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Connecticut CPA
May/June 2013
clients have grown accustomed to
the successor firm once the buyout
begins and retention is no longer the
concern it once was. The secret to the
two-stage deal is how you position it to
your client base. You should showcase
it as the gain of the successor firm, not
the loss of your firm!
Deal Structure
The last thing but one of the most
critical issues to address in any trans-
action is deal structure.
Since you are dealing with an intangi-
ble asset, both parties would obviously
like to mitigate their risk factors. The
three questions we are probably asked
the most often, in order, are: what's
the multiple, what's the multiple, and
what's the multiple?
Larger firms traditionally use a multiple
of compensation in deal structures,
typically two to three times the aver-
age annual compensation for a part-
ner, paid out anywhere from eight to
ten years. Smaller practices tend to
buy out partners based on a multiple of
their equity in the firm typically from
.75 to 1.25, with obvious exceptions,
again paid out over time.
However, while most buyers and sellers
want to focus exclusively on the mul-
tiple a practice is sold for, you need to
remember that the multiple is the effect
not the cause. The causes include how
much money is paid upfront (if any),
length of the payout and retention peri-
ods, and the profitability of the transac-
tion, including tax treatments.
Here is a simple litmus test to ensure
your buyout formula works: Take the
retiring partner's compensation and
subtract that figure from the cost of
their replacement labor (if any), cou-
pled with the retirement payments.
If the difference is a positive number,
then the purchase price is self-funding.
If it's negative, then it is highly likely
that it's an unworkable deal nobody
will have an incentive to buy out a retir-
ing partner only to make less money.
Remember, any effective succession
plan (whether internal or external)
should allow an owner or retiring part-
ner the opportunity to monetize his or
her assets, ensure the success of the
consolidated practice going forward,
and allow for the development of the
firm's future leaders.
paid advertisement
Joel Sinkin is presi-
dent and Bill Carlino
is managing director
at Transition Advisors,
a national consulting
firm specializing in
ownership succes-
sion and transition
strategies for CPA
firms. They can be
reached at 1-866-
279-8550 or www.
Joel Sinkin
Bill Carlino
Remember that key components to any successful
transition are client retention and satisfaction.