Alternate Partnership Arrangements on the Rise

Business Brokering Wednesday 28th of October 2020

With cost of housing up and uncertainty all around it's not surprising that professionals seeking partnerships might hesitate at taking on more debt for an equity purchase. But some practices are solving the issue by offering a different take on the traditional partner package.

Attracting and retaining the best talent within a firm has always been one of the key tenets underpinning long term growth and profitability within accounting firms. 

I have seen a lot of changes in the way potential partners are admitted to firms since commencing work in the accountancy M&A and partner recruitment space 20 years ago.

These days a prospective partner candidate is likely to already have a high level of debt on board thanks to the increased cost of housing (the national median house value has increased by 412% in 25 years). It’s not surprising that many are reticent to add to this load in order to purchase an interest in a practice.

The result is that while the partner equity model has been utilized very effectively in the past it can be  far less attractive to the current generation of high-performing practice leaders. 

Many of them will feel resentment over the perception that their role as the new partner is to fund the retirement of the senior partners while shouldering more of the workload.

To their eyes the “traditional” model seems to offer them:

  • Unrealistically long-term commitment
  • Lock-in to a scenario offering limited control
  • High levels of debt for risk profile
  • Uncertain succession plan
  • 7 to 10 year pay back periods net of tax
  • Siloed political culture and work ethic contrary to team development

Seen in this light it is not surprising that both practices and partner candidates are willing to embrace different approaches.

One example I’ve seen recently that doesn’t rely on the purchase of equity but rather on a more performance-based program provides:

  • Remuneration of approx. $350K plus a short-term incentive (STI) and long-term incentives (LTI). 
  • The STI takes the form of a percentage of profit based on performance KPI’s of up to 30% of fixed remuneration.
  • The LTI occurs each year of service and is payable annually after a qualifying period based on sustainable KPI performance and growth of the business. The LTI will be in the range of a further 30% of the growth of the business (assessed as a percentage of revenue introduced or incremental profit to the practice).
  • The LTI is also represented as a performance equity stake in the capital of the firm, earned from participation in the sustainable growth of the practice.

This is just one example, of course – different firms offer different terms according to their individual goals and requirements.

The take-home message is that there is a much broader range of offers available to professionals who are in a position to consider partnership.

If you are in such a position, or if you are a firm seeking a partner candidate, feel free to get in touch with me for a confidential chat.

Mark Witt CA

Mark is the Head of Brokering at Business Exchange with over 20 years experience and 400+ completed transactions

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