Presented byAugust Aquila, CEO

AQUILA Global Advisors, LLC

August is the CEO of AQUILA Global Advisors, LLC which specializes in succession planning, mergers and acquisitions, compensation plans and transformational strategic planning

Selected as one of the “Top 100 Most Influential People” in the Accounting Profession by Accounting Today in 2004, 2007 and 2009

Former partner in top 100 firm – Friedman, Eisenstein, Raemer & Schwartz (FERS)

Former executive with American Express Tax & Business Services, Inc

August counts among his CPA clients firms ranging from more than $110 million in revenue to as small as $1 million.

What differentiates August from other advisors is his unending devotion to implementation and his in-depth knowledge and experience

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Compensation Plans

Mergers & Acquisitions

Strategic Planning

Succession Planning

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Current Succession Planning Landscape

Recent Survey Results

Getting Started – Working on the firm not in

it

Value creation

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What do you want to achieve today?

What will be your greatest take away?

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What You Need to Know

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“Failure to plan for succession is the greatest current threat to the future of the accounting profession and should be the firm’s most important strategic issue”

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“Succession Planning is about creating opportunities”

August Aquila

STAFF GALOREUP AND OUT WHO CARES

MANAGERSCAN’T WAIT TO BECOME AN OWNER

PARTNERSLIFE IS GOOD, I MADE IT TO THE TOP

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STAFFWHAT DO THEY LOOK LIKE?

MANAGERSTELL ME AGAIN WHY I SHOULD BE AN OWNER

PARTNERSNOW, WHAT DO WE DO?

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Will I get paid?

Will the clients stay?

How will the payments be structured?

◦ Capital gains or ordinary income

Should I sell the firm or merge?

Should I sell now or wait?`

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Can we afford to pay THIS MUCH?

Can we retain his/her clients?

Should we put a cap on our retirement

payments?

Should we have a mandatory retirement

age?

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Multi-Owner Firms◦ Have started plan 35%◦ Will start in next 2

years 32%◦ Will start in next 5

years 10%◦ Will start in next 10

years 3%◦ Plan drafted 9%◦ No need 10%

Sole Practitioners◦ Have started plan 17%◦ Will start in next 2

years 43%◦ Will start in next 5

years 23%◦ Will start in next 10

years 3%◦ Plan drafted 3%◦ No need 10%

Source AICPA 2008 Succession Planning Survey

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Multi-Owner Firms

◦ Current 20%

◦ Next 1 to 2 years 13%

◦ Next 3 to 5 years 30%

◦ Next 6 to 10 years 17%

◦ More than 10 years away

3%

◦ No challenges 16%

Sole Practitioners

◦ Current 14%

◦ Next 1 to 2 years 18%

◦ Next 3 to 5 years 33%

◦ Next 6 to 10 years 27%

◦ More than 10 years

away 5%

◦ No challenges 3%

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No one does it better Key rainmaker Don’t talk to me about succession Next in command is not a threat Younger partners not ready Internal political issues Won’t transition clients Senior partners won’t retire

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Succession planning is the ultimate management challenge.

It addresses our own mortality. It deeply touches a wide range of emotions: Dreams (met and unmet) Hopes Security Relationships with family and co-workers Ambitions Fears

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Working on the firm, not in the firm.

1. Separate personal identify from practice2. Develop 3 prong plan3. Determine what your practice is worth4. Cultivate a team5. Develop other interests6. Have a well-written partnership agreement7. Choose a successor8. Develop plans for successor9. Create your succession plan

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“It’s easier to live with ambiguity”

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SUCCESSION

RECRUITINGRETENTION

NEW PARTNERS

1. Safeguard the long-term health of the practice

2. Ultimately plan for your own retirement security

3. Prepare for and install a successor

4. Let go of a business that you spent a lifetime building

 

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It’s Time to Face the Music!

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Do you have a succession plan?

Is some or all of your retirement plan

funded?

Do you expect to be bought out?

Do you know who will buy you out?

Do you have afixed date?

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What do you think is the first and second best choice for your firm and why?◦ Do nothing and eventually let the practice die◦ Split up◦ Sell to consolidator (such as McGladrey, Cbiz,

Fiducial) or an independent public accounting firm◦ Merge – downstream, upstream or lateral◦ Bring in people to take over◦ Transition to existing group of employees

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“This firm would be nothing without me.” 72% don’t have funded retirement plans Senior management stays in place too long Firm founder is key rainmaker Founders/MP wear too many hats All or most partners come from within

“In the US our heroes die with their boots on. They don’t fade into the sunset.”

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What is the value of the practice without me?

How can I transfer what I do to others?

How do I pass on my skills?

How do I pass on my business and client relationships?

How do I start taking a secondary role in the firm?

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“This firm would be nothing without me.”

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Learn to delegate

How do you start giving up control?

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A strategic plan for the firm

A policy around funding or not funding partner deferred compensation plans

A personal financial security plan for the retiring owner, including an estate plan for your spouse, children

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What do you want the firm to become?

What do you need to do to realize this

dream?

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Funded plan

Unfunded plan

No plan

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Trade off between current compensation and long-term security

Funding with qualified retirement plans◦ Tax deductions for funding the plan◦ Assets protected from creditor claims◦ Qualified trust earnings are tax deferred◦ Qualified plan should not discriminate in favor of

highly-compensated employees

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Funding with non-qualified plans◦ Funding a non-qualified plan does not results in a

tax deduction◦ Creditor claims can erode plan assets◦ Can discriminate in favor of highly compensated

owners◦ Plan earnings are currently taxed to the firm

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Based on trust and goodwill

Pay as you go

Base on agreed upon valuation formula

◦ Equity or multiple of compensation

◦ Return of owner’s capital

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Very small buy in and very small buy out

Typical law firm retirement plan

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Multipliers – Revenue or Book Size*◦ More than $1 on the $1 7%◦ $1 on the $1 42%◦ 95 cents on the $1 2%◦ 90 cents on the $1 3%◦ 85 cents on the $1 2%◦ 80 cents on the $1 7%◦ 75 cents on the $1 14%◦ 70 cents on the $1 3%◦ 65 cents or less on the $1 13%*Source AICPA Succession Planning Survey

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Multipliers – Salary◦ Less than one year’s salary 6%◦ One year’s salary 8%◦ One year’s salary x 1.5 3%◦ One year’s salary x 2.0 17%◦ One year’s salary x 2.5 14%◦ One year’s salary x 3.0 38%◦ One year’s salary x 3.5 3%◦ More than one year’s salary x 3.5 5%

Source: AICPA 2008 Succession Survey

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Accrual basis capital account (ABC)◦ Paid over 5 years◦ Often with interest

Goodwill (computed on cash basis)◦ Larger firms use a multiple of compensation◦ Smaller firms use a calculation base on fees◦ Usually paid out over 10 years◦ No interest◦ Annual cap on payments

Usually 5-10% of revenue

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Learn to delegate

◦ Identify your transition team

◦ Build their competencies

◦ Create trust in the organization

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Single owner◦ Two managers

Firm has revenue in excess of $700,000 Owner has transitioned 5080% of work to

the two managers Margins 45%+ Should the owner sell to the managers or

look for a firm to buy him/her out?

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What will you do with the rest of your life?

◦ New business opportunities

◦ Civic, charitable endeavors

◦ Travel, play golf, etc

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Key Partnership Agreement Issues

◦ Mandatory retirement age from partnership

◦ Client transition tied to benefits

◦ Cap total dollars to be paid in any one year

◦ Determine vesting period

◦ Define partner disability

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◦ How much advanced notice should be given

◦ Non-compete and non-solicitation agreements

◦ Early retirement penalty

◦ Termination with and without cause

◦ Continued use of firm’s name

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Unplanned exit of the owner (death)◦ Financial hardship to family◦ No one else in family qualified to hold interest in

practice Loss of clients and goodwillo Remaining asset have little value

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What it is

How to get started

Analyze the practice

The deal structure◦ What size firm

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Have a buy-sell agreement with a key employee if possible

Have a practice continuation agreement with a larger firm

Selecta trusted advisors to quickly sell the practice

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Identify possible replacements. Look inside and outside of the firm. Evaluate all potential successors. List your first, second, and third choices. Have key players document information. Cross-train your employees. Ask for help to formalize your plan.

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Identify specific competencies Provide informal coaching by assigned

partner Give on-the-job training opportunities Offer formal training in interpersonal skills Make available formal training in delegation

and supervision Send future leader to external leadership

training program

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Empower people throughout the organization to do their jobs responsibly and autonomously.

Identify managers or other staff with potential.

Mentor promising staff. Include junior staff in decision making. Set up a timetable for new leadership.

◦Looks at a 1 – 3 year window

◦Don’t copy another’s plan

◦Use outside advisors

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Will I be financially secure after retirement?

Have I identified a successor?

Do I believe that there is meaning to my life outside of the practice?

Do I have new challenges to look forward to after retirement?

Am I committed to an effective succession plan?

Can I delegate authority to others?

Have I announced a firm date for my retirement?

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7 yeses - you didn’t need this program 6 yeses - you are almost there 5 yeses - you are more than half way

there 4 yeses - start getting serious 3 yeses - get an outside advisor 2 yeses - at least you are thinking 1 yes - you are under 40 or plan to work

forever

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Hold a brainstorming meeting◦ Spouse◦ Major clients◦ Advisors◦ Employees

Failure to plan . . .◦ Fire Sale??◦ Lower price◦ Force to sell at a weak time

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When you reach mid to late 50s

Gives you a 5 to10 year window

Know when to leave

Tie succession/retirement plan to your

personal wealth accumulation

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Liquidity

Provide new owners opportunities

Enhance value of your firm

Release energy of successors

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Start while the partner is still there Communicate personally with key clients Don’t assume that clients know what is

going on Create a script

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Mandatory Retirement◦ Only 36% of firms have one◦ Retirement does not mean leaving

Identify New Role – don’t let the intellectual capital escape◦ Senior statesperson◦ Mentor◦ Business development

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Set up a timetable for the transition◦ Two to four years

Identify future skills and talents Create a process

◦ Self nomination◦ Describe candidates platform

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Make Sure You Plan Develop and nurture the next generation Know when to leave Retirement plans should be good for

everyone Succession planning is a natural course of

running a practice A good plan provides the firm with choices

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What did I forget to address?

Practice Continuation Agreements: A Practice Survival Guide, Second Edition by John A. Eads, AICPA

Compensation as a Strategic Asset by August Aquila and Coral Rice, AICPA

AICPA/PCPS Human Capital Resource Center www/aicpa.org/pcps

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For a free consultation please contact:

August J. Aquila952-930-1295aaquila@aquilaadvisors.com

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THANK YOU –

YOU’VE BEEN A GREAT AUDIENCE