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
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
• Equity-based
• Pure Formula
• Committee-based
• Cross Evaluation • Leader-based
• Eat what you kill • Closed comp
versus one firm
versus open plans
Types of Compensation Plans
◊ Equal & Equity-based
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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
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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
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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
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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
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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
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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
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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?
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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
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Admission of new partner
• Simple majority
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Expenses in excess of certain amount
• Unanimous
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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
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Funded vs unfunded
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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
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Voting
Grounds
Non-Competes
What is cause?
Protecting the Firm – Scenario 1
Small 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 2
4-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 3
Regional 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 Egan
[email protected]
1-814-382-3585
www.TransitionAdvisors.com