buying out retiring partners 6-9-16 - … · buying out retiring partners ... goto webinar system...
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Buying Out Retiring Partners
What You Need to Make Sure the
Plan SucceedsPlan SucceedsJune 9, 2016
Presented by
Terrence E. Putney, CPA
CEO, Transition Advisors, LLC
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NASBA CPE Earned Credit GuidelinesTransition Advisors, LLC is a proud and approved sponsor on the National
Registry of CPA Sponsors per the National Association of State Boards
of Accountancy (NASBA).
In order to receive your one CPE credit – You must complete two requirements
� GOTO webinar system monitors your participation and you must participate in three
polling questions during the presentation.
�An Evaluation Form will be e-mailed to you after the webinar ends and it must be
completed and returned back to us before we can e-mail your CPE Certificate of completed and returned back to us before we can e-mail your CPE Certificate of
completion. The certificate will be e-mailed to you within 10 working
days.
A survey for this webinar will appear immediately after the session ends,
so please take a minute to complete our survey before closing your browser for
GOTO webinar. This survey is very important to Transition Advisors, as it helps us in providing you
quality information.
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Upcoming Webinars
Transition Advisors, LLC offers FREE twice-monthly CPE courses
June 23 – Preparing Your Firm to Grow through M&A
July 7 – The Art of Your Deal
July 21 – How to Structure Your Partnership AgreementJuly 21 – How to Structure Your Partnership Agreement
Visit transitionadvisors.com/upcoming-courses.php for more
information.
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Transition Advisors, LLC
You may obtain a hard copy of this presentation by making a request by e-mail to Nicki Johnston, Marketing Director, Transition Advisors, LLC. Please send your name and
mailing address to
[email protected]@transitionadvisors.com
This information will be repeated at the end of the presentation
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Transition Advisors, LLC
National consulting firm working exclusively with accounting firms on issues related to ownership transition
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What’s on your mind?
I don’t think we can pay for
partner retirements-too
expensive
Will there be anybody
there to buy me out when
it’s my turn?
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What’s on your mind?
I don’t think I’ll get paid what my
equity interest is worth at retirement
We don’t have an agreement and we
have partners leaving soon
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What’s on your mind?
I don’t trust the
younger people in
our firm to keep
the firm going and
buy me out
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What’s on your mind?
And then one day your partner walks in
like Jerry Maguire
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Today’s Agenda
• Can you replace retiring partners?
• Proper transition of duties
• Methods used to structure buyouts• Methods used to structure buyouts
• The right value for your firm
• The financial arrangement
• Other aspects of your owner agreement
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External Data
2012 PCPS Succession Survey
2015 Rosenberg Survey
2015 Inside Public Accounting National 2015 Inside Public Accounting National
Benchmarking Report
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Polling Question
Does your firm have adequate talent on the
bench to replace retiring partners?
• No, we don’t
• I think so, but we don’t have a good way to admit • I think so, but we don’t have a good way to admit
them as owners
• Yes, I am confident we do
• We don’t plan to replace our partners internally
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Transition Plan
Allow at least two years to
transition a retiring
partner’s duties
You must have that partner’s
replacement(s) in place by
that time to properly execute this plan
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Assessing Your Firm’s Succession Readiness
Partner Succession Projection
Partner 1-3 yrs 4-7 yrs >8 yrs
A RR
B RS
RR=Role Reallocation RS=Role Succession
B RS
C RS
D RR
E RS
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Transition Plan
• Internal succession team with capacity
• Understanding of how to replace the retiring
partner’s duties
• Enough time and active involvement • Enough time and active involvement
Make the day a retired partner walks out the
door a non-event
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Tying Transition to Buyout
• At 2 year notice period
• Written transition plan-very specific
• Failure to provide notice OR failure to execute
plan-either set discount or variable dealplan-either set discount or variable deal
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Polling Question
Please email a copy of the Generic Transition
Plan
YesYes
No
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Methodology
Multiple of comp
Book of business
Equity
AAV
8+ Partners1
51%
6%
7%
25%
<8 Partners1
34%
13%
24%
16%AAV
Fixed
Equal
None (not incl)
25%
11%
4%
12%
16%
10%
2%
18%
1Rosenberg
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AAV Article
How to admit new partners: A fresh approach
The AAV method can help accounting firms find the
right formula for bringing in new owners on terms
everyone can live with. everyone can live with.
December, 2015
http://www.transitionadvisors.com/succession-planning.php
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AAV/Unit Method
• Determination and use of AAV units
• Example
• Redistribution-retirements and terminations
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AAV/Unit Method
Use for new partner admission
• Admission date
– Ptnr A: 1,200,000 units
– 5 other ptnrs: 1,000,000 units each– 5 other ptnrs: 1,000,000 units each
– New ptnr: 0 units
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AAV/Unit Method
Use for new partner admission
• 5 years later
– Ptnr A: 1,400,000 units
– 5 other ptnrs: 1,200,000 units each– 5 other ptnrs: 1,200,000 units each
– New ptnr: 200,000 units
• Ptnr A retires-10 year payout
– 140,000 units redistributed annually to remaining
partners
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AAV/Unit Method
Benefits
• Doesn’t require new partners to buy intangible value
• Flexible allocation
• Rewards sweat equity• Rewards sweat equity
• Built in vesting
• Flexibility of comp based combined with ownership
of equity based
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Polling Question
I believe our approach to valuing our owners’
interest in our firm is:
• Fair and affordable
• Fair, but I’m not sure we can afford the buyouts• Fair, but I’m not sure we can afford the buyouts
• Not fair, too low
• Not fair, too high
• N/A, we don’t have an agreement
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Principles of Value
Tangible value-accrual basis
book value
Intangible value-clients, Intangible value-clients,
employees, name, goodwill
Intangible value is often 3 to 6 times
tangible value
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Principles of Value
Common Theory is to assume inherent value of one
times revenue or three times compensation
Reality is intangible value in a CPA firm
is based on a buyer’s expectationis based on a buyer’s expectation
of future results following a transition
of the relationships and other assets
that make up the intangibles
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Principles of Value
Without a proper transition of roles for a retiring
partner, the intangible value of the firm is
dramatically diminished
Too much emphasis on the financial terms
Not enough on the transition plan
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Valuation Multiple
>100%
100%
90% +
8+ Partners
8%
20%
8%
<8 Partners
8%
25%
9%
% of Net Fees-Goodwill-Rosenberg
90% +
75% +
50% +
<50%
8%
24%
20%
20%
9%
24%
23%
11%
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Internal v External Valuations
Why do external sales appear to sell at a higher
multiple than internal buyouts?
• External deals are bid
• Internal deals are a put option• Internal deals are a put option
• Different package of terms
• Internal deals are designed to keep the firm viable
• External deals are designed to maximize liquidation
value
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Right Financial Arrangement
Tie the payout to the transition-
appropriately
• Trusting the transition plan
will be executedwill be executed
• Trusting the transition plan
will work
• When you can’t take that chance
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Right Financial Arrangement
Backwards Valuation Reward your retiring
partners fairly for their
years of sweat equity
BUTBUT
Don’t expect your
remaining partners to
borrow or take a step back
in compensation to do it
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Right Financial Arrangement
Available capital is the retired partner’s foregone
compensation
Three uses for that capital
• Pay the retiring partner off• Pay the retiring partner off
• Cost of replacing that partner
• Some upside for the remaining partners for
assuming the obligation and the extra work
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Right Financial Arrangement
The basic assumption is:
• An owner is earning compensation as an owner,
even with lowered time commitment, and NOT at
the same time, being bought out ORthe same time, being bought out OR
• The owner is being paid for their equity and if still
working is being paid as a non-owner
It’s hard financially to do both at the same time
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Right Financial Arrangement
Example
Retiring partner comp and benefits $300k
Replacement resources $120k
Remaining capital $180kRemaining capital $180k
Need to decide how much can be used for
buyout and how much should be left behind
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Example
• Firm volume $1.9 million
• Retiring partner equity 45%
• Retiring partner comp & ben $275,000
• Capital account $175,000• Capital account $175,000
• Payout retirement over 5 years
(works out to $171,000 per year)
• Cost of replacement resources $125,000
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Example
• Year 1 net cash flow
$275,000 less $125,000 equals $150,000
of available capital
$150,000 less $175,000 (cap acct) less$150,000 less $175,000 (cap acct) less
$171,000 (retirement) equals
$146,000 of negative cash flow
• Years 2 thru 5 net cash flow
$150,000 less $171,000 equals $21,000 of negative cash flow
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Example
Alternative plan
• Pay capital over 5 years
• Pay retirement over 10 years
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Example
• Years 1 thru 5 net cash flow
$275,000 less $125,000 equals $150,000
of available capital
$150,000 less $35,000 (cap acct) less$150,000 less $35,000 (cap acct) less
$85,500 (retirement) equals
29,500 of positive cash flow
• Years 6 thru 10 net cash flow
$150,000 less $85,500 equals $64,500 of positive cash flow
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Polling Question
How many equity partners/shareholders do you
have in your firm?
• 1
• 2-4• 2-4
• 5-9
• 10-19
• 20+
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Mandatory Retirement Age
• 88% of $20M+ and 78% of $10M to $20M1
• 77% of $20M+ and 74% of $10M to $20M2
• 58% of $2M to $10M; 24% of <$2M1
• 51% of <$10M2• 51% of <$10M2
• 47% of all respondents3
1Rosenberg 2IPA 3PCPS
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Mandatory Retirement Age
• Average age is 661
• 54% use 65, 29% are 66 to 702
• Trends
1Rosenberg 2PCPS
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Tax Treatment
• Increasing use of cap gain treatment under
736 (b)
• Match up with appropriate payout period
• 736 (a) avoidance of self-employment taxes• 736 (a) avoidance of self-employment taxes– Lifetime payments, no ongoing service, cap acct paid
• 409 A issues
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Personal Goodwill
• Requirements of Martin Ice Cream case
• One time opportunity to lock in cap gain
treatment
• Interface with existing or new deferred comp • Interface with existing or new deferred comp
plans in mergers
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Vesting
Tenure
• 28% 10 years1
• 33% less than 10 years1
• 23% 20 years or more1
Age-partial
• 41% <551
• 30% = 551
Age-full23% 20 years or more Age-full
• 26% 551
• 23% 601
• 23% 651
1PCPS
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Options If Internal Succession Fails
• Cull out saleThink about down-sizing to a level your remaining partners
can handle
• Upstream mergerGive your firm at least 2 to 3 years to find a suitable
merger partner before you have to find a replacement 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
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Articles
CPA Firm Succession Series
July, 2013 thru June, 2014
www.transitionadvisors.com/succession-planning.php
CPA Firm Valuation Series
October, 2014 thru December, 2014
www.transitionadvisors.com/valuing-accounting-firm.php
How To Admit New Partners-A Fresh Approach
December, 2015
www.transitionadvisors.com/succession-planning.php
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For More InformationVisit the AICPA Succession Planning Resource Center
http://www.aicpa.org/InterestAreas/PrivateCompaniesPracticeSection/StrategyPlanning/center/Pages/default.aspx
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• Gary Adamson, Adamson Advisory• Mary Bennett, MLBennett Consulting• Bonnie Buol Ruszczyk, bbr marketing• Sarah Dobek, Inovautus Consulting• Angie Grissom, The Rainmaker
Companies
• Tamera Loerzel, ConvergenceCoaching
• Terry Putney, Transition Advisors• Rick Solomon, Thriving Firm• Carrie Steffen, The Whetstone Group• Sandra Wiley, Boomer Consulting
#SuperConf15
• Dustin Hostetler, Boomer Consulting• Rita Keller, Keller Advisors• Roman Kepczyk, Xcentric
• Jennifer Wilson, ConvergenceCoaching
www.cpaconsultantsalliance.com
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Bridging the Gap: Strengthening the Connection Between Current and Emerging Leaders in the
CPA Profession
Amazon.com
$49.97
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Free White Papers on Industry Trends
• CPA Firm Leadership: Communication Drives New
Possibilities
• Measuring Happiness at Work: How Firms Can Win • Measuring Happiness at Work: How Firms Can Win
With a Happy Culture
• Top CPA Firms Succession Challenges
Download at: www.cpaconsultantsalliance.com
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For More Information
Please visit our website for resources including free reports, whitepapers and case studies,
www.TransitionAdvisors.com
You may obtain a hard copy of this presentation by making a request by e-mail to Nicki Johnston, Marketing Director, a request by e-mail to Nicki Johnston, Marketing Director,
Transition Advisors, LLC. Please send your name and mailing address to