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The break up. By Louise Druce

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29th May 2007
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Just as many loved up couples wouldn’t dream of signing a pre-nuptial agreement before they get married, some practice partners don’t want to face up to a time in the future when the honeymoon is most definitely over and they might have to part company – leaving them wide open to the possibility of a very messy divorce.

As AccountingWEB member David Melia found out to his detriment when he faced an acrimonious business split a few years ago: “It’s easier to come to a partnership agreement when you are happy to go into it than when everybody hates each other’s guts.”

There are many reasons why businesses decide to go their separate ways. In Melia’s case, his four-partner practice hit crisis point when a new partner was brought into the fold. He claims that because the firm hadn’t set down specific responsibilities in stone and there was no real monitoring in place, he felt things were not working out just six months into the new arrangement. Lengthy meetings failed to resolve the conflict and it took nine long months before the partners called it a day. But that was just the start of the problems.

“There was no agreement in place about how the partnership would close, which clients we would take, who paid for what and so on. It fossilised because the focus was on the fighting between the partners and not on the service to the clients,” he says.

“Potentially, if we hadn’t finally got to the point where the business was able to separate then it would have been dragged down.”

Instead, Melia claims, the lack of trust that had developed meant the only thing they had to fall back on was the Partnership Act, so the partners spent many more months and thousands of pounds hammering out a dissolution settlement through their solicitors rather than face the “nuclear option” of losing everything.

Glenn Collins, head of advisory services at ACCA UK, offers his top tips on what successful partnership agreements need to contain:

  • Division of clients in batches by activity and current principle
  • Method of valuation referring to multiple or, more likely, the current average multiple
  • Method of how tangible and intangible assets will be valued. It is advisable to include details on how debtors, amounts recoverable on contracts and work in progress will be considered
  • Accounting policies and timescale for producing accounts
  • Restrictions on the principles during and after the change, including communication, marketing and notification

Making an agreement

His experiences have left Melia in no doubt that a partnership agreement set out when each party is happy be involved in the process at the start of the union makes good business sense - something echoed by Glenn Collins, head of advisory services at the Association of Chartered Certified Accountants (ACCA). “Business break up is one of the risks often not considered when setting up a business or changing a structure. But this is often the best time for the parties to consider or agree what will happen if it doesn’t work or someone just wants to leave,” he says.

The ACCA regularly run succession planning courses, which, he argues, partnership agreements should be considered part of, with many of the provisions applying to both a break up and succession.

He also refers to the Partnership Act as something “refreshingly concise” that has stood the test of time, but not as useful as a partnership agreement drawn up by the very people whose needs are the ones that have to be considered. Typically, this would cover the allocation and fair value of clients and assets, the final set of accounts and any restrictions agreed by the former partners – the most contended issues when disputes arise.

“Accountancy practices, like any provider of professional services, must ensure the internal and external pressures can be overcome. They will wish to avoid as far as possible increased administrative demands and costs, loss of value to the firm, a breakdown in communication between the firm and the clients and staff, and involving clients or staff in any dispute,” adds Collins. “It is also important to try to avoid costly legal action between the parties.”

This is just as true where a split might have been more amicable. AccountingWEB member Phil Rees, now a sole practitioner, also felt disillusioned at the way his former company was being run following a merger. After a few months he was approached by a senior partner and agreed to talk about a de-merger. The difference was he was able to shake hands on an agreed deal just a few weeks later.

“Typically, the most difficult challenge to overcome is usually the ego of one or more parties and the almost universally held belief that ‘X’ contributes less than I do and, in fact, it’s me that carries the partnership,” he says.

“Partnership agreements should include arbitration clauses to avoid all the money going to solicitors where people are too big-headed or childish to agree things.”

Like Melia, Rees has no regrets about his decision to leave. In fact, says Melia, it was the best thing that could have happened in the long-run. “If the business has died you need to bury it and move on,” he advises. “The mistake I made was that I dealt with the clients and didn’t really look at the business. If I’d monitored the business I would have spotted it a mile off. I tried to keep it on an even keel and looked at it as something that could be rescued. If it’s wrong, it’s wrong.”

Rees went on to establish his own two-partner practice but has also taken one or two lessons with him. “I’ve dealt with a lot of similar situations since and always insisted that when someone is going into a partnership or setting up a new company that they have shareholder agreements or partnership agreements,” he explains. “It might cost a few hundred pounds at the outset but it’s better than the thousands of pounds it can cost at the end.”

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By AnonymousUser
30th May 2007 12:35

Clarification

My partner is not my business partner but she does work in the business.

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By edwinsol
01st Jun 2007 18:13

Partnership Agreements
I act as a solicitor in both setting up partnerships or llp's or indeed limited companies - it is so right to get a written agreement from the outset.
I act for several accountancy practices up & down the country. I have one case where a 2 man firm tried to document their own agreement - it is incapable of being understood by them or by me, causing real problems on the retirement of one of the partners.
I have various standard documents dealing with (inter alia) the methodolgy of valuing goodwill on death, retirement etc by reference to defined GRF.
If this is of interest please see my web site - www.edwinross.com for contact details. I am away from 11th June until 20th June
Edwin Ross

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