Host: I wanted to have Patrick Dichter on Acquiring Minds because Patrick was a consultant to dozens of small businesses over a number of years. Then last year set out to acquire a bookkeeping business. So he was exposed to tons of different businesses and from that experience decided that a bookkeeping business, very specifically is what he should buy. As he embarked on his journey to becoming an acquisition entrepreneur, I wanted to learn what attracted Patrick so much to bookkeeping. And so this episode is all about that. And if you want another good bookkeeping story, check out episode 38 with Chris Williams, who also acquired a bookkeeping business in 2021. Okay, here comes Patrick Dichter, the new owner of AppleTree Business Services. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. As you can imagine, podcasters love to connect with and hear from the audience. I am no different. And one quick and easy way to do that is LinkedIn. Many of you have already reached out to me via LinkedIn. Thank you for that. But I figured I would mention it here on the pod and encourage everyone else to do the same. Connect with me. Let me know what you'd like to hear more of or if you're searching how that's going. It's really cool to hear from you. Just search Will Smith acquiring minds on LinkedIn or on Google. That should also turn up my LinkedIn profile toward the top of the results. Just make sure to search for Will Smith, Acquiring Minds. If you search just Will Smith, there's this other guy that'll appear first. See you on LinkedIn. Patrick Tichter, thank you for joining me today on Acquiring Minds.

Guest: I'm happy to be here. Thanks for having me.

Host: You are the new owner of AppleTree Business Services. AppleTree provides bookkeeping, payroll and tax services to small businesses. It's based in New Hampshire, about an hour north of Boston. And you closed on the business at the very, very end of the 2021. So just about two months ago. Looking forward to hearing your story today, Patrick, and to having you tell us about bookkeeping, which is a business that has interested me and I know others for reasons that we'll talk about. But start us off, Patrick, with your background. Give us the two minutes on you and just taking us right up to that decision to go out and want to buy a business.

Guest: Yeah. Thank you for having me and hopefully add some value to your listeners. I know when I was searching I felt like I had Podcasts and Twitter. And those were, those are my immediate mba. Kind of a lonely anonymous search while I was looking. So yeah, my quick story. Grew up in Colorado, you know, undergrad and mba. I went to school. I was not an accountant by trade. I took accounting courses and then I went down a sales path. So I, I sold door to door in college and really cut my teeth doing door to door sales. And then I helped grow a digital marketing agency after my MBA and we grew it from 0 to 35 million in revenue while I was there. And I loved serving small businesses during that time. And then I joined a consulting company, Cultivate Advisors, a great small business advisory company and had about a three and a half year run there. And, and what led me here was, you know, we'd start these consulting engagements and most of the time we'd see really bad bookkeeping. It was out of date and kind of a mess and we always end up referring it out. And I had an itch to go buy a business and as I thought about different industries or B2B service, you know, categories, I just kept coming back to bookkeeping and, and the more I explored it, the more excited I got. And so I searched for about 10 months and ultimately closed on apple tree at the end of 2021.

[4:11] Host: Cool. I want to dig in a little bit. I want to hear about how cultivate informed this and the fact that you went out looking for a particular type of business. That's really important part of your story. But you glossed over a little bit. Patrick, this itch to buy business, where did this itch come from? Had you been entrepreneurial before? Why buy a business rather than start one from scratch? Give me more about just kind of emotional journey to come and personal journey to arriving at. I want to go out and buy a business.

Guest: Yeah. Not to get too personal. I didn't grow up with money, grew up kind of lower middle income. And I always had, I felt like I had that entrepreneurial bug. But I never looked at myself as a founder type. I'm not a technical or software developer. And I had a couple of stints where I started a consumer product company or I started a small landscaping company growing up. And. I love the advisory work that we were doing. But naturally you're going to see some people that are doing really well and making great money and think maybe I could do that or maybe I could have more time, freedom. So that's where I came from. I think it was always there. And then in doing three years of advising, you see all these different businesses and you see patterns and just getting to know what my strong suits are. My strong suits are sales and marketing. So feeling like if there was an opportunity to run with that, it could be a good one. So that's part of it. Yeah.

Host: And why not? So as you know, you just alluded to the fact that we all now think of founders and entrepreneurs as Mark Zuckerberg and Elon Musk. Highly technical, which is unfortunate because of course that's historically not been the case and it's not the case now, but it's what the media has told us. But going back to whether or not to start buy versus Build, it sounds like you'd started a landscaping company as a younger guy. But why not start a bookkeeping business rather than. Than buy? So in other words, start a business

[6:25] Guest: that doesn't require technical jobs in the bookkeeping and accounting space. It's something that I thought about and I think if you have listeners who are already an accountant, it's probably better off to build. A couple of reasons made me want to buy, frankly, household cash flow. We have three young kids and just the ramp up to get it to be able to support us. I don't know if I would have been able to do that. And frankly I thought if I could buy an existing one, I could maybe add more value and move faster towards my long term goals and maybe save a few years and not burn out versus like trying to. Trying to build it from scratch.

Host: So in just your time at Cultivate. Actually before Cultivate, you said you worked at the digital marketing startup that grew from 0 to 35. That sounds suspiciously like Cassie Kneecamp. Were you guys at. Was this Revlocal?

Guest: Yeah, yeah, yeah. So yes, Cassie and I worked together. I was her sales leader for a bit and she's a dear close friend of mine. So we met each other in Ohio at a networking event. She came to work at Revlocal. We launched a couple different markets together. St. Louis, Chicago, and then she joined Cultivate in Chicago. And she's like, you should come check this out. I really think you'd like this work. And yeah, and we're still close friends to this day.

Host: So just for the audience who hasn't listened to Cassie was one of my earlier interviews, probably, I don't know, 15, 20. And she bought a fencing company on biz by sell. So you guys are following each other from Revlocal to Cultivate to acquiring minds to buying businesses. That's pretty cool. Okay, so Cultivate. So I had Cassie on talking about Cultivate I then have had the CEO of Casey, Casey Clark on the CEO of Cultivate. So Cultivate is just something I've watched. A business that I've watched seems to be doing really well, small business advisory consulting, as you said, and growing like crazy. You see such a wide cross section, presumably over three years, two and a half years of Cultivate such a wide cross section of small businesses and you decide to go after a very specific type of business, namely bookkeeping. And so give us a sense of all these other businesses. How many of these other types of businesses did you see and that bookkeeping was really rose above to grab your attention?

Guest: Yeah. So cultivate does one on one advising. And I probably had like 40 to 45 clients myself during that time. That included a lot of professional services, a lot of marketing agencies and then a lot of trades. Cabinetry, drywall, remodeling, solar. So yeah, most of their clients are service based businesses that are like 0 to 10 million.

[9:27] Host: And were any of those businesses business types or industries tempting to you? Did you consider going down a different path in bookkeeping before?

Guest: Yeah, I mean I'm always like chatting with people on Twitter. I think property management is one that is very attractive to me. I had a software development client that similarly I was like, wow, this is a great business. There was a small software company that service trucking companies that I worked with that appeals to me. And I had a lot of marketing agencies.

Host: Custom software or as a SaaS.

Guest: It was a SaaS tool for trucking companies. And then I had a lot of marketing agencies, but I did not want to buy a marketing agency. And a lot of people were like, what? Why wouldn't you go buy an agency?

Host: Especially since you've said sales and marketing is your strong suit.

Guest: Yeah. So a couple things, bookkeeping. I saw just how transformative that was to a small business when they had good clean data and they started to understand their numbers. And frankly I think the competition is higher in marketing agencies. I think there's a lot of people that, yeah, it's frankly higher competition versus a little bit more of like a cottage industry in bookkeeping. And what I saw with the firm I was at and a lot of other marketing agencies, you can do a great job and people just change their mind and stop, stop doing marketing with you. Right. Whereas it's hard to leave an accounting firm if they're doing a decent job. So it's pretty sticky. And I also, the more I explored, I just saw there's room for efficiency and there's definitely some elements that are somewhat similar to SaaS. You can have a really good lifetime value of a customer. You get the recurring revenue, you don't quite get the profitability as it scales. But there's a lot you can build off of that accounting relationship. You can help with CRM implementation, you can do fractional controller work, fractional CFO work. My long term goal is ultimately to do other acquisitions and have a holding company. And I think accounting firm just sets you up for a better platform to do that from.

Host: Sure. And was this a kind of your own insight or was there a model out there that you saw of other bookkeeping companies that have done that, that have started offering ancillary services and ancillary business services to bookkeeping?

[12:12] Guest: You know, since it's gone public now, but since Cultivate has acquired an accounting company, funny enough, they acquired a bookkeeping company just a couple months ago and that was announced. And it was funny because I heard about them wanting to do it and I had been trying to go after my own deals. So I think we had similar thoughts there. And I had a good friend in Denver who he always had a bookkeeping company on the side and he had a couple of U.S. employees and then he had a team in India and I had referred some clients to him and they were very happy with the services. And he told me what his margins were like. So a couple of those conversations were very eye opening. And then there was one prospective client that came in for Cultivate and I sat down with him. His name's Adam and he's bought three accounting firms now. And he was telling me just how many accounting firms are for sale where they're 250k to 750k in revenue and the owner can't retire or they have health issues because they never scale it past that. And his first acquisition, the accountant, died at his desk. It's pretty sad, but he's like, that's the reality is there's just so many of these smaller accounting firms that can't scale for various reasons, owner can't get out of their own way or they, they aren't able to recruit and train other people. So that was another conversation that opened up my eyes to kind of just how fragmented this space is.

Host: Yeah. Although that feels like often when we hear about really fragmented spaces, we think that right. This is a great acquisition, candidate for acquisition, growing through acquisition. But with something like accounting and people, individual accountants who maybe they're just loan accountants or they have a very small staff. If they just get to 250. Between 250 and 750. They are all. I mean it. The business is just them. Yes. Much more than say like a, you know, a really small mom and pop H Vac company where.

Guest: Right.

Host: The guy running who founded the H Vac company is probably not out in the field doing work. Maybe he is some, but he's got other people doing the work versus an accountant. They're doing all the work. So how do you. So, so that doesn't seem like as good of an opportunity. So just kind of talk me through understanding that.

Guest: Yeah. So what I started to see when I was searching is there's a lot of those small firms for sale and I think there's a lot of people that do tuck ins. They'll buy the book of business and then they'll try to retain some of the staff and they'll keep growing that way. But there weren't a lot of bookkeeping or accounting firms that were over a million in revenue and had good systems and good profitability. And if they were on the market, they would go for sale very fast. Or the bigger ones that I talked to through an introduction, they just say, I'm not going to sell this. They knew what they had and they didn't want to let go of it. So you're kind of looking for the minority of accounting firms that, especially if it's majority bookkeeping that have been able to scale like that.

[15:43] Host: But the smaller 250 to 750 type accounting firms that you just described, do those now become an opportunity for you, Patrick, that you can tuck in their client? They are, even though they're so wound up in the owner, you can buy their books of business and tuck them in effectively.

Guest: I'd feel much more comfortable picking those up now versus the first one. It's just much higher risk if that's the first one that you go after.

Host: Okay, okay. And before we get into the search, just one more thing on cultivate and what oriented you toward bookkeeping? So just talk me through a little bit how you saw in your cultivate clients that there was just this weakness that you saw over and over again, messy or non existent books and how cleaning up the books could really help these small business clients that you had. Talk me through that.

Guest: Yeah, so I think it's this natural evolution, right. Where you're scrappy and you're a guy that does websites and you go along, you're just looking down at your bank account. You're like, okay, I got money in the bank account and I'll hire a couple people and you're really, you're not looking at your financials on an accrual basis and you don't know any different. You know, so you might have books that you've done yourself, or you might have like some individual who's doing your bookkeeping. And then you throw that over to a CPA at tax time and they take this mess and try to do your taxes and they're overwhelmed. And it's a very like, reactive process. And you know that example of the founder who has a web design company, it's gotten them to that point.

Host: Right.

Guest: But if I met them at Cultivate and I said, okay, you're 500k in revenue and you've been paying yourself 80 to 100k and they tell me they want to get to 1, 2, 3 million as an agency, I'm going to say, okay, we need to really make sure we understand the profitability of each project that you're doing and what your cash flow cycle looks like and what your acquisition cost looks like and how much you're paying to contractors. And suddenly to be able to make those types of decisions and analysis, you need to have good clean books. And so then the light bulb would go off and it was an easy thing for them to understand, like, oh, this is why it's matters now to really professionalize my accounting and financials, you

[18:17] Host: know, because you really can't make strategic decisions or really understand your business very well. The economics of your business without clean books.

Guest: Yeah, yeah. And I also, I, I see why they're underserved too, because if you're a CPA and like, some guy walks through your door, he's like, oh, I just started doing websites. Would you take me on as a client? You know, it's like a lot of CPAs might not service them well because they don't know if they're going to grow or like, how much they can afford quality services. So that's really where I continue to see this come up again and again and again with our clients.

Host: Great. And just for getting everybody on the same page and definitions differentiate for me, bookkeeping and accounting and CPA and tax services and all of that, because it can get quite blurry.

Guest: Yeah, there's a, there's a big spectrum of services and there's a big spectrum of the types of firms. When I initially was searching, I was looking for pure bookkeeping. I, I didn't want to buy a firm that also did tax at the time because my thought was, you know, CPAs might refer the tax work. But typically, you know, when you think of the accounting stock, like bookkeeping is going to include reconciliations like categories and transactions, updating the P and L on the balance sheet, doing monthly financials, maybe some accounts receivable, accounts payable, type recognition. And then from there a CPA by definition is somebody who's able to do public audit work and do tax work. And then you also have other firms that might do fractional controller, fractional cfo, and a lot of firms will do payroll as well. So there's a very wide spectrum. And also the firm I bought just serves businesses. There are some people that will choose to just cater to certain industries or also take on individuals. So there's a lot of accounting firms for sale where you see a lot of individual returns coming through the door. And then there's this other spectrum of if you look on accounting brokerages, you'll see cloud based or traditional. And the traditional is where somebody's coming in and probably visiting your office and dropping off physical returns.

Host: And then the cloud, the cliche shoebox full of receipts. Right?

[21:00] Guest: Yeah, yeah, yeah. So, yeah, so. And then there's also all the particularities around what software tools do you use. So if you look on the accounting brokerages, a lot of times they'll tell you up front like what software they run all their clients through. Because, you know, if you're running all your tax work through ultra tax and somebody else uses a different tool, it can be really hard to, to combine those firms just because of the muscle memory with how you process clients.

Host: So in this world you're kind of like a whatever, as you said, like an ultra tax shop versus whatever versus a QuickBooks shop. I don't know, maybe QuickBooks is just what individuals and small businesses use, not what the firms use.

Guest: Yeah, so a lot of times it's around the tax software where they'll make the distinction on. Yeah, yeah. So, okay.

Host: And so talk to me about this evolution. So you were looking for strictly bookkeeping and then that evolved. Why?

Guest: And yeah, yeah, so I had a deal that I thought was going to close in June that was, you know, purely bookkeeping. It was about 800k in revenue. And that deal fell apart. And it was frankly two things. One, there's just not many that are big enough to have the seller's discretionary earnings. That felt worth it to me. And then two, as I talked to more people who had done the acquisitions, they said CPAs don't end up referring you back clients. A lot of times they'll try to keep the bookkeeping or they're going to keep their referrals close to their vest. And as I was doing my own outreach and I met Steve, the previous owner of Apple Tree, and he explained to me the model of how they've handled tax work with clients and the structure. I became comfortable with it and willing to take on a little bit more risk, a little more compliance, and it allowed a bigger firm size, and I think it creates more stickiness with clients when you're doing their tax work as well.

Host: Okay. So you kind of backed into it because an opportunity presented itself to buy something that was more than just strictly bookkeeping.

Guest: Yeah.

Host: What were you going to say?

Guest: And it was also just becoming. When I first started, I was like, I don't want that risk or

Host: responsibility.

Guest: And I've become okay with it. Yeah.

Host: So let's get into your search a little bit. So you, you, you went out there knowing the type of business you wanted to buy. You just referred to brokers in this space. So there are these bookkeeping and accounting businesses or practices or client lists transact enough that there's a whole cottage industry around for brokers just serving this space. Correct. And talk to me about that.

[24:01] Guest: Yeah. So there's. There's probably four or five brokerages that just cater to accounting firms. And none of them would take me seriously except one, PO Advisors. But I just could not get the time of day. I'd try to build a relationship with a broker and tell them my background and tell them that I can grow the firm and I'll backfill the owner's time. And they were just like, no, if you're not a cpa, I'm not going to present you to our clients. Go partner with the CPA and come back to me. But yes, there's definitely. Most of the deal flow is controlled through those brokerages. They'll throw the deal up on biz, buy, sell as well. But it's not like that's the platform that it usually comes through.

Host: And these brokers wouldn't take you seriously or wouldn't even talk to you because you're not a cpa. Now, does that, did that give you pause? I mean, so, so one of the obvious questions here about choosing a bookkeeping or accounting firm is, you know, if one isn't a CPA oneself, you know, and in general in acquisition entrepreneurship, we get comfortable with that. I'm not a landscaper, but I bought a landscaping company. Right. So it's not uncommon. But this is as you as you just referred to a minute ago, there's a lot of responsibility in filing the taxes of small businesses. So the stakes are higher in the work you're doing, frankly. And it's just a lot more technical. I mean there's obviously there's very technical training that goes into becoming a CPA or even a bookkeeper. So you might walk into this industry feeling a little intimidated by that but thinking you can figure it out. And then all these brokers are like, no, no dude, if you're not a cpa, so why were they saying no? Is it because they just thought that you wouldn't be able to hang or they just the thought that you were going to be a tire kicker and an actual CPA is much more likely to close a deal or what.

Guest: So there are, in air defense, there are a couple states where you need to be a CPA to own the firm. I think Texas is one. But I think the main reason was they were trying to prioritize who they were talking to and they felt like their client, the seller, wouldn't take me seriously. Or a lot of these deals have earn out components and retention components and they thought there'd be a big risk of clients churning out if I'm not a CPA that can take on a lot of that work. But I emailed them all and I said, hey, remember me? I bought a firm that was over a million, like maybe be more open minded next time. So I was petty like that and I sent them all an update. We'll see if they, if they change their stance.

Host: But yeah, I mean, and given that you are going to be presumably growing through acquisition, you are going to need to establish relationships with them for deal flow. I hope you weren't too petty. But did it.

[27:10] Guest: So you're bothered, you determine? Yeah.

Host: Did it deter you? If the industry is telling you, hey, you're an outsider, you can't, you shouldn't be buying here.

Guest: I was pretty convicted in my thesis. It definitely might have slowed me down a little bit. Even some of my own outreach people were like, you don't want to buy an accounting firm. And a couple people were like, just go start a bookkeeping firm. But during that time, truly the more I explored it, the more grounded I got in my thesis that this feels like a really good place to be. And, and I was taking bookkeeping courses along the way to try to just be able to speak the language a little bit. And I probably submitted six Lois. And so I dug in and due diligence on a few of Those. And even after some of those deals that didn't go through, I continue to remain excited that there'd be one out there that I could make this thing go

Host: okay. So let's get into how you were ultimately successful with your search. You're given the cold shoulder by the industry's brokers. So you engage in a proprietary search, ginning up your own deal flow. Talk to me about what that looked like and the mechanics of it.

Guest: Yeah, yeah. So I had a virtual assistant build a list of firms in the geographies that I wanted as well as virtual firms. And then I created an email marketing sequence and wrote the copy for that and used a tool to catch him via email. And then I also reached out to people in my network to try to get some referrals, people who had accounting firms or maybe already had fractional CFO companies and see if they knew anyone who might be selling. So the first email batch that went out, it was like 70 people and I had five solid replies. And I was like, shit, this is easy. At the end of the day, I think I probably sent 500 emails. It led to 20 or so seller calls. And you know, three of the Lois that I sent were from that. And ultimately the one that I closed was from my own outreach. So I always offer up to people on Twitter or search. Wonder if you know that you're after one or two industries. I'll show you how I did it. And I think it's a channel worth pursuing. I think some people are told outreach is the channel. Yeah, I definitely think like the broker deals are probably faster and ready to go, but you'll catch some people who have been thinking about it or maybe they didn't want to go through a broker, you know, and I heard that a lot.

[30:18] Host: And why was that? To save the money. They didn't want to pay a broker.

Guest: Yeah, I think that was, that was part of it. And they're like, I was thinking about maybe listing and a year from now, but let's chat, you know, so.

Host: And did you get any of the dismissiveness from the owners of these businesses that you reach out to that you had gotten from the brokers? None.

Guest: They were, they were much more open minded. They were almost like curious, you know, of like, okay, what are you thinking here? And let's chat. And it was kind of refreshing versus the, the feel from the brokers.

Host: Yeah. And how did you position your email? Can you give us a taste of the kind of messaging you used? That's the secret, Will.

Guest: Yeah. So really Direct subject line. And then the body was short. It just said, will. I've been looking for an accounting firm to acquire in California, and Acquiring Minds seemed like a potential fit. I've been working with small businesses for 10 plus years, and if you've ever thought about selling in the near future, I'd love to chat. Just reply and we'll get a conversation started. So it was somewhat personalized of like location, your firm in particular, and just direct to say, if you have any interest, let's chat. And the sequence was only three messages over two weeks. And yeah, it worked.

Host: Yeah, that's excellent. Now the, you know, you were searching for not only a particular industry in a particular geography. So that's a very narrow search. Although you say you had actually 500, a lead list of 500 or a, an outreach list. So how big was your geography if you were. I mean, there can't be 500 bookkeepers in New Hampshire.

Guest: Right. So we were living in Colorado and we moved to New England at the end of May. So when I first started, I was targeting people in Colorado, and then I started targeting people in New England between New Hampshire, Maine, Vermont and Mass. And then I also tried to build a list of virtual firms. Those are a little bit harder to build the list on, but yeah.

[33:01] Host: So in fact, there are a few hundred of bookkeepers that fit the bill in those four states.

Guest: Yeah, I'm sure I hit some that were kind of traditional CPA firms that I might not have wanted if a conversation started, but yeah.

Host: And the contractor who built the list for you, how did that work?

Guest: He was a person from Upwork and I referred other B2B clients to him for list builds for some of the marketing and sales outreach that I'd done with some other clients before.

Host: So can people reach out to you for this individual if they want to build a list?

Guest: Yes. But don't reach out to me unless you're gonna follow through on your shit. You know, I, I have so many people that say, well, you teach me how to do it, and I send them exactly how to do it. And I say, it'll take 500 bucks and 10 hours of your time and hardly anyone falls through. But one other guy on Search Funder did, and he emailed me. He's like, this changed my life. Because he's like, I. I didn't have deal flow and now I have deal flow. So I'm happy to help, but don't hit me up unless you're going to follow through.

Host: That's awesome. You hear that?

Guest: Everybody, I'll show you how to do it.

Host: So don't waste his time. But if you actually do what Patrick teaches you, the one guy who followed through it, quote, unquote, change his life. That is quite an offer. I love it. Cool. Okay. And it worked. Obviously, it worked for you. So you get 500 emails, you talk to 20 people. Did you talk to 20 people, or you get 20 responses to the email?

Guest: I had probably 20 calls.

Host: I had 20 calls.

Guest: Many more replies.

Host: Yeah, okay, 20 calls. And then work me down this number. So how many then did you disqualify after the first call? Take me through the funnel all the way down to Apple Tree.

Guest: Of those calls, you know, probably. Of those 20, probably seven or eight felt like making an offer to some of them just got too busy or some of them. Our conversations fell apart before the loi. But what I tried to establish with people as soon as we got on the phone was that I knew my stuff and I was serious. And if it felt like a firm that I wanted to go for, I was going to send them an NDA quickly and I was going to proceed to loi. And so I think that goes a long way with just how you make first impressions and that you're going to follow through. So that other deal fell apart in June, and then I had to get the snowball rolling again and try to find another deal. And I felt like I was running out of time before the end of the year. And then tax season. Nobody wants to sell between January and May, but in September, I connected with Steve, the previous owner of Apple Tree, and he said, let's chat. And it felt like a really good fit from the start, and we had some rapport. And so we proceeded through the LOI pretty quickly and then moved to closing.

[36:15] Host: Great. I want to hear about Apple Tree, the specifics of Apple Tree. But first, when you said that part of your strategy was to just really establish credibility and that you knew what you were doing in that first call, make a strong first impression. And you said that basically making it clear that if things feel right, you'll quickly send an NDA, quickly get under loi. Was there anything else in that call that you did to give off a positive first impression that you were a serious buyer?

Guest: I think it's just the little things, like showing that you read their website and their bio and be genuine with connecting with them on how they built their business and why they want to sell and show them that I had a plan to continue their legacy and

Host: grow the firm, was there Anything about demonstrating financial wherewithal that you could pay for?

Guest: No, I'm kind of part of my story. Like I did at the start here. Here's my background. I love small businesses. I spent time in consulting and I've just seen how important bookkeeping and clean financials are and I want to acquire a firm and serve those small businesses.

Host: Cool.

Guest: And then after the seller call, I would follow up with an email and say, great to meet you. Here's why I think I'd make a good person to sell to and I would just keep the process moving along with them.

Host: So were you self taught on all this, Patrick, or were you following a playbook from one of the books or a course or something?

Guest: No, it was frankly just from my background in sales.

Host: It's like, well, yeah, yeah, of course.

Guest: Reiterate, follow through, be direct, you know, And I know they're busy, you know, so I'm trying to, you know, stand out in their mind and keep it on the rails. But it was funny because there's one fractional CFO who referred me to, he's like, oh, this is a great bookkeeper. And I got to an LOI stage with her and suddenly she had another offer. And I'm like, you weren't going to sell and now you have two offers. I was like, I'm on the phone with her attorney. I was like, if your other offer is this mutual friend, the fractional cfo, you should sell to him. You know, and they're both just dead silent and they're like, we can't say who the other party is. I was like, okay, like, just sell to him. So it was kind of funny because I went through all this work with this referral and then he ended up making her an offer as well. So it's such a roller coaster, just the looking and trying to get under loi and then once you're under loi, trying to get the financing approved and you know, you find some things you don't like in due diligence and you know, but it all worked out.

[39:17] Host: So tell us then about Apple Tree and Steve was the seller's name. Yeah, yeah, yeah, tell us about Steve and Apple Tree.

Guest: So Apple Tree, we do bookkeeping, payroll and tax for small businesses as a package service. So instead of that experience of sending your bookkeeping to one person here and then sending it over to a CPA over there, we do it all in one plan. So what that creates for a small business is a more proactive approach that helps you get better financials that are more up to date and more clean. There's cash flow planning that goes into that. There's better tax planning that goes into that and you have a team that you can lean on. So what I really loved about AppleTree is he had three managers who are the tax experts and really run the client relationship and then there's staff accountants and payroll. So Steve only had two clients that he was involved with anymore. And the 70 plus clients really had their managers as like their go to person. So it was, it was productized really well. So it created a better, created, you know, better cash flow for the company and a better client.

Host: And by productized you mean. Patrick, this is, it was basically, it was like a monthly, kind of like a, as you said earlier, like a SaaS, a SaaS model. So your clients or the 70 clients pay monthly. They don't pay one lump sum at tax time, Correct?

Guest: Yep.

Host: And it's the same fee every month, month in, month out?

Guest: Yeah, we'll, we'll look at it annually to see if it needs to be adjusted if they grew a lot. But yeah, one.

Host: And is this, is this a model that the industry is going toward or was this Steve's kind of own little innovation?

Guest: It's becoming more common. But the advantage with Apple Tree, and I didn't know this, is he's been part of a association called pasba and that's an association of accounting firms that just serve small business. So I'm almost getting like all these best practices that you'd get in a franchise without paying a franchise fee. So within pasba there's a few hundred firms and they share pricing strategies, what software works, job descriptions, growth numbers. And he's been part of a mastermind, a smaller group within the association for 10 plus years. So it's really, he's a super sharp guy and he's done well. But a lot of it comes from just teachings from PASBA of like, how do you train people, how do you bring in the right client, how do you get out of the way as the owner? And that's, that's really where a lot of that came from.

[42:01] Host: And this is all stuff that you, you didn't really realize until after you closed on the business. All this is all just kind of green.

Guest: When we, when we got our second call, he was telling me about the association and I just started to see how different this firm was versus the others that were out there. And it's funny because there's a searcher who's like trying to scoop up every PASBA firm that he can. He's Harvard MBA with a bunch of investor money, and he's found out how well around they are, and he's trying to buy a bunch of them. I think he's bought two now, so.

Host: Well, there might be more after this.

Guest: There might be more. Yeah. There was also Shannon, who's the live oak banker that specializes in accounting firms. When I was talking to him, he said, oh, this is a PASBA shop. He's like, they're much different. They're very, very good.

Host: Oh. And he's like, and what does PASBA stand for?

Guest: I don't know. Professional association of. Yeah, Professional association of Small Business Accountants, maybe.

Host: Oh, yeah, Sounds good. Yeah. But it's pasba.

Guest: Yeah. Yeah.

Host: Okay.

Guest: And so it was kind of funny because we closed in December. And normally his mastermind meets every January. So early January, I got to meet these people that he's known for 10 years. And I sat on the hot seat, you know, for two hours, and I gave my business plan and, like, what's going on in the business? And then I got to see all of them do it with, you know, the. Their growth numbers and their profit margin and what their org chart looks like. It was pretty incredible.

Host: When they went around and you. And you saw, you know, everybody open the kimono of their own businesses, did that make you feel like you had something really to compare apple tree to? Did it make you feel better or worse about apple Tree?

Guest: Better. Better, because we're kind of middle of the pack in this group of 10 in terms of size, and they're, you know, we haven't gotten to the numbers yet, but there were three firms that are like two and three times our size. And when I heard their challenges, I was like, game on. I can solve that. You know, I was like, it just made me excited.

Host: And you can solve that because of your own personal experience, your own professional experience.

Guest: There are challenges around recruiting and sales and keeping good systems in the business. And I was like, great. You know, it seemed like for everybody, it's a slog to get it up to a million in revenue. And then it seems like you can move much faster to go from, like, 1 to 5 million.

Host: Very exciting. Okay, well, speaking of numbers, tell us what you can about apple trees.

Guest: Yeah.

Host: So

Guest: the business was basically doing 1.2 million in revenue the prior year and 330,000 in seller's discretionary earnings. That was on the little bit bigger side of some of the ones that I came across. And these businesses trade for usually between 0.9 and 1.5 times annual revenue. So I ended up kind of right in the middle of that. And we're only two months in, but we've retained every client and the monthly recurring revenue is up 10% over last year. We've had our challenges, but the transition's been going well. And I feel like I bought a really solid firm.

[45:42] Host: That's so great. And also, you had just said that it's a slog to get to a million, and then getting from a million to five happens at a much more accelerated rate. Well, here you are. Here apple tree is sitting at 1.2. So all that, you're right at the point where you can really kick things into high gear. The slog. You're just post slog.

Guest: Yeah, yeah. My goal is to get to 5 million within five years. So, yeah, we'll see. And maybe we'll come back to this clip and see if I'm on track or made it happen.

Host: The margins in bookkeeping, are they pretty. So you had 300. What did you say? 330 NSDE on 1.2 million in revenue.

Guest: Right.

Host: So that's about 20. A little under 25%, I guess.

Guest: Yeah, yeah.

Host: And is that pretty standard in bookkeeping? No, bookkeeping and accounting,

Guest: it really varies back to this whole. Like, there's so many different types of accounting firms. So on average, you know, our cost of labor essentially delivering the service, you'll see a lot of accounting firms that are around like 50%. Ours is a little bit better than that, and that's like a U.S. average. And then there's other people that offshore and their cost is maybe like 20%, so they pick up much better margin. And then I think if you're just doing tax, I think it can be more profitable, but it's lumpy and it's high stress during the tax season. Sorry, it's a complicated answer, because I think compared to pure bookkeeping companies, ours is better. I was thinking about it for a while, but most of the time, if I was seeing a firm that was doing a million in revenue, you might see 150, 200 in ste. Oh, yeah. I think the net is probably on average between 15 and 20%. So we're a little bit above that the way it was run previously. But I don't think that'll continue because I'm just not as efficient as Steve was. And I'm going to grow it and reinvest in growth and people.

[48:17] Host: And is Appletree then what you would call a cloud firm?

Guest: No, we're sort of in the middle between traditional and cloud. Covid definitely forced a lot of more remote engagements. But we have a physical office and people are probably there 80% of the time. And there's some clients that mail things to us. So we're not a pure, pure cloud firm. You know, like I know you had Chris on an episode.

Host: Yeah.

Guest: A while back at system six. His is 100% cloud. Yeah.

Host: And is part of the Strategy to become 100% Cloud or. Not necessarily.

Guest: I definitely want to keep moving that way. I don't want to lose, you know, ideal clients, but I want to continue to keep moving that way. One of the pivots I want to make is up to this point he's gone to market geographically to say we're the go to firm in this area of New England. And I want to go to market based on industries which makes us service people all over the country.

Host: Yeah. And what industries are those?

Guest: Ultimately I want to have four buckets. But the first two that I'm really going after are trades. Landscaping, roofing, remodeling, flooring, H vac, and then the other bucket would be professional services, marketing agencies, architects, things like that. So I want to say if you're a service based business, either trades or B2B services, we're your go to accounting firm for people with one to 30 employees.

Host: And did you choose those buckets for strategic reasons or because it's really what you know and just got so familiar with at cultivate?

Guest: Yeah, it's partly what I know. And I just think you become more efficient and you get higher confidence from the client if you already speak their language. And because there's so many things tied to the accounting stack. If I have a home service business and I say, yeah, I know service titan and I know jobber, immediately you're going to trust me or a marketing agency that says, oh, okay, yeah, you guys are using HubSpot. We know the integrations and, and we know your pain points around time tracking and we know stripe integrations, things like that. So that's the thought. There is. You can command your price better and become more efficient with the client.

Host: We just have bumping up on time here, Patrick. But I wanted to have we hit on the lessons and surprises that you've already learned after. After two months in the seat.

[51:01] Guest: So I closed at the end of the year, right before the busy season. So one surprise has been just how slow I feel like I need to move and how cautious I need to be of the rest of the staff's stress level. Around tax time. So I'm kind of sitting on my hands until May to make some of these changes. The other big surprise has been how narrow of a client we've been willing to work with up to this point. So I've had some leads come in, and because we do live payroll, it'll be a company based out of Texas that has a couple employees in Ohio and Pennsylvania. And Steve will say, no, we don't want that as a client. It's a total nightmare to do payroll in those states. Or no, we don't want it because that person said they're going to sell their business in 18 months. We're not going to do a bunch of back work and then lose them in 18 months. It's frankly been really surprising to me just how many leads haven't felt like a fit. At least I'm defaulting to him on who we're willing to take on as a client at this point, partly to try to not mess with things too much and partly because we're bumping up against capacity with our team. So that's been a big surprise. The other big surprise, I thought tax would be more black and white, and it's much more art than it is science. I've seen, with a lot of cases I've seen multiple times, where two different CPAs can have just completely different opinions on what to do in certain cases.

Host: I find that not reassuring about filing my own taxes.

Guest: Yeah. So it's a. Yeah. So those have been the big surprise and the last surprise, frankly, is how smoothly it's gone. I was expecting just a lot more stress and chaos, and we've had some. Don't get me wrong, but it's not been some of the nightmare situations that you read about or hear about.

Host: How has the team taken to the fact that the new owner is not one of them?

Guest: They've been really positive and supportive, and I think Steve did a good job of selling them on that idea. He said, I could have sold to a regional firm and they probably would have cut half of you and got rid of the office. Because Patrick is not a CPA himself, there's not going to be a lot of change around here. We're going to keep the same procedures, the same team, the same office, et cetera. And I've tried to build relationships with them quickly and make sure that I don't change things early on.

Host: You referred to Steve, the way you talked about the leads coming in, new business coming in, and Steve kind of filtering out stuff that isn't a Good fit, first of all. So is he still helping you in the business? I mean, what's the handoff looking like?

[54:11] Guest: Our purchase agreement was he'd stay on through May

Host: through tax.

Guest: Yeah, I'd imagine maybe he'd work for us part time afterwards. We have a really good relationship and he's super sharp and that's probably my biggest challenge is just filling his shoes when he's gone. So we'll see.

Host: Was he open to selling because he was a retiring guy?

Guest: I think he wanted just the weight of ownership off his shoulders. It's been a brutal couple years for accountants between PPP and Eidl and CARES act and all these tax changes and they never had a chance to breathe, you know, So I think he was just feeling all the weight of the past couple years and just not wanting all the pressure of owning on him and wanting to do a little bit of travel. So when we started talking, he's like, okay, I need to know if you're a serious buyer and if you're going to be it or not. Otherwise I have these two other people that are sending me Lois, you know, so he, he definitely wanted to find his buyer this fall.

Host: And the two other Lois that he was considering or about to consider, where did they come from? Because you found Steve via proprietary search.

Guest: One was a large roll up group and then the other was that searcher who's targeting all these firms in the association. Ah.

Host: And the other thing that struck me about what you were saying about Steve is how he, this point that he filtered leads so strictly because typically that kind of being really selective or being really niche I feel like is something that more mature businesses do and scrappy founder owners don't know to do and they just say yes to everything. But it sounds like he was really the exception to the rule. Yeah,

Guest: it's made the business really stable and it frankly helps the staff too. Right. So he'll tell a prospect, you know, he'll go through the sales process. But if you're just looking for bookkeeping or you're just trying to get last year's tax return done, he's just like, no, we're not, we're not your firm. You got to do at least bookkeeping and tax with us and it's going to be on a monthly basis. And you know, we're, I tell people now we're kind of the Toyota value prop. Like we're not the most expensive game in town, but we're not the cheapest, but it's really good value. And you're going to get a better experience, you know. So that's been his approach is to like have a really tight, narrow focus of who he's willing to work with and not just say yes to like one off projects or one of those services that he wants.

[57:13] Host: Excellent. Patrick, for those who might want to get in touch with you either to learn the secrets of your of your proprietary outreach or otherwise we see each other on Twitter tell people your Twitter handle and if there are other ways that they should get in touch with you, how they might do that.

Guest: Yeah, I'm Patrick Dichter on Twitter D I C H T E R I've got a personal website as well as the apple tree website and then that's listed there or you know, if you're on LinkedIn I'm on LinkedIn a little bit but Twitter is probably the best place. Very good.

Host: This has been great. Thanks a lot for your time Patrick.

Guest: Thanks for having me Sam.