HEADING FOR THE EXIT

There are myriad reasons why partners leave firms. In addition to ‘normal retirement’, if such a thing still exists, there is also ill health and death, the partnership having good reason to move a partner out, or simply the partner themselves feeling it’s time to move on. But how many firms have codified approaches to dealing with these situations? How many plan for the unexpected?

Many see this as simply a financial issue, and yet often they have not worked through the impact of expected retirements, even when the financial arrangements are known.

Managing partner exits can be highly complex, particularly if there is no prior agreement as to entitlements, or if the agreements are unrealistic as to the market value of goodwill at the time of departure.

It is not unusual in smaller firms for the age profile of the clients to mirror the age profile of the retiring partner, which may diminish the future value of goodwill.

Transition action

So it's essential to ensure that the other roles the retiring partner may have undertaken are understood and transferred properly to others in the practice. The transitioning of clients and other roles within the firm needs sound planning and probably a fair amount of time. Introducing a client to a new partner at the 11th hour is rarely the best approach when trying to maintain good client relationships.

So much for planned retirements. Unplanned or early retirements are even more of a challenge. Unplanned exits can still be managed in advance, through written agreement about the implications of such events – for example, how quickly capital will be repaid and whether this would be calculated based on current or future profits.

Be insured

Firms often don’t consider insurance in this context; or if they have, there may be uncertainty as to who the beneficiaries of the policies are. In addition, there are occasions when the surviving spouse believes there are pension arrangements in place via the firm, whereas these are more normally a personal rather than firm liability.

Aside from retirement, practices need to ensure there is a clear agreement as to what happens if a partner simply decides to leave – whether they are a ‘good leaver’ (leaving on good terms for another career, for example) or a ‘bad leaver’ (departing to join a rival or to set up in competition). In both cases there needs to be absolute clarity as to the financial arrangements and the application of any restrictions with regard to stealing clients and team members.

It is sometimes argued that such restrictions are unenforceable, but this is not necessarily the case, if they are crafted correctly.

Take their leave

Finally, there are those situations where a partner is asked to leave. There can be a multitude of reasons for this, but they are usually to do with performance, behaviour or just incompatibility.

Ensuring that these exits are orderly can be a major challenge, but can be handled far more easily and promptly where the firm’s procedures are codified. Bear in mind that the procedures and legal conditions that apply in the case of employees do not necessarily apply to partners.

Although there is inherent uncertainty around partner exits, firms can be prepared: be clear on the process and implications by ensuring as far as possible that there are prior agreements in place for each of the possible scenarios.

Derek Smith is a senior consultant at Foulger Underwood

This article originally appeared in the ACCA's Accounting & Business magazine

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