Partner Agreements Should Reflect Declining Goodwill Values

Source: The Managing Partner Advisor

The following includes excerpts, reproduced with permission, from an article by Gary Adamson.

The CPA profession is a reflection of the Baby Boomer Bubble (BBB), with 61 percent of CPA firm partners now over age 50. Soon firms will be retiring and buying out partners at a pace never seen before.

The goodwill values used for partner retirements have trended downward over the last decade or so. These are almost always expressed as a multiple of revenue, and the generally accepted value used to be one times revenue. The surprise for many of us BBB members is that the new average out there is a little less than 80 percent of revenue.

Once we get our heads around the new lower value for our firms, how do we determine how much to pay to a retiring partner? The “gold standard” is the multiple of compensation method, which uses relative partner compensation – typically an average of three to five years of total compensation – to allocate goodwill. Average compensation is multiplied by a factor to arrive at the partner's share of goodwill.

In most firms goodwill is paid out in the form of deferred compensation over terms ranging from five to 10 years, with no interest. The CPAs reading this are thinking “but with no interest, the value used for the firm is really less than 80 percent!”

Other partner retirement considerations include vesting schedules for age and years of service, death and disability provisions, mandatory retirement ages, post-retirement employment, client transition expectations, and caps to protect the firm. If you're updating your partner agreements to address the new goodwill values, make sure you're bringing the entire agreement up to date.

For the complete article, read “The Baby Boomer Bubble – Valuing Your Firm for Partner Retirements.”

From The Managing Partner Advisor, the newsletter of Gary Adamson, February 2013, http://adamsonadvisory.com.