Ready for the Baby Boomer Buyout?

Source: The Managing Partner Advisor

In this article, Gary Adamson addresses the vast number of retiring Baby Boomers and what that means for CPA firms that will be required to buy them out. Adamson discusses partner agreements and how firms can determine if they are prepared to “make good” on those agreements.

Adamson explains that most buyouts are based on a firm's capital and goodwill. The challenge for firms facing the exodus of Baby Boomers is that the goodwill value of firms has been on the decline. While goodwill value used to be generally accepted at one-times-revenue, it is now only a percentage – from 72 percent to 78 percent – of firm revenues, according to the 2012 Rosenberg MAP survey.

Adamson recommends the multiple-of-compensation method for determining how much to pay retiring partners. This method uses partner compensation to distribute a firm's goodwill value. Following is the example Adamson provides to explain the method:

If a firm is netting 33.3 percent profit before any partner compensation and it is using a goodwill value for the firm of 80 percent of revenue, then the goodwill value is 2.4 times total partner compensation. If our retiring partner's average compensation was $300,000, then the retirement benefit using the 2.4 multiplier is $720,000. Note that the multiplier and the methodology is normally the same for all partners in the firm.

Adamson explains that goodwill is commonly paid out in terms of five to 10 years without interest. He also notes that there are issues in addition to goodwill values that should be considered if and when your firm updates its partner agreements, and encourages firms to make a thorough review and update.

For the complete article, read “Here Comes the Baby Boomer Bubble – Valuing Your Practice for Partner Retirements.”

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