70% of solicitors don’t have a partnership agreement

I am seeing an increasing number of firms throughout the country approach me for advice in partnership disputes, that can only be put down to being triggered by the economy.

Partnership disputes may occur at any time, but the likelihood of this happening is heightened when firms are struggling. We have been involved in a number of situations where partners’ interests in a practice have needed to be valued. The valuations expected by either side of the dispute are often far apart.

On each of these occasions, had an adequate partnership agreement been in place, there would have been little difficulty in determining the appropriate course of action.

I am also approached on a regular basis for advice on the terms for partner retirements. Similar considerations are required in these cases to partnership disputes but extra care needs to be taken as often any agreement reached is seen as a precedent for future retirements.

Some of the key issues include:
- goodwill valuation
- consultancy terms
- ongoing expense payments

In recent years, following the introduction of UITF40, the argument of whether to pay goodwill to retiring partners has changed, as have the factors to take into account in determining the value of goodwill, if any is to be paid at all.

The main concern in finding an appropriate solution is always to ensure that the continuing practice is allowed to prosper and that succession is not hindered.  Partnership disputes should not be allowed to impact on staff within the practice. If dealt with correctly, the impact on the firm itself can be minimised, but it will always take time to resolve the dispute.

This time, especially in the current operating conditions, could obviously be better employed and it is easy to take your eye off the ball when disputes occur.

If a dispute does arise, the partners should try in the first instance to find a solution from within. If it does not prove possible to reconcile the differences internally, it is a good idea to bring in experienced specialists to help at an early stage before the differences become too acrimonious. 

Accountants experienced in advising solicitors and/or qualified mediators are ideally placed to help. The further any dispute is allowed to drag on, the higher the chances of the differences becoming irreconcilable, and the impact on the practice may become too great.

Without a suitable partnership agreement, it is very difficult to enforce an adequate solution without dissolving the practice, as the fall-back Partnership Act 1890 is extremely cumbersome. In my experience, up to 70% of solicitors’ practices do not have an up-to-date partnership agreement. This is fairly surprising given the fact that solicitors would not advise their clients to go into partnership without one. In the good times, not having such an agreement is fine, but you never know what is round the corner.

If you require any assistance with partnership disputes or retirements, please contact Andy Poole at andy.poole@armstrongwatson.co.uk.

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