We have found that small and midsized CPA firms are very inconsistent in defining what it takes to become an equity partner whereas competency standards at many of the larger firms are applied on a fairly consistent basis. We have also found that firms of all sizes (small, midsized and large) are very inconsistent in determining and measuring equity partner financial drivers. In some cases, extremely complex structures, cumbersome and difficult to work, are in place.
The purpose of this perspective is to summarize:
WHAT DOES IT TAKE TO BECOME AN EQUITY PARTNER?
At the larger firms, an individual has to demonstrate that he/she can consistently help perpetuate the firm by exhibiting skills and abilities in the most important competencies summarized below:
HOW TO DETERMINE THE FINANCIAL DRIVERS:
In Our Opinion, upon becoming an equity partner, everyone should be required to cut a check representing his/her cash capital account and, to keep it simple, every equity partner should put in the same amount of capital (usually between $50,000 to $300,000 — depending on the philosophy of debt vs. partner capital to fund operations and investments). Cash capital, representing his/her ownership in the firm, earns annual interest payments and is returned over two/three years after the partner’s retirement.
While a partner’s ownership in a firm is determined by the percentage of an individual’s cash capital when compared to the total cash capital in a firm, we believe that basic partner
rights (including participating in the firm’s annual partners meeting to discuss general firm business and to vote on partnership agreement amendments and determining the allocation of proceeds upon the sale or acquisition of the firm) should be driven by a heavy weighting of an individual partner’s performance (measured by total compensation) plus the amount of a partner’s cash capital account.
Applying a simple, yet effective, methodology in determining basic rights of an equity partner, as opposed to extremely complex, cumbersome and difficult to work structures, is encouraged. Here is an example of what we mean by simple and effective. Let’s assume that a firm has decided to weigh compensation three times more than capital and that there are a total of 1000 votes available to all equity partners. Here is an illustration of how to determine basic voting rights:
No doubt about it. Developing future equity partners is important business. We encourage small and midsized CPA firms to develop competency standards and adhere to them. We also encourage firms of all sizes to apply simply financial drivers such as capital accounts, rights, ownership and what has been earned upon retirement rather than some of the very complex structures in place that are cumbersome and difficult to work with.
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 shares 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.