We all like to think that we’ll know when it’s time for us to walk away from work for good. In fact, many of us are so eager for the things we’ll be able to do when we retire that we look forward to it. Some obligatory lunches with longtime colleagues, transition meetings with favorite clients, an after-work reception … and then we’ll put it all behind us.
But what do you do when someone is clearly ready for retirement and won’t go? What do you do with a longtime partner who is dragging your CPA practice down and isn’t picking up on the hints that it’s time to go fishing or play golf? How do you handle a partner who sees himself or herself as integral to the practice’s viability when s/he is really keeping it from becoming what the clients and his fellow partners need to it be?
This is why it pays to have a mandatory buyout provision in your partnership agreement. Such a provision spells out specific reasons that a CPA practice’s partners may use to show another partner the door. Such provisions might include a mandatory retirement age, significant reductions in profitability, mistakes that put the practice in a position to lose clients, a failure to maintain licensing or continuing education requirements, legal or ethical lapses, or significant health matters such as early signs of dementia.
A mandatory buyout offers the remaining partners a graceful way to ease a partner who’s no longer pulling his or her weight out the door. If the provision is well-drafted, it takes much of the emotion out of the process, allowing the remaining partners to point to business conditions that all of the partners have agreed to observe. If your practice is interested in adding a mandatory buyout provision to your partnership agreement, you’d be wise to consult with experts who have designed similar provisions for other practices.
We have to recognize that retirement isn’t always a partner’s goal, particularly if that partner has few outside interests or motivations. It may be that work is critical to his or her sense of self-worth, or that the partner’s ego struggles with the idea of younger partners taking over clients with whom she’s had a strong personal relationship. In those cases, forcing retirement in the absence of a mandatory buyout provision can create resentment, leading the departing partner to damage relationships with clients and hurt the practice’s future earnings.
Drafting and implementing such provisions long before any of the current partners consider stepping down is critical to avoid future angst. If retirement appears to be a far-off dream, professionals will be more likely to agree to provisions that may not affect them for many years. Trying to force a new buyout provision on a partner close to retirement age may be taken as a personal attack.
In addition to spelling out the rationale for triggering a buyout, the provision must also address how the practice will finance the move. It’s critical that buyouts be self-funding, or they will decrease the value of the remaining partners’ ownership. One strategy is to use third-party financing to spread the cost of the buyout over several years. Specialty lenders, like Oak Street Funding®, understand the CPA practice model and can lend based on income, rather than assets.
About Oak Street Funding
The materials in this paper are for informational purposes only.