Partners: The Issues That Keep You Up Nights
Marc Rosenberg, CPA / Jul 23, 2018
CPAs seem to tend towards conservatism – they dislike change. Old school practices dominate and change is hard. But change is inevitable. Progressive firms will tell you they thrive on change. They are eager to adopt new school practices. Why not you? Here are some examples of old school vs. new school practices.
Bringing in New Partners
Old School: Determine the buyout by multiplying the ownership percentage of the new partner (how this is determined has stumped me for 20 years!) times the firm’s annual revenue. Result: New partners owe several hundred thousand dollars to the firm, which they can’t afford and wouldn’t pay even if they could afford it. Further complicating the new partner buy-in are (1) onerous buyouts due the senior partners and (2) a lack of any coherent succession plan, thereby making new partners feel like they are being victimized by a Ponzi scheme.
New school: Disconnect the buy-in from ownership percentage, making sure that it is affordable, generally a statutory fixed amount of $75K to $150K. Create a written succession plan. Develop a leadership development program so that today’s new partners aren’t alone in turning off the lights tomorrow.
How To Bring In New Partners was written for the thousands of firms that want to bring in new, younger partners but aren’t sure how to do it.
Old school: Things used to be simple. All a firm needed to be profitable was for its partners to bring in business and work an avalanche of billable hours. Most compensation systems revolved around these two metrics, referred to as formulas. Firms felt that little else needed to be compensated.
New school: Firms are so much more sophisticated today because the world is more complex and clients’ needs go beyond accounting and tax. Bringing in business is still important and always will be, but not to the exclusion of everything else. Firms understand that it is more important what partners do with their non-billable time (manage the firm, market and help staff learn and grow) than their billable time, the latter of which is today, a minor compensation factor for progressive firms.
CPA Firm Compensation:The Art and the Science is a go-to source for firms seeking methods of allocating partner income that reward partners for performance-based activities that make the firm truly successful – both production and intangible achievements.
Old school: Until 5-10 years ago, most local firms paid lip service to succession planning as Baby Boomers started retiring. Sure, they all wanted to stay independent after the retirement of senior partners, but they reasoned that the consequences of failure were small because, in the back of their minds, they had a fallback plan: merge into a larger firm as an exit strategy.
New school: Buyers are much pickier today. They learned some hard lessons from acquisitions that didn’t pan out. Also, active buyers are inundated with sellers, so they can afford to cherry-pick. As a result, finding buyers is no longer a slam dunk. Would-be sellers are getting much more serious about succession planning, as evidenced by the increasing number of firms putting their succession plans in writing.
CPA Firm Succession Planning: The Perfect Storm shows you how to create and implement a succession plan for your firm that works.
Old school: Firms often threw together a document, perhaps snatched from another CPA firm and had their lawyer – who knew absolutely nothing about CPA firms – prepare the final agreement for signature. In most cases, these agreements ignored many of the 30 critical provisions that properly written CPA firm partner agreements require, thereby leaving the firm vulnerable on a number of counts.
New school: Firms seek advice from experts who have experience with CPA partner agreements, who in turn work with an attorney – also experienced with CPA firms – (good luck finding such a person!) to create a proper agreement. Among the 30 critical provisions are voting, duties of the MP, mandatory retirement, new partner buy-in, how ownership percentage is determined and used and a proper, affordable buyout agreement.
CPA Firm Partner Agreement Essentials identifies the 30 key provisions that should be in your partner agreement and explains why.
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