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Four key financial considerations for Partners at an Accountancy Firm

Four key financial considerations for Partners at an Accountancy Firm

Becoming a partner at an accountancy firm offers several potential benefits, from earning a higher income, influencing the business’s future strategy to gaining additional trust and respect from colleagues. But according to research compiled by Natwest, Taylor Mowbray and Rekoop, since the economic downturn fewer partners are being admitted to accountancy practices and when they do make the move they are on average 7 years older too.

With some existing partners opting to delay retirement to ensure they have sufficient resources to manage in later life, younger accountants are exploring alternative career paths in business rather than in practice. However, the future for those that do achieve partnership status appears bright. A survey of 184 UK practices highlighted that profits are rising above inflation with accountants delivering a median profit per equity partner of £108,000. Smaller accountancy firms are also enjoying higher rates of growth at 15% in contrast to larger and very large practices, at 4% and 1% respectively.

Making partner remains the Holy Grail for many accountants who sacrifice work life balance for several years to finally reach their goal. Yet upon reaching the pinnacle of their profession, many remain unprepared for the life changing impact that this transition invariably involves. The following top tips from Wesleyan Bank outline the key financial factors accountants should consider before taking up an equity or non-equity partnership position.

Understand the different agreements – Equity partners own the business, share in the profits, have greater managerial influence and enjoy better employee benefits. But they assume greater financial risk and are required to make capital contributions based on the equity interest they hold. Equity partners also face more complicated personal tax liabilities as a result of becoming self employed and need to make provisions for these payments in January and July.

A growing number of firms prefer to adopt the non-equity partnership agreement as typically this model is more cost effective and they can evaluate potential partners with a view to promoting them. Non-equity partners have no financial interest in a firm but some may be compensated with a percentage of the profits based on an assessment of their contribution to the firm.  In contrast to equity partners, as an employee they can continue to take advantage of company benefits such as healthcare, medical insurance and retirement planning at no extra cost.

Spread the cost of capital contributions and tax liabilities – The transition from salaried employee to profit share can have a major impact on an equity partner’s personal finances. Partners are generally required to make ongoing capital contributions and while these costs will vary by firm, initial payments can be significant depending on the equity interest they hold.

An easier and more affordable way to fund required contributions is to spread the cost over time. Trusted financial partners can provide short and long-term partner equity loans to facilitate new partner buy-ins and buy-outs for partners who are nearing the end of their career and looking to sell their share in the firm to an associate. Specialist alternative finance providers also offer a range of flexible products to enable partners to bolster the substantial working capital they have invested and preserve vital funds to grow the business.

Similarly, partners can alleviate cash flow concerns by spreading the cost of their tax bill into manageable monthly payments by financing their Income, Corporation and Capital Gains tax liabilities instead of paying a lump sum in January and July. Trusted providers can arrange payments directly to HMRC or look to finance your tax bill retrospectively if you have already made payment.

Reduce risk – Making the quantum leap to partner is not a decision that accountants should take lightly.. Before taking the plunge, it’s important to perform the necessary due diligence so you can be satisfied the timing is right. Key areas to evaluate include a practice’s historical and projected profitability, profit sharing ratios and whether contingency plans exist for partner succession issues and consultancy arrangements.

Preparation is essential to reduce risk and unnecessary heartache. By completing the necessary checks well in advance, new partners can concentrate on serving their clients and fulfilling revenue objectives.

Consider the firm’s future plans – An equity partner’s income can be greatly affected depending on the success or failure of their firm so it’s important to understand the business’s growth plans. Do you plan to invest in new equipment or technology to overcome productivity barriers and generate more fee income from your clients? Is the best chance to grow your business through acquisition, and if so, how will this be financed?

Specialist alternative lenders offer tailored asset finance products to help spread the cost of new equipment or IT investments by incorporating hardware, software and associated fees in one affordable package. They can also offer competitive long-term loans for up to 20 years to suit bespoke practice acquisition requirements to support the growth and expansion of your practice.

Whatever your borrowing needs, look for a lender who has knowledge of the accounting profession and who will be able to guide you through the process to ensure your progression to becoming a partner or selling your share in a practice is a smooth one. As a Member Reward Partner to the ICAEW, Wesleyan Bank prides itself on having an intimate knowledge of the accountancy sector and ensure its flexible finance solutions meet your own unique requirements.

Wesleyan Bank assists chartered accountant to smoothly transition to equity partner of leading firm.

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