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Partner Retirement - Buyout Plans
Presented By: Gary Adamson, CPA
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Gary Adamson, CPA Recovering Managing Partner
Over 20 Years as a MP of a Top 200 Firm Grew firm from 9 to over 120 people Now working with firms to reach solutions, faster Consultant, author and speaker
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Adamson Advisory – Focused on CPA Partners
Firm Governance Partner Compensation Partner Retirement and Agreements Partner Succession Partner Retreats Mergers and Acquisitions Partner Coaching and Goal Setting
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Adamson Advisory Follow our blog at www.adamsonadvisory.com/blog
Sign up for our newsletter at Contact us at Call us at
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Partner Retirement – Buyout Plans
Credits: The 2012 Rosenberg MAP Survey 2012 PCPS / Succession Institute, LLC Succession Planning Survey
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Rules of the Game Talk to me Polling questions from time to time
I will ask you some questions as we work through the material Pepto Bismol slides
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2011 Top Issues for the Profession
1. Partner accountability / unity 1. Retaining clients 2. Bringing in new clients 2. Partner accountability / unity 3. Retaining clients 3. Succession planning 4. Fee pressure / pricing 4. Bringing in new clients 5. Succession planning 5. Staff retention 6. Staff retention 6. Fee pressure / pricing AICPA Survey of Firms with 21+ Professionals
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2012 PCPS Succession Survey
62% of multi-owner firms expect succession planning to be a significant issue in the next five years. (about the same % as the survey) 54% of multi owner firms do not have a written plan in place. (improved from 65% in 2008)
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The Perfect Storm 1994 to 2009, lowest number of accounting grads (150 hour requirement) Even lower number sitting for the exam The BBB
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Baby Boomer Bubble 76 million of us born between 1946 and 1964
61% of all CPA firm owners are over 50 1993 – 40% of AICPA members over 40 2008 – 70% ??
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Bill Reeb’s Definition of Succession Planning
Succession planning is not scrambling around to find a solution when the clock has run out. It is running your firm well now and having the people and systems in place.
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Partner Retirement – Buyout Plans
Inside deal – our topic today Outside deal, beyond our scope but the pricing is higher
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Value of a CPA Firm Two pieces – capital and goodwill
What’s different about a CPA firm compared to most of your clients? Personal relationships - transition issues Relative low buy ins and the concept of vesting Longer term payout
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Value of a CPA Firm Tug of war between the “old guys” and the “young guys” What is Fair? Risk if value is too low Risk if value is too high
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Two Components of Value
Accrual Basis Capital Goodwill
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Capital Accrual book value
Payout generally cash or a relatively short term Interest is paid
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Goodwill What is your firm worth to your partners in an inside deal?
110% of fees? 100%? 80%? 50%?
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Polling Question What percentage of fees are you using to value your firm? 100% Less than 100% More than 100% We don’t use a percentage of fees We don’t have a buyout plan
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Multiple Used To Value Internal Partner Buyouts *
% of Net Fees Paid for Goodwill 2-4 Partners 149 Firms 5-7 102 Firms 8-12 65 Firms 13+ 53 Firms All Firms 2011 2010 > 100% 8% 11% 7% 9% 100% 20% 21% 17% 90 – 99% 6% 12% 75 – 89% 25% 22% 27% 23% 26% 50 – 74% < 50% 18% 15% Overall Valuation Percentages (as % of Fees) Over $20M $10-20M $2-10M Under $2M All Firms 2011 71.9% 77.8% 77.3% 88.3% 2010 71.4% 76.5% 78.7% 81.0% 78.1% 2009 82.5% 75.4% 77.6% *Rosenberg 2012 MAP Survey
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So, where did 1x fees go? Inside vs outside
Client transition issues (more mobility) Changing attitudes of younger partners Sweat equity
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Value of a CPA Firm Typical firm with revenue of $4,000,000
Capital $1,000,000 Goodwill (80% of revenue) 3,200,000 Total Value $4,200,000
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Different Approaches to Allocating the Goodwill
We don’t know?! Equal Fixed amount Ownership % Book of Business AAV Multiple of Compensation
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AAV (Average Annual Volume) Approach
Allocates the growth in the firm’s revenue each year to the current partners Normally based on relative compensation New partner gets 0 coming in unless they buy it. When a partner retires, their AAV balance is reallocated to other partners as retirement payments are made.
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AAV Illustration Total 1,450,000 130,000 1,580,000 1,264,000 1,100,000
Partners Net Fees Jan. 1 Yearly Increase Dec. 31 Goodwill At 80% Ptr A 1,450,000 130,000 1,580,000 1,264,000 Ptr B 1,100,000 110,000 1,210,000 968,000 Ptr C 800,000 70,000 870,000 696,000 Ptr D 650,000 60,000 710,000 568,000 New Ptr E 30,000 24,000 Total 4,000,000 400,000 4,400,000 3,520,000 3,200,000 320,000
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Relative Compensation Approach
Most widely used Example Firm with revenue of $6 million Netting $2 million (1/3) before partner comp At 100% of revenue, the goodwill is 3x total partner comp.
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Relative Compensation Approach
If goodwill is set at 3x partner comp, a retiring partner receives 3x his/her comp Generally based on the average of the highest three of the last five years, or five of last seven, etc. Why? 2012 PCPS Survey – 11% of firms using a 2.0 multiple 17% of firms using 2.5 35% of firms using 3.0
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Partner Retirement Systems *
2-4 Partners 149 firms 5-7 102 firms 8-12 65 firms 13+ 53 firms 2011 All 2010 Multiple of comp 36% 48% 55% 44% 45% 41% Book of business 13% 7% 2% 10% 15% Owner Pct. 20% 12% 9% 14% AAV 17% 19% 30% 18% Fixed 11% Equal 3% 0% 4% 1% No provision 28% 41 firms 13 firms 5% 3 firms 8% 4 firms 61 firms 23% 88 firms *Rosenberg 2012 MAP Survey
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Polling Question What method are you using to allocate firm goodwill to individual owners? Multiple of compensation Book of business Ownership percentage AAV Other or we don’t have a buyout plan
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Goodwill Payout Terms Deferred compensation structure
Beware of code section 409A Ten year payout common – sometimes shorter No interest or CPI
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Vesting Concept of earning the buyout / retirement / deferred comp over time The firm wants partners to stick around for the long haul Generally two scales in use – age and years of service
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PCPS Survey Results -Vesting
Minimum years of partner service to vest: 6 or fewer years, 30% 10 years, 28% 15 years, 13% 20 years, 16% Minimum age to receive full benefits: Age 55, 26% Age 60, 23% Age 65, 23%
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Two Hybrid Vesting Examples
Plan A 20 years as a partner Full vesting at age 65 50% limit until age 56 Plan B 25 years with the firm, vesting does not begin until year 11 Full vesting at age 65 with a 2.5% per year reduction for a departure before 65
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Death and Disability Payout is generally the same as a normal retirement Perhaps some “bonus” if insurance Define both ST and LT disability And, salary continuation, if any
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Non Compete Provisions
Rule #1. Consult an attorney in your state. True non-competes rare today Payments for clients taken is the new norm. 100% common, up to 150 to 200% Term? Payments for taking staff
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Maximum Payouts Protect the golden goose 5-10% of fees (10% is high)
One firm, 12% of profits before partners How it works
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Guarantees or Collateral
Forget it
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Mandatory Retirement / Buyout
Increasing trend to set the date 2012 PCPS Survey: 54% age 65 15% age 66 to 69 14% age 70 Why does the firm need to control it?
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Polling Question Our mandatory retirement age is: Age 65 Under age 65
Over age 65 We don’t have a mandatory retirement age
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Post Retirement Employment?
This is no longer a partner position At firm’s discretion (most do) Pay for specific duties / tasks. Normally billable time, new business, other projects. Charge time – typically 40% of billed time New business – 10 to 15% for three or less years. DO NOT – allow a “retired” partner to continue to do what they always did and receive retirement benefits.
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Notice / Transition Most firms don’t penalize the retired partner for lost clients. However There is a movement to notice and transition requirements/expectations, with penalties Notice – minimum of one year (two is better) Transition process that must be completed
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Client Transition Policy
Starts with a new client sales pitch: “If you go on a sales pitch alone, you get shot.” Continues with team orientation to servicing clients; creating “multiple touch points.” The firm maintains the partner’s comp during transition. The firm drives the transition process. Written plan (dates, post-retirement plans) Name the successors to the retiree—by client, target dates. Agree on announcements, internal & external. Quarterly monitoring of progress.
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Funding? Rare, but sometimes 401k or other retirement plan offsets
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Health Insurance An important story
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How Does the Math Work? Assumptions Cash Flow Current Comp is 300k
Add a staff for 100K Retirement payments are 3x over ten years Cash Flow +300,000 -100,000 -90000 +110,000
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Buying In The days of the big $ buy-ins including value for goodwill are over $100,000 to $150,000 Accrual balance sheet Financing?
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Other Stuff Look back provisions upon a subsequent sale
What is the split upon a sale? When do payments start upon an early withdrawal? Does a “for cause” termination affect the payout? What is the firm’s process for transition of clients?
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Questions?
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Thank You Follow our blog at www.adamsonadvisory.com/blog
Sign up for our newsletter at Contact us at Call us at
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