Bringing a New Partner into an Accounting Practice
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This article gives an outline of how to bring a new accountant into an accounting practice. The author goes from common sense to legal advice, from the accountant’s purchase of ownership to the parties’ exit strategy and unwinding of the relationship.
Culture Fit. Before anything else, think hard whether the new accountant will fit in with the practice’s culture. The primary risk is that the existing group and the new accountant might not fit together. For example, the group and the accountant might differ on hours (especially during tax season) or the handling of employees.
Compensation. An accounting group’s compensation structure is the most important part of its culture. The hardest thing to get right and keep right is a group’s compensation structure. Every group has its own compensation structure ranging from “eat what you kill” to equal shares. I give a common formula for fixing compensation in Article 4, Accountant employment agreements and independent contractor agreements.
Buying into the Practice. After salary, think ownership. Frequently the practice asks the accountant to wait a period of time (e.g. one year) before the parties discuss the buy-in. This ensures that the new accountant fits-in before buying-in. Accountant employment agreements sometimes have clauses for the accountant’s purchase of ownership in the practice. Usually the clauses are vague and non-binding, and only express the parties’ expectations on the subject. If the accountant’s buy-in is a material part of the deal, however, specify these deal terms:
The ownership percentage that the accountant will get
The purchase price
The period over which the accountant will pay the purchase price
The extent of the accountant's participation in control decisions for the practice, e.g. is he or she on the board of directors?
Corporate Structure. The new accountant must buy into something, and usually that something is an accountancy corporation. The accountancy corporation’s structure should protect both the incoming accountant and the existing group. You need to shield each accountant from two kinds of liabilities: (1) liabilities arising from the acts of the other accountants in the group, and (2) general liabilities of the accountancy corporation (such as real property leases, etc.). At the same time, the corporate structure must comply, to the letter, with the laws and regulations that govern accountants.
Group Liabilities. If the existing accountants are liable for group debts, be clear about the liabilities for which the new accountant will become responsible. Will the new accountant guarantee existing loans or leases? Will the new accountant step into a capital call?
Exit Strategy. Now that you’ve structured the entry of the new accountant, structure the exit. The existing accountants and the incoming accountant all need an exit strategy. The most common exit is the termination of the accountant’s employment plus the buy-back of his or her equity. The practice also might give severance pay to the departing accountant.
This is where a buy/sell agreement comes in. A buy/sell agreement is essentially an agreement for exiting a practice. A buy/sell agreement works like this – the agreement names certain trigger events for buy-back (e.g. termination of employment, death) then it either requires or permits the buy-back of the accountant’s equity on the occurrence of that specific event. Then the agreement sets a price for the buy-back. For more on buy-sell agreements for an accountant practice, see Article 5, Shareholder buy-sell agreements for accountancy corporations.
This article only gives a short roadmap about bringing a new accountant into an accounting practice. There is a lot more to this subject than introduced here. Before you do anything, get competent legal counsel to help you.
ABOUT THE AUTHOR: Matt Dickstein
Matt Dickstein, Business Attorney, provides business legal services in the San Francisco Bay Area and the Silicon Valley, California, including San Jose, Palo Alto, San Francisco, Oakland, Hayward, Fremont, Walnut Creek, Pleasanton and Sacramento.
Since 1994, I have been representing businesses of all types, big and small. I handle business transactions, corporations & LLCs, real estate ventures, professional practices, and franchises.
Copyright Matt Dickstein - Business Attorney - Google+
More information about Matt Dickstein - Business Attorney
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Compensation. An accounting group’s compensation structure is the most important part of its culture. The hardest thing to get right and keep right is a group’s compensation structure. Every group has its own compensation structure ranging from “eat what you kill” to equal shares. I give a common formula for fixing compensation in Article 4, Accountant employment agreements and independent contractor agreements.
Buying into the Practice. After salary, think ownership. Frequently the practice asks the accountant to wait a period of time (e.g. one year) before the parties discuss the buy-in. This ensures that the new accountant fits-in before buying-in. Accountant employment agreements sometimes have clauses for the accountant’s purchase of ownership in the practice. Usually the clauses are vague and non-binding, and only express the parties’ expectations on the subject. If the accountant’s buy-in is a material part of the deal, however, specify these deal terms:
The ownership percentage that the accountant will get
The purchase price
The period over which the accountant will pay the purchase price
The extent of the accountant's participation in control decisions for the practice, e.g. is he or she on the board of directors?
Corporate Structure. The new accountant must buy into something, and usually that something is an accountancy corporation. The accountancy corporation’s structure should protect both the incoming accountant and the existing group. You need to shield each accountant from two kinds of liabilities: (1) liabilities arising from the acts of the other accountants in the group, and (2) general liabilities of the accountancy corporation (such as real property leases, etc.). At the same time, the corporate structure must comply, to the letter, with the laws and regulations that govern accountants.
Group Liabilities. If the existing accountants are liable for group debts, be clear about the liabilities for which the new accountant will become responsible. Will the new accountant guarantee existing loans or leases? Will the new accountant step into a capital call?
Exit Strategy. Now that you’ve structured the entry of the new accountant, structure the exit. The existing accountants and the incoming accountant all need an exit strategy. The most common exit is the termination of the accountant’s employment plus the buy-back of his or her equity. The practice also might give severance pay to the departing accountant.
This is where a buy/sell agreement comes in. A buy/sell agreement is essentially an agreement for exiting a practice. A buy/sell agreement works like this – the agreement names certain trigger events for buy-back (e.g. termination of employment, death) then it either requires or permits the buy-back of the accountant’s equity on the occurrence of that specific event. Then the agreement sets a price for the buy-back. For more on buy-sell agreements for an accountant practice, see Article 5, Shareholder buy-sell agreements for accountancy corporations.
This article only gives a short roadmap about bringing a new accountant into an accounting practice. There is a lot more to this subject than introduced here. Before you do anything, get competent legal counsel to help you.
ABOUT THE AUTHOR: Matt Dickstein
Matt Dickstein, Business Attorney, provides business legal services in the San Francisco Bay Area and the Silicon Valley, California, including San Jose, Palo Alto, San Francisco, Oakland, Hayward, Fremont, Walnut Creek, Pleasanton and Sacramento.
Since 1994, I have been representing businesses of all types, big and small. I handle business transactions, corporations & LLCs, real estate ventures, professional practices, and franchises.
Copyright Matt Dickstein - Business Attorney - Google+
More information about Matt Dickstein - Business Attorney
View all articles published by Matt Dickstein - Business Attorney
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
