Partner Retirement / Buyout Plans: Current Trends

Partner Retirement / Buyout Plans:

Current Trends

Presented By: Marc Rosenberg, CPA

THEROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com


The Rosenberg AssociatesThe Rosenberg Associates

Marc Rosenberg, CPA, PresidentMarc Rosenberg, CPA, President

23 years consulting to CPA firms23 years consulting to CPA firms

Consultant, author and speaker Consultant, author and speaker

700 client firms from coast to coast700 client firms from coast to coast

Top 100 Most Influential People in Top 100 Most Influential People in Acting Profession – Acting Profession – Accounting TodayAccounting Today

- - 77 consecutive years consecutive years

Named one of the most recommended Named one of the most recommended CPA firm consultants by CPA firm consultants by INSIDE Public INSIDE Public

AccountingAccounting



1000 Skokie Blvd. Suite 5551000 Skokie Blvd. Suite 555

Wilmette, IL 60091Wilmette, IL 60091

Phone: 847-251-7100Phone: 847-251-7100

Fax: 847-251-4622Fax: 847-251-4622

[email protected]@rosenbergassoc.com


Rosenberg is active with CPA firms:Rosenberg is active with CPA firms: Facilitate retreatsFacilitate retreats Partner compensation & retirementPartner compensation & retirement Succession planningSuccession planning MergersMergers Strategic planning Strategic planning Practice management reviewsPractice management reviews Partner relations and conflictPartner relations and conflict Upward evaluation surveysUpward evaluation surveys


TitlesTitles

1.1. How to Bring in New PartnersHow to Bring in New Partners

2.2. How to Negotiate a CPA Firm How to Negotiate a CPA Firm MergerMerger

3.3. How to Operate a Compensation How to Operate a Compensation CommitteeCommittee

4.4. What What ReallyReally Makes a CPA Firm Makes a CPA Firm Profitable?Profitable?

5.5. Guide to Planning the Firm RetreatGuide to Planning the Firm Retreat

6.6. Effective Partner Relations and Effective Partner Relations and CommunicationCommunication

Also known as “white papers”Also known as “white papers”

Our proprietary consulting Our proprietary consulting methods, handouts, checklists, methods, handouts, checklists, and intellectual capital are and intellectual capital are captured in each of these captured in each of these monographsmonographs



The Rosenberg MAP Survey The Rosenberg MAP Survey – – Accounting Today Accounting Today calls it “generally calls it “generally accepted as the barometer for CPA accepted as the barometer for CPA firm practice management.”firm practice management.”

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Watch for MVP Slides

MVP

Final Groundrule

I take questions during the presentation

Value of a CPA FirmValue of a CPA Firm

Example: A $4 million firmExample: A $4 million firm

Value:Value: CapitalCapital $1,000,000 $1,000,000 (25% of fees?)(25% of fees?)

GoodwillGoodwill 4,000,0004,000,000 (0ne times) (0ne times)

TotalTotal $5,000,000$5,000,000


Philosophy of a CPA Firm’sPhilosophy of a CPA Firm’sPartner Retirement/Buyout PlanPartner Retirement/Buyout Plan

1.1. As an owner of a firm with a well-defined As an owner of a firm with a well-defined street value, you have a right to your street value, you have a right to your share of the firm’s value when you leave.share of the firm’s value when you leave.



2.2. Your share – the value of your efforts to Your share – the value of your efforts to build up the value of the firm:build up the value of the firm:• Bringing in businessBringing in business• Managing the firmManaging the firm• Servicing/retaining clientsServicing/retaining clients• Developing staffDeveloping staff• Capitalizing the firmCapitalizing the firm• Working hard AND smartWorking hard AND smart



3.3. Firms do Firms do notnot look at this plan as a look at this plan as a savingssavings plan that can be cashed in plan that can be cashed in at at full valuefull value any time the partner any time the partner wants. wants.

Firms want their partners to stay Firms want their partners to stay around for the around for the long haullong haul..



Two main types of paymentsTwo main types of payments

1.1. CapitalCapital

2.2. Goodwill / Deferred compGoodwill / Deferred comp


CapitalCapital

Majority accrual basis vs. cash basisMajority accrual basis vs. cash basis Payback often shorter than goodwillPayback often shorter than goodwill WithWith interest interest

How to calculate a partner’s How to calculate a partner’s share of the firm’s capitalshare of the firm’s capital

1.1. Partnership accounting rulesPartnership accounting rules

2.2. Ownership percentageOwnership percentage


•Income allocation•Capital contributions

•Draws/salaries to partners•Cash distributions

Increases with: Decreases with:

Q


GoodwillGoodwill


Determining aggregate valueDetermining aggregate value

100% of fees? 100% of fees?

90%? 90%?

75%? 75%?

50%?50%?


Multiple Used To ValueMultiple Used To ValueInternal Partner Buyouts*Internal Partner Buyouts*

% of Net % of Net Fees Paid Fees Paid

for Goodwillfor Goodwill

2-4 2-4

PartnersPartners

139 Firms139 Firms

5-7 5-7

PartnersPartners

111 Firms111 Firms

8-12 8-12

PartnersPartners

89 Firms89 Firms

13+ 13+

PartnersPartners

63 Firms63 Firms

Grand TotalGrand Total

20092009 20082008

>100%>100% 6%6% 4%4% 3%3% 12%12% 6%6% 9%9%

100%100% 20%20% 20%20% 21%21% 26%26% 21%21% 20%20%

90-99%90-99% 4%4% 1%1% 4%4% 7%7% 4%4% 7%7%

75-89%75-89% 34%34% 34%34% 34%34% 17%17% 32%32% 27%27%

50-74%50-74% 25%25% 28%28% 29%29% 24%24% 26%26% 23%23%

<50%<50% 11%11% 13%13% 9%9% 14%14% 11%11% 14%14%

*2010 Rosenberg MAP Survey

Overall Valuation Percentages (as % of Fees)

Over $20M $10-20M $2-10M Under $2M All Firms

2009 82.5% 75.4% 77.6% 82.5% 78.1%

2008 76.6% 79.6% 83.3% 79.1%

MVP

What happened to 1x fees?What happened to 1x fees?

1.1. Resistance from young people.Resistance from young people.

2.2. Fear over losing retiree’s clients.Fear over losing retiree’s clients.

3.3. Bad debt reserve.Bad debt reserve.

4.4. New partners feel they helped build New partners feel they helped build the retiring partner’s client base.the retiring partner’s client base.

5.5. Remaining partners too busy to take Remaining partners too busy to take on clients of retiree.on clients of retiree.



6 Methods for Goodwill6 Methods for Goodwill

1.1. Multiple of compensationMultiple of compensation2.2. 3.3. 4.4. 5.5. 6.6.

•If partners earn 1/3 of fees as profits

•Then, 3 times comp = 1 times fees

Defining “compensation”

1. All income, not just “salary.”2. You want partners to transition

clients without fear of comp going down.

Average of highest 3 of last 5 years 4 of last 7 Etc.




1.1. Multiple of compensationMultiple of compensation2.2. AAV (Average Annual Value) AAV (Average Annual Value) 3.3. 4.4. 5.5. 6.6.

AAV MethodAAV Method

Incremental Growth MethodIncremental Growth Method(Better name)(Better name)


Partners Net FeesJan. 1

YearlyIncrease

Net FeesDec. 31

GoodwillAt 80%

Ptr A 1,000,000 90,000 1,090,000 872,000Ptr B 850,000 60,000 910,000 728,000Ptr C 700,000 60,000 760,000 608,000Ptr D 450,000 60,000 510,000 408,000

New Ptr- E 0 30,000 30,000 24,000

Total 3,000,000 300,000 3,300,000 2,640,000

GW benefits at 80%

2,400,000 240,000 2,640,000

AAV Illustration


Each partner’s AAV builds as firm grows ----

First to retire



1.1. Multiple of compensationMultiple of compensation

2.2. AAV AAV

3.3. Ownership percentageOwnership percentage

4.4. Client base Client base

5.5. EqualEqual

6.6. Fixed amountFixed amount

Partner Retirement Systems*Partner Retirement Systems*2-4 Ptrs2-4 Ptrs

139 Firms139 Firms5-7 Ptrs5-7 Ptrs111Firms111Firms

8-12 Ptrs8-12 Ptrs89 Firms89 Firms

13+ Ptrs13+ Ptrs63 Firms63 Firms

2009 2009 TotalTotal

2008 2008 TotalTotal

Multiple Multiple of compof comp

27%27% 46%46% 51%51% 56%56% 43%43% 41%41%

Book of Book of businessbusiness

17%17% 11%11% 4%4% 2%2% 10%10% 13%13%

Owner Owner Pct.Pct.

31%31% 19%19% 14%14% 16%16% 21%21% 21%21%

AAVAAV 15%15% 14%14% 22%22% 16%16% 16%16% 17%17%

FixedFixed 8%8% 10%10% 8%8% 8%8% 9%9% 8%8%

EqualEqual 2%2% 0%0% 1%1% 2%2% 1%1% 0%0%

*Per 2010 Rosenberg MAP Survey


MVP


Term of payoutTerm of payout

10 years most common10 years most common

At lower payout levels, 5-7 years is At lower payout levels, 5-7 years is more commonmore common


InterestInterest

Yes on capitalYes on capital

Rarely on goodwillRarely on goodwill


VestingVesting

To encourage partners to stay To encourage partners to stay around for the long haularound for the long haul

Decisions:Decisions:• Based on years as a partner?Based on years as a partner?• Age based?Age based?• Limit vesting until early retirement age?Limit vesting until early retirement age?• Age for 100% vesting?Age for 100% vesting?

Two Common Vesting Methods

HYBRID

20 yrs as partner Full vesting at 65 50% limit until 56

SIMPLER

Full vesting at 65 Vesting reduced by

5% for every year before 65 that the partner retires


MVP

Q


Payout nuancesPayout nuances

Will you allow a partner to receive retirement Will you allow a partner to receive retirement payments while he/she works payments while he/she works full timefull time? ? Fundamental Rule #1 – Try to avoid this.Fundamental Rule #1 – Try to avoid this.

Part-time? Part-time? If clients transitioned, yes.If clients transitioned, yes.

Does a partner Does a partner loselose any or all benefits if he/she is any or all benefits if he/she is expelledexpelled with causewith cause??


NoticeNotice

Should be at least one year prior to Should be at least one year prior to retirement (trend is increasing retirement (trend is increasing towards two years)towards two years)

Meaningful transition efforts should be Meaningful transition efforts should be a condition for receiving goodwill a condition for receiving goodwill benefitsbenefits

MVP

Two requirements to receive goodwill payments

1. Give proper notice.

2. Transition clients.

Consequence of non-compliance: reduced benefits at sole discretion of the firm


Client Transition Policy

1. Starts with first meeting with prospect:

“If you go on a sales pitch alone, you get shot.”2. Continues with team orientation to servicing clients;

creating “multiple touch points.”3. The firm maintains the partner’s comp during transition.4. The firm drives the transition process.5. Written plan (dates, post-retirement plans).6. Name the successors to the retiree – by client, target

dates.7. Agree on announcements, internal & external.8. Quarterly monitoring of progress.

From Sam Allred of Upstream Academy


MVP


Mandatory retirementMandatory retirement

Rigid requirements not very commonRigid requirements not very common

At 65, if partner wants to keep At 65, if partner wants to keep working, should be approved by working, should be approved by annualannual vote of partners. vote of partners.


Limits on annual payoutLimits on annual payout

Usually 5-10% of feesUsually 5-10% of fees


FundingFunding

Very little except some life insurance Very little except some life insurance for death and/or 401k.for death and/or 401k.

Q


Reduce benefits if clients leave?Reduce benefits if clients leave?

Overall: 18% yes; 82% noOverall: 18% yes; 82% no Reductions more common if the firm waits Reductions more common if the firm waits

longer to put together buyout agreement.longer to put together buyout agreement. Reductions more common if retiree has 1 Reductions more common if retiree has 1

or 2 huge clients.or 2 huge clients. Reductions more common if a substantial Reductions more common if a substantial

amount of retiree’s client base leaves the amount of retiree’s client base leaves the firmfirm


Retired partners Retired partners working part-timeworking part-time

Retiree is not a partner.Retiree is not a partner. The The firmfirm decides on the work. decides on the work. Pay: 30-50% of collected billable timePay: 30-50% of collected billable time Rarely any pay for non-billable workRarely any pay for non-billable work 10-15% for new business – 3 years10-15% for new business – 3 years An office and supportAn office and support


Death and disabilityDeath and disability

Most firms treat it the same as a Most firms treat it the same as a normal retirement.normal retirement.

Ways to make benefits more Ways to make benefits more generous:generous:

• Accelerate vestingAccelerate vesting• Accelerate payout periodAccelerate payout period

Payments Guaranteed?Payments Guaranteed?

Never!Never!


How firms afford the buyout paymentsPart 1: The math

Assumptions

Comp = $300KAdd staff = $100KBenefits: 3 times = 900K

÷ 10 yrs = 90K per year

Cash Flow

No pay to ptr $300KRetire pmts (90K)Add staff

(100K) Cash ahead $110K


Problem: Retiree wants to continue his comp AND start receiving his buyout. That doesn’t work.

MVP

How firms afford the buyout paymentsPart 2: Good management

Growth Respectable profitability Track record of developing staff to

ptr, thus avoid age clustering of ptrs Track record of prior retirements


MVP

Top 10 Mistakes I SeeTop 10 Mistakes I SeeIn Partner Retirement PlansIn Partner Retirement Plans

1.1. Pay interest on GW.Pay interest on GW.

2.2. No vesting.No vesting.

3.3. 90 days or less notice.90 days or less notice.

4.4. No mandatory retirement provision.No mandatory retirement provision.

5.5. No limits on annual payments.No limits on annual payments.


Top 10 Mistakes I SeeTop 10 Mistakes I SeeIn Partner Retirement PlansIn Partner Retirement Plans

6.6. Lone Ranger specialties.Lone Ranger specialties.

7.7. Receiving retirement checks while still Receiving retirement checks while still controlling clients; i.e., no transition.controlling clients; i.e., no transition.

8.8. Client transition process not formal.Client transition process not formal.

9.9. Proceeds of sale revert to owner %.Proceeds of sale revert to owner %.

10.10. Pay benefits based on book of business.Pay benefits based on book of business.


Many young people look at their Many young people look at their firm’s partner buyout plan and feel firm’s partner buyout plan and feel

it’s a Ponzi schemeit’s a Ponzi scheme

It’s not a Ponzi scheme if:1. The firm grows.2. The firm is profitable.3. Reasonable buy-in.4. Well written buy-out plan.5. No Lone Rangers.6. Good spread in ages of the partners.7. Good track record of client retention re: retirees8. Pass the “Acid Test.”


Q

THE ROSENBERG ASSOCIATES LTD.www.rosenbergassoc.com

QUESTIONS?



1000 Skokie Blvd. Suite 5551000 Skokie Blvd. Suite 555

Wilmette, IL 60091Wilmette, IL 60091

Phone: 847-251-7100Phone: 847-251-7100

Fax: 847-251-4622Fax: 847-251-4622

[email protected]@rosenbergassoc.com

Partner Retirement / Buyout Plans: Current Trends

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