What Will Your Compensation Package be if You Sell Your Professional Practice to a Larger Firm?
By Jane M. Myers, Esq.
One of the biggest issues faced by the professional who has built their own business and wants to sell it to a larger firm, is how to structure their compensation arrangement.
There are many, many ways that compensation can be structured and within those scenarios, there are many variations.
Typically, compensation arrangements range from straight commission on one end of the spectrum to the other end of the spectrum where compensation is based strictly on a fixed salary.
Where compensation is based on straight commission, the professional is paid based solely on a percentage of the business they generate for the new firm; that percentage can vary based on whether it’s calculated on the “gross” dollar amount of business generated by the professional or on the “net” dollar amount realized by the firm. The “net” dollar amount is the amount left after the new firm recoups its “overhead”. The question of what a firm includes in its determination of “overhead” is important to understand since the higher the amount attributed to overhead, the less money there will be available to the professional.
In terms of determining what would be appropriate compensation for the professional, the new firm will most likely want to make sure they are not “out-of-pocket” meaning they will pay based on the revenue they can safely predict the professional will generate for them.
Here are some typical compensation arrangements that we see for seasoned, experienced “professionals.” They include a fixed salary, perhaps some variation of compensation based on business generated by the professional, PLUS more.
It’s common for a professional to be paid a salary based on their projected billable hours. Typically the firm will pay the professional 1/3 of what the professional bills the firm’s clients (adjusted by actual collections) with 1/3 retained by the firm as profit and the remaining 1/3 allocated to the firm’s “overhead.” The professional should know what the hourly rate is that the firm will be billing for their time. Multiply that rate by the number of hours the professional reasonably expects to bill, divide that number by 3 and that would be the base salary. Expect that there will be performance reviews and salary adjustments based on performance. We recommend that the professional ask to have a performance review every 6 months to avoid surprises later on.
The professional should also inquire if the new firm pays bonuses and the circumstances to qualify for a bonus.
Factor in as separate, additional compensation the value of the projects that the professional will be transferring to the new firm, if any. The professional can reasonably expect to be compensated for transferred projects and the value of the projects should be addressed separately and in addition to the salary arrangement.
We recommend that the professional discuss with the new firm additional compensation in the form of payment of a percentage of billings that the professional generates based on new work the professional brings to the firm after employment has begun. This type of compensation arrangement is quite common since it provides good incentive for business development – it allows both the employee and the firm to benefit from the results.
Some firms will pay a professional a “signing bonus” because by hiring the professional, they will acquire the professional’s “good will” (i.e. pre-existing, on-going business relationships, the professional’s reputation in the industry, unique expertise, etc.). There is no set amount for a signing bonus and whether a firm will be willing to pay it varies. The professional should check with colleagues to determine if signing bonuses are commonplace within the specific industry. If the new firm does agree to a signing bonus, expect that they may want to structure payments to be made periodically to the professional rather than in a lump sum – that protects the firm in case the professional quits or is terminated early by the firm.
Other forms of compensation include paid vacation days, personal days, sick days, participation in their 401(K) plan and whether the firm “matches” a percentage of the professional’s salary. When determining the compensation package, it’s a good idea to obtain information about the firm’s health insurance plan and the amount the professional will be expected to contribute toward the premium. Also check if the firm contributes money to a flexible spending account that can be utilized by the professional for out-of-pocket medical expenses.
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Please note that this article is intended only as a general discussion of various compensation structures that may be included in employment contracts and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, business or situation. Circumstances and the applicable legal principles vary and you should consult with an attorney before entering into any contract or agreement.