Understanding what Your Partnership Agreement Should I nclude Joel Sinkin, President Transition Advisors

Accounting Transition Advisors National Consulting Firm working exclusively with accounting firms on issues related to ownership transition

Transition Advisors, LLC Partners and Associates Joel Sinkin President Terrence Putney CEO Chris Frederiksen National

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If there are 50 things you need to think about in a transaction……. ……the smartest of us will think of only 35

Key Elements to a Partnership Agreement 1.Compensation 2.Governance 3.Death/Disability, Retirement 4.Termination 5.Unwinding the Partnership

Goals of Partner Compensation Motivate partner behavior to achieve desired strategic and financial results Create motivation for top performance by rewarding modified behavior Build a strong partner team through retention of the best performers, removal of non-performers, and attracting new talent

Types of Compensation Plans Equal Lockstep Pure Formula Cross Evaluation Equity-based Committee-based Leader-based

Types of Compensation Plans ◊ Equal Often used in new partnerships Promotes collegiality Requires substantially equal contribution to be sustainable Long term, often fails to promote high performance

Types of Compensation Plans ◊ Equity-based Often used in new partnerships Promotes collegiality Requires substantially equal contribution to be sustainable Long term, often fails to promote high performance

Types of Compensation Plans ◊ Lockstep Based on seniority Often similar to Equity-based as equity normally accrues based on seniority Disguised as unit-based plan where units accumulate over time Over time tends to reward for past performance more than current

Types of Compensation Plans ◊ Pure formula An accountant’s dream Relies mostly on pre-determined, objective measures Promotes clarity and certainty Leaves out hard to measure, subjective elements of performance Can be manipulated in many cases

Types of Compensation Plans ◊ Cross Evaluation Relies on each partner evaluating other partners and allocating compensation Has appearance of fairness-democratic Requires knowledge by all partners of other partners’ contribution Tends to lump most partners into an average rating at the expense of recognizing outliers

Types of Compensation Plans ◊ Leader-driven Managing Partner decides Requires strong managing partner and trust in their decision-making ability Most flexible … can be very effective Often lacks transparency which can lead to mistrust and lack of needed feedback

Types of Compensation Plans ◊ Committee-driven Appropriate for large firms Works well when knowledge of all partners’ contributions is not readily available to each partner or the managing partner Allows for flexibility and fair vetting of issues Can lack needed transparency Can be inefficient

Equity: What Does It Mean? Compensation Profit Sharing Decision making Internal buyouts External buyouts

Different Types of Partners? Full Equity – Senior Full Equity – Junior Income Of Counsel Using the term Principal

Governance Decision making Unanimous vs Super majority vs Simple majority Financial Commitments

Governance By way of example … Super majority Admission of new partner Simply majority Expenses in excess of certain amount Unanimous Dissolution or sale

Retirement ◊ Voluntary Mandatory age / Vesting Partners desiring to stay on after retirement and how that impacts their role, compensation and buyouts Valuing equity Equity Compensation Funded vs unfunded Work backwards formula

Retirement ◊ Terms Payout periods Retention periods Tax structure Caps Penalty buyouts Premature exit Exit without appropriate notice Getting “booted” out

Death or Disability Definition of temporary disability vs permanent Where insurance fits in re disability Death Where insurance fits in re death

Termination Voting Grounds Non-Competes What is cause?

De-Merger Clauses When is it appropriate and not appropriate? How long can they be invoked Allowing partners to leave with clients Handling of: Original clients New clients Firm name Staff Liabilities Leases

Other Thoughts External Sale/Dissolution Roles and responsibilities Hold harmless Non-competes Arbitration vs lawsuits Restrictive covenants: Leaving with or without clients

Transitioning Clients What are the clients’ fears? Is the partner/owner I trust still there? Is it going to cost me more money? Is the staff I am accustomed to working with part of the successor firm? Change IS A DIRTY WORD THE EMPHASIS NEEDS TO BE ON continuity NOT THE LOSS OF, BUT THE gain OF …

Miscellaneous It is a living agreement? Limit retirement timing Create benchmarks, time frames Replace the role, not the body

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