Accounting Firm Agreement

Accounting Firm Agreement Overview

Levenfeld Pearlstein, LLC

2 North LaSalle Street, Suite 1300

Chicago, Illinois 60602

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Introduction:

• Importance of Agreement

- Will the firm be able to make quick, efficient decisions?

- Will partners be able to leave and take business?

- Will the next generation have a chance to grow?

- Will it be easy to bring on lateral partner?

- Will the firm be able to Merge?

Levenfeld Pearlstein, LLC 2

Agreement:

• Impetus for Revising Your Agreement

- Proactive Example: • 10-year old firm; 7-partners; 35-professionals

• Added partners laterally

• Founding Partners wanted to:

- Make firm cohesive

- Smoothly transition to next generation

- Secure retirement income

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Process Used:

• Consulted with advisors to determine objectives

• 9-Monthly partner meetings before or after work

- Started after tax season

• Lawyer in attendance for Most Meetings

• Agenda for each meeting that confronted issue


Outside Event:

• Long established firm – second generation near retirement

• 15-partners; 75 professionals

• Leadership wanted to merge with regional firm

- Perceived lack of leadership in younger generation

- Desire to secure retirement benefits

• 80% voting requirement to merge

• Younger generation said “no, we want to

run it”

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“Each generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it." [George Orwell]


Process:

• Committee formed consisting of: - 2 from older generation

- 2 from younger generation

- Neutral partner

• Development of extensive outline - Security for older generation

- Control for younger generation


Major Agreement Provisions:

• Governance

• Retirement

• Compensation

• Restrictive Covenants

• Capital

• Income Partners

• Nuts & Bolts


Governance:

• Governing Body (Executive Committee)

• Managing Partner

• Powers Retained by the Partners

• Advantages/Disadvantages of Centralized Management

- Efficiency and accountability

- Autonomy


Executive Committee:

• Evolutionary Process

• Governing Body (all decisions except those specifically reserved)

• Selection of Members

- Nominating Committee

- Ratification vs. Election

• Managing Partner is on EC

• Firm First Mentality


Executive Committee (continued):

• Term (e.g., 3-years)

• Term Limits (e.g., 2-terms)

- Subject to override by super majority vote

• Removal

- Majority of Executive Committee


Managing Partner:

• Day to day decision making

• Selected by:

- Executive Committee


• Term (e.g., 4-years)

• Term Limit (e.g., 2-terms)

• Member of Executive Committee

• Removal

- Majority of Executive Committee


Partnership Voting Rights (Retained Powers):

• Fundamental Decisions

- Mergers (over a certain size)

- Dissolution

- Partner hires

- Making a partner

- Partner Expulsion


Partnership Voting Rights (Retained Powers) (continued):

• Major Economic Decisions

- Banking Relationship

- Draw-down over a certain amount

- New lease

• Governance

- Ratification of Executive Committee Members

- Ratification of Managing Partner

- Amending the Partnership Agreement

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Question: What else would you add to the list?


Super Majority Voting:

• When to Use

- Merger (80% story)

- Dissolution

- Amendment of Partnership Agreement

• Will of Majority vs. Protection of Minority

- Should the will of the majority ever be thwarted?

• Type of Majority

- Percentage Interest

- Per Capita

- Capital Accounts


Other Governance Structures:

• Other Structures as Firm Grows

- Compensation Committee


- Promotions Committee


Retirement: Favorite Subject of Anyone Over 50

• Overview

- Mandatory Retirement

- Early Retirement

- Vesting

- Basis of Payments

- Changes in Payments

- Life Insurance

- Withdrawal and Competition

- Work after Retirement


Mandatory Retirement:

• Mandatory Retirement Age

- 65 – 70

• Age Discrimination

- Owners as Employees

- Voting Rights

- Risk of Loss

• Allows transition planning


Early Retirement:

• Retirement Age: 55 on

• Executive Committee Approval

• Compliance with Restrictive Covenants

• Long Notice Period (6 to 24 months)

• Consequences of Failure to Give Requisite Notice


Retirement Benefits:

• Vesting of Retirement Benefits (examples)

- 20-years for full vesting

- 10-years for any vesting

- Credit for merged-in partners


Retirement Payment Amount:

• Retained Business Approach

- e.g., 20% of partner’s originated business for 5-years

- Younger firm

- Less institutionalized

- If business leaves, no payment – strong incentive to transition clients

• Issue of Credit Sharing and Compensation


Retirement Payment Amount (continued):

• Compensation Average Approach

- e.g., average of highest 3 of last 5-years x number of years (e.g., 3-years)

• More Institutionalized Firm

• Percentage Interest - Value Firm (e.g., 1.0 x revenue) x partner percentage interest at

retirement


Post Retirement Adjustments:

• Originated Business – Self adjusting

• Compensation Average/Equity Purchase - Loss of firm business

- Loss of partner’s business

• Inflation Adjustments


Payment Period/Payment Limitations:

• Anywhere from 5 to 15 years

• Generally no more than 10% to 12% of net income - Recapture mechanism

• Missed payments get carried into future years


Life Insurance:

• No transitional period

• Protects the partner and the firm

• Entire amount or portion of insurance proceeds may be paid to deceased partner

• Partner can take policy after retirement


Payment Protections:

• Remaining partner personal liability

• Ability of retired partners to vote on merger or other

matters


Work After Retirement:

• Generally no right

• Decision on an individual basis


Compensation:

• Generally not addressed directly in partnership agreement

• Compensation Committee - Executive Committee appointment

- Terms and term limits


Compensation (continued):

• Generally not limited by percentage interest or capital accounts

• Objective/subjective/mixed


Withdrawal/Dismissal:

• Retirement Benefits - Generally lost

- Some firms allow for benefits when they would otherwise have been received (e.g., at age 60)

• Restrictive Covenants Will Apply


Restrictive Covenants/Purchasing Clients:

• Non-compete

• Client non-solicit

• Employee non-solicit

• Generally upheld by courts


Restrictive Covenants/Purchasing Clients (continued):

• Consequences of Violation - Injunctive relief

- Forfeiture of retirement benefits

- Liquidated Damages

• 100% to 200% of fees lost

• 50% to 100% of employee compensation


Firm Capital:

• Capital Contributions

- Need for working capital

- Upon admission

• Fixed amount

- Additional capital

• Tied to compensation

• Profit retention


Firm Capital (continued):

• Capital Accounts

- Disparate capital accounts

- True-ups (to percentage interest or compensation)

• Periodic

• Generational shift

• Return on Capital

- Prime +

- Fixed percentage


Firm Capital (continued):

• Return of Capital - Withdrawal/retirement

- Payout (1 to 5 years)

- Interest

- Set-off rights

• Amounts owed

• Violation of restrictive covenants

• Contingent liabilities that relate to periods when a partner


Income Partners:

• Recognition of professional achievement

• No capital contributions

• No voting rights

• Considered as employees - Age discrimination - cannot require age based retirement


Income Partners (continued):

• Restrictive covenants

• Retirement benefits (sometimes)

• Make part of partnership agreement or separate agreement - Psychological effect

- Inadvertent granting of rights


Nuts & Bolts:

• Full-Time Profession Devotion - Side businesses

• Proceeds of All Work - Authorships

- Programs

- Speaking

- Boards

- Trustee/Executor


Nuts & Bolts (continued):

• Rights of Contribution - Leases

- Bank loans

• Confidentiality - Firm

- Clients



• Professional Standards

• Rights to Name

• Mediation/Arbitration - But not for injunctive relief



• Just and Faithful Dealings - Pay taxes

- Pay debts

• Relationships with Clients - Investing

- Disclosure/permission



• Indemnification by Partnership - Exceptions:

• gross negligence

• willful misconduct

• Indemnification by Partner • gross negligence

• willful misconduct


Amendments:

• Supermajority - Not unanimous

- Protection against amendment that singles out one partner

• Retirement Benefits - No amendment unless majority of those near retirement agree

- But can change for younger generation


Questions/Comments:
