what area the tax law applies. 

[00:12:02] Patrick Dichter: You said the tax code. 

[00:12:04] Ronald Skelton: Yeah, you just basically he's like you just put that at the end of it. So if somebody looks at it, this looks all you know, you getting audit or something looks awkward they just look at it look it up and go, okay. That's what they did that. 

[00:12:12] So it's like, all right. There's a real estate, he's gone now. That was a real estate tax guy that did all of our stuff. And he did that with everything. He did, that was a little bit, you know, can you do that? Or can you not do that? He'd put the piece of the tax code basically get the end of on your returns.

[00:12:27] And,so nobody I knew that had him doing it had ever been audited, knock on woods. Yeah, it's one of those, it's kind of like walking into, I don't think anybody knows this for reference, but, like not everybody will like, it's like walking into a Baskin Robbins. Yeah, they sell ice cream, but there's 31 flavors, right?

[00:12:41] You can go on there and like, yeah. I think accounting is always going to be that way. There's 31 flavors to do it. And, there's 150 ways to do it. And 31 of them will not so land you in jail. So, cool. So now you've got these accounting firms. Are you still doing the other businesses and stuff and you're feeding them leads into the accounting firms? Or you focused 100 percent on this now? 

[00:13:02] Patrick Dichter: No. Totally focused on accounting. We're really focus on a certain type of small business client and a certain type of engagement. I did add consulting services, so that didn't exist in the firm before, and there's a couple of us that do that.

[00:13:15] And that's more, forward looking, growth, strategic planning, forecasting, pricing analysis, those types of things. But it's not the main focus of our business. 

[00:13:24] Ronald Skelton: Okay. And then, what is that typical, if somebody was listening and they're interested, what would be the typical client that you serve?

[00:13:32] Patrick Dichter: Yeah, our bread and butter is service based businesses, right? So, kind of the home services guys, like plumbing, tree services, flooring, and then professional services. Attorneys, web design, consultants, architects, folks like that. So we, we bring clients on a very specific engagement.

[00:13:50] So we do a subscription that includes. Their bookkeeping, their business taxes, and their personal taxes. Typically between 700, two grand per month. We don't split up services. So if somebody says, can you just do my taxes or can you just do bookkeeping? We don't. Because we think it's going to create a better client experience for them.

[00:14:08] And then the tax planning and tax experience goes a lot better when you have the bookkeeping with the same, same team. 

[00:14:15] Ronald Skelton: A lot less stress for you too, because I know our accountants would always get upset because basically we just, send them a bunch of Excel files and quick dumps and boxes receipts and like here, figure it out. You don't get that. 

[00:14:27] Patrick Dichter: Not fly with us, Ron. We'd kick you to the curb. 

[00:14:30] Ronald Skelton: It's been a while since I've done that, but I'm saying that's the way I started out in small business. I grew up a painter's son, right? Like we painted houses for a living and our record keeping or bookkeeping was, once a year we had a scrounge up everything and take it over to the, this guy's personal property because my dad would put all those receipts in a brown paper, grocery bag.

[00:14:49] And then, he had one of those, green accounting notebooks. He would have a list of all the jobs we did and then how much we got paid. Who worked for us and how much they got paid. And it wasn't accounting. It was just basically a log book. And he would hand the log book and all the receipts to the accountant, and we would do this, probably March, around March or so we'd give it to him. So he only had, two or three weeks before like a personal, the taxes needed to be turned in. And he's like, you got to start giving me this stuff earlier.

[00:15:16] So I give it to us quarterly. And my dad would just always like, Oh, I forgot. So this guy, both loved us and hate us. Cause he would charge us, charge my dad more than he would charge the other clients. But it had to be like, you had a business partner. I bet they worked out of the back of a big, huge house they lived in.

[00:15:31] And I bet you, there's a big conference table in there. I just had this vision of them going back there and laying receipts all over the, all over that conference table and sorting things by date and, shaking their head and drinking their scotch that they used to drink. And, like cussing us the whole time they were doing their taxes.

[00:15:47] That was in the nineties. It's a different world now. Cool. So what is your, what is your outreach method now? How do you, like a lot of people we talk about growing through acquisition.

[00:15:56] You've done that right now. Now you're in this solidify stage. what I call a solidify stage. You've made three acquisitions. You want to grow them and kind of get them congealed better to work together. So you're going to do some organic growth, some marketing, have them work together under a single platform.

[00:16:10] And even, I honestly think you'll come back to buying businesses. It's in your blood now. But not until you've, I always joke around. It's kind of like a woman when she has a baby, you ask her the day after the baby's born, if she wants to have another, she's like, Oh no. By the time that baby finished breastfeeding, she's like, okay, I'm ready. Like, Oh, I want another baby. 

[00:16:27] I think, acquisition entrepreneurs the same way.

[00:16:29] Patrick Dichter: You had me right. I might have baby fever, after next tax season.

[00:16:32] Ronald Skelton: So, but what's the plan right now? What do you use currently for your growth?

[00:16:35] Patrick Dichter: Coming through inbound leads right now. So, people that find us online through our marketing. And, I was doing sales for, I don't know, the first 15 months. Recently hired somebody to take over sales from me and, that's been it. Is really like working the inbound leads that come in.

[00:16:53] Haven't started doin' outbound yet, just because, it's been kind of the growth that we're looking for so far. 

[00:17:00] Ronald Skelton: I tell you, when I look for a sales guy, I still like, I do my first search of the resume. My, Cutco rainbow, but I actually look for those and see if anybody's gotten there. Because it's usually all long, and I don't want them just coming out of there. 

[00:17:11] But if that's in there, did in the background of who kind of cut their teeth on, on sales. I usually got a pretty good instance. And the second thing I'll do, and I'm curious if you do the same thing, as I ask them what's the most they've ever made. There's a self limiting factor for most salespeople.

[00:17:27] They'll get right back up to that fairly quick. So if you talk to the sales guy and I go, Hey Patrick, what's the most you've ever made as a sales rep? And you go 150. I've hit 150 at my last company, 150 at the first. I know within the first 18 months at my company, you're going to be at the 150 sales range, because you're, you know how to get there.

[00:17:42] You've done it before. You've got that taste, that's your lifestyle. But also that's the point where 90 percent of the sales reps are going to start slacking off and not going for 200, $300, 000. And that's their comfort zone. And they're going to get there as fast as possible. 

[00:17:56] Patrick Dichter: It's kind of like the law of the lid that, Maxwell would talk about.

[00:17:59] Yeah, it's definitely when I was hiring sales reps,for seven years I was leading sales teams and hiring sales reps. And, yeah, you definitely have to find the right mix with a comp plan of like enough to like help them, I mean, some of their needs where they need to stay hungry and you definitely had to feel out like, okay, is this person coming from making 80 K in their previous role or making 30. Or, making 150 and where's that line going to cross where they could get back to that or maybe make more money with us.

[00:18:26] Yeah. But yeah, I think more often than not, if they've been in sales for a while, they're going to, that water is going to find this level again. Yeah. 

[00:18:33] Ronald Skelton: Yeah, I think so. Okay. What's the lessons learned like, before the show and you kind of indicated a little bit now that you're not interested in anymore at the, you're not excited about doing additional tuck ins right now.

[00:18:44] Is it just integration? Or, cause it. 

[00:18:48] Patrick Dichter: Well, it's also, we're growing well organically, right? So, if we were to go look at accounting firms for sale right now, you might find one that's 60, 70, 80 grand a month in monthly recurring revenue. We're growing organically by like five or six K a month.

[00:19:02] So, I can wait around for 10 or 12 months, to hit that same mark and not go through all the pain and I'd pay a lot less money. So that's kind of where it's coming from, is just like the pain of integration and also organic growth and also,I think it would totally stress on my team if I were to do another one this year.

[00:19:18] So that could change next year. We could be in a different spot, but we're definitely in a mode of like, we made a lot of hires. We're getting them settled in. We made a lot of technology changes. 

[00:19:27] Ronald Skelton: So the older accounting firms tend to be very, location based. Meaning like, if I talk to an accounting firm in Dallas, it's over 20 years old, 90 percent of their customers are within 50 miles of Dallas, right?

[00:19:40] That's not true anymore with some of the newer ones with all the online. Are you geographically located in a particular market with a concentration in that market? Are you pretty spread out? 

[00:19:50] Patrick Dichter: Now we serve clients all over the country. When I first bought it, it was very heavy concentration in New Hampshire where the firm is based. But now we sell all over the country.

[00:20:01] And I think that's the way accounting is going is people service nationwide. You also see a lot of accounting firms niching down, you know, so let's say where the accounting firm for dentists or like we're the accounting firm for creators. Or we specialize in real estate pros or high net worth, or we specialize in sales tax.

[00:20:17] Ronald Skelton: There's a lot of them out here in California. I just moved back to California last year and there's a lot of them that are like, Hey, we specialize in California because they have so many weird rules and laws and, it's just different here. I think this is one of like, I think less than a dozen states that basically charges pro teams, players.

[00:20:32] If you show up to this state, you play a game in this state, California wants their state income tax for that game you played here. They hunt them down and get it too. 

[00:20:40] Patrick Dichter: I love whenever, whenever we have a prospect from California and the sales process, and they're like, what's the price?

[00:20:44] I'm like, well, it's double because you're in California. And then I'm like, well, here, really our price is that, but yes. I think, the tax laws out there are definitely unique and, cost of living is high. 

[00:20:55] Ronald Skelton: I'm here for family reasons. Otherwise it's not a great place to have a small business.

[00:20:59] So let's go forward in the kind of the, like what mistakes did you make in your acquisitions and what do you think other searchers are making mistakes on right now? 

[00:21:09] Patrick Dichter: So pre close, I think a common mistake that I see a lot of searchers make, is they overanalyze something when they just have this in.

[00:21:19] So one thing I tell every searcher that I'm talking to is, if anything looks halfway interesting, go for a seller call as fast as you can. Cause they're, you picture the typical searcher he's like,I found this,commercial flooring company. It's got really good EBITDA and then they'll go spend two weeks looking at all the macroeconomic blah, blah, blah, blah, blah about flooring.

[00:21:39] And it's like, dude, just get on a call with that seller. Because so many things happen right away. Like you'll know, do I feel some sort of like rapport and trust with this person? It's also, if it's a broker deal, you have to move fast because broker deals go faster and you have to get them to like you.

[00:21:56] Because they're going to have 20 other people from the broker, barking up their tree. And a lot of these deals are competitive. I also think you'll find deals that on paper. You might've thought were like an eight out of 10 and then you get a seller call. You're like, nah, that's a four out of 10 or vice versa.

[00:22:11] So you can find something and be like, wow, this was not marketed well, or that wasn't described well by the broker. And this is actually like a decent, decent deal. So I think that's one big mistake that I see a lot of searchers make is they just, they act like they're already in due diligence before they've ever talked to the seller.

[00:22:28] And it's like, no. Just get the first call, you'll get a gut feel. You'll get a lot of sense for like, why are they really selling? Do I trust what's in the SIM? And then you can move to the next step, and get into LOI and then do the rest of your due diligence, et cetera. So I think that's one big mistake that a lot of searchers make. 

[00:22:48] Ronald Skelton: Yeah, I think one of the things you hit on before the show we talked about is like the, searchers being told they should go straight to the top of the SBA range, right? Don't buy anything under a five million dollar SBA. You're wanting to get a million dollars EBITDA if you can, or as close to it as you can. And there's a sweet spot underneath that, that actually has, especially if you're good at sales and marketing or marketing and sales. 

[00:23:11] And I'll define the difference between, a lot of people don't understand the difference between marketing makes the phone ring, the sales closes the deal. In my world that's how I see it. Marketing causes interest and intrigue. Sales is, getting the contract signed. And the collects checked, checks collect.

[00:23:25] Anyway, getting paid. But I honestly think there's a sweet spot in there, where You'll meet a lot of good creators who created companies that are doing 100k 200k 300k 400k SDE because they created something that had product market fit in the marketing terms. The customers like it. They grew by word of mouth and friends and family and all that, but they've never spent a single dollar or a single, on marketing.

[00:23:52] And they never had a single salesperson other than the owner. And that's a sweet spot. If you really look at some of these things, but wait a second, they're sitting on something here. And they said they're sitting on a big pile of timber that's smoldering and nobody's thrown any gasoline on it ever.

[00:24:06] Patrick Dichter: Yep. I agree. There's a lot of like the Harvard book says like, don't buy anything under 750 K of EBITDA. And a lot of people will say that, but I think in that like three to 700 K there's a lot of opportunity because the multiples aren't as high. There's less people looking at them. And, yeah, once you get your first deal, more will come to you. So you could buy more later.

[00:24:24] And, there's often a case where the owner's burned out or tired, and if you come in there with energy and marketing and, some people management, you can grow that business, that, might've had less people looking at it. 

[00:24:36] Ronald Skelton: So what made the, remind me real quick. What made the shift, we're working for others and now you're out on your own, right? What made that shift where like, okay, I'm ready to do this. Cause a lot of people are still listening right now. And they're like, they're holding onto their day job, they're really listening to this. They may have listened to a dozen shows by now.

[00:24:53] They know they're going to do it at some point, but there's a catalyst. Something makes a shift at some point where like, okay, now's the right time. What was that point for you? 

[00:25:01] Patrick Dichter: I think I've always had a little bit of an entrepreneurial itch. But I didn't know what it was going to be. And then a couple of things happened. That marketing startup that I was at, I poured my soul into that and I just felt like I didn't have much left, right? 

[00:25:16] Like I was making decent money, but there were stock options that I would lose if I left the firm. And my sales org was like growing 50 percent year over year in production and my income was flat. And I tried to renegotiate my sales comp with the founders and they were just like, Nope, it's not going to change.

[00:25:32] And I was like, I'm out of here. So then I go to this consulting firm, work really hard. I'm helping my clients make a ton of more money. I have the opportunity to make partner. And then when I look at like, what does it actually look like to make partner? I was like, it doesn't seem like that much upside, you know?

[00:25:47] And I think to go for an acquisition, you have to have a little bit of a chip on your shoulder, a little bit of crazy. And I was like, I'm tired of not feeling like I'm getting all this upside, right? Like I've worked so hard since eighth grade to what I do, what I think are the right things.

[00:26:03] Get the good grades and do well in sports and get into the school and do all these jobs. And then I just felt like I had very little to show for it, for our family. And I was like, fuck this. I'm going to go bet on myself. And, it was like, that was really the feeling is like, I'm tired of, feeling like I pour so much into it and I have like very little to show for it. So, I'm gonna go for it.

[00:26:23] Ronald Skelton: No, I like it. I've interviewed so many people and it's usually one or two things like, it's the story of an opt like me. I've been an entrepreneur all of my life. I make a horrible employee. I'm really good at solving problems and fixing things. So if you look at my employment record, I usually work for companies one or two years, and then once everything's running really well and they're having less outages and things are not broken anymore, I get bored and tell the ownership.

[00:26:44] Well, I think about them and then I, and then they asked me to leave or I leave, just because I find something better. So I'm not a great employee.

[00:26:52] Patrick Dichter: Yeah, I think you have to recognize that and have the self awareness, right? Like, am I a good employee or am I not? And I think for me, like I was an excellent employee, but it was just like, it was a self awareness of like, okay, if I really want to build wealth, like that's just not going to help me build the type of wealth that I want.

[00:27:08] I didn't grow up with money. I have three young kids. My wife works and I was like, no, I'm going to take a bigger swing here. 

[00:27:15] Ronald Skelton: But yeah, when my father passed away of cancer, he actually, he gave me a ring that, that this company had given to him for working at that company for 25 years. He says i've worked with this company. And I said this at his funeral too and kind of ticked off the owner. But I said, dad handed me that ring and said look, I didn't get a, I barely got a high school education.

[00:27:33] I think he dropped out in 10th grade. He said, I felt like I was stuck working for the same company. He worked there for 44 years and he said I don't think I feel like I could go anywhere to go. He says life's too short. Don't do anything you hate doing. Like I worked at the same company at 25 years.

[00:27:45] They gave me this, like this cheap gold ring and he gave me the ring. Which I held up at a funeral and didn't realize the owners of the club were, I mean the owners of the paint factory were there. And I was like, it made up my mind. I'm like, I'm getting outta IT.

[00:27:55] I hate IT and I'm not gonna spend another day doing something I hate. I'm gonna go find something I enjoy. 'Cause I was an employee at IT companies of at that point. But, entrepreneurs are either one, I think there are two different guys. Like I said, the kinds of entrepreneurs all their lives.

[00:28:08] And there's kinds like, Hey, I'm done with this. I got to go do my own thing. You need both because I would imagine if you took the EOS test that says visionary versus, operator, you probably fall on a higher operator scale than most. And you are a key element to a lot of companies out there. 

[00:28:25] I'm always looking for that, what they call them integrators, I call them operators, but basically somebody who's organized, wants to systemize things, grow it a systematic way. You need those people. There's a stones to guys like me who are looking for the next problem to solve, and they call them visionaries. I hate that word. It puts me on a pedestal. I don't call myself a visionary, but I like solving problems. 

[00:28:48] What happens if you're the problem solver? If you brand yourself, I'm the problem solver, what does everybody bring you? What do you always have plenty of? Problem, right? So you don't want to be that guy. And I've had that problem with a lot of companies I had. I had a real estate investment firm that I own, and it was the hardest one to do in any industry.

[00:29:05] We negotiated short sales and did investor backed short sales. There's not a more complex way to do real estate. That said, I had buddies of mine that were going out and, it'd take us 18 months to negotiate a deal. And we'd have 50 or 60 of those in negotiations at any given time.

[00:29:21] But, there were buddies out there. He goes, I flipped three deals this week. And like in the time that you took this, like you had to negotiate buying a house for six months from a bank or 18 months from a bank, fighting with them and sending them documents and negotiating with them.

[00:29:33] They went out and bought one and, and finished it and sold it already. They'd already done everything. So, not all the time is the most complex way, the most important. That's why I like that you're kind of putting the brakes on the, growth by acquisition. That's one of the complex ways to go.

[00:29:48] Patrick Dichter: Yep. Yeah. I think, in most businesses, like you're either you're fixing marketing and sales and then it works and then your ops breaks and then you fix ops. You're like, okay, now we have capacity. Let's go back and crank on marketing and sales. I think a mistake is not realizing that you need to oscillate between the two.

[00:30:03] So yeah, we're at a point where we're going to slow down on growth for this calendar year and tighten up our people and processes. And then maybe we'll be in a different spot next year. So we'll see.

[00:30:14] Ronald Skelton: What does the end game look like? Is this something you're going to run until retirement?

[00:30:18] You're going to build it up till you can get your six X from the PE firms. Or is that something you're uncomfortable saying? Cause your employees might hear it. I didn't think about that before I asked it. 

[00:30:25] Patrick Dichter: No, it's fine. Yeah, I've got, I don't know, PE firms and strategics like barking on my tree now, but, no, my plan is to hold it.

[00:30:33] And the original game plan, we'll see, but my midterm goal was to get it, up to 5 million within five years. Offline revenue, and then hold it and then start buying other types of small businesses. So apple tree, the accounting firm would always kind of be the platform or the main HQ to create like deal flow and cash flow and relationships, to then maybe go buy a SaaS company here or an HVAC company there, a landscaping company there.

[00:31:01] So right now I'm really focused on getting to that midterm goal. And then we'll see if maybe I'd end up pursuing other acquisitions, or maybe I just stick to holding this one company and grow it even more. 

[00:31:14] Ronald Skelton: It's interesting as I know, I know I've interviewed quite a few hold co's and I haven't run across, I have the same idea you have there. Is, right now I'm buying media assets and websites and newsletters and stuff like that because I'm buying customer base.

[00:31:27] And the reason I'm in the B2B space is, and at some point I'll probably get an accounting firm because I'm paying accountants, right? And I'll probably, I know marketing pretty well, but I'll probably get a small marketing firm. Just like I run this podcast, I'm absolutely currently seeking, purchase a guest booking services.

[00:31:45] Some of them make good money. My team's really good at booking all guests. I've got more guests than I absolutely need, but right now it's a cost center for my business. I pay VAs to reach out to people, but it could be a profit center. So the reason I would acquire, but if you're holding a hold company, owning a marketing firm and an accounting firm and and that type of stuff.

[00:32:05] I got the concept years ago from a really weird source. I was in the Air Force, a buddy of mine was in the Navy and, I think he might've actually got kicked out of the Navy because they figured out what his business is, why he was making so much money.

[00:32:18] I got out of the Air Force in 97, yeah, 97. So he was, it's about probably 94, 95. And, he had one of the first adult websites and a data center nearby. And, all Asian adult stuff, but his accounting firm figured out what he was doing and, basically fired him as a client.

[00:32:36] So he bought an accounting firm. Like I'm your main client, and you can still have all your other clients, but I'm your main client. And then his ISP, his internet service provider said, yeah, we don't want you in our data center anymore. And he's like, we've seen them on the market. They're actually, the reason they wanted him out of there is they were, they were for sale and they didn't want that clouded.

[00:32:54] So he bought them. So now he owns his ISP. Basically he built this holding co infrastructure around this and he was doing, you know. I asked him one day, well exactly how many, how much money are you making? He goes, well, i've got six hundred thousand people paying me four dollars and ninety five cents a month. And I was like, okay. 

[00:33:14] I'm not interested in being in the business, but I learned from the model. I love the idea of like, okay, you're going to use accounting all the time. Why not be the main client of your accounting firm? You're going to need marketing services or sales for services all the time.

[00:33:24] Why not be the sales, like the lead client for a good outsourced sales team, right? So I think that's a brilliant approach that you're thinking is maybe later on when everything's ironclad and this thing's really where you want it, I'll buy something that really needs a solid accounting team. And maybe you'll get a discount on it cause their books aren't that good, but your guys can go in there and rip it apart and put it back together. There's all kinds of businesses out there that are for sale. They're solid businesses, but they don't know how to display it correctly because their books are just a mess.

[00:33:52] Brokers try to fix it all the time. Half the time the brokers can't even make it look right. So, what's the next, I mean, I've asked you a lot of questions. What am I missing here, man? What should we talk about?

[00:34:01] Patrick Dichter: Well, one of the other things, that pre show we talked about was, mistakes that searchers make and related to their accounting.

[00:34:08] And we see this all the time. So I think the big mistakes that I see commonly is, somebody that comes from like private equity or finance, they buy a business and they're like, Oh, I know numbers finance and they try to do their own bookkeeping. It doesn't go well because like the last thing that you get to, and so you're always behind and you probably make mistakes.

[00:34:29] So that's one thing that I would say avoid. The other mistake that I see a lot is they'll use the seller's account. And oftentimes like their loyalty is to the seller, it's not to you. And they're probably not like a modern accounting firm. So just recently a guy bought a printing company and I told him that, and he's five months in, he's like, you were right. 

[00:34:52] I used the seller's accountant and I'm getting like terrible service and nothing's up to date. And then the last mistake that I see is they try to just hire bookkeeping when they've bought a business. But when you do that acquisition, more often than not, it's an asset sale, right? So you can do asset or stock sale.

[00:35:09] But when you do an asset sale, you have to take the purchase agreement and stand up your balance sheet properly. And that takes like a CPA or a really good accountant to do that. And then your bookkeeping flows from there. And, a lot of people don't do that. So, their balance sheet is just wrong for the first year or their first tax return just goes terribly.

[00:35:30] So the way we like to do it when we work with searchers, we start talking to them when they're under LOI, scope it out. And then we have an onboarding call with them like three or four days before they close, so that their operating account is already connected to QuickBooks Online. It's one less thing to worry about.

[00:35:44] And then, you go ahead and close, we stand up the balance sheet and then from day one, you get good, clean financials. So you can see what's my margin looking like,what's my debt service coverage looking like. Can I take money out? Can I buy additional acquisitions?

[00:35:59] And it's one less thing that they have to worry about versus trying to do their own bookkeeping that they usually don't do well.

[00:36:05] Ronald Skelton: Right. One of the things I've noticed is a lot of the, maybe not the searchers themselves, but a lot of the acquisition entrepreneurs. When you say search funder, usually people using that phrase typically fall in their MBA students coming out of school.

[00:36:19] They've raised money and they've got some backing and some coaching as to buying a company. If they're self funded, that's another thing. There are some acquisition entrepreneurs are starting to put that label on themselves, saying, I'm a search funder. And, I think there's a distinction between the two.

[00:36:32] I really think there is. Usually in my world, the acquisition entrepreneurs come from the world, hey, we've run does this is for, like me, I'm getting a little old, a little tired, and I don't think I want to spend like try 10 new ideas and see which one sticks. Like I used to do when I was young. 

[00:36:45] Cause not most startups don't work. So now I'm looking for things like what's already working or it's already churning cash out, that I couldacquire or invest in, that would, benefit me and my family. So on the flip side of that, not everybody should be a start, not everybody should start a business and not everybody should acquire a business. But the, the acquisition entrepreneurs, I don't think very many of them have a good financial background, right?

[00:37:11] You were in sales, you were in marketing, I'm not a CPA, right? Probably understand accounting. I've looked at so many balance sheets and stuff. Probably understand accounting more than a lot of people, but I wouldn't dare try to, like when you say stand up the balance sheet, I'm a hundred percent sure I'd get it wrong. 

[00:37:27] I'm a hundred percent sure. Right. Cause I didn't even know what you're talking about. If somebody told me that I could produce a balance sheet, I would pull up the one in QuickBooks or I'd pull up the one in some Google template or,Excel template and started trying to fill in the blanks.

[00:37:39] What does it say? It needs to go there. Okay. The template says this goes there and that's not necessarily always true, right? Probably wrong. 

[00:37:47] Patrick Dichter: Yeah, it'd probably do it wrong and spend 10 hours on it. When you could have spent those 10 hours, like work with your team.

[00:37:52] Ronald Skelton: Or looking for my next acquisition. Cause I do small ones.

[00:37:55] Where do you see, like, other than the initial setup, do you think that, is it something they should outsource totally and just have an accounting outsource team? Or do you think this is something that, it just needs to be set up right, guidelines followed. Do you guys do anything like, A lot of these companies, you don't do, you don't do the like, okay, we'll bring you up to speed.

[00:38:13] That's why I was going to ask. Because a lot of times you buy these smaller companies. They have an internal bookkeeper accountant. Some of them even have, I haven't seen too many with the CPA unless they're doing a million dollars in EBITDA, but sometimes you get people that have trained accountants in the past.

[00:38:26] Patrick Dichter: That can make sense. Right. Yeah. When you get over, I don't know, five, 10 million in revenue you could have an in house staff account. But, to do your own bookkeeping, I still think that you're going to shoot yourself in the foot and do things wrong, versus having a outsourced professional company do it. 

[00:38:42] Ronald Skelton: I think there's something to be said about competing interests and cognitive bias too. If I work for you, if somebody works directly for me on a day to day basis and I say, Hey, I need to go buy this.

[00:38:55] My account, my internal staff accountant is probably going to figure out a way to try to make it happen. Because he's employed by me. I reach out to an outsourced guy like you and says, Hey, I'm going to make a major purchase in the next two months. My books don't look like I can do that.

[00:39:10] How can we move things around and make more cash? You're more likely to be able to tell me to go, yeah, it's a bad idea. Or your team's going to go, yeah, it's not two months, it's eight months. Or go get some more sales or something other than, Hey, let me move some numbers around and see what we can do.

[00:39:24] And I've heard that in businesses I've owned and business I've worked for. Where the CEO is standing up and go, Hey, we need to make these five purchases. It's not in the budget and the controller and the other people go, give me a little bit and let me work on this. And they go back and try to figure it out.

[00:39:37] Are they trying to keep their job or is it legitimately, I like to call it a, save my butt type of accounting done if they're in house. So I can see this, I can see the purpose for going outsourced. When is it a, I mean, the other side of it is that finances, a lot of people don't get this one either though.

[00:39:53] I'll do the contrarian of you on this. Financers are absolutely core of my business by outsourcing them. Do I leave loose control of some portion of my finances. I'm putting, if I don't know my numbers inside and out and have team on staff that know my numbers inside and out, and, something happens to you or your business, you get hit by a bus, where does that leave me in my business?

[00:40:18] Patrick Dichter: Yeah. It's a fair argument. I think, if you look at a marketing agency that's doing 2 million in revenue or a painting company that's doing 3 million in revenue or a, kitchen cabinetry company doing a million in revenue, right? They get outsourced to us and we'd handle all their bookkeeping and tax for, between 700 to 2000 per month.

[00:40:39] If you were to hire in house, you're probably going to have to pay five or six grand a month to get somebody competent, right? And that doesn't, you still need to be responsible and know your numbers. So what we would do is save you time and we review the financials with you and we'd say Ron, here's what your gross margin is looking like,here's what your cashflow is looking like.

[00:40:57] We noticed,there was a big jump in software, like what's going on there. So it's, an owner still should understand their numbers. And, hopefully it's a, it's an educational process where you're working alongside your accountant as you review those numbers. Or,if you're a single member LLC and we said might make sense for you to become an S corp, we'd want you to understand why.

[00:41:20] It's definitely, it's in the middle, right? Like you still need to know what's going on and be responsible. But I think it's more likely, much more affordable. And also with our team there's redundancy. So if we have turnover, we can fill them in quickly. Whereas if you lose your staff account, you're probably down for two months before you replace them.

[00:41:41] Ronald Skelton: Yeah, it's the thing that comes to my mind is, like there's a bunch of romantic comedy sitcoms that were stifed out of a, Hey, I was a millionaire billionaire. And then my accountant ran off my money and now I have this, the little thing going over here. What was that one that was blue moon, like there was their marketing agency or whatever, but like the same thing, like there's a story of, the accountant messing things up and destroying the business or the accountants messing things up.

[00:42:03] So there's some fear of turning loose, when you're talking about totally outsourcing something, or giving somebody so much control over your finances. So, but there's gotta be a balance that like, you're not doing it right yourself either. Well, how do people reach out to you?

[00:42:17] What's a good way for people to reach out, get in touch with you, show you their messy books and see what you can do for them? 

[00:42:24] Patrick Dichter: Yeah, I'd love to connect with anyone and chat. You can go to our website. So appletreebusiness. com or look up apple tree business services. You can find me on Twitter.

[00:42:34] You can find my LinkedIn, Patrick Dichter on both of those. Always love chatting with other business owners or people searching and happy to be a resource. 

[00:42:42] Ronald Skelton: Okay. Well, I appreciate having you on here today. Is there any, anything left you want to add right before you get off here?

[00:42:47] Patrick Dichter: No, I think we covered a lot. I appreciate you having me on and, for all you do to educate people with your podcast. 

[00:42:52] Ronald Skelton: Awesome. Thank you. We'll call that a show. Hang out for just a second.