As more baby boomers retire, more professional CPAs are needed to take over firm leadership nationwide. By 2030, all baby boomers will be over 65. It’s been dubbed the Great Retirement and the Silver Tsunami, and it gives up-and-coming CPAs an opportunity for new partners to buy into existing firms. But how?
The average CPA firm buy-in cost is $144,000 according to The Rosenberg Survey, which polled 400 CPA firms. Realistically speaking, not many professionals have that amount of cash in the bank waiting and ready to spend on a future professional business investment.
At some firms, new partners are expected to make an immediate payment in cash or assume a loan. 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.
We work with CPA firm owners across the country to support their business financing long-term growth and exit strategies. As a specialty lender, creating a custom plan tailored to the needs of the firm is essential to ensure its perpetuity long after the original owner retires. Planned well, a firm can continue its growth for many decades.
The key to success is planning and being open to possibilities. During partnership planning, design and discussion related to CPA firm buy-in, be sure to cover these four essential topics:
1. Who can become a partner?
The plan should describe partnership requirements to maintain fairness and give aspiring partners a roadmap. Typically, CPA firms seek employees who go above and beyond, have integrity, and demonstrate a high level of technical and leadership skills. Some firms may offer partnerships to employees with a niche expertise to potentially increase the value of the firm’s services. In firms where the criteria are vague, favoritism or even nepotism can come into play. Therefore, the plan must include measurable metrics to help prevent these challenges and ensure fairness among all potential partners.
2. What is the cost of a buy-in?
The cost of a CPA buy-in is typically determined by a valuation of the firm multiplied by the ownership percentage. However, some firms choose to add the goodwill value of the firm to the accrual basis capital, and then multiply by the partner’s percentage of the firm. Other firms will set a fixed price for all buy-ins.
3. What financing options are available?
Since few new partners have access to a large cash savings account, many firms create financing for buy-ins. For some firms, that involves internal financing with repayments taken from future payroll and profit distributions. Others may expect payments quarterly or annually, perhaps deducted from future shares of profits.
Other firms guarantee financing from an outside lender. This helps the new partner obtain a better loan rate and terms than they can on their own. The new partner then pays the borrowed amount directly to the firm, which adjusts the partner’s 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. Call it a shared risk.
Here’s an example of the loan process for CPA partner buy-ins: New partners take out a loan from a lender using the firm’s revenue as the collateral with a guarantee from the firm. With this plan, firms are able to expedite the buy-in process without needing to access cash reserves or face potential payroll deduction problems. New partners are completely vested in the rights and privileges of full partnership immediately and the firm is not responsible for holding a note.
4. What are the expectations for new partners?
It is important that CPAs aspiring to become partners and their firm governance agree on the expectations to prevent misunderstandings. Openly and honestly have a discussion and ask questions. What performance metrics or professional development milestones are expected? If expectations aren’t met, what happens? What credentials are required now and in the future?
Making partner in a CPA firm is an exciting milestone many CPAs work hard to achieve. Following an established plan for buy-in will help ensure a successful transition. Remember, each buy-in structure should be as unique as the firm, but new partners should not be surprised by the cost or expectations. Use these key topics as discussion points to create a plan for a long-term successful partner buy-in.
