Q&A - Is a Merger Right for My Firm or Should I Stay Independent?

Q: We have one of our partners in our group that has determined to retire early (15 years) and in our agreement says he can with changes in deferred comp payout. He has noted this will occur on 1/1/2022 (there has been 0 transition thus far and he will help with that).  Have you seen this before? Can a firm continue to exist or is it essentially a forced  sale for us? 

A: Yes we have seen this prior and it is more than difficult. The key was not having the “right” protection within the ownership agreement. For example, a clause that if you retire without a minimum of 2 years notice will add in a retention period so that if clients are lost you make less, vesting periods, etc… But the damage is done and without reviewing your ownership agreement assume you are stuck in this position.

If you do not have the expertise and capacity to replace this partner you have limited options that include:

• Identifying a partner level person from within or externally to replace the partner leaving. Very hard in today's market but a possibility
• Culling out the clients you can no longer manage due to capacity or skill set and selling that portion of your firm

Merging into a  larger firm who has the talent and capacity to help you with this horrific situation you are in as well as provide potentially a larger platform of services, better technology, long term succession  and other benefits. Happy to discuss your situation via a phone call.

Q: What is a rule of thumb for a valuation of a small CPA - tax firm?

A: It varies based on many things. For example profitability, rates, nature of clients, etc… The multiple is the effect. The cause is how much money upfront if any, how long is the payout and retention period, can I absorb your firm into my location or do I need to retain yours….On our website; transitionadvisors.com are many articles on valuations. Typically the range we are currently experiencing in small tax firms are .7 to 1.1 depending on terms and other such things. This article may be helpful:  https://www.transitionadvisors.com/files/content/FiveVariables_Dec18.pdf

Q: What is transition advisors process to a two step deal?

A: A good toll to understand it better is likely you reading the attached article. It is somewhat dated but still gets you the info you are seeking: https://www.transitionadvisors.com/files/content/Articles%20Combine_v3.pdf:

Q: What do you think of SBA 7A loans being used to buyout Partners?

A: Not our favorite way but if the rest of the terms, the retention period, the profitability, and the rest of the deal makes sense, with todays low interest rates it can be made to work but is far from the typical method utilized. 

Q: What are you seeing today for the multiple of sales for mid-sized firms?

A: Most mid-sized firms don't purely sell, some partners stay on and exchange equity in their firm for equity in the successor firm. If all or some are selling, it can greatly range in value based on the nature of the clients, the duration of the payout and retention period, nature of the services provided…obviously if I am paying a retiring partner over 10 years based on client retention versus 5 years with a fixed valuation, the multiple will be very different. Also many firms are trying to make sure the buyout they pay for external firms is not that different than internal valuations which typically range from 2X to 3X average compensation of the partner retiring. Happy to have a call and provide more insights

Q: We only have equity partners. What is different for an income partner?

A: That can range. Many firms provide no buyout or vote for a non-equity partners, some give them a buyout but a smaller one and or a smaller voice.  The key is using it correctly. We prefer it not being solely used as a retention tool but as a steppingstone toward equity.

Q: In firms where there are multiple partners and the partner group disagrees about the future path, how do firms get to a point of decision-making where all partners feel heard and have the ability to ensure their best value going forward?

A: Always a challenge. We have performed many retreats and general consulting work where we delve into trying to help identify short- and long-term firm goals, how that matches up with individual partners goals and what tools we can use to find a place that works for all. Sometimes that's working it out internally, sometimes it requires a merger. The key to remember is that if we don't make sure the firm survives, independently or as part of a new firm,  everyone loses. I'd welcome speaking about it further if you would like too.

More Questions? We are happy talk more...

Joel Sinkin: [email protected]

Terry Putney: [email protected]

Call:  1-866-279-8550 | Visit: www.TransitionAdvisors.com