Don’t Let Retiring Partners Double Dip
Marc Rosenberg, CPA
Here’s a question that frequently arises in my consulting engagements:
What are your thoughts on partners wanting to work for the firm in a non-partner role after they retire, who continue to control “their” clients while receiving deferred compensation and a salary for their work?
The answer is rooted in the maxim: “No transition…no goodwill.” This means that retired partners should not have the inalienable right to deferred comp without actively and effectively transitioning their clients. If they don’t transition, then the remaining partners, at their sole discretion, should be able to reduce the deferred comp payments.
I would also add this: Firms are free to do whatever they want in writing their partner agreements. If the partner group decides that they want to give themselves the freedom to continue working their client base, with little or no transition AND pay deferred comp to retired partners AND continue to compensate them at a partner level, that’s their prerogative. But in my opinion, this is misguided. Unfortunately, I have seen a number of founding and/or power partners bully the other partners into agreeing to this one-sided and thus, dangerous arrangement.
A Typical Retirement Transition
- The partner gives notice, which these days, is 18-24 months prior to retirement.
- During the notice period, the partner actively and effectively transitions clients.
- Ideally, the firm has in place a written client transition policy, which is closely monitored by the firm’s management. Assigning clients is primarily a firm decision, not a decision of the partner, though the partner can make suggestions.
- Partner retires on an agreed-upon retirement date.
- If partners wish to continue working, it is at the firm’s annual discretion. The firm decides how much they work, what work they perform for which clients, and what their comp will be.
- Comp for retiring partners is usually decided on a case by case basis and is commonly 35-40% of the collected billable time (hours x rate) worked by the partner. The partner is eligible to earn the same commissions for bringing in business as the firm offers its staff. It’s very unusual for retired partners to be compensated for non-billable time.
Conclusion
The main reason for making deferred comp payments to retired partners is to “acquire” their clients. If a firm knew for sure that they would lose the clients of a retiree, I doubt that deferred comp payments would be made. Failing to transition clients in a retirement scenario means that the firm gets nothing in exchange for the payments, which is neither a fair nor reasonable arrangement.
Paying deferred compensation to a “retired partner” who continues to control clients and opts out of client transition is the CPA firm equivalent to “double-dipping.” No one likes double-dippers.
Crafting a buyout plan that is fair to all parties – the retiring partner and the firm – requires careful thought and oversight. Consult our guide: CPA Firm Partner Retirement/Buyout Plans to make sure all the expectations are crystal clear.
5 Comments
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The issue that Marc identifies is a serious one. A couple of comments and additions. Not only should firms have a transition policy, but partners should prepare a transition plan specific to their clients. In a word, how they will implement the policy. The retirement date should be “hard and fast.” Partners who are reluctant to retire will delay transition to delay retirement. Firms should consider including in their partnership agreement a reduction in the retirement benefit if the transition plan is not followed. Finally, allowing retired partners to “hang-on” as employees or contractors can be a real problem. They can’t stop being partners! They consume partner resources (e.g. offices, support staff, technology, etc.), boss people around, continue to take the lead on clients, etc.
I agree that the issue is a serious one, but have some points that should be considered regarding the services by the retiring partner/owner to clients subsequent to the sale. I do think that the retiring partner should be transitioning clients to others in the firm years before they retire. However, I do not envision this as the removal of the partner from servicing a client not only during the transition period, but also for a time after retirement. The purpose of the retired partners later services can continue to cement the client relationship with the firm. Throughout my career, even now as a retired partner, I have been involved with business acquisitions that have almost always included a time period of subsequent employment by the former owner, and certainly the key officers of the target company. In many cases there have been earn-out agreements, but there also have been times when such agreements were not in existence. I see the key issue being that client relationships are transitioned, and that should be much sooner than retirement.
Peter. As always, your insight is deep and critically important. Thanks.
Thank you for your continued insight. I am part of an $8 million firm, and a year to 2 out of transitioning. The client base I’m transitioning is larger $2.2 million, and I have a few managers in the firm who work almost exclusively on a part of this book. My thought is to transition in segments, perhaps $500k per year until its complete, but continue engaged here fully. So a 5 year transition, with salary drop accordingly and a buyout start and building each year…through 10 years, that will actually end in 15 years from the start. Any comments would be helpful.
Wise thoughts, as usual Ed.