1. Mergers of Accounting Firms: The Why, How and With Whom to Affiliate Joel Sinkin, President Transition Advisors

2. ◊ About Us 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 www.transitionadvisors.comwww.transitionadvisors.com ◊ 866.279.8550 ◊ jsinkin@transitionadvisors.comjsinkin@transitionadvisors.com

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

4. Reasons Why Firms Merge Firms fall into 2 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…

5. Why is Activity So High? Competition Economy Technology Niche Development Aging of the partners/staff Buyers’ or Sellers’ market Whose in trouble in the future?

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

7. Have a Goal Prior to Merging ◊ BIGGER is not always better Be wary of mergers for pure overhead reduction Having a specified purpose for a merger helps in identifying the target and helps you relate to deal structures that accomplish your plan

8. Standard Goals of Merger for Growth Growth of Billings Addition of Talent Cross Selling Adding a New Marketplace Succession

9. Growth of Billings Cash flow Synergies or increases in costs Treat as an acquisition Capacity to take on the workload Continuity to retain clients or pass on deal

10. Addition of Talent Are they: ●Bringing a niche? ●Bringing excess capacity? ●Bringing a book of business? ◊ You cannot get a star with empty offers though

11. 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

12. Adding a New Marketplace To cross sell To attract new clients Technology is making it easier to attract additional staff/partners Strong communication, routines, plans, and guidelines are the keys to success

13. Mergers for Succession 1.Have agreed upon time tables for role reductions of retiring partners 2.Have everything in place before you start Terms … economy impacts terms Are clients partner-loyal or brand-loyal? Transition Plan Capacity to takeover the retiring partners Space, staff, firm name TWO STAGE DEALS

14. Building an Internal Succession Team The mini-merge Cannot get a star with empty offers Create benchmarks, time frames Replace the role, not the body

15. General Guidelines ◊ Equity The poker chip method What does equity mean? Additional factors … Profitability Staff Rates Assets Niches More Look-back periods to adjust equity The 10,000 lb. gorilla … minority equity partners

16. General Guidelines ◊ Compensation Start off by remaining whole when possible Handle perks/benefits as part of the package Avoid immediate increases Accountability Buyouts Compensation – fixed or contingent

17. General Guidelines ◊ The Process How long should it take? Making the deal the priority Why time kills all deals

18. Mergers ◊ Compensation Book of Business vs Equity Ownership All for One and One for All Profit distribution … equity vs formulas Relative compensation as a proxy for culture assessment

19. Retirement: Partnership Agreement ◊ Voluntary Mandatory age vs vesting Notice Valuing equity Equity Compensation Funded vs unfunded Capital accounts Work backwards formula

20. Retirement: Partnership Agreement ◊ Terms Payout periods Retention periods Tax Structure Caps Penalty buyouts Premature exit Exit without appropriate notice Getting booted out

21. Death or Disability Definition of temporary disability vs permanent Where insurance fits in re disability Death Where insurance fits in re death If notice is required for retirement, how is death or disability handled?

22. Termination Voting Grounds Non-Competes What is cause?

23. Miscellaneous It is a living agreement Limit retirement timing Create benchmarks, time frames Replace the role, not the body

24. 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

25. 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

26. 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) ◊ Focus on how you will run the firm, NOT how it is currently managed

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

28. 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

29. 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 ……..

30. 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