Partnership Offers: Questions Prospective Partners And Firms Should Answer
This post serves two purposes: Prospective partners should ask the basic questions below to help them judge whether they are making a smart decision in accepting a partnership offer. At the same time, the existing partner group should use the questions below as a checklist to help “get their house in order” before extending a partnership offer.
- Does the firm have written criteria for making partner? Are the criteria reasonable? Attainable? By the way, it’s perfectly reasonable and even appropriate for there to be a major subjective criterion based on the partners’ sense of trust and comfort level with a prospective partner.
- As a new partner, what will be your role? Beware if the firm wants you to continue functioning as a staff person, working on the partners’ clients, without being allowed to act like a partner.
- Does the firm have a partner agreement, spelling out sensitive but critically important provisions such as death and disability, mandatory retirement, partner duties and prohibitions, causes for expulsion, managing partner duties, voting, etc? No one should agree to be an owner in a business without a signed partner agreement in place.
- How is voting structured? As a new partner, if your ownership percentage is small and voting is based on ownership percentage for all issues, you won’t have any say in important decisions. Voting should be one person, one-vote except for major issues such as mergers, changing the partner agreement and a few others.
How to Bring in New Partners addresses ►a modern partner’s role►the non-equity partner position ►how firms develop staff into partner ►how the buy-in amount is determined ►what a new partner gets for the buy-in ►how new partners are compensate ►how voting works ►how a new partner’s capital account is maintained ►non-compete and non-solicitation agreements covenants, ►22 provisions of a well-conceived partner buyout plan
- How is compensation allocated?
- Is the system performance-based instead non-performance-based, the latter of which includes pay based on ownership percentage, pay-equal or seniority?
- A compensation formula that is so heavily skewed towards book of business that a new partner cannot possibly earn a decent compensation level.
- A compensation formula that is so heavily based on billable hours that partners are encouraged to hoard staff-level work instead of delegating it.
- What is the profitability of the firm? How are revenues and profits trending? A new partner should think carefully about becoming an owner of a stagnant, marginally successful or declining business.
- Is there a cluster of older partners whose overlapping retirements could threaten the future viability of the firm? You don’t want to become a new partner only to have the firm sold in a few short years because the firm can’t survive the retirement of several key partners at the same time.
- What is the buy-in? It should not be ownership percentage times the value of the firm, which results in onerous buy-in amounts – usually many hundreds of thousands of dollars. Instead, it should be a relatively nominal amount, say, $75-150K. And the payments should be spread out over several years so that the new partner does not have to take a pay cut. However, new partners should not expect these nominal buy-ins to result in the acquisition of a substantial amount of the firm’s value once you pay the buy-in.
- Does the firm have a retirement/buyout plan in place?
- If not, the partner agreement should specifically state this instead of being silent on it.
- If not, why not?
- Goodwill valuation should be reasonable; no more than 100% of revenue and preferably closer to 80%, where most firms are at.
- Annual payouts to all partners should be limited.
- To be eligible to receive buyouts, partners should be required to provide plenty of notice (at least one year and preferably two) and client transition. Partners should never be allowed to receive their buyout while controlling clients.
- When partners start retiring and begin receiving their buyouts, how will this impact the income of the remaining partners? The plan should be structured in such a way that the remaining partners either (a) earn more income or (b) no less than their previous income prior to a partner retiring. This is made possible by no longer compensating the retiring partner and using those savings to fund the buyout payments.
- Is there a mandatory retirement policy? You don’t want to be a new partner in a firm where the old partners work forever or their retirement dates are unclear. Without mandatory retirement, talented young people won’t stay with your firm and the future viability of the firm is in jeopardy.
- Does the firm have a decent succession planning strategy, in writing? As a young partner who will be obligated to eventually participate in the buyout of all the present partners, you will need to add additional partners as time goes by to perpetuate the firm’s leadership and help pay for the buyouts. You don’t want to be the last person to turn out the lights.
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