Making Equity Changes in Partnerships

Source: Texas Society of CPAs, Public Practice

This is based on Bill Reeb’s article dealing with retirement. Portions are direct excerpts from the article, presented with permission from The Texas Society of CPAs.

Equity adjustments may be necessary to reward rainmakers for their past achievements and move to a system that Bill Reeb calls “Building a Village.” In his previous article, reviewed by CPA Leadership Report in January and titled “Developing a Partner Compensation System—More to it than Meets the Eye,” we discussed how Reeb would make these equity adjustments. Click here to read the review and the complete article.

If a rainmaker/superstar doesn’t want to go along, he or she should be terminated.

In a real estate analogy, Reeb notes that upon the sale of real estate in a syndication, each passive partner would receive his or her ownership percentage. The active investor receives the same, but in addition he or she is compensated annually for managing the deal. The investors each get the same amount from the sale.

So if you own 20 percent of a CPA firm, your retirement benefit comes primarily from the value of that interest in the firm. The value is typically between 65 percent to 80 or 90 percent on the dollar (of revenue). The amount may be higher than the market value of the firm.

The problem is that, for example, if you have two equal partners, but one works much harder and is more productive than the other, it is difficult to adjust annual compensation to balance that differential. This is true for firms with fewer than 15 partners.

If compensation is used to determine retirement benefits, partners near retirement try to maximize their compensation because it also maximizes their retirement benefits. In actuality older partners tend to slow down, so their compensation should diminish, but their retirement benefits should not.

So retirement should be based on equity. Older partners can slow down but simultaneously take steps to strengthen the firm, for example by transitioning clients to younger partners. If retirement is based on compensation, they will hoard the clients.

Reeb will pick up here in his next column to take his first crack at partner compensation, now that equity and retirement have been addressed.

Reeb is a keynote speaker, author, trainer, coach, facilitator and management consultant with more than 20 years of business consulting experience. He has founded seven small businesses in the retail, software development and services sectors, including the CPA firm Winters & Reeb, PLLC, in Austin, Texas. Reeb has also been published internationally, with around 200 columns and articles to his credit.

For the complete article, click here.

From Texas Society of CPAs, Public Practice. January/February 2008.

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