external succession planning for the 1 to 4 partner firm joel sinkin accounting transition advisors
TRANSCRIPT
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External Succession Planning for the 1 to 4 Partner Firm
Joel SinkinAccounting Transition Advisors
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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
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If there are 50 things you need to think about in a transaction…….
……the smartest of us will think of only 35
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Why is Activity So High?
Economy:
2006 through 2008versus
2009 and 2010 +?
Niche Development
The Boomers
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Impact of Demographics
In 1993, over 40% of AICPA members were over 40 years old……
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Impact of Demographics
PricewaterhouseCoopers Survey 2004
In 2008, that number rose to 70%……
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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
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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
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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
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Three Ways to Grow
One client at a time
Develop marketable niches
Merge or acquire another firm
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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
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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!
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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”
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How to Select a SuccessorFinancial strength
Professional/staffing strength
Ethnic/language considerations
Longevity of partners
Employee track record
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What is the Seller Thinking?
“I am irreplaceable”
“I am MASTER of my owndomain!”
“Clients NEED me”
“If I retire, I’ll die!”
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Purchase Price Structuring
Multiple of billings Fixed purchase price - Fixed as a multiple
- Fixed based on past compensation
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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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)
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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
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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
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Due DiligenceFirm culture
Potential exposure issues
Quality control issues
Retention rate of employees
Work papers
Leases or other obligations
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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
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The Transition…..
Client Communications
Roles for new staff members
Specialization
Other Thoughts
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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:
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For more information
Please visit our website for resources includingfree reports, whitepapers and case studies.
Joel [email protected]
1-866-279-8550www.TransitionAdvisors.com