Here Are Some Best Practices for Admitting New Partners to Your Accounting Firm
by Gary Adamson on
How Much Capital?
“It depends“ is not a good answer but there is really not a rule of thumb for the percentage of equity that the firm sells to the new partner. It depends on the firm and how it approaches a number of things including partner compensation and retirement. We can however give you a few numbers and thoughts. First, the average buy-in for a new partner based on 331 firms in the 2012 Rosenberg survey was $137,000.
Second, the trend in the profession is that ownership percentages are having less and less to do with what a partner’s compensation and retirement payouts will be. It is more about your performance and relative contribution among your partners.
Capital is becoming more about voting rights and supporting a portion of the firm’s balance sheet. I'm seeing the profession move to capital accounts that are similar for all partners except for new ones where they may start out at some smaller level and move up to “full equity” status over time.
Financing the Buy-In
Since most of our younger associates are not able to write a check for $137,000, firms must figure out a way to assist with financing for the new partner. The normal route is that the firm will withhold the amount over some period of time from future profit distributions to the new partner.
There is another approach used by some firms that I happen to like a lot. It is using outside financing rather than inside. Basically the firm guarantees a loan for the new partner at a bank. Normally the firm can help the new partner obtain attractive terms. The new partner borrows the $137,000 and contributes it to the firm in exchange for the partnership interest. The firm will make sure that the new partner receives a compensation increase that is at least enough to cover the new debt service.
Here is why I like it -- The firm gets the new capital dollars which most firms can certainly use. Yes, it comes with a guarantee but it is off-balance sheet debt. More important, there is something personal about the new partner borrowing that $137,000 from a bank. It is pretty sobering and it brings a certain level of seriousness to the transaction that you won’t get otherwise.
On a personal note, I will never forget when I borrowed the money to make my first capital contribution as a new partner. It was a huge deal to me. Some of you may remember when the prime rate was 22% back in the 1980’s, which made it even more interesting!
Regardless of whether you change anything or not, the Baby Boomer succession wave presents an opportunity to review and challenge how we bring new partners into our firms.