Source: CPA Practice Management Forum

Joel Sinkin and Terrence Putney (Accounting Transition Advisors) write about internal and external acquisitions. Here are highlights.

Internal Sales
Succession plans may require two years' retirement notice. This allows the value of a partner's interest to be fixed at the retirement date. If adequate notice is not given, the payments may be subject to adjustment for actual client attrition.

• Valuing an internal sale:
  • Firms over $25 million -- multiples are generally two to three times annual partner compensation. Payout periods range from seven to 12 years.
  • Firms under $25 million -- generally a multiple of the partner's equity percentage times the firm's revenue, typically in the range of 0.6 to 1.25. A multiple of one is common.
• Other considerations:
  • Interest is not normally paid on the deferred payments.
  • Typically, tangible equity (accrual basis) is added to the above valuations and paid out over the same time period as the intangible value.
  • A cap on annual payouts is recommended, usually from five to 15 percent of revenues.
• Retired partner may want to continue part time. This can be good for the firm:
  • It helps with client retention.
  • Younger partners have more growth opportunities.
  • Their skills may be of great benefit to the firm.

External Sales

• The recession has negatively affected the amount of cash paid up front. Some deals are being consummated with no cash up front.
• Profitability of the firm being acquired should be adjusted for valuation purposes to account for potential economies of scale and differences in billing rates. (Work formerly performed by partners may now be performed by managers or seniors at lower rates.)
• Payouts are generally five to 10 years.
• The lower the up-front cash, the longer the payout period, the more profitable the deal, the higher the multiple.

Value Depends on Supply and Demand
The supply and demand effects will not be the same for all firms. They will vary with location (metropolitan area firms may be more desirable) and size (larger firms may have fewer potential buyers).

The Economy
Contrary to most predictions, the recession has not decreased valuations for firms that are willing to sell with retention adjustments and smaller up-front payments.

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From CPA Practice Management Forum, CCH Incorporated, 800-449-8114, December 2009, p. 5, "Succession Planning -- Valuing Partner Equity in Larger Firms."

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