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Accountancy Practice - one partner leaving

Accountancy Practice - one partner leaving

Our practice has three shareholders one of whom is leaving and wishes to take their client with them in return for their shares whilst also being paid the amount owed to them on their dla. I could really do with some impartial advice to help guide me on how this sort of thing should work as i'm sure ours isnt the first practice to go through this change. Thanks in advance  

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03rd Mar 2016 10:44

Advice on what?

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03rd Mar 2016 10:49

Indeed.  What do you mean by

Indeed.  What do you mean by "how this sort of thing should work"?

Do you mean the company's repayment of the balance on the departing shareholder's loan account?

Do you mean the departing shareholder's transfer of their shares to the company or the continuing shareholders?

Do you mean the firm's disengagement from one if its clients? 

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By lornag
03rd Mar 2016 12:35

Sorry I wasnt very clear

Sorry i wasnt very clear in my question, to be honest i'm feeling a bit overwhelmed with the situation and was hoping to hear either from people who have been through the process and could explain what agreement they came to between the partners or alternatively from someone who has guided other clients through the same process and could perhaps work with us too. Apart from disengaging clients which we have a simple process for already, then guidance on all of the above would be great.

We have a small practice with approx 300 clients over two branches. One partner is planning to either go it alone or join another practice. The departing partner feels he should take his clients and be repaid his DLA. He thinks the aged debt relating to his clients will be for us to chase when he is gone (many of his client pay by SO but in arrears). There are insufficient funds available to repay his current DLA balance. He want to keep his shares and remain as a director once he is gone unless we have repaid him what the company owes him. (the shareholders agreement is silent on this point)

My understanding is that we either value the company on its turnover less debt or on its balance sheet after adjusting for goodwill. In broad terms if the company has gross recurring revenue of approx £300k and his shares are 1/3 and his clients are also about 1/3 then at the top level the company could be considered to receive consideration of £100k for the clients (even though no cash will change hands) which will give rise to a corporation tax bill for the company. The partner who is leaving says that if we were to put the shares on the open market the value is only what someone is willing to pay and no one would pay anything like that so he feels the figures should be much lower - but i'm concerned about how we get it at the right value so it's fair to all concerned but HMRC dont think we are deliberately supressing it to avoid tax.

There is also the practicalities of transferring clients (should they chose to go) ie if all the physical files are at the other branch where the departing director is based, can we allow him just to keep the paper based client files (we have everything electronically too) or do we need to bring all the physical files back to this office?

I'm sure there will be other things that we have not yet even thought about so guidance on all aspects of extracting a director and his clients from a practice which will continue to trade with the remaining clients and shareholders would be appreciated.

 

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03rd Mar 2016 12:40

Is this not just a matter for negotiation between the outgoing and continuing partners?

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03rd Mar 2016 12:45

When a directors / shareholder leaves the starting point should be that they are repaid the DLA and a value for their shareholding. Anything that deviates from that is negotiation and negotiations work two ways.

Giving the partner “his” clients in return for his shares might prove to be a good way forward. Should he leave after receiving money for his shares, the likelihood is that he will poach these clients and / or they will leave your practice of their own accord to go to his new practice.

If any clients do leave, I would treat the handover as I would any other client leaving my practice. I would wish to retain hard copies of the files and provide only electronic copies. Though there really isn’t a need for hard copies in this day and age.

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03rd Mar 2016 15:12

A question

You are obviously a company, is the DLA represented by the purchase of goodwill from the partners on incorporation?

If it is just undrawn dividends etc then proved the departing shareholders percentage holding roughly equates to the same percentage in fees that he is taking, then that sounds fair. If the DLA is from the sale of  goodwill, then the answer is very different.

Regarding the debtors, these arise on work done and profits previously allocated.  It is therefore right for the existing company to collect them.  You may however restrict his DLA drawdown if you think he may collude with the clients and play silly Bs

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By birdman
03rd Mar 2016 15:06

Two separate issues here..

The share value will be based upon GRF, about £100k sounds right as per OP's clarifying message. No reason to assume this wouldn't be achievable on open market, surely? Remaining shareholders would pay this from personal funds.

If he then bought the clients from the Company this would be a similar sum, but payable to the Company.

Some clients may want to stay with the firm not the outgoing Director, I'd have thought...

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03rd Mar 2016 15:17

Yes but no!

Birdman would your answer differ if the balance sheet was

Asset - Goodwill £300k

Liability - DLA £300k

as a result of incorporation?

Mr Leaver wants to take £100k worth of GRFs and draw out £100k from his DLA.

Fair?

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By birdman
03rd Mar 2016 15:43

Yes but yes!

What I said, except that instead of paying cash for the goodwill, the outgoing Director would offset some, most or all against DLA (all in your scenario, assuming even split of the £300k).

The remaining Dirs would still need to buy the shares. 

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By JimFerd
03rd Mar 2016 16:06

Entirely agree with Cheeky.

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03rd Mar 2016 18:28

I did this!

Happy to have a chat if you want to pick my brain.  Our split was amicable and it was a smooth transition for clients.  
www.sf-accounting.co.uk if you want to contact me.

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By lornag
04th Mar 2016 12:22

Thanks :-)

Hi Caroline

A chat would be great if you can spare time. I will get in touch by email to find out when would be a good time for you to talk.

Lorna

 

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