Succession Options

Exit Strategies for Firm Owners

Nancy Egan, Managing DirectorTransition Advisors

Accounting Transition Advisors

National Consulting Firm working exclusively with accounting firms on issues related to ownership

transition

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

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 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 practitioners have a PCA.

What are Your Succession Options?

1. Turn out the lights & lock the doors

2. Sell

3. Merge upstream

4. Internal succession

1. Turn out the Lights

“Dying with your boots on”

Work as long as you are able Work until the practice withers away 18% of practitioners are planning on this

approach

Advantages Maintain control Earn more than a buy-out – not really true

Disadvantages Lose value of asset Family/estate will have to deal with it Clients

2. Sell the Practice

Immediate Sale - Abrupt Change for You and Clients

Wait until last minute

Continue working part-time for transition

Retention issues – clients

Retention issues – employees --> clients

3. Merge Upstream – Two-Stage Deal

• Stage One:– 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!

Two-Stage Deal

• Stage One: * 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

Two-Stage Deal

• Stage One advantages to seller – 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 $

Two-Stage Deal

• 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 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

4. Internal Succession

Assessing Internal Candidates

Track record Prior promotions Work ethic / desire Ability to develop & retain clients

Opportunity to prove themselves Non-equity or Income partner position Criteria for performance

Timing Mentor supply to meet demand

External Succession Options

When Internal Succession is not an option

Sell retiring partner’s base Partner loyal vs. firm loyal Integration of support staff

Merge entire firm with successor firm Retiring partner transitions clients Remaining partners have longer-term role

in combined firm

When to Start the Transition Process

• 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.Things going to get worse as supply (of sellers) increases vs demand: Whose in trouble?

The 7 Steps in a Deal

1. Author a generic practice information including your goals

2. Organize your must haves3. Identify what your merger partner should look like4. Have your initial meetings5. Narrow the field and share non binding offers6. Perform due diligence7. Close the deal

Selecting 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

• Lunch test

Bigger is not always better!

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 ……..

Transition Plan

• Announcing the affiliation – who gets what

• Role replacement• Behind the curtain vs. in front of the

curtain• Positive messaging

ITS ALL PACKAGING!

Why Time Kills All Deals

• Adversarial Positions• Is it your priority• Messages you send when you are not timely• The bad always comes out• Momentum • The 13th time you read the agreement• Unexpected competition

How do you assure your merger is going to work?

Goals: Be Clear as to each others

Share what success looks like

Be honest about the pain to get there for both parties

Not everything has to change day one (some do!)

> Behind the door changes> In front of the door changes

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

Nancy Egannegan@transitionadvisors.com

1-814-382-3585www.TransitionAdvisors.com

Accounting Profession At-A-Glance

Revenue … $94B

No. Firms … 109,200 (est.)

Annual Growth Rate 2009-2014 … 2.8%

Employment: 518,000

Impact of Demographics

In 1993, over 40% of AICPA members were over 40 years old……

Impact of Demographics

In 2012, that number rose to 70%+

Why is M&A Activity So High?

• Economy:2006 through 2008

versus2014 and beyond…

• Niche Development – need to expand beyond tax and audit

• Supply vs Demand• Talent Gap - 78 million Boomers retiring

The Succession Challenge!

Author a generic practice information including your goals

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

• Lease info• Technology• Goals/objectives for the deal• Timing for partners - role reductions

vs. long term growth• What success looks like

Organize your must haves

Items that are absolute breakers such as: Location Partner retention CompensationItems you strongly prefer such as: Technology Staff retention NameItems you are more flexible about such as: Software Perks

Have your initial meetings1) Share your firm

information, goals and must haves upfront

2) Focus on Four C’s3) Discuss what success

looks like4) Narrow the playing

field into top choice (s), bridesmaids and forget-about-it

Ask for a Non Binding Offer

• Financial Terms

• Philosophical aspects

• Roles (i.e. Equity, non-equity…)

• Addressing must haves

• Client transitional concepts

• Staff retention / transition

Perform Due DiligenceFor the mergee/seller• Prior track record of successor firm in M & A

• Background checks: professional, financial, legal, malpractice, licenses, peer review

• Their own retention rates- clients & staff

• Technical skills

• Employee Manual, employee contracts

• 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 Diligence

For 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

Closing the deal

• Contract/Closing at once

• Role of Lawyers

• Signing date versus effective date

• When are you ready to sign