Arriving at an Effective Departure Policy
Source: Public Practice
In parts one and two of this series, Bill Reeb urged CPA firms to review and, if necessary, update their partner or shareholder agreements (“partner agreements,” for short) and described several key policies these agreements should cover. He also emphasized the importance of avoiding multiple versions of the partner agreement and of addressing each issue only once to avoid redundancy and facilitate amendments to the agreement.
In part three, Reeb offers recommendations for several departure/termination policies:
- Total disability. Policy should allow the firm to retire a disabled partner who, after returning to work, is out for more than 12 months of any rotating 24-month period.
- Partner taking clients/employees. Reeb recommends requiring a partner to pay the firm two times annual revenues for clients and two times annual salary for employees (framed over a two-year period).
- Partner not taking clients/employees. In addition to addressing retirement payment terms, the agreement should give the firm “stop payment” rights in the event of partner behavior that hurts the firm.
- Death. Typically, the firm pays the partner's estate on a fully vested/maximum-retirement-benefit basis. But Reeb recommends discounting this amount 25 percent to 50 percent to reflect the financial impact on the firm of the partner's loss.
- Termination. Reeb recommends a super-majority (66 2/3 percent) of votes from the other partners to fire a partner.
Agreements should also include policies for partial disability.
For the complete article, read “Partner/Shareholder Agreements – Part Three.”
From Public Practice, Texas Society of CPAs, February 2011, www.tscpa.org.