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Partner Retirement / Buyout Plans: Current Trends

Partner Retirement / Buyout Plans: Current Trends. Presented By: Marc Rosenberg, CPA. THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com. The Rosenberg Associates. Marc Rosenberg, CPA, President 23 years consulting to CPA firms Consultant, author and speaker

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Partner Retirement / Buyout Plans: Current Trends

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

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

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

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

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

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

  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?) Goodwill 4,000,000 (0ne times) Total $5,000,000 THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

  11. Philosophy of a CPA Firm’sPartner Retirement/Buyout Plan 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’sPartner Retirement/Buyout Plan • Your share – the value of your efforts to build up the value of the firm: • Bringing in business • Managing the firm • Servicing/retaining clients • Developing staff • Capitalizing the firm • Working hard AND smart THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

  13. Philosophy of a CPA Firm’sPartner Retirement/Buyout Plan 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. Two main types of payments • Capital • Goodwill / Deferred comp THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

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

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

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

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

  19. Multiple Used To ValueInternal Partner Buyouts* MVP THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com *2010 Rosenberg MAP Survey

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

  21. 6 Methods for Goodwill Multiple of compensation • If partners earn 1/3 of fees as profits • Then, 3 times comp = 1 times fees • THE • ROSENBERG ASSOCIATES LTD. • www.rosenbergassoc.com

  22. Defining “compensation” • All income, not just “salary.” • 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. 6 Methods for Goodwill Multiple of compensation AAV (Average Annual Value) • THE • ROSENBERG ASSOCIATES LTD. • www.rosenbergassoc.com

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

  25. AAV Illustration Each partner’s AAV builds as firm grows ---- First to retire • THE • ROSENBERG ASSOCIATES LTD. • www.rosenbergassoc.com

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

  27. Partner Retirement Systems* MVP • THE • ROSENBERG ASSOCIATES LTD. • www.rosenbergassoc.com *Per 2010 Rosenberg MAP Survey

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

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

  30. Vesting • To encourage partners to stay around for the long haul • Decisions: • Based on years as a partner? • Age based? • Limit vesting until early retirement age? • Age for 100% vesting? THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

  31. 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 Two Common Vesting Methods Q • THE • ROSENBERG ASSOCIATES LTD. • www.rosenbergassoc.com

  32. Payout nuances • 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. • Does a partner lose any or all benefits if he/she is expelledwith cause? THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

  33. 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 THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

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

  35. MVP 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

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

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

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

  39. 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 retiree has 1 or 2 huge clients. • Reductions more common if a substantial amount of retiree’s client base leaves the firm THE ROSENBERG ASSOCIATES LTD. www.rosenbergassoc.com

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

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

  42. Payments Guaranteed? Never! The Rosenberg Associates

  43. MVP 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 How firms afford the buyout paymentsPart 1: The math Problem: Retiree wants to continue his comp AND start receiving his buyout. That doesn’t work. • THE • ROSENBERG ASSOCIATES LTD. • www.rosenbergassoc.com

  44. How firms afford the buyout paymentsPart 2: Good management MVP • 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

  45. Top 10 Mistakes I SeeIn Partner Retirement Plans Pay interest on GW. No vesting. 90 days or less notice. No mandatory retirement provision. No limits on annual payments. The Rosenberg Associates

  46. Top 10 Mistakes I SeeIn Partner Retirement Plans Lone Ranger specialties. Receiving retirement checks while still controlling clients; i.e., no transition. Client transition process not formal. Proceeds of sale revert to owner %. 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: • The firm grows. • The firm is profitable. • Reasonable buy-in. • Well written buy-out plan. • No Lone Rangers. • Good spread in ages of the partners. • Good track record of client retention re: retirees • Pass the “Acid Test.” Q • THE • ROSENBERG ASSOCIATES LTD. • www.rosenbergassoc.com

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

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

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