1. Succession Options Exit Strategies for Firm Owners Nancy Egan, Managing Director Transition Advisors

2. Accounting Transition Advisors National Consulting Firm working exclusively with accounting firms on issues related to ownership transition

3. Today’s M&A Marketplace and What Firms Should Be Doing Now

4. Succession Challenges 80 percent of multi-owner firms expect succession planning to be the most important issue over the next 10 years! Less than half of multi-partner firms in the U.S. have mandatory retirement guidelines. 61 percent of firm partners/equity owners are over 50. 46 percent of multi-owner firms have a formal succession plan in place! Firms with less than 15 employees, 70 percent DO NOT have a succession plan in place! Less than 6 percent of sole practitioners have a PCA.

5. What are Your Succession Options? 1.Turn out the lights & lock the doors 2.Sell 3.Merge upstream 4.Internal succession

6. 1. Turn out the Lights “Dying with your boots on”  Work as long as you are able  Work until the practice withers away  18% of practitioners are planning on this approach Advantages  Maintain control  Earn more than a buy-out – not really true Disadvantages  Lose value of asset  Family/estate will have to deal with it  Clients

7. 2. Sell the Practice Immediate Sale - Abrupt Change for You and Clients  Wait until last minute  Continue working part-time for transition  Retention issues – clients  Retention issues – employees --> clients

8. 3. Merge Upstream – Two-Stage Deal Stage One: – Calculate the owner’s net – Calculate the labor the owner uses to achieve the net – In multi partner firms, the focus shifts from labor to chargeable hours – Focus on how long the owner intends to devote similar time, have a back date!

9. Two-Stage Deal Stage One: * Successor takes on all costs of operations: Labor, rent, etc… *Seller paid on percentage of gross collections from original clients * Tax advantages to both parties * Seller’s time commitment not critical factor

10. Two-Stage Deal Stage One advantages to seller – PCA agreement on steroids – Mitigates loss of client fees – Free additional back up and support – Work less since administration and other items passed onto successor thus more time to transition, develop new clients and enjoy life. – Higher client retention = more $

11. Two-Stage Deal Stage One advantages to buyer – Synergies Labor Rent Software Malpractice insurance Better transition

12. Two-Stage Deal Stage Two – When does stage one end and stage two begin – Retention period commences if applicable – How do we pay seller for a part time continuing role – What about new business developed in stage one or stage two? – Buyout terms: what is the multiple

13. 4. Internal Succession Assessing Internal Candidates  Track record  Prior promotions  Work ethic / desire  Ability to develop & retain clients  Opportunity to prove themselves  Non-equity or Income partner position  Criteria for performance  Timing  Mentor supply to meet demand

14. External Succession Options When Internal Succession is not an option  Sell retiring partner’s base  Partner loyal vs. firm loyal  Integration of support staff  Merge entire firm with successor firm  Retiring partner transitions clients  Remaining partners have longer-term role in combined firm

15. When to Start the Transition Process How many more tax seasons do you want to work? Client “face time” Investments including technology, leases, staff Process should begin 5-7 years out The supply of sellers is going to increase, multiples will drop. Things going to get worse as supply (of sellers) increases vs demand: Whose in trouble?

16. The 7 Steps in a Deal 1.Author a generic practice information including your goals 2.Organize your must haves 3.Identify what your merger partner should look like 4.Have your initial meetings 5.Narrow the field and share non binding offers 6.Perform due diligence 7.Close the deal

17. Selecting 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 Lunch test Bigger is not always better!

18. 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? ITS ALL PACKAGING! CHANGE IS A DIRTY WORD. THE EMPHASIS NEEDS TO BE ON CONTINUITY. NOT THE LOSS OF, BUT THE GAIN OF ……..

19. Transition Plan Announcing the affiliation – who gets what Role replacement Behind the curtain vs. in front of the curtain Positive messaging ITS ALL PACKAGING!

20. Why Time Kills All Deals Adversarial Positions Is it your priority Messages you send when you are not timely The bad always comes out Momentum The 13 th time you read the agreement Unexpected competition

21. How do you assure your merger is going to work? Goals: Be Clear as to each others Share what success looks like Be honest about the pain to get there for both parties Not everything has to change day one (some do!) > Behind the door changes > In front of the door changes

22. For More Information Please visit our website for resources including FREE reports, whitepapers and case studies. Nancy Egan negan@transitionadvisors.com 1-814-382-3585 www.TransitionAdvisors.com

24. Accounting Profession At-A-Glance  Revenue … $94B  No. Firms … 109,200 (est.)  Annual Growth Rate 2009-2014 … 2.8%  Employment: 518,000

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

26. Impact of Demographics In 2012, that number rose to 70%+

27. Why is M&A Activity So High? Economy: 2006 through 2008 versus 2014 and beyond… Niche Development – need to expand beyond tax and audit Supply vs Demand Talent Gap - 78 million Boomers retiring The Succession Challenge!

28. Author a generic practice information including your goals Metrics: revenues, services rendered, rates, staff, profitability, etc… Lease info Technology Goals/objectives for the deal Timing for partners - role reductions vs. long term growth What success looks like

29. Organize your must haves Items that are absolute breakers such as:  Location  Partner retention  Compensation Items you strongly prefer such as:  Technology  Staff retention  Name Items you are more flexible about such as:  Software  Perks

30. Have your initial meetings 1)Share your firm information, goals and must haves upfront 2)Focus on Four C’s 3)Discuss what success looks like 4)Narrow the playing field into top choice (s), bridesmaids and forget-about-it

31. Ask for a Non Binding Offer Financial Terms Philosophical aspects Roles (i.e. Equity, non-equity…) Addressing must haves Client transitional concepts Staff retention / transition

32. Perform Due Diligence For the mergee/seller Prior track record of successor firm in M & A Background checks: professional, financial, legal, malpractice, licenses, peer review Their own retention rates- clients & staff Technical skills Employee Manual, employee contracts In a merger a key document is the partnership agreement of the successor firm Your practice special needs i.e. language, licenses, niches… Transpose their firm into yours…

33. Perform Due Diligence For the successor firm or buyer: Metrics The great mystery of billing rates Differences in Profitability … not always important Continuity = retention Culture Partner Billable Hours Size of Book managed Marketing Dress Codes Billing … hourly vs value Compensation … proxy for culture Technology i.e. the cloud

34. Closing the deal Contract/Closing at once Role of Lawyers Signing date versus effective date When are you ready to sign