Understanding what Your Partnership Agreement Should Include. Joel Sinkin, President Transition Advisors

Transcription

1 Understanding what Your Partnership Agreement Should Include Joel Sinkin, President Transition Advisors

2 Accounting Transition Advisors National Consulting Firm working exclusively with accounting firms on issues related to ownership transition

3 Transition Advisors, LLC Partners and Associates Terrence Putney CEO Joel Sinkin President

4 Transition Advisors, LLC Partner and Associates Bill Carlino Managing Director National Consulting Services Mark Basinski California, Arizona, Nevada, Oregon, Washington, Utah Russ Best Texas, Colorado, Missouri, Kansas /

5 Transition Advisors, LLC Partners and Associates Nancy Egan Pennsylvania, Maryland, Washington, D.C Peggy Tyers Toronto, Ontario Province Mike Farinelli National Business Development

6 If there are 50 things you need to think about in drafting such an agreement. the smartest of us will think of only 35

7 Key Elements to a Partnership Agreement 1. Compensation 2. Governance 3. Death/Disability, Retirement 4. Termination 5. Protecting the Firm

8 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

9 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

10 Types of Compensation Plans Equal Often used in new partnerships Promotes collegiality Requires substantially equal contribution to be sustainable Long term, often fails to promote high performance

11 Types of Compensation Plans Equity-based Often used in new partnerships Promotes collegiality Requires substantially equal contribution to be sustainable Long term, often fails to promote high performance

12 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

13 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

14 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

15 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

16 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 Positives is easy to calculate and some feel fair Negative is promotes my client versus firm client and creates less brand loyalty and more partner loyalty making succession more challenging

17 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

18 Equity: What Does It Mean? Compensation Profit Sharing Decision making Internal buyouts External buyouts

19 Different Types of Partners? Full Equity Senior Full Equity Junior Income Of Counsel Using the term Principal

20 Governance Decision making Unanimous vs Super majority vs Simple majority Financial Commitments

21 Governance By way of example Super majority Admission of new partner Simply majority Expenses in excess of certain amount Unanimous Dissolution or sale

22 Retirement Voluntary Mandatory age / Vesting Partners desiring to stay on after retirement and how that impacts their role, compensation and buyouts Valuing equity Equity Compensation Funded vs unfunded Work backwards formula

23 Retirement Terms Payout periods Retention periods Tax structure Caps Penalty buyouts Premature exit Exit without appropriate notice Getting booted out

24 Death or Disability Definition of temporary disability vs permanent Where insurance fits in re disability Death Where insurance fits in re death

25 Termination Voting Grounds Non-Competes What is cause?

26 Other Thoughts External Sale/Dissolution Roles and responsibilities Hold harmless Non-competes Arbitration vs lawsuits Restrictive covenants: Leaving with or without clients

27 Miscellaneous It is a living agreement? Limit retirement timing Create benchmarks, time frames Replace the role, not the body

28 For More Information Please visit our website for resources including FREE reports, whitepapers and case studies. Joel Sinkin