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Merger Readiness: Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC

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Page 1: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Merger Readiness:

Maximizing Best Practices

Joel Sinkin, President

Transition Advisors, LLC

Page 2: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Transition Advisors, LLCNational consulting firm working exclusively with accounting

firms on issues related to ownership transition

Page 3: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Managing the Merger and Acquisition Process

Zoom versus face to face

It starts by creating a roadmap from beginning to the end. We have narrowed it down to a 7-step process:

Page 4: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Roadmap to Follow

• Identifying target firms and making solicitations

• Gathering preliminary data and prepare to share same; must haves; goals

• Intro meetings

• Non-binding offers: Make them complete

• Due diligence

• Final agreement drafts

• Transition clients and staff plus integration

Page 5: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

We have a business plan that identifies our

strategic goals for mergers and/or acquisitions.

We have a written plan for what strategic goals we have for mergers and acquisitions. The plan will guide the type of firms we target, the type of deal structure we use, and will be shared with all the constituents within our firm and the candidate firm that are responsible for executing the plan.

Page 6: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

The strategic objectives we develop could include:

• Growing our firm to become stronger and more profitable

• Expanding our geographic markets

• Acquiring new niche services such as IT Consulting/HR Consulting

• Increasing our competitive positioning in our market

• Obtaining more clients to cross-sell our services

• Strengthen our own succession team with new younger leaders

• Merging Up

• We have partner unity

Knowing your objectives dictates deal structure, candidates that make sense…

Page 7: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

We have identified the goals, outside resources we will need and

prepared them to assist us as needed and what we will do solo.

• Finding merging partners:

o Develop databases, solicit through letters, phone, networking and advertising versus consultant versus broker

• Knowing the alternative deal structures, valuing firms and benchmarks

• Drafting agreements. Role of attorney.

• IT

• Financing

• Consultants

1) Who is: putting together the information, identifying candidates, managing the meetings, negations, due diligence and integration.

2) How will the firm inform other partners and when as to carrying aspects of the deal

Page 8: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

We have identified the information we shall seek

from merger candidates.

• Client make up

• Staff info including roles and compensation

• Partners: goals, what equity means, future

• Current ownership agreements and obstacles possible such as buyout formulas, vesting, mandatory retirement…

• Services offered, not offered

• Metrics

• Virus impact

Page 9: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

We have identified the must haves for target firms

with regard to fit in terms.

• Client make up

• Services offered

• Size

• Location

• Culture (3 tests)

• How the merger meets the short and long terms goals

Page 10: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Roadblocks to be

Prepared For Time

• Adversarial nature

• Messages you send

• Leaking pending to merger to

marketplace, clients, staff

• The 13th time you read the

agreement

• Opening door to competition

Page 11: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Roadblocks

• Unity of Partners

• Capacity

• Emotions

• Transition Issues

o Staff

o Clients

• IT

Page 12: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Roadblocks

• Equity

• Firm Name

• Communication

• Unneeded ‘must haves’

o Staff

o Leases

Some cultures tougher to mix then others:

▪ eat what you kill versus one firm client.

▪ Retainers, fixed fees, time and billing, value billing

Page 13: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Packaging Our Firm as an Ideal Solution:

Best Practices

Page 14: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Four C’s: The baseline for knowing you have the

right or wrong firm.

• Chemistry

• Capacity

• Continuity

• Culture

Page 15: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

We are prepared to share appropriate information about our firm

in order to create interest from candidate firms in our firm.

• Preparing a practice summary sheet

• An organization chart

• How decisions are made in the firm

• Platform of services offered

• Sharing ownership agreement

• What success looks like

Page 16: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Understanding Methods to Structuring the

Transition of a Practice through an External Sale

1. Straight sale

2. Merger

3. Two stage deals• Sell equity but stay on

• Best transition

Page 17: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

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

o What does equity mean when they merge?

o Are there retention elements?

o How does their compensation and role change?

o What about their buyout?

Page 18: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Five Main Variables for

Valuing a Practice

1. Cash up front, if any

• Dependent on time of year

• The deal’s cash flow

• Treatment of accounts

receivable

• Virus impact

Page 19: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Five Main Variables for Valuing a Practice

2. Retention clause/guarantee

• Collection deals, deals by percentage

• Fixed deals

• Limited guarantees

• Economy clause

• Virus impact

Page 20: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Five Main Variables for Valuing a Practice

3. Profitability

• 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* Virus impact

Page 21: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Five Main Variables for Valuing a Practice

5. Multiple

• Cause vs effect

o Multiple = effect

o Balance = cause

• Basic rule:

o Lower down payment, longer payout period

o Higher profitability, longer guarantees = higher multiple

• IT helping or hurting

• Buyer versus seller’s marketplace

Page 22: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

We are prepared to replace as necessary the

technology and other systems of a merged firm.

• How when are we integrating technology platforms.

• Is the IT conversation being done with or without outside sources

• Have we anticipated the costs; typically $10,000 per person. How financing? Other integration expenses

• Do we have a reasonable plan for training the personnel of an acquired firm on our technology systems?

Page 23: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Assessing Your Firm’s Succession Readiness

Two ways a partner can be replaced:

• Role re-allocation

• Role succession

Page 24: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Assessing Your Firm’s Succession Readiness

Role Re-allocation• If sufficient capacity and skill set: retiring partner’s duties are re-allocated to

remaining partners

• Can fix an over-partnered firm

• Assumes existing capacity for client management, technical expertise, admin duties

• Usually capacity still must be replaced to maintain revenue

Page 25: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Assessing Your Firm’s Succession Readiness

Role Succession• Don’t have excess partner capacity or

skill set-role must be replaced with a new partner

• Duties might still be shifted but existing capacity at partner level is insufficient in general

• Roles to be replaced include client management, practice development, special expertise

Page 26: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Assessing Your Firm’s Succession Readiness

Transitioning Roles

• 2 years minimum

• Active involvement of transitioning partner

• Replacement partners need to be staged

Page 27: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Assessing Your Firm’s Succession Readiness

Partner Succession Projection

RR=Role Reallocation RS=Role Succession

Partner 1-3 yrs 4-7 yrs >8 yrs

A RR

B RS

C RS

D RR

E RS

Page 28: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Our owner agreement is set up to handle all the

retirement buyouts of our partners without

putting a strain on the firm.

Using the litmus text

Page 29: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Retirement

• Methods for Valuing equity

oBook of business

o Equity

oCompensation

oHybrids

Page 30: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Niche Mergers

Barry Melancon during a speech Wednesday at the

Accountants Club of America:

“When you look at the top 400 firms, there are record numbers of mergers and acquisition activity of non-CPA firms,” he said. “We are

seeing those firms having to diversify skill sets and technology platforms and capabilities, and they have been doing that through acquisition of

other types of business enterprises to diversify within their own environment. About a third of the mergers and acquisitions that

occurred in 2019 actually were non-CPA firm acquisitions by CPA firms.”

Page 31: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

Niche Mergers

How to structure:

• Establish base compensation niche partners are currently making

• Guaranty their comp remains steady so long as their revenues and time commitment remain steady

• Key is how to share growth

• Are they partners in firm, separate entity?

• Buyout

• Cash upfront requests

Page 32: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

For More Information

Visit the AICPA Succession Planning Resource Center

https://www.aicpa.org/interestareas/privatecompaniespracticesection/strategy-planning/center.html

Page 33: Merger Readiness: Maximizing Best Practices Readiness Maximizing...Maximizing Best Practices Joel Sinkin, President Transition Advisors, LLC Transition Advisors, LLC National consulting

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

[email protected]

1-866-279-8550

www.TransitionAdvisors.com