Retiring Partners: Who Should Buy Them Out?
Source: The Marc Rosenberg Blog
The following includes excerpts, reproduced with permission, from a blog post by Marc Rosenberg.
CPA firms use two main methods to buy out retiring partners:
- The firm buys out retiring partners and makes their retirement payments. The remaining partners “pay” for the buyout by treating these payments as a firm expense. So if a partner's income allocation percentage is 20 percent, essentially he or she will pay 20 percent of the retirement payments.
- The other partners buy out retiring partners directly. Usually, this approach is closely linked to client transition. If a younger partner gets 50 percent of a retiring partner's clients, he or she pays 50 percent of the retirement payments. It is common for retiring partners to arrange their own deals with “buyer” partners, though some firms steer this process in a manner that is good for the firm.
The second approach offers some advantages, including more cash flow to the non-buyer partners and greater fairness if the firm's compensation system places a high value on book of business. I favor the firm buyout approach, however, because:
- Acquiring a book of business for something close to “one times fees” is a very lucrative investment if clients are retained. The buying partner essentially “buys” significant, future compensation increases. This isn't fair to the other partners.
- When partners start making deals with other partners to buy and sell firm ownership and clients, all sorts of dubious and inconsistent “agreements” get made.
- The partner willing to buy the business may not be the best partner in the firm to service the retiree's clients. When ownership is transferred between two partners, it shuts the firm out of the client transition process.
For the complete post, read “CPA partner buyouts: Two main methods.”
From The Marc Rosenberg Blog, April 10, 2012, http://blog.rosenbergassoc.com.