Success Planning, Buying and Merging Larger Accounting FirmsIn Today's Economic

Environment

Joel SinkinAccounting Transition Advisors

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

accounting industry• Customized solutions• Over 950 transactions, over 19 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

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

Impact of Demographics

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

Reasons Why Firms Merge

Firms fall into two categories:

1. Firms seeking growth by combining with another firm

2. Firms seeking to solve a problem

Know your reasons…know theother firm’s reasons

Why is Activity So High?

Competition

Economy

Technology

Niche Development

Aging of the partners/staff

Three Ways to Grow

One client at a time

Develop marketable niches

Merge or acquire another firm

Have a Goal Prior To MergingHave a Goal Prior To Merging

•Be wary of mergers for pure overhead reduction

Bigger is not always better

•Having a specified purpose for a merger helps in identifying the target and helps you relate to deal structures that accomplish your plan

Standard Goals of Merger for Standard Goals of Merger for GrowthGrowth

•Growth of Billings

•Addition of Talent

•Cross Selling

•Adding a New Marketplace

• Succession: merging up or building an internal team

Growth of Billings

•Capacity to take on the workload

•Continuity to retain clients or pass on deal

•Cash flow

•Treat as an acquisition

•Synergies or increases in costs

Methods to Structuring the Acquisition of a Practice

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

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

and treatment of accounts receivableEconomy impact

2. Retention clause/guarantee - Collection deals, deals by percentage - Fixed deals - Limited guarantees - Economy clause

Economy impact

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

Cross Selling•You’re selling their clients

•They’re selling your clients

•Compensation

•Licenses

•Commitment from partners and staff to take a proactive role in marketing

Adding a New MarketplaceAdding a New Marketplace

•To cross sell

•To attract new clients

•Technology making it easier

•To attract additional staff/partners

•Strong communication, routines, plans, and guidelines are the key to success

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 Guidelines• Compensation

-Start off by remaining whole when possible, avoid immediate increases

-Handle perks and benefits as part of the package

- Accountability

- Buyouts: Valuing Partner Equity

> Equity Formulas

> Compensation Formulas

> The ultimate Litmus Test to see if your

partner buyout program works!

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

De-Merger De-Merger Clauses•When is it appropriate and not appropriate?

•How long can they be invoked?

•Allowing partners to leave with clients

•Handling of

-original clients -new clients

-firm name -staff

-liabilities -leases

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

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 only how it is currently managed

Due DiligenceFirm culture

Potential exposure issues

Quality control issues

Retention rate of employees

Work papers

Leases or other obligations

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