Question: I am soon to become a partner in a consulting outfit.
What should I ask to be the sharing formula as a partner in a consulting outfit that does training, development, and recruitment?
Answer: Dear Kunle, There is no one “share” or “sharing formula” that works for all service firms. Each firm is different, comprised of different people, with different contributions and different expectations. However, there are three general approaches to “sharing formulas.” In two of those three, there are five criteria used to determine shares. Let me explain:
a. Approach to Share Formula Number One: What I call “Equal Shares for All.” Though it may not seem like a “formula” at all, some service firms use a very egalitarian approach: all partners receive an equal amount of the profits. While I applaud those who work this way, it often leads to differences, resentments and disputes due to different work habits: some partners may work harder, some may bring in more business, and some may take a lot of vacations. Still, for the right people, this may be a great and simple way to go.
b. Approach to Share Formula Number Two: What I call “Annual Knife Fight.” In this approach, once (or twice) each year, the partners go into a room, argue their points of view, say how they think the “pie” should be divided, agree on percentages to be used for the next 12 (or 6) months, and when they leave, shake hands . . . until the next “knife fight.” The criteria most often used by partners using this approach are explained in section “d,” below.
c. Approach to Share Formula Number Three: What I call “By Calculation.” In this approach, the partners assign a value – or points – for five (or so) different attributes that help the firm be successful. Then, each of the partners is evaluated, and assigned “points” which leads to a calculation – which can be done by a calculator – to determine his or her “share of the pie.” The criteria most often used by partners using this approach are explained in section “d,” below.
d. Criteria Used to Decide Partner Shares. There are five most common criteria used in arguing for (under the “Annual Knife Fight” approach) or in assigning points (in the “By Calculation” approach) to the partners:
1. Number of New Clients Brought into the Firm by each Partner;
2. Amount of Revenue Brought into the Firm by each Partner’s Clients;
3. How much each Partner contributes to the Administration of the Firm;
4. How much each Partner Uses the Firm’s Resources (such as staff and offices); and
5. How long each Partner has been a Partner of the firm.
Let’s give an example, as an illustration. First, the partners would decide which of the above criteria is important to them, and assign a value to each:
a. If Partner A brought in more clients than any Partner, she might be assigned 10 points for that;
b. If her clients brought in revenues of an average amount, she might be assigned 5 more points for that;
c. If she never helped out in running the firm, she might be given 0 points for that;
d. If she used a lot of staff time, she might lose 3 points;
e. And, finally, if she was with the firm 28 years, she might get 17 points.
Her total points would be 29 points. If that was one half of Partner B’s total points, then Partner A would get only one half of the profits (or weekly draw) for the next year as Partner B received. But if Partner A’s points were 30% more than the points of Partner C, then Partner A would get a greater share of profits (or weekly draw) than Partner C.
e. If you are the firm’s newest partner, you should ask “relatively.” By this, I mean that you should get (i) no less than any other new partner, either now or in the past, and (ii) a sum that is higher than any other non-partner staff member. And, if you have any special talents, any special relations, any special fame, or any other special attributes, for each one you should ask for a slightly greater share of profits. Don’t be greedy – you are trying to forge a new relation with your new partners. But don’t be bashful, either.
As you can see, there is no one best approach that fits all service firms. That said, these are the ways most service firms approach – and navigate – the task of sharing the fruits of the firm’s labors.
If you are interested in obtaining a model Partnership Agreement, [click here].
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Thanks, again, for writing in.
Best, Al Sklover
© 2011 Alan L. Sklover, All Rights Reserved.