are you attracting the new breed of equity partners?

7 tactics to address the “new normal.”

by domenick j. esposito
8 steps to great

there’s no argument within the accounting profession that today’s economy is anemic, margins are squeezed and talent, particularly tax talent, is very scarce.

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on top of that:

the philosophies of: (a) finders, minders, grinders and (b) an accounting firm model (principally low-margin compliance services) are no longer sufficient and probably are counterproductive to the perpetuation of a firm.
clients have the upper hand in their accounting firm relationships.
technology will continue to create a lesser demand on lower-level staff.
it is widely believed that google and microsoft will soon become fierce competitors for certain compliance services.

this environment requires that accounting firms address several important strategies and tactics:

acceleration of the move from a traditional accounting firm model to a professional services firm model (with a heavy emphasis on high-margin consulting and advisory services).
additional emphasis on firm brand value (built upon quality people with quality services consistently rendered) and less emphasis on individual partner brands. while personal partner relationships will continue to remain important, the quality of the firm’s work must be consistently delivered in the marketplace for brand credibility.
a go-to market sales methodology and process that is driven by a professional sales force.
increasingly more attention to firm differentiation through industry specialization.
enhanced training of partners to develop them into true trusted advisors who, as a byproduct of annual compliance services, create client value by providing advice on ebitda and working capital improvements that enhance business valuations.
predictability of fees as the long-predicted demise of the billable hour has arrived.
proactive management to reduce cost of delivery including more it, highly skilled paraprofessionals and outsourcing.

these market conditions create a new normal for the characteristics firms need to look for as they attract and evaluate future equity partners. more than ever, firms will require a new breed of equity partners – partners with elevated qualities that will help grow and perpetuate the firm.

the operative question that needs to be addressed is “does the enterprise value of your next equity partner significantly contribute to perpetuating and growing the firm’s business, maintaining and enhancing technical excellence and driving client and staff retention and has this value been demonstrated by a track record of steady and increasingly improved performance?”

at the same time, attracting this new breed of equity partner will require that firms step up their commitment by offering enhanced rights, obligations and deferred compensation/retirement benefits. presented below are a sample of these enhancements:

equity partner rights include participation at the annual partners meeting to discuss general firm business and to vote on partnership agreement amendments. it’s not unusual for firms to identify a certain total number of votes that need to be allocated among equity partners. as an example, one firm has a total of 1,000 votes available to all equity partners.
individual equity partners have the right to cast their allocation of votes determined as the product of:
- 1,000 multiplied by
- a fraction determined by adding:

the product of three times a compensation factor (the numerator equal to the equity partner’s compensation for the two preceding years; the denominator equal to total equity partners compensation for the two preceding years) and
the product of a cash capital factor (the numerator equal to the equity partner’s cash capital at the end of the two preceding years; the denominator equal to total equity partners’ cash capital at the end of two preceding years) and by dividing the sum of (a) and (b) for each equity partner by the sum of (a) and (b) for all equity partners.

here is an illustration of how this would work. say there are two equity partners:

equity partner #1 has 10% of the compensation factor and 10% of the cash capital factor. equity partner #1 has 10% total compensation and cash capital.
equity partner #2 has 90% of the compensation factor and 90% of the cash capital factor. equity partner #2 has 90% of the total compensation and cash capital.
equity partner #1 would get 10% of the 1,000 votes or 100 votes; equity partner #2 would get 90% of the 1,000 votes or 900 votes.

ownership in an accounting firm is essentially the same as ownership in any commercial enterprise. ownership has both potential upside and potential risk and an investment is required to fund operations. upon admission into the partnership, individual equity partners have an obligation to remit cash capital of a predetermined amount (same amount for every equity partner; usually $50,000 to $300,000 per partner at the top 100 firms – depending on the philosophy of debt vs. partner capital to fund operations and investments). the initial contribution is usually between 40% to 50% of the predetermined amount. annually a certain percentage (typically 10%) of year-end bonuses for all equity partners will be held back as additional cash capital until the total predetermined amount is remitted. cash capital is entitled to an annual interest payment. the firm’s executive committee will annually determine the interest rate that is attributed to cash capital. cash capital is returned upon retirement or withdrawal.
the new breed equity partner is entitled to a deferred compensation/retirement benefit. to be competitive in the marketplace, this benefit is generally between 200% and 300% of average annual compensation during the three highest out of the last five preceding years payable over 10 years. vesting occurs over a 10-year period pro ratably. payments generally are made during 10 years following retirement or withdrawal.
if the firm is sold, acquired or merged up, the new breed of equity partner is entitled to an allocation of the proceeds. allocation methodologies are usually outlined in the firm’s partnership agreement. it is not unusual for the allocation methodologies to mirror the compensation factor and the cash capital factor referred to above.

over the years, many accounting firms have gotten complacent as to who they have admitted into their firms as equity partners. many lowered the bar because “someone has to do the work.” as a result, many accounting firms do not have a sufficient number of equity partners who have the potential to perpetuate and grow these practices.

if a firm has its principal strategy as going it alone and remaining independent, there needs to be a paradigm shift. these firms need to recognize that there is a new normal that requires a new breed of equity partner – and firms have to be willing to enhance ownership benefits.

posted on april 20, 2017

dom esposito

about the author

domenick j. esposito was the ceo of grant thornton, vice-chair of bdo, and national growth director at cohnreznick.

he is the author of "8 steps to great: the eight essential strategies driving success at the world's largest cpa firms. and how to apply the lessons at firms of all sizes," published by 卡塔尔世界杯常规比赛时间.

a life in public accounting

in 2016, esposito, then a former ceo of bdo, moved from a 46-year career in public accounting into the next phase of his professional life – consulting to cpa firms, launching a boutique advisory firm, esposito ceo2ceo, that provides advice to ceos, managing partners and other senior partners of cpa firms focused on the mid-market throughout the u.s.

with the launch, esposito authored “8 steps to great," a guide for ceos, managing partners, and other senior partners on how to move their firm to the next level.

cohnreznick national growth director

esposito was one of the most qualified individuals in the country to advise cpa firms on growth and profitability. through 2015, he was national practice & growth director and an executive board member of cohnreznick, llp, a mid-market sustainable brand and the tenth-largest cpa firm in the united states. he oversaw cohnreznick’s go-to-market industry specialization and consulting and advisory service lines. he was also intimately involved in the firm’s mergers and acquisitions and strategic and tactical activities for its public company and capital markets initiatives. dom joined the predecessor firm of j.h. cohn in 2002 as the chief operating officer and executive board member.

dom was also an independent director of ethan allen interiors inc. for several years (through 2014), dom was a member of the nasdaq listing and qualifications committee to the organization’s board of directors. he formerly served as the leader of the new york state society of cpas committee for large and medium-sized firms practice management. he also was an adjunct accounting professor at c.w. post/long island university.

bdo and grant thornton

through october 2002, dom was vice chairman at bdo, a mid-market sustainable brand and the seventh-largest international accounting and consulting firm in the u.s., with almost 50 offices and 3,400 employees. during his brief time with bdo, he was responsible for the alliance distribution network (at the time consisting of over 80 cpa firms, 10 law firms, and 25 consulting firms). he was also responsible for attracting and servicing a number of clients.

from 1979 through 2001, dom was with grant thornton, another mid-market sustainable brand and the sixth-largest international accounting and consulting firm in the u.s., with over 50 offices and 4,500 employees. he joined grant as an audit manager, became a partner in 1981, led the long island office from 1984 to 1986, became assistant managing partner of the new york office in 1986, and from 1988 to 1999, led the new york office. in 1999, esposito became a regional managing partner and for two years, through 2001, was the firm’s chief executive officer.

cpa, partner, mba, leader, influencer, media celebrity

between 1996 and 1998, and while he was ceo, esposito was on the partner board and was also on the board of grant thornton international – the worldwide umbrella organization. in these capacities, he developed strong experience in strategic thinking and execution, international relationships, corporate governance, partnership matters, branding, expense control, client relationships, and new business development.

as ceo, he took grant thornton to record earnings, consummated the largest line-of-business sale in the firm’s history, developed a major joint venture with axa financial, and made the largest practice acquisition in the firm’s history. from 1969 to 1979, esposito was with price waterhouse (now pwc), servicing ibm when he was promoted to manager in 1976.

dom was a cpa, has been quoted in national and local media, and has appeared on radio and cable tv.

esposito also testified before the securities and exchange commission.

he received his m.b.a. from st. john’s university and his b.s. from ferris state university. accountingtoday, one of the leading trade journals for the accounting profession, named esposito one of the most influential people in the profession for two consecutive years.

he passed away in 2021 at the age of 74.

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