There are really two steps to arrive at an agreement. You must have the proverbial “meeting of the minds,” and you must get it in writing.
Here are some of the items you must address.
Gather data. Each prospective partner should be willing to share some data about clients. These data do not have to disclose client names, but they should include the following information: Assets, Revenue, Dates of Birth, and known health issues. At my Partnerships website, I have a spreadsheet for you. Among other things, it will calculate average age for client and spouse. In my “Buyout Partnership” white paper, I have instructions on how to calculate the life expectancy of that book.
Consider: Suppose the average age of a clientele is: husband 76 and wife 72. Very roughly, in ten years, 20% of both spouses will have passed away. Unless you have drilled deep into the family relationship, 20% or more of your assets will have gone to the heirs to be spent or managed elsewhere. If you have 300 clients now, in ten years, you will have 240. Therefore, just to stay even, you need to add a minimum of six households per year. And this doesn’t even factor in losses due to withdrawal. If you are really brave, you will fill in the withdrawal cell on my spreadsheet. As a matter of fact, anyone with a book of retirees should download the “Buyout Partnership” and learn how to get a rough idea of the life expectancy of your book.
Get an appraisal. This is vital. A senior partner’s business with $50 million in assets could be worth less than a junior partner’s business with $25 million, assuming the junior is fee-based. I have some resources for you in the “The Buyout Partnership.”
Decide to become a partnership. A partnership, by definition, is “a business entity in which the partners share with each other the profits or losses of the business.” I suppose you could say that a partnership could consist of “these are mine/those are yours/and these are ours.” You could say that. But that does not make it so. I have seen the “mine/yours/ours” model tried countless times, but they blow up sooner rather than later.
There are at least two reasons for their demise: lack of trust and “ours” become orphans. If you had complete trust in your partners, you would throw it all in one bucket. The problem with “ours” is that each partner can always make more by working on “his” or “hers.” “Ours” gets neglected. My counsel is: keep talking until you trust your partner enough to put all the clients in one bucket. This means no trial marriages. Get married or break up. No living together!
Negotiate initial compensation. There is no hard and fast rule on this. Probably the most frequent initial comp formula is: add trailing 12 gross revenue for each partner to get a total. Each partner gets their percentage of the whole.
Negotiate compensation trend. Unless the senior partner’s departure is imminent, a partnership with long-term survival value must trend toward 50-50. Let’s say that the senior partner’s production is $500K and the junior is $250. Initially, the senior partner draws compensation of 2/3 and the junior 1/3. But if the junior partner starts finding new assets from existing clients and bringing in new clients, production will go up. So the junior partner should, over a several year period, step to a 50-50% split. Let’s say at $1 million, the percentages are 60-40. The senior is actually making more but has a lower percentage. A series of steps such as this can be calculated.
Work out a decision-making process. One of the biggest dangers of a partnership is: “cannot make a decision.” Two 50-50 partners disagree and forward motion stops. I suggest if a decision cannot be made, a person respected by both is brought in to break the tie.
Decide how to handle disability. I am familiar with one partnership where one of the partners was ill for a year. The other partners carried on, kept the business alive and kept sending the checks. But suppose it’s five years? Stuff happens.
Decide on a divorce clause. One of the big reasons partnerships break up is because the partners never looked at what could happen and planned for it.
Suppose one partner wants to change firms and the other does not?
Suppose one partner develops a different investment philosophy?
The possibilities are endless.
A possible provision in your agreement could be something like: Each partner is entitled to take clients he or she brought to the partnership. A meeting will be held with a mutually agreed on mediator to apportion the other clients on the basis of revenue and relationship with the understanding that the split on revenue shall be approximately the split on income as specified elsewhere in this agreement.
The better job you do deciding how to split the less likely you are to split.