Here Comes the Baby Boomer Bubble – Valuing Your Practice for Partner Retirements
by Terri Eyden on
By Gary Adamson, CPA
I talk about the BBB with my clients a lot. No, this BBB is not the Better Business Bureau; it is the Baby Boomer Bubble. There is constant reference by the news media about the aging of the Baby Boomers, but I, for one, did not know exactly what it meant. So, I "Googled" it.
What I found is not good news for the accounting profession. The BBB is seventy-six million of us born in the United States between 1946 and 1964, and we are fairly evenly spread through those nineteen years. That means the oldest of this huge bubble are four million folks who turned sixty-five last year. And, we have another eighteen years to go!
The CPA profession is a reflection of the BBB, with 61 percent of CPA firm partners now over age fifty. Every survey you look at highlights succession as one of the top issues of almost every firm. The point of all this is that firms will be retiring and buying out partners at a pace never seen before.
Many of us are looking at our partner agreements for the first time in a long time, trying to determine whether we have structured the buyout provisions in a way that remains fair to all and, in particular, affordable to the firm. It is not just the value that we place on the practice but, perhaps as important, the terms under which that value is paid to a retiring partner.
Let us start with the typical structure of most buyouts. There are two pieces: capital and goodwill. Capital is pretty easy. It is the firm's accrual based capital and it gets adjusted for the normal things – fair market value of real estate, work in process, and receivable reserves, etc. It is paid out to the retiring partner as cash or a note that bears interest, over a relatively short term.
The second piece is the goodwill of the practice, and this is where most of the conversation centers.