What Happens When You Merge-In or Sell?
Understandably this seems to be a mystery to most firms. It makes sense since most people sell or merge once in a lifetime.
- Exit Timeline. You do not leave immediately. The acquirer needs you for a transition period, which could be six months to a decade. A fast exit can damage a deal and most firms want quality people to stay to ensure a smooth transition.
- Blends. There are hybrids. These are firms that may have a few partners leaving soon and other partners who might be in their 40s seeking twenty plus years. This is normal.
- Control. Yes, you are no longer in total control. This is the hardest part for transitioning leaders to understand. You will have a voice, but not be the deciding factor.
What is a Normal Buyout?
There are a lot of variations. Each offer needs to be viewed beyond a multiple of revenue. Some pay a multiple of the partner’s earnings. Others pay on extended periods. In general, here is the “standard” deal. 1x revenue paid over three to five years based on retention of the client base. Some deals have floors that guarantee payment after a certain percentage of client shrinkage. Others have ceilings that limit the upside.
Am I a Partner Still?
It depends on your arrangement. In general, if you are 60 plus years old, and the firm has an age 65 retirement policy, you will transition as an Income Partner. Your compensation often does not change. Again, that depends on the deal. Keep in mind that when you merge up or sell you transfer a great deal of risk and administration to the new firm. If you are younger, your equity may convert to the new firm’s equity structure. If you are an Income Partner currently, you may come over in the same capacity.
Can My Compensation Increase?
Yes. What often holds a Partner back from selling more or working their referral sources is a lack of time. With the firm’s administration, hiring, firing, training, etc. now in the hands of someone else, you are free to sell. The more you sell, the more you make. Make sure you clearly understand the impact on your compensation and payout if you start bringing in new work.
When Does a Buyout Occur?
Buyouts begin when your retirement officially starts. Example; a partner comes over at 62 and is working full-time until 65. This is treated as a merger with a deferred buyout. When the partner officially stops working in his or her full-time capacity then their buyout begins. They may keep working as a consultant and even retain their title in name. When this occurs, they may bill 500 or 1,000 hours and get paid a percentage of the collections above and beyond their buyout.