Check-List for Potential Partners

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Are you considering the appointment of a new Partner?

The following is a checklist of criteria for discussion with potential Partners.  The objective is to ensure that (s)he is under no allusion about the breadth of issues and the importance of reaching an understanding about each Partner’s expectations and contributions, recognising these may change over time.

Although it is designed to assist a scoring of potential Partners, in the process the same criteria also assists assessment of the existing Partner(s).

1. Procurement of New Projects/Clients

Capacity to generate work for the practice is essential, whether it can be demonstrated by a list of current or potential clients, or by a personality that will move easily in circles that will complement your firm’s current service offering.

Discussions can cover this expectation and the relationship between shareholding and work sources; as the new Partner introduces an increasing proportion of the total practice workload, so the shareholding may increase.

2. Monitor Standards

While it is important to refine as many roles as possible for each Partner, the one role in a consulting design practice that causes most concern is quality.  Existing or past principals who built the practice and set the standards will normally determine the expectation for quality, at least initially.

3. Remuneration

While an employee elevated to Partner will expect an increase in remuneration, part of the increase will relate to a return for risk.  The asset backing of the Partners will rarely equate in exact proportion to equity, hence nor will risk.  This must be explained and agreed from the start and can justify differential remuneration.

It is also necessary to established policies regarding remuneration package items such as motor vehicles, entertainment expenses, subscriptions, home telephone, etc., including treatment of Fringe Benefits tax liability.

4. Equity

Progressively passing equity from the retiring Partner(s) to the new energetic Partner(s) maintains a high level of motivation for the new Partner(s) to keep building the practice. In exchange for mentoring and supporting the new Partner the selling Partner gains the benefit of increases in the value of the shares sold in subsequent years, but motivation only remains with progressive transfers. This process also helps to differentiate between Partners of un-equal age or ability.

The growth in the business results in an increase the new Partner’s remuneration (particularly through dividends) and thus capacity to pay correspondingly increases.  An agreed annual valuation process is required.

5. Personal Financial Position

New Partners must realise the risks and responsibilities of accepting an equity position in a practice.  It is important to structure to practice to ensure the risk exposure is linked proportionally to the personal asset backing provided by each Partner. Younger Partners are less likely to have the capacity to provide significant asset backing.

The resultant structure should be easily discernible by creditors, including Banks, who may seek redress.  Otherwise the Partner with the most (and most easily liquidated) assets will become the effective risk taker.

6. Management Roles

All Partners must assume some responsibility for the management of the practice, whether the various roles be shared or allocated on a portfolio basis under headings such as Finance, Human Resources, Marketing, Quality Assurance, and Administration.

A new Partner may assume more minor management responsibilities and gradually take over others, or may bring special skills for an area of practice management.  Whichever way this is treated, it is essential that the Partners have an understanding about their rights or desire to be involved in each other’s responsibilities.

7. Other Expertise

What special skills does the new Partner bring and how will this fit into the practice?  Are the new Partner’s special skills needed and what are both parties’ expectations for applying them?

8. Professional Career Plan

An assessment of vocational achievements and specialties, qualifications and employment might reveal a career path that may or may not be compatible with practice objectives.  For example, an incoming Partner’s expectation of taking the practice into a special area may be predictably unsuccessful.

Review your Options

There are many other issues, but a schedule such as the above is intended to provoke discussion on a realistic basis and help to keep discussions clear and objective.  Reasons for proceeding with, or ceasing to consider a partnership will then be understood.

Call 0408 403 439 or email me for the benefit of the presence of an independent person in such considerations.  Such discussions should review all the above as well as alternative transition processes in an endeavour to satisfy all party’s concerns and objectives.

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