1. Partner Retirement - Buyout Plans
Presented By: Gary Adamson, CPA

2. Gary Adamson, CPA Recovering Managing Partner
Over 20 Years as a MP of a Top 200 Firm
Grew firm from 9 to over 120 people
Now working with firms to reach solutions, faster
Consultant, author and speaker

3. Adamson Advisory – Focused on CPA Partners
Firm Governance
Partner Compensation
Partner Retirement and Agreements
Partner Succession
Partner Retreats
Mergers and Acquisitions
Partner Coaching and Goal Setting

4. Adamson Advisory Follow our blog at www.adamsonadvisory.com/blog
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5. Partner Retirement – Buyout Plans
Credits:
The 2012 Rosenberg MAP Survey
2012 PCPS / Succession Institute, LLC Succession Planning Survey

6. Rules of the Game Talk to me Polling questions from time to time
I will ask you some questions as we work through the material
Pepto Bismol slides

7. 2011 Top Issues for the Profession
1. Partner accountability / unity
1. Retaining clients
2. Bringing in new clients
2. Partner accountability / unity
3. Retaining clients
3. Succession planning
4. Fee pressure / pricing
4. Bringing in new clients
5. Succession planning
5. Staff retention
6. Staff retention
6. Fee pressure / pricing
AICPA Survey of Firms with 21+ Professionals

8. 2012 PCPS Succession Survey
62% of multi-owner firms expect succession planning to be a significant issue in the next five years. (about the same % as the survey)
54% of multi owner firms do not have a written plan in place. (improved from 65% in 2008)

9. The Perfect Storm
1994 to 2009, lowest number of accounting grads (150 hour requirement)
Even lower number sitting for the exam
The BBB

10. Baby Boomer Bubble 76 million of us born between 1946 and 1964
61% of all CPA firm owners are over 50
1993 – 40% of AICPA members over 40
2008 – 70% ??

11. Bill Reeb’s Definition of Succession Planning
Succession planning is not scrambling around to find a solution when the clock has run out. It is running your firm well now and having the people and systems in place.

12. Partner Retirement – Buyout Plans
Inside deal – our topic today
Outside deal, beyond our scope but the pricing is higher

13. Value of a CPA Firm Two pieces – capital and goodwill
What’s different about a CPA firm compared to most of your clients?
Personal relationships - transition issues
Relative low buy ins and the concept of vesting
Longer term payout

14. Value of a CPA Firm
Tug of war between the “old guys” and the “young guys”
What is Fair?
Risk if value is too low
Risk if value is too high

15. Two Components of Value
Accrual Basis Capital
Goodwill

16. Capital Accrual book value
Payout generally cash or a relatively short term
Interest is paid

17. Goodwill What is your firm worth to your partners in an inside deal?
110% of fees?
100%?
80%?
50%?

18. Polling Question
What percentage of fees are you using to value your firm?
100%
Less than 100%
More than 100%
We don’t use a percentage of fees
We don’t have a buyout plan

19. Multiple Used To Value Internal Partner Buyouts *
% of Net Fees Paid for
Goodwill
2-4
Partners
149 Firms
5-7
102 Firms
8-12
65 Firms
13+
53 Firms
All Firms
2011
2010
> 100% 8%
11% 7% 9%
100%
20%
21%
17%
90 – 99% 6%
12%
75 – 89%
25%
22%
27%
23%
26%
50 – 74%
< 50%
18%
15%
Overall Valuation Percentages (as % of Fees)
Over $20M
$10-20M
$2-10M
Under $2M
All Firms
2011
71.9%
77.8%
77.3%
88.3%
2010
71.4%
76.5%
78.7%
81.0%
78.1%
2009
82.5%
75.4%
77.6%
*Rosenberg 2012 MAP Survey

20. So, where did 1x fees go? Inside vs outside
Client transition issues (more mobility)
Changing attitudes of younger partners
Sweat equity

21. Value of a CPA Firm Typical firm with revenue of $4,000,000
Capital $1,000,000
Goodwill (80% of revenue) 3,200,000
Total Value $4,200,000

22. Different Approaches to Allocating the Goodwill
We don’t know?!
Equal
Fixed amount
Ownership %
Book of Business
AAV
Multiple of Compensation

23. AAV (Average Annual Volume) Approach
Allocates the growth in the firm’s revenue each year to the current partners
Normally based on relative compensation
New partner gets 0 coming in unless they buy it.
When a partner retires, their AAV balance is reallocated to other partners as retirement payments are made.

24. AAV Illustration Total 1,450,000 130,000 1,580,000 1,264,000 1,100,000
Partners
Net Fees
Jan. 1
Yearly
Increase
Dec. 31
Goodwill
At 80%
Ptr A
1,450,000
130,000
1,580,000
1,264,000
Ptr B
1,100,000
110,000
1,210,000
968,000
Ptr C
800,000
70,000
870,000
696,000
Ptr D
650,000
60,000
710,000
568,000
New Ptr E
30,000
24,000
Total
4,000,000
400,000
4,400,000
3,520,000
3,200,000
320,000

25. Relative Compensation Approach
Most widely used
Example
Firm with revenue of $6 million
Netting $2 million (1/3) before partner comp
At 100% of revenue, the goodwill is 3x total partner comp.

26. Relative Compensation Approach
If goodwill is set at 3x partner comp, a retiring partner receives 3x his/her comp
Generally based on the average of the highest three of the last five years, or five of last seven, etc.
Why?
2012 PCPS Survey –
11% of firms using a 2.0 multiple
17% of firms using 2.5
35% of firms using 3.0

27. Partner Retirement Systems *
2-4
Partners
149 firms
5-7
102 firms
8-12
65 firms
13+
53 firms
2011
All
2010
Multiple
of comp
36%
48%
55%
44%
45%
41%
Book of
business
13% 7% 2%
10%
15%
Owner
Pct.
20%
12% 9%
14%
AAV
17%
19%
30%
18%
Fixed
11%
Equal 3% 0% 4% 1% No
provision
28%
41 firms
13 firms 5%
3 firms 8%
4 firms
61 firms
23%
88 firms
*Rosenberg 2012 MAP Survey

28. Polling Question
What method are you using to allocate firm goodwill to individual owners?
Multiple of compensation
Book of business
Ownership percentage
AAV
Other or we don’t have a buyout plan

29. Goodwill Payout Terms Deferred compensation structure
Beware of code section 409A
Ten year payout common – sometimes shorter
No interest or CPI

30. Vesting
Concept of earning the buyout / retirement / deferred comp over time
The firm wants partners to stick around for the long haul
Generally two scales in use – age and years of service

31. PCPS Survey Results -Vesting
Minimum years of partner service to vest:
6 or fewer years, 30%
10 years, 28%
15 years, 13%
20 years, 16%
Minimum age to receive full benefits:
Age 55, 26%
Age 60, 23%
Age 65, 23%

32. Two Hybrid Vesting Examples
Plan A
20 years as a partner
Full vesting at age 65
50% limit until age 56
Plan B
25 years with the firm, vesting does not begin until year 11
Full vesting at age 65 with a 2.5% per year reduction for a departure before 65

33. Death and Disability
Payout is generally the same as a normal retirement
Perhaps some “bonus” if insurance
Define both ST and LT disability
And, salary continuation, if any

34. Non Compete Provisions
Rule #1. Consult an attorney in your state.
True non-competes rare today
Payments for clients taken is the new norm.
100% common, up to 150 to 200%
Term?
Payments for taking staff

35. Maximum Payouts Protect the golden goose 5-10% of fees (10% is high)
One firm, 12% of profits before partners
How it works

36. Guarantees or Collateral
Forget it

37. Mandatory Retirement / Buyout
Increasing trend to set the date
2012 PCPS Survey:
54% age 65
15% age 66 to 69
14% age 70
Why does the firm need to control it?

38. Polling Question Our mandatory retirement age is: Age 65 Under age 65
Over age 65
We don’t have a mandatory retirement age

39. Post Retirement Employment?
This is no longer a partner position
At firm’s discretion (most do)
Pay for specific duties / tasks. Normally billable time, new business, other projects.
Charge time – typically 40% of billed time
New business – 10 to 15% for three or less years.
DO NOT – allow a “retired” partner to continue to do what they always did and receive retirement benefits.

40. Notice / Transition
Most firms don’t penalize the retired partner for lost clients.
However
There is a movement to notice and transition requirements/expectations, with penalties
Notice – minimum of one year (two is better)
Transition process that must be completed

41. Client Transition Policy
Starts with a new client sales pitch:
“If you go on a sales pitch alone, you get shot.”
Continues with team orientation to servicing clients; creating “multiple touch points.”
The firm maintains the partner’s comp during transition.
The firm drives the transition process.
Written plan (dates, post-retirement plans)
Name the successors to the retiree—by client, target dates.
Agree on announcements, internal & external.
Quarterly monitoring of progress.

42. Funding?
Rare, but sometimes 401k or other retirement plan offsets

43. Health Insurance
An important story

44. How Does the Math Work? Assumptions Cash Flow Current Comp is 300k
Add a staff for 100K
Retirement payments are 3x over ten years
Cash Flow
+300,000
-100,000
-90000
+110,000

45. Buying In
The days of the big $ buy-ins including value for goodwill are over
$100,000 to $150,000
Accrual balance sheet
Financing?

46. Other Stuff Look back provisions upon a subsequent sale
What is the split upon a sale?
When do payments start upon an early withdrawal?
Does a “for cause” termination affect the payout?
What is the firm’s process for transition of clients?

47. Questions?

48. Thank You Follow our blog at www.adamsonadvisory.com/blog
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