External Succession Planning for the 1 to 4 Partner Firm

Joel SinkinAccounting Transition Advisors

Accounting Transition AdvisorsAbout the firm:• Merger and transition advisors exclusively serving the

accounting industry• Customized solutions• Over 950 transactions, over 20years of experience• Represent the buyer or seller• Services include:

Buyer-seller introductions Merger and acquisition transaction structure Document preparation/review, valuation and due diligence Post-transaction business planning General consulting and coaching

If there are 50 things you need to think about in a transaction…….

……the smartest of us will think of only 35

Why is Activity So High?

Economy:

2006 through 2008versus

2009 and 2010 +?

Niche Development

The Boomers

Impact of Demographics

In 1993, over 40% of AICPA members were over 40 years old……

Impact of Demographics

PricewaterhouseCoopers Survey 2004

In 2008, that number rose to 70%……

Succession ChallengesIn 2008 AICPA survey63% of the firms stated they expected at least 1 partner to retire within 5 years with more then half saying more then one partner

Well up from just 2004!

American Institute of Certified Public Accountants

Succession ChallengesWritten plan is in house

•25% of firms said they have a written succession plan in 2004

•35% in 2008

Despite the improvement. James Metzler, VP of the AICPA for Small Firm InterestStated that was not nearly enough

American Institute of Certified Public Accountants

Succession ChallengesFunding Retirement Plans

•62% of firms state succession is a significant issue

•Only 10% have fully funded retirement plans

• Firms that do fund partner retirement don’t beyond 50% of full liability

American Institute of Certified Public Accountants

Three Ways to Grow

One client at a time

Develop marketable niches

Merge or acquire another firm

Starting the Transition ProcessWhen should we start?

How many more tax seasons doyou want to work?

Client “face time”

Investments including technology, leases, staff

Things going to get worse as supply of sellers increases versus demand

Is Your Successor Ready? Do you know……….

……why the other firm wants to merge?

....... the staffing situation/excess capacity?

…… their physical space requirements?

…… current technology and equipment?

…… financial strength or issues?

Bigger is not always better!

How to Select a SuccessorSpecialties that you offer that they would need to understand

Size of successor, retention rates and excess capacity

Billing rates/ Professional credentials Location(s)

Culture: This includes the difference between “brand loyal” Clients and “partner loyal”

How to Select a SuccessorFinancial strength

Professional/staffing strength

Ethnic/language considerations

Longevity of partners

Employee track record

What is the Seller Thinking?

“I am irreplaceable”

“I am MASTER of my owndomain!”

“Clients NEED me”

“If I retire, I’ll die!”

Purchase Price Structuring

Multiple of billings Fixed purchase price - Fixed as a multiple

- Fixed based on past compensation

Methods to Structuring the Transition of a Practice through

an External Sale1. Straight sale

2. Buy in to a Buy Out - Buyer opts in an interest into the firm - Buyer may/may not bring clients into the newly combined entity

3. Merger or Buy Out

4. Carving or culling out clients

5. Two stage deals - Sell equity but stay on - Less exposure for seller than #2 and #3

Five Main Variables for Valuing a Practice

1. Cash up front, if any (2011 economy impact) - Dependent on time of year, the deal’s cash flow

and treatment of accounts receivable and time to recover investment

2. Retention clause/guarantee (2011 economy impact) - Collection deals, deals by percentage - Fixed deals - Limited guarantees - Economy clause

Five Main Variables for Valuing a Practice

3. Profitability - Seller’s current profitability/billing rates - Buyer’s anticipated profitability/billing rates - Tax ramifications of deal structures

(Goodwill vs. current deduction)

4. Length of the payout period

Five Main Variables for Valuing a Practice

5. Multiple - Cause vs. effect

Multiple=effect Balance = cause

- Basic rule:

Lower down payment, longer payout periodHigher profitability, longer guarantees= higher multiple

Tax versus traditional accounting clients?

Practice Information – Take a Look!

Who does the work?•High touch clients vs. low touch clients

•Field work - Level of staff - Manual versus computerized file management

Practice Information – Take a Look!

Post acquisition labor cost•Seller’s compensation•Staff requirements•Space (satellite office versus moving into your space•Technology

Client acquisition•Client’s general financial health•Growth opportunities•Client longevity•Types of services provided to clients

Practice Information – Take a Look!Billing Information

•Accounts receivables•Age analysis of cash flow•Time and billing versus retainers•Value Billing•Billings in dollars (larger practices, lower multiples)•Billing rates and what they mean to you

Other Items to ConsiderOther assets, either acquired or required

•Furniture, fixtures, equipment•Leases and location•Staff joining the new firm or not joining

Participation in Future Growth•Fee increases from prior services•Fee increases for new services•Fee increases for referrals•New business incentive clause

Sales – Internal v. ExternalInternal Sales

•Almost always go for less•Often no retention period•Death, disability and penalty buyouts•Remaining partners making more•Non multiple formulas on gross are more common•Accounts Receivable & WIP

External sales are more of a “business” deal and go for high dollars

Sales – Internal v. ExternalThings to be wary of…………

•Multiple partners, leaving simultaneously

•Partners reducing time commitment, but not income or control

•Replace the role, not the body

•Cannot replace the administrator with a “Rainmaker”

•Must have excess capacity

•Partnership agreements (check them annually)

Do your homework!

History and background of the firm

Client retention rates

Billings vs. collections, billing rates

Compensation packages of all firm members

Employee manual, employee contracts

Furniture, equipment, assets and leases

Pricing, billing and collections

Profitability

Due Diligence

Due DiligenceClients

Who does the workWhere is the work completed?How many clients require face time?FeesIndustries servedServices for clients

Collections age analysis of A/R and cash flow (per month)

Focus on how you will run the firm,

not how it is currently managed

Due DiligenceFirm culture

Potential exposure issues

Quality control issues

Retention rate of employees

Work papers

Leases or other obligations

Other ThoughtsGeneral “chemistry” between the parties

Continuity of relationships will help retain clients

A good deal is a fair deal

Remember, it’s the package, not the individual variables

Staff merging

The Transition…..

Client Communications

Roles for new staff members

Specialization

Other Thoughts

Transitioning Clients

CHANGE IS A DIRTY WORD

THE EMPHASIS NEEDS TO BE ON CONTINUITY

NOT THE LOSS OF, BUT THE GAIN OF…

-Is the partner/owner I trust still there?

-Is it going to cost me more money?

-Do I have to travel far to meet with my new accounting firm?

-Is the staff I am accustomed to working with part of the successor firm?

What are the clients fears:

For more information

Please visit our website for resources includingfree reports, whitepapers and case studies.

Joel SinkinJsinkin@transitionadvisors.com

1-866-279-8550www.TransitionAdvisors.com