valuing your accounting practice when selling to a partner ... · valuing your accounting practice...
TRANSCRIPT
![Page 1: Valuing your Accounting Practice When Selling to a Partner ... · Valuing your Accounting Practice When Selling to a Partner or External Buyer Joel Sinkin, President Transition Advisors](https://reader033.vdocuments.us/reader033/viewer/2022043007/5f95053afca9f26b9a3e17f2/html5/thumbnails/1.jpg)
Valuing your Accounting
Practice When Selling to a
Partner or External
Buyer Joel Sinkin, President
Transition Advisors
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Accounting Transition Advisors
National Consulting Firm working exclusively with
accounting firms on issues related to ownership transition
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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 2008
versus 2009 versus
2015 ???????
Niche Development
The Boomers
Is it a Buyers or Sellers Marketplace
Whose in trouble re valuations?
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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 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?
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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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What is the Seller Thinking?
“I am irreplaceable”
“I am MASTER
of my own
domain!”
“Clients NEED
me!”
“If I retire, I’ll die!”
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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
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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!
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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
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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 $
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Two Stage Deals
• Stage One advantages to buyer
– Synergies
• Labor
• Rent
• Software
• Malpractice insurance
• Better transition
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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?
– Buyout terms: what is the multiple
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Five Main Variables for
Valuing a Practice
1. Cash up front, if any (2014 economy impact)
• Dependent on time of year
• The deal’s cash flow
• Treatment of accounts
receivable
• Time to recover investment
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Five Main Variables for
Valuing a Practice
2. Retention clause/guarantee (2014 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 period
• Higher profitability, longer guarantees = higher multiple
• Tax clients vs Traditional Accounting clients?
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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
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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
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Transition Advisors
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Transition Advisors
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Transition Advisors
American Institute of Certified Public Accountants
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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
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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
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For More Information
Please visit our website for resources including
FREE reports, whitepapers and case studies.
Joel Sinkin
1-866-279-8550
www.TransitionAdvisors.com