Understanding what Your Partnership Agreement Should I nclude Joel Sinkin, President
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Transcript of Understanding what Your Partnership Agreement Should I nclude Joel Sinkin, President
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 [email protected] President631-493-0022
Terrence Putney [email protected] CEO866-279-8550
Chris Frederiksen [email protected] National415-924-3100
Transition Advisors, LLC
Partners and Associates
Bill Carlino [email protected] Managing Director – National Consulting Services914-273-4327
Mark Basinski [email protected] California, Arizona, Nevada, Oregon, Washington, Utah866-279-8550
Russ Best [email protected] Texas, Colorado, Missouri, Kansas913-962-2563/214-453-1200
Transition Advisors, LLC
Partners and Associates
Nancy Egan [email protected] Managing Director – National Consulting Services814-807-1290
Peggy Tyers [email protected] Toronto, Ontario Province905-823-1585
Michael Farinelli [email protected] 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 [email protected]
1-866-279-8550www.TransitionAdvisors.com