Valuing your Accounting

Practice When Selling to a

Partner or External

Buyer Joel Sinkin, President

Transition Advisors

Accounting Transition Advisors

National Consulting Firm working exclusively with

accounting firms on issues related to ownership transition

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 2008

versus 2009 versus

2015 ???????

Niche Development

The Boomers

Is it a Buyers or Sellers Marketplace

Whose in trouble re valuations?

Three Ways to Grow

• One Client at a time

• Develop marketable niches

• Merge or acquire another firm

Starting the Transition Process

When should we start? • How many more tax seasons do you

want to work?

• Client “face time”

• Investments including technology, leases, staff

Things going to get worse as supply (of sellers) increases

vs demand: Whose in trouble?

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!

What is the Seller Thinking?

“I am irreplaceable”

“I am MASTER

of my own

domain!”

“Clients NEED

me!”

“If I retire, I’ll die!”

Methods to Structuring the

Transition of a Practice through an

External Sale

1. Straight sale

2. Buy in to a Buy-Out

• Buyer opts in an interest into the firm

• Buyer may or 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

Two Stage Deal

• Stage One:

– Calculate the owner’s net

– Calculate the labor the owner uses

to achieve the net

– In multi partner firms, the focus

shifts from labor to chargeable hours

– Focus on how long the owner intends to devote similar time, have a back date!

Two Stage Deal

• Stage One: (external sale)

* Successor takes on all costs of

operations: Labor, rent, etc…

*Seller paid on percentage of gross

collections from original clients

* Tax advantages to both parties

* Seller’s time commitment not critical factor

Two Stage Deal

• Advantages to seller in stage one

– PCA agreement on steroids

– Mitigates loss of client fees

– Free additional back up and support

– Work less since administration and other items passed onto successor thus more time to transition, develop new clients and enjoy life.

– Higher client retention = more $

Two Stage Deals

• Stage One advantages to buyer

– Synergies

• Labor

• Rent

• Software

• Malpractice insurance

• Better transition

Two Stage Deal

• Stage Two – When does stage one end and

stage two begin

– Retention period commences if applicable

– How do we pay seller for a part time

continuing role

– What about new business developed in stage one or stage two? Replacement clients, included clients new clients

– Buyout terms: what is the multiple

Five Main Variables for

Valuing a Practice

1. Cash up front, if any (2015 economy impact)

• Dependent on time of year

• The deal’s cash flow

• Treatment of accounts

receivable

• Time to recover investment

Five Main Variables for

Valuing a Practice

2. Retention clause/guarantee (2015 economy

impact)

• Collection deals, deals by percentage

• Fixed deals

• Limited guarantees

• Economy clause

• What deal worked best for who?

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 period

• Higher profitability, longer guarantees = higher multiple

• Tax clients vs Traditional Accounting clients?

Other Items to Consider

Other 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. External

Internal 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

• Tax treatment and 736 (a) (1)

• Capital accounts

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

Transition Advisors

Transition Advisors

Transition Advisors

American Institute of Certified Public Accountants

Practice Information – Take a Look!

Billing Information

• Accounts Receivables

• Age analysis of Cash Flow

• Time and Billing vs Retainers

• Value Billing

• Billings in dollars (larger practices, lower multiples)

• Billing Rates and Profit and what they mean to you

Other Thoughts

• General “chemistry” between the parties

• Continuity/Culture of relationships will help retain clients

• Capacity to take over the roles being diminished

• A good deal is a fair deal

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

• Increase your firms value: metrics, IT, avoid leases, good talent

Other Thoughts

The Transition….. Client Communications Roles for new staff members Specialization

The Transition…..

Client Communications

Roles for new staff members

Specialization

Transitioning Clients

What are the Client’s fears?

• Who gets a phone call

• Who gets a visit

• Who gets a letter

• Firm Name options

CHANGES BEHIND THE DOOR

CHANGES IN FRONT OF THE DOOR

Transitioning Clients

◊ What are the Client’s fears?

• 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?

ITS ALL PACKAGING!

CHANGE IS A DIRTY WORD.

THE EMPHASIS NEEDS TO BE ON CONTINUITY.

NOT THE LOSS OF, BUT THE GAIN OF ……..

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

Joel Sinkin

jsinkin@transitionadvisors.com

1-866-279-8550

www.TransitionAdvisors.com