Transcript Buying, Selling and Merging Accounting Firms

Success Planning, Buying and
Merging Larger Accounting Firms
In Today's Economic Environment
Joel Sinkin
Accounting Transition Advisors
Accounting Transition Advisors
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:
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Buyer-seller introductions
Merger and acquisition transaction structure
Document preparation/review, valuation and due diligence
Post-transaction business planning
General consulting and coaching
If there are 50 things you need to think about in a
transaction…….
……the smartest of us will think of only 35
Impact of Demographics
In 1993, over 40% of AICPA
members were over 40 years
old……
Impact of Demographics
In 2008, that number rose
to 70%……
PricewaterhouseCoopers Survey 2004
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
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
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
Impact of Demographics
Why the small Regional
Firms are the most at risk
for succession in the near
future
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
Why is Activity So High?
Competition
Economy
Technology
Niche Development
Aging of the partners/staff
Three Ways to Grow
One client at a time
Develop marketable niches
Merge or acquire another firm
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
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
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
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
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
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
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
Addition of Talent: Building an
Internal Succession Team
If they are:
Bringing a niche
Bringing excess capacity
Bringing a book of business: Cannot get
a star with empty offers though
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
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
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
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!
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
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
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
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 only how it is currently managed
Firm culture
Due Diligence
Potential exposure issues
Quality control issues
Retention rate of employees
Work papers
Leases or other obligations
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
Transitioning Clients
What are the clients 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…
For more information
Please visit our website for resources including
free reports, whitepapers and case studies.
Joel Sinkin
[email protected]
1-866-279-8550
www.TransitionAdvisors.com