“partnership structure – management dynamics of firms that grow from 2 partners to 4 and...

“Partnership Structure – Management Dynamics of Firms that Grow from 2

Partners to 4 and Bigger”

CEOKoltin Consulting

Group, Inc.Chicago, Illinois

LIFE CYCLE 1

Revenue Up to $2 million

Governance Committee, if at all!

# of Partners 1 – 3

Biggest Worry

Making payroll!

Strategy “Anyone who can pay our bills is a worthy client.”

LIFE CYCLE 2

Revenue $2-$5 million

Governance Our compensation formula IS our governance.

# of Partners 2 – 6

Biggest Worry How do I find time to work ON the business (vs. IN the business)?

Strategy Differentiation – “With us you’ll get a ‘hands-on’ working partner vs. the ‘bait and switch’ that larger firms try to use.”

LIFE CYCLE 3

Revenue $5-$10 million

Governance Managing partner elected (more administration than real management). Also, management is not valued as highly as client service or new business.

# of Partners 4 – 12

Biggest Worry Do we go out and invest in professional management or keep the partners doing “non-billable” things? How do we recruit, retain and grow younger talent?

Strategy “Let’s start to specialize and really focus on industry/functional niches.”

LIFE CYCLE 4

Revenue $10-$30 million

Governance Managing Partner position gaining traction and trying to develop A&A and Tax Department leadership.

# of Partners 8 – 40 (two-tiered partnerships more prevalent)

Biggest Worry Range of efforts results in compensation beginning to spread wider amongst the partner group/retirement issues/change to compensation system.

Strategy “Should we stay independent or merge up (or merge with an equal)?

LIFE CYCLE 5

Revenue $30 million+

Governance True CEO and high-level, professional management.

# of Partners Number based on revenue per partner. Typically between $1-$2 million revenue per partner.

Biggest Worry How do we create: real depth and industry/service-line specialization, one-firm concept, and integrate mergers?

Strategy “Should we expand geographically, be more aggressive in mergers and recruit lateral partners (free agents)?

Door #1

Ground Hog Day

No Pain – No Gain

Door #2

Major Reconstuctive

Surgery

Will look better, but at

what cost?

Door #3

Let’s Merge Up into Someone

Else’s Playbook

Interestingly, the results

from doors 2 & 3 are the same

Future Survival of the Firm

Future Survival of the Firm

Relationship v.

Service-based

Partner

Relationship v.

Service-based

Partner Leadership Talent

Leadership Talent

First v.

Multi-Generation

Firm

First v.

Multi-Generation

Firm

Rainmaker “Lite”

Rainmaker “Lite”Size

of Firm

Size of

Firm

Cruisers v.

Dynamos

Cruisers v.

Dynamos

Types of Services (Type 1 v. Type 2)

Types of Services (Type 1 v. Type 2)

Market Share/Desire

to Expand Geographicall

y

Market Share/Desire

to Expand Geographicall

y

Source: Journal of Accountancy, April 2007

The Big Four and the “Middle The Big Four and the “Middle Market”Market”

Number of Services Used◦ 1 service◦ 2 services◦ 3 services◦ 4 services◦ 5 services

Probable Retention Rate◦ 12%◦ 24%◦ 63%◦ 81%◦ 98%

Mandatory shift – from “renting” clients to actually “owning” them.

Competitive Spirit Clutter Cohesiveness Candidness Crystal-Clear Vision Curious Contagious Enthusiasm Crazy! Change Agent Communication

1) What professional characteristics would you want to see in the next MP?

2) What personal characteristics would you want to see in the next MP?

3) As you reflect on the biggest challenges facing the firm over the next 5 years, what are they?

4) How should the MP’s performance be measured?

5) Do you envision the structure of the MP position potentially changing in any way?

6) Would this person be interested, have the backing of the other partners and give up their workload to make this position successful?

Set and influence the strategic vision/ direction of the firm

Lead the firm’s 1- and 5-year targets for growth and profitability

Create an environment that positions firm as the “Employer of Choice Firm” throughout the Region

Help coach and monitor the PICs’ performance in a manner consistent with the “One Firm” concept

Lead the Executive Committee and provide clarity and accountability for their roles

Provide counsel and cohesion to the firm’s management team

Rally the partners to greater performance and provide for a culture of “connectivity”

Be a leader in the communities that the firm services

Five-year strategic plan “Heavy lifting” – major issues effecting firm Mergers and acquisitions Hiring of lateral partners to the firm Litigation and business risk Advisor to the Managing Partner Ideas for new product and service lines Ambassador to carry the “Firm” message to

other partners and associates

Tax Department Leader – Job Description

1) Empowered with overall responsibility to manage growth, profitability and overall resources of the Tax Department.

2) Recruitment of new tax talent to the firm.3) Mentoring and development of existing tax staff and partners.4) Responsible for leading new product/service department ideas for the

Tax Department.5) Oversight of tax training and technical issues as they relate to

members of the Tax Department.6) Oversight of utilization scheduling and realization of Tax Department

members.7) Establishment of tax members’ billing rates, as well as helping

establish fees on larger tax engagements.8) Meets monthly (or quarterly) with tax partners and managers to coach

and counsel them on individual performance.9) Responsible for overall client satisfaction (both internal and external

clients of the firm).10) Helps promote the cross selling of tax services firm-wide, and also

promotes cross selling of non-tax services within the Tax Department.

Leadership Management Administration

CEO/

COO

$$$ $$ $

Executive

Committee

$$$ $$ $

Dept.

Heads/PICs

$$$ $$ $

What value do you place on each of these areas?

How hard do you want to “push the gas pedal?”

What kind of management talent do you really have?

New business Billable time Realization WIP/AR Client satisfaction Recruiting, retention &

staff development High impact ideas M&A candidates

Managed book of business

Succession planning Partner peer ratings Professional growth Administrative

compliance Technical quality Team & dept. leadership Community involvement

Unified Firm* Strategy/Vision

Individual Partner Goals

Firm Governance/Accountability

Performance-Based Partner Compensation

*Includes Department, Office and Industry Team Goals

CLIENT

Originating Partner

(Aggressive Alvin)

Relationship Partner

(Loveable Larry)

Service Partner(Billable

Bob)

“Average partner compensation will increase, but for the average partner, it will probably stay the same.”

Daryl Ritchie, CEO of Meyers Norris Penny LLP

What percentage of your partner compensation dollars are guaranteed (salary) vs. “at risk” (bonus)?

Do you have an Open, Closed or Quasi-Closed partner compensation system?

What, if any, portion of your partner compensation program is strictly formula based?

*Arguably, 90% of firms have no formula

Briefly describe your deferred compensation program:(selected answers)

2.5 X highest 5 of 7 years paid out over 10 years, all unfunded. Multiple of a percentage of total comp, payable over 10 years. 20% of average of 3 highest of the last 6 years compensation, paid for a

17-year period. We value the Firm at 1x annual volume. Partners accumulate shares based

on the increase of Firm value. These shares are redeemed when the partner retires. The retiring partner also receives capital gain treatment.

Vesting schedule over 30 years. (20 as a partner and 30 as an employee/partner.) Amount is determined based on the highest 3 of previous 5 year’s compensation times 2. 90% is paid out over 9 years, with the remaining 10% over life certain.

2.5 times the average of the last 5 years of comp, not to exceed $1.1M, paid over 10 years.

Who actually determines partner compensation within your Firm?

Partner Compensatio

n

Partner Compensatio

n

CEO/MP

Executive Committee/

Board of Directors

Management Committee/

RPIC/PIC/OMP

1st vs. 2nd Gen Firm

1st vs. 2nd Gen Firm

Single vs. Multi-Office

Single vs. Multi-Office

Organic Growth

Strategy vs. Merger

Strategy

Organic Growth

Strategy vs. Merger

Strategy

Traditional vs. Non-Traditional Service Practice

Traditional vs. Non-Traditional Service Practice

One tier ◦ equity only

Two tiers ◦ equity, income

Three tiers ◦ equity, limited equity, income

Four tiers ◦ equity, limited equity, income, principal

Five tiers ◦ equity, limited equity, income, principal, retired

Six tiers ◦ equity, limited equity, income, principal, retired, contract

Seven tiers ◦ equity, limited equity, income, principal, retired, contract,

special*

*has not ‘officially’ retired but, based on performance, one would think they ought to!

Guaranteed vs. non-guaranteed compensation?

Greater Compensation? Book of Business? Voting Rights? Capital Contribution? Deferred Compensation/Retirement Benefits? More Accountability? Limited Liability - Indemnification from

Lawsuits?

Briefly describe the primary differences in how you compensate income vs. equity partners:

To Contact Allan:625 N. Michigan Avenue, Suite 2100

Chicago, IL 60611312.245.1930 (phone) 312.245.1935 (fax)

akoltin@koltin.com