The Partnership deal – time to ask questions

The flurry of announcements of new partners from law firms over the past few weeks has been one of the rare rays of metaphorical sunshine in these dark days for the professional services sector.  It’s difficult to read such news and not think of the great delight those new partners must be feeling at achieving a career-long goal, or the sense of  reward for the many sacrifices made over the years or simply imagining the delight at being admitted to a group that, in the vast majority of firms, is characterised by collegiality, friendship and shared values.

This year however, another sentiment sprang to my mind – one which I have not considered for the last decade and one that has been provoked by the recent pandemic.  That is ‘what serious and fundamental questions should a potential new partner be asking of themselves and their firm before accepting an offer of partnership’?

As we are all so very aware, we are living in unprecedented times and so the traditional view of partnership in a professional services firm being a golden ticket to life-long escalating earnings must be questioned in the same way we are questioning most other matters that make up our ‘historical’ view of the way we work.  Firms are – quite rightly – making significant investments in their peoples’ job security, well-being and technology and the financial burden of those decisions is likely to fall on partners.

So the reality is that in many firms, partner earnings (and the timing of payment of those earnings) are likely to be under greater pressure for many years.  In that context, what do we suggest that those considering  partnership in 2021 and beyond start to think about?

Most obviously, make sure you read all the documentation that your Firm make available to you (and ask for documentation if it is not readily available).  Paramount amongst these documents is the Partnership Agreement or LLP deed.  Dependent on the classification of partners in a firm, there may be one or more such agreement, but make sure you read and think hard about the provisions in therein.  Consider particularly:

• How the Firm is governed
• Voting rights on partnership issues
• Drawings schedules and reward architecture
• Levels of capital contribution and sources of borrowing to fund capital
• Arrangements for resignation or retirement
• Restrictive covenants

Reading documents is fine and is clearly something that every prospective partner should do.  But do not let this get in the way of talking to other stakeholders who may have information that does not appear in formal documents.

You should think about meeting with some or all of the following:

• Your Finance Director – this postholder will be able to help you with an insight into the current financial health of the Firm including cashflow, borrowings, lease commitments and other overheads
• Your Risk Partner – here you can talk about the Firm’s claims record and the robustness of risk management and any associated insurances that the Firm has in place
• Your Business Development (BD) Director – a switched on BD Director can be a great source of advice on your potential market and its opportunities
• Your HR Director – you ought to know how you will be assessed and your performance evaluated as well as understand the range of people leadership and management responsibilities that may be expected of a partner
• Your Head of Department – this person has probably supported your admission to partnership, but you should ensure you have a clear view of this stakeholder’s expectations of you
• There may be other knowledgeable people in your Firm to talk to but don’t forget to look outside of the Firm as well.

Some partners I have worked with have spoken to ex partners in their Firms – either retired or resigned – to get a more holistic view of the Firm.  Perhaps a trusted head-hunter or sector consultant will be able to add colour to the picture you are building?

But potential partners should never overlook the need to ensure that family members are clear about what becoming a partner means.  Be open about the potential risks, rewards and non-financial benefits and costs of the change in status.  By way of just one example, immediately upon becoming an equity partner you become self-employed and are taxed as such.  This combined with what can be – and recent events will exacerbate this situation – a lumpier and less predictable income flow, can mean that in the early years of partnership, personal financial commitments need to be carefully managed.  Likewise, partners will need to provide their own pensions and benefits – albeit many firms have group schemes of which partners can avail themselves.

Without discounting the importance of this due diligence, however, please do not lose sight of what a fantastic experience and monumental achievement being invited to become a partner still remains.  You will have a group of colleagues who share not only a common business and financial interest, but a shared set of values, a sense of camaraderie and a pride in working to serve clients to the best of your collective abilities.  Good luck!

Steve Lee, Partner, Aretai LLP

April 2020

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