Art of Accounting: Managing partner or dictator?

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In many firms the reality is that most partners below the “dictator” at the top are treated as employees—maybe a little more respectfully, but still as employees. This is especially so for the newer partners.

Keep in mind there are exceptions, and I am expressing what I have seen as a general, and not universal, rule. And note that this does not apply to me or to any of my partners along the way.

In most smaller firms, the managing partner is usually the founder, and this also means the partner with substantially more than a 50 percent ownership. In those cases the firm is not really run democratically, but as a dictatorship. That means partner salaries, draws and bonuses are singularly determined. It also usually means there is not a clear path of succession either upon death, serious illness or slowing down, either by choice or because of health. It also can mean this person has the primary relationship with the major clients.

This is reality, but it doesn’t mean it is untenable or fatal. Let me address each issue for the non-managing partners.

• If your salary is higher than what you could receive working somewhere else, then don’t complain.

• If your raises and bonuses continue at reasonable amounts, then don’t complain.

• If you are able to do your work without micromanagement by the dictator, then don’t complain.

• If you have staff you supervise, are not professionally stagnant, and your skills are able to grow, then don’t complain.

• If you have not developed your own book of business, then don’t complain.

• If there is an executed partnership or buy-sell agreement that spells out what happens upon the dictator’s death or disability, then don’t complain. If there is no such agreement, then you must lobby to get one. That is critical.

• If that agreement doesn’t address all of the other essential issues such as retirement or withdrawal, then it should be done. But not having it is usually de rigueur for firms with a dictator, so don’t get crazy about it.

• Usually in these situations there are either younger partners capable of taking over, or there aren’t (pretty smart analysis on my part, huh?).

• If there are potential successors, then the sooner that planning starts, the better. However, if there are potential successors, and there is no plan in place, I might question the ability of these people to take over, operate the firm and assume the liability to buy the dictator out if and when that will occur.

• If there are no potential successors, then the likelihood is that the firm will be sold when the dictator decides to hang up his or her pencil, or upon their death or disability.

• The lack of potential successors could be because of the age gap, lack of entrepreneurial desire or ability of the younger partners, partners that overly mire themselves in client service, no one stepping up to assume any sort of management role or responsibility, or no firm leader other than the dictator.

• Even if there is an inadequate buy-sell agreement, there still should be a practice continuation plan in effect that spells out how a transition or sale would be conducted, at what price and terms and to whom. Note: I have a sample practice continuation agreement you can use as a guide and get for free by emailing me at GoodiesFromEd@withum.com . However, with more than one owner, these issues should be fully incorporated into the buy-sell agreement.

• A protective measure would be for you to develop stronger relationships with clients.

• In the context above, the end result will be that the firm will be merged, i.e., sold, to a larger firm and you will continue with your “job” regardless of your title.

• You will be an “owner” when you acquire equity with the appropriate agreements. While your views might not be able to prevail, you will have a seat at the table to express your thoughts.

The above obviously doesn’t cover the entire area, but addresses some of the issues that I see as the reality, not the ideal or simply good business practices. Use this as a guide to direct you how to get closer to a better arrangement, but the reality is the dictator is the boss.

Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, and “Managing Your Tax Season, Third Edition.” Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Ed is an adjunct professor in the MBA program at Fairleigh Dickinson University teaching end user applications of financial statements. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or emendlowitz@withum.com.

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