A simple map for partner buy-ins

Typically, CPA firms devote a great deal of thought to partner retirements. That’s no surprise, given that most CPAs work hard throughout their careers to ensure they are able to make the most of their post-retirement years. But it’s just as important to think about the other side of partnership: bringing new partners aboard to assume leadership roles and enhance the firm’s ability to the fund the current partners’ retirements.

That’s why it’s important to develop a formal buy-in program for new owner-partners and to closely connect it with the CPA firms’ retirement plan. That connection is important for two reasons. First, part of the cost of becoming a partner is agreeing to financially support retiring partners. Second, because it provides assurance to the new partner that s/hewill eventually benefit from the extra responsibility associated with partnership.

The potential partners and the imminent retirees bring competing interests to the process. The current partners expect to be compensated as much as possible for the sweat equity they’ve contributed to the firm’s development, while new partners want the greatest possible value for their investment. The plan should be explicit in describing costs, financing options, and the expectations for new partners in terms of their role, required performance, and any mandatory professional development.

Each buy-in structure should be as unique as the firm. At some CPA firms, new partners are expected to make an immediate payment in cash or assume a large loan. Others may expect payments quarterly or annually, perhaps deducted from future shares of profits. Generally, it’s preferable to make those payments to the firm — rather than directly to the other partners — because doing so increases the firm’s capitalization.

While the traditional attitude about buy-ins included the new partner acquiring a significant amount of goodwill, that approach often increases the cost beyond the reach of young professionals. That’s why it’s become more common for buy-ins to be based on the new partner buying a portion of the firm’s accrual basis balance sheet, and subsequently earning a share of goodwill value through a vesting process built around years of service.

Since few new partners have access to a large pile of cash, many firms are creating opportunities for financing new partner buy-ins. For some firms, that involves internal financing with repayments taken from future payroll and profit distributions. What’s often a more practical and workable approach is for the current partners to line up and guarantee financing from an outside lender, helping the new partner obtain a better rate and terms than possible on his or her own. The new partner then pays the borrowed amount directly to the firm, which adjusts his or her compensation to cover the debt service. This approach gives the firm a healthy infusion of capital in return for taking on the minor risk of the loan guarantee.