Succession Planning for Small to Midsize Firms—Ensuring a Smooth Transition June 23, 2010

1. Succession Planning for Small to Midsize Firms—Ensuring a Smooth TransitionJune 23, 2010 August Aquila AQUILA Global Advisors, LLC

2. Introduction

3. Pop Quiz: When will you start? • Please answer only one of the following • Have started plan • Will start in next 2 years • Will start in next 5 years • Will start in next 10 years • Plan drafted • No need

4. The Current Succession Landscape • Sole Practitioners • Have started plan 17% • Will start in next 2 years 43% • Will start in next 5 years 23% • Will start in next 10 years 3% • Plan drafted 3% • No need 10% Source AICPA 2008 Succession Planning Survey • Multi-Owner Firms • Have started plan 35% • Will start in next 2 years 32% • Will start in next 5 years 10% • Will start in next 10 years 3% • Plan drafted 9% • No need 10%

5. Succession Planning Challenges • Sole Practitioners • Current 14% • Next 1 to 2 years 18% • Next 3 to 5 years 33% • Next 6 to 10 years 27% • More than 10 years away 5% • No challenges 3% • Multi-Owner Firms • Current 20% • Next 1 to 2 years 13% • Next 3 to 5 years 30% • Next 6 to 10 years 17% • More than 10 years away 3% • No challenges 16%

6. Those Were the Days

7. Welcome to Today!

8. Major Challenges Today • Future partner shortage • Competitive battles • Regulatory changes/Standards overload • Higher client and staff expectation • Lack of desire to engage in business development activities by many partners • Unfunded retirement plans

9. Why We Put off Succession Planning • Retirement seems a long way off, too early to start • We don’t like to think about it • We don’t even want to retire • The thought of anyone else running the firm is painful • You’re too busy to plan for succession • No one can do it better • The firm would be nothing without me

10. Think About This “This firm would be nothing without me.”

11. Why We Put off Succession Planning (cont.) • I’m the key rainmaker • Don’t talk to me about succession • Next in command is not a threat • Younger partners not ready • Internal political issues • I don’t want to transition clients • Senior partners won’t retire • What will I do with my life? • What will my spouse do with me?

12. Questions to Consider • Who will take over when you are ready to retire? • How has the firm changed since the last transition? • What skills will new leaders need to succeed? • Do you have a process to follow?

13. Questions to Consider (cont.) • Do you have a succession plan? • Is some or all of your retirement plan funded? • Do you expect to be bought out? • Do you know who will buy you out? • Do you have a fixed date?

14. What are the options?

15. Time to Face Some Hard Issues • What do you want to do with the practice? • What is the firm doing to plan for management succession? • Who will make the choice for you? • What are you doing to ensure that current management will be replaced by a person able to meeting future challenges in a rapidly changing environment?

16. Succession Planning Options • Do nothing • Split up • Sell • Merge • Internal transition • Bring people in • Practice continuation (sole practitioners)

17. Which Option is Best for You? • What could be best for your firm? Select 2 from above) - Option One - Option Two

18. “It makes no difference what size practice you have, the primary goal for future management is continuation of a growing profitable professional practice following the retirement or demise of present management.”

19. Reality Bites • 72% don’t have funded retirement plans • Senior management stays in place too long • Firm founder is also key rainmaker • Founder/MP wears many hats • Successors come from within

20. Your Primary Goals • Safeguard practice • Plan for your own retirement • Install a successor • Let go of the practice

21. Let’s Just Live with Ambiguity • Ultimate management challenge • Addresses your mortality • Touches wide range of emotions • Why can’t we just ignore the topic?

22. Rewards to Those Who Plan • Liquidity • Provide new owners opportunities • Enhance value of your firm • Release energy of successors

23. How to do it

24. Nine Step Approach • Separate personal identify from practice • Develop 3 prong plan • Get independent valuation • Cultivate a team • Develop other interests • Create your succession plan

25. Nine Step Approach (cont.) • Have a partnership agreement • Choose a successor • Develop plans for successor

26. 1. Separate personal identify from practice

27. 2. Develop 3 prong plan • Develop strategic plan for the firm • Develop your own retirement • Develop an estate plan to protect your assets

28. 3. Get independent valuation • Multipliers – Revenue or Book Size • More than $1 on the $1 7% • $1 on the $1 42% • 95 cents on the $1 2% • 90 cents on the $1 3% • 85 cents on the $1 2% • 80 cents on the $1 7% • 75 cents on the $1 14% • 70 cents on the $1 3% • 65 cents or less on the $1 13%

29. Get independent valuation • Multipliers – Salary • Less than one year’s salary 6% • One year’s salary 8% • One year’s salary x 1.5 3% • One year’s salary x 2.0 17% • One year’s salary x 2.5 14% • One year’s salary x 3.0 38% • One year’s salary x 3.5 3% • More than one year’s salary x 3.5 5% Source: AICPA 2008 Succession Survey

30. What is a Fair Buyout Amount? • Accrual basis capital account (ABC) • Paid over 5 years • Often with interest • Goodwill (computed on cash basis) • Larger firms use a multiple of compensation • Smaller firms use a calculation base on fees • Usually paid out over 10 years • No interest • Annual cap on payments • Usually 5-10% of revenue

31. 4. Cultivate a team • For multi partner firms • Learn to delegate • For sole practitioners • Trusted advisors • Spouse • Outside consultant

32. 5. Develop other interests • What are your outside interests? • Civic, charitable work • Other business interest • Travel • Education • Etc.

33. 6. Create Your Succession Plan It’s All About Options

34. 7. Have a partnership agreement • Mandatory retirement age from partnership • Client transition tied to benefits • Total dollars to be paid in any one year • Partner termination with or without cause • Vesting period • Partner disability

35. 8.Choose a successor • What is your process? • Anoint the next leader • Hold an election • Make it a competitive process

36. 9. Have a plan for the successor • Identify specific competencies • Provide informal coaching by assigned partner • Give on-the-job training opportunities • Offer formal training in interpersonal skills • Make available formal training in delegation and supervision • Send future leader to external leadership training program

37. Getting Started

38. Getting Started • Hold a brainstorming meeting • Failure to plan . . .

39. When Do You Start? • When you reach mid 50s • Gives you a 10+ year window • Know when to leave • Sell at the top of your game • Tie succession/retirement plan to your personal wealth accumulation

40. Are you ready to let go? • Will I be financially secure after retirement? • Have I identified a successor? • Have I announced a firm date for my retirement? • Do I believe that there is meaning to my life outside of the practice? • Do I have new challenges to look forward to after retirement? • Am I committed to an effective succession plan? • Can I delegate authority to others?

41. SCORE • 7 yeses - you didn’t need this webinar • 6 yeses - you are almost there • 5 yeses - you are more than half way there • 4 yeses - start getting serious • 3.yeses - get an outside advisor • 2 yeses - at least you are thinking • 1 yes - you are either under 40 or plan to work forever

42. Questions • What did I forget to say? AQUILA Global Advisors, LLC 952.930.1295

43. Resources • Practice Continuation Agreements: A Practice Survival Guide, Second Edition by John A. Eads, AICPA • Compensation as a Strategic Asset by August Aquila and Coral Rice, AICPA • AICPA/PCPS Human Capital Resource Center www/aicpa.org/pcps

44. For More Information or Help • For a free consultation please contact: August J. Aquila952-930-1295 aaquila@aquilaadvisors.com