Hello everyone, and welcome to the Upstream Leader Podcast. I am excited to be with you here today. We are talking alternative ownership models. We’ve talked private equity before, we’ve talked M&A, we’ve talked “fiercely independent.” Today we’re going to be talking about a new type of model that is out there, an alliance model. For that conversation, I have with me Steve Shein, co-founder of Franklin Alliance. Steve, great to have you on the show.
Yeah! Jeremy, it’s a pleasure to be here. Thanks for having me.
I am excited for this conversation. We’ve chatted several times over the past few months, learning about what you all are doing at Franklin Alliance. So I’m excited to dive into this, and what it could mean for firms in the profession. But before we do, I’m going to start things off the way that I always do, which is asking you, how did you become the leader that you are today?
Yeah, it’s a good question, Jeremy. And of course, as a listener myself, I’ve heard you ask that question. I think it’s—I’m very proactive about self-growth, so I think I try to learn from all experiences in my life. I’ve been an entrepreneur, I’ve been an investor, I’ve been a venture capital investor. I’ve tried to learn from every experience and been proactive about intentionally trying to grow from each, and I think that, just having that mindset, viewing life as a journey that you’re always looking to improve upon, is just kind of like an ethos of my DNA. I think that’s kind of what has led me on the path that I’m here. Yeah, I’m excited to continue to learn and grow as we evolve and as I evolve.
Yeah. Well, and that’s one of your operating pillars, if I recall correctly, at Franklin Alliance: Growth is one of those, and that idea of perpetual growth. So let’s talk a little bit about the landscape of things right now. So in our profession, obviously, there’s a lot going on. There’s private equity, you know, the first deals that are kind of going to the first turn, I guess, on private equity investments. M&A activity is still alive and well, it seems. Plenty of firms want to be independent. What led you to decide maybe there needs to be another model out there, and maybe there’s a better way forward for firms?
Yeah, I’m excited to dive into that. So I’ll give you a bit of a multifaceted answer, but the overarching kind of impetus is that the boutique segment, which we kind of classify as firms that are less than $10 million in revenue, right? There are many firms that maybe they’re second-generation accounting firms, maybe they’ve been in business for years, but they haven’t reached the size that they’re viewed as a platform by private equity, but lineage and posterity is very important to the managing partner and the ownership and leadership of that boutique firm. So we kind of overlay that, that ethos, with the fact that the way the accounting profession has evolved. We’ve all seen these statistics about, for every seven accountants leaving the industry, there’s one coming in, X percentage of accountants are at succession age. It’s harder to address these types of headwinds when you don’t have the economies of scale of a large firm.
When you’re a large firm, you have a recruiting division and internal recruiting division that all they’re doing all day is trying to recruit talent for the firm, but as a boutique firm owner, you’re wearing a lot of hats. You don’t necessarily have the capacity to do all of that at the same time. So our view was, okay, we have these headwinds that are easier navigated by large accounting firms, right? And then you also have these parameters that we would use to describe the current state of the accounting industry: One of those is that boutique firms, in our view, are the backbone of the accounting industry. I mean, there are so many firms that are categorized in this segment. You have the largest firms, like the Big Four and the Big Ten, etc., but really they only make up a small minority of the total market cap of the whole kind of accounting industry. There’s a very long tail of boutique firms and smaller firms. And these firms treat clients with a more customized kind of white glove service, they have relationships with their clients, it’s just a different environment, where their business owners are individuals that have a relationship with their accountant and are not viewed necessarily as a number, but rather it’s a relationship. We think that’s an important kind of ethos.
So our goal with the Franklin Alliance is to perpetuate and support boutique firms so they can continue to provide this great service to individual people, to local people, local firms, and local businesses. How do we perpetuate that but give them the resources of a large firm to help them navigate the way the industry is evolving? That’s our ethos, and we structured it in a way that’s a bit different than I would say the majority of the players in the space.
Well, when you talk about that tail, right, of how many firms there are, I think I was with a group of managing partners last week and someone shared this statistic that I think it was 1 percent of all accounting firms make more than $6 million in revenue. The other 99 percent are $6 million and under. So you talk about that tail. We talk a lot about the firms that are IPA top 100, IPA top 500—don’t get me wrong. I love those firms, there’s lots and lots of great firms in there. But to your point, many of them have gotten to that point where they’ve got, they may not say they have full economies of scale, but they’ve got better economies of scale than some of these boutique firms, right? So I see why you would play to that. I do want to ask real quick, when you say boutique, my initial inclination is specialty. They’ve got a niche or an industry or a very particular market segment that they are really focused in on. Is that your definition of boutique or is boutique more, you could be a generalist and you’re high volume, low margin tax return shop. What is your definition of boutique? Because I’m curious where that fits into this.
Yeah, it’s a good question, Jeremy. I think what you highlighted as a sub-tenet of how we define boutique, there’s the overlay of revenue guardrails—we’re not, our goal is not to partner with very large firms because we just feel like the resources that we bring to bear, we’re trying to allocate specifically to the boutique segment. So like revenue, if you consider less than $10 million of revenue, as a kind of strike zone, and then as you relate, it’s more the former; it’s more working with small business owners, working with them on their client accounting services work as well as their tax work. Maybe there is a niche focus on a specific industry like healthcare or construction or real estate, etc. That’s all interesting to us. But we don’t exclude firms that don’t have that. We do intentionally target firms that are not just high volume, low margin—that is kind of less of a strike zone in terms of our target firm partner. So I think it’s kind of all those factors, but we’re opportunistic. In actuality, we’re looking for the best partners first and foremost.
That makes sense. So you’re looking for firms that they really are—they have a desire to grow. They have a desire to scale, but maybe not the means to do it. So you’re looking at that under $10 million firm size range. Is the goal to help them achieve greater than that, to help them become those $20 or $25 million firms that they may aspire to be? Or is it more help them perpetuate, or a combination of things?
I think it’s a combination. In effect, it’s how do we provide the resources that they would want to achieve whatever their goals are. If their goal is to 5x the size of their firm, they may need operational resources, they may need recruiting support, they may need capital, they may need knowledge sharing and strategic counsel. We have a board that’s been specifically developed for that purpose. A lot of it’s avoiding just recreating the wheel, right? Because there are accounting firms that have tried and successfully navigated this path to go from, let’s say, a $3 million in revenue firm to 7 to 14 to 20, and etc. Taking best practices and plugging them in with the resources that we provide, that can be more favorable from an economic point of view, because we have more economies of scale than an individual firm would on its own—so it’s all of that. It’s really bespoke to what their goals are as a firm owner. Some people are much more aligned with growth; others, they want to just focus more on what they like and less on what they don’t like, and they want to partner with us to help them do that. I think the beauty of it is that it doesn’t have to be a one-size-fits-all for us.
So in those situations, kind of thinking through, because you mentioned you may have multi-generation firms that are those boutique firms and they’re trying to figure out how do they continue to perpetuate, right? When I think of a multi-generation firm, taking an outside investor, it almost feels a touch contrary to their whole idea of keeping it within the family, right? Keeping that longevity. Yes, it perpetuates the firm, but at what cost or does it feel so? How do you, for curiosity’s sake, how do you bridge that gap when somebody is like, “Hey, we’re a third-generation firm. We want to keep perpetuating. We have a goal. We’ve been around a hundred years. We want to be around another a hundred years.” And they’re looking at an outside investor. How do you alleviate some of the fear that, well, we’re going to take an outside investment and then our culture, our firm, it may last a hundred years, but it’s not going to feel the same?
Yeah. I love that question because I feel like it’s a strong differentiator for us as an organization. And we have multiple of these examples as case studies, by the way, that have been successful with us. So the first partner who’s actually believed so much in our vision, he’s become a co-founder, his name is Brent Bement, a firm in Utah, multi-generational firm, his father started the firm. I think the reason that we have such alignment with firms like that is that we are not prescriptive in going in and saying, “Okay, you need to raise prices 15 percent,” the owner of that firm is saying, “well, we’re servicing our”—
“You don’t know my clients! We can’t do that!”
Exactly, like these are the people in our community. Like, “Oh, we really like using UltraTax. We don’t want to use CCH. We like our three days a week work from home policy. Or we like X.” We are not prescriptive and we do not purport to know the business better than the people running it. That is the full stop, we have some best practices naturally, and we’ve looked at many firms, and we lean on our experiences in the strategic advisory board, and we bring to bear these resources. But we don’t try to go in and tell a firm owner how to run their firm, we provide them the resources that they can leverage at their discretion. So a second generation firm owner, maybe they like a lot of the way that the firm is operating, but maybe there’s some things that they want to improve upon and they look at us as like, “Oh, the Franklin Alliance isn’t going to make me switch software. They’re not going to make me change the way that we actually navigate client relationships. They’re not going to change culture.”
What you articulated, that kind of case study, is what we feel our model is best suited for because other comparative models are much more prescriptive. If a smaller boutique firm, that’s 4 million or 5 million in revenue, gets acquired by a large regional firm, we know how that goes. The smaller firm subscribes to the processes of the larger firm, and that’s not an optional subscription, you know? So we feel like those situations where we may provide the Goldilocks-type solution because we’re not forcing change. We just want to perpetuate the business, the best parts of the business. We don’t want to force change for change’s sake. We can help them level off the firm over time and ensure that they can be more successful for the next hundred years than they’ve been in the previous hundred. We like that. We like finding ourselves in those conversations.
So how does your team then interact with the firm leadership, right? You’re not changing culture, it’s not prescriptive. Obviously, you’ve got a business interest here, so you’re not completely hands-off and “do what you want.” How does your leadership team then interact with the leadership team of a firm that you’ve invested in?
What we try to do is effectively be a data-driven partner that helps to just shed light on the progress that firm owner might be making, or the goals that they might have for the firm, and we try to be an accountability partner in helping us achieve our joint goals. We’ve seen, because we have the benefit of pattern matching, and we’ve seen throughout our careers and throughout building this, the things that are more successful and the things that aren’t, and the resources that some firms utilize and some don’t, we will shed light on all of that. But we won’t prescribe the conclusion. What we’ll do is say, “Okay, this is your goal, Jeremy, this is what you want to do with your firm. This is what we’ve seen. This is what we think the path would be for you to reach that goal. And then we’ll be a partner with you and have touch points regularly to help you reach that goal and making sure that we’re working towards the goal that you set for your business.” And then also, that helps us know when to deploy resources against that, as we have these regular touch points with our firm owners and everyone within the firm—we roll up our sleeves. We’re not afraid of doing what we’re asked to do. We’re not foisting that upon you. But if you were to say you want some help looking at a potential acquisition, you want a recruiting partner, you’re looking at building out an advisory division adjacent to your compliance division, and you want to talk to someone who’s navigated it, we have internal resources for that. And by having the regular touch points, we know when you’re thinking about certain goals, and that way we’re most informed on when to deploy resources against those goals.
The ethos is a true partnership. A partner is a thought partner, but also, they keep you, you bounce ideas off each other, you beat up ideas. You get through that intellectual discourse, and it’s illuminating. At times, some of these firm owners, they haven’t had a true partner to do that with. They’re running the firm, they’re kind of solo running the firm, and maybe they’d like that, but they don’t have it. You know, a partnership provides accountability, it provides resources, and all that. That’s our ethos. That’s how we do it. We’re not in the firm day to day, telling you how to run the firm at all, but to the extent you want to be involved and you want to be in touch with us as often as you want, one of my partners, Tuyee, is our operating partner—he’s very involved. With some of these firms, he’s as involved as they want him to be.
So it sounds like it’s really an ideal scenario for a firm; they’ve got an area of specialty, they understand what makes them successful, they’ve got a great culture. Maybe they’re struggling a little bit with running the firm like a business, which I think is a huge opportunity within the industry, is for firms to take all of that knowledge that we have on how to help our clients run their business, and apply it internally to our firms and do that.
Exactly.
But to your point, a lot of partners probably don’t feel like they have the time, the resources, or the operational support behind them to do that. It sounds like in your situations, Steve, that’s a lot of what you’re providing, that type of an aspect is here’s how you can now run this thing like a business and make it even more successful?
That’s exactly right.
Okay.
That’s exactly right. To overlay on top of that, it’s, yes, here’s what we can do together, and instead of you needing to go out and procure all those resources yourself, we just provide it.
Right. So let me ask a question: business model for you guys side of things. The perception out there right now on private equity is what happens at the turn? Once the next private equity fund comes in, and you get the first investment, that’s great, the sale happens, there’s still a lot of unknown where we’ve seen one of those happen—I still don’t know that we know exactly what that means because it is so recent. And that’s kind of the understood way that private equity is going to work: They’re going to invest, they’re going to take a controlling share, and at some point, five, seven years down the road, there’s going to be a sale to another private equity firm, and that’s just going to keep happening.
As I understand it. That’s not how you all work. That’s not your long-term play. It isn’t, “Hey, let’s invest in five years, let’s sell you off to somebody else.” So talk a little bit about the business model of this alliance concept, because you all do take a controlling share in most situations. It’s not like you are just taking a five percent investment and then providing this. There is a controlling share. But what’s the long-term play and how do you see this playing out for firms that work with you all or work in this alliance model 10, 15, 20 years down the road?
Yeah. So we were very cognizant of that exact point as it relates to how we structured the Franklin Alliance. We are an operating company. We’re not a fund—we’re not a private equity fund. We’re backed by venture capital and high net worth and some prominent figures in the accounting industry and friends and family. The benefit of the way that we structured this is the venture ecosystem, although a cousin to private equity, navigates and has different expectations and different timelines. So we view ourselves as intentional, patient capital. We do not need to flip the Franklin Alliance in five years. We do not have that three to five-year private equity timeline. I think that avoids needing to act in a certain way to achieve that specific restriction.
So that is something that we wanted to intentionally offer to firms, because as we navigate this journey, our end goal is to create a massive platform of boutique firms that are very successful and happy running their firm the way they’re running it. And if we can create that, then we let the exit take care of itself. That’s our ultimate vision. If it takes more than five years to create that, then so be it. We intentionally structured ourselves that way as an operating company with patient capital. I think that is something that we have some pride behind because we feel like the optionality to firm owners is something that we’re happy to provide.
Yeah. No, I appreciate that. You mentioned that one of the managing partners of a firm was so bought into it that he became a co-founder.
Yep.
You’ve got four co-founders. One is a CPA and it sounds like he bought into the idea. So for the other three of you, why accounting firms?
Yeah, it’s a good question.
Because you’re not an accountant by background, right?
No, I’m not.
Okay, I didn’t think so.
Yeah. And so my impetus for this is a little bit different, I think, than my co-founders. I had a thesis as a venture capital investor in the accounting space, and as I learned more about the accounting industry, I felt—and I built conviction around the fact that rather than needing to choose the best vertical SaaS player or the best AI provider to accounting firms, I saw a real need to build a platform that supported boutique accounting firms. So rather than—traditional venture capital strategy would be to find the tech player that’s going to sell into this segment of the market and try to back them—what I ultimately wanted to do was back the beneficiaries of the way that the technology will evolve, and the beneficiaries of that technology will be the firm owners in the boutique firm. As well as the large firms, don’t get me wrong, but I think we can make a bigger impact by helping the boutique firms because the larger firms can navigate it on their own. Whereas the relationships and the knowledge that we’ve built over this and our previous careers, and our exposure, will help boutique firms and make a bigger impact.
So that was my impetus for doing this. I built up, after talking to a lot of boutique accounting firms over the last several years, a lot of conviction around this because I heard the same challenges from many firm owners. And I thought to myself, well, what if we create a platform that can address all of that and remove some of the restrictions of a traditional private equity model, and remove some of the restrictions of a regional firm acquisition model? Then it’s like these firm owners have a different option, a different type of partnership option. So that was kind of my journey, I guess, that I traversed and how I arrived here in accounting firms. I think accounting, if you look at accounting from a pure investment point of view, there are a lot of things that private equity firms and institutional investors like about it: It’s a must-have service. It’s not a nice-to-have service, it’s recession resilient, there are a lot of firms. All of that makes it a great partner for institutional investors. But I think our motivation and our process that arrived at this is a little bit different and comes from a more nuanced perspective. Does that make sense?
Yeah, no, it does, it does, and I appreciate that insight. One more question here as we get close—well, I say one more question, one more hard question, then I’ll maybe give you a touch of an easier question. So, M&A is here, private equity is here, the alliance model, what you all are doing, is a new entrant, kind of an alternative into this space as well. What does it take in your mind for a firm to remain successfully independent in 2025?
Reinvestment. I think, that was a pretty quick, reactionary response, but I think that I stand by that. I think a lot of firm owners, the cash flow that’s generated by the firm is taken by the proprietors and the ownership of the firm, and that’s great. That’s an aspect of small business. But I think reinvestment is what propagates and helps firms evolve and grow. So I think if there was one thing, I would say it’s reinvestment—and reinvestment can mean a lot of things. But I think the overarching point of reinvestment is an important one because the field is evolving, technology is evolving. We see that firsthand. I think leveraging that sometimes takes time and effort and capital. And an openness, most importantly, an openness to reinvest.
Yeah, and it seems like that is a challenging aspect of it. That’s not just boutique firms that are under $10 million. That’s $20 million, $30 million, $50 million firms, they’re realizing it does take a lot to reinvest. From my perspective, it seems like that’s a lot of the reason that firms have opted for not remaining independent. It’s not so much that they couldn’t do what they wanted on their own, it was more to your point earlier—they didn’t want to be the patient firm. They wanted to, “Let’s go more quickly.” I really believe that with a lot of firms, whether it’s M&A or they take private equity, or working with an operating company, they know that they could get there on their own, because frankly, you’re probably not looking at the firms that want to do the hard work, so they’ve got to have a track record that they’re actually successful in doing these things.
But for many firms, it’s, “We want to do it faster. We know that we could get there and it may take a dozen, you know, 12, 15 years to get there, but we want to get there in 12 to 15 months.” And that’s where that partner, that extra player, really comes into play. So if a firm is looking to learn more about Franklin Alliance, how you all operate, what’s the best place for them to find more about this model and what it looks like evolving going forward?
Yeah, people can reach out to me directly: Steve@FranklinAlliance.co. Our website also has an ingest form. People can reach out via the website and there is a lot of additional information on the website, FranklinAlliance.co, that shares the resources that we bring to bear, how we think about partnership, the structure, etc. And yeah, we’re an open book. Part of our goal is just to propagate this perspective throughout the industry so firm owners know the options that they have, because we do feel like the additional interest and the pretty prominent interest from institutional investors provides optionality to firm owners. We just want, if we can propagate that message, that’s adding good karma to the industry. If we can be helpful in any way, reach out.
Very good. Steve, I really appreciate that. Thank you so much for your time today. I’ve enjoyed learning more about the model, kind of why you’re behind it and what it can mean for the industry. Thanks for joining me.
Awesome. Thank you, Jeremy. Looking forward to doing it again sometime.
Sounds great.
