Six Keys to a Successful Buyout Plan

Source: CPA Practice Management Forum

Younger partners often view partner buyout plans as nothing more than Ponzi schemes, defined by author Marc Rosenberg as “plans where people are fooled into continually contributing money on the front end in exchange for a nice payday at the back end.” According to Rosenberg, a buyout plan is a good deal for older and younger partners alike if the following keys to success are present:

1. The firm grows five percent to 10 percent each year and consistently adds new young partners.
2. The firm is profitable – that is, income per partner is in line with the average in its market.
3. The firm has no “lone rangers” – partners whose clients lack a strong relationship with the firm's staff and are unlikely to stay if the partner leaves.
4. Partners aren't allowed to “coast” on the power of clients brought in years or decades before.
5. Partners are accountable (making coasting less likely).
6. When a partner retires, the remaining partners' income goes up, because retirement payments are less than the cost of paying compensation to the departing partner.

In addition, the buy-in amount for new partners should be reasonable, the retirement plan should be well-designed, and the firm should have a good track record of retaining the clients of retiring partners. The article includes a checklist outlining the “Features of a Properly Written Partnership Buyout Plan.”

For the complete article, read “Partner Buyout Plans: Are They Ponzi Schemes?”

From CPA Practice Management Forum, CCH Incorporated, 800-449-8114, March 2011, p. 5.