5 Points to Consider When Paying Out Goodwill

Vintage pocket watch lying on hundred dollar billsHow 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:

  1. The gross benefits payable.
  2. 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.
  3. Vesting.
  4. Reductions caused by expulsion, violation of the firm’s non-compete/non-solicitation provisions or the departing partner joining another CPA firm.
  5. 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:

  • Non-traditional services that leave when partner retires
  • Penalties due to inadequate transition & notice

     =     Net goodwill payable, before vesting

     X     Vesting percentage

     =     Net vested goodwill payable

-     Minus loss of benefits due to:

  • Expulsion
  • Violation of non-compete/non-solicitation provisions
  • Joining another CPA firm

-     Minus amounts the departed partner may owe the firm

=     Final, net goodwill payable

 

 

6 METHODS USED BY CPA FIRMS TO CALCULATE THE GOODWILL PAYABLE TO A RETIRING PARTNER*

Method Usage by Percentage of Firms

Method

24 Ptrs,

90 Firms

5–7 Ptrs,

84 Firms

812 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

12 Firms

4 Firms

2 Firms

57 Firms

* Based on a recent edition of The Rosenberg MAP Survey of nearly 400 firms.