1. Succession Planning Using Sales And Mergers Joel Sinkin, President Transition Advisors

2. About the firm: Merger and transition advisors exclusively serving the accounting industry Customized solutions Hundreds of transactions, over 20 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

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 to 2012 + ? Niche Development The Boomers

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

6. Impact of Demographics 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 will retire 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, AICPA for Small Firm Interest, stated, ‘that was not nearly enough’. American Institute of Certified Public Accountants

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

10. 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?

11. 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!

12. How to Select a Successor Specialties you offer 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” clients

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

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

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

16. 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

17. What if Some Partners Want to Slow Down and Others Want to Grow and Stay On for Many Years? Most multi-partner firms have this situation Partners seeking immediate role reduction do a sale Partners seeking to slow down in 5 years or less do a Two Stage Deal The Partners looking to stay on merge What does equity mean when they merge? Are there retention elements? How does their compensation and role change? What about their buyout?

18. Five Main Variables for Valuing a Practice 1. Cash up front, if any (2012 economy impact) Dependent on time of year The deal’s cash flow Treatment of accounts receivable Time to recover investment 2. Retention clause/guarantee (2012 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 clients vs 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 vs computerized file management

22. 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) How do we pay the retired partner for ongoing role? For New Business?

23. 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

24. Due Diligence 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

25. Due Diligence 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)

26. Due Diligence Clients Firm Culture Potential exposure issues Quality control issues Retention rate of employees Work papers Leases or other obligations

27. 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 Staff merging

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

29. Transitioning Clients What are the Client’s fears? 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? CHANGE IS A DIRTY WORD. THE EMPHASIS NEEDS TO BE ON CONTINUITY. NOT THE LOSS OF, BUT THE GAIN OF ……..

30. 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