If you’ve developed a plan to address the future viability and ownership of your CPA practice, congratulations. You’re ahead of most practices. But having a plan to govern who may become partners or how they’ll be selected is only part of what you need to consider. It’s just as important to determine how you’re going to finance the process.

That’s crucial, because a CPA practice buy-in must address two competing interests fairly. The current partners want to be sure they’re being compensated for the time and energy they’ve invested in the development of the practice and in securing its roster of satisfied clients. At the same time, the new partners need to feel the investment they’re making will provide sufficient value. Agreements about practice succession can’t be vague promises; to be effective and fair, they must contain detailed plans that spell out the cost of becoming a partner, what the new partner will receive for that investment, how it will be handled, and how that investment will be divided between the selling partners and the practice’s capital.

There is no single buy-in structure that’s right for every CPA practice. Some will expect new partners to make an immediate payment in cash or by assuming a large loan. Others may expect payments quarterly or annually, perhaps by taking a portion of the new partner’s share of future profits or bonuses.

A common approach in today’s environment is for the amount to be based on the new partner buying a portion of the firm’s accrual basis balance sheet, then earning a share of goodwill value through a vesting process that rewards years of service. According to the recent Rosenberg Survey, the average buy-in for partners at 400 practices was $144,000.

Practices that want to remain viable and ensure healthy retirement incomes for veteran partners need to bring on new partners to make that possible, but that amount of money may be a deterrent for a young CPA. Senior partners can bridge the gap by finding and supporting funding approaches that will encourage new partners. Some use repayments from future payroll and profit distributions, but a better approach for many practices is to turn to outside financing.

One effective approach involves the practice guaranteeing a loan made by an outside lender. Because the financing is guaranteed, the rate and terms are more affordable than the new partner could expect to obtain on his or her own. The new partner pays the borrowed amount directly to the practice, which adjusts compensation to cover the debt service. Through this approach, the new partner is able to make a commitment to the practice, and the practice itself is rewarded for making the guarantee by receiving a substantial infusion of capital.

One caveat about this type of approach is that it may be foreign to many traditional lending sources such as local banks, which are more accustomed to financing tangible asset transactions. A better option for many CPA practices is a specialty lender familiar with the nature of the industry’s structure and revenues, so it can approach the underwriting with realistic expectations and an appreciation for inherent risks.

About Oak Street Funding

The materials in this paper are for informational purposes only.

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