Buying Out Retiring Partners: What Does It Take?

Jul 19th 2013
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By Alexandra DeFelice

Does your firm's partner agreement contain the necessary elements to buy out retiring partners in the near future? Perhaps you haven't looked at the agreement in several years, or maybe your firm doesn't even have one. 

Neither situation is rare, according to Terry Putney, CEO of Transition Advisors, a national consulting firm that works with accounting firms on issues related to ownership transition. During a June 17 webinar on the topic, Putney provided some tips on what it takes to make partner buyouts successful.

"Your owner agreement defines the culture of your firm", Putney said. If partners are paid based on their book of business, they'll focus on their individual books of business, which results in silos versus a cohesive firm. "Many firms operate that way successfully, but if that's not a culture you want, you should change that." Sometimes agreements contain terms or clauses written twenty years ago that no longer are consistent with the culture of that firm, he added.

Partners need to understand the value that creates the basis for paying out a partner instead of making the deal purely financial, Putney stressed. 

Value consists of two components: The tangible (A/R, cash, etc.) and the intangible (the employees, name of the firm, and goodwill). The intangible could be three to six times more valuable than the tangible, Putney said. Firms need to allow enough time to transition the work from the retiring partner, so that the day the partner walks out the door, it's a nonevent – for the retiring partner's clients and for the firm.

So how does that happen? There are two ways to replace a partner: (1) Role reallocation, in which the partner's duties are spread among other partners; and (2) role succession, which comes into play when the partner has special duties no one else has that will need to be assigned to someone else in the firm. 

Transitioning plans require at least two years to fully transition the duties of a retiring partner, according to Putney. Individual-only tax clients typically will not take two years, but for a large audit client, that's the minimum amount of time. 

How do you know you have the right financial agreement

"Reward your retiring partners fairly for their years of sweat equity, but don't expect your remaining partners to borrow or step back in compensation to do it", Putney said. "That leads to unmotivated partners who are unwilling to execute the plan and stay with the deal."

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About the author:

Alexandra DeFelice is senior manager of communication and program development for Moore Stephens North America, and a regional member of Moore Stephens International Limited, a network of more than 360 accounting and consulting firms with nearly 650 offices in 100 countries. Alexandra can be reached at [email protected].

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