IN OUR OPINION, PERSPECTIVE #105 — March 16, 2020
(A Continuing Series for Leading CPA Firms)
“Avoiding “Silent” Partners”
“I can accept failure; everyone fails at something. But I can’t accept not trying”
— Michael Jordan
The dictionary defines “silent” partners as “partners not sharing in the actual work of a firm”. In the context of a CPA firm, we define “silent” partners as those partners who are not developing business relationships and originating new work and therefore are not perpetuating the firm.
One of the shortcomings, if not the biggest shortcoming, at many small and midsized CPA firms today is their inability to perpetuate themselves because they do not have the right mix of partners. The best way to avoid “silent” partners in the first place is to avoid promoting professional staff who can’t perpetuate the firm. And the best way to avoid such mistakes is to have clear criteria and guidelines for what it takes to become a partner.
Visualize your partner group fitting into a bell curve:
- In Quartile #1, here you have your stallions — very high performers who produce outstanding contributions year after year. They want to win and know-how. Contributions might be excellent client relationships, consistent new business development in excess of $250,000 a year, mentoring younger staff or firm administration. The stallions usually get large year-end bonuses and generally are a firm’s highest earners.
- In Quartile #2, you have your solid performers — reliable team players who do their best and are sincere in furthering the firm. They probably consist of a combination of seasoned equity partners and a number of up and coming non-equity partners. They are worth every penny in compensation.
- In Quartile #3, you have your journeymen (“silent” partners) — every firm has them. These partners give you a solid performance and do what they can to further firm but generally act, look and feel like employees — not owners. They usually aren’t the lead partners on client relationships because they are ineffective at building relationships. They only occasionally bring in some new business.
- In Quartile #4, you have your poor performers (“silent partners”). Some of these partners no longer have gas in their tank. Some never had gas in the tank and should not have been promoted to partners in the first place. Some have been with the firm for a very long time; probably too long. This makes it difficult to deliver the message that they are probably better off seeking employment elsewhere. Waiting to deliver tough love later rather than sooner usually isn’t a good thing and more than likely makes a bad situation even worse.
In Our Opinion, every CPA firm needs more than 50% of its partners in Quartiles #1 and #2. If your firm doesn’t, there is considerable work that needs to be done before the firm can achieve satisfactory growth. This is particularly true if a firm has more than 50% of its partners in Quartiles #3 and #4.
To ensure that their partner mix starts moving toward more than 50% in Quartiles #1 and #2, and thereby reducing their number of “silent” partners, some CPA firms have adopted key criteria and guidelines when promoting:
- A senior manager or principal to non-equity partner, and
- A non-equity partner to equity partner.
SENIOR MANAGER OR PRINCIPAL TO NON-EQUITY PARTNER PROMOTIONS:
When it comes to promoting a senior manager or principal to non-equity partner, the key question these firms pose is the following:
“Does the non-equity partner candidate’s enterprise value contribute to perpetuating and growing the firm’s business, maintaining and enhancing the firm’s technical excellence and driving client and staff retention?”
As it relates to developing business relationships and originating new work (the key to avoiding “silent” partners), the criteria and guidelines developed by these firms are presented below:
- The candidate needs to demonstrate a track record of performance in:
- Originating a combination of new business and cross-selling in the minimum amount of $500,000 over the last three years. Quality Control candidates are excluded from this requirement.
- Successfully bring involved in new business pursuits/assists.
- Demonstrating an ability to cross-sell services new products and services to existing clients.
NON-EQUITY PARTNER TO EQUITY PARTNER PROMOTIONS:
Moving from non-equity partner to equity partner typically is a consideration after functioning two, perhaps, three years as a non-equity partner. When it comes to promoting non-equity partners to equity partners, the key question these firms address is presented below:
“Does the equity partner candidate’s enterprise value significantly contribute to perpetuating and growing the firm’s business, maintaining and enhancing the firm’s technical excellence and driving client and staff retention and has this value been demonstrated by a track record of steady and increasingly improved performance?”
As it relates to developing business relationships and originating new work (again, the key to avoiding “silent” partners), presented below is the criteria and guidelines pose is the following:
- The candidate needs to demonstrate a track record of steady and increasingly improved performance in:
- Creating new business originations through industry and/or functional specialization and by achieving actual results, net of losses, in the minimum amount of $250,000 for each of the last three years.
- Consistently cross-selling new products and services to existing clients.
- Contributes to our growth culture by prioritizing development, communicating this, and helping others build their business development skills.
Keep in mind that the new business origination amounts referred to above are presented for illustrative purposes only. Your guideline amounts need to make sense for your own firm.
In recent years, many small and midsized CPA firms have become very lax when it comes to promoting senior managers or principals to non-equity partners and when it comes to promoting non-equity partners to equity partners. This occurred because organic revenue growth was double digits, client demands were very strong, and firms needed partners just to service the clients and get the work out the door. This no longer is the case. Organic revenue growth is rather modest and client demands are not as great in this uncertain economy.
Accordingly, we encourage firms to recognize this paradigm shift and have stretch goals when it comes to promoting new partners. “Silent” partners can be deadly for any firm. Ideally, a firm should have a minority of its partners reach the ranks of equity partners (perhaps 40%) and the majority of its partners as non-equity partners. When it comes to promotion criteria and guidelines, we recognize that one size doesn’t fit all. Therefore, the criteria and guidelines outlined above require modification for CPA firms in different geographies and with different niches.
Dom Esposito, CPA, is the CEO of ESPOSITO CEO2CEO, LLC — a boutique advisory firm consulting to leading CPA and other professional services firms on strategy, succession planning and mergers, acquisitions and integration. Dom, voted as one of the most influential people in the profession for two consecutive years by Accounting Today, authored a book, published by www.CPATrendlines.com., entitled “8 Steps to Great” which is a primer for CEOs, managing partners and other senior partners. In Our Opinion, is a continuing series of perspectives for leading CPA firms where Dom and his colleagues share insights, experiences and wisdom with firm leaders who want to “run with the big dogs” and develop their firms into sustainable brands. Dom welcomes questions and can be contacted at either firstname.lastname@example.org or 203.292.3277.