Interview with Founder Rob Colón

Today, we are checking in with Rob Colón, who recently successfully turned around, managed, and spun out a 100+ employee accounting practice with 11 offices spread across the US.  He is now CEO and founder of Tribe Clarke & Co., a decentralized, perpetual owner of small and medium-sized accounting firms.

Diana: Hey, Rob – let's jump right into it!

Rob: Diana, thank you for dropping by. 

‍Diana: So, Rob. Talk to me about Tribe Clarke & Co.  What was the inspiration behind it? What exactly does it mean to be a decentralized, perpetual owner of something?

‍Rob: Tribe Clarke is a culmination and refinement of my past business experiences. I have been very blessed in my life, even during the most difficult times, and I have tried taking what I have learned along the way and apply it here. I started my career as a CPA in Alvarez & Marsal's tax practice and eventually moved to their operations and process improvement teams, where I worked with the portfolio companies of private equity groups. 

‍Diana: Oh, interesting. That sounds like a great learning experience.

Rob: It definitely was.  I always felt like the dumbest person in the room when I worked there.  The caliber of the professionals there is so high… I tried to be a sponge and learn as much as I could. A lot of mentors and close friends came from that time of my life. It was a great way to learn operations and also to see how the world of private equity worked.

Diana: Ok, sorry for interrupting.  Where did you go next?

Rob: No worries! Since then, I have gone the entrepreneurial route and have experienced the major ups and downs that come with that life… from building and selling one consumer brand business for millions of dollars, landing on the Inc. 5000 three times, to having to close another business down as a result of the Covid pandemic. Most recently, a good friend of mine, who runs a holding company with various businesses, had a business unit comprised of 11 CPA firms across the US. The group as a whole was underperforming, and he asked me to come in and help turn it around, with the ultimate goal of spinning it off to another buyer.  It took a little over a year, but we ultimately managed to turn the performance around and sold it to a private equity group that wanted to get into the space.

‍Diana:  So what led you to form Tribe Clarke?

‍Rob: Oh yes, your original question! Sorry.  I talk a lot.

Diana: Not at all.  I appreciate the context and background.

Rob:  Well, because of the different paths my business life has taken, I have been able to see the inner workings of Private Equity.  I have worked hands-on with teams engaged in turning around their portfolio companies, and I have sold my own business or division I managed to Private Equity on two different occasions. 

There are definitely some great groups out there, but on average, private equity groups suffer from the same symptoms: they have a 3-5-year time horizon.  They typically use a ton of debt to try and maximize their returns. Well, when you have only 3-5 years to make something work, and you couple that with a ton of debt, you have to run those companies a certain way.  You have to drastically cut redundancies (i.e., fire staff) fast, raise prices drastically on clients, and be forceful about cross-selling other financial products to clients.

In order to do that, PE firms need to have a heavy hand in running the companies they acquire.  But they don't think like long-term owners the way someone who built their firm over 30 years does. There is an end goal for Private Equity, and that end goal is to sell your firm all over again in a few years for more money than they put in.  That's it.  That's their goal.   

And it's not that it's right or wrong.  It's just a different strategy, and it may be great for some. But I don't think it's for everyone.

Diana: How is Tribe Clarke different?

Rob: I think my having had my own business, my own personnel, and the day-to-day journey of being a business owner… helped me gain some perspective.  Putting myself in the shoes of these firm owners, I would want a safe haven and permanent home for the firm I built… for my staff and clients who have been with me for years. I wouldn't want some chop shop coming in and messing with my baby. I would want my firm to ultimately land somewhere where it is cared for and nourished and can continue growing.  And that's what Tribe Clarke is; it's a permanent home for your firm.

We are perpetual owners for firms, meaning we don't sell what we buy.  So we don't have this short term pressure to make financial voodoo happen with the goal to flip your firm for a profit down the road.  We care about sustainable cash flow over the next 20 to 30 years, and sustainability comes from keeping your team and clients happy and top of mind. 

Diana: Ok, that helps explain what you mean by perpetual.  What do you mean when you say that Tribe Clarke is decentralized?

Rob: Firms continue to have local autonomy, they are not integrated into anything…  meaning they continue to run the day to day operations and act independently.  Sometimes that's the founding partner, and sometimes that is an up and coming junior partner or senior manager in line to be partner.

We support the firms by taking a lot of administrative burdens off their plates… things like payroll, HR, back-office accounting and finance, invoicing, recruiting, etc.  This frees up a lot of time at the firms which they can now use to better serve their current clients or bring in new ones. We also provide firms with ample training and the Tribe Clarke Growth Playbook, which helps firms take a step back and work on their business for a bit (instead of just in their business). 

But at the end of the day, the firms continue to run their own operations.

Diana: Hmm. That is a pretty unique model.  But I have a question. Do firms take on the name and branding of Tribe Clarke & Co., or can they continue with their own name and branding?

Rob: Yeah. That's a great question. Thanks for bringing that up.  The firms continue with their own name and branding. In some cases, the firms can take the opportunity to add a junior partner's name to the firm, but it will never be changed to Tribe Clarke & Co.  The team members on the ground are the ones who built the firm and have the client relationships.  They should see their own names when they walk through their doors every day, as should their clients. 

I think it's also important to mention that Tribe Clarke never buys 100% of a firm.  We acquire about 51% and want the partners who are going to be running the day-to-day to keep 49% of the firm.  It's much more of a partnership than a purchase.  It's important that the local managers continue to benefit from the firm's growth in cash flow every year.  These aren't stock options or phantom stock units like they give in private equity.  They actually continue to own the business and benefit from the annual distributions of cash.  It's cash in their pocket every year. It's a tangible return from which they benefit immediately. What's neat is that the best practices in the Tribe Clarke Growth Playbook typically improve client retention and increase cash flow by 50 to 100%. So, selling partners end up taking home the same amount of cash every year as before selling to Tribe Clarke, even though they sold 51% of the business.

Diana:  Wait. So to help me understand.  A seller who used to take home $100k in distributions every year, can sell you 51% of the firm and still be taking home $100k in distributions? Do I have that right?

Rob: Yeah. That's right… or very close to it. It's really a combination of what I mentioned before.  It doesn't happen on day two but typically within 6 to 12 months, depending on how effective the firm operator is in implementing the playbook.  Taking all those administrative burdens off their plates frees up an inordinate amount of time at the firm, and particularly the partners' time.  That's time that can be spent adding more value to current clients or seeking out more of the right type of clients.

The playbook gives the firms best practices when it comes to client analysis, pricing, managing and incentivizing your team to help recruit the right talent, managing your Accounts Receivables and WIP properly. 

I actually have a crazy example.  I sat with a firm once, and we analyzed their client portfolio at the time.  100% of their profits came from only half their customers.  Literally all of it.  The cost of serving the other half surpassed all the billing. If that half of the client book did not exist, the firm would still retain every single dollar of profit they had.  Their team would be less stressed.  

They would all of a sudden have freed up the capacity to take on new work.  It was definitely a shocker for the firm.  But this isn't a knock on the firm. Firms are extremely busy serving clients, meeting tight deadlines, and dealing with a shortage of personnel in the industry and a changing landscape.  And this is one of the biggest areas of support Tribe Clarke can offer.

And it doesn't have to be an uncomfortable situation or conversation with clients.  Tribe Clarke helps these firms craft the messaging to have those conversations with clients.  Sometimes, the pricing has to change, but not always.  Sometimes, the firm just needs to bring the level of services in line with what the clients are being billed. ‍

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Diana:  What are your most critical acquisition target criteria? What are you looking for in a firm?

Rob: The firm needs to offer primarily tax and accounting services and have been in business for at least 7 years.  Our sweet spot is a firm with $1 to $5 mm in revenue with $150k to $1mm + in net operating cash flow. And have at least two partners who are willing to stay on as partners for 3-5 years. Preferably, the firm can show consecutive client and earnings growth.

Diana: Why have partners wanted to sell?

‍Rob: There are​​ two strong reasons. First, some firm owners do not want to have all their eggs in one basket. For example, maybe they are 40, have a family, and feel like they need to buy a house or withdraw some money to decrease their personal risk. And at the same time, they want to continue running and growing their firm.  They still have another 20 to 30 years of entrepreneurship left in them and also want a partner to help them scale.

Secondly, many owners discover when they are around 50 or 55 that they do not have succession plan in place for their firm or themselves.  When they go to retire, how do they cash out their equity? Who takes over? Maybe they have a second partner or potential junior partner, but these situations hardly ever come with a big paycheck up front.  If they are selling to someone within the firm, they typically get paid out over time… say 10 years or so. 

And that structure may not be as attractive for them, and they do not want to go the private equity route because of all the reasons we already discussed.

Diana: Aside from what we have gone over, are there other reasons a firm owner would decide to sell to Tribe Clarke?

Rob: Transaction certainty is also very high with Tribe Clarke. We have a very streamlined and transparent process that takes 90 days or less.  Our due diligence is pretty fast.  We use financial and legal advisors but do the commercial and operational due diligence ourselves. We do a lot of upfront work to understand the business prior to issuing an LOI.  So, by the time we get to due diligence, we are really only trying to confirm our investment thesis, and we aren't surprising sellers with discount negotiation tactics or trying to retrade them on valuation.‍

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Diana: How do you finance the acquisitions?

Rob: The majority of the 51% acquisition is paid in cash. We use earnouts for a small % of the acquisition‍ to incentivize the sellers to stay engaged in growing the firm and transitioning well. Sometimes, the sellers want to sell a portion of their remaining 49% as well, and that's an opportunity for junior team members to buy into the partnership.  The structure for that portion can vary from deal to deal. Sometimes, Tribe Clarke finances the junior partners, and sometimes, the seller finances it. Sometimes, it's a combination.

Diana: How do you value firms?

Rob: We make it very easy by applying a standard multiple on the trailing twelve months of free operating cash flow. As we have some experience, we can identify potential problems early. We try to deal with these by asking questions before the formal DD process. In this way, the purchase price is not based on the wrong data, which is very important for ensuring a smooth process.

We always check the cash flow before making an offer. ‍

Diana: What happens after a transaction?

Rob: The significant change is that they need to start reporting to us monthly and having weekly check-in meetings. We are also very transparent and openly share the firm's financial performance with everyone on the team. Firms are not used to that, but it is important. It gets everyone on the same page and makes them feel like they are rowing in the same direction.  We tie that directly to the Tribe Clarke Profit Sharing Plan we introduce to the firm.  It is a very transparent and simple formula based on the firm's financial performance and individual goals.  So everyone knows how they are being measured and what contributes to their bonus.

Like I mentioned earlier, Tribe Clarke takes on the administrative tasks that used to be massive time sinks for the firms.  So they will find themselves with more time on their hands to do more productive work.

We really only buy good firms, so there are no drastic changes needed.  We like to say, "you sold a portion of your firm, but you kept the keys" because they keep running the day-to-day.  And the day after the transaction looks pretty much the same as the day before the transaction. 

We will also work with the team to schedule a week-long offsite training in Miami, FL, to help bring them up to speed with the Tribe Clarke Growth Playbook and have them meet the other team members who will be supporting them going forward.  ‍I haven't really had anyone complain about having to come to Miami for a week, though.

Diana: Rob, thanks.  It has been great learning more about Tribe Clarke and your vision for the future of the accounting industry.

Rob: Thank you, Diana. It has been my pleasure.