avoiding the roadblocks & understanding the market · the smartest of us will think of only 35....
TRANSCRIPT
Mergers of Accounting Firms:
Avoiding The Roadblocks & Avoiding The Roadblocks &
Understanding The Market
Joel Sinkin, President
Transition Advisors
NASBA CPE Earned Credit Guidelines
Transition Advisors, LLC is a sponsor on the NationalRegistry 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 of the polling questions during the presentation. presentation.
2) Complete the online evaluation that will appear in your browser immediately after the webinar.
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 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.
Upcoming Webinars
Transition Advisors, LLC offers FREE monthly CPE courses
Upcoming Webinars:
December 11 – Mergers: How, Why, When and With Whom
January 15 – Keys to Transitioning/Retaining Clients and Staff through a January 15 – Keys to Transitioning/Retaining Clients and Staff through a
Merger or Acquisition
Visit transitionadvisors.com/upcoming-courses.php for more information.
Accounting Transition Advisors
National Consulting Firm working exclusively with
accounting firms on issues related to ownership transition
If there are 50 things you need to think about in a transaction…….
The smartest of us will think of only 35.
And if you’re the smartest person in the room And if you’re the smartest person in the room
then you’re probably in the wrong room!
Reasons Why Firms Merge
Firms fall into 2 categories:
1. Firms seeking growth bycombining with another firm
2. Firms seeking to solve a 2. Firms seeking to solve a problem
Know your reasons… Know the other firm’s reasons…
Why is M&A Activity So High?
Economy:
2006 through 2008
versus
2014 and beyond…
Niche Development – need to expand beyond tax and auditaudit
Boomers’ retirement – 78 million person gap in the talent pipeline.
The Holy Grail – a young CPA with a good book of business.
Impact of Aging Demographics
In 1993, over 40% of AICPA members were over 40 years old……
In 2012, that number rose to 70%……
By 2020, 75 percent of the AICPA
membership will be eligible to retire
(that’s 400,000 members!)(that’s 400,000 members!)
1 person in the US turns 65 every 8 seconds!
400-plus more 65th birthdays by the end of this presentation.
Succession Challenges Ahead!
• 80 percent of multi-owner firms expect succession planning to be the most important issue over the next 10 years!
• Less than half of multi-partner firms in the U.S. have mandatory retirement guidelines.
• 61 percent of firm partners/equity owners are over 50.
� 46 percent of multi-owner firms have a have a formal succession plan in place!46 percent of multi-owner firms have a have a formal succession plan in place!
� Firms with less than 15 employees, 70 percent DO NOT have a succession plan in place!
� Less than 6 percent of sole pracs have a PCA.
The High Cost of Procrastinating
Case Study:� A sole practitioner in the Northeast put off finding a
successor – in the interim several things happened:
� 1. A key employee resigned.
� 2. One of his large growing clients suddenly became “at risk” because they needed services the sole practitioner didn’t offer.didn’t offer.
� His aging IT infrastructure needed a comprehensive and expensive upgrade.
� Now, the owner is open to any offer that comes along instead of managing the process in an orderly fashion.
Recent M&A Activity
Since October 2011…..
More than 400 mergers of CPA firms!
BDO – SS&G
• Elliott Davis-Decosimo
• Rothstein Kass-KPMG
• O’Connor Davies – Perl & Asch (NY)
• Cullari Carrico – Levine Bartlett & Swantic (NJ)
Other active firms in M&A: Other active firms in M&A:
Marcum
Sikich
Carr Riggs & Ingram
WSB
What are your competitors doing to beat you to the best merger opportunities?
How to get in the door with prospects
1) A firm you develop a personal relationship
with over time
2) Use an intermediary to open the door
3) Identify a firm that is already in a selling
mindsetmindset
4) Make an offer to get their attention
5) Make a marketing campaign
perform a special search:
> Reach out and touch program
> Networking events
> Mailing
This is Not Your Father’s CPA Firm!
�You can’t run a CPA firm in 2014 like you did in 1980!
Gradual move toward value pricing and value billing – about 10-
15 percent now use some form of VP and VB system.
Firms moving to “one-partner/one-firm” concept rather than
individual books of business.
More remote workers – 1995 there were 9.5 million remote
workers – 13.5 million in 2012 and now some 30 million work
remotely at once a week.
Greater use of mobile devices: more than 90 percent of CPAs
use smartphones or tablets. Given rise to the birth of virtual
firms.
Now 8-10 percent of new firms are virtual. (AICPA).
The 7-Step Process
Once in, determine how interested
they are and then MOVE FAST
* why time kills deals
Suggested sequence of events
�Introduction meeting
�Sharing goals (must haves)�Sharing goals (must haves)
�Exchange generic information
�Make non binding offer
�Due Diligence
�Transition plan
�Documentation signing
Look at it from the seller’s POV
Make sure you keep this
about the seller;
�They are 100% focused
on: what’s in it for me?
�They are less interested �They are less interested
about what’s in it for you
�Later on you can recruit
them to be champions of
your cause
How do you assure your merger is going to work?
Goals: Be Clear as to each other’s
Share what success looks like
Be honest about the pain to get
there for both parties – WSB’s “rip
and replace.”
Not everything has to change day
one (some do!)
> Behind the door changes
> In front of the door changes
How do you assure your merger is going to work?
◊ BIGGER is not always better
• Be wary of mergers for pure overhead
reduction
• Having a specified purpose for a merger
helps identify the target and helps you relate
to deal structures that accomplish your plan
Don’t expect people to do the same thing they have
historically done and make less for doing it. That
applies to partners and employees.
Are You Focused On The Right Things?What’s Important for a ‘Good Fit’?
• The great mystery of billing rates
• Differences in Profitability … not always important
• Key: Cultural Differences
• Culture• Partner Billable Hours• Partner Billable Hours
• Size of Book managed
• Marketing
• Dress Codes
• Billing … hourly vs value
• Compensation … proxy for culture
Change: Biggest Roadblock
• Financial strength
• Professional /
staffing strength
• Ethnic / language • Ethnic / language
• Longevity of partners
• Employee track record
Roadblocks
• IT
• Capacity
• Impatience
• Transition Issues
• Staff
• Clients
• Unity of Partners
Owner Accountability & Unity
SIX STEPS TO FOLLOW
1) Creating a governance system
2) Construction of goals specific to each partner’s role
3) Understanding what success looks like3) Understanding what success looks like
4) Creating a compensation system that ties into goals
5) Having regular debriefing meetings
6) Partner buy-in
Governance: Owner Accountability &
Unity
• Decision making
• Unanimous vs
Super majority vs Super majority vs
Simple majority
• Financial Commitments
Owner Accountability & Unity
By way of example …
• Super majority • Admission of new partner
• Simply majority• Expenses in excess of certain amount • Expenses in excess of certain amount
• Unanimous• Dissolution or sale
Owner Accountability & Unity
Pros and Cons of Unanimous Decision Requirements
Usually works best in small firms 3-5 partners.
Would not recommend for 8 partners and higher…
Example – 15 partner firm and 14 want to admit a new Example – 15 partner firm and 14 want to admit a new
partner - one hold out. The minority has to buy into
the greater good.
Otherwise you get what’s known as “paralysis by
analysis.”
Owner Accountability & UnityConstruction of Goals Specific to
Each Partner’s Role
MAKE THEM AS MEASURABLE AS POSSIBLE
Financial: metrics
> chargeable hours
> realization> realization
> profitability…
Business development
Market penetration
People development (mentoring)
Owner Accountability & Unity
Does Success Look Like
Success for the audit partner different than success for a tax partner, or the quality control partner etc…
Create quantitative and measurable yardsticks wherever possible
Be as specific as you can. K.I.S.S.
Owner Accountability & Unity
Compensation ProgramsExamples of Roadblocks to Avoid
• Buyouts based on a system that penalizes you for transitioning clients. Can’t ask someone to slow down when buyout is based on last several years of comp.
• Comp systems tied into your personal book of • Comp systems tied into your personal book of business when the firm goal is to create a “one firm client” approach. No incentive to push it to someone else.
• Compensation programs not based on the goals that have been created for each partner’s role.
Owner Accountability & UnityDe- Briefing sessions
Two Issues to Focus on
• Is the partner achieving the goals
• Is the firm holding up their side?• Is the firm holding up their side?
Be honest and clear
Owner Accountability & UnityRegular De- Briefing sessions
In the meeting
• Progress update
• Roadblocks encountered
• Identifying where falling short• Identifying where falling short
and create strategy to rectify
• Establish mini goals to be reviewed
at next meeting
• Hold these meeting at least quarterly
Owner Accountability & UnityPartner Buy In
No program will work if you don’t have partner buy in day one
• Buy in to firm goals• Buy in to your role• Buy in to how you will
be measuredbe measured• Buy in to authority• Buy in to the greater good • Buy in to consequences
of falling short• Keep selling concepts year round
Roadblocks
• Equity
• Firm Name
• Communication
• Unneeded ‘must haves’
• Staff
• Leases
Roadblocks
• Time
• Adversarial nature
• Messages you send – i.e.
employee handbook
• Leaking pending merger to • Leaking pending merger to
marketplace, clients, staff
• The 13th time you read the
agreement
• Opening door to
competition
Organize Your “Must Haves”
• Items that can be absolute deal-breakers such as:
� Location
� Partner retention
� Compensation
• Items you strongly prefer such as:• Items you strongly prefer such as:
� Technology
� Staff retention
� Name
• Items you are more flexible about such as:
� Software
� Perks
Identify What Your Merger Partner Should
Look Like!
• Start with the Big Four (the C’s that is)
A) Culture
B) Chemistry
C) Continuity
D) CapacityD) Capacity
� Specialties
� Technical skills
� Size
� Location
� Technology
Making Your Firm Beautiful for a
Merger or Sale
• Technology:
– Paperless
– The Cloud
• Brand versus Partner loyal• Brand versus Partner loyal
• Trained clients
• Accurate understanding of your firm and its
metrics – like your house never looks better
than when you’re ready to sell it.
The Cardinal Sin: Overlooking IT
• Recently, a client of ours was considering two acquisition candidates:
• Firm A:
• Great metrics/realization rates
• Capable and loyal staff
• Not paperless, no portals
• Firm B:
• Poor metrics/sub-par realization rate
• Average tenure for employees
• Strong in IT
• Which one did he choose and why?
What is on the other firm’s mind in a merger? Should you care?
• Master of their own domain
• Clock punching employee
• What’s in it for me?
• I don’t want to be swallowed up, I’ll lose my identity
• They are going to cherry pick my clients • They are going to cherry pick my clients
• I can’t accept this much risk. I need certainty
• My name must be in the firm
• If I work a few more years, I will make even more
• It is more emotional than financial for most partners particularly small firms and sole practitioners.
Internal Buyout Issues
• Remaining partners must make more
• How many partners can leave at same
time?
• Notice• Notice
• Replace the role, not the body
• Brand versus Partner Loyal impact
• Vesting periods for buyout more important than age?
• Caps
A Merger Gone Wrong
• A merger between a $1 million and $8 million firm – both parties
excited for the synergy and cross-selling opportunities – each vacated
their offices and consolidated into a larger space.
•Six months later, cultural and personality differences surfaced and
they decided to de-merge – but did not have a de-merger clause in
the agreement.the agreement.
• Each firm agreed to take back their original clients – but problems
arose.
• The $8 million firm wanted the smaller one to pay for the new
clients they signed since the merger. In addition the larger firm held
the lease to the new space which they could not afford on their own.
•Both firms lost both employees and clients.
Why Some Mergers Go South
1. Poor Deal Structure: At the 11th hour, we uncovered a buyout term situation
where the cost of acquiring partners’ equity by the successor firm plus the cost of
replacing them was greater than their comp – thus the successor firm would be
in negative cash flow for many years during the buyout.
2. Business Plan Execution: Not getting complete partner buy-in with regard to
cross-selling opportunities.
3. Differences in overhead and profitability: Larger firms tend to have a higher 3. Differences in overhead and profitability: Larger firms tend to have a higher
investment in IT, HR and more layers of QC and review – thus higher overhead
and lower profit margins.
4. Equity: Firm A has three equity partners – 50, 45 and 5 percent, respectively,
merging into a 10 partner firm. Firm B is not going to give the 5 percent
shareholder an equity stake in the firm. But there are ways to overcome that, i.e.
make them an income or contract partner.
Due Diligence
•For the mergee/seller:
•Prior track record of successor firm in M&A – speak to someone they merged
with.
•Background checks: professional, financial,
legal, malpractice, licenses, peer review
Metrics•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…
Due Diligence
•For the successor firm or buyer:
Metrics
The great mystery of billing rates
Differences in Profitability … not always important
Continuity = retention
Culture
• Partner Billable Hours• Partner Billable Hours
• Size of Book managed
• Marketing
• Dress Codes
• Billing … hourly vs. value
• Compensation … proxy for culture
• Technologies
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
• Lawyers
For More Information
Please visit our website for resources including
FREE reports, whitepapers and case studies.
Joel Sinkin
Bill CarlinoBill Carlino
1-866-279-8550
www.TransitionAdvisors.com