Should Billings Originated by Managers Reduce Their Buy-in?

ptr agreementQuestion from a MP: “Our approach for determining the buy-in for a new partner is to multiply a projected ownership percentage of 5-10% times the firm’s annual billings and discount the number by 20% for the person’s ‘sweat equity.’

“We discussed the buy-in matter with our next partner. He has brought in $30,000 of new business, for which he received a 15% bonus annually for three years, as part of the firm’s incentive program for staff to bring in business.

“The manager wants a reduction in his buy-in by the $30,000 of billings he originated. We feel that if someone receives a bonus for originating business, which he did on company time and with the help of the firm’s marketing activities, the buy-in should not be reduced by the $30,000. How would you advise us?”

OUR RESPONSE: Determining the buy-in by multiplying the firm’s annual billings by an arbitrary ownership percentage is no longer common.  At most firms, the total buy-in amount would result in such a high figure that the new partner either can’t afford it or won’t pay it or both. Example: At a $5M firm, a 5% buy-in would be $250,000 and 10% would be $500,000, either of which is a lot of money to new partners. Today, most firms ask for a buy-in amount that ranges from $75-150,000. With this method, there is no link between buy-in amount and ownership percentage acquired. In fact, the term “ownership percentage” ceases to be used to decide anything. The buy-in is paid in over a period of years, with a small downpayment ($10-25K).

The key is whether or not the manager signed a non-solicitation agreement. If so, then the clients are clearly owned by the firm. Bringing in clients is seen as part of the job of the manager (for which he receives a bonus) and a qualification to make partner. If the manager did not sign a non-solicitation agreement, and he wants to leave the firm and take clients, then he essentially owns the clients today.

Perhaps the biggest concern is: Do you want to let this issue drive a wedge between the firm and the partner candidate?

If this person is a star who has been a model employee, you may not wish to risk a serious argument with him. On the other hand, a staff person raising questions about the ownership of clients may be an indicator of problems down the road. I once interviewed a manager who was ready to be a partner. During our meeting he told me he would never sign a non-solicitation agreement because, in his words, “I might want to leave the firm some day and if I do, I want to take as many clients as I can, even if I didn’t originate them.” Needless to say, the partner candidate was terminated on the spot.

On one hand, if you determine the buy-in based on the firm’s annual billings, and there is no non-compete with the staff person, he makes a good case that his buy-in should be reduced by his origination. Neither you nor I are happy about handling it this way, but there is an element of fairness in it that is hard to deny.

On the other hand, if you change the buy-in practices to those that I suggest, and he agrees to sign the non-solicitation agreement that is (hopefully) in your partner agreement, then your problem is solved.

As the example in this post illustrates, the method of bringing on new partners has changed in recent years, and your partner agreement may not have kept up with the times. Our monograph How to Bring in New Partners details all the issues firms should consider in drafting new partner buy-ins.

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