Download General Guidelines

Mergers of Accounting Firms:
The Why, How and With Whom
to Affiliate
Joel Sinkin, President
Transition Advisors
Transition Advisors
◊ About Us
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Merger and transition advisors exclusively serving the accounting
industry
Customized solutions
Hundreds of transactions, over 20 years of experience
Represent the buyer or seller
Services include:
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Buyer-seller introductions
Merger and acquisition transaction structure
Document preparation/review, valuation and due diligence
Post-transaction business planning
General consulting and coaching
www.transitionadvisors.com
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866.279.8550
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[email protected]
If there are 50 things you need to think
about in a transaction…….
……the smartest of us will think of only 35
Reasons Why Firms Merge
Firms fall into 2 categories:
1. Firms seeking growth by
combining with another firm
2. Firms seeking to solve a
problem
Know your reasons…
Know the other firm’s reasons…
Why is Activity So High?
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Competition
Economy
Technology
Niche Development
Aging of the partners/staff
Buyers’ or Sellers’ market
Whose in trouble in the future?
Three Ways to Grow
• One Client at a time
• Develop marketable niches
• Merge or acquire another firm
Have a Goal Prior to Merging
◊ BIGGER is not always better
• Be wary of mergers for pure
overhead reduction
• Having a specified purpose for a
merger helps in identifying the
target and helps you relate to deal
structures that accomplish your plan
Standard Goals of Merger for Growth
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Growth of Billings
Addition of Talent
Cross Selling
Adding a New Marketplace
Succession
Growth of Billings
• Cash flow
• Synergies or increases in costs
• Treat as an acquisition
• Capacity to take on the workload
• Continuity to retain clients or pass on deal
Addition of Talent
Are they:
●Bringing a niche?
●Bringing excess capacity?
●Bringing a book of business?
◊ You cannot get a star with empty offers though
Cross Selling
• You’re selling their clients
• They’re selling your clients
• Compensation
• Licenses
• Commitment from partners and
staff to take a proactive role in marketing
Adding a New Marketplace
• To cross sell
• To attract new clients
• Technology is making it
easier to attract
additional staff/partners
• Strong communication,
routines, plans, and
guidelines are the keys
to success
Mergers for Succession
1. Have agreed upon time tables for role reductions
of retiring partners
2. Have everything in place before you start
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Terms … economy impacts terms
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Are clients partner-loyal or brand-loyal?
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Transition Plan
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Capacity to takeover the retiring partners
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Space, staff, firm name
TWO STAGE DEALS
Building an Internal Succession Team
• The mini-merge
• Cannot get a star with empty offers
• Create benchmarks, time frames
• Replace the role, not the body
General Guidelines
◊ Equity
• The poker chip method
• What does equity mean?
• Additional factors …
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Profitability
Staff
Rates
Assets
Niches
More
• Look-back periods to adjust equity
• The 10,000 lb. gorilla … minority equity partners
General Guidelines
◊ Compensation
• Start off by remaining whole when possible
• Handle perks/benefits as part of the package
• Avoid immediate increases
• Accountability
• Buyouts
• Compensation – fixed or contingent
General Guidelines
◊ The Process
• How long should it take?
• Making the deal the priority
• Why time kills all deals
Mergers
◊ Compensation
• Book of Business vs Equity Ownership
• All for One and One for All
• Profit distribution … equity vs formulas
• Relative compensation as a proxy for culture assessment
Retirement: Partnership Agreement
◊ Voluntary
• Mandatory age vs vesting
• Notice
• Valuing equity
 Equity
 Compensation
 Funded vs unfunded
 Capital accounts
 Work backwards formula
Retirement: Partnership Agreement
◊ Terms
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Payout periods
Retention periods
Tax Structure
Caps
Penalty buyouts
 Premature exit
 Exit without appropriate notice
 Getting booted out
Death or Disability
• Definition of temporary disability vs permanent
• Where insurance fits in re disability
• Death
• Where insurance fits in re death
• If notice is required for retirement, how is death or
disability handled?
Termination
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Voting
Grounds
Non-Competes
What is cause?
Miscellaneous
• It is a living agreement
• Limit retirement timing
• Create benchmarks, time frames
• Replace the role, not the body
De-Merger Clauses
• When is it appropriate and not appropriate
• How long can they be invoked
• Allowing partners to leave with clients
• Handling of:
 Original clients
 New clients
 Firm name
 Staff
 Liabilities
 Leases
Due Diligence
◊ Do Your Homework!
• History and background of the firm
• Client retention rates
• Billings vs. Collections, billing rates
• Compensation packages of all firm members
• Employee Manual, employee contracts
• Furniture, equipment, assets and leases
• Pricing, billing and collections
• Profitability
Due Diligence
◊ Clients
• Who does the work?
• Where is the work completed?
• How many clients require face time?
• Fees
• Industries served
• Services for clients
• Collections - age analysis of A/R and cash flow (per month)
◊ Focus on how you will run the firm, NOT
how it is currently managed
Due Diligence
• Firm Culture
• Potential exposure issues
• Quality control issues
• Retention rate of employees
• Work papers
• Leases or other obligations
Other Thoughts
• General “chemistry” between the parties
• Continuity of relationships will help retain clients
• A good deal is a fair deal
• Remember, it’s the package, not the individual
variables
• Staff merging
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?
CHANGE IS A DIRTY WORD.
THE EMPHASIS NEEDS TO BE ON CONTINUITY.
NOT THE LOSS OF, BUT THE GAIN OF ……..
For More Information
Please visit our website for resources including
FREE reports, whitepapers and case studies.
Joel Sinkin
[email protected]
1-866-279-8550
www.TransitionAdvisors.com