How Firms Disguise Their New Partner Buy-In
Years ago, the buy-in was determined by first, totaling the value of the firm (accrual basis capital PLUS the goodwill value of the firm) and then, multiplying it by the ownership percentage awarded to the new partner. The resulting buy-in amount was often a huge figure, usually in the $400K to $700K range.
Huge buy-ins are no longer in vogue, though some firms continue using this approach. The Rosenberg Survey shows that new partner buy-ins ranged from $100,000 to $150,000, with the average being $144,000. Only 18 out of 400 participating firms reported buy-ins in excess of $400,000.
Clearly, firms are disconnecting ownership percentage from the buy-in amount. Firms are treating the buy-in more as an ante to get into the game than a purchase of a share of the true value of the firm.
The method of payment of the buy-in by the new partner, however, has remained unchanged. It’s almost always paid over a period of years via reduction of salary and/or bonus. In cases where the buy-in is a fixed amount, say $100,000, it’s clear that the buy-in is $100,000.
But in the past year or so, I’ve seen a few firms disguise the true buy-in amount; I’m sure there are others doing the same that I am not seeing. Here are two examples:
Firm #1 required new partners to pay $20,000 immediately upon becoming partner. The remainder of the buy-in was paid in over a period of years via payroll reductions until the partner group deemed that the new partner had paid in a “sufficient amount,” usually $200K to $300K. The level of performance of the partner was one factor that determined when the buy-in was deemed to be complete. All very vague and mysterious. When this firm responds to MAP surveys requesting the amount of a new-partner buy-in, they incorrectly respond with $20,000, but the true number is in the $200-300K range.
Firm #2 didn’t require their new partners to pay any part of their buy-in immediately. Instead, the entire buy-in is paid in over a period of years via payroll reductions until the partner’s capital account equals their annual compensation, usually $200-$300K. When this firm responds to MAP surveys requesting the amount of a new-partner buy-in, they incorrectly report zero but the true number is in the $200-300K range.
So, the message here is that in determining what a new partner’s buy-in is, it includes not only the down-payment but the amounts to be withheld from the new partners’ compensation over a period of years.
How has bringing in partners changed since you were made partner? What are firms doing these days to craft buy ins that are a win for both parties? Consult our monograph How To Bring in New Partners.
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