2016 Roadmap to Succession Planning for Firms in the

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1 2016 Roadmap to Succession Planning for Firms in the Southeastern U.S. November 10, 2016 Presented by Marcia L. Miller Managing Director, Transition Advisors, LLC 1

NASBA CPE Earned Credit Guidelines Transition Advisors, LLC is a sponsor on the National Registry of CPA Sponsors per the National Association of State Boards of Accountancy (NASBA).

2 NASBA CPE Earned Credit Guidelines Transition Advisors, LLC is a sponsor on the National Registry of CPA Sponsors per the National Association of State Boards of Accountancy (NASBA). In order to receive your 1.2 CPE credits You must complete two requirements: 1) Participate in all four polling questions during the presentation. Partial credit will be awarded to those who complete three of the polls. 2) Complete an online evaluation after the webinar. 2

3 Attendee Control Panel In order to fully participate in the webinar, please familiarize yourself with your GoToWebinar control panel on the right hand side of your screen. The orange arrow on the top of the control panel is to minimize the control panel. During the presentation, all participants are muted but you can communicate with us using the question box towards the bottom of your control panel on your screen as a method of sending us your questions and/or comments. Just type your question in the box and click send. The presenter will answer all your questions during our presentation and we welcome your participation. 3

4 Upcoming Webinars Transition Advisors, LLC offers FREE monthly CPE courses December 15 The Urge to Merge: How, Why, When and With Whom January 12, 2017 Back to the Future: A look back at what happened in 2016 and what we can expect for the New Year Visit transitionadvisors.com/upcoming-courses.php for more information. 4

5 Transition Advisors, LLC National consulting firm working exclusively with accounting firms on issues related to ownership transition 5

6 WHEN TO START TO PLAN YOUR SUCCESSION 6

7 Today s M&A Marketplace and What Firms Should Be Doing Now 7

8 Three Ways to Grow One Client at a time Develop marketable niches Merge or acquire another firm 8

9 Types of Merger Mini Merger: adding one to two partner firms with books of business Upstream merger: this will typically involve three deals within one: Immediate sale Two stage sellers Merger for partners not seeking succession or role reduction typically for 6 years or more Equity, Comp, Look Back periods, DeMerger 9

10 Is it a buyers or sellers marketplace: location, location, location Density of population Size in revenues Niches Whose in trouble re valuations? 10

11 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

12 Starting the Transition Process When should we start? (Ideally the day you open for business) 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. 12

13 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! 13

14 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? 14

15 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. 15

16 Polling Question #1 How many equity partners do you have in your firm?

17 Obtain the Necessary Talent Characteristics of a Partner Technically competent in chosen field Good at training and developing people Ability and desire to bring in new business Willing to do extra things for the good of Firm Poised; someone staff look up to Leadership skills Creative thinker Presence in the community Has excellent relations with clients Can comfortably speak to groups Is effective with billings and collections Has a passion for the success of the Firm this is not just a job Is reliable and trustworthy can be counted on to protect the Firm and its Partners/Principals Takes on a role in firm administration Has good relationship with peers Has relationships in the CPA community Can mange a $1 million -$1.5 million book of business Is a good business person Will be a complement to existing Partners and enhance chemistry of Partner group Is effective at recruiting for the firm 17

18 How To Choose Your Successor Or Target/Firm To Acquire/Merge 18

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! 19

20 What is the Seller Thinking? I am irreplaceable If I retire, I ll die! Clients NEED me! I am MASTER of my own domain! 20

21 Practice Information Take a Look! Billing Information: Accounts Receivables Age analysis of Cash Flow Time and Billing vs. Retainers Value Billing Billings in dollars (larger practices, lower multiples) Billing Rates and Profit and what they mean to you 21

22 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 22

23 Assessing Your Firm s Succession Readiness Role Succession Partner s role has to be replaced with a new partner; Duties might still be shifted but existing capacity at partner level is insufficient in general; Roles to be replaced include client management, practice development, special expertise. 23

24 Assessing Your Firm s Succession Readiness Brand vs Partner Loyal Clients: Brand: Takes less time to execute Partner: Must start the process earlier Replace the role not the body! 24

25 Assessing Your Firm s Succession Readiness Transitioning Roles 2 years minimum Active involvement of transitioning partner Respect the personal nature of relationships (especially clients) Every client has options 25

26 Assessing Your Firm s Succession Readiness Most clients are physically seen annually 2 years is two visits! First visit is the hand off Second is for back up purposes Clients 4 fears Who gets a phone call Who gets a visit Who gets a letter Firm Name options Transitioning Roles CHANGES BEHIND THE DOOR vs CHANGES IN FRONT OF THE DOOR Make the exit a non-event for staff and clients!! 26

27 Assessing Your Firm s Succession Readiness Decision Point Can you provide the necessary replacements for your retiring partners in time? 27

28 Developing an Internal Succession Team Four Step Process Step 1 - Obtain the necessary talent Step 2 - Develop the talent into internal successors Step 3 - Make sure you have a proper financial arrangement Step 4 - Develop a transition plan in detail. 28

29 Options If Internal Succession Fails Cull out sale Think about down sizing to a level your remaining partners can handle: How To Value it. Upstream merger Give your firm at least 2 to 3 years to find a suitable merger partner before you have to find a replacement for retiring partners. 29

30 Polling Question #2 Which best describes your personal situation over the next five years? I am seeking to reduce my time commitment to my practice I have partners seeking to reduce their role I am interested in acquiring a firm None of the above 30

31 How To Value An Accounting Firm When Selling Externally And When Selling To Partners 31

32 Five Main Variables for Valuing a Practice 1. Cash up front, if any (2016 economy impact) Dependent on time of year The deal s cash flow Treatment of accounts receivable Time to recover investment 32

33 Five Main Variables for Valuing a Practice 2. Retention clause/guarantee (2016 economy impact) Collection deals, deals by percentage Fixed deals Limited guarantees Economy clause 33

34 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) 4. Length of the payout period 34

35 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 Tax clients vs Traditional Accounting clients? 35

36 Purchase Price Structuring Multiple of billings Fixed purchase price - Fixed as a multiple - Fixed based on past compensation 36

37 Sales Internal v. External Internal Sales Almost always go for less Often no retention period Death, disability, and penalty buyouts Remaining partners making more Non-multiple formulas on gross are more common Accounts Receivable & WIP External Sales are more of a business deal and go for high dollars 37

38 Sales Internal v. External Things to be wary of Multiple partners, leaving simultaneously Partners reducing time commitment, but not income or control Replace the role, not the body Cannot replace the Administrator with a Rainmaker Must have excess capacity Partnership Agreements (check them annually) Caps? Proper notice? Buyout terms that work? 38

39 ALTERNATIVE DEAL STRUCTURES 39

40 Methods to Structuring the Transition of a Practice through an 1. Straight sale External 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 40

41 A Road - Map From Start To Finish For Your Deal 41

42 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. 42

43 Polling Question #3 Which issues do you see affecting your practice most in the next year? Succession for retiring partners Admitting new partners Client retention for retiring partners Need for growth 43

44 Roadblocks To Anticipate And How To Overcome Them 44

45 Roadblocks Time Adversarial nature Messages you send Leaking pending to merger to marketplace, clients, staff The 13 th time you read the agreement Opening door to competition 45

46 Why Time Kills All Deals Adversarial Positions Is it your priority Messages you send when you are not timely The bad always comes out: dessert Momentum The 13 th time you read the agreement Unexpected competition 46

47 CHANGE is the Biggest Roadblock Others include: Financial strength Professional / staffing strength Ethnic / language considerations Longevity of partners Employee track record Unity of Partners Capacity Impatience Transition Issues of Staff & Clients IT 47

48 ROADBLOCKS Equity Firm Name Communication Unneeded must haves Staff Leases Some cultures tougher to mix then others: eat what you kill versus one firm client. Retainers, fixed fees, time and billing, value billing 48

49 Identify What Defines the Right Successor Firm Culture Start with the Big Four (C s that is): What s it like to be a client, employee and partner in this firm? Chemistry How well do you get along with key people in this firm? Continuity How will changes in your operations affect retention of your clients/staff? Capacity Does this firm have the capacity to take this on including replacing you? 49

50 Polling Question # 4 Your most likely personal succession plan looks like: Find an external buyer Selling internally to partners or staff No idea 50

51 For More Information Visit the AICPA Succession Planning Resource Center /center/pages/default.aspx 51

52 For More Information Please visit our website for resources including FREE reports, whitepapers and case studies. Marcia Miller

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

Succession Planning Using Sales And Mergers Joel Sinkin, President Transition Advisors Transition Advisors, LLC A National Consulting Firm working exclusively with accounting professionals on issues related