Academic journal article Journal of Accountancy

Add a New Owner to Your Firm: Here Are Sensible Ideas for Buying or Selling Ownership Interest in a CPA Practice

Academic journal article Journal of Accountancy

Add a New Owner to Your Firm: Here Are Sensible Ideas for Buying or Selling Ownership Interest in a CPA Practice

Article excerpt

EXECUTIVE SUMMARY

* MANY OWNERS OF CPA FIRMS KNOW their future retirement likely will be funded by enlarging the ownership pool. For young CPAs who can't afford to purchase a partnership interest, some firms create an interim level that avoids the ownership-affordability problem by promoting an individual to "nonequity" (income) owner.

* A NONEQUITY OWNER SHARES in the firm's income but doesn't own a share of the firm's accrual-basis capital (ABC) and may not get full access to all its financial information, a vote on all firm issues or other entitlements. The arrangement provides both parties a period of time in which to size each other up and work out future terms.

* PRESSING EQUITY-OWNER QUESTIONS include whether a new partner should buy in; how owner/partners should determine the price; whether payment goes to the firm or to "selling" owners; and what percentage of ownership to offer. Arriving at a fair deal involves factors unique to the firm.

* BASED ON A FIRM'S SIZE, the amounts of money involved and the percentage owners wish to share, firms may use purchase terms similar to these: An interest in both the ABC and in the goodwill (G); an interest in the G (but no interest in the ABC that exists as of the date of admission); an interest in the G at a bargain price such as 50% of current value (it can be higher or lower) and full price for the ABC.

* MOST MULTIOWNER FIRMS WILL offer a new owner a 1% to 5% stake, Smaller firms (up to three owners) might offer from 5% to 20%; a sole proprietor might offer a 50% partnership to one individual.

* BEFORE A FIRM NEGOTIATES a new-owner buy-in, the owners already should have a fair buyout (retirement) formula. The two should be appropriately related.

There is strength in numbers--but which numbers? Many CPA firm partners know enlarging the ownership pool likely will fund their future retirement. However, before admitting new owners, they must deal with some important financial issues, among them:

* Today many young CPAs can't afford to purchase a partnership interest, and they are unwilling to take on debt to do so.

* Many owners won't give up a percentage of ownership at below-market prices to make a deal more attractive to potential partners.

* A firm's partnership buyout formulas or amounts may not correspond to proposed new-partner buy-in amounts.

* Changes in the profession during the past decade--plus some that may occur in the future--have created conditions that could undermine the potential value of an ownership interest in an accounting firm.

This article presents practical advice for dealing with those factors as well as time-tested formulas parties can use to negotiate fair terms for buying or selling ownership interest in a CPA firm. Note: For ease, firm owner is used for principal, partner or member in this article.

THE EQUITY OR NONEQUITY CONUNDRUM

An arrangement that many firms use to relieve the ownership-affordability burden is to promote an individual to "nonequity" (income) owner. This satisfies a new partner's wish to move up by conferring a title equivalent--at least in the public eye--to the firm's other owners'. Nonequity owner rights and privileges vary considerably, however.

Generally, a nonequity owner shares in the firm's income, although not necessarily as part of the equity owners' compensation system. Nonequity owners may not get full access to all of a firm's financial information (such as how much the equity owners earn) and may not get to vote on every firm issue. Their partner benefits, retirement packages and other perks and entitlements may vary as well. An individual may remain a nonequity owner for a year or two or even permanently. With the culture of the profession in flux there is no longer a norm for admitting new owner/partners, and many firms are having to thrash it out case by case.

A beneficial feature of nonequity ownership is the arrangement provides both parties a period of time in which to size each other up in their new context and work out future terms. …

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