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Murphy’s law or law of unintended consequences

24th Jul 2014
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Whether driven by such problems as Equitable Life, the general fall in annuity rates, the global financial crisis or financial problems in the European economy, or simply the desire for and expectation of an older generation to receive a significant capital sum on retirement, goodwill is now an increasing issue of interest within the profession.

Derek Smith, a senior consultant at Foulger Underwood, recently acted as expert witness on the Wildin case. The case [Graham Michael Wildin v HMRC] was about how to calculate the goodwill value of a Gloucestershire accounting practice that was sold in 2003. Wildin and HMRC disagreed over the CGT Wildin owed after he sold shares in his firm.

In days long gone, students of accountancy paid a premium to an established practitioner to be trained as accountants. This is no longer the case with, more often than not, graduates expecting a rich reward for offering their services to firms as trainees and an even richer reward upon qualification. 

At the other end of the timeline, traditionally practising accountants expected someone to make a goodwill payment to buy into the practice and help partners to retire. Within medium and larger firms this ceased to be the approach some years ago but the practice was still retained in part by smaller firms. For some, this was established through their partnership agreements even though these were not always read (or shown!) to incoming partners. Although in some cases there was a discount applied for those who had been with the firm for some time, this was not always the case.

The recent past however has seen the emergence of a number of circumstances that were perhaps previously unforeseen or unexpected.

These include:

a. Perhaps because of the general economic situation a number of firms who had previously been ‘non-goodwill’ firms seeking to introduce (or reintroduce!) the concept

b. A number of very expensive legal disputes where retiring partners are relying upon agreements which would now be viewed as overly generous and certainly which embody goodwill values which are significantly above the market realities

c. The increasing practice of crystallising goodwill within the accounts of firms particularly those that choose to incorporate

d. A number of cases where matrimonial disputes give rise to the need to value goodwill

e. A number of firms which have recognised the need to put in place up-to-date partnership or shareholder agreements which address the goodwill issue

f. A marked increase in the interest of HMRC as to the basis of valuation which is being applied or has been applied

Having been involved in the recent past with a number of partnership and valuation disputes, I am increasingly of the view that too many firms have inadequate agreements in place. For some it is because there are no formal agreements, for some it is because the agreements which they have in place were written some time ago and the world has changed a great deal in the interim, and for others it is because they are poorly structured and worded (in though they may have been prepared in the recent past). While fully acknowledging that it may be inappropriate to generalise across the legal profession as a whole, I would want to note that the worst agreements which I have seen were either written by lawyers for their clients or were used by the lawyers themselves. Sadly their understanding of accountants and accounts can leave much to be desired.

I have also sometimes struggled to understand the expectations of partners when trying to determine the value of goodwill within their practices. At the extremes, if they are in the midst of a matrimonial dispute there is little or no value but this changes radically if they subsequently decide to retire and sell their practice, particularly if they seek to sell to others within the firm. Sadly I have been involved in trying to help a number of firms where the previous agreements with retiring partners have served only to jeopardise seriously the future viability of the firms that these erstwhile partners once cherished.

I am frequently advised by the senior or managing partners within firms that there is no real need to review their existing agreements as they are “fit for purpose”. It then becomes clear after a brief review that there is a lack of clarity as regards such matters as:

a. Capital, profit sharing arrangements and other entitlements

b. Obligations and responsibilities of partners

c. Resolutions and meetings

d. Rights of partners

e. Retirements from the partnership for whatever reason

It does rather beg the question as to exactly what purpose they are considered to be fit for. Many will apparently avoid getting the job done properly because of the cost involved. Having recently been involved in advising a four partner firm with a dispute centred upon a flawed agreement where the legal costs of resolution of the parties exceeded £200,000, the cost of getting right in the first place pales to insignificance.

As regards valuations my recent experience of dealing with alleged experts has also served only to confirm my fears that judgements based purely on cost are not normally the best and that too many people in the market claim an expertise which they clearly do not have. Sadly this also applies to the regulatory authorities who appear to use people for whom the term “expert” is a misnomer. The danger is clearly that those who the regulators are seeking to regulate are often ill equipped to deal with this potential injustice and do not have the necessary experience to demonstrate the lack of knowledge and experience of the so-called experts.

I suspect that few accountants would recommend accepting work for which they lacked the necessary knowledge and experience but all too often they seem to do so when it comes to agreements and valuations.

Derek Smith is a senior consultant at Foulger Underwood.


Replies (17)

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By carnmores
24th Jul 2014 21:08


my starting salary was £750 p.a , happy days

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By Vaughan Blake1
25th Jul 2014 09:18

£750 p.a. - Luxury! And you tell that to the kids of today....

I'll get me coat.....

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By ShirleyM
25th Jul 2014 09:28

You were the elite, carnmores, assuming we are of similar age

My starting salary working in the wages dept at NEGB was approx £350 p.a. It was far higher wage than many other businesses.

But then, those were the days before 'equality' and females were always paid less than males.

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By carnmores
26th Jul 2014 12:39

i worked for the first or one of the first wonen

to be admitted to ICAEW

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By iain.mcgregor
29th Jul 2014 08:26

I must be older than all the other commentators - I was indentured as an apprentice at the mind boggling sum of £90 pa for the first year, rising to £120 in year 2...and fined a £ for reading the paper!

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By jonsa
29th Jul 2014 11:48

First salary

I remember it well. I got £7 per week.  I was lucky the usual rate was only £6.

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By Casterbridge Hardy LLP
29th Jul 2014 11:53


I think that I may be even older than you iain.mcgregor - in 1963 my premium was £78.00.00 pence which I was repaid at the rate of £1.10.00 pence per week:  thank goodness those days have gone!

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By miketombs
29th Jul 2014 12:00

78 pounds?

What's that in guineas?

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By Tom 7000
29th Jul 2014 14:42

If your salary was less than £4000 when you started...


You should be retired by now sitting on a beach in the carribean and not worried about the goodwill in your old practice

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By stanbu
29th Jul 2014 14:51

On the beach....

I'll drink to that..... Burp....

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By tonyglasbey
29th Jul 2014 16:44


That's what I like to see: my colleagues sharing experience of serving articles, and not getting sidelined by ethereal issues like goodwill. Must be summer. :-)

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Johny Fartpants Picture
By johnny fartpants
29th Jul 2014 22:44

You were lucky!

 I had to get up in the morning at ten o'clock at night half an hour before I went to bed, drink a cup of sulphuric acid, work twenty-nine hours a day down mill, and pay mill owner for permission to come to work, and when we got home, our Dad and our mother would kill us and dance about on our graves singing Hallelujah.

And you try and tell the young people of today that ..... they won't believe you.

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Replying to sash100:
By roger65
30th Jul 2014 08:41


started 1961 3 weeks after 15th birthday £3 per week, 10/- tax/ni, £2 to mum for board, 10/- to me, which was supplemented by 8/6 pw paper round before cycling to work, which was 8 hours a day, five days a week plus Saturday morning - for sole practitioner FCCA. Highlight of the week; Friday lunchtimes - went to local chippy, two fried fish, portion chips, four rounds bread and butter, Jusoda - lovely! Later, first house - new 3-bed semi at  £3,250 etc.........................

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By carnmores
30th Jul 2014 09:58

Roger are you still at it at 70 ish?

good on you ..............

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Replying to FirstTab:
By Casterbridge Hardy LLP
30th Jul 2014 14:04


67+ and still at it - thanks to good old Equitable Life and a mendacious government,

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By AndrewV12
06th Aug 2014 09:48


Next you will be saying you had to get up half an hour before you went to bed ........

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