Budros Ruhlin & Roe of Columbus, Ohio, has devised a creative internal succession plan that might serve as a model for other firms in a similar position. Budros, who founded the firm with Peggy Ruhlin in 1987, told Financial Advisor in 2005 he never expected they "would sell the firm for a large sum of cash."
The plan is based on techniques that Ruhlin, the firm's CEO, employed when she was a CPA working with clients operating dental practices. With about $1.5 billion in assets, the firm has two partners in their 60s and two in their 40s, so it has the talent in place to engineer a successful transition. As part of their shareholders' agreement, the partners are bound to sell their shares at the age of 70, though they can continue working and draw a salary.
Essentially, the plan allows the purchasing partners to buy the senior partners out at a discount to a valuation of the firm furnished by Moss Adams at the time of a purchase or sale event. There are several reasons for the discount. Selling shareholders get capital gains tax treatment on the transaction, but purchasers don't get any tax deductions for the payments to the seller. Also, it limits the amount of debt the purchasing shareholders or the firm would have to assume to buy out the others.
But there is also a clawback provision to ensure that the purchasing shareholders don't simply turn around and flip the firm at a big multiple once they buy their shares at a discount. That provision would make the selling partners whole if the firm is sold within two years after a partner is bought out.
Still, Ruhlin notes that while their firm has recovered nicely from the financial crisis, valuations have not.