How to Create an Effective Partnership Agreement
Source: Public Practice
In part one of this series, Bill Reeb urged CPA firms to review and, if necessary, update their partner or shareholder agreements (“partner agreements,” for short). Common shortcomings include multiple versions of the agreement and unwieldy voting thresholds.
Part two lists common policies a partnership agreement should cover, in categories such as “roles and responsibilities,” “voting processes,” “retirement policies,” and “departure/termination policies.” Reeb recommends that each issue be covered only once. So, for example, to value a partner buyout, you'd have to consult several policies, including those addressing “valuation,” “sale of interest,” “transition,” and “shareholder leaving.” Although this adds complexity, it avoids redundancy, which can make it difficult to update the agreement over time.
Also in part two, Reeb takes a closer look at retirement policies. In a small firm, it's common for a departing owner simply to sell his or her book of clients. As firms grow larger, however, they rely less on “hunters,” who bring in new clients, and more on “village builders” — talented practitioners who can grow the firm's existing business. To tie these village builders to the firm, Reeb recommends vesting schedules that start at age 60 and go to the mandatory sale-of-ownership age.
To avoid a potentially disastrous mass exodus, Reeb suggests requiring two years' written notice for early retirement. In addition, the partnership agreement should provide for a compensation package that motivates retiring partners to assist in transitioning clients and referral sources and to provide training and mentoring to his or her successors, with financial penalties for noncompliance.
Finally, Reeb recommends incorporating a “maximum payout” provision that defers payment of retirement benefits if necessary to maintain a “reasonable balance between current partner income and retired partner benefits outflow.”
Part three of the series will focus on partner departure/termination policies.
For the complete article, read Partner/Shareholder Agreements — Part Two.
From Public Practice, Texas Society of CPAs, December 2010, www.tscpa.org.