CPA firm mergers & acquisitions : how to buy a firm, how to sell a firm, and how to make the best deal

260 Pages·2014·4.5 MB·English

by  Putney

CPA
FIRM
&
How to Buy a Firm, How to Sell a Firm,
and How to Make the Best Deal
14410-349
Joel L. Sinkin
Terrence E. Putney, CPA
14410-349_CPA Firm Mergers & Acquisitions_Title Page.indd 1 11/25/13 12:21 PM
Notice to Readers
CPA Firm Mergers and Acquisitions does not represent an o cial position
of the American Institute of Certi ed Public Accountants, and it is
distributed with the understanding that the author and publisher
are not rendering legal, accounting, or other professional services in
the publication. This book is intended to be an overview of the topics
discussed within, and the author has made every a empt to verify
the completeness and accuracy of the information herein. However,
neither the author nor publisher can guarantee the applicability of the
information found herein. If legal advice or other expert assistance is
required, the services of a competent professional should be sought.
Copyright © 2014 by
American Institute of Certi ed Public Accountants, Inc.
New York, NY 10036-8775
All rights reserved. For information about the procedure for requesting
permission to make copies of any part of this work, please email
[email protected] with your request. Otherwise, requests should be
wri en and mailed to the Permissions Department, AICPA,
220 Leigh Farm Road, Durham, NC 27707-8110.
1 2 3 4 5 6 7 8 9 0 SP 1 9 8 7 6 5 4
ISBN: 978-1-94023-512-7
Publisher: Linda Prentice Cohen
Acquisitions Editor: Erin Valentine
Developmental Editor: Suzanne Morgen
Project Manager: Amy Sykes
copyright page (print).indd 2 12/3/2013 5:30:54 PM
CONTENTS
Chapter Page
AbouttheAuthors ix
Acknowledgments xi
Introduction xiii
1 TheMarketplace 1
WhatAretheMarketplaceTrends? 2
TheOverallEconomyandCPAFirms 2
InternationalTrends 4
TrendsinCPAFirmDemographics 4
TechnologyTrends 7
GenderTrends 8
WhereDoFirmsStandonSuccession? 9
So,IsItaBuyer’soraSeller’sMarket? 10
SizingUptheSeller 11
ShiftsintheMid-SizeFirmMarket 11
GetAheadoftheTrend 12
ExceptionstotheRule 13
Let’sTalkTechnology 14
FindingAlignment 15
2 Succession:GettingtheTimingRight 17
LetMeCounttheDays 17
WhereDoClientLoyaltiesLie? 19
UniqueSkills 20
WhatAreYourCommitments? 21
PersonalandProfessionalRoadblocks 22
CommittingtoRetirementorSaleofOwnership 24
JumpStartChange 25
SoonerRatherThanLater 27
ActionAgenda 27
3 HowtoChooseaSuccessorYouandYourClientsWillLove 29
ThinkAbouttheFourCs 30
Chemistry 30
Capacity 32
Culture 32
Continuity 33
iii
CONTENTS
Chapter Page
3 HowtoChooseaSuccessorYouandYourClientsWill
Love—continued
WhatIstheWorstThatCouldHappen? 34
SmartWaystoSmooththeTransition 35
WorththeEffort 38
ActionAgenda 39
4 OurManagersWillBuyUsOut,Right?SpeedBumpstoAvoidon
theRoadtoInternalSuccession 41
WhatIsonYourPartners’Minds? 42
StrengtheningthePartnershipAgreement 43
ProtectAgainstRisk 44
CoverAlltheAngles 45
BeSureItIsaWorkablePlan 46
WhoShouldLead? 47
TrainingFutureLeaders 47
NonequityPartners 49
UsingMergersforLeadershipDevelopment 53
DoNotOverlookTheseKeystoMakingaDealWork 53
TheBuyoutFormulaMustBeAttractive 53
LifestyleIssuesHaveBecomeMoreImportantto
YoungerPotentialSuccessors 54
LeadershipIsaCriticalAttributeforSuccessors 54
KeepSuccessioninMindWithEachNewHire 55
TeamworkIsEssentialtoSuccess 55
WilltheTransitionWork? 55
TransitioningClientRelationships 57
IdentifyCriticalIssues 58
Don’tForgettheSafetyNet 59
ActionAgenda 59
5 WhatIsaFirmWorth? 61
ExternalVersusInternalSales 61
WhatIstheMultiple? 62
NegotiatinganInternalSale 63
AWillingSellerStillNeedsaWillingBuyer 66
EffectofTaxTreatmentandInterestonDeferredPayments
inBuyoutTerms 72
iv
CONTENTS
Chapter Page
5 WhatIsaFirmWorth?—continued
UsingMergersandAcquisitionstoBuildaSuccessionTeam
andPreserveValue 72
PositioningtheFirmforPossibleMerger 75
WhatYouNeedtoKnowAboutExternalSales 76
NetTangibleAssets 77
TheIntangibleValue 78
TheStructureofanAcquisition 79
PriceEqualsValuePlusTerms 81
FactorsThatAffectValue 82
APracticeofUnder$1Million 82
NegotiatingaDealforaLargerFirm 88
TypesofClientsandServices 88
Staff 88
NewMarketplaces 88
Capacity 89
StepstoIncreaseValueBeforeYouSell 89
ActionAgenda 94
6 AlternativeDealStructures 95
ImmediateBuyout 95
TheTwo-StageDeal 97
TheCullOutSale 101
MergersVersusAcquisitions 103
CombinationDealsinMergers 104
AddingItUp 107
RelativeValuesofTwoFirmsinMergers 107
CompensationGaps 108
DealingWithConflictingPolicies 111
OtherPostmergerIssues 112
ClientTransition 112
AdvisingClients 112
WhatIsLeftHanging 113
Perks 113
TheRightDealforYou 114
ActionAgenda 114
v
CONTENTS
Chapter Page
7 ManagingMergerMinefields 115
ReasonsSomeMergersFail 115
MergersfortheWrongReasons 116
PoorDealStructure 116
BusinessPlanExecution 116
DifferencesinOverheadandProfitability 117
Transition 118
Equity 119
BillingRates 119
DifferencesintheClientExperience 120
DifferencesinQualityControlSystems 121
AFailuretoCommunicate 121
Ego 121
Timing 121
PotholesinthePartnershipAgreement 123
DoNotForgetAccountsReceivableandWorkinProcess 125
Let’sCalltheWholeThingOff 127
TermstoAddress 130
WhenaDe-mergerClauseIsDefinitelyNot
Appropriate 132
PartialDe-mergers 133
MergerCosts 133
CombinationAffiliations 133
ActionAgenda 133
8 ThePowerofaPracticeContinuationAgreement 135
WhyPCAsMatter 136
AnExitStrategy 138
WhatIsinaPCA? 140
TheTriggeringEvents 140
CompensationTerms 141
RestrictiveCovenants 142
YourPCAPartner:ATrustedInternalEmployee 142
YourPCAPartner:ASuccessorFirm 143
Capacity 144
ClientServiceApproach 144
ServicePricing 145
vi
CONTENTS
Chapter Page
8 ThePowerofaPracticeContinuationAgreement—continued
Expertise 145
PartnerDemographics 145
CultureorChemistry 145
DoNotOverlooktheSmallStuff 146
WhyaPCAIsNotaGoodRetirementVehicle 146
PlanfortheBusinessofTransition 147
PlanningforLeadershipInterruption 148
ActionAgenda 149
9 TheKeystoDueDiligence 151
LayingtheGroundwork 152
WhatIsDueDiligence? 152
Timing:WhenShouldtheDueDiligenceReviewBegin? 153
PreliminaryVersusFieldDueDiligence 154
ProtectingProprietaryInformation 156
ConductingFieldDueDiligence 157
FieldDueDiligenceforBuyersandSuccessorsin
Mergers 157
FieldDueDiligenceforSellersandFirmsMerging
Upstream 163
DealTermsandDueDiligence 167
ReactingtoDueDiligenceFindings 167
ActionAgenda 167
10 GettingtheTransitionJustRight 169
ClientRetention 170
TimingoftheAnnouncement 170
TheMessage 170
IntroducingtheSuccessor 171
InvolvementofBothFirmsintheCommunication
Process 171
TheSeller’sTimeCommitmenttotheTransition 171
StaffRetention 173
InformtheMostSeniorStaffMembersFirst 173
MakeaSpecialAnnouncement 174
SendanUpbeatandPositiveMessage 174
TackleCompensationandBenefitConcerns 174
vii
CONTENTS
Chapter Page
10 GettingtheTransitionJustRight—continued
AddressEmploymentAgreements 174
ClarifyReportingRelationships 175
EmphasizeCareerOpportunities 175
OrientNewEmployees 175
MaintainanOpenDialogue 175
TheTransitionPlan:StepstoConsider 175
ActionAgenda 178
11 TheArtoftheDeal 181
WhentheFirmOpensItsDoors 181
IftheFirmIsAlreadyUpandRunning 182
IfYouArePlanningonInternalSuccession 183
IftheFirmIsVerySmall 183
WhenYouAreConsideringaDeal 184
WhenYouAreReadytoMeetCandidates 184
WhenYouAreThinkingAboutTiming 185
WhentheDealIsBeingFinalized 186
EmbracetheOpportunities 187
Appendix Page
A NationalManagementofanAccountingPracticeSurveyData 189
B AnnualSuccessionPlanningChecklist 195
C SamplePracticeContinuationAgreement 199
D SampleClientAnnouncements 209
E DueDiligenceTools 213
F SampleTransitionLetters 239
G PracticeSummarySheets 249
viii
A A
BOUT THE UTHORS
Joel Sinkin is the President of TransitionAdvisors, LLC, a firm that
exclusively consults on mergers and acquisitions for public accounting
firms. Mr. Sinkin, who has been named on Accounting Today’s list of the
Top 100 Most Influential People inAccounting, is an expert in practice
evaluation, succession planning, and transaction structure. He has
personally overseen hundreds of transaction closings of accounting
firms since 1990 and has worked with firms of all sizes, from sole
proprietors to large regional and international firms. He consults on
internal and external succession planning and provides complete
transaction support, including valuations, alternative deal structures,
documentation, due diligence, and transitional issues regarding
partners, staff, and clients.
To create a new type of consulting firm that offered a fresh approach to
accounting firm succession and growth, Mr. Sinkin joined forces with
Terrence E. Putney, CPA, in 2004 to form TransitionAdvisors LLC.
TransitionAdvisors is dedicated to working exclusively with accounting
firms nationwide to develop and execute strategies to expand through
mergers and acquisitions, to identify objectives and create unique
methods to facilitate retirement and other owner transitions, and to
build business plans and owner agreements to facilitate and manage
internal succession.
Mr. Sinkin teaches CPE courses and lectures for theAICPA, many state
societies of CPAs, national accounting organizations, and many other
professional organizations. He is frequently quoted in trade magazines
and has authored or been quoted in articles including the Journal of
Accountancy, Accounting Today, CCH’s Practice Management Forum, The
CPAJournal, Insight, The Practicing CPA, the Practical Accountant, Inside
Public Accounting, CPAPractice Management Forum, The New Jersey CPA,
The Sum News (Massachusetts Society of CPAs), The Diplomat, Florida
ix
CPAFIRMMERGERSANDACQUISITIONS
CPAToday, The Business Journal, the MNCPAFootnote, The Asset, CPA
Leadership Forum Report, CPAWealth Provider, and Mergers & Acquisitions
Best Practices in People Management For a Changing Environment (a
Watson Wyatt publishing product). He coauthored Buying and Merging
CPAFirms, published by PPC. Mr. Sinkin is an editorial adviser to the
AICPA’s newsletter Small Firm Solutions and a member of The CPA
Journal Editorial Review Board.
Terrence E. Putney, CPA, brings his unique experience in both the
accounting and merger and acquisition disciplines to his role as CEO of
TransitionAdvisors. Mr. Putney, who has been named in Accounting
Today’s list of the Top 100 Most Influential People inAccounting, has
over 35 years of experience as a practicing CPA, as president and CEO
of a large CPAfirm, as a partner leading mergers and acquisitions for a
national accounting firm, as a corporate executive responsible for
building and leading professional service strategies, and as a consultant
to accounting firms of all sizes.
After leading 5 years of unprecedented growth as President and CEO of
Donnelly Meiners Jordan Kline in Kansas City, Mr. Putney negotiated
the sale of the firm to form the foundation of HRB Business Services
and became the first president of this accounting firm consolidation
strategy. The firm expanded to over 1,000 professionals in its first year
through the acquisition of large local firms forming regional platforms.
He led the transformation of HRB Business Services into RSM
McGladrey after its acquisition of the nonattest assets of McGladrey &
Pullen in 1999.
As Senior Managing Director-Mergers and Integrations of RSM, he
participated in managing the growth of the firm through acquisition to
its position as the fifth largest accounting firm in the United States
before its sale back to McGladrey & Pullen in 2011. He then successfully
launched a pilot program to offer accounting and tax services under an
alternative branding strategy as vice president of the small business
resources division of a Fortune 500 professional services firm in 2002.
He fulfilled a personal goal to return to his first passion, consulting,
and bring the knowledge and personal experience he gained firsthand
back to the accounting profession when he joined with Joel Sinkin to
form TransitionAdvisors in 2004.
An accounting graduate of Kansas University, Terry is a licensed CPA
and a member of theAICPAand the University of KansasAccounting
and Information SystemsAdvisory Council. He is a frequent speaker at
conferences and is regularly published in accounting profession
magazines. He has been published in the Journal of Accountancy, CCH
Practice Management Forum, and The CPAJournal.
x