How firms decide the goodwill payable to a retiring partner.
By Marc Rosenberg
Retirements & Buyouts
There are five factors that need to be taken into account when computing the goodwill benefits due a retiring partner:
- The gross benefits payable.
- Reductions due to (a) non-traditional services that will leave when the partner retires (examples include business valuations and litigation support) and (b) penalties assessed for failure to transition clients and/or provide the required notice period.
- Vesting.
- Reductions caused by expulsion, violation of the firm’s non-compete/non-solicitation provisions or the departing partner joining another CPA firm.
- Reductions relating to amounts the departed partner owes the firm such as loans, advances, etc.
OVERALL CALCULATION OF GOODWILL PAYABLE TO A RETIRING PARTNER
+ Gross goodwill payable based on one of 6 methodsMinus possible reductions for:
= Net goodwill payable, before vesting X Vesting percentage = Net vested goodwill payable – Minus loss of benefits due to:
– Minus amounts the departed partner may owe the firm = Final, net goodwill payable
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6 METHODS USED BY CPA FIRMS TO CALCULATE THE GOODWILL PAYABLE TO A RETIRING PARTNER*
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Method Usage by Percentage of Firms |
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Method |
2–4 Ptrs, 90 Firms |
5–7 Ptrs, 84 Firms |
8–12 Ptrs, 63 Firms |
13+ Ptrs, 44 Firms |
All Firms |
| Multiple of compensation |
32% |
50% |
50% |
46% |
43% |
| AAV |
19% |
12% |
24% |
27% |
19% |
| Book of Business |
15% |
12% |
9% |
5% |
11% |
| Ownership Percentage |
21% |
18% |
8% |
7% |
15% |
| Fixed |
12% |
7% |
8% |
11% |
10% |
| Equal |
1% |
1% |
1% |
4% |
2% |
| Firms with No Retirement Provision |
39 Firms
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12 Firms
|
4 Firms
|
2 Firms
|
57 Firms
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* Based on a recent edition of The Rosenberg MAP Survey of nearly 400 firms.