1. Partner Retirement / Buyout Plans: Current Trends Presented By: Marc Rosenberg, CPA THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

2. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com The Rosenberg Associates Marc Rosenberg, CPA, President 23 years consulting to CPA firms 23 years consulting to CPA firms Consultant, author and speaker Consultant, author and speaker 700 client firms from coast to coast 700 client firms from coast to coast Top 100 Most Influential People in Acting Profession – Accounting Today Top 100 Most Influential People in Acting Profession – Accounting Today - 7 consecutive years - 7 consecutive years Named one of the most recommended Named one of the most recommended CPA firm consultants by INSIDE Public Accounting CPA firm consultants by INSIDE Public Accounting

3. The Rosenberg Associates 1000 Skokie Blvd. Suite 555 Wilmette, IL 60091 Phone: 847-251-7100 Fax: 847-251-4622 marc@rosenbergassoc.com

4. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Rosenberg is active with CPA firms: Facilitate retreats Facilitate retreats Partner compensation & retirement Partner compensation & retirement Succession planning Succession planning Mergers Mergers Strategic planning Strategic planning Practice management reviews Practice management reviews Partner relations and conflict Partner relations and conflict Upward evaluation surveys Upward evaluation surveys

5. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Titles 1. How to Bring in New Partners 2. How to Negotiate a CPA Firm Merger 3. How to Operate a Compensation Committee 4. What Really Makes a CPA Firm Profitable? 5. Guide to Planning the Firm Retreat 6. Effective Partner Relations and Communication Also known as “white papers” Also known as “white papers” Our proprietary consulting methods, handouts, checklists, and intellectual capital are captured in each of these monographs Our proprietary consulting methods, handouts, checklists, and intellectual capital are captured in each of these monographs

6. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com The Rosenberg Associates The Rosenberg MAP Survey – Accounting Today calls it “generally accepted as the barometer for CPA firm practice management.” The Rosenberg MAP Survey – Accounting Today calls it “generally accepted as the barometer for CPA firm practice management.”

7. The Marc Rosenberg Blog Launch: April 2011 Frequent posts about key CPA firm practice management topics Opportunity to stay on top of key CPA issues Subscribe to receive emails notifying you of new blog posts

8. Watch for MVP Slides MVP

9. Final Groundrule I take questions during the presentation

10. Value of a CPA Firm Example: A $4 million firm Value: Capital$1,000,000 (25% of fees?) Capital$1,000,000 (25% of fees?) Goodwill 4,000,000 (0ne times) Goodwill 4,000,000 (0ne times) Total$5,000,000 Total$5,000,000 THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

11. Philosophy of a CPA Firm’s Partner Retirement/Buyout Plan 1. As an owner of a firm with a well-defined street value, you have a right to your share of the firm’s value when you leave. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

12. Philosophy of a CPA Firm’s Partner Retirement/Buyout Plan 2. Your share – the value of your efforts to 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 THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

13. Philosophy of a CPA Firm’s Partner Retirement/Buyout Plan 3. Firms do not look at this plan as a savings plan that can be cashed in at full value any time the partner wants. Firms want their partners to stay around for the long haul. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

14. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Two main types of payments 1. Capital 2. Goodwill / Deferred comp

15. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Capital Majority accrual basis vs. cash basis Majority accrual basis vs. cash basis Payback often shorter than goodwill Payback often shorter than goodwill With interest With interest

16. How to calculate a partner’s share of the firm’s capital 1. Partnership accounting rules 2. Ownership percentage THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Income allocation Capital contributions Draws/salaries to partners Cash distributions Increases with:Decreases with: Q

17. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Goodwill Goodwill

18. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Determining aggregate value 100% of fees? 100% of fees? 90%? 90%? 75%? 75%? 50%? 50%?

19. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Multiple Used To Value Internal Partner Buyouts* % of Net Fees Paid for Goodwill 2-4Partners 139 Firms 5-7Partners 111 Firms 8-12Partners 89 Firms 13+Partners 63 Firms Grand Total 20092008 >100%6%4%3%12%6%9% 100%20%20%21%26%21%20% 90-99%4%1%4%7%4%7% 75-89%34%34%34%17%32%27% 50-74%25%28%29%24%26%23% <50%11%13%9%14%11%14% *2010 Rosenberg MAP Survey Overall Valuation Percentages (as % of Fees) Over $20M$10-20M$2-10MUnder $2MAll Firms 200982.5%75.4%77.6%82.5%78.1% 200876.6%79.6%83.3%79.1% MVP

20. What happened to 1x fees? 1. Resistance from young people. 2. Fear over losing retiree’s clients. 3. Bad debt reserve. 4. New partners feel they helped build the retiring partner’s client base. 5. Remaining partners too busy to take on clients of retiree. The Rosenberg Associates

21. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com 6 Methods for Goodwill 1. Multiple of compensation 2. 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

22. Defining “compensation” 1. 1. All income, not just “salary.” 2. 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. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

23. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com 6 Methods for Goodwill 1. Multiple of compensation 2. AAV (Average Annual Value) 3. 3. 4. 4. 5. 5. 6. 6.

24. AAV Method Incremental Growth Method (Better name) THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

25. PartnersNet Fees Jan. 1 Yearly Increase Net Fees Dec. 31 Goodwill At 80% Ptr A1,000,00090,0001,090,000872,000 Ptr B850,00060,000910,000728,000 Ptr C700,00060,000760,000608,000 Ptr D450,00060,000510,000408,000 New Ptr- E030,000 24,000 Total3,000,000300,0003,300,0002,640,000 GW benefits at 80% 2,400,000240,0002,640,000 AAV Illustration THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Each partner’s AAV builds as firm grows ----  First to retire

26. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com 6 Methods for Goodwill 1. Multiple of compensation 2. AAV 3. Ownership percentage 4. Client base 5. Equal 6. Fixed amount

27. Partner Retirement Systems* 2-4 Ptrs 139 Firms 5-7 Ptrs 111Firms 8-12 Ptrs 89 Firms 13+ Ptrs 63 Firms 2009 Total 2008 Total Multiple of comp 27%46%51%56%43%41% Book of business 17%11%4%2%10%13% Owner Pct. 31%19%14%16%21%21% AAV15%14%22%16%16%17% Fixed8%10%8%8%9%8% Equal2%0%1%2%1%0% *Per 2010 Rosenberg MAP Survey THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com MVP

28. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Term of payout 10 years most common 10 years most common At lower payout levels, 5-7 years is more common At lower payout levels, 5-7 years is more common

29. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Interest Yes on capital Yes on capital Rarely on goodwill Rarely on goodwill

30. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Vesting To encourage partners to stay around for the long haul To encourage partners to stay around 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?

31. 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 THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com MVP Q

32. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Payout nuances Will you allow a partner to receive retirement payments while he/she works full time? Fundamental Rule #1 – Try to avoid this. Will you allow a partner to receive retirement payments while he/she works full time? Fundamental Rule #1 – Try to avoid this. Part-time? If clients transitioned, yes. Part-time? If clients transitioned, yes. Does a partner lose any or all benefits if he/she is expelled with cause? Does a partner lose any or all benefits if he/she is expelled with cause?

33. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Notice Should be at least one year prior to retirement (trend is increasing towards two years) Meaningful transition efforts should be a condition for receiving goodwill benefits MVP

34. Two requirements to receive goodwill payments 1. 1. Give proper notice. 2. 2. Transition clients. Consequence of non-compliance: reduced benefits at sole discretion of the firm THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

35. 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 THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com MVP

36. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Mandatory retirement Rigid requirements not very common Rigid requirements not very common At 65, if partner wants to keep working, should be approved by annual vote of partners. At 65, if partner wants to keep working, should be approved by annual vote of partners.

37. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Limits on annual payout Usually 5-10% of fees

38. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Funding Very little except some life insurance for death and/or 401k. Q

39. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Reduce benefits if clients leave? Overall: 18% yes; 82% no Reductions more common if the firm waits longer to put together buyout agreement. Reductions more common if the firm waits longer to put together buyout agreement. Reductions more common if retiree has 1 or 2 huge clients. Reductions more common if retiree has 1 or 2 huge clients. Reductions more common if a substantial amount of retiree’s client base leaves the firm Reductions more common if a substantial amount of retiree’s client base leaves the firm

40. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Retired partners working part-time Retiree is not a partner. Retiree is not a partner. The firm decides on the work. The firm decides on the work. Pay: 30-50% of collected billable time Pay: 30-50% of collected billable time Rarely any pay for non-billable work Rarely any pay for non-billable work 10-15% for new business – 3 years 10-15% for new business – 3 years An office and support An office and support

41. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Death and disability Most firms treat it the same as a normal retirement. Most firms treat it the same as a normal retirement. Ways to make benefits more generous: Ways to make benefits more generous: Accelerate vestingAccelerate vesting Accelerate payout periodAccelerate payout period

42. Payments Guaranteed? Never! The Rosenberg Associates

43. How firms afford the buyout payments Part 1: The math Assumptions Comp = $300K Add staff = $100K Benefits: 3 times = 900K ÷ 10 yrs = 90K per year Cash Flow No pay to ptr$300K Retire pmts (90K) Add staff(100K) Cash ahead$110K THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Problem: Retiree wants to continue his comp AND start receiving his buyout. That doesn’t work. MVP

44. How firms afford the buyout payments Part 2: Good management Growth Respectable profitability Track record of developing staff to ptr, thus avoid age clustering of ptrs Track record of prior retirements THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com MVP

45. Top 10 Mistakes I See In Partner Retirement Plans 1. Pay interest on GW. 2. No vesting. 3. 90 days or less notice. 4. No mandatory retirement provision. 5. No limits on annual payments. The Rosenberg Associates

46. Top 10 Mistakes I See In Partner Retirement Plans 6. Lone Ranger specialties. 7. Receiving retirement checks while still controlling clients; i.e., no transition. 8. Client transition process not formal. 9. Proceeds of sale revert to owner %. 10. Pay benefits based on book of business. The Rosenberg Associates

47. Many young people look at their firm’s partner buyout plan and feel it’s a Ponzi scheme It’s not a Ponzi scheme if: 1. 1. The firm grows. 2. 2. The firm is profitable. 3. 3. Reasonable buy-in. 4. 4. Well written buy-out plan. 5. 5. No Lone Rangers. 6. 6. Good spread in ages of the partners. 7. 7. Good track record of client retention re: retirees 8. 8. Pass the “Acid Test.” THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com Q

48. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com QUESTIONS?

49. The Rosenberg Associates 1000 Skokie Blvd. Suite 555 Wilmette, IL 60091 Phone: 847-251-7100 Fax: 847-251-4622 marc@rosenbergassoc.com