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5 items you need in your firm’s owners’ agreement

OwnershipWhat’s in your owners’ agreement? I recommend creating these critical documents when the firm is first formed and updating them as needed. An effective agreement can enhance decision-making and productivity, and it’s also the foundation for a successful changeover to new internal ownership. Even in a merger or acquisition, the decisions set forth in an owners’ agreement can set the stage for a smoother and more rewarding transition. Here are some significant issues that should be addressed in any agreement.

Firm governance. When you establish policies on who will run the organization and how it will be run, it can enhance efficiency and profitability. No matter how independently each partner may handle his or her work, there are many advantages to having common agreement on some key issues, such as:

  • Voting rights and shares of partners and how they are determined.
  • How a managing partner is chosen.
  • How much authority he or she has.
  • How much time the managing partner spends on administration versus client work.
  • How long his or her tenure will last.

Firm valuation. How will you decide what a share in the firm is worth when it’s time to buy out a partner or bring in a new one? Valuation is important to many of the CPAs I work with, which is why it’s essential to clarify the rules for your firm. The owners’ agreement should set forth terms for how a partner’s equity is valued and what formulas or approaches are used.

Buyout considerations. The owners’ agreement should include a buyout agreement that is updated at least annually. Your goal should be to offer a retiring partner a fair payout, with terms that compensate remaining partners for taking on his or her responsibilities and ensure the firm’s ongoing financial health. It should also allow for deferral of payment of the retirement payout if the firm is facing issues such as a cash crunch or the loss of a major client, and address what will happen in case of a partner’s death or disability.

Rules on partner retirement. My experience working with firms has shown that, as a starting point to ensure a smooth transition, the partnership agreement should require a minimum of two years’ notice of any partner’s intent to leave. Other best practices include:

  • A provision that prevents two partners from retiring within the same 12-month period. Along with the two-year minimum notice, this policy protects the firm from having to replace talent and capacity in a hurry and from being responsible for buyout payments that it’s unprepared to make.
  • Setting rules on termination of partners before retirement. What will happen if a partner decides to leave long before his or her retirement age? What kind of payout does a partner receive if he or she leaves because of performance or other issues? Documenting the answers to these questions ensures that a firm is not caught by surprise or bogged down in disagreements.
  • Establishing a retiring partner’s responsibilities for transitioning clients and otherwise ensuring a smooth and timely handover to a new partner. Once again, this is key to maintaining stability during change.
  • Deciding whether the firm will have a mandatory retirement age. While not necessarily a requirement, a clear sense of when change will occur can clarify planning.

Succession considerations. A strong bench of potential future leaders will enhance any firm’s success, stabilize its succession path and even make it a strong M&A candidate if an external succession is chosen. The partnership agreement can set forth how promising leadership candidates are identified and groomed, addressing issues such as external and internal training, mentoring and sponsorship and non-equity partnership, and the owners’ related responsibilities.   

                These are just a few of the key issues that a comprehensive owners’ agreement can address. By developing and updating this document, firm leaders can avoid endless meetings over issues that an effective agreement could decide for them and enable all their professionals to concentrate on the important work of the firm. For advice relating to reviewing your current ownership agreement, check out our new personalized reports.

Joel Sinkin, President, Transition Advisors. Joel has been involved with and consulted on 900+ transaction closings of accounting firms since 1990. He teaches CPE courses and lectures for the AICPA, national associations and state societies. He co-wrote the book “CPA Firm Mergers & Acquisitions: How to Buy a Firm, How to Sell a Firm, and How to Make the Best Deal.

Ownership courtesy of Shutterstock.


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