How to ensure your firm's equity structure is delivering the best results possible
Any accountant who has been part of one is likely to believe equity partnership structures are not the best way of organising a business.
Recently some of the larger and more visionary firms have been seeking to improve the standard partnership model. And there's mounting real-world evidence that tweaking conventional arrangements can promote greater collaboration, create better incentives, drive stronger growth and result in higher profitability.
More on that shortly, but first let's recap the downsides of no-goodwill equity partnerships.
Let's look at things through the eyes of Larry, Barry and Harry who have equal equity in a business.
Aged in his thirties, Larry's just made partner. He stands to benefit the most from the firm investing in long-term growth. But he's just bought a house and started a family, so he has no cash to spare. Barry who is in his forties is financially set up. He's keen to scale up the firm while there's still plenty of time for him to reap the rewards of future expansion. Aged in his sixties, Harry is looking to get as much money out of the business as he can as he cruises to retirement. In the above scenario, far-sighted Barry is likely to frequently get outvoted by Larry and Harry to the eventual detriment of the business.
This is what's likely to happen when nobody is incentivised to take on the thankless role of managing partner but everyone wants the power to veto decisions.
Larry (wealth management) and Barry (business advisory) are keen on the idea of diversified revenue streams. Yet they can't help resenting Harry (auditing) getting an equal share of the profits while making a lesser contribution towards them. Meanwhile, Harry spends a lot of time feeling underappreciated; he works just as hard as the others, but his audit profit margin is smaller.
Harry's got an auditing client who could benefit from some of Larry's wealth management wisdom and Barry's business advice. Does he share the client around? Of course not. There's no significant, direct pay off for doing so and what if one of those opportunists takes over his client?