Helping potential partners deal with millennial debt

How do you welcome the next generation of partners to a professional services firm when they're unable to fund their initial capital contribution? As the financial leader of an architecture, consulting, accounting or law firm, this may be a question that remains top of mind when faced with a partnership dilemma. Although graduating from law school and passing the bar exam allows young lawyers to join the firm, the debt these millennials have incurred may play a role in their ability to rise within the firm, thereby draining the organization of superior talent.

According to the Bureau of Labor Statistics, between 2006 and 2016, college tuition and fees rose 63 percent. In response, millennial debt in the form of education loans grew at an unprecedented rate. Today, government estimates mark student loan debt at $1.53 trillion, most of which is owed by millennials.

In fact, a recent report from the Federal Reserve Board noted that "the average student loan balance for millennials in 2017 was more than double the average loan balance for Gen Xers in 2004."

Debt dictating life

Given the amount of debt weighing on the minds and paychecks of millennials, they often delay major life events, such as buying a house, starting a family and saving for retirement.

Similarly, for millennial attorneys on the path to becoming a partner of the firm the difficultly is they lack the liquid the resources and are reluctant to take on additional debt to contribute the required equity capital. For some firms, the lack of financially qualified partner candidates could hamper succession, sustainability and even herald the beginning of a partnership's decline to dissolution.

How can CFOs at professional services firms help millennials improve their financial standing to qualify them for partnership?

• Student loan assistance. Some employers now offer student loan repayment assistance to win the war for talent. So far, most companies plan a cap on how much they'll contribute to their employees' debts, with limits ranging from $3,000 to $30,000. For a professional services firm with concerns about losing superior performers in the partner pipeline, it may make sense to pay off a larger portion of millennial debt than is currently the norm.
• Locate a borrower. Another option involves partnering with a financial institution to finance the initial buy-in, with the firm frequently agreeing to guarantee the loan. With the new partner's approval, your firm withholds a portion of the partner's profits to pay the loan. The firm may be able to work out a tailored repayment schedule based on the partner's earnings.
• Withhold earnings. With the new partner's approval, your firm can withhold a portion of earnings to fund the buy-in over time. This option is the least desirable if your firm needs an infusion of equity capital to ensure its financial well-being. Like finding an external lender, this option allows for the firm to customize the repayment schedule based on income to give the partner more financial flexibility.
• Access to financial experts. These advisors can help millennials build financial plans for increasing cash flow, building wealth and formulating a timeline to aggressively reduce debt, which hopefully aligns with your firm's needs in the partnership ranks.

Helping millennials saddled with debt to enter your partnership ranks can take many forms, ranging from debt counseling to innovative arrangements to finance their equity stake. All of these options can help you retain your top talent, rather than losing high-performing associates because of their financial burdens. Nonetheless, each of these measures takes time to put in place. Since millennials represent the future of your firm, it's never too early to begin the transition process.