What Role Does the Shareholder/Partner/Operating Agreement Play?

In summary, your shareholder/partner/operating agreement could single-handedly implode your internal succession plan.

A dramatic statement? Yes, we agree it is but it does have significant truth to it.

Many firms have not updated their internal agreement for years, if ever. It is most likely outdated, insufficient or not applicable especially when developing an internal succession solution. Many firms are currently operating outside of their original agreement and that may or may not present additional problems.

Read your agreement and answer these questions as if you are a brand new partner or will soon be made a partner:

• If I were a new partner and read this agreement would I feel comfortable there is a long-term opportunity for me?
• If I were to calculate the cost of buying out the partners ahead of me would it be necessary for me to absorb a reduction in compensation or benefits to buy them out?
• If I were to project myself 15 or 20 years into the future do I have reasonable assurance I will be taken care of?
• Do I have confidence the partner or operating agreement has given significant effort to addressing many, if not all, of the future circumstances that can or may take place in a firm?
• Will this agreement reasonably stand the test of time?
• In the event the partners vote for an external merger does the agreement address that circumstance?
• If there were a problem internally between the partners would this agreement help resolve outstanding questions or concerns?
• What would I include in this agreement if I, as a new partner, were to rewrite it today?

We ask you to review these and other questions because your partner or operating agreement is just as important as your "merger" agreement, it is just used internally. When a new partner is merged in it should be viewed similarly to an external merger to a large degree and answer all the same questions. Some firms opt to have an outside industry specific consultant review and or re-write the agreement each time a new partner is admitted. The cost of this review could be a few thousand dollars depending on the firm and the agreement but that is often inexpensive "insurance" to give all partners, new and tenured, the confidence that all considerations have been incorporated.

For more information please read these articles:

• Managing Owner Transition Through an Owners' Agreement by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
• How to Manage Internal Succession by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
• Replacing Retiring Partners by Terrence Putney and Joel Sinkin, The CPA Journal, c2009
• Planning and Paying for Partner Retirements by Joel Sinkin and Terrence Putney, Journal of Accountancy/AICPA, c2012

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