1. Succession Planning For Success Retaining Clients & Employees 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. Accounting Profession At-A-Glance  Revenue … $94B  No. Firms … 109,200 (est.)  Annual Growth Rate 2009-2014 … 2.8%  Employment: 518,000

5. 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!

6. 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 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 pracs have a PCA.

7. What happens if you put off succession ? Nothing good.  Firms that wait too long to begin planning for succession usually wind up with two options –  A hastily arranged merger with unfavorable terms…or…  Turning out the lights and locking the doors  Firms that are not proactive will surely create client and real estate opportunities for those practices that are!

8. Annual Succession Checklist Some key questions to ask each year  Have any of the partners’ career or retirement goals changed over the past year?  Do we have any partners who want to reduce their time commitment over the next five years?  Do we have any critical staff closing in on retirement? And if so, do we have the capacity to replace them?  Have any new partners been admitted to, or left the firm?  Do any of the above require changes to our current succession plan?

9. Internal Succession Plan – Replacement Options Replace the Role – Not the Body  Fulfillment by remaining partners  Allocate client relationship responsibility  Allocate billable hours – ‘role reallocation’  Promote staff member(s) to partner  Transition relationships – 2 years ideal  Merge in or hire partner-level person  Book of business & capacity issue  Technical expertise  Culture issue  Partner vs. firm loyal clients

10. Internal Succession Plan Step 1 – Written Plan  Identify administrative & management responsibilities  Identify clients directly managed  Level of dependence  Expertise required  Frequency of contact

11. Internal Succession Plan Step 2 – Communication & Reassignment  Communicate “What, When, How” – consider scripting  Owners and key personnel  Affected clients  Centers of influence  Reassignment  New relationship manager  New owner of non-client responsibilities

12. Internal Succession Plan Step 3 – Execute the Plan  Orientation of new relationship manager  Files  Methods  Client introductions  Joint service  Transition from terminating owner  Low to no involvement Success = It’s a non-event when terminating owner leaves

13. Internal Succession Evaluation 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. Selecting a Successor Firm 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!

17. 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

18. 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

19. 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

20. 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 your firm into theirs…

21. 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

22. 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 ……..

23. Transition Plan - Clients Announcing the affiliation – Press Release Personal communications Meetings Calls Letters Role replacement Behind the curtain vs. in front of the curtain Phones Positive messaging ITS ALL PACKAGING!

24. Transition Plan - Employees Notification Key employees individually Others in groups Emphasize positive opportunities Minimize gaps in information Script partners & key people Employee mentors Administrative Handbooks Benefit plans Employee agreements ITS ALL PACKAGING!

25. 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

26. 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

27. 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