The Toughest Issues in Bringing In New Partners
The dual-headed monster of succession planning and finding quality staff is causing anxiety at firms across the country.
Retiring Baby Boomer partners feel they lack the quality bench to replace them. This explains the fact that only 20% of first generation firms make it to the 2nd – which is not expected to improve in the near future. Most partners prefer the exit strategy of developing new partners internally to replace and buy them out vs. merging out of existence. The stay-independent strategy preserves the firm’s legacy and gives flexibility to senior partners in how they wind down. Unfortunately, this option isn’t available to the majority of firms due to insurmountable succession planning hurdles.
If your firm is fortunate enough to have staff that are partner material, here are critically important practices you should follow.
Prospective partners should have “the right stuff” They should be able to build strong relationships with clients, demonstrate credibility with staff, be effective communicators and show commitment to helping staff learn and grow. Other partners should feel good calling them “partner” because they are trustworthy, show good judgment and reliability, are team players and leaders. Not every person needs to be a rainmaker, but potential partners should at least be comfortable with practice development. Finally, they should possess technical knowledge at a sufficiently high level that partners can confidently delegate complicated assignments and cherished clients to them.
Inspire staff to want to be partners. CPA firm partners have a great gig: Challenging work. A mutual love affair with their clients. They are entrepreneurs in a small business. Unlimited job flexibility. And… they make great money – $300-500K per year for most. It’s great to be a CPA firm partner!
But alas, partners tell me their young staff don’t want to be a partner. The partners naturally conclude that there is something wrong with young people for lacking ambition. But they are dead wrong. The problem is the partners! They don’t talk up to the staff how great it is to be a partner. They need to mentor staff in what it takes to be a partner and be proactive in helping the staff succeed.
New partners need not all be equity partners. Twenty-five years ago, only 10-20% of partners were non-equity vs. equity partners. Now it’s nearly 60%. It’s common for firms to have staff with a 10-20 year tenure with the firm who are valuable, productive “worker bees” but lack practice development and leadership skills. Fearful of losing them by deferring their elevation to partner, many firms in the past promoted these fine people directly to equity partner as a way to retain them. These days, firms are doing this less and less and instead, using the non-equity career path.
Make buy-ins affordable. Decades ago, the gold standard for determining a new partner’s buy-in amount was a three step process. First, compute the value of the firm, making sure to include goodwill (usually at one-times revenue). Second, somehow decide an ownership percentage to award to the new partner. Third, multiply the ownership percentage times the value of the firm and…voila…there’s the buy-in. New partners were instructed to deliver a suitcase of 5s and 10s, totaling several hundred thousand dollars, to the firm.
Those days, for most firms, large and small, are long gone. New partners are neither willing nor able to afford huge-buy-ins. Firms now decide on a statutory buy-in amount that is (a) independent of ownership percentage and (b) more nominal, usually in the $75,000 to $150,000 range. A critical parallel policy is to avoid equating the buy-in amount to the new partners’ ownership in the firm. It makes no sense for a new partner to pay a nominal buy-in and receive in exchange, a share in the firm’s value that is immediately 5-10 times the buy-in amount.
How to Bring in New Partners is written for firms fortunate enough to have staff with the right stuff to be partners. But they may not know the current best practices for doing so.
It addresses ►what a partner’s role is these days, ►the non-equity partner position, ►how firms develop staff into partner, ►determining the buy-in ►what a new partner gets for the buy-in ►compensating new partners ►determining ownership percentage ► voting ►maintaining a new partner’s capital account ►non-compete and non-solicitation agreements covenants ►22 provisions of a well-conceived partner buyout plan
Make buyouts sensible. A sure way to cause prospective partners to reject a partnership offer is to require them to sign a retirement/buyout agreement that is hopelessly out-of-date and onerous. The firm should not pay a buyout to partners who fail to provide proper notice and/or fail to transition their clients to other firm members. In most cases, the main way a firm finances buyouts to retired partners is by no longer having to compensate the retirees. If the income to the remaining partners after a partner retires stays unchanged or decreases, this is a clear sign that the buyout agreement has been poorly conceived.
Help new partners understand that voting is overrated. Yes, new owners of a company are legally entitled to a vote. But they quickly find that having a vote isn’t a big deal. First, despite the fact that the firm may be legally organized as a partnership, it’s run like a corporation. Most decisions are made by management (the MP and his/her team) or the Executive Committee/Board. New partners quickly find out that partners do not have the inalienable right to participate in every firm decision.
Second, influenced by the above, firms rarely take formal votes of the full partner group. Instead, most decisions are made by consensus after a discussion. Having a vote really means having the opportunity to persuade your other partners.
Partners understand that mandatory retirement is a good thing. Seems counter-intuitive, doesn’t it? If partners have this cool job, why would they agree to retire before they want to? The answer is succession planning. Firms dominated by partners in their late 60s and 70s will gradually lose their best young talent, who see old people clinging to their clients, billable work and firm leadership, thereby depriving them of personal growth opportunities.
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