Scaling a boutique requires scale capital. Adding more headcount, entering new markets, launching new service lines, and other initiatives require capital. On this episode, Matthew Lescault, President & CEO at Lescault & Walderman, shares how he has financed his new acquisitions and how he has been able to successfully integrate the acquired firms into his processes and culture.
TRANSCRIPT
Greg Alexander [00:00:15] Welcome to the Boutique with Collective 54, a podcast for founders and leaders of boutique professional services firms. For those that aren’t familiar with us, Collective 54 is the first mastermind community dedicated exclusively to helping you grow, scale and exit your pro search firm. My name is Greg Alexander. I’m the founder and I’ll be your host for this episode. And today we’re going to talk about growing through acquisition. Very often we talk about selling your firm, but there’s another side of that equation, which is buying other firms as part of your growth strategy. What I hope to accomplish today is to put this on your radar as a possible growth avenue to discuss maybe how to finance it. The strategy behind acquisitions and how to integrate it successfully after you’ve bought the firm or firms. And we’re very fortunate to have a role model. Role model with us today. His name is Matt Lescault, is a member of Collective 54, is going to be sharing parts of his journey with us. So, Matt, welcome to the show.
Matthew Lescault [00:01:17] Thank you, Greg. Great to be here.
Greg Alexander [00:01:20] Would you provide a intro to the audience? Tell us a little bit about your firm and yourself.
Matthew Lescault [00:01:26] Yeah. So my company, Lescault & Walderman, the outsource accounting firm, providing bookkeeping controller, CFO services as well as system implementation of ERP level accounting software and third party products. We’ve been around since 2006 of formula services, but I would say that really the iteration of the company as it is today, the model that we have as that is today, really started in 2017 and was with a big change in how we’ve done things in the past. Just as a quick sidebar, you know, we went from really a siloed model to a firm model and that really changed the game for us from a scalability component.
Greg Alexander [00:02:09] Tell me about that. What do you mean by siloed model to a scale model or firm model?
Matthew Lescault [00:02:15] So, you know, in professional services, you know, there’s two, two kind of models that can be that. You see that in a lot of ways. So silo model is each partner kind of has their book of business, operates their book of business in a way that they see fit. They might have different processes, might have different billing rates, might have different focuses. And it’s really, you know, and a lot of times that you put your kill mentality for a model really takes the idea of one collective vision, one collective strategy and deploying that firm wide across all partners and all staff.
Greg Alexander [00:02:54] Okay, got it. And what caused you to make that rather substantial change?
Matthew Lescault [00:03:00] I call them glass ceilings. I’ve hit a number of glass ceilings over my career. What I mean by glass ceiling is sort of a barrier that you kind of put put in your own way, a barrier that that can be broken through. But you have to be able to self-reflect and understand where your where your strengths are and where your real weaknesses are. So what we noticed is that, you know, when we were in that kind of siloed mentality, we didn’t have processes that allowed for the real growth to bring in middle management, to bring in the ability to take on more work and take it off of the owners to be the main points of contact. And so when we were able to take it away from us and create this process, that strategy that’s firmwide, we were able to empower our staff to be the points of contact and not fall directly on the ownership group.
Greg Alexander [00:04:00] Yeah. That is a really big change that graduations are making that change. You know, that’s that’s a pretty common path, the approach that firms go through and sometimes they get stuck and they never make that change. So congrats on that. The team wanted you to come on the call today for a particular reason, and that is you’re one of the few firms inside of our membership that has made some acquisitions, and that’s part of your growth plan. And that’s where really my line of questioning is. And I guess my first question would be maybe a 30,000 fee, kind of what’s the strategy around growing through acquisition?
Matthew Lescault [00:04:35] So our strategy is twofold. I know we’re here to talk about acquisition and I won’t spend much time on this, but I truly believe in organic growth coupled with acquisition growth. You can say the other way around, you know, acquiring growth and or acquisitions as a growth strategy and having an organic component. What we looked at as we saw in our industry, in the accounting industry, a lot of role grow ups happening in a lot of books of business out on the street and some general industrywide issues around hiring and what everybody’s talking about. So from from our perspective, when we understood how the financing worked, we thought that the way that we could solve kind of two components, one, or gaps within our own capability structure and two, and in creating deeper trenches within our industry focuses in our what we what we consider our niches. Acquisition was a it was a way to pump a big chunk of clients in at one time.
Greg Alexander [00:05:41] Yeah. So I love the fact that your strategy is, is to protect, you know, you have your organic growth, which for obvious reasons is very important, but you’ve augmented it with inorganic growth, meaning grow through acquisition. And this is a real area that you can contribute because a lot of our members are boutique pro firms and they haven’t gotten to that second leg of the stool yet. They’re relying almost exclusively on organic growth. And I do believe that in some niches yours is an obvious one, that there is an opportunity to augment that growth and plug some gaps and deepen some niches, etc., through acquisitions. But the challenge is some of them have, practically speaking, especially those that haven’t done it before, is a how do you find the deals and B, how do you pay for them? So what advice would you give our listeners on those two dimensions?
Matthew Lescault [00:06:37] I hate to do this, but I want to take one step back because I think that there’s a real key component to being able to successfully go go into an acquisition strategy. And doing one acquisition is not what I would call strategy, and I don’t think that you have to have the infrastructure. But if you want to go into a into a the acquisition strategy, do multiple ones, which is what we’re doing. I actually started this path back in 2019 and which I identify a lot of shortcomings within our company that would stall the ability to scale. And so we spent from around November late 2019 to mid 2021, building our infrastructure up in preparation for the acquisition. Now part of that goes into some of these you’re talking about right now is understanding the overall playing field that you’re dealing with. For me, a lot of a lot of firms are represented by business brokers that are akin to investment bankers, and they didn’t really understand the understood the industry, the accounting industry and how that worked and didn’t understand what a good book look like. And so what I started doing through through my research is really trying to align myself with people that understood and work specifically within the accounting and accounting consulting industry. And really started to pick those people’s brains of what successful what other firms had done and create a strategy around that. What’s going to be the most successful for us? So it really started well in advance and saying, okay, we need to have really good H.R. processes for onboarding multiple staff at one time. We need to have great client onboarding experience because we’re going to be switching all of these new clients over our engagement letters in our process, and we need to have the appropriate level of staff from a again, middle management, upper management, so that it didn’t fall completely on the owner. And so we spent we spent a good year and a half just creating that infrastructure to get into the acquisition mode. The next thing was really understanding the financing component. You brought this up. I went and found a bank that all they did was finance for accounting firms and actually our firms. But I don’t know a lot on that side of it, but they really they they’re a bank that understands the accounting world, understands what makes the value of the firm, how cashflow works from a seasonality. And I go one about the process in a very unique way. So I didn’t go through SBA. This wasn’t SBA lending. This was underwriting through the understanding of our entity. So they came in, look at our profits, they looked at the way that we structured our client relationships, and they underrated us for a certain amount. And basically they understand how how we fund and finance through the acquisition process.
Greg Alexander [00:09:51] Okay. Very good. You know, that’s interesting. A couple of things that you mentioned there. I want to just double click on. It’s really fascinating to me that your strategy from the get go was to do multiple acquisitions as opposed to a single acquisition and the prep work that’s needed to be put in place to make that happen. That’s a real lesson to be called out. And I want to underline and circle that for our members that are considering growth through acquisition. And then the second thing regarding the financing, so if I’m from to understand you correctly, given the fact that you went to a bank, it sounds like these deals were done through debt. Is that correct?
Matthew Lescault [00:10:25] Yes.
Greg Alexander [00:10:26] Okay. So regarding the debt, maybe just broadly speaking, what are the structures? What’s the structure of a loan or a set of loans used to execute this strategy?
Matthew Lescault [00:10:40] So the way that the way we’ve structured this from the actual banks perspective was we took the valuation that we agreed to with the seller and we split into two, two buckets, basically your asset purchase and then your consulting for retention. So there’s always earn outs and that’s a big, big component, especially in accounting. But I think professional services in general is that you really need to make sure that you have a strong earn out clause within your agreement. And so from the banks perspective, we got the 50% from them financed that over a ten year period and then it will pay out from consulting for a three year period after that. That’s tied to the retention of the client base.
Greg Alexander [00:11:27] Okay, very good. So half the deal. So if I’m selling my firm to you, I’m going to get half the deal, a cash at closing, then I’m going to be in a three or and I’ll turn largely to client retention. And then you as the buyer just a. Everyone listening. You’re funding that really with 100% of other people’s money, the bank is providing the cash at closing and then the business, based on their performance, is funding the rest of it through the three arena. That’s really a brilliant strategy regarding the debt itself. Do you have to personally guarantee it?
Matthew Lescault [00:11:59] I did.
Greg Alexander [00:12:00] Yeah, I thought so. And that makes me admire you greatly. Obviously, you’re convicted. You really have a lot of conviction on this strategy. So some of our members are reluctant to extend themselves in that way with personal guarantees. So how did you get there emotionally, psychologically? How did you accept that risk?
Matthew Lescault [00:12:23] And that’s an interesting question. I guess I just I just kind of realized that if I wanted to get my goals, there wasn’t going to be a bank or a no or to get debt that wasn’t going to ask for a personal guarantee. I didn’t want to give a personal guarantee. I had to get a private equity. And my goal is to not sell out private equity, at least this early on. And if I ever do, it’s going to be I want to be on my terms. And also with sort of planning out the strategy of the debt financing, I really understand the cash flow of what I’m doing. And again, when I haven’t when I have an earnout, you know, and I know what the profit margins are, I know what they’re going to be consistently. You know, we can we typically are purchasing books of business that we believe we can get 20 or 30% gains out of out of the out of the gate. You know, every every time that we’re financing these, we’re actually picking up additional gross profit that is allowing us to go back in and get more lending. And so at the end of the day, I feel very confident in our ability to do this. I’m not too concerned about my personal guarantee because, you know, that’s the best way to put it. I got the funding based on my current EBIDTA. And so every time I purchase a new book of business, an increase in my EBIDTA from a dollar amount, making me more or less risk because I have more cash.
Greg Alexander [00:13:52] Yeah. And making you more bankable. Right.
Matthew Lescault [00:13:56] Well, my joke my joke to the bank was, you know, was lets make me too big to fail.
Greg Alexander [00:14:02] Yeah, exactly. I tell you, it’s a really innovative strategy. I have to tip my hat to you. I’m not seeing a lot of this. I don’t know if it’s sector specific or not. Is there is there a general kind of sector roll up happening in the accounting space right now?
Matthew Lescault [00:14:18] Big guys are are buying up firms left and right. It’s. I’m going to say this, so I’m going to start with I believe that you have to have a Y for growth. Everybody wants to grow. Everybody talks about growing. But what’s your why? And so I think this is really started for me as I saw what was happening in the industry. And I saw that really you as an organization or us as an organization would need to have investment into technology, technology development, not just buying technology, but innovating new technology, integrating new technology. We would also need to invest in professional development paths for learning paths to for staff retention. And we need to be able to compete. We don’t to be the size of of the Baker Tilly’s of this world or the RSM or the clay is. We don’t need to be that big, but we need a capability perspective. We have to be able to be competitive. So with that being said, the Y is what really drove the reason for the growth and why we wanted to go down that path. I did not want to be forced at any time. Again, the other side my way is I want to make the decision. I want to be able to say I want to sell because I want to sell. I feel like I have to sell or I don’t want to sell, period. And I’m never going to sell. I want I want at the end of the day to have the choice. And I really believe that if we didn’t invest in being at a certain level, at a certain size, that my hand was me force at some point.
Greg Alexander [00:15:58] Yeah, well, that it’s such a great story. And we’re at a time when to where we try to keep these episodes short. But this is a real contribution. It’s something that I don’t think a lot of members are thinking about. Those that are thinking about it might be thinking too small, maybe one deal, as opposed to doing several deals. They probably aren’t ready infrastructure wise to do a lot of deals, and maybe they’re not confident enough to go on the line with a personal guarantee. So all those things, you provided a great role model this week and hopefully it’s inspirational for the other members. So you have on the membership, really appreciate you sharing part of your journey with us today.
Matthew Lescault [00:16:37] Thank you very much. It’s great to be here.
Greg Alexander [00:16:39] All right. Okay. So for those that are in pro share and want to belong to a community and learn from great people like Matt considered applying to Collective 54, you can find us at Collective54.com and if you want to read more on this subject and lots of others, pick up a copy of our book, The Boutique How to Start Scale and Sell a Professional Services Store. Thanks for listening and I look forward to our next episode.
