Succession Planning Using Sales And Mergers. Joel Sinkin, President Transition Advisors

Transcription

1 Succession Planning Using Sales And Mergers Joel Sinkin, President Transition Advisors

2 Transition Advisors, LLC A National Consulting Firm working exclusively with accounting professionals on issues related to ownership transition

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

4 Future Challenges Succession Planning (less than 50 percent of multi-owner firms have a plan). Career Development (Millennials) Developing future firm leaders Change management Client communication

5 Future Trends Increasingly complex rules and standards Continuing economic uncertainty Ongoing adoption of new technologies Increased competition (global) By the 2020 at least 5 of the largest accounting firms will be from China.

6 Future Trends More firms developing stronger bench as war for talent heats up. More firms move away from traditional top-down structures flatter organizations. Compensation systems tailored toward reward and entrepreneurship. Tax and audit (type 1 work) handled by staff

7 Impact of Demographics In 1993, over 40% of AICPA members were over 40 years old

8 Impact of Demographics In 2012, that number rose to 70% Now 75 percent of AICPA s 400,000 members will be eligible to retire by 2020!

9 Succession Challenges In 2012 AICPA survey Roughly 70% of the firms stated they expected at least 1 partner to retire within 5 years. More than half expected more than 1 partner would retire. One person turns 65 every 8 seconds! Over 2,000 by end of today s presentation.

10 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 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.

11 Why is M&A Activity So High? Economy: 2006 through 2008 versus 2014 and beyond Niche Development need to expand beyond tax and audit 78 million Boomers retiring gap in the talent pipeline. The Holy Grail a young CPA with a good book of business.

12 Why is M&A Activity So High? Since October More than 400 mergers of CPA firms! * BDO Alpern Rosenthal Holtz Rubenstein Baker Tilly Rothstein Kass-KPMG Other active firms in M&A: Marcum Sikich Carr Riggs & Ingram WSB

13 Annual Succession Checklist Some key questions to ask each year 1. Have any of the partners career or retirement goals changed over the past year? 2. 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? How often do you debrief on such topics?

14 Other Items to Consider 1. Addition or closing of a client service niche 2. Adding another location 3. Gain (or loss) of a large client 4. A significant change in revenues 5. A downturn (or upturn) in the economy or local market. 6. Sudden loss of partners or staff (resignation or death/disability. 7. Facing commitment to large expense such as location/rent

15 Succession Challenges We will have succession-planning challenges in next 10 years 2004 (32 %) 2012 (42 %) Challenges in 3-5 years 2004( 18%) 2012 (30 %) We currently have succession challenges 2004 (1%) 2012 (22 %)

16 Building a strong bench What s critical to retaining talent? Salary Growth opportunities Paid personal/vacation time Open-door management Challenging projects and work Comfortable office atmosphere Firm s reputation/prestige Flexible work schedule Retirement savings plans/benefits Frequent client contact

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

18 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 vs demand: Whose in trouble?

19 Is Your Successor Ready? Do you know why the other firm wants to merge?. the staffing situation / excess capacity?. their physical space requirements?. current technology and equipment?. financial strength or issues? Bigger is not always better!

20 How to Select 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; one firm concept versus eat what you kill..

21 How to Select a Successor Financial strength Professional / staffing strength Ethnic / language considerations Longevity of partners Employee track record

22 What is the Seller Thinking? I am irreplaceable If I retire, I ll die! Clients NEED me! I am MASTER of my own domain!

23 Methods to Structuring the Transition of a Practice through an External Sale 1. Straight sale 2. Buy in to a Buy-Out Buyer opts in an interest into the firm Buyer may or may not bring clients into the newly combined entity 3. Merger or Buy-Out 4. Carving or culling out clients 5. Two stage deals Sell equity but stay on Less exposure for Seller than #2 and #3

24 Stage One: Two Stage Deal 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!

25 Two Stage Deal Stage One: (external sale) * 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

26 Two Stage Deal Advantages to seller in stage one 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 $

27 Two Stage Deals Stage One advantages to buyer Synergies Labor Rent Software Malpractice insurance Better transition

28 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

29 What if Some Partners Want to Slow Down and Others Want to Grow and Stay On for Many Years? Most multi-partner firms have this situation Partners seeking immediate role reduction do a sale Partners seeking to slow down in 5 years or less do a Two Stage Deal The Partners looking to stay on merge What does equity mean when they merge? Are there retention elements? How does their compensation and role change? What about their buyout?

30 Other Items to Consider Other assets, either acquired or required Furniture, fixtures, equipment Leases and location Staff joining the new firm or not joining Participation in Future Growth Fee increases from prior services Fee increases for new services Fee increases for referrals New business incentive clause

31 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

32 Clients Due Diligence 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)

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

34 Other Thoughts General chemistry between the parties Continuity/Culture of relationships will help retain clients Capacity to take over the roles being diminished A good deal is a fair deal Remember, it s the package, not the individual variables Staff merging

35 Other Thoughts The Transition.. Client The Transition.. Communications Client Communications Roles for new staff members Roles for new staff members Specialization

36 Transitioning Clients What are the Client s fears? Who gets a phone call Who gets a visit Who gets a letter Firm Name options CHANGES BEHIND THE DOOR CHANGES IN FRONT OF THE DOOR

37 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..

38 For More Information Please visit our website for resources including FREE reports, whitepapers and case studies. Joel Sinkin