Valuing your Accounting Practice When Selling to a Partner or External Buyer. Joel Sinkin, President Transition Advisors

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1 Valuing your Accounting Practice When Selling to a Partner or External Buyer Joel Sinkin, President Transition Advisors

2 Accounting Transition Advisors National Consulting Firm working exclusively with accounting firms on issues related to ownership transition

3 Transition Advisors, LLC Partners and Associates Terrence Putney CEO Joel Sinkin President Bill Carlino Managing Director National Consulting Services

4 Transition Advisors, LLC Partner and Associates Mark Basinski California, Arizona, Nevada, Oregon, Washington, Utah Russ Best Texas, Colorado, Missouri, Kansas / Nancy Egan Pennsylvania, Maryland, Washington, D.C

5 Transition Advisors, LLC Partners and Associates Peggy Tyers Toronto, Ontario Province Marcia Miller Florida Mike Farinelli National Business Development Kay Conklin National Business Development

6 If there are 50 things you need to think about in a transaction. the smartest of us will think of only 35

7 Why is Activity So High? Economy: 2006 through 2008 versus 2014??????? Niche Development The Boomers Is it a Buyers or Sellers Marketplace Whose in trouble re valuations?

8 Three Ways to Grow One Client at a time Develop marketable niches Merge or acquire another firm

9 Methods to Structuring the Transition of a Practice through an External Sale 1. 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 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

10 Stage One: Two Stage Deal 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!

11 Two Stage Deal Stage One: (external sale) * 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

12 Two Stage Deal Advantages to seller in stage one 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 $

13 Two Stage Deals Stage One advantages to buyer Synergies Labor Rent Software Malpractice insurance Better transition

14 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

15 Five Main Variables for Valuing a Practice 1. Cash up front, if any (2014 economy impact) Dependent on time of year The deal s cash flow Treatment of accounts receivable Time to recover investment

16 Five Main Variables for Valuing a Practice 2. Retention clause/guarantee (2014 economy impact) Collection deals, deals by percentage Fixed deals Limited guarantees Economy clause

17 Five Main Variables for 3. Profitability Valuing a Practice Seller s current profitability / billing rates Buyer s anticipated profitability / billing rates Tax ramifications of deal structures (goodwill vs current deduction) 4. Length of the payout period

18 Five Main Variables for Valuing a Practice 5. Multiple Cause vs effect Multiple = effect Balance = cause Basic rule: Lower down payment, longer payout period Higher profitability, longer guarantees = higher multiple Tax clients vs Traditional Accounting clients?

19 Other Items to Consider Other assets, either acquired or required Furniture, fixtures, equipment Leases and location Staff joining the new firm or not joining Participation in Future Growth Fee increases from prior services Fee increases for new services Fee increases for referrals New business incentive clause

20 Sales Internal v. External Internal Sales Almost always go for less Often no retention period (brand versus partner loyal) Death, disability, and penalty buyouts Remaining partners making more Multiple formulas based on compensation are more common in larger firms than equity formulas Accounts Receivable & WIP External sales are more of a business deal and go for high dollars

21 Sales Internal v. External Things to be wary of Multiple partners, leaving simultaneously Partners reducing time commitment, but not income or control Replace the role, not the body Cannot replace the Administrator with a Rainmaker Must have excess capacity Partnership Agreements (check them annually)

22 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 Remember, it s the package, not the individual variables Increase your firms value: metrics, IT, avoid leases, good talent

23 For More Information Please visit our website for resources including FREE reports, whitepapers and case studies. Joel Sinkin