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

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Presentation on theme: "Partner Retirement - Buyout Plans Presented By: Gary Adamson, CPA."— Presentation transcript:

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

2  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 2

3  Firm Governance  Partner Compensation  Partner Retirement and Agreements  Partner Succession  Partner Retreats  Mergers and Acquisitions  Partner Coaching and Goal Setting 3

4  Follow our blog at  Sign up for our newsletter at  Contact us at  Call us at

5 Credits:  The 2012 Rosenberg MAP Survey  2012 PCPS / Succession Institute, LLC Succession Planning Survey 5

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

7 2011 Top issues2009 Top Issues 1. Partner accountability / unity 1. Retaining clients 2. Bringing in new clients2. Partner accountability / unity 3. Retaining clients3. Succession planning 4. Fee pressure / pricing4. Bringing in new clients 5. Succession planning5. Staff retention 6. Staff retention6. Fee pressure / pricing 7 AICPA Survey of Firms with 21+ Professionals

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

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

10  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%  ?? 10

11  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. 11

12  Inside deal – our topic today  Outside deal, beyond our scope but the pricing is higher 12

13  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 13

14  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 14

15  Accrual Basis Capital  Goodwill 15

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

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

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

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

20  Inside vs outside  Client transition issues (more mobility)  Changing attitudes of younger partners  Sweat equity 20

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

22 1. We don’t know?! 2. Equal 3. Fixed amount 4. Ownership % 5. Book of Business 6. AAV 7. Multiple of Compensation 22

23  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. 23

24 Partners Net Fees Jan. 1 Yearly Increase Net Fees Dec. 31 Goodwill At 80% Ptr A 1,450,000130,0001,580,0001,264,000 Ptr B 1,100,000110,0001,210,000968,000 Ptr C 800,00070,000870,000696,000 Ptr D 650,00060,000710,000568,000 New Ptr E 0 30,000 24,000 Total 4,000,000400,0004,400,0003,520,000 Goodwill At 80% 3,200,000320,0003,520,000 24

25  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. 25

26  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

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

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

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

30  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 30

31  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% 31

32  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 32

33  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 33

34  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 34

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

36  Forget it 36

37  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? 37

38 Our mandatory retirement age is: A.Age 65 B.Under age 65 C.Over age 65 D.We don’t have a mandatory retirement age 38

39  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. 39

40  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 40

41 1. Starts with a new client sales pitch: “If you go on a sales pitch alone, you get shot.” 2. Continues with team orientation to servicing clients; creating “multiple touch points.” 3. The firm maintains the partner’s comp during transition. 4. The firm drives the transition process. 5. Written plan (dates, post-retirement plans) 6. Name the successors to the retiree—by client, target dates. 7. Agree on announcements, internal & external. 8. Quarterly monitoring of progress. 41

42  Rare, but sometimes 401k or other retirement plan offsets 42

43  An important story 43

44 Assumptions Current Comp is 300k Add a staff for 100K Retirement payments are 3x over ten years Cash Flow +300, , ,000 44

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

46  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? 46

47 47

48  Follow our blog at  Sign up for our newsletter at  Contact us at  Call us at


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