August AquilaAQUILA Global Advisors

•August is the CEO of AQUILA Global Advisors, LLC which specializes in succession planning, mergers and acquisitions, compensation plans and transformational strategic planning

•Selected as one of the “Top 100 Most Influential People” in the Accounting Profession by Accounting Today in 2004, 2007, 2009 to 2011

•AAM Hall of Fame member, founding AAM Board Member

•Former partner in top 100 firm – Friedman, Eisenstein, Raemer & Schwartz (FERS)

•Former executive with American Express Tax & Business Services, Inc

Selection criteria more important than ever

Determine you firm’s philosophy

Characteristics of an equity partner

Personality traits of an equity partner

Know your numbers – Buy-In

Part 1

Do you currently have . . .

Too many partner employees rather than partner owners?

Too many underperforming partners? Too few rising stars? Just too many partners?

Scarcity of good people

Fewer entrepreneurs

Fewer employees want it

Firms facing profit squeeze

Strong fee competition

Succession issues

Part 2

 Some Considerations:

◦ Profitability of the Firm.

 ◦ Leveraging requirements to accomplish your

return on equity

◦ Overall growth of the Firm

 ◦ Individuals with unique talents

As a firm grows, should the number of partners also grow?

What are the firm’s expectation for gross revenue per partner, realization, etc?

What character and competence are critical?

Do you require some minimum level of origination?

Some minimum level of billings?

Would you depart from these levels and why?

Make sure you . . .1. Establish realistic policies and admission

criteria that majority of partners support. 2. Review them to ensure they remain realistic

with the passing of time. 3. Make certain that partners remain acutely

aware of the firm's policies and partnership admission criteria.

4. Improve the partner evaluation procedures to minimize the number of under-qualified candidates who receive actual consideration.

Part 3

Do itSolve it

Own itSee it

Versus

Ignore itNot my job

Finger pointingTell me what to do

Cover your tailWait &

seeSource: The Oz Principle

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Equity partners should be individuals with a high tolerance and passion for the risk of ownership

Individual > Firm Firm > Individual

1. My clients are the firm’s

2. I introduce others to my clients

3. I pass what I know on to others

4. Partner supports firm decisions

5. Management adds value through coordination

1. My clients are mine2. Don’t trust others

with my clients3. I hold on to what I

know4. My rights are

paramount5. Management

interferes in my plans

Positive Characteristics:

◦ Puts firm first◦ Team player◦ Lives the firm’s values◦ Has a high degree of emotional intelligence◦ Accountable for his/her own actions ◦ Staff want to work with him/her

Commitment to:

◦ the firm

◦ client service

◦ on-the-job training

◦ life-long learning

◦ the profession

◦ personal & professional ethics

Integrity Respect for others Entrepreneurial desire (motivation) Emotional intelligence Social presence Sense of humor (can laugh at him/herself) Embraces change Stretches oneself outside of comfort zone Accountable

Make sure the partner fits into the culture of your firm◦ Do they share the firm’s vision?◦ Are they motivated by it?◦ If they are getting on your bus are they in the right seat?

Categories1. Technical/Niche Excellence2. Business Development3. Client maintenance (Satisfaction/Retention)4. Business Management5. Personal Production6. Leadership7. People Developer

Does the individual bring a needed expertise to the firm?

Are they passionate about a specific industry?

Does the individual have a "professional identity" within and outside of the firm for skill in their specialty areas?

Acquire, develop, and retain clients The ability to develop and originate new

clients for the firm is one of the most significant criteria

Brings in business for self and others Will you admit someone into the

partnership without this skill?

Most firms encourage new partners to establish a professional relationship with clients

The ability of the partner to relate and interact with a client is an important factor to be considered

Do clients like working with the potential partner?◦ Measure client turnover

◦ Client loyalty

Client profitability

Billing and Collection◦ DSO WIP and A/R◦ Write downs

Clients managed (book of business)

Billable hours

Cash collected

Leverage

Help others Manage a department and/or a niche area Gain confidence of team, partners, and

clients Transfer client relationships Cope with change Firm fan

Provide on-the-job training and mentoring

Give staff the opportunity to get involved with clients

Staff stay at the firm because of the partner

Staff want to be on partner’s engagements

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Make sure you have a buy-out formula before you let someone buy-in

Needs to be fair

Discount?◦ Sweat equity ≠ what the market will pay. ◦ Average internal valuation is 65% - 75%

Average buy in amount around $110,000

How do owners determine a price? How and on what schedule should the new

partner make payments? What percentage of ownership should the

firm offer? What is the new partner actually buying?

An interest in accrual basis capital (ABC)

An interest in the goodwill (G) Firms use different approaches:

◦ An interest in both the ABC and in the G◦ An interest in the G (but no interest in the ABC

that exists as of the date of admission)◦ An interest in the G at a discount and full price for

the ABC

Some firms may offer a better price and larger ownership because new partner has brought in a lot of business

Some firms may offer a small ownership percentage for free based on contributions that new partner has made to the firm

Some firms believe new partners should pay full value and seek full payment of the purchase price, which includes both the accrual-basis capital (ABC)—that is, the equity of the partnership interest—as well as 100% of the “goodwill” value (G), defined as 100% of gross fees

Facts: The owners give an interest in the G (but no interest in the ABC that exists as of the date of admission).

The owners retain 100% of the tangible assets but give the new owner a share of the intangible asset (G). The new owner shares in the future growth of the tangible assets

Example: Individual gets a 5% interest in the G and the existing ABC is $1 million

If a year later the ABC is $1.2 million, the new owner now has a 5% stake in the increase, which would equal $10,000 (that is, 5% of $1,200,000 – $1,000,000 = $200,000 X .05 = $10,000).

Facts: An interest in the G at a bargain price e.g. 75% of current value.

Firm grosses $2 million (G value) and has $500,000 in ABC.

The new person buys a 5% interest at full price for the ABC and pays for only 75% of the value for the G portion

Example: The new owner pays a total of $100,000

The full price for the ABC (5% of $500,000 = $25,000)

Plus the 75% price for the G (5% of $2,000,000 X .75 = 1,500,00

5% x 1.500,000 = 75,000).

Facts: Firm grosses $2m, ABC = $500,000 Buys a 5% interest in the G at full price

(that is, 100% of current value) and 5% interest in the ABC at full price

Example, owners who require the new owner to pay full price for the 5% interest in both the ABC and G, would obtain $125,000.

5% x 500,000 = $25,000 plus 5% x 2,000,000 x 1 = $100,000)

This has been a brief overview of what needs to be considered when you bring in a new equity partner.

The key is to have crystal clear guidelines for admitting an equity partner.

Determine what is right for your firm.

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What did I forget to address?

For a free consultation please contact:

August J. Aquila952-930-1295aaquila@aquilaadvisors.com

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THANK YOU –

YOU’VE BEEN A GREAT AUDIENCE