Transition Advisors LLC

Back to the Future: A look back at Back to the Future: A look back at

what happened in 2016 and what

we can expect for the New Year

January 12, 2017

Bill Carlino

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Transition Advisors, LLC

National consulting firm working exclusively with accounting firms on issues related to ownership transition

Today’s Agenda

� The Profession by the Numbers

� The Evolution of the 21st Century CPA Firm

� Succession Challenges – internal vs. external

� Merger Mania and Why it will Continue

� Turnover and the Modern Workforce

� The New Beltway Administration and What it May Mean for the Profession

Accounting Profession At-A-Glance

• Revenue … $99B• No. Firms … 94,600 (est.)• Employment …532,985 (public accounting

only)only)• Growth in 2015 …9.32% (Top100)• Growth in 2015 for firms $2 million and

under – 8.1%

Top 100 Firms- Revenue/Growth

� 2015 U.S. Net Revenue … $59.11B (+9.32%)

� Big Six … $50.91B (+8.1%)

� Firms over $100M … $8.38B (+7.08%)

� Firms under $100M … $3.6B (+9.7%)

� AccountingToday Top 100

Top 100 Firms

� Deloitte $16.14B

� PwC $ 12.2.B

� E&Y $ 11.19B

� KPMG $ 7.9B

� RSM $ 1.63B

� GT $ 1.55B

Top 100 Leaders in Growth

� Armanino 26.8%

� Wipfli 25.42%

� Bonadio Group 21.5%� Bonadio Group 21.5%

� Kearney & Co. 20.15%

� PKF O’Connor Davies 17.21%

Top Client Niche Services

� Attest� Business Valuations� State and Local Taxes� Estate Trust/Gift

International TaxEstate Trust/Gift

� International Tax� M&A� Industry Specialization� Litigation Support� Non-Profits� Forensics/Fraud

Top Client Categories

� Manufacturing� Midsized businesses� Real Estate� Construction� Construction� Technology� Wholesale Distributors� Professional Services� Large Businesses� Healthcare

Income per Equity Partner

� Firms over $20M in fees: $549,413

� Firms between$10M and $20M in fees:$471,151

� Firms between $2M and $10M: � Firms between $2M and $10M: $364,016

� Firms under $2M: $215,915

Rosenberg Survey

What’s In?

� Value/Pricing/Billing

� BPO

� M&A/Succession

� The � The Cloud/Technology

� Virtual Firms

� New Regulations

This is Not Your Father’s CPA Firm!

�You can’t run a CPA firm in 2017 like you did in 1980!

�Value pricing and value billing about 15-20 percent of CPA firms

now use some form of VP and VB system.

�Firms moving to “one-partner/one-firm” concept rather than

individual books of business. Especially among “partner-loyal” firms vs.

“brand-loyal” practices.

�Working Remotely – 1995 there were 9.5 million remote workers

– 13.5 million in 2012 and now roughly 40 million people work

remotely at least once a week.

�Projected to reach 63 million by end of 2016 according to Gartner

Research.

�Greater use of mobile devices: more than 95 percent of CPAs

use smartphones or tablets. Given rise to the birth of virtual firms.

Today, about 15 percent of all start-up firms are virtual.

�

Evolution of the 21st Century CPA Firm

The modern CPA firm is moving the focus away from

compliance to “value added” client services. Transition

evolution from Type 1 work to becoming “advisory

firms.”

New niches areas in demand:New niches areas in demand:

Cybersecurity – “IT stress tests, SOC audits”

Sustainability/”Green Accounting”

Human Resources

Workflow and process improvement

BPO – will be a $25-$30 billion business by end of

2017.

�

What’s Keeping CPAs awake at night?

1. Finding and Retaining Qualified Staff

2. Workload Compression

3. Succession Planning (70 percent of the AICPA’s

400,000 members will be eligible for retirement by

2020!) 60 percent of all equity partners are over the 2020!) 60 percent of all equity partners are over the

age of 50. One person turns 65 in the U.S. every 8

seconds!

4. Bringing In New Clients

5. Owner/Partner Unity

AICPA PCPS survey of 6,400 firms

Baby Boomers vs. Gen X

Then vs. Now1. Needs: Pension vs. Purpose

2. Wish List: Good Boss vs. Great Colleagues

3. Work Hours: 9-5 vs. Whenever

4. Workplace: Office vs. Wherever 4. Workplace: Office vs. Wherever

5. Tenure: Whole Career vs. Whenever

Nobody gets the gold watch anymore

One Firm Culture

Eliminates “Lone Ranger” mentality

amongst more senior partners.

Easier to transition clients – usually

more than one partner services the

client.client.

Equity not directly tied to the book of

business

Doesn’t de-incentivize partners to

transition.

No “my client, your client” silos.

Easier to cross-sell additional services

Are You Ready for 2017?According to CPA.com – poll of 400 firms -only 8

percent of CPAs feel that the profession is “future

ready”

Only 10 percent view themselves as “innovative.”

1.Must understand and embrace emerging

technologies – the digital future is already here

2. Will experience a quantum change in traditional

roles – be agile to meet the needs of a changing roles – be agile to meet the needs of a changing

marketplace

3. Need to be aware of how globalization and

cross-border transactions will be a “game

changer” in how firms operate

4. Need to understand the value of a diverse

workforce

5. Must be prepared for new rules and regulations

from government

Trends for the 2017 CPA firm

• Uses the latest technology and tools (i.e. cloud applications)

• Not bound by geography or any other traditional barriers

• Strive to cultivate passionate relationships with clients – not

just business relationships

Willing to try new things – and fail if need beWilling to try new things – and fail if need be

• Professional “revolutionaries” with a growing number of

followers.

• Start with the “why?” and not with the “what?”

Start with Why?

• CPAs know what they do, but do you know why you do it?

• Looking at the reason for your existence differently

• Before: “We make computers that are reliable and

affordable. Pick one up today.”

• Apple: “At Apple, we think differently. And we happen to • Apple: “At Apple, we think differently. And we happen to

make great computers.”

• CPA firm: Our firm has a team of experienced professionals

willing to meet the needs of our clients.”

• CPA Future Firm: “At XYZ firm, our passion is our clients.”

Accounting Salaries, College Enrollments

Accounting Salaries Projected to Grow 3.7 percent in 2017 – for those CPAs well-versed in technology it will grow to 6 percent!1. Hottest Commodity today: A young CPA with or

without a book of business – The Holy Grail!2. Accounting study enrollments during the 2015-

2016 academic year surpassed the 270,000 mark.2016 academic year surpassed the 270,000 mark.3. EY plans to hire 15,000 U.S. employees in fiscal

2017 – 9,200 of them students4. PwC predicted that by the end of 2016, 80

percent of its U.S. workforce will be Millennials.

What’s Critical to Retaining Talent in 2017?

� Salary

� Growth opportunities

� Paid personal/vacation time

� Open-door management

� Challenging projects and work

� Strong IT culture� Strong IT culture

� Firm’s reputation/prestige

� Flexible work schedule

� Retirement savings plans/benefits

� Frequent client contact

Current CPA Profession Demographics

� Over half of all CPA graduates are women

� 25 percent of all CPA graduates are non-white

� 13 percent of “high potentials” are � 13 percent of “high potentials” are non-white

� 5 percent of partners are non-white

Current Profession Demographics

� The percentage of equity stakeholders over the age of 50 in the U.S. for firms from $2 million to over $20 million is 63 percent.

� Average partner age is 53.7.� Average partner age is 53.7.� The percentage of total female

partners in that same group is 16.7 percent.

Today’s Workforce

� 2016- Millennials have overtaken Baby Boomers as America’s largest generation – 75.4 million vs. 74.9 million.

� By 2020, Millennials will comprise � By 2020, Millennials will comprise more than 50 percent of the entire U.S. workforce.

CPA Firm Demographics of the Future (2030)

� Over one-third of partners will be women

� 50 percent of CPA staffs will be non-white45 percent of “high-potentials” will be � 45 percent of “high-potentials” will be non-white

� 35 percent of partners will be non-white

� NextGen Consulting

Social Media and Accounting Blogs

� 400-Plus Accounting Blogs

� More firms increasing use of Social Media; i.e. Facebook, LinkedIn.

* 75% of Top 200 Firms have Facebook and i.e. Facebook, LinkedIn.

* 75% of Top 200 Firms have Facebook and LinkedIn presence. No more corporate “blocks” for staff.� Facebook now has 1.71 billion users, 1.14

million are mobile. 467M on LinkedIn.

Social Media and Recruiting

� More CPA firms using social media as a recruiting tool.

� More than 75 percent of firms over $5 million and 83 percent of firms over $10 million using social media platforms such million and 83 percent of firms over $10 million using social media platforms such as YouTube, LinkedIn and Facebook for recruiting efforts.

AICPA PCPS

Staff Turnover

� As economy improves staff turnover trended upward in 2015 – latest stats available.

� Why? More opportunities.Firms over $10 million reported average Why? More opportunities.

� Firms over $10 million reported average turnover rate of 13.4 percent.

� Firms from $750K to $10M reported a turnover rate of between 8-9 percent.

AICPA MAP of 1,600 firms

Going Mobile – The 21st Century Firm

Going Mobile: nearly 3 billion globally have a mobile phone – by end of 2016 that will rise to 4.5 billion.By end of 2016 – about half of all IT expenses will be earmarked for remote – cloud etc.Other 21st century office expenses: BI analytics, Other 21 century office expenses: BI analytics, cyber security.BPO – automation occurring at the low-end –FreshBooks, Xero, Wave.In an ideal world – up to 4-7 percent of your top line revenue should be spent on technology. 2nd

largest investment behind hiring talent.

Pending Technologies

1. Google’s Project Fi – provides inexpensive cellular

service directly to phones – combines access to T-

Mobile and Sprint that can switch between the two.

2. Amazon’s Cloud Services – grew more than percent

over the past two years. Taking on Dropbox, Microsoft

and Google. 2 million plus users. and Google. 2 million plus users.

3. 3D Printing – By 2018 nearly 30 percent of durable goods

will use 3-D printing. 3D printer shipments will double by

2017. Global market of $2.2 billion.

4. 5G Cellular – ETA to be deployed by 2020.

How the Modern Workplace is Changing

1. Internet of Things, wearables, more firms allowing BYOD; SOC, BI, data analytics service niches more in demand by clients.

2. Marketing/business development becoming much more tech-oriented, CMOs slowly morphing into CIOs. morphing into CIOs.

3. CPA firms becoming more strategic in choosing accounting software solutions. Seeking to integrate best-in-class apps to automate specific services and minimize or delete data entry and focus on higher-value and advisory services.

How the Modern Workplace is Changing

1. Technology and a strong IT culture has provided an entrée for firms to consider satellite offices – allowed them to act as one.

2. Allowed to partially overcome staff shortages –particularly in the case of multiple offices. Allows you to leverage work, frees up partners Allows you to leverage work, frees up partners to cross-sell services.

3. Helps with part-time staffing during busy season – an example would be stay-at-home moms with tax prep background.

Merger-Mania

� 500+ recorded mergers over the past four years (and hundreds more that went unreported)

� Just 5 years ao,55 of Top 100 reported completing at least one merger

� Armanino-TravisWolff� CLA-Gallina� MRPR CPAs – Rhoades Doehrer� Brady Ware-Gross Duke Nelson

Percentage of Firms that Acquired a Practice

1. Less than $200K – 4%2. $200K-$500K – 7%3. $500K-$750K- 7%4. $750K - $1.5M – 12%5. $1.5M -$5M – 16%5. $1.5M -$5M – 16%6. $5M-$10M – 31%7. Over $10M – 24%

AICPA MAP of 1,600 firms

Reasons for M&A

� Geography / New Markets

� New niches/biz val/lit support

� Competition – above and below� Competition – above and below

� Lack of Formal Succession Plan

Succession Planning

• 80 percent of multi-owner firms expect succession planning to be the most important issues over the next 10 years!

• 61 percent of firm partners are over 50.

� 46 percent of multi-owner firms have a have a formal � 46 percent of multi-owner firms have a have a formal succession plan in place!

� Firms with less than 15 employees, 70 percent DO NOT have a succession plan in place!

� Less than 6 percent of sole pracs have a PCA.

AICPA PCPS

When Do You Begin The Process?

• How many more tax seasons do you want to work full time?

• Do you have the talent on your bench?� Or do you have to go outside?� Holy Grail: a young CPA with a good book of � Holy Grail: a young CPA with a good book of

business!� Ideally, succession should begin 5-7 years out.

Succession issues abound

� 32 percent of small to midsized firms in AICPA/PCPS survey will face succession challenges over the next 6-10 years.

� 28 percent face succession issues over the next 3-5 years.next 3-5 years.

� 22 percent say they have succession issues right now!

� That’s more than 80 percent of survey respondents.

� .

Issues Impacting Succession Strategy

� Younger firm members not ready for leadership posts (42%).

� Firm does not have approved owner agreement (28%).No penalty for senior partners who � No penalty for senior partners who improperly transition clients (25%)

� No mandatory retirement age (19%)� Retiring partners unwilling to transition

clients (16%).

� .

Succession: Gearing Up – To Wind Down

� When Should We Start?� You can never start too soon, but you can

easily start too late.� Again - How Many More Tax Seasons Do You

Want To Work – Full Time?Want To Work – Full Time?� Evaluate Client “Face Time.”� For most, 3 years is 3 client visits.

� .

Annual Succession Checklist

� 1. Have any of the partners’ career or retirement

goals changed over the past year?

� 2. Do we have any partners who want to reduce

their time commitment over the next five years?

� Do we have any critical staff closing in on � Do we have any critical staff closing in on

retirement? And if so, do we have the capacity to

replace them?

� Have any new partners been admitted to, or left

the firm?

� Do any of the above require changes to our current

succession plan?

� .

Succession Checklist Part II

1. Addition or closing of a client service niche

2. Adding another location

3. Gain (or loss) of a large client

4. A significant change in revenues4. A significant change in revenues

5. A downturn (or upturn) in the economy or

local market.

6. Sudden loss of partners or staff (resignation

or death/disability.

� .

Is Your Successor Ready?

� Looking Internally or Externally?� Who’s on your bench? Staffing, excess

capacity.� If external succession, do you know why

the other firm wants to merge?the other firm wants to merge?� Evaluate current technology and lease

situations.� Financial strength of suitor� Remember, bigger is not always better.

Better is better!

� .

The High Price of Waiting Too Long

� A sole practitioner in the Northeast put off finding a

successor – in the interim several things happened:

� 1. A key employee resigned.

� 2. One of his large growing clients suddenly became

“at risk” because they needed services the sole “at risk” because they needed services the sole

practitioner didn’t offer.

� His aging IT infrastructure needed a comprehensive

and expensive upgrade.

� Now, the owner is open to any offer that comes

along instead of managing the process in an orderly

fashion.

� .

Changes Along the Beltway?

New Administration = Regulatory changesPresident-elect Trump has unveiled the following proposals…Individual tax cuts:Individual tax cuts:1. Reducing the individual marginal rate

tax brackets to 12, 25 and 33 percent2. Double the standard deduction to $15K

for single filers and $30k for joint filers.

� .

Changes Along the Beltway?

Business tax cuts:1. A reduction in the top corporate tax

rate to 15 percent from 35 percent.2. Repeal and replace the ACA including

all associated taxes - 3.8 percent on all associated taxes - 3.8 percent on net investment income, the additional .09 percent Medicare tax on wages and self employment

3. A repeal of the estate and gift tax.

For More InformationVisit the AICPA Succession Planning Resource Center

http://www.aicpa.org/InterestAreas/PrivateCompaniesPracticeSection/StrategyPlanning/center/Pages/default.aspx

Transition Advisors LLC

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