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Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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Page 1: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Keys to Your Partnership Agreement – Protecting

the FirmNancy Egan, Managing Director

Transition Advisors

Page 2: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Accounting Transition Advisors

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

transition

Page 3: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Key Elements to a Partnership Agreement

1. Compensation

2. Governance

3. Death/Disability, Retirement

4. Termination

5. Protecting the Firm

Page 4: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 5: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 6: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 7: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 8: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 9: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 10: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 11: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 12: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 13: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Different Types of Partners?

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

Page 14: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Governance

• Decision making• Unanimous vs

Super majority vs Simple majority

• Financial Commitments

Page 15: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Governance

By way of example …• Super majority

• Admission of new partner

• Simple majority• Expenses in excess of certain amount

• Unanimous• Dissolution or sale

Page 16: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 17: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Retirement◊ Terms

• Payout periods

• Retention periods

• Tax structure

• Caps

• Penalty buyouts• Premature exit

• Exit without appropriate notice

• Getting “booted” out

Page 18: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Death or Disability

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

• Death• Where insurance fits in re death

Page 19: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Termination

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

Page 20: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 21: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

Page 22: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Protecting the Firm – Scenario 3Regional Multi-Partner Firm

• Challenge: attract young partners

• Mandatory retirement

• Cost of admission

• Financial viability of buy-out

Page 23: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

Miscellaneous

• Is it a living agreement?

• Is it sustainable?

• Create benchmarks, time frames

• Replace the role, not the body

Page 24: Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

Nancy [email protected]

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