succession planning for small to midsize firms—ensuring a smooth transition october 19, 2010
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Succession Planning for Small to Midsize Firms—Ensuring a Smooth Transition October 19, 2010. Presented by August Aquila, CEO AQUILA Global Advisors, LLC. AQUILA Global Advisors, LLC. - PowerPoint PPT PresentationTRANSCRIPT
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Presented byAugust Aquila, CEO
AQUILA Global Advisors, LLC
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August is the CEO of AQUILA Global Advisors, LLC which specializes in succession planning, mergers and acquisitions, compensation plans and transformational strategic planning
Selected as one of the “Top 100 Most Influential People” in the Accounting Profession by Accounting Today in 2004, 2007 and 2009
Former partner in top 100 firm – Friedman, Eisenstein, Raemer & Schwartz (FERS)
Former executive with American Express Tax & Business Services, Inc
August counts among his CPA clients firms ranging from more than $110 million in revenue to as small as $1 million.
What differentiates August from other advisors is his unending devotion to implementation and his in-depth knowledge and experience
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Compensation Plans
Mergers & Acquisitions
Strategic Planning
Succession Planning
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Current Succession Planning Landscape
Recent Survey Results
Getting Started – Working on the firm not in
it
Value creation
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What do you want to achieve today?
What will be your greatest take away?
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What You Need to Know
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“Failure to plan for succession is the greatest current threat to the future of the accounting profession and should be the firm’s most important strategic issue”
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“Succession Planning is about creating opportunities”
August Aquila
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STAFF GALOREUP AND OUT WHO CARES
MANAGERSCAN’T WAIT TO BECOME AN OWNER
PARTNERSLIFE IS GOOD, I MADE IT TO THE TOP
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STAFFWHAT DO THEY LOOK LIKE?
MANAGERSTELL ME AGAIN WHY I SHOULD BE AN OWNER
PARTNERSNOW, WHAT DO WE DO?
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Will I get paid?
Will the clients stay?
How will the payments be structured?
◦ Capital gains or ordinary income
Should I sell the firm or merge?
Should I sell now or wait?`
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Can we afford to pay THIS MUCH?
Can we retain his/her clients?
Should we put a cap on our retirement
payments?
Should we have a mandatory retirement
age?
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Multi-Owner Firms◦ Have started plan 35%◦ Will start in next 2
years 32%◦ Will start in next 5
years 10%◦ Will start in next 10
years 3%◦ Plan drafted 9%◦ No need 10%
Sole Practitioners◦ Have started plan 17%◦ Will start in next 2
years 43%◦ Will start in next 5
years 23%◦ Will start in next 10
years 3%◦ Plan drafted 3%◦ No need 10%
Source AICPA 2008 Succession Planning Survey
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Multi-Owner Firms
◦ Current 20%
◦ Next 1 to 2 years 13%
◦ Next 3 to 5 years 30%
◦ Next 6 to 10 years 17%
◦ More than 10 years away
3%
◦ No challenges 16%
Sole Practitioners
◦ Current 14%
◦ Next 1 to 2 years 18%
◦ Next 3 to 5 years 33%
◦ Next 6 to 10 years 27%
◦ More than 10 years
away 5%
◦ No challenges 3%
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No one does it better Key rainmaker Don’t talk to me about succession Next in command is not a threat Younger partners not ready Internal political issues Won’t transition clients Senior partners won’t retire
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Succession planning is the ultimate management challenge.
It addresses our own mortality. It deeply touches a wide range of emotions: Dreams (met and unmet) Hopes Security Relationships with family and co-workers Ambitions Fears
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Working on the firm, not in the firm.
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1. Separate personal identify from practice2. Develop 3 prong plan3. Determine what your practice is worth4. Cultivate a team5. Develop other interests6. Have a well-written partnership agreement7. Choose a successor8. Develop plans for successor9. Create your succession plan
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“It’s easier to live with ambiguity”
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SUCCESSION
RECRUITINGRETENTION
NEW PARTNERS
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1. Safeguard the long-term health of the practice
2. Ultimately plan for your own retirement security
3. Prepare for and install a successor
4. Let go of a business that you spent a lifetime building
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It’s Time to Face the Music!
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Do you have a succession plan?
Is some or all of your retirement plan
funded?
Do you expect to be bought out?
Do you know who will buy you out?
Do you have afixed date?
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What do you think is the first and second best choice for your firm and why?◦ Do nothing and eventually let the practice die◦ Split up◦ Sell to consolidator (such as McGladrey, Cbiz,
Fiducial) or an independent public accounting firm◦ Merge – downstream, upstream or lateral◦ Bring in people to take over◦ Transition to existing group of employees
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“This firm would be nothing without me.” 72% don’t have funded retirement plans Senior management stays in place too long Firm founder is key rainmaker Founders/MP wear too many hats All or most partners come from within
“In the US our heroes die with their boots on. They don’t fade into the sunset.”
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What is the value of the practice without me?
How can I transfer what I do to others?
How do I pass on my skills?
How do I pass on my business and client relationships?
How do I start taking a secondary role in the firm?
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“This firm would be nothing without me.”
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Learn to delegate
How do you start giving up control?
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A strategic plan for the firm
A policy around funding or not funding partner deferred compensation plans
A personal financial security plan for the retiring owner, including an estate plan for your spouse, children
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What do you want the firm to become?
What do you need to do to realize this
dream?
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Funded plan
Unfunded plan
No plan
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Trade off between current compensation and long-term security
Funding with qualified retirement plans◦ Tax deductions for funding the plan◦ Assets protected from creditor claims◦ Qualified trust earnings are tax deferred◦ Qualified plan should not discriminate in favor of
highly-compensated employees
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Funding with non-qualified plans◦ Funding a non-qualified plan does not results in a
tax deduction◦ Creditor claims can erode plan assets◦ Can discriminate in favor of highly compensated
owners◦ Plan earnings are currently taxed to the firm
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Based on trust and goodwill
Pay as you go
Base on agreed upon valuation formula
◦ Equity or multiple of compensation
◦ Return of owner’s capital
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Very small buy in and very small buy out
Typical law firm retirement plan
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Multipliers – Revenue or Book Size*◦ More than $1 on the $1 7%◦ $1 on the $1 42%◦ 95 cents on the $1 2%◦ 90 cents on the $1 3%◦ 85 cents on the $1 2%◦ 80 cents on the $1 7%◦ 75 cents on the $1 14%◦ 70 cents on the $1 3%◦ 65 cents or less on the $1 13%*Source AICPA Succession Planning Survey
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Multipliers – Salary◦ Less than one year’s salary 6%◦ One year’s salary 8%◦ One year’s salary x 1.5 3%◦ One year’s salary x 2.0 17%◦ One year’s salary x 2.5 14%◦ One year’s salary x 3.0 38%◦ One year’s salary x 3.5 3%◦ More than one year’s salary x 3.5 5%
Source: AICPA 2008 Succession Survey
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Accrual basis capital account (ABC)◦ Paid over 5 years◦ Often with interest
Goodwill (computed on cash basis)◦ Larger firms use a multiple of compensation◦ Smaller firms use a calculation base on fees◦ Usually paid out over 10 years◦ No interest◦ Annual cap on payments
Usually 5-10% of revenue
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Learn to delegate
◦ Identify your transition team
◦ Build their competencies
◦ Create trust in the organization
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Single owner◦ Two managers
Firm has revenue in excess of $700,000 Owner has transitioned 5080% of work to
the two managers Margins 45%+ Should the owner sell to the managers or
look for a firm to buy him/her out?
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What will you do with the rest of your life?
◦ New business opportunities
◦ Civic, charitable endeavors
◦ Travel, play golf, etc
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Key Partnership Agreement Issues
◦ Mandatory retirement age from partnership
◦ Client transition tied to benefits
◦ Cap total dollars to be paid in any one year
◦ Determine vesting period
◦ Define partner disability
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◦ How much advanced notice should be given
◦ Non-compete and non-solicitation agreements
◦ Early retirement penalty
◦ Termination with and without cause
◦ Continued use of firm’s name
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Unplanned exit of the owner (death)◦ Financial hardship to family◦ No one else in family qualified to hold interest in
practice Loss of clients and goodwillo Remaining asset have little value
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What it is
How to get started
Analyze the practice
The deal structure◦ What size firm
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Have a buy-sell agreement with a key employee if possible
Have a practice continuation agreement with a larger firm
Selecta trusted advisors to quickly sell the practice
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Identify possible replacements. Look inside and outside of the firm. Evaluate all potential successors. List your first, second, and third choices. Have key players document information. Cross-train your employees. Ask for help to formalize your plan.
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Identify specific competencies Provide informal coaching by assigned
partner Give on-the-job training opportunities Offer formal training in interpersonal skills Make available formal training in delegation
and supervision Send future leader to external leadership
training program
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Empower people throughout the organization to do their jobs responsibly and autonomously.
Identify managers or other staff with potential.
Mentor promising staff. Include junior staff in decision making. Set up a timetable for new leadership.
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◦Looks at a 1 – 3 year window
◦Don’t copy another’s plan
◦Use outside advisors
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Will I be financially secure after retirement?
Have I identified a successor?
Do I believe that there is meaning to my life outside of the practice?
Do I have new challenges to look forward to after retirement?
Am I committed to an effective succession plan?
Can I delegate authority to others?
Have I announced a firm date for my retirement?
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7 yeses - you didn’t need this program 6 yeses - you are almost there 5 yeses - you are more than half way
there 4 yeses - start getting serious 3 yeses - get an outside advisor 2 yeses - at least you are thinking 1 yes - you are under 40 or plan to work
forever
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Hold a brainstorming meeting◦ Spouse◦ Major clients◦ Advisors◦ Employees
Failure to plan . . .◦ Fire Sale??◦ Lower price◦ Force to sell at a weak time
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When you reach mid to late 50s
Gives you a 5 to10 year window
Know when to leave
Tie succession/retirement plan to your
personal wealth accumulation
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Liquidity
Provide new owners opportunities
Enhance value of your firm
Release energy of successors
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Start while the partner is still there Communicate personally with key clients Don’t assume that clients know what is
going on Create a script
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Mandatory Retirement◦ Only 36% of firms have one◦ Retirement does not mean leaving
Identify New Role – don’t let the intellectual capital escape◦ Senior statesperson◦ Mentor◦ Business development
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Set up a timetable for the transition◦ Two to four years
Identify future skills and talents Create a process
◦ Self nomination◦ Describe candidates platform
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Make Sure You Plan Develop and nurture the next generation Know when to leave Retirement plans should be good for
everyone Succession planning is a natural course of
running a practice A good plan provides the firm with choices
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What did I forget to address?
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Practice Continuation Agreements: A Practice Survival Guide, Second Edition by John A. Eads, AICPA
Compensation as a Strategic Asset by August Aquila and Coral Rice, AICPA
AICPA/PCPS Human Capital Resource Center www/aicpa.org/pcps
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