Quite often we are asked whether there should be some form of clause within a partnership/proprietorship agreement regarding the contribution of revenue by its partners. This can be a double edged sword; in some respects the answer is yes, and in others, it’s no. Nevertheless, this is certainly a very important topic to discuss when entering into a partnership and throughout its longevity.

Our experience suggests that in multi partner firms, it’s not uncommon for there to be a difference in the level of fees personally produced by partners as well as managed. In fact, it’s probably very rare to find an exact match or comparison. This is particularly the case where some of the partners have a natural ability to generate work, form networks and attract clients. However, at what point does this become a problem?

Current benchmarks suggest that notionally, many firms will have approximately $1 Mill in fees per partner. So, if a firm has a partner with say $1.1 Mill in fees that they manage, another partner with $900K in fees and a third partner with say $500K in fees, how do all the partners feel about this inequity?

Now, it is also important to note that in circumstances where one partner may be responsible for the firm’s administration or other such non revenue oriented tasks, an allowance may also be given in respect of the level of fees they are expected to produce and manage. However, again how much of an allowance is deemed as fair? In reality, every practice will have their own expectations.

Another point that may add to the complexity in this matter is the levels of equity held across the partnership. Taking the example above, how would the partnership feel if equity was held equally amongst the three partners managing those fee bases? I suspect that there would be some disharmony at some stage. This is often the case where two of the partners have either a stable or growing fee base whilst the third partner is managing a declining fee base. However, would the same angst exist if the partner managing the small fee base, as in the above, held less equity than the two with fee bases around $1 Mill?  Perhaps not.

Generally we find that the partners will all receive the same salary where specific salaries are paid. This can then become a very difficult scenario where the smaller fee base becomes a size that is barely contributing much beyond a salary and profit distribution for that particular partner or partners. For example, a fee base of $400K managed by one partner, irrespective of the equity held, will be contributing very little to the overall profit of the firm once a reasonable salary of say between $150K and $200K is deducted and then profits are distributed (presuming this to be the case). In many cases, this type of scenario can lead to disharmony.

So how can this be addressed?

Well, those partners with larger fee bases to manage can, where possible, redistribute some of their clients to the partner with the smaller fee base. Some firms may endeavour to vary equity or make adjustments to salaries.

Our recommendation from the outset is to discuss expectations amongst the partnership early on as well as map out possible solutions should such scenarios occur. However, we also need to realise that the final outcome may just mean that it is time for someone to find a new home.

If everyone is on the same page in terms of expectations, there will be fewer surprises as these situations arise.