Partner Retirement - Buyout Plans

Presented By: 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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Firm Governance Partner Compensation Partner Retirement and Agreements Partner Succession Partner Retreats Mergers and Acquisitions Partner Coaching and Goal Setting

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Credits:

The 2012 Rosenberg MAP Survey

2012 PCPS / Succession Institute, LLC Succession Planning Survey

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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 2009 Top Issues

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

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AICPA Survey of Firms with 21+ Professionals

62% of multi-owner firms expect succession planning to be a significant issue in the next five years. (about the same % as the 2008 survey)

54% of multi owner firms do not have a written plan in place. (improved from 65% in 2008)

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1994 to 2009, lowest number of accounting grads (150 hour requirement)

Even lower number sitting for the examThe BBB

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76 million of us born between 1946 and 1964

61% of all CPA firm owners are over 501993 – 40% of AICPA members over 402008 – 70%2012 - ??

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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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Inside deal – our topic today

Outside deal, beyond our scope but the pricing is higher

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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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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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Accrual Basis Capital

Goodwill

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Accrual book value

Payout generally cash or a relatively short term

Interest is paid

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What is your firm worth to your partners in an inside deal?

110% of fees? 100%? 80%? 50%?

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What percentage of fees are you using to value your firm?

A. 100%B. Less than 100%C. More than 100%D. We don’t use a percentage of fees E. We don’t have a buyout plan

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% of Net Fees Paid forGoodwill

2-4Partners

149 Firms

5-7Partners

102 Firms

8-12Partners65 Firms

13+Partners53 Firms

All Firms

2011 2010

> 100% 8% 11% 11% 7% 9% 8%

100% 20% 21% 21% 17% 20% 21%

90 – 99% 7% 6% 7% 12% 8% 7%

75 – 89% 25% 22% 27% 17% 23% 26%

50 – 74% 23% 21% 25% 27% 23% 23%

< 50% 17% 18% 9% 20% 17% 15%Overall Valuation Percentages (as % of Fees)

Over $20M

$10-20M $2-10MUnder $2M

All Firms

2011 71.9% 77.8% 77.3% 88.3% 77.8%

2010 71.4% 76.5% 78.7% 81.0% 78.1%

2009 82.5% 75.4% 77.6% 82.5% 78.1%

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*Rosenberg 2012 MAP Survey

Inside vs outside

Client transition issues (more mobility)

Changing attitudes of younger partners

Sweat equity

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Typical firm with revenue of $4,000,000

Capital $1,000,000Goodwill (80% of revenue) 3,200,000

Total Value $4,200,000

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1. We don’t know?!2. Equal3. Fixed amount 4. Ownership %5. Book of Business6. AAV7. Multiple of Compensation

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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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PartnersNet Fees

Jan. 1Yearly

IncreaseNet FeesDec. 31

GoodwillAt 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 0 30,000 30,000 24,000

Total 4,000,000 400,000 4,400,000 3,520,000

GoodwillAt 80% 3,200,000 320,000 3,520,000

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Most widely used

ExampleFirm with revenue of $6 millionNetting $2 million (1/3) before partner

compAt 100% of revenue, the goodwill is 3x

total partner comp.

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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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2-4Partners149 firms

5-7Partners102 firms

8-12Partners65 firms

13+Partners53 firms

2011All

2010All

Multipleof comp 36% 48% 55% 44% 45% 41%

Book ofbusiness 13% 13% 7% 2% 10% 15%

OwnerPct. 20% 12% 10% 9% 14% 15%

AAV 17% 15% 19% 30% 19% 18%Fixed 11% 12% 7% 11% 10% 10%Equal 3% 0% 2% 4% 2% 1%

Noprovision

28%41 firms

13%13 firms

5%3 firms

8%4 firms

17%61 firms

23%88 firms

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*Rosenberg 2012 MAP Survey

What method are you using to allocate firm goodwill to individual owners?

A. Multiple of compensationB. Book of businessC. Ownership percentageD. AAVE. Other or we don’t have a buyout plan

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Deferred compensation structure

Beware of code section 409A

Ten year payout common – sometimes shorter

No interest or CPI

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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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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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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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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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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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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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Forget it

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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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Our mandatory retirement age is:

A. Age 65B. Under age 65C. Over age 65D. We don’t have a mandatory retirement age

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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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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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1. Starts with a new client sales pitch:“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.

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Rare, but sometimes 401k or other retirement plan offsets

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An important story

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Assumptions

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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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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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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Follow our blog at www.adamsonadvisory.com/blog

Sign up for our newsletter at www.adamsonadvisory.com

Contact us at gadamson@adamsonadvisory.com

Call us at 765-488-0691

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