Are Partner Buyout Plans Ponzi Schemes?

Partner buyout plans at CPA firms have been around for a long time.  But the retirement of Baby Boomer partners has brought these plans under a level or scrutiny unlike years past.  Billions of dollars are at stake, nationwide.  Older partners wonder if their younger partners have the “right stuff” to keep the firm together and write their retirement checks.  Younger partners are increasingly leery of obligating themselves to a plan that seems like an elaborate Ponzi scheme.

There is compelling evidence that these retirement plans DO work: 50% of multi-partner firms are making retirement payments and sales/mergers are valuing goodwill at 70-100% of fees every day.

If these 6 factors are present, then it’s a good deal for the young partners. Without these factors in place, I can see how they might be viewed as a Ponzi scheme:

1. Growth.  Without growth, there is no room for younger partners.  Without younger partners, retirement plans are a pipe dream.
2. The firm is profitable.  Earning a share of handsome profits for 20-30 years should be very exciting to those who will write retirement checks.
3. The firm has a reasonable new partner buy-in. Should be in the $50,000 to $150,000 range, regardless of firm size.
4. The firm’s partner retirement plan is properly written.
5. The firm has a track record of successfully retiring partners and retaining their clients.
6. Your firm can pass the “Acid Test.” When a partner retires, the remaining partners’ income goes up because money saved from not paying the retiring partner exceeds his/her retirement payments.