Sample: Best Practices Performance Tool
|
To access the entire Best Practices Performance Tool, and to attend our webinars at no cost, become a Webinars Plus Subscriber of CPA LEADERSHIP INSTITUTE. |
|
CPA Best Practices Performance Tool™ -- SAMPLE |
|
Our CPA Best Practices Self Assessment Tool™ is divided into segments. Here is volume 1:
The CPA Best Practices Assessment Tool™ is designed to help you evaluate where you are as a firm in several key practice management areas, and how you can improve. Our Best Practices, and explanations of what it means to be performing at a high level with respect to each Best Practice, are written by some of the leading consultants in the profession. They give you insight into what the best CPA firms are doing. What makes them different and great firms? We are not suggesting that every “best of the best” firm is scoring high on each one of these Best Practices. But our experience tells us that if they aren't at the top of their game in each area, we can almost promise you that they are working on it. We ask that you read each of our Best Practices explanations one segment at a time, starting with Leadership and Management, and then rate your firm on where you think you are on each Best Practice using the rating scale below. If you're not doing it, then give yourself a score of 0, which does not indicate a weak performance. It indicates only that you are not actively engaged in that Best Practice.
Note that your ratings represent your opinion of how you are doing on each Best Practice. If for example, an explanation on a particular Best Practice has six suggestions, you don't have to be excelling at all six to be doing really well and rate yourself highly. Although many Best Practices can be performed as well by smaller firms, they will not be able to perform highly on as many Best Practices as larger firms – it's just not possible. Don't be concerned about that – we are going to be conducting a series of surveys, under the title CPA Self Assessment Survey.™ We will summarize the survey responses by size of firm so that you can see how you compare to your peers. And, remember, the Network is about improving. Doing the self-assessment and comparing your self-assessment to your peers are indispensable first steps towards improvement. You may find you have considerable internal resources to create and implement an improvement plan. |
|
SAMPLE of Critical Area 4: Partner Admission, Transition, and Buyout |
|
Partner Admission and Buyout Best Practices 1.There is a Written Partner Agreement That Includes Buy-in/Buy-out Provisions. Many small firms and even some large firms do not have documents that reflect a standardized process that the firm uses to bring in new partners and to retire or buy out exiting partners. The operating or partnership agreement, or in the case of a corporate structure the individual shareholder agreements, should capture both the valuation and process used by the firm. The provisions should reflect both the individual wishes and characteristics of the firm as well as the best practices of the profession. While the documents should stand the test of time and provide guidance over a number of years, they should also be reviewed and updated periodically (every five to ten years) to reflect any significant changes in the profession. 2. An Initial Capital Buy-In is Required for New Partners. Coupled with the concept of vesting for partners to earn goodwill over a period of time, most firms are now requiring a relative small initial capital buy-in for new partners. National averages range from $150,000 to $200,000 and includes no goodwill component. Some firms utilize a fixed or negotiated amount while others will establish an initial capital account that is a percentage of the partner's expected compensation. The percentage of firm ownership received by the new partner is generally very small. Since most new partners do not have cash available to make the initial capital investment, there are two common methods of financing. One is internal firm financing where the firm withholds a portion of the partner's future profit sharing to build the capital account. The second is to assist the new partner in securing bank financing, often with the firm's primary bank, to make the capital contribution in cash. Most firms will guarantee the loan. 3. The Firm Has Considered an Income Partner (Non-equity) Position. Most larger firms and many smaller firms have created an income partner position. It is the entry point to partnership and a stepping stone to the equity partner position. Some firms will allow partners to remain at that level indefinitely without advancing to the equity position. The key characteristics of the income partner position are:
4.The Partner Agreement Includes Provisions for Death or Disability, Prohibitions on Soliciting Staff, and Early Payments of Deferred Compensation.
5.The Valuation of a Partner's Interest is Based on Accrual Basis Capital and Goodwill. The generally accepted- approach to valuing an accounting firm for internal succession purposes is made up of two pieces. One piece is the partners ownership percentage of the firm's accrual basis capital. Accounts receivable and work in process should both be net of appropriate valuations reserves. Any proceeds from firm owned life insurance on the partner's death would typically be excluded. Firm owned real estate is normally valued at fair market value. The second piece of the value is goodwill expressed as a multiple or percentage of net accrual basis fees. Note that the national averages for internal goodwill valuation will generally be somewhat less than an external transaction in a merger or sale scenario. 6.A Partner's Capital is Normally Paid Out in Cash or a Short--Term Note. A partner's interest in firm accrual capital is redeemed by the firm and normally paid out in the form of cash or an interest bearing short-term note. A note is used if the retiring partner has a significant percentage of the firm's capital. Some firms will pay out the capital first over a three to five-year term and then begin the goodwill payout in subsequent years. But it is more common for the capital payout and goodwill payout to run concurrently. 7.The Internal Goodwill Valuation is Based on a Percentage of Fees with a National Average of Approximately 80 Percent. National surveys peg the average internal valuation at approximately 80 percent of fees. This number hasn't moved very much over the last 15 years and was not really impacted by the recession. There is a fairly wide standard deviation with approximately 30 percent of survey respondents at 100 percent of fees or above and 35 percent at less than 75 percent of fees. It is also noteworthy that interesting that the valuation percentage declines as firm size increases. 8. Allocation of the Firm's Valuation Among Partners is Based on Several Approaches Including Relative Compensation as the Most Popular. Once a firm has determined its overall goodwill valuation, there must be a process or approach to allocate that value to the equity owners of the practice. Note that income partners almost always do not share in the firm's goodwill valuation. There are at least six methods in use by the profession today and they are:
Although the method used varies significantly based upon the size of your firm, the three most prevalent are multiple of compensation, ownership percentage and AAV. Multiple of compensation has become the most used approach and a best practice in the profession. 9. The Multiple of Compensation Method Calculates Goodwill as a Function of Partner Compensation. The first step is to convert the goodwill valuation based on a percentage of fees to a function of partner compensation. A simple illustration would be a firm generating $3 million of revenue and using an 80 percent of revenue valuation would have a goodwill value of $2.4 million. Assuming that same firm has a partner profit pool of one third of revenue or $1 million, the goodwill value is 2.4 times the profit pool (which in most firms equals partner comp). Taking the example further, if a partner's share (compensation) of the profit pool is $300,000, using a 2.4 multiple, his/her share of the firm's goodwill is $720,000. In practice, we have worked with firms using multiples ranging from 2 to 3.5 times partner comp. To arrive at the compensation number for the calculation, the best practice is to use an average or selection of the individual partner's compensation level for the last several years before retirement. A couple of examples:
|
|
Become a WEBINARS PLUS SUBSCRIBER NOW to Access |