To quote Green Day, “It is sometimes unpredictable, but in the end it’s right.”
Every year, many owners (or partners) of advisory businesses, sometimes even founders, are asked to leave their firms for reasons ranging from underperformance to poor relationships or disastrous mistakes they have made.
As painful and difficult as that may be, sometimes the only course of action left is to ask your partner to leave your firm and “don’t come back no more” (Ray Charles this time).
If the situation has escalated to this point, the decision is also usually badly needed for the organization to continue to grow or even survive.
The reality of larger partnerships is that being an owner does not mean you are guaranteed employment for life. In fact, as firms grow larger and add more owners they recognize that there are many reasons to fire partners. What’s more, the management process and ownership agreement of the firm should anticipate this and allow it to happen. Even though firing a partner is painful, keeping one who should be gone can be fatal.
In my experience, there are usually four reasons a partner needs to be fired—poor job performance, poor relationships, problems he or she faces outside the firm, or for cause. Let’s examine each in turn.
Partners in most firms are entitled to significant benefits, including compensation, but those come with very high expectations for a partner’s productivity and contribution. A firm can’t offer one without the other. Yet sometimes, for one reason or another, a partner falls behind, and the drop in output may be so significant that the only way to deal with it may be to ask the person to leave.
Let’s consider salary alone. Salaries for partners range anywhere from $200,000 to $500,000 in my experience. To afford such compensation, firms need a certain level of revenue that is managed by the partners. As a rule of thumb, I would propose a partner’s compensation should not exceed 30% of the revenue he or she is responsible for (using that guideline, a partner with a salary of $250,000 should generate at least $833,000 in revenue). If the owner brings in less revenue than that, the firm can’t sustain its desired profit.
Add a generous set of benefits and a share of profits and partners now have to produce a million or more in revenue to keep the firm’s economics at the right level.
Yet often there’s a partner who loses a valuable source of referrals or the ability to add clients. Or the partner’s energy level declines and his or her passion for work disappears. It usually happens gradually, and the rest of the partners witness a gradual decline in revenues.
At first everyone is supportive and encouraging, but after a year or two the situation becomes tense as the others realize they are paying for someone else’s slack. In one of the situations I have seen, a partner was receiving $600,000 in income to manage $500,000 in revenues.
Sometimes a partner or owner is a good contributor but is also a frustrated or frustrating member of the partner group. It is not unusual to see in larger partner groups someone who is not only unhappy with the firm but seems to spend most of the time sabotaging every initiative. Such people vote against necessary projects, block the addition of new partners and veto mergers. At some point, they may not even be logical; they simply want to spite their partners and punish them for some past “wrongs.”
I wish these cases were rare, but they aren’t. Usually, they start with some friction between two individuals. This escalates and later involves the rest of the partners, who might then side with or support one of the parties of the conflict, leaving the other in isolation.
The lonely partner, now defeated, can be like a dormant volcano causing frequent earthquakes, always threatening to blow up. That’s why partners should think twice about simply outvoting someone and leaving them to stew.
In other cases, just the personality and communication style of some partners may cause them to become unacceptable to the others in the group. Some people are simply abrasive, prone to conflict, turning every discussion into a fight and failing to get along with anyone. And their reputation for being “difficult” is often a self-fulfilling prophesy. It’s not that they simply lost a political battle—that they were merely outvoted—but that they alienated everyone around them and found themselves alone.
Sometimes partners are dealing with problems outside work. Their spouses or children may be sick, so they are unable to contribute as much as they used to. They want to—maybe even badly so! But they don’t have the time and energy.
What’s worse is they also need the income associated with the job. How do you fire one of your partners because he or she has a sick family member? There are no good answers in such tragic cases. Separation may be necessary but the business necessities and the relationship priorities will collide in the worst possible way. Tactful negotiations may perhaps create a reasonable way for the partner to leave but the emotional toll on everyone involved is always very high.
Sometimes a person’s behavior goes beyond the pale and violates the values of the firm, its policies or even the law, and that partner must be terminated. Because partners have leadership and management responsibilities, in visible positions of authority, their conduct must meet high standards. Not every partner is a manager in an advisory firm, but all partners should be setting an example of the firm’s values in the way they treat people and behave.
Firms never give that lecture to their partners, but perhaps they should. There should be some kind of “welcome to being a partner” document that says:
- Please don’t get drunk at the holiday party. That goes for all other company events too.
- Please don’t make inappropriate jokes—at least not in the office. Posting them in the office or forwarding them to others is pretty bad, too.
- Please don’t berate our employees. Yes, even if you don’t call them names, it is still not OK.
- Please, please, please don’t have an affair in the office.
- Please don’t post embarrassing things on social media. Clients can see them and our employees see them.
- Please don’t get us in the news, unless you are receiving some kind of an award!
As much as this list sounds fairly obvious, I can think of at least two or three times people have flouted those demands in the last five years.
It’s absolutely necessary, however, that you take action with people who behave badly. Your actions in such situations should be swift and decisive.
In order to deal with the firing of a partner, firms need to make three things clear with their partners from the beginning:
First, you are not a partner for life! There should be a clear understanding that being an owner is not a status that is guaranteed forever. It’s something that is earned every year, not just once. That statement should be made loud and clear for all the current and aspiring partners (and should be understood by the entire firm as well).
Second, there is real accountability. In a well-functioning firm, there should be a clear and transparent process for setting goals and measuring results. It should come as no surprise to a partner that he or she has not met revenue expectations or business development goals in a long time. Accountability makes all the difference between what could be an arbitrary or unfair decision to let someone go and a decision that is difficult but well-understood and accepted.
Unfortunately, many firms don’t set goals for partners; they don’t have performance evaluations for partners and they don’t even communicate to those partners messages about their personal weaknesses. As a result, when the time comes for the firm to deal with an underperforming partner, everything seems personal and arbitrary.
Finally, there is a mechanism. There should be a well-thought-out mechanism in the partnership agreement for terminating partners. Your corporate attorney can guide you to the various options, and there should be a way for the owner group to let someone go. Time and again, however, I work with firms whose only mechanism for a partner to leave is either through voluntary “retirement” or termination for cause. This can be badly insufficient to deal with someone who is underperforming but doesn’t want to leave.
Frequently, I also see agreements where an unanimous decision of all the partners is required to “fire” one of them. In some cases that means a partner would have to vote against him- or herself, which is absurd. It’s more sensible when other partners can overrule the one they are firing, though even then it may be difficult.
Realistically, I think that if some “supermajority” of the partners believe that another partner should be fired, that should be enough reason to take action. In this case, it is perhaps best that every person has one vote—the decision should not be purely based on ownership percentages.
Consider also that many times the person you want to fire is a founder. Founders sometimes have trouble adapting to larger organizations. They also sometimes have the mentality that they are allowed to do whatever they want or that not all standards apply to them. Only a tiny minority of situations get that bad. But if such a founder-partner needs to be fired, it may be difficult to do so by just voting shares (especially if the founder is a large shareholder) or by asking for a unanimous decision.
Again, if founders and partners know what is expected of them in the first place, and if they know there is a mechanism for correcting problems, those problems can be diffused. It would then come as no surprise to the founder or partner in trouble that a change is coming, and it would possibly ward off an explosion of anger or even litigation.
When a partner has to leave, there are several important issues to deal with:
The value of the partner’s ownership stake
Sometimes partners have to leave, but that doesn’t mean they don’t still co-own their firms. Their stakes have to be valued before they depart, and in some firms, there are different valuations used for the different circumstances of a person’s departure. For example, a partner who is retiring after many years of service, and as part of an orderly transition, may receive a higher valuation than someone who suddenly plans to depart next Tuesday. In certain agreements, a partner who is fired may lose not only a job—but also quite a bit of his or her investment in the firm.
This is particularly true in cases where a partner is fired for cause. This is a good question to consider: Should the other partners pay full value for the stake of a partner who just got the firm in the news because he was drunk and caused a serious car crash (this hypothetical is based on a real case). It’s a legal question that should be discussed with your attorneys, of course, but it’s also a very important culture question. What is the cost to the firm when one partner fails its values?
The value of clients
Ideally, all clients belong to a firm, but when a partner is fired he or she may have a very difficult time making a living without having anybody to work with. Depending on the circumstances, a firm may allow its partners to take some clients with them so they can begin a practice of their own. Usually that happens when the partner is leaving over productivity or relationship issues—and does not happen when there’s a firing for cause.
The partner’s job
Sometimes a partner loses a job but not ownership. Or vice versa. If the partner can keep the job, that might answer some difficult questions. The partner’s productivity might have declined but he or she has otherwise remained a professional and constructive “citizen” of the firm, perhaps one who can keep a job advising there. Perhaps the partner can accept lower compensation. Such a demotion is difficult to recover from, but not impossible.
Alternatively, if someone needs time away from the business in order to deal with personal or family issues, perhaps that partner can resign but still remain a shareholder for a time. Despite its complications, this arrangement may be a better solution than asking the person to leave entirely.
It’s a huge commitment to be a partner in a firm. One of my own former partners used to tell me, “No one can make you as successful as your partners can … but also no one can make you as miserable as your partners can!” A good partnership should be one that prepares for the possibility that it might not work out.
Sometimes people fail or we fail them, but whatever the reasons may be, separation is sometimes the only way to resolve the situation. The decision, as painful as it can be, is the only way forward.
A version of this article originally appeared in Financial Advisor Magazine.