The valuation used to determine the terms for paying retired partners will never make sense unless you assume the firm will at least perform as well as it did before the partner retired. Some firms can never get comfortable with the concept of fixing the obligation to retired partners at the date of retirement. The remaining partners fear they won’t retain the retired partner’s clients so they often make the payments contingent similar to how they would handle the acquisition of a practice off the street. There are a myriad of problems that kind of agreement can cause. As a result the overwhelming tendency is to use fixed payment streams in partner agreements.
However, I frequently hear of and work with firms that are uncomfortable with the perceived risk for retaining retired partners’ clients. Some have had bad experiences with lost business that was managed by retired partners. Others cite a problem with retired partners hanging on to client responsibilities long after they supposedly “retired”. The risk for client retention seems to have just been postponed.
There are two provisions that should be in your partner agreement that will help you manage this issue.
Adequate notice-We highly recommend that you require at least a two year notice in advance of a partner’s retirement (plus any other form of termination). This will normally give the firm adequate time to develop and execute a plan for the transition of a partner’s duties including his/her client responsibilities. Even if your firm is not in a position to replace a retiring partner, two years will give you enough time to develop Plan B which might include culling out that specific partner’s book of business to an external buyer or in the most extreme cases merging up the whole firm. This can happen if the firm has inadequate replacement resources or the firm is not in a position to take on a partner’s highly specialized client base. Failure to provide notice should either make the payments subject to adjustment for lost business or result in a set discount in the range of 25% to 50%.
Execution of Formal Transition Plan-Even with the two year notice requirement, we have seen an discomfort in a lot of firms within the remaining partner group that a retiring partner will actually transition during the required two years. Often in firms that are used to giving partners a lot of latitude, there is a fear the retiring partner just won’t let go. We are increasingly suggesting firms add a second requirement that the retiring partner execute to the satisfaction of the firm a formal written transition plan during the two years. Failure to do so, after having been given a chance to cure the non-compliance, leads to the same adjustment that would have been applied if adequate notice was not provided.
About the Author:
Terrence Putney, CPA (firstname.lastname@example.org) is CEO of Transition Advisors, LLC, www.transitionadvisors.com, which exclusively consults on succession and growth strategies for accounting practices nationally and ownership transition. He can be reached at email@example.com or 913-262-8550.