Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director

1. Keys to Your Partnership Agreement – Protecting the Firm Nancy Egan, Managing Director Transition Advisors

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

3. Key Elements to a Partnership Agreement Compensation Governance Death/Disability, Retirement Termination Protecting the Firm

4. 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

5. Equal • Pure Formula • Cross Evaluation • Eat what you kill versus one firm • Equity-based • Committee-based • Leader-based • Closed comp versus open plans Types of Compensation Plans

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

7. 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

8. 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

9. 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

10. 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

11. Types of Compensation Plans ◊ Eat what you kill versus one firm More than a compensation plan but a philosophy Smaller firms tend to be more eat what you kill, larger firms more one firm concept Also called book of business approach Positive: easy to calculate and some feel fair Negative: promotes my client versus firm client and creates less brand loyalty and more partner loyalty making succession more challenging

12. Types of Compensation Plans ◊ Closed compensation plans versus open Appropriate for large firms Requires substantial trust of the system and decision makers Enables firms to be more flexible on attracting talent and doing mergers Lacks transparency Trend in larger firms is closed

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

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

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

16. Retirement ◊Voluntary Mandatory Age / Vesting Partners desiring to stay on after retirement and how that impacts their role, compensation and buyouts Valuing Buy-out Equity Compensation Funded vs unfunded Work backwards formula

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

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

19. Termination Voting Grounds Non-Competes What is cause?

20. Protecting the Firm – Scenario 1Small Firm – 1 partner wants to retire/slow down Capacity of remaining partners Retiring partner grooms a successor Cull out & sell partner’s book Merge entire firm into larger firm Buy-out of retiring partner Longer-term role for remaining partner

21. Protecting the Firm – Scenario 24-Partner Firm – 2 Senior, 2 Junior Capacity of remaining partners Replace the role – not the body Affordability – caps, length of buy-out Funds for replacement = Retiring partner comp minus buy-out payments Incentive for remaining partners

22. Protecting the Firm – Scenario 3Regional Multi-Partner Firm Challenge: attract young partners Mandatory retirement Cost of admission Financial viability of buy-out

23. Miscellaneous Is it a living agreement? Is it sustainable? Create benchmarks, time frames Replace the role, not the body

24. For More Information Please visit our website for resources including FREE reports, whitepapers and case studies. Nancy Egan negan@transitionadvisors.com 1-814-382-3585 www.TransitionAdvisors.com