Why are new partners required to buy-in to a firm?

Unless you are being offered a salaried partner role, as a partner in a firm you are also an owner of the firm. This means that new partners are required to buy an equity stake, or as it is often known ‘buy-in’ to their firm.
 

How is a new partner buy-in amount calculated?

A firm’s partnership agreement typically sets out the process to calculate a new partner’s buy-in amount. The new partner buy-in amount is typically based on a proportion of the firm’s accrual basis balance sheet. Nowadays firms tend not to add in large goodwill factor to their buy-in calculations.

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How to make partner and still have a life
How to make partner and still have a life

How much is a typical new partner buy-in amount?

It is almost impossible to answer this question as it depends on a number of factors:

  • how well capitalised the firm is
  • the size of the firm relative to the number of equity partners
  • how the firm compensates partners

The typical new partner buy-in amount is not a publicly available figure. In fact I was asked by an Australian journalist recently this very question. Both her extensive research and my insider knowledge was not enough to properly answer this question. However, the 2012 Rosenberg survey of 331 American CPA firms found that the average buy-in for a new partner was $137,000. In the UK I have heard of buy-in amounts ranging from £50,000 to £200,000. My old firm, BDO LLP, used to have a new partner buy-in amount of £60,000. Whereas another top 10 UK accountancy firm (and not a Big 4 firm) has a fixed amount for a new partner buy-in of £100,000.

How do new partners finance their buy-in?

Whatever your firm’s new partner buy-in amount, most of us normally don’t have enough personal funds to cover this. In the UK, most firms will help their new partners to get a partnership loan to buy their stake in the firm. The firm will then guarantee the loan. The new partner’s drawings are then used to pay off the interest on the loan and sometimes a portion of the capital. Many new partners are initially very concerned about taking out a mortgage sized loan to buy an equity stake in their firm. The reality is that if your firm’s balance sheet is healthy and the firm is well lead and managed, this partnership loan is very low risk. This is why it is important to do your due diligence on your firm BEFORE signing the partnership agreement.

Some firms, particularly in the USA, will not require their new partners to inject capital on the day they join. Instead their ‘buying-in’ amount is gradually paid off by the firm withholding a proportion of the new partner’s profit share. This is done until the partner has paid off their buy-in amount.

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