E162: Reconciled CEO Michael Ly Shares Lessons Learned from Acquiring Accounting Firms

[00:00:00] Ronald Skelton: Hey, I'm here with Michael Ly. He is the CEO of Reconciled. And I'm really happy to have you on the show today. Thank you for taking the time out of your day and hanging out with us. 

[00:00:10] Michael Ly: This is great. No, thank you for having me. 

[00:00:12] Ronald Skelton: A lot of people see your ads on our thing. You're a sponsor here.

So I just want to fully disclose that. But the reason you're a sponsor is because I really believe in what you guys have. I'm kind of picky about who I put on the show Who we even allow to be sponsors. I really like what you guys are doing. And so we're going to talk about, and you built it through mergers and acquisitions.

You grew it that way. There's a lot of applied knowledge that you have that are very relevant to our audience. I think we'll get into that today and we'll actually, learn, take some lessons and learn some stuff from you. You've done a variety of different financing structures and other stuff.

I'm looking forward to this. We always start off with the origin story. Kind of looks like you've been in finance for a while. But could you give us the, I jokingly say you were born now, you're on my show about you know by buying and selling companies. Could you fill out the gap in between? How did you end up on an M&A show?

[00:00:59] Michael Ly: That's great. Well, thank you for first of all, i'm a big fan of the show. I found out about the show and became a sponsor because I was a listener. I wasn't like looking for shows to sponsor or beyond, but I became a listener cause you, you have great content and great guests. So just want to give you a shout out on that. I was born and raised in Arizona. I went to Arizona state and studied accounting and business in arizona State. I actually started doing accounting really young at 16. I got my first accounting job at 16 and that came out of some summer database entry jobs I had at a local non profit. They promoted me after multiple summers into their accounting role full time.

So I've always either been in non profit or small business or startups as either a bookkeeper, senior accountant, controller, and eventually a CFO. AftEr I studied business accounting college, I went and joined a, local accounting firm here in Phoenix and helped to do their consulting practice as a interim controller at different companies. My wife and I, we moved in 2007 to Seattle, Washington. We spent four and a half years there. And while I was there, I helped the company grow from 10 to $40 million dollars in a period of four years and started there as a controller.

Eventually became their, CFO. Then in 2011, my wife, and after having our first child, we moved to Burlington, Vermont. I spent, 10 years in Burlington, Vermont. Mainly focused on helping small businesses and startups. After doing that for a number of years as a consultant, interim CFO controller, kind of came up with a common theme amongst those companies in that.

Usually when you go into a small business, the person doing the accounting is a trusted person, but they're not trained. So it could be the owner themselves, could be a spouse, could be a business partner, could be a receptionist office manager. But never a trained accountant, and that's almost rare at a small business.

So after a number of years of consulting, finally, in 2016, I decided to launch Reconciled. So that's the origin story of Reconciled is really, I saw a problem and I said, I think I could solve this consistent problem by providing a affordable, accessible and predictable bookkeeping service that all small business owners could access. And, so that's what we launched in 2016. 

[00:03:13] Ronald Skelton: I'm guilty of it. If I think back to all the businesses I own, I started my, I got handed my first business when I was 16. My father was a painter and he said, Hey, you wanna run this for a while? So I started running a painting, we did some remodeling, but mostly painting. From the time I was 16 until I was 20.

And, our accounting basically was, shove all the receipts in a paper bag and hand them to the guy that did the books and the taxes. He only wanted to see them at the end of every quarter. He got mad if we waited longer than that. But sometimes we go almost, I remember one, we went almost the entire year before we gave him the brown paper.It literally was a brown paper shopping bag with the little handles on it. It was a fancy brown paper shopping bag. I had the handles. But it was just stacked full of receipts with date, we made sure we put the dates and stuff on it because he was like, he trained us on what to put on him, but that's all he took. And that was our accounting. We looked at our checking book regularly and like, did we have money or do not?

And then I go to college and I had enough classes, with a bachelor's degree and a master's degree, both in business related topics. I had enough accounting classes that no, I don't want to be an accountant. In order to get a bachelor's degree in management information system you have to take accounting one and two. 

And in order to get an MBA, and marketing, you have to take accounting one and two again, at a different level. But before I graduated, I almost quit my master's degree. I was like, I don't want to be in technology anymore.

And the advisor said, what are you want to do? I said, I'm an entrepreneur. I'm going to go start something else. Well, choose something to help your entrepreneur career. And it came down to like accounting or, marketing. 

But anyway, I know enough about it to know that I need other people to take a look at it. And, right now I have a semi retired, forensic accountant that takes care of it for me.

But, when she decides to, to tell me that, she doesn't want to do it anymore. I'll probably reach out to you and go, Hey, you've been a sponsor for a while. You might want to take a look at this mess we got. 

[00:04:59] Michael Ly: Your story is no different than most small business owners. It's the same thing.

It's been that way for a long time for most small business owners. Even though there's all this technology out there, there are still many, business owners where it's a shoe box, it's a bag of receipts. And there are still accounts out there willing to take that shoe bag or that shoe box in that bag for receipts and that's the preferred method they have. So it's, honestly hasn't changed that much. 

[00:05:21] Ronald Skelton: We used to have, there was a service, I can't remember what it was called. They'd send us these Ziploc bag looking like FedEx bags. When even when I had my real estate investment firm. They would send us these bags and you stuff all the receipts in.

You don't even have to scan them. You just stuff all the receipts in it, sell it and send it out to them at the end of every couple of weeks or month. And they would scan it and put it in our QuickBooks. For even my, for my big real estate investment firm that I sold to get into this or gave it transferred the partner.

I don't know if you really call it a sell. We, divided the real estate up. But, even that the accounting was pretty much just, hand receipts over to somebody. They stick it in a, into Excel spreadsheets, which eventually made it into QuickBooks, which was, just enough to get our taxes done. And that's not the way to do it. So the funny thing was, is when I got into mergers and acquisitions the first six or eight months, I'm like, I can't find any small business that has good books. Cause I wanted to, like you're taught to review certain things. And I bought somebody on this show and he's like, you're looking for good books. none of these guys had 'em, you run multiple businesses and you've never had good books. So it is a problem out there. You guys, you You've carved off a really cool niche and, in that space that you can solve that problem for them at reasonable rates.

How's it going for you? You guys are, we said 2016, so you're what? Is that seven years into it? Is that right? 

[00:06:28] Michael Ly: Yeah, seven years into it. Yeah, it's going well. We did over 6 million in revenue last year. So We've been able to grow it. 

And in the accounting world, most of the industry is littered with small, little, tiny, small shops, bookkeeping shops, tax shops.So the majority of firms are well under a half a million bucks a year in revenue. And it's usually because it's the owner. What they feel like they are comfortable producing in services. And then maybe a part time or full time staff accountant or tax preparer or whatever.

Most accountants in the field, they don't think of their first identity as a business owner or an entrepreneur. Their first identity is, I'm an accountant. And I've yet to meet an accountant who says they're not the best accountant in the world. They all think they are. And they all think they're the best and the only one that can serve you the best. Which obviously is absurd. So it's an absurd idea, but that keeps most small accounting firms from growing much, much more past half a million bucks. Although you hear it in the news a lot about the big four, right? ENY, KPMG, Deloitte, and PwC. Like you hear about them, but they make up the minority, the smallest minority of the number of accounting firms.

And there's probably hundreds of thousands, if not a million accounting firms or accountants doing it solo work. So you would technically count them as a firm since they're independent. There's probably like a million of them or at least a few hundred thousand, and most of them are very small. So even to get past a million, we've bought firms and oftentimes it's taken them 10 to 20 years to get to a million bucks. And you're going, okay.

You're probably a typical accountant then you probably run in the business like a typical accountant, but that's mainly business. We spent the first four, four years just growing organically. Just doing our own go to market. Getting customers organically. And then it was really the past three years that we focus on a rollup strategy where we're, where we've done three acquisitions now and we're planning to continue to do more.

[00:08:27] Ronald Skelton: You've acquired three companies already. You're in the process of growth through acquisition of other companies. Can you walk us through a little bit of how did you come across the first one? Did you set on intentionally to do it or somebody reached out to you? And let's start with that.

And then we'll talk about how you built your, the thesis or the idea of what you're looking for as an acquisition target.

[00:08:45] Michael Ly: Yeah, that's a great question. So, I remember it really clearly, I was visiting my family in Arizona where my, my parents and my siblings live. And I was, it was the start of the pandemic and so I was stuck.

My family and I were stuck in Arizona. Just hanging out. And so we were sitting there, and so I would go down to an office, private office I rented. I was thinking through how do I, what do I do in this pandemic? What's something unique I can take advantage of this opportunity? So of course, accountants got super busy with PPP loans, EIDL loans, all the subsidies, helping all our clients.

And we went into that. But I really thought, man, this pandemic, this is going to be an opportunity. They're going to be a lot of firm owners that are going to get tired from this pandemic. Or not know what to do. And especially not know how to make the shift to a new remote work future.

That's going to be the reality for many, many, many, many companies as we saw that happen. So, we had started a hybrid and then we already went to remote well before the pandemic. So we've been a remote work company for most, almost all of the business life of the business. So at the beginning of 2020, I put together a thesis and a playbook for doing a few smaller acquisitions to prove that our model.

And then I reached out to a bunch of investment groups and banks to say, Hey, I want to do this, we want to get our first one. So I ended up hiring a buying broker. And he had represented a larger accounting firm in the industry. He had done, multiple deals for them at the larger size, but he had a Rolodex of a bunch of small firms that they would have bought, but they were too small.

So I went to him and said, hey, I'd like the access to your Rolodex. And I'd like you to represent us and be exclusive with us. So that's what we did. We signed him up as a buying broker. And so he did active outreach to that Rolodex and to a bunch of others firms that he knew he had spoken to in the past. And so that was really, really, helpful. And then I did my own outreach because I speak often in the accounting conferences. I'm networked and networking a ton in the industry. So I knew firms that I would have loved to put in the pipeline of potential for purchase. So that was super helpful.

So the first deal we did was November, 2020, it was a firm out of Tallahassee, Florida. And my buying broker had spoken to that guy before. And knew that this might be the right opportunity to reach out to him this time. So he was doing under a million year in revenue at the time. And so it was a great little acquisition for us, for to be able to do because we were doing just about 2 million dollars in runway in 2020.

So it's not like we could go for the whole behemoth yet. We really wanted to start small and prove out that we could do an integration. After so that's how we get started. 

[00:11:26] Ronald Skelton: You didn't try to do the minnow swallow on the well?

[00:11:28] Michael Ly: Yeah, now we're at that stage where we'd be open to that because I've known enough but at the time it was like, oh that, it's pandemic. Most investors and banks aren't going to be excited about a minnow swallowing a whale during this time.

But it was great to start off small and to follow on with a couple other small ones and learn a ton. Be able to learn a ton and de risk the financial, the financial collapse that could happen if I did it wrong. 

[00:11:53] Ronald Skelton: So what were some of the lessons learned after the first acquisition? Is like, what were some of the things like, yeah, I'm not going to do that again.

Like that part of that again. Or what were some of the things like, Hey, I really liked how, what were the wins and the things that, set you back a little bit, like, okay, we're going to do that differently. 

[00:12:08] Michael Ly: Yeah. So probably what makes me different than those who go and they, maybe they're working full time and they go buy a business, right?

And so they're not running the bit of business in the industry yet.Makes me different is that I have a team of people that actually, I need to get on the same page first. And the mistake I made for, there was a, probably a couple, a few of mistakes that were at the top of my head. And for sure, if I could go back and change them, I would.

One is, I underestimated how much prep time my team needed. To be on the same page with me about why we were doing this. I have a wonderful management team. And at the time, wonderful management team really all believed in me. We're great to work together. And they were the type of people where if I said jump, they'd say how high, right? Buying another business with a different culture, in different, different state with different type of business model. They were mainly it, it going into an office still, even though they served clients remotely because of the pandemic. They were going into an office and all the employees had worked together for a long time.

And they would see the owner every single day and they could get coffee with the owner, ask them questions. We were buying a completely different culture. I underestimated how much prep time they would need and I underestimated that or I overestimated that, that they were on the same page with me. So I wish I went back and prep them better. My side better. The other side is, I wish we took a lot more time for integration post close. My director of operations at the time felt like, Hey, we bought the firm. It's November 1st. We bought the firm. Let's give them till the end of the year, till the end of 2020 to get everything integrated.

In regards to, onto our payroll systems, onto our, all the employees stuff, but then they need to be keeping, they need to track time into our systems. They need to transition all their workflows, everything. And the thing I realized is one, if you're going to close on November 1st, November, December, or holiday months, people's brains are just done.

[00:14:08] Ronald Skelton: Thanksgiving, Christmas, New Year's right? 

[00:14:14] Michael Ly: Their brains are done. And also, they already have a job. They're working full time for the seller, right? So now they're going to work full time for you. It's not like they don't have full capacity already. They already have full capacity. Now you want to add on top of them.

Okay. You got to go through orientation, like a new employee. You need to now look at your current system. And let's say the current system is in their heads, which most small business it is. You need that current system. You need to document all that into our workflow system. Because that in order to scale, you need to have a workflow system.

You have a documentation process as we did, but we didn't give them enough time. So it was too fast. It was way too fast. Especially for accounts. Most accounts are not in fast growing environments. Even at a fast growing startup. Most accounts, the accounting department does not grow at the same pace as the rest of the company. You can have an accounting department of one or two people till you get to 10 million in revenue at one company. Then you might add a part time person, to get to 20. So the accounting department grows very slowly in number count. Well at Reconciled, our main bread and butter is accounting services.

So the accounts that join there, it's growing fast because we're hiring more and more and more accountants. We're changing our processes. We want to serve our customers better. We're changing our internal workflow systems so that we're more efficient internally. And those things changes at different sizes of the company.

So I wish we had given them more time, more like a 90 day to 180 day period of transition. And kind of listen, non negotiables must transition here. And then, slowly give them a list of things that be done within six months. So we didn't do that. We ended up losing a lot more staff than we wanted to in the first, the first six months that we could have prevented easily. It could have prevented. 

[00:16:03] Ronald Skelton: I get it. If you think about accounting in general, like I told you, I had a choice between marketing and accounting. I hate doing the same thing twice. I always joke around and said, I would outsource brushing my teeth. If I could get the right person to show up to my house at, at four in the morning when I wake up and at nine, 10 o'clock at night, when I go to bed. I don't do anything that's repetitive.

I like creative stuff and doing things unique and solving problems and that's where I thrive. I don't do well having to do the same thing over and over again. An accountant likes, order, structure, things that repeat. If you told me you wanted to be my accountant, one of the first things I want to do is, I'd walk you out to the car and like look inside your car.

It ain't going to look like mine. We live in a tiny home. I have a tiny studio here. My car's full of skateboards and, anything that's recreational is in the back of the, the station wagon looking thing I drive is a beater of a car. Cause I take the kids everywhere. I would never expect an accountant's car to look like that. My desk is cluttered with all kinds of artsy craftsy things that I like to play with and everything from, I don't know random stuff.

My dust cover that none of you guys ever get to see for the microphone when I get off the mic, my wife made it work on me, duck, right?

It's random stuff on my desk. You would never see that in the accounting world. The accounting world, those people thrive on structure strike. They want challenges they want, you know the fixing so i'm sure. But you know once it's done, it's done a certain way. That's why I think you think that every accountant thinks that they're the best is because they've got it done, it works and that's the way it's supposed to be. So I could really see where maybe an engineering firm or something a little different like that, where they're always dealing with new problems would be faster to integrate than somebody like, the widgets turn this direction. So I can see where that would be a cultural shift. And, there's book after book after book written about who moved my cheese and disruption and change. So that's a very valuable lesson learned there is, what is the culture like? Who are the individuals? And what are they accustomed to do? Do they thrive in a changing environment? Or is it really disruptive to them? And then how do you mitigate that risk and still get done what you needed to get done? 

[00:18:05] Michael Ly: Yeah. And if you think about most accounting, I described accounting departments. Think about most accounting firms, I described a little bit. 

They don't grow fast. Most accounting firms don't grow fast. Nothing changes. It's the same processes, the same people, same set of clients. And at most accounting firms that are growing that slow, yeah, the clients don't leave because nothing changes. It's Betty, Sally, Dan, it's the same guy all the time.

And there is this thing about human nature in, and about the things that we, really, are concerned about, which is our finances. We don't want a lot of changes in them, so we give it to them. I put accounting in this bucket of the five or six things that you generally shop for locally, and you generally want a person that you get to know, right?

And it's your attorney you shop locally for. Your doctor you shop locally for. Your accountant you shop locally for. Financial services advisor, your bank. So even though all those things can technically be done remotely now, even your doctor visits, 90, 95 percent of what you need can literally be done in video and prescribed.

You still go, ah, I want to see that person in person. Most of us won't make that shift. And then you also want that same person you've done it for years. Oh, they know me. They have this, you have this comfort level. So kind of firms just don't change. And then you want to, I naively thinking, Oh, everyone loves change, right?

Everyone loves fast growth as CEO of Reconciled. They love growing at a full pace. They love running, running and, you extending their energy. And the reality is most accounts don't. They just don't. So I, just really overestimated what people were capable to do and underestimated the fact that they really loved the stable environments they were in.

[00:19:49] Ronald Skelton: So how do you mitigate the risk of losing great accountants? When you make your next acquisition, you give them more time? Or is there a prep exercise and training you can go through is like, look, there's going to be some things changing here and here's how we deal with them, right?

You almost get to play the CEO slash psychologist, cause you're going to have to deal with human emotion and all businesses are human driven businesses. Whether, you're writing software and there's software involved, or you're, like you do in accounting. Even if the business has hard assets, there's a huge portion of every business that basically walks out of the business at the end of every day. It's the people that run it. How do you deal with it? Going forward on your next acquisition and stuff, what's the plan? How are you going to give them more time? You got some training in place or?

[00:20:29] Michael Ly: Yeah. So, we learned from that experience and we took a lot of that learnings into our second and third acquisition.

So we gave a lot more time on our second or third acquisition. Actually, it's funny, on the third acquisition, we gave so much time that they begged us to shorten the timeline. They were like, we actually want to move faster. We want to move faster. The third one happened to be a more modern firm.

They were ready working remotely. They didn't see clients in person. They'd have a central office that they worked at. So it was a little more better fit for us. But we gave more time that helped keep the employees understanding. Okay. The owner's not trying to just totally disrupt our lives. The owner's not trying to mess up our work.

And what's the most important thing for, the actually accountants that you're hiring from the firm, they want to be proud of their work. And they actually like the fact that they know their clients and they're going to know their clients names. So they want to be proud of their work and they want to be, they want to know they're in an environment that is not going to just surprise them every single week with change.

So in the prep time, when you buy, oftentimes you're never going to meet the employees of the firm you're buying. You're going to just know the owner, maybe some key leaders. But most of the time, never going to meet the employees until post close. The document sign, you show up with your employment agreement saying, Hey, here's your offer letters.

So what we've done is say, okay, Hey, you're going to have plenty of time. Here's the timeframe and then lay out, here are is the timeframe. And then here are the system transitions that are going to occur, but they don't all have to happen this week or even tomorrow. We're going to give you time and here are the deadlines.

And then we assign them to champions internally. To say, okay, Hey, here's the departments you're reporting to, but here's your mentor. Here's your champion that is part of Reconciled already. And they're going to mentor you through Reconciled way. So I know you're going to have a difficult, I know that no matter what we do in prepping you, this is a lot of change because now there's a new owner.

The owner you've been working for 10, 15, 20 years to build the company you're you have now, that owner is no longer going to be the owner and they're going to be transitioning out as a contractor in a year. So, we want to work with you to understand our culture, our way.

And also we want you to bring your best to us. So one thing we do express is, hey, there's a reason why we're buying your business, your firm, you help build it. There's something about it that we like. So why don't you help us be better at Reconciled by showing us the different things in different ways you service clients.

Maybe there's a capability we're missing. Maybe there's an approach that we haven't thought about. Maybe there's something about the way you communicate that we don't have set up and you find it missing in our communication style. So, we want to make sure that we're inclusive in that and welcoming in that.

[00:23:05] Ronald Skelton: And when you're going through these, you find certain people that just, they eat, live and sleep certain things like IRS code and stuff. We had an IRS guy and unfortunately, he died in a weird way. And his family's trying to take over the business a little bit.

But, he used to come and speak at events and stuff and he would bring these huge stacks of documents like this is the IRS code. He carried them around with him for real estate transactions. But his tax returns were so creative, that he put the tax code beside like if you put something on your tax return, he thought the IRS would bulk at. He'd put the code beside it inside of there so they can look it up and not come after you. But he lived that stuff. And that sometimes you want those guys that like, they love the space. They love something awkward that I would never get into. And when you do these acquisitions, finding those talents and finding those key people in there that just are, to the rest of the world might be a little bit odd, but a real asset to you, and you don't want them walking. 

You want them to come up and go, Hey, I'm a little different than most people. I do X, Y and Z and here's why. But changing things too fast, I could see you lose those people because I like, but, he was so good at, if somebody told him he was doing it wrong, you would have lost him in a heartbeat. 

He'd have just been gone because he studied that, that tax code for years and years and years. He was a licensed CPA too, but he just, that's all he did. Real estate tax returns. Let's go to some of the positive things you learned. After the first acquisition, what did you really like? We talked about some things you'll learn after the first one or two acquisitions. Like, wait a second, this is really something we want to keep, doing. What parts of it did you like? 

[00:24:32] Michael Ly: So I the first part I really enjoyed is because it's probably just because of my outgoing personality.

I love the outreach process. I love the hunt. I love the process of finding the good deal. And none of that is seeing and finding, businesses, firms and now we have actually expanded outside of just accounting firms. We're looking at payroll services companies, HR services companies, anything in the back office we're open to and looking at. But finding, finding the firm, meeting the owner and hearing their story, like hearing, what's happening in their story.

So that actually has been the, the really cool thing to, to learn and see and go about that process. That hunt and that process has been very, very enjoyable and I just get to network with more business owners and also, get to, to learn about how they built their business and what they're all about. So that's probably been the biggest thing.

And then post close, once we've done the deal, in the process of the deal, because I've done financing all different types of ways, and we're going to get into this. Because of that, I've been able to experience what is it like to do different types of financing models for an acquisition. And what I like about certain ones, what I don't like and there is no like, golden key to which one's the best.

They're all different. They all have pros and cons and they all, they all take a little bit of your flesh each time. Like they all do. But then post acquisition, as we've done the iteration is, the great people that we get to meet and we employ now, honestly, that's been really, really just like amazing. To meet amazing people who ended up at these businesses, working there, helping build them and did now have them join my team.

That's been really, really cool.

[00:26:08] Ronald Skelton: That's really valuable to just the, having a team of coming from different angles and different, diverse backgrounds and different industries and stuff, gives you an insight into some realms that you probably would have never got if you just built something from scratch. If you build something organically, you can to do what you've always done. Even if you buy something in your lane, they're always doing something a little bit outside of there, right? There's always a portion of their business you're like, why do they do that?

And then you learn it and you're like, yeah, we probably should continue doing that. It's pretty good. Let's talk about, now you've got this diverse team, you're growing. You get to meet really cool people. I see that you're, you got that true entrepreneurial spirit in that. You're insanely curious about how businesses run.

It's not everybody. Not all entrepreneurs are insanely curious about others, but I'm always fascinated about how certain things work and how businesses work. And, it sounds like you are too. What is something that's really surprised you? Like you're out there, you're looking at things and you're like, I always like the oddball stories. If you got anything that just like really stood, maybe you purchase it, maybe it didn't. I know you're under NDA. So you can't say their name and that type of stuff in those situations, but what's something really that stood out for you?

[00:27:11] Michael Ly: I guess one thing that was confirmed, but also, well, one thing that was really oddball is this, when I go buy an accounting firm, I generally want to get the owner out as fast as possible. Oftentimes in most deals, most business deals, they'd like the owner to be around for a while working, doing stuff, doing important things.

I actually don't want that. And the reason why is the owners of the firms, no matter how amazing they are, no matter how nice they are, they are the biggest impediment to culture change. Now, they're selling their business, right? You'd think they're ready to retire. They said they are. They said they're tired.

They said they're ready to be doing the next thing. They want to just go fishing, whatever it is they're doing. The reality is they've spent 10, 20, 30 years building this business, unless they are very self aware about a new identity for themselves or what their, what their worth is. All of their worth is wrapped up in the business and the day to day of this business. Their life meaning and what they wake up for, they're so used to it. I always tell owners look, I want to know that you want to transition within 12 months and if it's sooner, great. And it's not that you're not in, you're not valuable anymore as a human being. It's just that you're not needed for this business. But a lot of the reason is the culture change that we need to make happen to shift from a traditional slow growing in office accounting firm, to a more modern faster growing startup-y feeling entrepreneurial environment.

And that shift has to have complete freedom and no naysayers in the background saying, Oh, I wouldn't have done that way, whatever. I just did not expect accountants to be like that when they say they're selling their firm. Now I hear it's like, it's actually a common issue on every acquisition and every deal, most sellers don't know.

They say they're ready and they're just not. They just haven't done the work. And so you have to really make sure in that process that they do that work. And you go, Hey, I just need to know that you're ready to transition and sell, and that you're not trying to keep working. Because that's really, really key important.

[00:29:09] Ronald Skelton: I asked a guest all the time for their horror stories. And one of the ones that was most recent was a guy, I think he bought a company and the previous owner stayed as the landlord. And at first he would stop by and check on things and it was always okay, but he started getting real resistance. A lot of the changes that were being made and started like causing scenes about changes being made.

And because he's the landlord, he basically couldn't tell the guy to like, quit coming by. He did tell him to quit going in there, disrupting things. But it came to the point where when you look at it those employees work for that other that seller. For 20, 30 years, who do you think the loyalty lies, right?

And if your resistance to change, like the thing I said on the show to him was like, look, when somebody is happy with a restaurant or service, they may tell a friend. When somebody is upset with something, they tell everybody to listen. You got to imagine if that seller starts to become upset about the changes you're making, he's telling the employees there, he's telling the customers, he still plays golf with, he's telling everybody, he doesn't like you're running his business.

And now you've got this poison pill, this cancer, that's like really causing you more problems than a lot of people perceive. So I get it. I totally get the idea. It's like, look, let's transition you out as fast as possible. Let's wean everybody off of needing you. I like the idea of hey, you go remote pretty quickly here. Don't come to the office, don't go in. If we need you, we're going to call you. I'll do a weekly call, tell you how everything's going. And then maybe we'll go to two weeks, every two weeks and stuff, and then we won't need to call you anymore. And then just know that, I'm paying you a retainer or whatever, earn out or whatever to be on call, in the event we have some type of catastrophe where we really need you.

So let's go into the, one of the things, because you do what you do, you're a sponsor on the show, too. One of the things you have at a unique advantage for the people listening is if they come to you, you understand mergers and acquisitions. Especially if they've just made an acquisition and like, okay, now what do I do with all these, this accounting?

It's not the way I've ever run it. I'm not even sure the way I'm running it's right. Do you guys get a lot of onboarding? Like, okay, we just bought this thing and we like to get everything ironed out. Is that something you guys can do and help people take a look at, integrating or bringing something in that's totally foreign to even them.

Like they, you ask them questions about the accounting. Like, I don't know, that's the way they've always done it. 

[00:31:21] Michael Ly: Yeah. So we get customers in all different life cycles, especially around the accounting side. One is we get some, we get a lot of clients where they're not even using accounting system. And they might have the owner might've just bought the business. And, you sit there going, okay, how did you vet, how did you do diligence? Well, just bank statements, tax returns. Okay. Yeah. That's literally the source of truth is bank statements, tax returns. You can't hide anything there. And as long as you make your deal around that, great. So then, we then go into the process of let's set you up on a proper accounting system.

Let's get some historical data into here and let's get access to the bank accounts and credit cards and other financial systems. We need access to, to do our work. So we've gotten to that all the way to, we've got an old school system sitting in a server in some warehouse. And the only reason the server exists is because the accounting system is on there.

That's it. There's nothing, 

[00:32:06] Ronald Skelton: No other weighing computers. I remember the old weighing computers with green screens and they have a big server room it takes to run them. 

[00:32:12] Michael Ly: Yeah. Yeah. So then we just help the client with the transition into transitioning that data. If there's historical data, we want to either digital format or a archive format that we can access. 

To getting information out of there, whether it's, printed off and scan it to us, printed off, take pictures of it. Here's the screens you need to go to and the information we need. And we help the new owner go through that. And then we transition it into a more modern accounting system like QuickBooks online, Xero, Sage Intacct, NetSuite, one of those. And then, there's enough of the market that has played dirty enough or experienced enough in QuickBooks Online. And that's the majority of our clients is our QuickBooks Online. So we end up taking over their QuickBooks Online instance. We get special access to an accountant's dashboard from Intuit.

And we're able to do mass transactions and mass classifications as an accountant and do other things that, a general user can't do. So we get that and then we're off to the races and start serving the client on a monthly basis. And our clients stem from pre revenue venture funded startups all the way up to companies doing 10 million a year in revenue. Our bread and butter customer is usually around half a million to 3 million in revenue. They're are small business. They might have 20, 10 to 20 employees. 

And when it comes in, when it comes to the ETA or search entrepreneurs that are buying their first business, then generally they're coming in with a, three to $10 million business. Unless they self-funded into SBA, then it might be smaller, like a million to $2 million business. And then they're, they've gotta decide, what do I do, like you said. Do I outsource? Do I bring it in-house? I talked to a lot of, first time entrepreneurs and say, Hey, let me, help you think about the process of outsourcing versus bringing in house.

But do you really want to worry about bringing in house? Do you really want to have to build the capability in house? Is Betty that's handling the books for you right now you just hired her from the seller? Is she really that efficient? Do you think she's going to get you to where you want to go? So those are all the conversations we end up having, and helping get people set up. 

[00:34:14] Ronald Skelton: And the other aspect is if you've, if you bought a business and you plan on growth through acquisition, having somebody like you guys who understands that process, like, look, yeah, we just bought this company and we're planning on buying more. Having your accounting and bookkeeping firm, and you guys do taxes and fractional CFO, working all this stuff, you can grow with them. And when they do the next acquisition, you go, Hey, I know we've got this set up this way. You helped us set it up. I just bought this thing over here. Can you help integrate it in?

You're probably better suited than most accounting firms would ever be to make that adjustment and help with that. And even make recommendations like, you learned already that accountants don't like change. You can actually go back to the, the seller and say, Hey, I know your integration plan said you're going to integrate, you bought this thing in November and told them they had to be by January 1st, you had to be on your accounting system. Probably ought to give them a little more time, right?

You could give that intelligent, you've got the lesson learned. You got the scar tissue already there to say, Hey, yeah, we could do it that fast, but, it's going to cause a lot of ripples on the other side and on those employees on their culture and all their stuff. Why don't we give them a little more time and let's do this, this out.

You've got that knowledge that most accounting firms wouldn't have. 

[00:35:22] Michael Ly: Yeah. most accounting firms, most accountants, most accounting firms you meet are tax specialists. They know how to get the tax forms filled out. They know how to make sure that the right deductions are taken and that you're taking advantage of all the credits. And they know how to deal with the IRS for you.

Most tax accountants, if they went straight into tax accounting after college, they've never worked in a company. They've never been around supply chain, operations, manufacturing, HR. They've never been around those other parts of your business. Especially if they right out of college, they just went to work for a public accounting firm.

Now they may have done the audits of those businesses. They may have done the tax return of those businesses, but have they been in the day to day with you as a business owner? No. That's most tax accountants you meet. And then if they happen to be offering other services like booking or CFO that's probably better.

If that's most of their career because then they've been exposed to a lot of industries, a lot of types of businesses. But then you gotta ask the question, have they done a deal themselves? Have they been involved in fundraising? Have they taken a client to the bank and raised SBA or gone through the SBA process?

Most accountants have never been through the SBA process. I have, right? Most accounts I've never raised outside debt that's not SBA. I have. Most of the accounts have never done an actual equity fundraise. I have. There are some who have done that too, but most have not. So it, if you were in a certain type of place like M&A, a search funding or your fund that you want your portfolio clients, your portfolio to have account who understands and a team, you want to find that type of accountant. And Betty, Sue, Sally, Bob down the street is not likely going to be the person that's done that. That's the thing, you're going to get out what you, what the out of the experience of the accountant and what their, and the value that they're able to charge. You're going to get what you're out of it, but if you're going to go with price shopping, yeah, you can find Betty down the street for $25 an hour or whatever. But they're, you're going to get out of it, what you're paying and you're going to get out of it, just her experience, her limited experiencing in your neighborhood or city.

[00:37:17] Ronald Skelton: And you're not going to be able to go to Betty and go, Hey, I'm looking at buying another company. What do I need to make changes in my own accounting? So I look better when I apply for that loan, right? When I go to raise debt, do I need to structure anything? Do we think different? Because there's changes that can be made and, structures you can do and things you can do inside of accounting that put your best foot forward.

When it comes to applying for a loan, that's different if you're trying to minimize taxes. You knowing their strategy and their long term view of where they're wanting to go and what they're trying to do, enables you, and you've been there. Like you, okay, if you're really going to do some acquisitions, you're going to do debt financing and stuff like that.

We're going to have to cut back on a little of those tax savings. We've got to show us a little bit more revenue on there to show people that you have the ability to cover debt, debt coverage ratios and stuff. Yeah, there's a huge advantage to working with somebody who has the background that you have. So what's the future look like?

Well, first of all, I just want to know, cause, I see that you work with QuickBooks and Sage and Xero. If we don't have any bias on any of them, what's your preference? What's the right accounting side? I know QuickBooks seems beginner and I think Xero is kind of pro in my own mind. But if I had to like, are they all pretty level? Or do you, Hey, if you're going to go to a $10 million company, you probably should not be on QuickBooks or. 

[00:38:25] Michael Ly: It really depends on your industry, size of your business, all those things. QuickBooks Desktop, QuickBooks Align are ubiquitous in the U S right? They own 80, 90 percent of the market share. And here's the deal. If you are the business owner and you need to go find a replacement bookkeeper, replacement controller, you can find people that know QuickBooks.

If you have a system like Xero or something that's been built out of the country, that's been introduced to the U S market, like zero has. They've got some market penetration, but here's the reality you want to find somebody that's a master at Xero, they're not like everywhere and out there all the time. And the fact is most people have never heard of Xero. Really the only people that have are people who are in business and they've looked at accounting systems. So most people, but the term QuickBooks, it's like the term Queen X. Oh, can you take a look at my QuickBooks? They might have a completely different accounting.

We've had clients come to us and say, Oh yeah, my accountant puts it in my QuickBooks. You're on stage by the way, like you're not even on QuickBooks. It's become synonymous with accounting software, that term, that name, so that brand. So it is the easiest thing to just pick up. It's made for the layman.

It is the junior play, but it's the reason why it has the largest market share. So I would recommend it for 80, 90 percent of the opportunities. And then there's the 10 percent of clients and businesses out there that, okay, they need a little more robust system.

They're past 10 million revenue, which, by the way, 95 percent of companies don't get past, don't get past 10 million. And 90 percent don't get past 1 million. So if you were past 10, you're in this really unique place in the country. And yeah, there's systems out there for your industry, Sage Intact, NetSuite, Microsoft Dynamics and their Dynamics 365 platform.

So there's all types. It really depends on the industry size. And then if you have a uniqueness around your accounting, are you doing project tracking? Do you need to report to the government? Certain government reports? Are you a SaaS company? You have recurring revenue? Unfortunately, most accounting software have not been built or caught up to the recurring revenue nature of most industries.

Everyone's reporting on gap financial statements. So gap financial statements don't assume or have room that you're a recurring revenue business because it's trying to tie your revenue with the delivery of your revenue. And that's when you recognize it. So gap is a very different play. So when you think of a startup or a true SaaS recurring revenue business, they may want a different tool that has actual KPI metrics reporting for set, for MRR, ARR, LTV, churn. That just doesn't exist in most accounting systems. 

[00:40:55] Ronald Skelton: We had a lot of buyers of SaaS and a lot of, a lot of people in that realm listen to the show and come on here as guests and stuff. What would be a tool that you could augment QuickBooks with or replace it with if you are a SaaS or recurring revenue model company?

[00:41:08] Michael Ly: Oh, there's all types out there and it really depends on the size. So SaaS Optics is pretty popular. ChartMogul is pretty popular. There's, Recurly. I mean, there's just all types. There's a whole slew of them. And then there's what most accountants and CFOs, if you go to them, even if they specialize in SaaS, what's their number one tool?

Excel. That tool, when you have a dashboard tool or any kind of other accounting tool. The biggest competitor to everything is excel. 

[00:41:33] Ronald Skelton: When you say that everybody calls everything Quickbooks, I've had a lot of small business owners like yeah I'll send you my Quickbooks and they send me expel spreadsheets. You're sending me excel spreadsheets and not Quickbooks reports. And they're like, oh, yeah, that's what i'm at. I'm like, okay, they use turbo tax, so everything's quickbooks film, right? But yeah, I've had probably a hundred people say i'm gonna send you my Quickbooks and then they start sending me a bunch of, a hundred excel spreadsheets. So okay, did you export it to Excel or did you, you can just do reports. I just need to see the QuickBooks reports is fine. 

So let's talk about, like the future. Where you guys headed? I know you're working on another acquisition. Oh, one thing real quick, cause I know somebody's going to ask me if I don't get it out there. Do you guys do any of the, during acquisition type of accounting work, due diligence, quality of earnings reports, looking at a company and kind of giving somebody a feel of, do you guys have services inside of your portfolio, you can do that for your clients?

[00:42:22] Michael Ly: Yeah, our advisory team can do those things. The only thing we can't do is, we are not a CPA firm, so we cannot do any type of official CPA sign off for a official, officially signed QE report, officially signed reviewer audit, officially signed compilation because we're not a CPA firm.

But if you don't need that, if you just need a third party vetting, you need a third party to walk you through it, you need coaching. You want to, you don't want to go through the process alone. Yeah, we could do all of that. And actually we have done that. It's just when it comes to, Hey, your bank needs a CPA vetted, and signed by a CPA document, that's not something we will, we can do because of firm status is not as a CPA. 

[00:43:05] Ronald Skelton: Okay. So basically bank requirements and then like SEC, if you're going to go public or something like that, they have to have fully audited your financials?

[00:43:12] Michael Ly: Yeah. Some people, when they say QE or the bank says we need this, they really just need a third party accountant to look at it. But they don't, they're not saying they need a, like an actually official audit report. And so that's a, anybody buying a business, you want to really get clarity on that because it'll save you a lot of money in time. If you don't have to get an official QOE done or you get an official audit done, it'll save you a ton of money in time.

And the price difference is drastic. Because the CPA firms taking a risk in that if the bank thinks that, if the bank wants to go after him later, cause you don't perform in your business or whatever, then the CPA firms just like, they kind of look at, who vetted this business? And the CPA firms held liable.

So that's why there's a huge differential in price as well. And if honestly, if you can get, you can convince the bank in the lending process or the seller to forego or use the buyer to forego an official QE report that needs to be signed. And you just do that through other means. Just show them the process, show them like what, what's going to happen. 

Most of the time, they really don't need that signature or that, that letterhead saying, we're a CPA firm. It's just, like you said, the SEC, it's really certain specific governing bodies that need it. But, if you're buying a one or $2 million business, look, if you get the bank accounts and tax returns, just assume that's the best financial access you've got.

It'd be different if you're buying a five to 10, $20 million business, but you're buying something small and review and audits way too much. A seller's not going to have the patience to go through that most of the time.

[00:44:42] Ronald Skelton: So I've started this question three times. We'll do it now. What's the future? What do you guys look at as like, where are you going? That kind of thing.

[00:44:49] Michael Ly: So Reconciled's a big dream and our big vision is, we want to serve 10, 000 small businesses and entrepreneurs across the country on a monthly basis. And impact 100, 000 jobs in the communities. Those businesses are in. 

That would make us roughly a 750 to 1000 member team as a company and probably producing around 100 to 120 million dollars in revenue a year. We would be the largest, if not one of the largest account online, pure play accounting players in the country, if not the world. We won't reckon not Reconciled to become this brand that is so synonymous with bookkeeping.

We're just like you talked about quick, we've know QuickBooks has become synonymous with accounting software and anything that does accounting and software. We want Reconciled to be that synonymous when a small business owner goes, I need bookkeeping done. The top three names are Reconciled and maybe Sally down the street and somebody else. Right now that doesn't exist.

There's no brand that exists in that space right now, and we want to become that space, that brand.

[00:45:50] Ronald Skelton: That's a great vision to have and it's attainable, right? Like, there's no xerox out there in your space. There's no Quickbooks out there in your space where you describe something and somebody goes that's so and so. If somebody says I want to like, what is the synonymous one for? My wife still calls them pops. So I want a pop. You want a Coca Cola or a Pepsi? And where I'm from, if you ask for a Coca Cola, they'll ask you what flavor. 

[00:46:10] Michael Ly: Yeah. Yeah. So you say, I want a Coke. I want a Coke. You're like, okay, you want a Pepsi? Do you want a dark pepper? YeAh. Coke is synonymous in the South, Southeast with soda.

[00:46:18] Ronald Skelton: But there's nobody holding them. Nobody holds that title in your space. So now you can carve it out. It's just a matter of time and, acquisitions, bigger. 

OnE last thing before we always go, we always do this, if people can only remember one or two things from the show, what would you want them to remember? You buy, what Michael Ly buy and Reconciled buy. What do you want people to walk away with? 

[00:46:38] Michael Ly: Yeah, get help. But I benefited tremendously for people to get help. And don't be afraid to ask people for advice in that process. Reach out to anybody, reach out to Ron, reach out to me.

People are more giving than you realize. They're willing to give a lot of free advice. And I found that in my journey, as I started my business and then went out and start acquiring, there were so many people that were supportive. People want to see, generally people want to see other people succeed. Because it helps them. It's like at the end of the day that you're not paying me, I'm giving you free advice, but I feel great about that. I feel great that I was a part of your journey. So just get help and don't, if you're a you're listening to this and you're going, I need to find my first bid, buy my first business, or I need to do something then. And you're just not where you're afraid, you're not concerned, we'll just get some help, reach out. And the other thing is this is, if you're trying to buy your first business, what I would do is whatever industry you've picked, I would reach out to five to 10 business owners in your industry that you're trying to buy in.

And I would take them out to coffee or lunch. Most of the time, those guys aren't asked to do anything. They're not asked on podcasts, they're not asked on to a meal, they're not asked for advice. You might be the first young person, the first owner, the first neighbor to ask them for advice. And that's so flattering, right?

So I would do that. You want to break into car washes, you want to break into laundromats, whatever it is. Go find the owners and don't worry if it's the one you actually want to buy. Don't worry about that. Go find the ones that are running the bad ones and go find the ones running the good ones. Ask them all for advice. So that's kind of what the thing I do that. 

[00:48:11] Ronald Skelton: I absolutely do that. Actually, I was looking at the coffee industry. I started calling people that like I knew a couple people in the industry just because I happen to have known them through business network and other ways. I got ahold of them.

I knew some other people. I just cold called them right out of the blue say, Hey, I'm in mergers and acquisitions guy. I'm considering getting into this space. I would love to just talk to you, even if it's on zoom or for a local. I'd love to meet with you and I'll buy you a lunch or whatever.

And, could you tell me about the industry? And they do, they love to talk about it. They like, why did you get in. And I'm insanely curious anyway. Just being able to hear like their foundation story. What why did they create what they created? What would they do differently? And then what are the gotchas?

I decided not to go to the coffee industry because after three or four good conversations with people really in the industry, It's a corrupt industry. It's almost as dirty as diamonds. I just didn't want to look over my shoulder all the time. There's middlemen that are dangerous like these the farmers don't get treated right. There's actually some really shady stuff that happens in the coffee industry. You got to constantly look out for. And, just not a play I wanted to make at the time.

That said, how do people reach out to you? If they want to reach out and chat with you or the, if you want if they want to get a hold of Reconciled they go to reconciled. com but if they want to talk to Michael Ly or they want to pick your brain about something. Or they've got a merger, it's like they've got an accounting firm you really should look at. They decided to walk away from, it's too big for them or something. You know if they've got a reason to reach out for you How do you want to be contacted? 

[00:49:32] Michael Ly: On linkedin. I'm on linkedin. Just look at Michael Ly. I have a fire emoji in front of my name. And so i'm the Michael Ly with the fire emoji from my name.

Just look me up reach out. I respond to almost all my messages. I monitor people and I'm very active on LinkedIn. So I've got over 10, 000 followers on LinkedIn and I have a show weekly. 

Yeah, I love outreach. I love people outreach. So it, whether you're buying in the accounting industry or you're buying in another industry, doesn't matter to me. I love talking to business owners and I can, my firm and myself can walk with you through that whole process.

[00:50:00] Ronald Skelton: Awesome. Well, I appreciate it. This was a bit of blast. I think we'll call that an episode. 

[00:50:03] Michael Ly: Yeah. Awesome. Thanks, Ron.