Should CPA Firms Continue the Decades-Long Practice of New Partner Buy-Ins?

Aspiring accountants who are invited to become a partner in their CPA firm usually face the hurdle of a buy-in requirement. This requirement is a payment that new partners must make to gain an ownership stake in the firm. Depending on the practice’s size, the buy-in requirement can be substantial at some firms, ranging from $100,000 to $200,000.

But is it necessary for CPA firms to require a buy-in from new partners?

A little history

Years ago, this was a common way that buy-in amounts were determined:

•  Step #1: Decide on the firm’s value, capital, and goodwill. Here’s an example: Assume that a $10M firm values its goodwill at one-times-revenue. Further assume that the firm’s capital is 20% of revenue, or $2M. Total value is $12M.
• Step #2: Decide the ownership percentage to award the new partner in exchange for the buy-in. Note: This is often a crapshoot.
• Step #3: If the firm decides that the new partner’s ownership percentage will be 5%, the buy-in would be a considerable $600,000, payable in 10s and 20s.

One of the characteristics of Baby Boomers was when the boss said “Jump!” the Boomers said, “How high?” New partners were so overjoyed at becoming a partner that they never questioned the sizeable buy-in. They just paid it with a smile. Younger new partners think differently, thank goodness! Now when the boss says “Jump,” younger people say, “Why? Besides, I have a better idea.” New partners have increasingly felt they cannot afford a buy-in and are unwilling to pay it. Fueling this is concern over the viability of the firm, given the retirement of the rainmakers, the uncertainties in the profession (inability to hire staff, the threat of artificial intelligence on compliance work, the future of the IRS given the desire by some to eliminate the IRS) and many other fears.

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Justifications for requiring a new partner buy-in

Firms have traditionally felt (many still do) that requiring new partner buy-ins is justified:

1. Every partner should have “skin in the game,” a meaningful amount of money invested in the firm that is at risk, thus ensuring that new partners are committed to the business and have an incentive to work hard and make sound financial decisions.
2. Although buy-in amounts have come down over the past few decades, one thing that hasn’t changed is that CPA firms still have a substantial street value—usually in the millions. Partners aren’t willing to give away a portion of that value for free. Hence, the buy-in.

But firms have gradually reacted to pressures to reduce the buy-in. As a result, new partner buy-ins have come down. In the most recent Rosenberg MAP Survey, the average buy-in, regardless of size, was $200,000 or so. Only 23 of 278 firms had buy-ins over $500,000. To ease the burden on this still significant buy-in, most firms today allow the buy-in to be paid over a period of years, without interest, often by withholding money from bonuses.

Should CPA firms continue to require new partner buy-ins?

Probably not zero, but something far less burdensome than $200,000, $500,000 or more. I know many partners will consider this blasphemous, but hear me out.

1. The buy-in stops some staff aspiring to be a partner. By eliminating or reducing the buy-in—by making the buy-in affordable—the obstacle is removed.
2. For many years, partners have been telling me that many of their staff don’t want to be a partner. In our experience, the main reason is not because they lack ambition and shun responsibility. Instead it’s because staff simply don’t know what it means to be a partner. Tragically, many firms have not told them these things. We have worked with dozens of firms where this is the case. Staff want to know:
   • What the buy-in will be
   • What hours they will be required to work—staff are convinced that partners seem to work “all the time”
   • What their obligations will be to buy out retired partners
   • If they will be responsible for the firm’s liabilities
   • How their compensation will change
   • What the partner agreement looks like
   • How their duties will change from being a manager—will they be required to do things they don’t want to do, such as firm management and business development?
   • Why it’s a good thing to be a partner in a CPA firm. What’s in it for them?
3. We’re not convinced that the “skin in the game” argument holds water anymore. Do we really think that most new partners will work less hard or less carefully and have less of a commitment to the firm if their buy-in is zero or a nominal amount? Existing partners will undoubtedly say, “I paid a substantial buy-in when I was their age. Why should they be given a pass?” My response is that things change, and we have to adapt. Also, the capital they contributed is still there, to be redeemed when they retire. What’s more important: getting your all-star staff to accept your partnership offer as your succession plan or feeling resentful that new partners get a waiver on the buy-in?
4. Here is a key: The biggest argument for retaining the substantial buy-in, and it’s totally valid, is this: “We don’t want to give away the store—the millions that our firm is worth on the street—for next to nothing.” That would be stupid and reckless.

Our response: Get away from using ownership percentage to allocate partner income, determine the buyout amount, and allocate the proceeds of a firm sale. Also, adopt simple provisions that greatly limit a small gaggle of new partners from wielding excessive voting power. Yes, my dear partners, this means that performance should largely replace ownership percentage as the way partners receive money, both present and deferred. If you do this, you will not be giving away the store.

Conclusion

Requiring a meaningful new partner buy-in may have benefits, but it may no longer be a good governance practice. CPA firms need to carefully consider the potential advantages and disadvantages of the buy-in requirement and determine whether it aligns with their values and goals. Ultimately, the decision should be based on what is best for the firm, its partners, and its star staff, both in the short and long term.

One last thing, which is the main message of this blog: please, please, don’t let a high buy-in be an obstacle for your staff to become partner.

We wish to thank our friend and colleague, Art Kuesel, for his significant contributions to the genesis of this blog.