make sure your agreement meets current standards.
by peter fontaine
cpa firm partner agreement essentials
too many firms suffer from major – often hidden – weaknesses and omissions in cpa firm partner agreements.
more: when solos bring in partners | 8 key items for partner agreements | 14 partner agreement issues in mergers | partner duties, prohibitions and grounds for expulsion
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- managing partner and executive committee lack sufficient authority to effectively run the firm.
- firm governance is heavily weighted toward original owners or the older generation. younger partners feel disenfranchised and underrepresented.
- partner duties and expectations are not well defined. performance of partners is hard to monitor and control.
- insufficient criteria for terminating partners.
- new partner admission and buy-in process unclear.
- twenty to 30 percent of all firms don’t have a goodwill-based partner retirement/buyout provision in their partner agreement. many of these firms’ partners incorrectly believe that this protects them against claims by departed partners to get paid for their interest in the firm that includes goodwill.
- retirement/buyout benefits based on ownership percentage or “book of business” instead of what each partner has contributed to the firm.
- virtually no requirements for client transition by retiring partners to be eligible for goodwill-based retirement benefits.
- draconian and therefore unenforceable provisions for the handling of partners who withdraw from the firm. example: valuing goodwill in excess of 150 percent of revenue.
rosenberg adds:
- notice periods these days are at least one year, and many are 18-24 months. it’s incredible how often we read old agreements that provide for only 12 months’ notice or less.
- non-solicitation agreements should not only cover clients taken but prospective clients as well. for prospects, the firm must be able to provide documentation, such as written proposals, emails and sales reports, to prove the prospects are bona fide.
- the vast majority of partner agreements we see do not include the taking of staff, which should carry a liquidated damages provision of 30-100 percent of the compensation (including bonuses, commissions and overtime) of the staff.
- new partner buy-ins are much lower today than 20 years ago. most today are disconnected from ownership percentage. instead they are determined at the firm’s discretion, usually $75,000 to $175,000.
- very few agreements address the compensation of disabled partners who stop working but intend to return.
- no provision for non-equity partners.
excerpted from peter fontaine’s publication “getting in touch with your legal side – a potpourri of issues and updates.”