Some recent assignments have become rather more complicated due to the differing aspirations of partners when faced with a merger or sale. The typical examples are usually found in two-to-four partner practices. Perhaps two of the partners wish to retire and one or two younger partners wish to continue.
There is often a disparity in the equity shares. In this example, the two younger partners have been given the title ‘equity partner’ with a small equity and profit share - and a major part of their remuneration is made up with a fixed share or salary.
The issue raises the younger partners’ equity share - and often fee base does not qualify them for an equity position with the larger firm. The larger firm may not recognise goodwill, therefore there is no purchase of equity on entering the equity partner group.
The anomaly arises when the younger practitioner, wanting to work on for ten or 20 years, has to be found an appropriate and compatible position in the larger firm. Often this is at the level of director or fixed salaried partner. The position usually comes with a formalised route to full equity partnership that may be very satisfactory for the young aspiring partner.
However, they may well have paid for their equity share in the old firm and have a capital account built up over several years to match their share of equity.
The solutions offered by a larger practice can be numerous. It could include valuing the equity from the old firm; releasing the funds made from previous contributions or incorporating equity value through improved remuneration.
Another alternative is for the younger partner to sells their equity, takes the proceeds of sale and capital account, then join the larger firm ‘clean’.
It is always recommended that these issues are discussed when profiling a practice prior to entering merger/sale discussions. An unfortunate situation occurs where a younger partner has been made a full partner, without perhaps fully meriting that position, but merely to anchor the individual in. This needs careful management but also some reconciliation and honesty with exiting partners to address the issue.
A minority can be a major problem
It is always worth considering our advice to partners who are seeking a sale/merger when we are asked ‘should we give some equity options or a promise of equity to younger partners?’ Our answer is an emphatic ‘no’.
Minority partners are always in a difficult position and reasons given for offering equity usually complicate deals. Although the younger partner may have career aspirations with a larger firm, they are far better off without the equity going in and then carving out their own career with the larger firm, alongside peers.
The mantra is take care of your younger partners, nurture them and if they are good they should be keen to take over the smaller practice on your retirement.
If they do want to join a larger practice at a time when the senior partners wish to retire, then that is a ‘plus plus’ position. However, it can be very difficult to engineer and more difficult to plan and manage.
Keith Underwood is a director at practice advisers Foulger Underwood
This is an edited and abridged version of an article that originally appeared in