Mergers of Accounting Firms: The Why, How and

With Whom to AffiliateJoel Sinkin, PresidentTransition Advisors

Transition Advisors◊ About Us

• 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:

• 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 ◊ 866.279.8550 ◊ jsinkin@transitionadvisors.com

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 bycombining with another firm

2.Firms seeking to solve a problem

Know your reasons… Know the other firm’s reasons…

Why is Activity So High?

• 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

• 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• Terms … economy impacts terms

• Are clients partner-loyal or brand-loyal?

• Transition Plan

• Capacity to takeover the retiring partners

• 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 …

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

EquityCompensationFunded vs unfundedCapital accountsWork backwards formula

Retirement: Partnership Agreement

◊ Terms• 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

• 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

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 Sinkinjsinkin@transitionadvisors.com

1-866-279-8550www.TransitionAdvisors.com