The Future of Accounting: Rosenberg Survey Insights on Partner Buy-In and Buy-Out

The Future of Accounting

In my first article on The Future of Accounting as reflected in The Rosenberg Survey—a comprehensive annual survey of the accounting profession that The Growth Partnership has authored—I examined emerging patterns we’ve seen regarding partner compensation systems. In this article, I’ll address the related issues of partner buy-in and buy-out and what recent trends we’ve observed.

Partner Buy-In

We’re all keenly aware of the succession crisis currently gripping the accounting profession. The shortage of experienced CPA employees in our profession has created a shortage of potential partners. At the Growth Partnership, we deal with accounting firms exclusively—and in our experience with the firms we work with, we have noted that they’re trying to make it easier to become a partner, by decreasing buy-in amounts and making terms more favorable.  

 

Partner Buy-Out

In The 2020 Rosenberg Survey, looking back at 2019, we reported the percentage of firms that offer mandatory retirement provisions:

 20192018201720162015
Over $20M95%94%91%87%88%
$10-20M78%81%74%77%72%
$5-10M70%69%70%70%69%
$2-5M47%53%51%49%49%
Under $2M26%25%19%17%29%

The number of firms that have mandatory retirement provisions in their partner agreements remained relatively steady, after an upward trend for the past few years. In working throughout the industry, we have noted a general acknowledgement of the importance of mandatory retirement provisions. Mandatory retirement does not mean it is mandatory to stop working. It means the partner must relinquish their equity and begin the capital and goodwill payment process. A well-structured succession strategy allows for a partner to continue working so long as it’s a win-win between him/her and the firm.

 

How Are Partner Buy-outs Being Funded?

From the table below, taken from our 2020 survey, it’s visible that the multiple of compensation method has become the gold standard in the industry at all firm sizes, particularly at firms with five or more partners, as the basis for calculating partner buy-outs. 

 
 2-4 Ptrs5-7 Ptrs8-12 Ptrs13+ Ptrs2019 Total2018 Total2017 Total
Multiple of Compensation34.1%49.4%58.2%60.7%47.347.6%46.4%
Book of Business8.0%14.6%7.3%0.0%9.2%10.4%9.3%
Ownership Percentage25%15.7%3.6%3.6%15.0%14.8%17.9%
AAV18.2%11.2%21.8%25.0%17.3%16.4%15.4%
Fixed12.5%9.0%7.3%7.1%9.6%8.8%8.6%
Equal2.3%0.0%1.8%3.6%1.5%2.0%2.5%
Firms with no retirement provision23.8%7.2%5.1%9.4%13.5%12.0%13.0%

A rather disturbing note, as we see in the bottom row, that in 2019, 13.5% of all firms had no retirement provision (compared to 12% last year). Why wouldn’t a firm have a buyout agreement in place? From our experience, agreeing on the terms is a very sensitive  subject, one that’s difficult for partners to address. As a result, they postpone the development of a   plan.

 

In Closing

From our experience with the firms we work with, it’s clear that firms of all sizes are struggling with partner retirement. First, many firms are realizing their existing partner buyout arrangements aren’t viable: payout terms are too short, and amounts too high. Second, there an insufficient number of CPAs on the “partner-to-be bench” to replace retiring    partners. Consequently, firms are struggling with client transition, responsibility transition, and oftentimes leadership transition, asking themselves, “Who is the next Managing Partner?” While it may be difficult, we feel it’s critical that partners engage in these discussions and put together a viable succession plan or update the existing one.

 

We’d like to know how your firm has been doing the past year. The 2021 Rosenberg Survey (covering 2020) is now open, and we’re canvassing CPA firms and soliciting their input until July 15, 2021. If you’re a CPA firm, how do you participate in The Rosenberg Survey and learn its findings? 

Simply go to www.rosenbergsurvey.com to begin the process. The survey is open and will remain so until July 15.

The Future of Accounting: Rosenberg Survey Insights on Changing Partner Compensation Systems

accounting

In the accounting world, there has been a shift in the way CPA firms have been compensating their partners and allocating their profits. Historically there was a lock-step system dictated by a direct correlation between age and compensation; the older you were, the more you got paid—regardless of the value you were bringing to the partnership.

However, there was a pitfall to that approach. What if you have a senior partner who’s now kicking back and not producing much, while an aggressive younger partner is busy racking up more hours, yielding a bigger book of business? Clearly, the younger partner is more valuable, but under the old system, the senior partner got paid more.

Today it’s changed completely. The majority of partner compensation systems are based on the value you bring to the firm. You can see the reality of this change clearly in the latest Rosenberg Survey, a widely respected study I author that reviews the previous year’s changing accounting landscape. 

For the past several years, we’ve seen the number of firms moving to the compensation committee method increase; in 2019, it leveled off (just slightly down). For firms of 13 partners or more, this method is still the overwhelming choice. 

Based on our consulting work and discussions with other top consultants in the profession, it appears the compensation committee is the system of choice for larger firms. Why is this? Here are some of the reasons: 

  • It allows for subjectivity, so firms can reward intangible contributions.
  • It takes the sole responsibility out of the hands of the Managing Partner.
  • It possesses advantages over a pure formula-driven system, which has numerous flaws (such as overlooking intangible contributions).
  • It creates a trusted group that looks out for the firm as a whole.
  • It’s often the only system the partners can agree on.

In the table below, here’s the nitty-gritty of what we learned about the current state of partner comp systems: 

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In our latest Rosenberg Survey, published in 2020 but covering the state of the CPA profession in 2019, we learned a surprising fact: over 60% of all firms are using a compensation system that allows for recognizing intangibles such as leadership, niche responsibility, and department responsibility, using such methods as Compensation Committee, Paper and Pencil, MP Decides, and All Partners Decided.

Fifteen years ago,it wasn’t this way. Now we’re seeing more partner compensation systems that reward for intangibles and ultimately, overall value.

Here’s another interesting set of figures regarding the range in partner income, from high to low: 

  • Firms over $20M: 3.3 to 1 (3.6 to 1 in 2018)
  • Firms $10-20M: 2.8 to 1 (2.5 to 1 in 2018)
  • Firms $5-10M: 2.4 to 1 (2.2 to 1 in 2018)
  • Firms $2-5M: 1.7 to 1 (1.9 to 1 in 2018)
  • Firms under $2M: 1.4 to 1 (1.3 to 1 in 2018

However, I should add that the findings I’m citing are all pre-COVID. But good news: the 2021 Rosenberg Survey (covering 2020) is now open; we’re canvassing CPA firms and soliciting their input until July 15, 2021. If you’re a CPA firm, how do you participate in The Rosenberg Survey and learn its findings? 

Simply go to www.rosenbergsurvey.com to begin the process. The survey is open and will remain so until July 15.

In our next article on The Future of Accounting, we’ll discuss partner buy-in. Stay tuned!