1. External Succession Planning for the 1 to 4 Partner Firm Joel Sinkin Accounting Transition Advisors

2. About 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

3. If there are 50 things you need to think about in a transaction……. ……the smartest of us will think of only 35

4. Why is Activity So High? Economy: 2006 through 2008 versus 2009 and 2010 +? Niche Development The Boomers

5. Impact of Demographics In 1993, over 40% of AICPA members were over 40 years old……

6. Impact of Demographics PricewaterhouseCoopers Survey 2004 In 2008, that number rose to 70%……

7. Succession Challenges In 2008 AICPA survey 63% 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

8. 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 of the AICPA for Small Firm Interest Stated that was not nearly enough American Institute of Certified Public Accountants

9. Succession Challenges Funding 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

10. Three Ways to Grow One client at a time Develop marketable niches Merge or acquire another firm

11. 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 versus demand

12. 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!

13. How to Select a Successor Specialties 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”

14. How to Select a Successor Financial strength Professional/staffing strength Ethnic/language considerations Longevity of partners Employee track record

15. What is the Seller Thinking? “I am irreplaceable” “I am MASTER of my own domain!” “Clients NEED me” “If I retire, I’ll die!”

16. Purchase Price Structuring Multiple of billings Fixed purchase price - Fixed as a multiple - Fixed based on past compensation

17. 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/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

18. 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

19. 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

20. 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 versus traditional accounting clients?

21. 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

22. 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

23. 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

24. 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

25. 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 External sales are more of a “business” deal and go for high dollars

26. Sales – Internal v. External Things 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)

27. 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

28. Clients 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) Focus on how you will run the firm, not how it is currently managed

29. Firm culture Potential exposure issues Quality control issues Retention rate of employees Work papers Leases or other obligations

30. Other Thoughts General “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

31. The Transition….. Client Communications Roles for new staff members Specialization Other Thoughts

32. 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:

33. For more information Please visit our website for resources including free reports, whitepapers and case studies. Joel Sinkin Jsinkin@transitionadvisors.com 1-866-279-8550 www.TransitionAdvisors.com