CPA Firm Partner Agreements – Top 10 Weaknesses

Posted on February 28, 2012 by Marc Rosenberg   Print This Post Print This Post


Thousands of CPA firm partner agreements haven’t been updated for 20, 30 years or more.  At some firms, this oversight is due to a lack of time.  At other firms, the issues neglected are somewhat sensitive so the partners avoid addressing them.  At most firms, it’s a little of both.  Here are 10 partner agreement areas we see neglected time and time again.

  1. Partner retirement provisions are hopelessly behind the times or simply ignored. Most prominent by far, are notice of intent to retire and specific client transition procedures for a pre-retirement partner.  Other neglected areas include vesting, limits on annual payouts to all partners and mandatory retirement.

  2. New partner buy-ins are too high. They have come down considerably in the last 20 years. 80-90% of all firms, large and small, now specify buy-ins of $150,000 or less. 

  3. Many agreements still specify that ownership percentage plays a huge role in income allocation, retirement benefits and voting.  Today, the impact of ownership percentage is much less than it used to be.

  4. Agreements fail to restrict partners from drawing compensation that is higher than their income allocation percentage.

  5. Voting that is driven by ownership percentage disenfranchises new partners, contributing to  their feeling of not being a “real” partner.

  6. Grounds for expulsion are not detailed enough.  Most agreements even fail to include a provision for dismissing a partner who is unable or unwilling to perform as a partner.  Without this provision, a firm may not be able to dismiss a partner for performance reasons.

  7. Many agreements have no non-solicitation provisions. 

  8. Many agreements do not specify how to compensate a disabled partner who is not working.

  9. Some agreements contain an excessive amount of verbiage describing the system used to allocate partner income.  The best agreements are almost completely silent on this because firms change their systems so often.

  10. Few agreements provide for non-equity partners and (non-CPA) principals.There is so much material on each of the above that I could easily do a separate post on each.  If you’d like me to expand on any of these issues, please comment below or give me a holler.
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Compensation Committee Horror Story

Posted on February 21, 2012 by Marc Rosenberg   Print This Post Print This Post

This story is real.  Some minor facts have been changed to protect the innocent, but the main points illustrated are based on actual experiences.

Democracy is a good thing.  But like most good things, if taken to the extreme, the results can be disastrous.

To many, it’s almost impossible to separate “partnership” from “democracy.”  Many partners in CPA firms believe strongly that the firm should be managed in a highly democratic manner.  They often feel that being a partner entitles them to be “involved” in managing the firm and making decisions.  They feel that this is the democratic way.

One area where the democracy mindset is tinkered with is when a firm adopts the compensation committee (CC) approach to allocating partner income (there are many other examples).  This is a tall leap for partners to take.  They are asked to entrust the most significant and sensitive aspect of being a partner – their compensation – to a small group of partners who function as judges.  They are told that if the partners don’t trust the judges, the system won’t work.

I have seen many firms who move to the CC system doggedly try to retain some semblance of democracy by adopting a rule that every partner eventually gets a chance to serve on the committee.  This is done by limiting the re-election of committee members.

Let me illustrate how this can backfire. Many of my clients ask me to attend their CC meetings for the first two or three years to keep them on track.  One firm that I worked with did a great job of objectively evaluating the performance of each of their eight partners.  During my first year with one firm, I witnessed the CC doing a fabulous job of evaluating each partner’s performance.  One of the partners had a terrible evaluation and actually had his pay reduced as result.  This partner was as close as one can possibly get to being fired.

Lo and behold, in the second year of the CC at this firm, this probationary partner was elected by the partner group to the committee to replace a member who was required to step down.  How crazy is that?

The moral of story is this:  The partners have to trust the judges for the system to work.  But in order to trust the judges, all the judges need to be credible to the other partners.

My advice to firms is to allow CC members to serve an unlimited number of terms, thereby resisting their democratic urge to give everyone a chance. Most firms have at least one partner who is not viewed as credible by the bulk of the partners.

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The Artist – It’s a Hoax, Folks

Posted on February 9, 2012 by Marc Rosenberg   Print This Post Print This Post

Theatrical poster

It seems that a couple of Hollywood types – say a producer and a director – were having their way with a bottle of 24 year-old Bruichladdich one evening.  Instead of the inebriated effect that fine Scotch has on its imbibers, it caused these movie moguls to wax whimsical and cynical.

The producer sarcastically asserted that the importance of dialog in movies is totally overblown.  As evidence of this, he pointed out the fascination people have with texting, having observed on multiple occasions his daughter and her friends texting each other…while in the same room!

The director said “As preposterous as your point is, we both know the only things that are important in selling a movie today is a frenzied marketing campaign by the movie studio followed by rave reviews by critics desperate to outwit each other by anointing some artsy-fartsy movie as the second coming of Gone With The Wind.”

“That’s brilliant!” the producer blurted out.  “We could make a low-budget throwback movie – say, a silent movie – no one has made one since the talkies came out in the late 1920s.  The movie will be seen as cool because it’s so countercultural. And the public will play along  – they’re so fickle they’ll embrace any new trend.”

“Yes indeed!” countered the director.  “We’ll do it in black and white so it has that film noir mystique. We wouldn’t need an expensive screenwriter because any numb-nutz can ‘write’ a script for a silent movie.  And we could use unknown actors because if they aren’t speaking, who needs top line stars?”

“Our costs would be practically nothing,” the producer mused, sounding very much like an accountant.

He continued to brainstorm:  “It will all be an elaborate hoax on the international movie-going public to prove how easy it is to program humans into believing what one wants them to believe.  It’s done every day in politics.  Why not movies?  Between the two of us, we have enough top drawer movie critics in our back pockets that we can coax them to play along with this farce and write enthusiastic reviews.”

“It’s diabolical,” giggled the director.   “Kind of like a Jackson Pollock painting.  If a mentally disturbed artist can make millions by throwing containers of paint on a white canvas, think what we can do with a movie.”

“You know, this has been done before,” the producer recalled.  “Orson Welles in 1938 terrified millions of gullible radio listeners by creating a  fake news broadcast about an invasion from Mars.  For a few hours, people were stuck in a kind of virtual world in which fiction was confused for fact.”

“We’ll need a catchy name for the movie,” said the director.

The producer had it ready.  “We’ll call it…The Artist.”

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Best CPA firms to work for: top trends

Posted on January 31, 2012 by Marc Rosenberg   Print This Post Print This Post

Accounting  Today released the 2011 Best Firms to Work For list in the December 2011 issue with some interesting findings.

Top-scoring firms offered a variety of features that contributed to high employee satisfaction, while the lowest-scoring firms were  so cited due to one particular item across the board: dissatisfaction with pay and benefits.

Companies earning positive feedback in the financial reward categories were noted for :

  • Reversing salary freezes
  • Restoring raises
  • Reinstating 401 match
  • Celebrating employee anniversary with personal gifts

One firm took an unusual step to see both staff and clients through the challenging economic times: to reduce the need to lay off employees during the recession, it offered its staff free of charge to not-for-profit clients.

In addition to compensation, one of the top three companies emphasized physical fitness, offering an on-site gym, sauna and massage room; yoga classes, and an annual tax-season weight-loss competition.  

Consistent performance feedback is noted at the top companies, with performance evaluations becoming more “honest and career-oriented.”  Ninety percent of “ best  firms” conduct two annual performance appraisals instead of one.

Firm communication is improving. Open communication is a top priority for high-scoring firms, to these ends:

  • No surprises
  • Give staff as much say in decision-making process as possible
  • Focus on the positive; give as thorough an explanation of the negative as possible

And more firms are moving from a closed-office to an open-door environment. With a focus on teamwork, partners are becoming more hands on, creating opportunities for more partner-staff interaction and exchange.  These top-ranked companies are finding that striking a better work/life balance and fostering a friendly, pleasant workplace environment that keeps employees engaged results in the highest degree of staff satisfaction.

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The Debate Over E-mail

Posted on January 25, 2012 by Marc Rosenberg   Print This Post Print This Post

young guy at computerIs e-mail an effective form of communication? Or has it outlived its usefulness? An interesting piece by Kristin Samuelson of the Chicago Tribune posed these questions of local business executives recently.

The discussion was triggered by an announcement from French technology giant Atos (74,000 employees in 42 countries) that the use of e-mail will be phased out over the next 18 months.  Why? According to Atos CEO Thierry Breton, only 10 percent of the 200 messages employees receive on an average day are useful, and  18 percent are spam. Managers spend between five and 20 hours a week reading and writing emails, he said. 

 ”If people want to talk to me, they can come and visit me, call or send me a text message,” Breton told the Wall St. Journal.

Instead of using emails, Atos employees will communicate via face-to-face communication, instant messaging or texting.

Such real-time workplace communication tools will surpass e-mail  in popularity within five years, according to 54% of CIOs surveyed by Robert Half Technology in August. And a recent study found that 95 percent of Americans aged 18 to 24 send or receive an average of 110 texts per day.

What’s scariest  is the ominous implication that texting will cause the extinction of emailing when the 18-24 group become middle and top managers in organizations. How will the emergence of these new technologies affect the function of e-mail in internal corporate communications?

Like many, I have been frustrated by today’s chief threats to email: spam and the ubiquitous use of smartphones which limit messages to cryptic, texting-like posts.  Like many, my temperature rises to a boil when people hide behind an email when the situation cries out for face-to-face communication.  

However, I find email an invaluable communication method and would be severely impaired if its use diminishes further.  I use it all the time to respond to clients’ requests for information, to share a single question or announcement with organized groups, to follow up and summarize the status of projects, events, issues, or to serve as a written record of a two-way, real-time conversation – a form of communication that is seemingly becoming a relic of the past.

I dread the thought of a future where face-to-face communications go the way of the ice truck.  So do the experts Kristin Samuelson consulted:

“Just as Mark Twain said ‘the report of my death was an exaggeration,’ so the report of the death of e-mail is an exaggeration,” local consultant David Grossman told the Tribune. “Often with e-mail, people think they get the information out and the communication is done.  That’s not the case.  Sending an e-mail is just the beginning.”

Atos CEO Breton agrees. “Emails cannot replace the spoken word.”

I pray he’s right.

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The Best Staff Bonus Plan

Posted on December 21, 2011 by Marc Rosenberg   Print This Post Print This Post

The best staff bonus plans I’ve seen base bonus payouts on two factors:  how well the firm performs vs. a target and individual achievement of formal, written goals.


The mechanics work like this:

 

  1. Decide on a target bonus pool.
  2. Add up the base salaries of participating staff.
  3. The ratio of (1) to (2) determines each person’s target bonus.  So, if the target bonus is 10%, and a person’s base is $80,000, they can earn an $8,000 bonus if the firm achieves 100% of its profit target and the individual hits 100% of his/her goals.
  4. Individual bonuses could slide higher or lower than target, depending on the extent to which the firm’s profit target is met or exceeded.
  5. The entire bonus pool is paid out.  So, money NOT paid to lower achievers is paid to those who enjoyed a high achievement rate.

The goals should have four main characteristics:

  1. All goals are SMART:  Specific, measurable, attainable, realistic and time-bounded.
  2. Staff goals should be aligned with the firm’s vision and with individual skills and performance attributes that each person needs to grow.
  3. Each person should have two types of goals:  Production and qualitative.   Production goals are the common ones:  Business brought in, size of client base, billable hours, realization, etc. Qualitative goals help the firm and improve the skill level of the individual.
  4. Reserve 25% of each person’s bonus for management’s discretion because there will always be performance aspects that can’t be measured by goals.

Download a sample Bonus pool for staff:

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Training: An eye-opening “Best Practice”

Posted on November 22, 2011 by Marc Rosenberg   Print This Post Print This Post

I recently led a group of managing partners in a discussion of best practices.  One firm, Porte Brown, an 8 partner, 70 person firm in Chicago, shared a practice with the group that was a real eye-opener.  Bruce Jones, Porte Brown’s MP, said:  “The first Wednesday of every month (except in the tax season), the entire firm shuts down for a mandatory  all-day training session.” 

Since Porte Brown is a client of mine, I was already familiar with this firm’s fanatical commitment to consistent and efficient processes  — it’s a hallmark of this firm’s excellent track record for growth and profitability.  But I didn’t know about the monthly training day practice.  Dave Bandel, a Porte Brown Partner, drilled down for me:

“All 70 people attend the training day.   The meeting starts with an update of administrative issues, current marketing events, and a review of all new clients for the month and how they were obtained.  Next, department heads give a heads-up on current department issues.  This includes an IT segment where new software, IT tips and new hardware are discussed.  After excusing the admin staff, we dive into presentations on general practitioner knowledge, most of which are tax related. After a break, we regroup our personnel for a tax session, followed by an accounting session, all led by firm personnel. Towards the end of the day we have separate practice group meetings such as manufacturing, construction and not-for-profit.”

It’s very unusual to find CPA firm practices that are substantively different from one another.  Porte Brown’s dedication to efficient processes and a mandatory, monthly one day training session are truly differentiators for them.

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Solos reluctant to sign practice continuation agreements

Posted on November 15, 2011 by Marc Rosenberg   Print This Post Print This Post

Some things never change.

My constant and strong recommendation to sole practitioners is that they enter into a practice continuation agreement (PCA) with another CPA firm, preferably one large enough to have enough personnel to be able to absorb the solo’s practice should a traumatic event occur.

A PCA provides for another firm to continue servicing the sole practitioner’s clients should a medical emergency prevent the solo from working.  The agreement often cites terms for the other firm to purchase the practice. 

To me, having a practice continuation agreement is a “no-brainer.”  I can’t think of a single reason why a sole practitioner should NOT want to do this.  Yet, I have only seen a small handful of firms enter into such an agreement in my career. 

Last year, during the peak of the tax season, I received a call from a friend of a solo whose health had prevented him from working since the previous fall.  I was asked to sell the firm – in mid March!  I’ve had involvement in roughly a dozen such cases over the years. Each time, I think how sad it is that the solo did not have an arrangement in place with another firm.

Dealing with one’s own mortality is admittedly difficult.  Solos know that eventually, they must do something, but they have an enormously difficult time addressing their own estate planning.  They may not consciously be making a decision to wait until they die or become disabled to make a move, but that’s essentially what they are doing. 

Alas, I’ll keep plugging away and won’t stop until I get more solos to enter into PCAs.

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Nothing beats face to face

Posted on November 7, 2011 by Marc Rosenberg   Print This Post Print This Post

Early in my career, I was asked to proofread a chapter in a finance book entitled “How To Negotiate a Merger.”  To this day, I still remember the central message:  To negotiate effectively, try to put yourself in the other guy’s shoes.

15 years later, the legendary Stephen Covey said it slightly differently in the 4th of his Seven Habits of Highly Effective People: “Think Win-Win; Genuinely strive for mutually beneficial solutions or agreements in your relationships.”

Internet and email are great – they’re the tools that make this dialogue possible!  But at what point do they start threatening our civilization’s ability to interact successfully in “real life?”  And what are the possible repercussions to your practice if face-to-face networking becomes a thing of the past?

  • People just don’t seem to “get it” when it comes to email and texting.  These were never intended to replace face to face dialog on sensitive or critically important matters.  Never say something in an email that you wouldn’t say to a person face to face.
  • When you want to thank an important person for something vital, pick up the darn phone and talk to the person; don’t be content with sending an email.
  • A whole generation of people are growing up texting instead of talking.  And it’s rubbing off on their parents.  To many, it seems like the scariest thing in the world is to actually talk to someone live or face to face.

My favorite Sci-Fi movie of all time is Forbidden Planet, a 1956 film starring a young Leslie Nielsen.  It’s about a long extinct people called the Krell.  Their civilization had advanced   computers that enabled them to act out negative subconscious thoughts by creating real monsters that ultimately killed off their population.

Is the use of advanced technology unleashing the monster within? Does email make confrontation easier and consensus more difficult?

Last year, I was advising a firm in their negotiations to purchase a smaller firm.  The MP of the larger firm called me, frustrated.   He had been  exchanging emails with the smaller firm for about a week or so and was disappointed at the lack of progress of the negotiations.  I suggested that the MP stop the emails and meet face to face with the seller.  He did this the next day and got the deal done in a nice, cordial, two hour meeting.  You just can’t beat face to face!

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Fall Colors and Succession Planning

Posted on November 1, 2011 by Marc Rosenberg   Print This Post Print This Post

Fall is my favorite season because the air is delightfully cool and crisp and Mother Nature puts on her most spectacular show. It’s a great time of year for scenic drives to places like Vermont -  listed in National Geographic Traveler as one of the world’s  50 Top Places of a Lifetime - in the rarefied company of the Taj Mahal, Paris, Grand Canyon, the Great Wall and Tuscany.  My 3 days there working on succession planning with one of the largest and most successful CPA firms in Vermont confirmed its reputation for splendor.

Driving amid forests transitioning to shades of red, orange, gold, brown, and purple I took an unprecedented opportunity to “talk” with Chance the Gardener on succession  planning.  Chance is the character from  Being There – the 1979 film about a simple-minded Washington D.C. gardener whose entire speaking ability consists of short statements about gardening which are interpreted by Washington’s power elite as witty, allegorical statements about business and the state of the economy.

I asked Mr. Gardener how CPA firms will be able to maintain their independence and successfully transition to the next generation.

Chance: We must work hard to tend our garden well, giving it healthy doses of light and water so that in the fall, the fruits of our labor can be fully realized.

Rosenberg:  So, I’m hearing you say that the best succession plan is nothing more than good, solid practice management.  If firms continually focus on management basics such as growth, profitability, leadership development and servicing clients by teams instead of individual partners, succession plans will automatically evolve, just like nature. 

Chance:  Yes, there is nothing complicated in the garden.  Nature has its simple way of taking care of life.

Rosenberg:  One more question:  If you were the Managing Partner of a firm, what would you do to ensure follow-through?

Chance: I like to watch. The leaves of the tree will turn from green in the summer to shades of orange, red, yellow and brown in the fall. 

Rosenberg:  Ah, you’re so right.  If the MP monitors and coaches the partners throughout the year, then the goals will translate from words on paper to positive change in the firm.

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