Transition Advisors

Succession

Planning for

Marcia L. Miller

Planning for

Florida Accounting

Firms

Transition Transition Transition Transition AdvisorsAdvisorsAdvisorsAdvisors

National Consulting Firm working exclusively with

accounting firms on issues related to ownership transition

If there are 50 things you need to think about in a transaction…….

……the smartest of us will think of only 35

Is It A Buyer Or Seller Marketplace

• Location

• Size• Size

• Density of population

• Niches and being virtual

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 50.

� 46 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.

WHEN TO START TO PLAN YOUR PLAN YOUR SUCCESSION

Three Ways to Grow

• One Client at a time

• Develop marketable niches

• Merge or acquire another firm

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

Obtain the Necessary Talent

• 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

• 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

Characteristics of a Partner

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 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

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?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.

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…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!

The High Cost of Procrastinating

Case Study:

� A sole practitioner in the Northeast put off finding a

successor & in the interim several things happened:

� A key employee resigned.

� One of his large growing clients suddenly became

“at risk” because they needed services the sole “at risk” because they needed services the sole

practitioner didn’t offer.

� His aging IT infrastructure needed a comprehensive

and expensive upgrade.

� Now, the owner is open to any offer that comes

along instead of managing the process in an orderly

fashion.

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 � 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?

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;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.

Polling Question # 1

How many partners are in your firm?How many partners are in your firm?

• 1 - 2

• 3 - 8• 3 - 8

• 9 - 20

• 21 +

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

Is Your Successor Ready?

Do you know . . . . . . .

……. why the other firm wants to merge?

……. the staffing situation / excess capacity?

……. their physical space requirements?……. their physical space requirements?

……. current technology and equipment?

……. financial strength or issues?

Bigger is not always better!

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)• Location(s)

• Culture: This includes the difference between “brand

loyal” clients and “partner loyal” clients; one firm

concept versus eat what you kill…..

How to Select a Successor

• Financial strength

• Professional / staffing strength

• Ethnic / language considerations

• Longevity of partners• Longevity of partners

• Employee track record

• Culture

• Capacity

What is the Seller Thinking?

“I am irreplaceable” “If I retire, I’ll die!”

“I am MASTER

of my own

domain!”

“Clients NEED

me!”

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

Other Items to ConsiderOther assets, either acquired or required

• Furniture, fixtures, equipment

• Leases and location

• Staff joining the new firm or not joining

Participation in Future GrowthParticipation in Future Growth

• Fee increases from prior services

• Fee increases for new services

• Fee increases for referrals

• New business incentive clause

ALTERNATIVE DEAL DEAL

STRUCTURES

Methods to Structuring the Transition of a Practice through an

External Sale1. 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 entitycombined 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

Two Stage Deal

• Stage One:

– Calculate the owner’s net

– Calculate the labor the owner uses

to achieve the netto 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!

Two Stage Deal

• Stage One: (external sale)

* Successor takes on all costs of

operations: Labor, rent, etc…

*Seller paid on percentage of gross*Seller paid on percentage of gross

collections from original clients

* Tax advantages to both parties

* Seller’s time commitment not critical factor

Two Stage Deal

• Advantages to seller in stage one

– PCA agreement on steroids

– Mitigates loss of client fees

– Free additional back up and support– 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 $

Two Stage Deals

• Stage One advantages to buyer

– Synergies

• Labor

• Rent

• Software

• Malpractice insurance

• Better transition

Two Stage Deal

• Stage Two

– When does stage one end and stage two begin

– Retention period commences if applicableRetention 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

Polling Question # 2

Which best describes your personal situation?Which best describes your personal situation?

• I am seeking to reduce my time commitment to

my practice in five years or less

• I have partners seeking to reduce their role within

five years

• I am interested in acquiring a firm

• None of the above

A Complete Road - Map

From Start To Finish From Start To Finish For Your Deal

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;4. Have your initial meetings;

5. Narrow the field and share non binding offers;

6. Perform due diligence;

7. Close the deal.

Author a generic practice information including your goals

• Metrics: revenues, services rendered, rates, staff, profitability, etc…

• Add lease info, timing for partners who may be seeking role reductions

• Technology• Technology

• What the goals are for the deal

• Individual goals for some partners if different

• Aging of the partners/staff

• What success looks like

Author a generic practice information including your goals (continued)

• List the deal structure you are seeking:

• Sale

• Merger (What type)

• Two Stage Deal• Two Stage Deal

• Combination

• List the value you seek

• In compensation

• Valuing your equity

Organize your must haves

Items that are absolute breakers such as:

� Location

� Partner retention

� Compensation

Items you strongly prefer such as:Items you strongly prefer such as:

� Technology

� Staff retention

� Name

Items you are more flexible about such as:

� Software

� Perks

Identify what your merger partner shouldshould look like!

Start with the Big Four (C’s that is):

Culture, Chemistry, Continuity & Capacity

�Specialties

�Technical skills�Technical skills

�Size

�Location

�Technology

Have your initial meetings

1) Share your firm information, goals and

must haves upfront

2) Focus on Four C’s

3) Discuss what success looks like3) Discuss what success looks like

4) Narrow the playing field into top

choice(s), bridesmaids

and forget-about-it !

Ask for a Non Binding Offer

• You have already told them what you have and

what you want;

• Require a non binding offer that shares with

you what the deal looks like philosophically you what the deal looks like philosophically

and financially, pending due diligence;

• Make sure the terms are complete as to must

haves, deal structure and terms.

Perform Due DiligenceFor the mergee/seller:

* Prior track record of successor firm in M & A

* Background checks: professional, financial,

legal, malpractice, licenses, peer review

* Metrics

* Their own retention rates* Their own retention rates

* Technical skills

* In a merger a key document is the partnership

agreement of the successor firm

* Your practice special needs i.e. language, licenses,

niches…

Transpose their firm into yours…

Perform Due DiligenceFor the successor firm or buyer:

• Metrics

• The great mystery of billing rates

• Differences in Profitability … not always important

• Continuity = retention

• Culture• Partner Billable Hours

• Size of Book managed

• Marketing

• Dress Codes

• Billing … hourly vs value

• Compensation … proxy for culture

• Technology i.e. the cloud

Close the Deal

• Now is the time to bring in lawyers

• What is the goal of a contract

• Lawyer that makes deal versus breaks deal

Final 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• A good deal is a fair deal

• Remember, it’s the package, not the individual variables

• Staff merging

Polling Question # 3

What is your greatest concern about What is your greatest concern about

succession planning?succession planning?

• Yielding control• Yielding control

• Client retention

• Buyout terms

• Other

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

Marcia L. Miller mmiller@transitionadvisors.comMarcia L. Miller

1-866-279-8550

www.TransitionAdvisors.com