Succession Planning for the 5 Partner Firm and Larger

Joel SinkinAccounting Transition Advisors

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

accounting industry• Customized solutions• Hundreds of successful transactions, over 20 years 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

Why is Activity So High?

Economy:

2006 through 2008versus

2009 through 2011

Niche Development TechnologyThe Boomers

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

……the smartest of us will think of only 35

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 ChallengesInternal Succession Plans

•86% of firms said they would transition •leadership internally in 2004

•In 2008 that dropped to under 79% and the expectations are those numbers are still optimistic

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 rarely fund beyond 50% of full liability

American Institute of Certified Public Accountants

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: whose in trouble?

Impact of Demographics

Why the small RegionalFirms are the most at riskfor succession in the nearfuture

Three Ways to Grow

One client at a time

Develop marketable niches

Merge or acquire another firm

Succession ChallengesBrand versus partner Loyal Clients:

Brand:Takes less time to

Execute:Partner:

Must start the process earlier

Succession Challenges

> Transition time required> Capacity to pass down work and replace those slowing down> Replace the role, not the body

Methods to Structuring the Acquisition/Transition of a

Practiceto a Third Party

1. Straight sale

2. Merger and Buy Out

3. Carving or culling out clients

4. Two stage deals

Most deals will be a combination of a Mergerand a Two Stage Deal

Five Main Variables for Valuing a Practice on External Sale

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

and treatment of accounts receivable

2. Retention clause/guarantee - 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)( The use of IRC Code 736a)

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

Valuing based on equity versus compensation

Addition of Talent: Building an Internal Succession Team

If they are:

Bringing a book of business: Cannot get a star with empty offers though

Bringing a nicheBringing excess capacity

General Guidelines• Equity

-The poker chip method

-What does equity mean?

-Additional factors are, profitability,

staff, rates, assets, niches, more

-Look back periods to adjust equity

- Multiple different levels of partner:

Income, Equity, Of counsel….

- Addressing the small partner in the merged in firm who cannot become a partner in your firm

General General GuidelinesBuyouts: Valuing Partner Equity

> Equity Formulas

> Compensation Formulas

> The ultimate Litmus Test to see if your

partner buyout program works!

CAPS

NOTIFICATIONS

RETENTION PERIODS

MergersCompensation

- Book of Business versus Equity ownership

- All For One And One For All

- Profit distribution: Equity versus formulas

- Relative compensation as a proxy for culture assessment.- Multi level approach to partners: Full, income, retired

partners all can have different compensation programs and different profit sharing opportunities and different buyouts

Building your own internal succession team > Mini Merge> Strong Offers> Replace the Role still

Cull Out Sale> your basement is someone else’s ceiling

Upstream Merger> typically this will be a Two Stage deal for some partners and a merger for others

If not internal, what are my other

options for Succession?

Other ThoughtsDeath of a partner:

PCA agreements for smaller firmsLife insurance and the role it plays

Disability: Defining temporary versus permanent

Plan in advance and review at least annually

The hunt for talent has already started!

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

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