1) A cap on a percentage of the collections that can be paid to retiring partners for their buyout in any one year. While retired partners' buyout payments should be made, the survival of the firm is the prevailing factor. If the firm doesn’t survive, the payments go away permanently.
Small firms may use a cap as high as 20% of gross revenues, large firms as low as 3%. The cap may be a higher percentage but based on net before partner draw as well. This cap doesn’t mean the retired partners lost the money, it simply means in the unlikely event the payments exceed this threshold, the excess is deferred to the subsequent year
2) A notification period where a partner must give, for example 2 years notice, prior to their intent to retire. This is especially true for firms that have fixed retirement compensation and or have partner loyal clients as opposed to brand loyal. This notification should trigger a transition plan that moves the relationships to the successor of each client. Penalties for lack of notice could include lower compensation or an addition of a retention period wherein if clients are lost the first two years after a partner retires; their compensation is adjusted prorata.
3) A limit to how many partners can retire within a reasonable time period such as 1 or 2 years. The larger the firm, the more that can. For example a 5 partner firm will find it more than challenging on many levels replacing 3 partners simultaneously.
4) A partner buyout formula that makes sense. We don’t tell our clients to buy a business and lose money for 5 years, we can’t tell our partners to either. The below link brings you to an article published in the CCH Practice Management Forum that walks you through how to value equity when selling to partners in larger firms. Many of the lessons will translate to smaller firms as well, especially the litmus test it teaches you to ensure your formula works!
