How Involved Should Retired Owners Be?

Senior businesswoman in officeThose still doing work should be under contract.

By Bill Reeb and Dominic Cingoranelli
CPA Trendlines / Succession Institute

Regarding involvement of retired owners in the firm, we asked this question: “Which of the following best describes the involvement of retired owners in the firm?” Some 42 percent say they have no influence and no involvement.

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But the answers to a dozen other questions were more interesting and potentially problematic. We think there are only five possible "right" answers. The rest just make things complicated and undermine a firm's ability to advance.

Here are the results of the survey:

Answer % in 2012 % in 2008 % in 2004
Retired owners have no involvement and no influence in firm operations. 42% 36% NA
Retired owners are still active in the community and have a formal role of being an ambassador for our firm. 20% 16% NA
Retired owners continue to manage client relationships. 19% 16% 26%
Retired owners do what they have always done, but just work fewer hours. 17% 17% NA
Retired owners still work on some of their old clients, but as a manager because another partner handles the relationship. 17% 23% NA
Retired owners are on an annual contract with the firm that has to be renewed each year with specific allowable activities they can perform. 17% NA NA
The firm, as a sign of respect, allows retired owners to continue working even to the point of their skills diminishing, but we closely monitor their work. 8% 4% NA
Retired owners do not operate under a special agreement and are allowed to continue working for the firm until they are asked to leave. 6% 10% NA
Retired owners are invited to board/management meetings, but don't have a vote. 6% 7% 9%
Retired owners are invited to board/management meetings and while they don't have a vote, they are still very influential. 5% 3% NA
Retired owners are commonly invited to board/management meetings and still vote. 1% 2% NA
Retired owners still do pretty much what they did before they retired. 4% 4% NA

 

In our opinion, the right answers to this question are:

  1. Retired owners should have no involvement or influence in firm operations; they should not be members of leadership groups, nor should they be attending board/management meetings.
  2. Retired owners should be active in the community and acting as an ambassador for our firm as long as they are being paid a retirement benefit.
  3. Retired owners should not manage client relationships – except it is not uncommon for firms to allow a nominal amount of revenue to continue to be managed by the retired owner, made up of clients who are 1) specifically identified, 2) very small clients (no large clients), 3) long-term friends or family of the retiring owner and 4) not deemed important to the firm.
  4. Retired owners can still work on some of their old clients, but only as a manager because another partner handles the relationship.
  5. Retired owners are on an annual contract with the firm, with specific allowable activities they can perform and that has to be renewed each year.

Now if you compare the right answers to the answers that we captured in the survey, as you can see, there are a number of policies that need to be put in place right away to protect the firm and position the retiring partner to continue to provide value in retirement.

The larger the firm, the more likely it will be that some retired owners continue to work with the firm under annual contracts, performing specific, delineated duties. This is a good practice.

The smaller the firm, the more likely the retired owners can continue to do what they’ve always done, but simply work fewer hours, and the more likely they will be involved in or influencing firm operations. These are bad practices. So all firms should take a lesson from the playbook of the larger firms who, while they will find a specific role for talented owners to continue to work, simply don’t allow retired owners to be part of or influence leadership.

When it comes to compensation of retired owners, the statement the respondents completed was, “Our firm’s compensation system ...”

And the answers are:

Answer % in 2012 % in 2008 % in 2004
has been/is made available to retired partners only if both the retired partner still wants to work and the firm wishes to retain him/her in some capacity. 41% NA NA
will pay retired owners a salary to continue working for the firm. 35% 24% 26%
will pay retired owners a percentage of their billings or collections for client work. 32% 23% 28%
will pay retired owners to bring in new business. 30% 14% 20%
has been/is made available to every retired partner if they wish to continue working in some capacity within the firm. 14% 21% NA
will pay retired owners to remain active in the community as ambassadors for the firm; serve on boards of directors; be involved in charity events, etc. 12% 5% 6%
will pay retired owners for the book of business they continue to manage after retirement. 10% 4% NA
is the same for retired partners as it is for active partners. 5% 2% NA
pays retired owners for other; please specify. 9% 15% 11%

 

By this time in the process, the retiring owner should:

  1. have properly transitioned his/her clients,
  2. no longer be managing clients (all clients who were assigned to them prior to retirement, except for the possibility of a few very small, nominal clients, should now be managed by the partners who were designated by the firm to take over the various client accounts)
  3. not be involved in the leadership of the firm or attending, unless invited to a specific meeting, any leadership meetings
  4. not be competing with the firm by setting up shop somewhere else
  5. be under an annual contract with specific terms and duties described. The contract should automatically expire each year. Without a renewal, the retired owner will know that his or her tenure working for the firm is over.
    Common acceptable terms of this contract are:
  • Percentage of billings (working in the role of a technical manager). This percentages usually ranges from 25 to 40 percent. Paying the retiring owner in excess of 40 percent, which is often found in smaller firms, is excessive and provides the retiring owner not only a partner-level cut of the fees billed, but all of the profit from the work they are doing.
  • To be very clear, when a retired owner is paid a percentage of personal billings, it is only on the work they are individually doing, not on the project or client’s billings.
  • Percentage of first year’s business for new clients, or in rare circumstances, new services. This number should be in the 10 to 20 percent range. Some firms will pay 10 percent for two years, some will pay 10 to 15 percent for one year, but we believe that 20 percent in one year is too high. On the other hand, 10 percent for one year is normal and reasonable (adjusted for actual collections).
  • Hourly agreed-to pay for specific performance. In other words, specifically identified activities (networking, internal training, working specific referral contacts identified by the firm, involvement in charitable events/boards, etc.) can be paid on an hourly basis or set up as duties to be performed within a small stipend or salary each year. This would not be paid at the owner’s billing rate, but at a much lower internal rate.
  • Other perks should be considered, such as paying for identified continued CPE, licensing fees, office (however, a manager-level office rather than a partner’s office), expenses, etc.

As you can see, between the survey questions and analysis, there are a great deal of policies that need to be put in place, significantly updated,  and/or implemented with greater accountability to better position the firm for both the seamless retirement and management of the relationship after the retirement of an owner.

No matter how painful these discussions might be today, they are not nearly as painful and economically damaging as they will be if you wait until someone is ready to retire. When the discussions are early, or at least four or five years away from someone retiring, although the arguments and emotions can run high, the conversation is more about what is fair and reasonable from a business perspective. Once you get a year or so away from an owner retiring, the dialogue begins to feel like the discussion is more about what the person retiring deserves rather than what is fair and sustainable for the firm. So, have these conversations now and work them out!

3 Responses to “How Involved Should Retired Owners Be?”

  1. Dominic Cingoranelli

    Amy – We normally recommend 33% of actual collections (rather than billings) be paid for chargeable work done by a retired partner employee. Many firms, however, don’t follow this advice and give them 40% of their collections. We have seen firms where people are paid 50%, but we think that amount is excessive, a huge perk for the retired partner, and unless he or she was bought out at far less than market, an amount in that range would be taking advantage of the remaining partners. – Dom and Bill

    Les – In our view, retired partners can have the option to work at the firm after retirement, at the discretion of the remaining partners, on a one-year renewable contract, renewable at the option of the remaining partners, with the proviso that the retired partner not handle client relationships, all of which should have been transitioned prior to retirement. Handling client relationships means that the retired partner hasn’t transitioned them to others in the firm, and the firm is now paying him/her to manage them in retirement, plus paying for them through retirement benefits, and there’s the chance that the firm won’t keep some of them afterwards.

    The economics of partner buyouts are based on the firm keeping the clients that the retired partners has transitioned to the firm. Out of the profitability of the retained clients will be paid the retirement benefits to the retired partners. If a partner chooses to retire and compete, he/she is double-dipping. We don’t believe a firm should be in the business of spinning off competitors or paying partners who wish to compete in retirement. – Bill and Dom

  2. Les Orr

    I have just personally conducted an informal survey of partners I know who recently retired.

    They had been with medium to large firms that had implemented suggestions similar to the ones in this article. In general, they had spent ~ half a century building the firms they left. They are still very competent and current. They are now living on what I would call “deferred compensation as a retirement earn-out.”

    All of them said the same thing: “I was a lot younger when I agreed to the non-compete clause. I wish I was still working or could simply open my own small practice.”

    A word to the wise …

  3. Amy

    If retired partners are paid a percentage of their actual billings what would be the average or common percentage that is used by small firms?