Understanding what Your Partnership Agreement

Should IncludeJoel Sinkin, PresidentTransition 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 jsinkin@transitionadvisors.com President631-493-0022

Terrence Putney tputney@transitionadvisors.com CEO866-279-8550

Chris Frederiksen cfrederiksen@transitionadvisors.com National415-924-3100

Transition Advisors, LLC

Partners and Associates

Bill Carlino bcarlino@transitionadvisors.com Managing Director – National Consulting Services914-273-4327

Mark Basinski mbasinski@transitionadvisors.com California, Arizona, Nevada, Oregon, Washington, Utah866-279-8550

Russ Best rbest@transitionadvisors.com Texas, Colorado, Missouri, Kansas913-962-2563/214-453-1200

Transition Advisors, LLC

Partners and Associates

Nancy Egan negan@transitionadvisors.com Managing Director – National Consulting Services814-807-1290

Peggy Tyers ptyers@transitionadvisors.com Toronto, Ontario Province905-823-1585

Michael Farinelli mfarinelli@transitionadvisors.com National Business Development913-866-8550

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

Other Thoughts

• External Sale/Dissolution

• Roles and responsibilities

• Hold harmless

• Non-competes

• Arbitration vs lawsuits

• Restrictive covenants: Leaving with or without clients

Transitioning ClientsWhat 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

For More Information

Please visit our website for resources including

FREE reports, whitepapers and case studies.

Joel Sinkinjsinkin@transitionadvisors.com

1-866-279-8550www.TransitionAdvisors.com