ADMISSION OF A NEW PARTNER.
I am in the process of joining an old colleague as a Partner in his audit firm where he has been operating as a Sole practioner. In the process of this exercise, he has raised two issues: (a) The preparation of a State of Affairs where the resulting excess assets over liabilities are supposed to be paid to him as Partner’s interest in the old firm and, (b) Goodwill.
Item (a) looked a little more straight forward with some reservations but for the sake of the future, I decided to go along. The reservations stem from the fact that my colleague never prepared any accounts for the firm so there is nothing in the form of hard facts to go by to prudently judge the real standing of the practice. Secondly, any suggestions of us preparing the accounts for at least the last 3 to 4 years (the pertinent records are available) seem unwelcome.
The main issue, however, is that of finding an acceptable method of calculating (b) Goodwill to compensate him. The absence of past accounts has not helped matters. My view was that we use past performance as a starting point in valuing what he is foregoing by my admission. My colleague wants us to calculate Goodwill using a percentage of the value (fees charged) of each client in the old practice which we should multiply by an agreed number of years and pay him that as his compensation. This is something I have never heard of. One of responsibilities of a partner in operating a practice is to obtain clients. So how can you again isolate this by demanding to be paid separately ! It is like hiring a Head of Finance in an organization and he turns around and says that he/she wants a commission when the audited accounts are not qualified.
Please kindly advise on the rationality of the method proposed by my colleague and assist to advise on the best method of valuing Goodwill or the prevalent practice in the professional world for admission of Partners.
Thank You for your consideration and attention.
David Nyende, Kampala, Uganda