Adamson Advisory

Transferring Client Relationships

This is an important area when a partner retires, and it is the one that pays the bills. The annuity revenue stream that we enjoy from our clients is critical and it is the currency that most firms use to pay the unfunded retirement benefits to the retiring partner. You really do have to get this right. 

The client transition plan needs to be orchestrated over at least two years, it needs to be written and it needs to be supervised and managed by the firm’s managing partner. More and more firms are requiring a minimum notice period for early exits, mandatory retirement ages and that the retiring partner work through a specific client transition process with the firm. There is also a trend toward penalties (reduction in retirement benefits) for the retiring partner if clients are lost because of inadequate notice and/or the client transition process developed by the firm is not completed. 

Beyond the above broad parameters, what should the process look like? First, separate the clients into groups based on their ease of transition. This really comes down to two or three factors: the closeness of the retiring partner’s relationship with the client decision maker, the degree of involvement of other people in the firm with that decision maker and the size of the client. The 1040s and small business clients may be as easy as a phone call or a letter introducing the new person. Perhaps personal introductions are all that you will need for others. The larger business clients are more likely to have other staff and partners involved and sometimes may actually be easier than accounts where the partner has been the primary contact. For the close personal relationships, which are always the toughest to transition, you should plan on shadowing through at least two year-end cycles.

Three Steps to Valuing Your Practice for Partner Retirements

There are 76 million Baby Boomers in the United States, defined as those of us born between 1946 and 1964. Accounting firms across the country are full of Boomers with 61% of all partners now over the age of 50, all marching toward retirement.

Consider these three steps in valuing your practice for partner retirements.

Step One is determining the value of your firm. Remember we are describing an internal structure, not an external sale or merger. Also, this is a process/transaction that is between the firm and the retiring partner; not a deal that is done outside the firm between individual partners.

There are two pieces to value – accrual basis capital and goodwill. The goodwill is almost always expressed as a multiple of revenue and the generally accepted value historically was one times revenue.

The surprise for many of us Baby Boomers may be that the overall average goodwill value out there has been about 80% of revenue for several years. The latest 2014 Rosenberg MAP survey of 364 firms puts the average at 81%.

So, once we get our heads around what is perhaps a lower value for our firms, Step Two is determining how we split up the firm’s goodwill among the owners. The choices here include allocating it based on ownership percentages or books of business which you tend to see in smaller firms. But the direction that the profession is trending is to allocate the goodwill based on owner compensation.

Step Three is the process you utilize to pay out the value to the retiring partner. The capital is usually paid out in cash or over a short term with interest. The vast majority of firms are paying out the goodwill in the form of deferred compensation (ordinary deduction to the firm and ordinary income to the partner). We see terms ranging from seven to ten years, with no interest. Ten years has become the norm.

It is probably time to pull those agreements out of the drawer, dust them off and take a look! Read the full story on this topic here.

Partner Succession – It’s All About Client Transition and Retention

CPA firms are wrestling their way through partner retirements and the accompanying succession issues in numbers that the profession has never seen before. It’s the Baby Boomer Bubble, up close and personal. But the biggie and the focus of my latest article is the transition of client relationships.

If you buy into the critical importance of client transition and retention, then we should expect that most firms have developed both a pretty good transition process and some well defined requirements for the retiring partners. Unfortunately, more often than not, that is not the case. The 2012 Succession Survey conducted by PCPS and the Succession Institute reported that 78% of firms do not have client transition expectations with financial penalties for retiring partners, if they are not completed.

If you are one of those firms in the 78% bucket, my article will give you some ideas on how to do a better job with client transition. Please pull out your partner agreements, dust them off and see if they even deal with this critical issue at all.

As the Baby Boomers march toward retirement the likelihood of multiple partner payouts within your firm increases. A well executed client transition plan is the best protection for the firm and the best insurance a retiring partner has that they will receive those unfunded retirement payments down the road.

Do Your Partner Agreements Include These Six Key Provisions?

In my prior firm, the review and revision of partner agreements was a process that happened every ten to fifteen years, if that often. I think that is pretty common in most firms. The problem is that firms change and evolve as do the partners and the environments that we practice in. Our agreements need to keep pace with that change. I continue to be amazed at the number of firms that have no agreements at all or haven’t made revisions in many years.

I want you to pull out your agreements, dust them off and read them. You might be surprised at what you see. Remember their primary purpose is to protect the firm and define the relationship between the firm and each partner. If you get motivated to update them, or create them, here are a few tips. I will preface this with the statement that I am not an attorney, this is not legal advice and you should consult an attorney in your state to help you.

Mandatory Retirement. I’m seeing this in most documents now. The point is that the firm should define the age at which normal retirement occurs. That means the individual’s ownership interest is purchased at that time and the firm determines whether the individual may continue in any employment capacity. The retirement age is not important, although the trend is that it is increasing. The expected retirement date and the control by the firm over the process are important.

Notice and Client Transition. This provision is a relatively new one but I’m seeing it more. It goes hand in hand with mandatory retirement, discussed above. The concept is that there is an expectation by the firm that the individual partner will give reasonable notice and enter into a plan to transition his or her clients over a period of time before retirement or voluntary separation from the firm. If you have ever had a partner leave the firm on short notice or a retiring partner who just won’t let go (I know that never happens in your firm) you know how tough it is to retain the clients. Let’s face it, if we lose a number of the partner’s clients because of poor transition it’s pretty tough to write those retirement checks. Put some teeth in your agreement to assure a smooth and successful transition.

Caps on Retirement Benefits. The discussion of how to determine the amount of retirement or deferred comp benefits for your firm is beyond the scope of this article. Regardless of how you get to the benefit amount, every agreement should include a provision to cap the total retirement benefits that can be paid out in any one year. You really have to balance the desires of the retiring generation with the younger generation who will be paying out the old guys. Generally it is a function of the firm’s gross revenue or profits before partner comp. I’ve seen numbers ranging from 10% of profits to 10% of gross revenue. You have to decide what is right for your firm.

Competition Provisions. This one is very much influenced by the laws in your state(s) of practice and you need to know how the courts view non-compete restrictions. I can tell you that
the trend for firms in many states is definitely away from a prohibition of competition with the associated  injunctive relief provisions. The movement is toward the concept of payment for clients that are taken from the firm for some period of time based on a multiple of billings. One year of billing seems to be fairly prevalent. Be careful not to offset deferred compensation payments to a partner against payment for clients as you may run afoul of IRS Code Section 409(a).

Vesting. The concept of retirement benefit vesting shows up in a couple of different ways in partner agreements. One is the “years of service” factor where the firm puts a value on tenure and contribution to the success of the firm over the long haul. An example here could be a twenty five year scale with full vesting at the twenty five year mark. The second is an age factor that ties into the firm’s mandatory retirement age, discussed earlier. This one is generally expressed in terms of a discount or penalty for every year that the exiting partner’s age is short of the target. For example, I have seen plans that discount the retirement payments by 2.5% for each year short of age 65. Many firms utilize a combination of both the years of service and age vesting factors.

Dispute Resolution. I’m seeing more and more partner agreements include language to require that any dispute surrounding them be settled by arbitration rather than through the courts. It can be more expeditious to go this route and it can also be a preferred choice for the firm over a possible jury trial. The American Arbitration Association is the body that is often referenced. Again, consult with an attorney in your state for specifics and whether these general statements may not apply to you.

CPA Partner Agreement Tune-Up Checklist

Partner agreements in most CPA firms get too little attention too, infrequently. They go in the file or desk drawer and stay there until “something” happens. Our goal at Adamson Advisory is to give you tools and tips that you can use in your firm, and hopefully nudge you into action before that “something” happens.

Here is a short checklist that you can use to review your firm’s partner agreements. It contains some guidelines that will get you started. We’ve also included some of the latest information on retirement provisions and current thinking that the profession is embracing.

If you’re like most firms, it has been awhile since you reviewed where you stand. Don’t put it off any longer.