In most firms the goodwill gets paid out in the form of deferred compensation (ordinary deduction to the firm and ordinary income to the partner). Terms range from five to ten years, with no interest. Seven to ten year terms are more common than five. The CPA’s reading this are thinking “but with no interest, the value used for the firm is really less than 80 percent”! Yes, that is correct.
There are many other partner retirement considerations including vesting schedules for age and year’s of service, death and disability provisions, mandatory retirement ages, post retirement employment, client transition expectations and caps to protect the firm. If you are updating your partner agreements to address the new goodwill values, make sure you are bringing the entire agreement up to date.
It is probably time to pull those agreements out of the drawer, dust them off and take a look!
Gary Adamson is the President of Adamson Advisory, specializing in practice management consulting for CPA firms. He is an Indiana University graduate and has extensive hands on experience as the recent managing partner of a top 200 CPA firm. He can be reached at (765)488.0691 or firstname.lastname@example.org. For more about Adamson Advisory, visit www.adamsonadvisory.com.