“Reprinted with permission from Partner ADVANTAGE Advisory Copyright © Hudson Sawyer Professional Services Marketing, Inc. August Aquila, Editor. Martha H. Sawyer Publisher. Editorial and orders 800-945-6462”

 

 

Partner agreements

 

There is Never a Problem, Until There is a Problem

 

BY AUGUST J. AQUILA

 

Several years ago, a wise managing partner said, “There is never a problem, until there is a problem,” and I have often used it when consulting with firms regarding their partnership agreement or lack of one. It amazes me how many have not updated their agreements since their founding, nor do they have multiple agreements that are different

for each new partner. I once read that more than half of small and mid-size

firms are working with incomplete, out-of-date or nonexistent written agreements. Is your agreement up-to-date?

 

PROFESSIONAL DISPUTES AND DIVORCES

There are very few firms that have never experienced an internal ownership problem. These can range from a partner not wanting to retire from the partnership, one or more partners believing they can do better on their own, to dealing with an unproductive or disruptive partner. The basic causes for most partnership disputes are money, money and more money. If you do have to go to court to settle your differences, make sure that your partnership agreement calculations are soundly rooted and consistently applied over time.

 

KEY PROVISIONS TO REVIEW

Partners today are more portable, therefore agreements need to address a broader range of occurrences than they did 20 years ago. The following is not intended to be all inclusive (given the limitation of the article length), but does cover some of the more critical provisions of a solid agreement. (While I use the word “partner,” the following provisions equally apply to shareholder agreements.)

 

TERMINATION WITH OR WITHOUT CAUSE

I once worked with a firm that had been in business for 17 years. When the firm was started, the founding partners were young and did not consider the need to address termination without cause. Make sure that your agreement clearly spells out the manner and means by which an owner shall leave the firm when the firm decides to end the relationship.

 

Partners today are more portable, therefore agreements need to address a broader range of occurrences than they did 20 years ago.

 

RETIREMENT

On the one hand, you don’t want to loose a valuable partner at their prime. Many firms include a reduction in benefits for early retirement. On the other hand, you don’t want to have partners staying in an ownership position well into their 60s or 70s. You want to make sure that there is a mandatory retirement age stated in the agreement. This merely requires the individual to retire from the partnership. The individual may continue to work as an employee of the firm.

 

DISABILITY

Many firms have life insurance on their partners, but fewer have any disability coverage (See editor’s note on page 1 for more on this topic). Firm owners are more likely to suffer some disability during their work life than they are likely to die during the same period.

 

NON-COMPETE AND NON-SOLICITATION AGREEMENTS

While you can’t stop an individual from making a living, you can put some teeth into your agreement if a former owner begins to compete and solicit firm clients. Remedies usually include termination of all current or pending benefits, the recovery of fees paid to the former owner and obtaining an injunction against the former owner. Your agreement should also include a right of offset when the partner either takes or fails to assist with collecting accounts receivables.

 

COMPENSATION

The agreement should spell out how compensation is determined. Specify whether there will be a base, a distribution based on equity, a return on capital invested in the firm, bonuses, etc. The agreement should also lay out how and in what order the various elements of the compensation system get paid.

 

ADMISSION OF NEW PARTNERS

The agreement should address the process and the required votes needed for admitting a new partner, as well as the capital and equity buy-in requirements.

 

Remember that the purpose of a good partnership agreement is to protect the firm, not one individual partner. If you would like to have your agreement reviewed, please call me.

 

August Aquila is the Director of Practice Management Consulting for The Growth Partnership. He has assisted many firms in developing comprehensive agreements. Contact: (952) 930-1295 or aaquila@thegrowthpatnership.com.