keys to your partnership agreement – protecting the firm nancy egan, managing director transition...

Keys to Your Partnership Agreement – Protecting

the FirmNancy Egan, Managing Director

Transition Advisors

Accounting Transition Advisors

National Consulting Firm working exclusively with accounting firms on issues related to ownership

transition

Key Elements to a Partnership Agreement

1. Compensation

2. Governance

3. Death/Disability, Retirement

4. Termination

5. Protecting the Firm

Goals of Partner Compensation

• Motivate partner behavior to achieve desired strategic and financial results

• Create motivation for top performance by rewarding modified behavior

• Build a strong partner team through retention of the best performers, removal of non-performers, and attracting new talent

Types of Compensation Plans

• Equal

• Pure Formula

• Cross Evaluation

• Eat what you kill versus one firm

• Equity-based

• Committee-based

• Leader-based

• Closed comp versus open plans

Types of Compensation Plans

◊ Equal & Equity-based• Often used in new partnerships• Promotes collegiality• Requires substantially equal contribution

to be sustainable• Long term, often fails to promote high

performance

Types of Compensation Plans

◊ Pure formula• An accountant’s dream• Relies mostly on pre-determined,

objective measures• Promotes clarity and certainty• Leaves out hard to measure, subjective

elements of performance• Can be manipulated in many cases

Types of Compensation Plans

◊ Cross Evaluation

• Relies on each partner evaluating other partners and allocating compensation

• Has appearance of fairness-democratic• Requires knowledge by all partners of other

partners’ contribution• Tends to lump most partners into an average

rating at the expense of recognizing outliers

Types of Compensation Plans

◊ Leader-driven• Managing Partner decides• Requires strong managing partner and

trust in their decision-making ability• Most flexible … can be very effective• Often lacks transparency which can lead

to mistrust and lack of needed feedback

Types of Compensation Plans

◊ Committee-driven• Appropriate for large firms• Works well when knowledge of all partners’

contributions is not readily available to each partner or the managing partner

• Allows for flexibility and fair vetting of issues

• Can lack needed transparency• Can be inefficient

Types of Compensation Plans

◊ Eat what you kill versus one firm

• More than a compensation plan but a philosophy• Smaller firms tend to be more eat what you kill,

larger firms more one firm concept• Also called book of business approach• Positive: easy to calculate and some feel fair• Negative: promotes my client versus firm client

and creates less brand loyalty and more partner loyalty making succession more challenging

Types of Compensation Plans

◊ Closed compensation plans versus open• Appropriate for large firms• Requires substantial trust of the system and

decision makers• Enables firms to be more flexible on

attracting talent and doing mergers• Lacks transparency• Trend in larger firms is closed

Different Types of Partners?

• Full Equity – Senior• Full Equity – Junior• Income• Of Counsel• Using the term Principal

Governance

• Decision making• Unanimous vs

Super majority vs Simple majority

• Financial Commitments

Governance

By way of example …• Super majority

• Admission of new partner

• Simple majority• Expenses in excess of certain amount

• Unanimous• Dissolution or sale

Retirement◊ Voluntary

• Mandatory Age / Vesting

• Partners desiring to stay on after retirement and how that impacts their role, compensation and buyouts

• Valuing Buy-out• Equity

• Compensation

• Funded vs unfunded

• Work backwards formula

Retirement◊ Terms

• Payout periods

• Retention periods

• Tax structure

• Caps

• Penalty buyouts• Premature exit

• Exit without appropriate notice

• Getting “booted” out

Death or Disability

• Definition of temporary disability vs permanent• Where insurance fits in re disability

• Death• Where insurance fits in re death

Termination

• Voting• Grounds• Non-Competes• What is cause?

Protecting the Firm – Scenario 1Small Firm – 1 partner wants to retire/slow

down

• Capacity of remaining partners

• Retiring partner grooms a successor

• Cull out & sell partner’s book

• Merge entire firm into larger firm• Buy-out of retiring partner

• Longer-term role for remaining partner

Protecting the Firm – Scenario 24-Partner Firm – 2 Senior, 2 Junior

• Capacity of remaining partners

• Replace the role – not the body

• Affordability – caps, length of buy-out• Funds for replacement = Retiring partner comp

minus buy-out payments

• Incentive for remaining partners

Protecting the Firm – Scenario 3Regional Multi-Partner Firm

• Challenge: attract young partners

• Mandatory retirement

• Cost of admission

• Financial viability of buy-out

Miscellaneous

• Is it a living agreement?

• Is it sustainable?

• Create benchmarks, time frames

• Replace the role, not the body

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

Nancy Egannegan@transitionadvisors.com

1-814-382-3585www.TransitionAdvisors.com