Practice Management

Avoid assumptions when forming partnerships

Discussions that evade specifics and include a large number of presumptions can doom a partnership to failure from the get-go

Aug 28, 2015 @ 11:10 am

By Joni Youngwirth

As the number of mid- to large-size firms in our industry has increased, so too have the discussions related to making partner in a firm. Unfortunately, given that we're still in the experimental stages of this evolution, the discussion is often lacking in specifics and full of assumptions, which can doom a partnership to failure from the get-go.

Some advisers simply aren't interested in becoming partner in a firm — after all, more than half of all advisers are solo practitioners. But for those firms that see in a partner both a future leader and an internal successor, it makes sense to think about what the path to partnership looks like well before it becomes a reality for the firm.


Both founding advisers and those aspiring to become partner have a tendency to make assumptions about how the relationship will work. Instead, be sure to articulate the following factors clearly, so both parties know where they stand.

What qualities should the partner have? This is a tougher question than it sounds. Although you can outline specific parameters for ownership, deciding whether someone should make partner is often more of a judgment call.

Still, it's important to qualify what you desire in an equity holder. Sometimes, partners contribute to revenue generation for the firm, but not always. Character traits have as much or more to do with the choice than anything else. A partner's fit is a far greater challenge to articulate and measure, and it will certainly be unique to each firm.

Will the partner buy in to ownership? One surprise for many advisers is the concept of buying in to ownership. Many advisers, especially younger advisers, think equity will be a gift they receive at some point, as opposed to a deal with financial underpinnings. In situations where ownership is given in exchange for sweat equity, ensure that owners and associate advisers are on the same page as to what that means.

For example, if an associate is working at 50% of fair market value, the sweat component is fairly clear; otherwise, the associate may simply feel underpaid. Human nature renders the latter situation common, and there are often differences of opinion as to what constitutes fair market value. This is where industry benchmark data can be useful.

What about equity discounts? Should you discount equity for an internal transition to an associate while assigning a higher value if the firm is sold externally? Keep in mind that the decision to discount value when a new owner buys in may set the stage for another discount when a senior adviser sells the practice and transitions out of the firm. Be sure to clarify where discounts apply from the onset of the partnership plan.

How much equity will you offer? Younger advisers may be surprised to learn that their share of the equity pot is in the 1% to 10% range. For decision-making control reasons, founding owners are likely to keep at least 51% in their hands. It's hard to undo an equity event, so owners are wise to ease into sharing equity.

In addition, advisers — particularly younger individuals — who become partners may find that they have little true say in how the firm is managed, so again, clarity is vital. Of course, having a say only matters when there is a difference of opinion. Which brings us back to the partnership criteria topic — and how important it is to find the right fit.

Some founding advisers will never even consider sharing equity, simply because they have no interest in sharing control — even when they have the majority vote. Nor do they want to do anything that will dilute their own ownership value. But for those who see value in having more input in running an organization; want to handcuff a younger generation and mold them as future leaders of the business; or see the benefit in having someone to share the load of running a firm, moving to an equity-sharing relationship has potential once deep trust and true respect are firmly entrenched.

As our industry continues to evolve, we are sure to see more formal partnerships emerge, especially among firms that seek to establish a lasting enterprise that far outlives the original founder.

Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.


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