How Partners Get Buyout Payments: 6 Key Elements

Every year, hundreds of firms create a partner retirement/buyout plan.

It’s natural for the partners to feel they can rest easy at this point, optimistic that the groundwork has been laid for each partner to receive, on average, a million dollars or more in retirement benefits when they retire.

But the path from creating the plan document to cashing their first retirement check is a treacherous one.  Like any plan, the easy part is creating it.  The hard part is making it happen.

There are six key elements to partners’ receiving their buyout payments:

Effective management.  Succession planning doesn’t happen on its own. Left to their own devices, partners approaching retirement tend to continually put off transition of client and other duties.  They usually don’t neglect this transition to be malicious or to intentionally circumvent the firm’s policies.  Instead, they have enormous difficulty facing the reality that they need to wind things down.  Management’s job is to take strong control over the retirement process for each partner.

A strong group of up and coming staff.  A successful track record of developing staff to partner must be established.  This provides the firm with partners who will write retirement checks, and help the firm achieve a nice range in partner ages. Too many partners retiring at the same time is one of the most common reasons why retirement plans fail.

Continuous growth and a respectable level of profitability.  This is the fuel that makes the succession engine purr.  Potential partners want to see a firm that is growing while achieving healthy profits before they’ll feel comfortable signing retirement checks.

Retention of retiring partners’ clients.  If the clients don’t stay, there is little justification for paying retirement benefits.  The firm needs to develop a culture of servicing clients as a team so that client transition is a firm-centric function rather than a partner-centric endeavor.  No Lone Rangers.

A track record of successfully retiring previous partners.  Past success doesn’t guarantee future outcomes.  Nonetheless, it’s reassuring to new partners to see a track record of the firm continually retiring partners without skipping a beat.

The math must work.  When a partner retires, the remaining partners should either make more money or at least stay the same.  If the payment of retirement benefits causes a cash flow strain to the firm, this is a symptom that something is amiss.

Our newest monograph, CPA Firm Partner Retirement /Buyout Plans, is a comprehensive 144-page guide to everything you need to know to create an effective, workable partner retirement plan.