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:
| 2019 | 2018 | 2017 | 2016 | 2015 | |
|---|---|---|---|---|---|
| Over $20M | 95% | 94% | 91% | 87% | 88% |
| $10-20M | 78% | 81% | 74% | 77% | 72% |
| $5-10M | 70% | 69% | 70% | 70% | 69% |
| $2-5M | 47% | 53% | 51% | 49% | 49% |
| Under $2M | 26% | 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 Ptrs | 5-7 Ptrs | 8-12 Ptrs | 13+ Ptrs | 2019 Total | 2018 Total | 2017 Total | |
|---|---|---|---|---|---|---|---|
| Multiple of Compensation | 34.1% | 49.4% | 58.2% | 60.7% | 47.3 | 47.6% | 46.4% |
| Book of Business | 8.0% | 14.6% | 7.3% | 0.0% | 9.2% | 10.4% | 9.3% |
| Ownership Percentage | 25% | 15.7% | 3.6% | 3.6% | 15.0% | 14.8% | 17.9% |
| AAV | 18.2% | 11.2% | 21.8% | 25.0% | 17.3% | 16.4% | 15.4% |
| Fixed | 12.5% | 9.0% | 7.3% | 7.1% | 9.6% | 8.8% | 8.6% |
| Equal | 2.3% | 0.0% | 1.8% | 3.6% | 1.5% | 2.0% | 2.5% |
| Firms with no retirement provision | 23.8% | 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.
