Valuing Multi-Partner. Joel Sinkin, President Transition Advisors

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1 Valuing Multi-Partner Accounting Firms Joel Sinkin, President 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 one CPE credit You must complete two requirements: 1) Participate in all three 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 twice-monthly CPE courses June 9 Buying Out Retiring Partners June 23 Preparing Your Firm to Grow through M&A July 7 The Art of Your Deal July 21 How to Structure Your Partnership Agreement Visit transitionadvisors.com/upcoming-courses.php for more information.

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

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 2009 versus 2016??????? Niche Development The Boomers Is it a Buyers or Sellers Marketplace Whose in trouble re valuations?

8 Starting the Transition Process When should we start? How many more tax seasons do you want to work? Client face time Investments including technology, leases, staff * Why do you have your clients? Brand versus partner loyal clients

9 Is it a buyers or sellers marketplace: location, location, location Density of population Size in revenues Niches Whose in trouble re valuations?

10 Polling Question #1 How many equity partners are in your firm?

11 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

12 What if Some Partners Want to Slow Down and Others Want to Grow and Stay On for Many Years? Most multi-partner firms have this situation Partners seeking immediate role reduction do a sale Partners seeking to slow down in 5 years or less do a Two Stage Deal The Partners looking to stay on merge What does equity mean when they merge? Are there retention elements? How does their compensation and role change? What about their buyout?

13 Five Main Variables for Valuing a Practice for an External Sale 1. Cash up front, if any Dependent on time of year The deal s cash flow Treatment of accounts receivable Time to recover investment

14 Five Main Variables for Valuing a Practice 2. Retention clause/guarantee Collection deals, deals by percentage Fixed deals Limited guarantees Economy clause What deal worked best for who? Guaranteed minimums Replacement Clients

15 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

16 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?

17 Polling Question #2 In the next five years my firm is likely to: Sell Acquire a smaller firm Merge into a larger firm Not sure

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

19 Sales Internal v. External Internal Sales Almost always go for less Often no retention period Death, disability, and penalty buyouts Non-multiple formulas on gross are more common Accounts Receivable & WIP Tax treatment and 736 (a) (1) Capital accounts External sales are more of a business deal and go for high dollars

20 Retirement Methods for Valuing equity Book of business Equity Compensation Hybrids

21 Internal Valuation Methods Valuation methodology-for those w agmnt Of those responding to recent AICPA survey* 37% use a multiple of equity 16% use managed book of business 22% use a multiple of compensation 25% use something else *2012 PCPS Succession Survey

22 Right Financial Arrangement Backwards Valuation Reward your retiring partners fairly for their years of sweat equity BUT Don t expect your remaining partners to borrow or take a step back in compensation to do it.

23 Right Financial Arrangement Available capital is the retired partner s foregone compensation. Three uses for that capital: Pay the retiring partner off. Cost of replacing that partner. Some upside for the remaining partners for assuming the obligation and the extra work.

24 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. OR The owner is being paid for their equity and is still working is being paid as a non-owner. It s hard financially to do both at the same time.

25 Internal Valuation Benchmarks Valuation methodology of those using multiple of equity or book Less than 10% used more than 100% of revenues Over 40% use 100% of revenues Almost 30% use between 75% and 100%

26 Internal Valuation Benchmarks Valuation methodology of those using compensation Almost 40% use three times About 15% use two and one half times Between 15% and 20% use two times

27 Polling Question #3 What issues do you see affecting your practice most next year? Succession Admitting new partners/shareholders Client retention All of the above

28 Transition Advisors

29 Transition Advisors

30 Transition Advisors American Institute of Certified Public Accountants

31 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 sharing client relationships

32 For More Information Visit the AICPA Succession Planning Resource Center Pages/default.aspx Joel Sinkin

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