Preparing Your Firm for an Upstream Merger

Transcription

1 Preparing Your Firm for an Upstream Merger November 10, 2016 Terrence Putney, CPA CEO-Transition Advisors

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 credit You must complete two requirements: 1) Participate in all four polling questions during the presentation. 2) Complete an online evaluation after the webinar.

3 Attendee Control Panel Take a moment to familiarize yourself with your Go To Webinar 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. All participants are muted during the presentation, but you can communicate with us using the question box towards the bottom of your control panel. 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.

4 Upcoming Webinars Transition Advisors, LLC offers FREE monthly CPE courses Upcoming Webinars: 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.

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

6 Polling Question How many equity partners do you have in your firm? 1) 1 2) 2 to 4 3) 5 to 9 4) 10 to 19 5) 20+

7 Case Study Selling/Merging Firm 3 partners, $2.4M in fees, $800k in capital Frank, 63 yrs old 70% of the equity Manages $1.3M of fees Comp is $450k Alice, 55 yrs old, indefinite retirement plans 25% of the equity Manages $800k of fees Comp is $275k Dan, 42 years old 5% of the equity Manages $300k of fees Comp is $150k

8 Case Study Buy-sell agreement requires Capital paid in first year Goodwill value paid over 5 years at 1X plus 6% interest on total revenue times equity Alice and Dan believe They can t afford the payments to Frank They don t have talent on the bench to replace Frank They can t manage the firm and clients on their own

9 Standard Goals for Merge Up/Sell

10 Risk Avoidance Liabilities to former and soon to retire partners Specialized services that may be unsustainable Lease renewals Potential loss of key employees Potential loss of key clients

11 Case Study Acquiring Firm 6 partners, $7M in fees 2 partners will be retiring in 4 and 6 years respectively 4 partners-in-waiting on the bench Firm knows it needs to promote the partner candidates but is concerned about diluting the profit pool

12 Alternative Deal Types Outright sales Two Stage Deals Cull out sales Sale vs merger

13 Polling Question What issues do you see affecting your practice most in next year? 1) Succession 2) Admitting new partners 3) Client retention for retiring partners 4) Need for growth 5) All of the above

14 Outright Sale Purchase payments begin immediately If seller needs to keep working-what to pay Disadvantage: not a lot of time for transition could lead to lower client retention

15 Two Stage Deal Stage One-usually up to 5 yrs Seller merges into buyer s firm Starts the transition process Maintain reasonable control over clients Take on a principal s or nonequity partner role Maintains compensation level

16 Two Stage Deal Stage Two-paying for the practice Seller transitions to a part-time or retired role If working, a per diem rate Purchase is now based on a practice that has ALREADY transitioned

17 Cull-out Sale Selling a part of the practice OR Retaining a part of the practice such as Clients Services Locations Breaking up the firm

18 Sale vs Merger Key difference is ownership status Merger-sign onto successor firm s owner agreement

19 Case Study Deal Structure Frank will bought out using a Two Stage Deal Alice will be admitted as an equity partner Dan will be admitted as an income partner with a path to equity if he can manage enough business

20 Case Study Parties agree that Franks, Alice s, and Dan s books of business are separate and distinct, therefore Frank s buyout will be tied to his book and Alice s equity will be tied to her book Dan will either eventually be admitted as an equity partner or be bought out of his equity in his old firm

21 Stage One- Frank s Two Stage Deal Stage One contractually ends in 3 years Frank s comp is tied to his historic comp by paying him 35% of the collections from his clients in comp and benefits If he uses more labor than a historic base, comp is adjusted accordingly (can happen due to growth or Frank reducing client service hours)

22 Frank s Two Stage Deal Frank s primary objectives in Stage One are: Transition Keep clients Introduce clients to his successor Maintain personal income

23 Frank s Two Stage Deal Stage Two Deal Terms- Retained AR and WIP Buyout based on collections over six years New Business Bonus

24 Polling Question Which best describes your personal situation over the next five years? 1) Reduce my role and time in the practice 2) Having partners reducing their role 3) Acquire another firm 4) None of the above

25 Principles of Value Think about what creates value for a practice An accounting firm practice value is primarily based on a seller s ability and that of the buyer to successfully get the seller s clients to transfer from the seller to the buyer

26 Terms-Five Primary Factors 1. Cash up front, if any Dependent on time of year The deal s cash flow Accounts receivable 2. Retention clause Collection deals Fixed deals Limited guarantees

27 Terms-Five Primary Factors 3. Profitability Seller s current profitability Buyer s anticipated profitability Tax ramifications of deal structures (goodwill vs current deduction) 4. Length of the payout period

28 Terms-Five Primary Factors 5. Multiple Terms are the cause Multiple is the effect Basic rule: Lower down payment, longer payout period Higher profitability, longer guarantees = higher multiple

29 Frank s Buyout Terms Frank was paid- No down payment 16.67% of collections from his book for three years Price locked after three years and the remainder was paid over three more years Treated 50% as an asset sale, and 50% as consulting agreement Frank was essentially paid 1X of his managed book of businessthe multiples will vary depending on the market and quality considerations

30 Alice s Merger Alice signed the partner agreement and- Was conditionally guaranteed $275,000 of comp and benefits for two years She received her pro rata share of the equity based on revenues (8%) She contributed her AR and WIP as a capital contribution to the new firm She became bound by all the terms and conditions of the new firm s agreement

31 Dan s Merger Dan signed an Income Partner agreement His base compensation was pegged at $150,000 for two years He is eligible for bonuses consistent with other income partners His share of the AR and WIP was retained by the successor firm If he is not made an equity partner within three years he will be paid for AR and WIP If he is made an equity partner, AR and WIP will be treated as contributed capital

32 Polling Question Your firm s most likely succession plan looks like: 1) Find an external buyer or upstream merger 2) Internal solution-prefer not to sell or merge 3) I don t know what my firm should do

33 Identify What Defines the Right Successor Firm Culture Four C s 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?

34 You Are What You Are However

35 However.. Buyers hate inheriting problems and poorly run practices Clean up your AR and WIP Present your partners and staff in a positive light Consider jettisoning problem staff Clean up the physical office-eliminate clutter Provide good time records Be willing to part with unprofitable clients

36 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. Initial meetings 5. Narrow the field and obtain a non binding offer 6. Perform due diligence 7. Contracts and close the deal

37 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 What the goals are for the deal Individual goals for some partners if different Aging of the partners/staff What success looks like

38 Author a generic practice information including your goals Determine the deal structure you are seeking: Sale Merger (What type) Two Stage Deal Combination

39 Organize your must haves Items that are absolute breakers such as: Location Partner retention Compensation Items you strongly prefer such as: Technology Staff retention Name Items you are more flexible about such as: Software Perks Limit your must haves as much as possible

40 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 like 4) Narrow the playing field into top choice(s), bridesmaids and forgetaboutit

41 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 and financially, pending due diligence Make sure the terms are complete as to must haves, deal structure and terms Do not negotiate in pieces

42 For the mergee/seller Perform Due Diligence * Prior track record of successor firm in M & A * Background checks: professional, financial, legal, malpractice, licenses, peer review * Metrics * 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

43 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

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

45 Articles CPA Firm Succession Series July, 2013 thru June, CPA Firm Valuation Series October, 2014 thru December, Roadblocks to Avoid in Accounting Firm M & A September,

46 Gary Adamson, Adamson Advisory Bonnie Buol Ruszczyk, bbr marketing Sarah Dobek, Inovautus Consulting Angie Grissom, The Rainmaker Companies Dustin Hostetler, Boomer Consulting Rita Keller, Keller Advisors Roman Kepczyk, Xcentric Tamera Loerzel, ConvergenceCoaching Jeff Phillips. Accountingfly Terry Putney, Transition Advisors Carrie Steffen, The Whetstone Group Sandra Wiley, Boomer Consulting Jennifer Wilson, ConvergenceCoaching #SuperConf15

47 Bridging the Gap: Strengthening the Connection Between Current and Emerging Leaders in the CPA Profession Amazon.com $49.97

48 Free White Papers on Industry Trends CPA Firm Leadership: Communication Drives New Possibilities Measuring Happiness at Work: How Firms Can Win With a Happy Culture Top CPA Firms Succession Challenges Download at:

49 For More Information Please visit our website for resources including FREE reports, whitepapers and case studies