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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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?
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.
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
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...
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?
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.
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.