Succession Planning for Small to Midsize Firms—Ensuring a Smooth Transition October 19, 2010

1. Succession Planning for Small to Midsize Firms—Ensuring a Smooth TransitionOctober 19, 2010 Presented by August Aquila, CEO AQUILA Global Advisors, LLC

2. AQUILA Global Advisors, LLC • August is the CEO of AQUILA Global Advisors, LLC which specializes in succession planning, mergers and acquisitions, compensation plans and transformational strategic planning • Selected as one of the “Top 100 Most Influential People” in the Accounting Profession by Accounting Today in 2004, 2007 and 2009 • Former partner in top 100 firm – Friedman, Eisenstein, Raemer & Schwartz (FERS) • Former executive with American Express Tax & Business Services, Inc • August counts among his CPA clients firms ranging from more than $110 million in revenue to as small as $1 million. • What differentiates August from other advisors is his unending devotion to implementation and his in-depth knowledge and experience

3. AQUILA Global Advisors, LLC • Compensation Plans • Mergers & Acquisitions • Strategic Planning • Succession Planning

4. Program Agenda • Current Succession Planning Landscape • Recent Survey Results • Getting Started – Working on the firm not in it • Value creation

5. Participants’ Input • What do you want to achieve today? • What will be your greatest take away?

6. Current Succession Planning Landscape What You Need to Know

7. “Failure to plan for succession is the greatest current threat to the future of the accounting profession and should be the firm’s most important strategic issue”

8. “Succession Planning is about creating opportunities” August Aquila

9. Those Were the Days

10. Welcome to Today!

11. Retiring Owner Concerns • Will I get paid? • Will the clients stay? • How will the payments be structured? • Capital gains or ordinary income • Should I sell the firm or merge? • Should I sell now or wait?`

12. Non-Retiring Owners & Others • Can we afford to pay THIS MUCH? • Can we retain his/her clients? • Should we put a cap on our retirement payments? • Should we have a mandatory retirement age?

13. 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%

14. 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%

15. Personal Challenges to Transitions • No one does it better • Key rainmaker • Don’t talk to me about succession • Next in command is not a threat • Younger partners not ready • Internal political issues • Won’t transition clients • Senior partners won’t retire

16. Personal Challenges to Transitions • Succession planning is the ultimate management challenge. • It addresses our own mortality. • It deeply touches a wide range of emotions: • Dreams (met and unmet) • Hopes • Security • Relationships with family and co-workers • Ambitions • Fears

17. GETTING STARTED Working on the firm, not in the firm.

18. Nine Step Approach • Separate personal identify from practice • Develop 3 prong plan • Determine what your practice is worth • Cultivate a team • Develop other interests • Have a well-written partnership agreement • Choose a successor • Develop plans for successor • Create your succession plan

19. “It’s easier to live with ambiguity”

20. Elements of Succession Planning

21. Your Primary Goals • Safeguard the long-term health of the practice • Ultimately plan for your own retirement security • Prepare for and install a successor • Let go of a business that you spent a lifetime building

22. Exercise I It’s Time to Face the Music!

23. Exercise I Let’s Face the Music • 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 afixed date?

24. Exercise II. Succession Planning Options • What do you think is the first and second best choice for your firm and why? • Do nothing and eventually let the practice die • Split up • Sell to consolidator (such as McGladrey, Cbiz, Fiducial) or an independent public accounting firm • Merge – downstream, upstream or lateral • Bring in people to take over • Transition to existing group of employees

25. Some Deadly Mistakes • “This firm would be nothing without me.” • 72% don’t have funded retirement plans • Senior management stays in place too long • Firm founder is key rainmaker • Founders/MP wear too many hats • All or most partners come from within “In the US our heroes die with their boots on. They don’t fade into the sunset.”

26. STEP 1Separate personal identify from practice • What is the value of the practice without me? • How can I transfer what I do to others? • How do I pass on my skills? • How do I pass on my business and client relationships? • How do I start taking a secondary role in the firm?

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

28. Do You Have to Control Everything? Learn to delegate How do you start giving up control?

29. STEP 2 Develop 3 prong plan • A strategic plan for the firm • A policy around funding or not funding partner deferred compensation plans • A personal financial security plan for the retiring owner, including an estate plan for your spouse, children

30. Strategic Plan for the Firm • What do you want the firm to become? • What do you need to do to realize this dream?

31. Planning Options • Funded plan • Unfunded plan • No plan

32. Funded Retirement Plans • Trade off between current compensation and long-term security • Funding with qualified retirement plans • Tax deductions for funding the plan • Assets protected from creditor claims • Qualified trust earnings are tax deferred • Qualified plan should not discriminate in favor of highly-compensated employees

33. Funding Retirement Plans • Funding with non-qualified plans • Funding a non-qualified plan does not results in a tax deduction • Creditor claims can erode plan assets • Can discriminate in favor of highly compensated owners • Plan earnings are currently taxed to the firm

34. Unfunded Retirement Plans • Based on trust and goodwill • Pay as you go • Base on agreed upon valuation formula • Equity or multiple of compensation • Return of owner’s capital

35. No Retirement Plan Concept • Very small buy in and very small buy out • Typical law firm retirement plan

36. STEP 3. Determine What Your Practice Is Worth • 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% *Source AICPA Succession Planning Survey

37. Determine What Your Practice Is Worth • 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

38. 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

39. STEP 4. Cultivate a Team and Delegate • Learn to delegate • Identify your transition team • Build their competencies • Create trust in the organization

40. Case Study • Single owner • Two managers • Firm has revenue in excess of $700,000 • Owner has transitioned 5080% of work to the two managers • Margins 45%+ • Should the owner sell to the managers or look for a firm to buy him/her out?

41. How will you live the second part of your life?

42. STEP 5 DEVELOP OTHER INTERESTS • What will you do with the rest of your life? • New business opportunities • Civic, charitable endeavors • Travel, play golf, etc

43. Step 6 Have a Partnership Agreement • Key Partnership Agreement Issues • Mandatory retirement age from partnership • Client transition tied to benefits • Cap total dollars to be paid in any one year • Determine vesting period • Define partner disability

44. Key Partnership Agreement Issues • How much advanced notice should be given • Non-compete and non-solicitation agreements • Early retirement penalty • Termination with and without cause • Continued use of firm’s name

45. Single Owner Firms • Unplanned exit of the owner (death) • Financial hardship to family • No one else in family qualified to hold interest in practice • Loss of clients and goodwill • Remaining asset have little value

46. PRACTICE CONTINUATION AGREEMENT • What it is • How to get started • Analyze the practice • The deal structure • What size firm

47. Single Owner Firms • Have a buy-sell agreement with a key employee if possible • Have a practice continuation agreement with a larger firm • Selecta trusted advisors to quickly sell the practice

48. STEP 7 Choose a Successor

49. Future Leaders • Identify possible replacements. • Look inside and outside of the firm. • Evaluate all potential successors. • List your first, second, and third choices. • Have key players document information. • Cross-train your employees. • Ask for help to formalize your plan.

50. Step 8 Develop Plan for Your Successor