This presentation by Russell Shapiro provides an overview of an accounting firm agreement, including the process, provisions, governance, retirement, payment period/payment limitations, life insurance, payment protections, compensation, withdrawal/dismissal, restrictive covenants/purchasing clients, firm capital, income partners and amendments.

1. Accounting Firm Agreement Overview
Levenfeld Pearlstein, LLC
2 North LaSalle Street, Suite 1300
Chicago, Illinois 60602
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2. Introduction:
• Importance of Agreement
- Will the firm be able to make quick, efficient decisions?
- Will partners be able to leave and take business?
- Will the next generation have a chance to grow?
- Will it be easy to bring on lateral partner?
- Will the firm be able to Merge?
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3. Agreement:
• Impetus for Revising Your Agreement
- Proactive Example:
• 10-year old firm; 7-partners; 35-professionals
• Added partners laterally
• Founding Partners wanted to:
- Make firm cohesive
- Smoothly transition to next generation
- Secure retirement income
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4. Process Used:
• Consulted with advisors to determine objectives
• 9-Monthly partner meetings before or after work
- Started after tax season
• Lawyer in attendance for Most Meetings
• Agenda for each meeting that confronted issue
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5. Outside Event:
• Long established firm – second generation near retirement
• 15-partners; 75 professionals
• Leadership wanted to merge with regional firm
- Perceived lack of leadership in younger generation
- Desire to secure retirement benefits
• 80% voting requirement to merge
• Younger generation said “no, we want to
run it”
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“Each generation imagines itself to be more
intelligent than the one that went before it,
and wiser than the one that comes after it."
[George Orwell]
Levenfeld Pearlstein, LLC

6. Process:
• Committee formed consisting of:
- 2 from older generation
- 2 from younger generation
- Neutral partner
• Development of extensive outline
- Security for older generation
- Control for younger generation
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7. Major Agreement Provisions:
• Governance
• Retirement
• Compensation
• Restrictive Covenants
• Capital
• Income Partners
• Nuts & Bolts
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8. Governance:
• Governing Body (Executive Committee)
• Managing Partner
• Powers Retained by the Partners
• Advantages/Disadvantages of Centralized Management
- Efficiency and accountability
- Autonomy
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9. Executive Committee:
• Evolutionary Process
• Governing Body (all decisions except those specifically
reserved)
• Selection of Members
- Nominating Committee
- Ratification vs. Election
• Managing Partner is on EC
• Firm First Mentality
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10. Executive Committee (continued):
• Term (e.g., 3-years)
• Term Limits (e.g., 2-terms)
- Subject to override by super majority vote
• Removal
- Majority of Executive Committee
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11. Managing Partner:
• Day to day decision making
• Selected by:
- Executive Committee
- Nominating Committee
• Term (e.g., 4-years)
• Term Limit (e.g., 2-terms)
• Member of Executive Committee
• Removal
- Majority of Executive Committee
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12. Partnership Voting Rights (Retained Powers):
• Fundamental Decisions
- Mergers (over a certain size)
- Dissolution
- Partner hires
- Making a partner
- Partner Expulsion
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13. Partnership Voting Rights (Retained Powers)
(continued):
• Major Economic Decisions
- Banking Relationship
- Draw-down over a certain amount
- New lease
• Governance
- Ratification of Executive Committee Members
- Ratification of Managing Partner
- Amending the Partnership Agreement
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Question: What else would you add to the
list?
Levenfeld Pearlstein, LLC

14. Super Majority Voting:
• When to Use
- Merger (80% story)
- Dissolution
- Amendment of Partnership Agreement
• Will of Majority vs. Protection of Minority
- Should the will of the majority ever be thwarted?
• Type of Majority
- Percentage Interest
- Per Capita
- Capital Accounts
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15. Other Governance Structures:
• Other Structures as Firm Grows
- Compensation Committee
- Nominating Committee
- Promotions Committee
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16. Retirement:
Favorite Subject of Anyone Over 50
• Overview
- Mandatory Retirement
- Early Retirement
- Vesting
- Basis of Payments
- Changes in Payments
- Life Insurance
- Withdrawal and Competition
- Work after Retirement
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17. Mandatory Retirement:
• Mandatory Retirement Age
- 65 – 70
• Age Discrimination
- Owners as Employees
- Voting Rights
- Risk of Loss
• Allows transition planning
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18. Early Retirement:
• Retirement Age: 55 on
• Executive Committee Approval
• Compliance with Restrictive Covenants
• Long Notice Period (6 to 24 months)
• Consequences of Failure to Give Requisite Notice
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19. Retirement Benefits:
• Vesting of Retirement Benefits (examples)
- 20-years for full vesting
- 10-years for any vesting
- Credit for merged-in partners
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20. Retirement Payment Amount:
• Retained Business Approach
- e.g., 20% of partner’s originated business for 5-years
- Younger firm
- Less institutionalized
- If business leaves, no payment – strong incentive to transition
clients
• Issue of Credit Sharing and Compensation
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21. Retirement Payment Amount (continued):
• Compensation Average Approach
- e.g., average of highest 3 of last 5-years x number of years
(e.g., 3-years)
• More Institutionalized Firm
• Percentage Interest
- Value Firm (e.g., 1.0 x revenue) x partner percentage interest at
retirement
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22. Post Retirement Adjustments:
• Originated Business – Self adjusting
• Compensation Average/Equity Purchase
- Loss of firm business
- Loss of partner’s business
• Inflation Adjustments
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23. Payment Period/Payment Limitations:
• Anywhere from 5 to 15 years
• Generally no more than 10% to 12% of net income
- Recapture mechanism
• Missed payments get carried into future years
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24. Life Insurance:
• No transitional period
• Protects the partner and the firm
• Entire amount or portion of insurance proceeds may be paid
to deceased partner
• Partner can take policy after retirement
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25. Payment Protections:
• Remaining partner personal liability
• Ability of retired partners to vote on merger or other
matters
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26. Work After Retirement:
• Generally no right
• Decision on an individual basis
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27. Compensation:
• Generally not addressed directly in partnership
agreement
• Compensation Committee
- Executive Committee appointment
- Terms and term limits
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28. Compensation (continued):
• Generally not limited by percentage interest or capital
accounts
• Objective/subjective/mixed
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29. Withdrawal/Dismissal:
• Retirement Benefits
- Generally lost
- Some firms allow for benefits when they would otherwise have been
received (e.g., at age 60)
• Restrictive Covenants Will Apply
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30. Restrictive Covenants/Purchasing Clients:
• Non-compete
• Client non-solicit
• Employee non-solicit
• Generally upheld by courts
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31. Restrictive Covenants/Purchasing Clients
(continued):
• Consequences of Violation
- Injunctive relief
- Forfeiture of retirement benefits
- Liquidated Damages
• 100% to 200% of fees lost
• 50% to 100% of employee compensation
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32. Firm Capital:
• Capital Contributions
- Need for working capital
- Upon admission
• Fixed amount
- Additional capital
• Tied to compensation
• Profit retention
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33. Firm Capital (continued):
• Capital Accounts
- Disparate capital accounts
- True-ups (to percentage interest or compensation)
• Periodic
• Generational shift
• Return on Capital
- Prime +
- Fixed percentage
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34. Firm Capital (continued):
• Return of Capital
- Withdrawal/retirement
- Payout (1 to 5 years)
- Interest
- Set-off rights
• Amounts owed
• Violation of restrictive covenants
• Contingent liabilities that relate to periods when a partner
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35. Income Partners:
• Recognition of professional achievement
• No capital contributions
• No voting rights
• Considered as employees
- Age discrimination - cannot require age based retirement
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36. Income Partners (continued):
• Restrictive covenants
• Retirement benefits (sometimes)
• Make part of partnership agreement or separate agreement
- Psychological effect
- Inadvertent granting of rights
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37. Nuts & Bolts:
• Full-Time Profession Devotion
- Side businesses
• Proceeds of All Work
- Authorships
- Programs
- Speaking
- Boards
- Trustee/Executor
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38. Nuts & Bolts (continued):
• Rights of Contribution
- Leases
- Bank loans
• Confidentiality
- Firm
- Clients
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39. Nuts & Bolts (continued):
• Professional Standards
• Rights to Name
• Mediation/Arbitration
- But not for injunctive relief
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40. Nuts & Bolts (continued):
• Just and Faithful Dealings
- Pay taxes
- Pay debts
• Relationships with Clients
- Investing
- Disclosure/permission
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41. Nuts & Bolts (continued):
• Indemnification by Partnership
- Exceptions:
• gross negligence
• willful misconduct
• Indemnification by Partner
• gross negligence
• willful misconduct
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42. Amendments:
• Supermajority
- Not unanimous
- Protection against amendment that singles out one partner
• Retirement Benefits
- No amendment unless majority of those near retirement agree
- But can change for younger generation
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43. Questions/Comments:
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