1. Success Planning, Buying and Merging Larger Accounting Firms In Today's Economic Environment Joel Sinkin Accounting Transition Advisors

2. About 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

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

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

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

6. 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

7. Succession Challenges Internal 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

8. 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 rarely fund beyond 50% of full liability American Institute of Certified Public Accountants

9. Impact of Demographics Why the small Regional Firms are the most at risk for succession in the near future

10. 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 the other firm’s reasons

11. Why is Activity So High? Competition Economy Technology Niche Development Aging of the partners/staff

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

13. Have 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

14. Standard Goals of Merger for Growth Growth of Billings Addition of Talent Cross Selling Adding a New Marketplace Succession: merging up or building an internal team

15. 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

16. 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 Merger and a Two Stage Deal

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

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) ( The use of IRC Code 736a) 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 Valuing based on equity versus compensation

20. 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 niche Bringing excess capacity

21. 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

22. Adding 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

23. 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

24. 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!

25. Mergers Compensation - 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

26. 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

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 only 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. 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:

32. 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