1. Succession Planning for the 5 Partner Firm and Larger Joel Sinkin Accounting Transition Advisors

2. About the firm: Merger and transition advisors exclusively serving the accounting industry Customized solutions Hundreds of successful 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. Why is Activity So High? Economy: 2006 through 2008 versus 2009 through 2011 Niche Development Technology The Boomers

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

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

6. Impact of Demographics PricewaterhouseCoopers Survey 2004 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 Well up from just 2004! American Institute of Certified Public Accountants

8. 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

9. 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

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 versus demand: whose in trouble?

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

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

13. Succession Challenges Brand versus partner Loyal Clients: Brand: Takes less time to Execute: Partner: Must start the process earlier

14. Succession Challenges > Transition time required > Capacity to pass down work and replace those slowing down > Replace the role, not the body

15. Methods to Structuring the Acquisition/Transition of a Practice to a Third Party 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

16. Five Main Variables for Valuing a Practice on External Sale 1.Cash up front, if any - Dependent on time of year, the deal’s cash flow and treatment of accounts receivable 2.Retention clause/guarantee - Collection deals, deals by percentage - Fixed deals - Limited guarantees - Economy clause

17. 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

18. 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

19. 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

20. 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

21. General General Guidelines Buyouts: Valuing Partner Equity > Equity Formulas > Compensation Formulas > The ultimate Litmus Test to see if your partner buyout program works! CAPS NOTIFICATIONS RETENTION PERIODS

22. 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

23. Building your own internal succession team > Mini Merge > Strong Offers > Replace the Role still Cull Out Sale > your basement is someone else’s ceiling Upstream Merger > typically this will be a Two Stage deal for some partners and a merger for others If not internal, what are my other options for Succession?

24. Other Thoughts Death of a partner: PCA agreements for smaller firms Life insurance and the role it plays Disability: Defining temporary versus permanent Plan in advance and review at least annually The hunt for talent has already started!

25. 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

26. 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:

27. 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