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VIEWPOINT: Are you thinking of introducing non-equity partners?

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The ratio of non-equity partners in accounting firms is on the rise.

Accounting firm owners traditionally balance the requirement for capital to be introduced with the desire to add owners.

However, the increasing costs associated with running an accounting firm, as well as ever-changing regulation and economic fortunes, promote an alternative or possibly a trial run for those seeking firm ownership.

Consequently, many firms now have non-equity partners who have been advised that this is the highest level they are going to attain in the firm. This approach enables firms to have ‘partners’ who are well-rewarded, but do not qualify for a profit share other than maybe participating in a bonus pool.

This satisfies the firm’s need to retain those with excellent technical skills, while not further diluting equity ownership. This option also exists for those partners that need or want to work fewer hours.

In order to pursue this approach, firm owners must establish the basis of entry for the non-equity partner. This will involve agreeing the benchmark for technical, management and administrative skills, the ability to be a good people person and a good communicator that could lead to development of new business.

Many firms around the world typically have 30% to 40% non-equity partners. The future? This could eventually be a 1:1 ratio.

Timelines
Typically a salaried partner will remain non-equity for a period of at least five years and during this time it possibly becomes clear that graduation to equity will not be offered. There are actually many satisfied non-equity partners out there!

In any event, if they are still salaried after five years, then they will probably remain as non-equity partners.

Remuneration
One of the challenges that many firms face is that once a certain level of income or income share has been attained, there is an expectation that this will continue. It is a fact that you will improve financial performance only if there are financial consequences for non-performance.

This will drive behaviour like nothing else. Equity partners’ income share is typically 50% salary, with the balance comprising profit and performance share.

You must determine the basis of remunerating non-equity partners.

This should include a base salary and some basis for sharing in a bonus pool. Here you will have to look at the remuneration structure for managers and junior partners, as I reckon that you would want the non-equity partner to achieve an income somewhere between these levels.

And finally, sharing profits based on historical equity ownership is very 20th century.