Many Happy Returns: Why Partner Buyout Agreements are a Great Investment

Source: The Marc Rosenberg Blog, August 14, 2018

The following includes excerpts, reproduced with permission, from a blog entry by Marc Rosenberg. 

Sounds counter-intuitive, doesn’t it?  How can assuming a significant debt obligation be a great investment? Would-be partners often question these plans because they seem a bit like Ponzi schemes — paying into something and not getting anything back. So why is signing a partner buyout agreement such a great investment?  Let me illustrate, using data for an average firm in the latest Rosenberg Survey:

• Revenue                              $10.7M
• Income per equity partner     $424,000
• # of partners                          7.4
• New partner buy-in               $160,000

Let’s further assume that the new partner enjoys a 30-year tenure as an equity partner.  The return a new partner will experience over those 30 years consists of three main parts: Earning an elite income level, experiencing a tripling of one’s initial capital investment, and receiving a hefty buyout paid at retirement. Adding up all three pieces, the total is $10.2M.  By any measure, that’s a pretty good return on a paltry $160,000 investment.

I can hear the naysayers and skeptics. They are saying that anyone can play with an Excel spreadsheet and manipulate statistics to reach a desired conclusion. Financial opportunities are good investments only if properly conceived.  But if the buyout plan seems like a Ponzi scheme, it probably is. Agreements should have [certain] features to make sure their new partners see the buyout plans as great investments, [including mandatory retirement, notice and client transition provisions, a fair goodwill valuation, vesting provisions, performance-based buyouts, and a reasonable payout period (typically, at least 10 years).]

For the complete entry, read “Signing A Partner Buyout Agreement: A Spectacular Investment for New Partners.”