Partner Selection Criteria in Today’s Environment

1. Partner Selection Criteria in Today’s Environment August Aquila AQUILA Global Advisors

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, 2009 to 2011 • AAM Hall of Fame member, founding AAM Board Member • Former partner in top 100 firm – Friedman, Eisenstein, Raemer & Schwartz (FERS) • Former executive with American Express Tax & Business Services, Inc

3. Agenda • Selection criteria more important than ever • Determine you firm’s philosophy • Characteristics of an equity partner • Personality traits of an equity partner • Know your numbers – Buy-In

4. Why You Need a Partner Admittance Plan Part 1

5. Why have a partner admittance plan? • Do you currently have . . . • Too many partner employees rather than partner owners? • Too many underperforming partners? • Too few rising stars? • Just too many partners?

6. Why now? • Scarcity of good people • Fewer entrepreneurs • Fewer employees want it • Firms facing profit squeeze • Strong fee competition • Succession issues

7. Firm Philosophy Part 2

8. When do you make someone an equity partner?  Some Considerations: • Profitability of the Firm. • Leveraging requirements to accomplish your return on equity • Overall growth of the Firm • Individuals with unique talents

9. Fixed number of partners? • As a firm grows, should the number of partners also grow? • What are the firm’s expectation for gross revenue per partner, realization, etc? • What character and competence are critical?

10. Know your numbers • Do you require some minimum level of origination? • Some minimum level of billings? • Would you depart from these levels and why?

11. Before assessing candidates Make sure you . . . • Establish realistic policies and admission criteria that majority of partners support. • Review them to ensure they remain realistic with the passing of time. • Make certain that partners remain acutely aware of the firm's policies and partnership admission criteria. • Improve the partner evaluation procedures to minimize the number of under-qualified candidates who receive actual consideration.

12. Characteristics of an Equity Partner Part 3

13. Prima Donnas Not Welcome

14. Lone Wolves Not Welcome

15. Administrative Partners Not Welcome

16. Not my fault partners not welcome Do it Solve it Own it See it Versus Ignore it Not my job Finger pointing Tell me what to do Cover your tail Wait & see Source: The Oz Principle

17. Equity Partners Equity partners should be individuals with a high tolerance and passion for the risk of ownership

18. Different Views on What Being a Partner Means • My clients are the firm’s • I introduce others to my clients • I pass what I know on to others • Partner supports firm decisions • Management adds value through coordination • My clients are mine • Don’t trust others with my clients • I hold on to what I know • My rights are paramount • Management interferes in my plans Individual > Firm Firm > Individual

19. Equity Partners • Positive Characteristics: • Puts firm first • Team player • Lives the firm’s values • Has a high degree of emotional intelligence • Accountable for his/her own actions • Staff want to work with him/her

20. Professional traits • Commitment to: • the firm • client service • on-the-job training • life-long learning • the profession • personal & professional ethics

21. CHARACTER TRAITS • Integrity • Respect for others • Entrepreneurial desire (motivation) • Emotional intelligence • Social presence • Sense of humor (can laugh at him/herself) • Embraces change • Stretches oneself outside of comfort zone • Accountable

22. Critical characteristic • Make sure the partner fits into the culture of your firm • Do they share the firm’s vision? • Are they motivated by it? • If they are getting on your bus are they in the right seat?

23. Competencies of a partner • Categories • Technical/Niche Excellence • Business Development • Client maintenance (Satisfaction/Retention) • Business Management • Personal Production • Leadership • People Developer

24. Technical/niche excellence • Does the individual bring a needed expertise to the firm? • Are they passionate about a specific industry? • Does the individual have a "professional identity" within and outside of the firm for skill in their specialty areas?

25. Business development • Acquire, develop, and retain clients • The ability to develop and originate new clients for the firm is one of the most significant criteria • Brings in business for self and others • Will you admit someone into the partnership without this skill?

26. Client maintenance • Most firms encourage new partners to establish a professional relationship with clients • The ability of the partner to relate and interact with a client is an important factor to be considered

27. Client maintenance • Do clients like working with the potential partner? • Measure client turnover • Client loyalty

28. Business management • Client profitability • Billing and Collection • DSO WIP and A/R • Write downs • Clients managed (book of business)

29. Personal production • Billable hours • Cash collected • Leverage

30. Leadership • Help others • Manage a department and/or a niche area • Gain confidence of team, partners, and clients • Transfer client relationships • Cope with change • Firm fan

31. People developer • Provide on-the-job training and mentoring • Give staff the opportunity to get involved with clients • Staff stay at the firm because of the partner • Staff want to be on partner’s engagements

32. Buy-In 4

33. Buy-in Buy-out Make sure you have a buy-out formula before you let someone buy-in

34. Buy-in • Needs to be fair • Discount? • Sweat equity ≠ what the market will pay. • Average internal valuation is 65% - 75% • Average buy in amount around $110,000

35. Key questions • How do owners determine a price? • How and on what schedule should the new partner make payments? • What percentage of ownership should the firm offer? • What is the new partner actually buying?

36. What is a new partner buying? • An interest in accrual basis capital (ABC) • An interest in the goodwill (G) • Firms use different approaches: • An interest in both the ABC and in the G • An interest in the G (but no interest in the ABC that exists as of the date of admission) • An interest in the G at a discount and full price for the ABC

37. Buy-in terms vary by firm • Some firms may offer a better price and larger ownership because new partner has brought in a lot of business • Some firms may offer a small ownership percentage for free based on contributions that new partner has made to the firm • Some firms believe new partners should pay full value and seek full payment of the purchase price, which includes both the accrual-basis capital (ABC)—that is, the equity of the partnership interest—as well as 100% of the “goodwill” value (G), defined as 100% of gross fees

38. Buy-in formula #1 • Facts: The owners give an interest in the G (but no interest in the ABC that exists as of the date of admission). • The owners retain 100% of the tangible assets but give the new owner a share of the intangible asset (G). The new owner shares in the future growth of the tangible assets

39. Buy-in formula #1 • Example: Individual gets a 5% interest in the G and the existing ABC is $1 million • If a year later the ABC is $1.2 million, the new owner now has a 5% stake in the increase, which would equal $10,000 (that is, 5% of $1,200,000 – $1,000,000 = $200,000 X .05 = $10,000).

40. Buy-in formula #2 • Facts: An interest in the G at a bargain price e.g. 75% of current value. • Firm grosses $2 million (G value) and has $500,000 in ABC. • The new person buys a 5% interest at full price for the ABC and pays for only 75% of the value for the G portion

41. Buy-in formula #2 • Example: The new owner pays a total of $100,000 • The full price for the ABC (5% of $500,000 = $25,000) • Plus the 75% price for the G (5% of $2,000,000 X .75 = 1,500,00 5% x 1.500,000 = 75,000).

42. Buy-in formula #3 • Facts: Firm grosses $2m, ABC = $500,000 • Buys a 5% interest in the G at full price (that is, 100% of current value) and 5% interest in the ABC at full price

43. Buy-in formula #3 • Example, owners who require the new owner to pay full price for the 5% interest in both the ABC and G, would obtain $125,000. • 5% x 500,000 = $25,000 plus • 5% x 2,000,000 x 1 = $100,000)

44. Conclusion • This has been a brief overview of what needs to be considered when you bring in a new equity partner. • The key is to have crystal clear guidelines for admitting an equity partner. • Determine what is right for your firm.

45. Questions What did I forget to address?

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

47. THANK YOU – YOU’VE BEEN A GREAT AUDIENCE