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

2. Transition Advisors 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 ?
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”
“If I retire, I’ll die!”
“I am MASTER
of my own
domain!”
“Clients NEED
me!”

15. Methods to Structuring the Transition of a Practice through an External Sale
Straight sale
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
Merger or Buy-Out
Carving or culling out clients
Two stage deals
Sell equity but stay on
Less exposure for Seller than #2 and #3

16. 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?

17. Five Main Variables for Valuing a Practice
Cash up front, if any
Dependent on time of year
The deal’s cash flow
Treatment of accounts receivable
Time to recover investment
Retention clause/guaranty
Collection deals, deals by percentage
Fixed deals
Limited guarantees
Economy clause

18. 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

19. 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?

20. 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

21. 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?

22. 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

23. 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

24. 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)

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

26. 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

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

28. 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 ……..

29. For More Information Please visit our website for resources including
FREE reports, whitepapers and case studies.
Joel Sinkin