Retiring Partners – Double Dipping?
Marc Rosenberg, CPA / Aug 14, 2017
A reader’s question: Our firm has started to buy out a key partner, who is 65. After giving notice of his retirement and after he “retired,” he is still managing and controlling his clients and has begun the transition process. He is still doing some non-billable management work, too. He plans to stick around until he is paid off, which will take 10 years. Given this, what is reasonable compensation for his current work?
Our response: Point #1: Here are some cardinal no-nos: (a) let partners “retire,” start receiving their buyout AND continue controlling their clients while receiving most or all of the compensation they received the year before they “retired.” There is one reason and one reason only why firms pay goodwill payments to retired partners –to get and retain their clients, and (b) let a retiring partner dictate to the firm how they will work after “retirement” and how they will get paid. Your statement “he plans to stick around until he is paid off” indicates that the firm plans to let the retiree dictate to them how he will work after retirement, which should not be acceptable.
CPA Firm Partner Retirement / Buyout Plans is a must-read for firms that need to update their existing plans or write a new agreement. The book addresses ►what CPA firms are worth, ►what partners must do to get their buyout money, ►how to value a firm’s goodwill, ►the acid test of a well-conceived retirement plan, ►6 methods of determining an individual partner’s buyout, ►vesting, ►notice and client transition requirements, ►mandatory retirement, ►non-compete and non-solicitation covenants
Point #2: Best practices which are very common, for paying retired partners:
- Retiring partner gives the proper notice and begins transition and mostly completes the transition during the notice period, which should be 18-24 months.
- Other firm partners should control the retiree’s clients. The retiree must annually request the firm’s approval to continue doing billable work.
- The work arrangement is part-time. Pay is often 35-40% of their collected billable time (billable hours x their billing rate). This is for the retiree’s personal time, not the time of everyone who works on the clients. There should be an incentive for the retiree to bring in business –15-20% for 3 years is common.
- “Retired” partners give up their equity in the firm upon retirement.
- Almost never do we see retired partners paid for non-billable time. The main exception is where the firm specifically requests the retiree to do admin work.