Succession Planning Using Sales And

MergersJoel Sinkin, PresidentTransition Advisors

Transition Advisors

About the firm:• Merger and transition advisors exclusively

serving the accounting industry• Customized solutions• Hundreds of 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

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

versus2009 to 2012 + ?

Niche Development The Boomers

Impact of Demographics

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

Impact of Demographics

In 2008, that number rose to 70%……

Succession Challenges

In 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 will retire

Well up from just 2004!American Institute of Certified Public Accountants

Succession Challenges

Written 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, AICPA for Small Firm Interest, stated, ‘that was not nearly enough’.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 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!

How to Select a Successor

• Specialties you offer 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” clients

How to Select a Successor

• Financial 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 own domain!”

“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 sale2.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 entity3.Merger or Buy-Out4.Carving or culling out clients5.Two stage deals

• Sell equity but stay on• Less exposure for Seller than #2 and #3

What if Some Partners Want to Slow Down and Others Want to

Grow and Stay On for Many Years?• Most multi-partner firms have this situation• Partners seeking immediate role reduction do a

sale• Partners seeking to slow down in 5 years or less

do a Two Stage Deal• The Partners looking to stay on merge

• What does equity mean when they merge?• Are there retention elements?• How does their compensation and role

change?• What about their buyout?

Five Main Variables for Valuing a Practice

1. Cash up front, if any (2012 economy impact)• Dependent on time of year• The deal’s cash flow• Treatment of accounts receivable• Time to recover investment

2. Retention clause/guarantee (2012 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 period• Higher profitability, longer guarantees = higher

multiple

• Tax clients vs 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 vs computerized file management

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)• How do we pay the retired partner for ongoing

role?• For New Business?

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

Due DiligenceDo 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 DiligenceClients

• Who does the work?

• Where is the work completed?

• How many clients require face time?

• Fees

• Industries served

• Services for clients

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

Due DiligenceClients

• Firm Culture

• Potential exposure issues

• Quality control issues

• Retention rate of employees

• Work papers

• Leases or other obligations

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

• Staff merging

Other Thoughts

The Transition…..

Client Communications

Roles for new staff members

Specialization

The Transition…..

Client Communications

Roles for new staff members

Specialization

Transitioning ClientsWhat 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?

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 Sinkinjsinkin@transitionadvisors.com

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