What is a partner ‘buy-in?’ How does a partner buy-in work? How much do I need to buy-in as partner at a Big 4 firm? These are all questions that I answer in this blog post.
What is a partner buy-in?
From the Big 4 (KPMG, PWC, E&Y, Deloitte) down to the smallest firms, acceptance as an equity partner means you will need to resign as an employee, become self-employed, and invest a substantial amount of capital into your firm. This capital is often called ‘buy-in’. In return for this capital stake, if the year is a profitable one, you will make significantly more than if you were employed. Of course, the big question is then…
How much will I need to buy-in to be a Big 4 partner? (Or actually in any firm?)
It may surprise you that the amount you need to invest in a firm is more dependant on how well capitalised the firm is, rather than the size of the firm. For the top 6 accountancy firms, including the Big 4, this amount can be between £50k and £200k. It is difficult to say how much exactly it will cost to buy-in as this can change year-on-year. However, as well as the state of the firm’s bank balance, it is also worth noting that this figure also depends on: the size of the firm relative to the number of equity partners and how the firm compensates partners.
How does a partner buy-in work? (And how do I find that much money?)
Probably the key difference between a Big 4 and a small firm is how efficiently and effectively this capital investment is handled. An established and well-run partnership will probably have arrangements with banks to loan you the amount you need for the buy-in. Therefore, you don’t suddenly need to find £50k on the day you become an equity partner. A Big 4 firm (and any other well-run firm) will set up the partnership loan with the bank for you, and automatically deduct your loan repayments from your partnership drawings. These loan repayments will normally cover the interest and capital repayments. To put this into context for you, here is a quick example of how a buy-in could work:
- To become a partner, you need to buy an equity stake which will cost you £100k.
- Your firm has a financing programme in place with a bank.
- The bank would finance the buy-in over a five-year period (at an annual interest rate of around 4%), payable in five annual instalments.
- As an equity partner, you would then receive approximately 70% of your annual ‘draw’ (your income from your firm) throughout the year and the remaining 30% would be paid at the end of the year if your firm hits budget.
- A portion of the 30% goes directly to your bank to satisfy each annual bank payment and the rest would go into your firm’s profit-sharing plan.
Don’t forget, most partners don’t earn a salary
Remember that your drawings are not the same as a wage or salary. As a partner you are self-employed, so your drawings are profits that you take out of the partnership. If the firm is having a lean time, your drawings may be less than the higher paid directors and salaried partners in the firm. However, it is very unlikely, unless you are a junior equity partner, for you to be in this situation at a Big4 firm.
Find out the partner buy-in programme at your firm
Now you know “what is a partner buy-in?” and “how does a partner buy-in work?” Just remember to find out how much you would need to buy-in as partner in your firm and the programme they have in place as early as possible. That way you can plan ahead!