Recession Affects CPA Retirement

Source: CPA Trendlines

Following is a July 26, 2010, blog post, reproduced with permission, by Rick Telberg.

Contrary to most predictions, the recession has not decreased valuations for accounting firms. But sellers must be willing to agree to retention adjustments and smaller up-front payments, according to Joel Sinkin and Terrence Putney at Accounting Transition Advisors.

In addition, some deals are being consummated with little or no cash up front. But, the lower the up-front cash, the longer the payout period. So payouts are now running five to 10 years.

The M&A brokers report that, in firms over $25 million, multiples are generally two to three times annual partner compensation, with payout periods ranging from seven to 12 years. And, at firms under $25 million, valuations are generally equal to the partner's equity percentage times the firm's revenue, typically in the range of 0.6 to 1.25.

For internal sales involving succession plans, Sinkin and Putney say buyers are more frequently requiring two years' retirement notice to allow the value of a partner's interest to be fixed at the retirement date. If adequate notice is not given, the payments may be subject to adjustment for actual client attrition.

Other considerations:

• Interest is not normally paid on the deferred payments.
• Typically, tangible equity (accrual basis) is added to the above valuations and paid out over the same time period as the intangible value.
• A cap on annual payouts is recommended, usually from five to 15 percent of revenues.

In addition, some retired partners are being encouraged to stay on, which helps with client retention, retains their skills, and can create growth opportunities for younger partners and retains.

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From CPA Trendlines, http://cpatrendlines.com, July 26, 2010, “New Wrinkles in CPA Exit Strategies.”