how firms decide the goodwill payable to a retiring partner. by marc rosenberg retirements & buyouts there are five factors that need to be taken into account when computing the goodwill benefits due a retiring partner:
by ed mendlowitz
author of “implementing fee increases”
question: a widow called me to ask if i wanted to buy her husband’s practice. he died suddenly a month ago. what should i offer and how should i handle this?
response: it is always hard to buy a practice from a widow or estate when the accountant did not make arrangements.
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the expectations of the seller are usually greater than reality, and the buyer is getting something that already has declined in value, with clients leaving as they hear of the death, and the information about client servicing is likely not too organized, if it exists at all. this also applies to a sudden complete disability. this should be a “lesson” to get your own affairs in order.
a lot depends on what type of firm you have.
by marc rosenberg
retirements & buyouts
the only reason why goodwill benefits are paid is for retention of the clients after the retiring partner exits the firm. a logical extension of this premise is that, if a retiree’s clients don’t stay, there is no basis for paying the money.
and two considerations for the working partners.
by marc rosenberg
retirements & buyouts
the vast majority of firms pay retirement benefits over a 10-year period. we occasionally see five to seven years at lower payout levels.
some firms under $10 million adopt five-year payouts for goodwill, reasoning that because five-year payouts are common for the purchase of a cpa firm, the same term should apply to their own buyouts.
how firms decide the capital payable to a retiring partner.
by marc rosenberg
retirements & buyouts
we know there are two parts to retirement benefits:
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the issues involved in determining the capital are very few and straightforward compared with the goodwill determination, which is far more intricate and nuanced.
in fact, there are four main variables in calculating the capital. this compares to 25 variables for goodwill. read more →
forget “one times fees” for goodwill.
by marc rosenberg
retirements & buyouts
one of the first and most critical decisions in creating a partner retirement plan is the overall valuation of the firm.
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the value of a cpa firm has two components: read more →
as partners work longer, average partner incomes decline.
the aging in the partner ranks of the cpa profession is by far most prominent at smaller firms, according to the most recent edition “the national map survey of cpa firm statistics.”
at firms with less than $2 million in fees, the percentage of partners over the age of 50 has risen to a startling 73.3 percent, up from 65.4 percent last year.
and at firms with fees of $2 million to $10 million, the number has risen to 66 percent from 65.3 percent. read more →
plus: making the math work.
by marc rosenberg
retirements & buyouts
why are cpa firms deficient at succession planning?
it is abundantly clear that cpa firms have succession planning challenges. partners overwhelmingly prefer the exit strategy of passing on the firm to younger partners vs. merging out of existence. but history shows that the vast majority fail at moving their firms into the next generation. what holds them back?
the answer lies in the classic pogo cartoon line: “we’ve seen the enemy and the enemy is us.” read more →
valuing a cpa firm for partner retirement purposes is much different than a valuation for merger purposes.
by marc rosenberg
retirements & buyouts
profitable, attractive firms, generally under $2 million, sold in a market with many potential buyers, will often fetch 110 percent to 150 percent of fees.
if this is the case, why do cpa firms value goodwill for retirement purposes at no more than 100 percent of fees and usually, 80 or 90 percent of fees? here are six good reasons why:
9 factors that ensure retirement plans will pay off.
by marc rosenberg
retirements & buyouts
when a partner group crafts their firm’s partner retirement plan, they are hopeful that the plan will play an important role in their financial futures. they are guardedly optimistic that their buyouts will be realized.
but the path toward the retirement payday is a perilous one. many actions are necessary and a number of obstacles must be overcome for a firm’s partner retirement plan to pay off. read more →
1 in 6 firms have no formal, written exit plans in place.
by marc rosenberg
retirements & buyouts
despite the clear, substantial value of a cpa firm, roughly 15% of multi-owner cpa firms – mostly firms with up to four partners – do not have a formal, written partner retirement plan. why? read more →
do it wrong and your firm could lose a pile of money.
by marc rosenberg
retirements & buyouts
partners have a natural tendency to view the firm’s partner retirement plan as a personal savings plan, but that’s not how these plans work. cpa firm retirement plans are quite different. read more →
apparently, they’re worth it.
by marc rosenberg
retirements & buyouts
an ample supply of willing buyers is a critical factor that strengthens and confirms the value of any asset, let alone a cpa firm. virtually every firm, from sole practitioners to the top 100, is eager to acquire a smaller firm. why is this? read more →