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Fifteen Steps to New Partner Buy-in

Plus the impact of ownership percentage on partner issues.

By Marc Rosenberg
How to Bring in New Partners

Let’s go over structuring a new partner buy-in step by step.

MORE: What Buying In Actually Means | Why Buying Into a Firm Is Such a Great Investment | The Business Side of CPA Firms | It Shouldn’t Take So Long to Make Partner | Three Types of Skills You Need to Become a Partner | Seventeen Basic Expectations of Partners | Nine Ways to Woo a Prospective Partner
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1. Calculate the value of a CPA firm as accrual basis capital PLUS goodwill. Goodwill is commonly expressed as a percentage of the firm’s annual revenue. This total value should not be given away to anyone without being paid for. Bringing someone in as an owner in a profitable, viable business for little or no buy-in makes no sense.
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What Buying-In Actually Means

Two women in office shake handsYou’re probably not an owner.

By Marc Rosenberg
How to Bring in New Partners

There are two components to the value of a CPA firm: capital and goodwill, the latter of which is often stated as a percentage of the firm’s annual revenue. Capital is on the balance sheet; goodwill is not.

MORE: Why Buying Into a Firm Is Such a Great Investment | Four Philosophies for Managing a CPA Firm | Public Accounting as a Business, 101 | 16 Steps to Creating a Partnership Path | Six Ways New Partners Differ from Managers | The Four Essentials for Every New Partner | Tell Potential Partners What It Takes
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Here’s a crash course in CPA firm business valuations. Assume a firm with annual revenue of $10 million. Most firms have accrual basis capital of roughly 20 percent of their revenues, consisting mostly of WIP and A/R. If we value the goodwill at 100 percent of revenue (this used to be so common it was automatic; today it is still common but much less so), the total value of the firm is $12 million: $2 million of capital and $10 million of goodwill.
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PRO Member Exclusive

Why Buying Into a Firm Is Such a Great Investment

Hand watering small plant in pot shaped like upward arrowCAUTION: Don’t get hung up on ownership percentage.

By Marc Rosenberg
How to Bring in New Partners

Accepting a partnership invitation offers two terrific, lifetime benefits to new partners that for most people cannot possibly be matched in any other career pursuit.

MORE: Four Philosophies for Managing a CPA Firm | How Partner and Staff Actions Impact Profits | Nuts and Bolts of Mentoring Staff | Nine Ways to Measure Staff Performance on the Path to Partner | Sixteen Duties of a Partner
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If they don’t see this and agree with it, then perhaps it would be unwise for them to accept the partnership offer.
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Four Philosophies for Managing a CPA Firm

Closeup of businesswoman writing on a flipchartBONUSES: Org charts for small, medium and large firms, plus 25 best practices.

By Marc Rosenberg
How to Bring in New Partners

When we discuss how CPA firms are managed, there are two kinds of firms.

MORE: How Partner and Staff Actions Impact Profits | The Business Side of CPA Firms | It Shouldn’t Take So Long to Make Partner | Three Types of Skills You Need to Become a Partner | Seventeen Basic Expectations of Partners | Nine Ways to Woo a Prospective Partner
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The first kind of firm argues that there is not much that needs to be managed at a CPA firm. These cynics might say, “Come on. Running a CPA firm isn’t rocket science. You hang out your shingle. You get clients. You hire staff. You do the work. Bill and collect. What needs to be managed?”
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How Partner and Staff Actions Impact Profits

SeniorBusinessman5Others_a-31774-629Six specific examples, plus benchmarking norms.

By Marc Rosenberg
How to Bring in New Partners

These four metrics are key to any analysis of CPA firm profitability.

  1. Fees per equity partner. The firm’s billings divided by the number of equity partners. This is one of the ways we measure leverage. The more billings each partner can manage, the higher the firm’s profit margin.

MORE: The Business Side of CPA Firms | Public Accounting as a Business, 101 | 16 Steps to Creating a Partnership Path | Six Ways New Partners Differ from Managers | The Four Essentials for Every New Partner

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On average, partners do 10-15 percent of all work performed for clients; the remaining 85-90 percent is performed by staff under the partners’ supervision. The higher the percentage of client work the partners perform, the harder it is for them to find the time to build their client base and help the firm achieve a high fees-per-partner ratio. To manage a large client base properly, partners need to delegate as much of the client work as possible to staff.

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