6Rules of the Game Talk to me Polling questions from time to time I will ask you some questions as we work through the materialPepto Bismol slides
72011 Top Issues for the Profession 1. Partner accountability / unity1. Retaining clients2. Bringing in new clients2. Partner accountability / unity3. Retaining clients3. Succession planning4. Fee pressure / pricing4. Bringing in new clients5. Succession planning5. Staff retention6. Staff retention6. Fee pressure / pricingAICPA Survey of Firms with 21+ Professionals
82012 PCPS Succession Survey 62% of multi-owner firms expect succession planning to be a significant issue in the next five years. (about the same % as the survey)54% of multi owner firms do not have a written plan in place. (improved from 65% in 2008)
9The Perfect Storm1994 to 2009, lowest number of accounting grads (150 hour requirement)Even lower number sitting for the examThe BBB
10Baby Boomer Bubble 76 million of us born between 1946 and 1964 61% of all CPA firm owners are over 501993 – 40% of AICPA members over 402008 – 70%??
11Bill Reeb’s Definition of Succession Planning Succession planning is not scrambling around to find a solution when the clock has run out. It is running your firm well now and having the people and systems in place.
12Partner Retirement – Buyout Plans Inside deal – our topic todayOutside deal, beyond our scope but the pricing is higher
13Value of a CPA Firm Two pieces – capital and goodwill What’s different about a CPA firm compared to most of your clients?Personal relationships - transition issuesRelative low buy ins and the concept of vestingLonger term payout
14Value of a CPA FirmTug of war between the “old guys” and the “young guys”What is Fair?Risk if value is too lowRisk if value is too high
15Two Components of Value Accrual Basis CapitalGoodwill
16Capital Accrual book value Payout generally cash or a relatively short termInterest is paid
17Goodwill What is your firm worth to your partners in an inside deal? 110% of fees?100%?80%?50%?
18Polling QuestionWhat percentage of fees are you using to value your firm?100%Less than 100%More than 100%We don’t use a percentage of feesWe don’t have a buyout plan
19Multiple Used To Value Internal Partner Buyouts * % of Net Fees Paid forGoodwill2-4Partners149 Firms5-7102 Firms8-1265 Firms13+53 FirmsAll Firms20112010> 100%8%11%7%9%100%20%21%17%90 – 99%6%12%75 – 89%25%22%27%23%26%50 – 74%< 50%18%15%Overall Valuation Percentages (as % of Fees)Over $20M$10-20M$2-10MUnder $2MAll Firms201171.9%77.8%77.3%88.3%201071.4%76.5%78.7%81.0%78.1%200982.5%75.4%77.6%*Rosenberg 2012 MAP Survey
20So, where did 1x fees go? Inside vs outside Client transition issues (more mobility)Changing attitudes of younger partnersSweat equity
21Value of a CPA Firm Typical firm with revenue of $4,000,000 Capital $1,000,000Goodwill (80% of revenue) 3,200,000Total Value $4,200,000
22Different Approaches to Allocating the Goodwill We don’t know?!EqualFixed amountOwnership %Book of BusinessAAVMultiple of Compensation
23AAV (Average Annual Volume) Approach Allocates the growth in the firm’s revenue each year to the current partnersNormally based on relative compensationNew partner gets 0 coming in unless they buy it.When a partner retires, their AAV balance is reallocated to other partners as retirement payments are made.
25Relative Compensation Approach Most widely usedExampleFirm with revenue of $6 millionNetting $2 million (1/3) before partner compAt 100% of revenue, the goodwill is 3x total partner comp.
26Relative Compensation Approach If goodwill is set at 3x partner comp, a retiring partner receives 3x his/her compGenerally based on the average of the highest three of the last five years, or five of last seven, etc.Why?2012 PCPS Survey –11% of firms using a 2.0 multiple17% of firms using 2.535% of firms using 3.0
28Polling QuestionWhat method are you using to allocate firm goodwill to individual owners?Multiple of compensationBook of businessOwnership percentageAAVOther or we don’t have a buyout plan
29Goodwill Payout Terms Deferred compensation structure Beware of code section 409ATen year payout common – sometimes shorterNo interest or CPI
30VestingConcept of earning the buyout / retirement / deferred comp over timeThe firm wants partners to stick around for the long haulGenerally two scales in use – age and years of service
31PCPS Survey Results -Vesting Minimum years of partner service to vest:6 or fewer years, 30%10 years, 28%15 years, 13%20 years, 16%Minimum age to receive full benefits:Age 55, 26%Age 60, 23%Age 65, 23%
32Two Hybrid Vesting Examples Plan A20 years as a partnerFull vesting at age 6550% limit until age 56Plan B25 years with the firm, vesting does not begin until year 11Full vesting at age 65 with a 2.5% per year reduction for a departure before 65
33Death and DisabilityPayout is generally the same as a normal retirementPerhaps some “bonus” if insuranceDefine both ST and LT disabilityAnd, salary continuation, if any
34Non Compete Provisions Rule #1. Consult an attorney in your state.True non-competes rare todayPayments for clients taken is the new norm.100% common, up to 150 to 200%Term?Payments for taking staff
35Maximum Payouts Protect the golden goose 5-10% of fees (10% is high) One firm, 12% of profits before partnersHow it works
37Mandatory Retirement / Buyout Increasing trend to set the date2012 PCPS Survey:54% age 6515% age 66 to 6914% age 70Why does the firm need to control it?
38Polling Question Our mandatory retirement age is: Age 65 Under age 65 Over age 65We don’t have a mandatory retirement age
39Post Retirement Employment? This is no longer a partner positionAt firm’s discretion (most do)Pay for specific duties / tasks. Normally billable time, new business, other projects.Charge time – typically 40% of billed timeNew business – 10 to 15% for three or less years.DO NOT – allow a “retired” partner to continue to do what they always did and receive retirement benefits.
40Notice / TransitionMost firms don’t penalize the retired partner for lost clients.HoweverThere is a movement to notice and transition requirements/expectations, with penaltiesNotice – minimum of one year (two is better)Transition process that must be completed
41Client Transition Policy Starts with a new client sales pitch:“If you go on a sales pitch alone, you get shot.”Continues with team orientation to servicing clients; creating “multiple touch points.”The firm maintains the partner’s comp during transition.The firm drives the transition process.Written plan (dates, post-retirement plans)Name the successors to the retiree—by client, target dates.Agree on announcements, internal & external.Quarterly monitoring of progress.
42Funding?Rare, but sometimes 401k or other retirement plan offsets
44How Does the Math Work? Assumptions Cash Flow Current Comp is 300k Add a staff for 100KRetirement payments are 3x over ten yearsCash Flow+300,000-100,000-90000+110,000
45Buying InThe days of the big $ buy-ins including value for goodwill are over$100,000 to $150,000Accrual balance sheetFinancing?
46Other Stuff Look back provisions upon a subsequent sale What is the split upon a sale?When do payments start upon an early withdrawal?Does a “for cause” termination affect the payout?What is the firm’s process for transition of clients?