partner retirement / buyout plans: current trends presented by: marc rosenberg, cpa the rosenberg...
TRANSCRIPT
Partner Retirement / Buyout Plans:
Current Trends
Presented By: Marc Rosenberg, CPA
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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
The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg AssociatesThe Rosenberg Associates
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
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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
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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
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The Rosenberg AssociatesThe Rosenberg Associates
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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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
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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.
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Philosophy of a CPA Firm’sPhilosophy of a CPA Firm’sPartner Retirement/Buyout PlanPartner Retirement/Buyout Plan
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
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Philosophy of a CPA Firm’sPhilosophy of a CPA Firm’sPartner Retirement/Buyout PlanPartner Retirement/Buyout Plan
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..
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Two main types of paymentsTwo main types of payments
1.1. CapitalCapital
2.2. Goodwill / Deferred compGoodwill / Deferred comp
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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
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•Income allocation•Capital contributions
•Draws/salaries to partners•Cash distributions
Increases with: Decreases with:
Q
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GoodwillGoodwill
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Determining aggregate valueDetermining aggregate value
100% of fees? 100% of fees?
90%? 90%?
75%? 75%?
50%?50%?
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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.
The Rosenberg AssociatesThe Rosenberg Associates
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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.
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6 Methods for Goodwill6 Methods for Goodwill
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)
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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
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Each partner’s AAV builds as firm grows ----
First to retire
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6 Methods for Goodwill6 Methods for Goodwill
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
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MVP
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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
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InterestInterest
Yes on capitalYes on capital
Rarely on goodwillRarely on goodwill
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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
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MVP
Q
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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??
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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
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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
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MVP
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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.
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Limits on annual payoutLimits on annual payout
Usually 5-10% of feesUsually 5-10% of fees
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FundingFunding
Very little except some life insurance Very little except some life insurance for death and/or 401k.for death and/or 401k.
Q
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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
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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
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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!
The Rosenberg AssociatesThe Rosenberg Associates
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
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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
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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.
The Rosenberg AssociatesThe Rosenberg Associates
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.
The Rosenberg AssociatesThe Rosenberg Associates
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.”
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Q
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QUESTIONS?
The Rosenberg AssociatesThe Rosenberg Associates
The Rosenberg AssociatesThe Rosenberg Associates
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