Should You Have Non-Equity Partners?
As featured in Accounting Today.
Succession planning at CPA firms has never been more difficult. Minting new partners is a struggle, as many potential candidates are leaving the field or are not interested in the job. This leaves more and more “retired” partners (those who have given up their equity) still working because there’s no one else to do the job. The non-equity partner role could alleviate some of this pressure.
Certain entity types and state boards of accountancy may restrict a firm’s use of the title “partner.” But if you have the latitude to use it for networking, marketing and internal purposes, read on for things to consider about the non-equity partner role.
What is a non-equity partner?
For many firms, a non-equity partner is someone who carries a partner title but is not an owner of the firm. Some firms use the terms “principal” or “director” to describe the same function. “Income partner” and “profits partner” may be synonymous with non-equity partner too.
The non-equity partner has similar responsibilities to an equity owner – generally in the areas of managing clients, engagements, and team members. And often only the partner group is aware of who is an equity partner (owner) and who is a non-equity partner (non-owner).
While non-equity partners are typically W-2 employees, many firms offer additional compensation or bonus structures. But they are not otherwise a part of the equity partner compensation system. Some firms now also offer their non-equity partners a deferred compensation benefit – at a lesser value than an owner would receive, but noticeably more than other employees get.
What benefit does the non-equity role bring?
In a poll we conducted, 87% of our 64 respondents had a non-equity partner position at their firm. This shows its trending popularity in our industry. And for good reason, as the role offers several benefits over a straight-to-owner path:
- Retain key employees through promotion when your rising stars “want to be a partner” even if they, or the equity partners, aren’t quite (or ever) ready for them to be an owner. The title can be a great boost for short- and long-term retention.
Let candidates who think they don’t want the risk-reward of ownership get more used to the idea without committing out of the gate. Or, just as important, provide a permanent position for someone lacking a key trait or two that would preclude them from being admitted to the ownership circle.
- Serve more clients who want to “know who the partner is” on their engagement when the existing equity owners are over-capacity on their ability to give clients and internal matters the appropriate attention. The non-equity partner role allows owners to delegate this critical client-service role to qualified individuals.
- Confirm leadership qualities by allowing both parties to try on the role and see if it’s a fit. I’ve heard too many stories about a strong senior manager who, when crowned partner, suddenly felt the rules didn’t apply to them anymore. They figured they could do what they want because now they were an owner. You can imagine how that turned out (or maybe you don’t have to imagine). It’s much easier to rectify those situations when you’re not entangled with them in a legal business arrangement.
Another option is low-equity ownership, which gives the person more of a stake in the game but not a controlling interest. We see this often at founder-led firms while the founders are still prominent contributors.
What ratios of non-equity to equity partners do firms have?
In our poll, we asked firms what their ratio of equity to non-equity partners was. For example, if a firm had 4 equity partners and 1 non-equity, they would report a 4:1 ratio. Some firms (9%) had more non-equity than equity, so their ratio might be 1:4.
More data points we observed:
- Firms of all sizes reported all ratios; e.g., of smaller firms, some had high non-equity partner counts, and some high equity partner counts. And vice-versa for larger firms in our poll.
- 13% of respondents had no non-equity partners.
- 19% had an equal ratio of equity to non-equity.
- 9% had more non-equity than equity.
- The remaining nearly 60% had the non-equity position, but had more equity than non-equity partners.
- This represents the firms moving away from the traditional equity-only model, but equity partners still holding a higher number of partner-titled positions.
Anecdotally, there was some trending towards having higher numbers of non-equity partners. Here are two comments from our poll:
- “NEP is a relatively new position for us. Over time, we expect to be 50% or less equity partners. We have moved six equity partners to non-equity since the non-equity position was created.”
- “We are almost half equity and half non-equity. In a year or two, we will have two equity partners and eight non-equity.”
If everyone’s a “partner,” who should the equity owners be?
The rising use of the non-equity role begs the question: What are the new criteria for someone to become an owner? For small to mid-sized firms, this provides a great opportunity to clarify the standards for ownership.
Anyone carrying the title of Partner must have the necessary technical skills. Without that, we’d have accounting professors rolling over in their graves, and no one wants that. Other baseline partner skills include strong client service, being reasonably good at working with employees, and understanding of the economics of a CPA firm.
For many firms, bringing in new business is still a requirement of becoming an equity owner, so that is another gating factor. However, we work with many firms that are, given the current economic circumstances, no longer requiring business development achievement or even aptitude before promotion to partner (including equity).
Leaders in the profession who are owners of successful CPA firms are looking for these traits for successor equity partners:
- Determined and ambitious to run a business, beyond giving outstanding client service
- Able to grow both revenue and a team of talented professionals
- Comfortable with the risk-reward ratio of owning an accounting practice
- Trustworthy and credible in the community or marketplace
If you’re an owner looking to groom successors, or a partner candidate, consider what your firm needs. If it’s more partners to serve clients and develop staff, a non-equity role may be sufficient. If it’s someone to be at the helm of the practice, or supporting those who are making key decisions for the business, look to develop those organizational leadership skills in others. Having both positions and defining the difference between them can clarify who might fit best into each role, making your development and succession plans clearer.
Best practices for managing and structuring the leadership group; descriptions of both partnership and corporate styles; role of the managing partner and firm administrator; decision making; voting; the role of a partner and how the organization changes as the firm grows.Learn More