What to do when a practice partnership goes wrong

  • The opportunities for things to go wrong in a partnership are endless
  • Resolving disagreements amicably is the key: Only lawyers win if you go to court.
  • Staff and clients should be kept away from conflicts between partners.
  • Planning ahead is crucial to a smooth hand-over.
Nicola Draper of Draper Hinks discusses why partnerships go wrong and outlines how to exit with dignity and cash.

Like marriages, accountancy partnerships can and do go wrong. Practices that start out optimistically may hit a problem when one of the partners decides to retire or dies. There can be disagreements over allocation of workloads, fees, or the amount of time taken off. You may disagree on the treatment of clients, or even on seemingly minor things like the colour scheme of the office. There can be differences of opinion on how to market the practice, which clients to target or take on, or any number of personality clashes. The opportunities for things to go wrong are endless.

While partnership agreements do much to clarify most situations, things do change and reconciling differences is as important as reconciling the books. If disagreements cannot be resolved amicably, a mediation service may be the answer. If this doesn’t work, a sale or buying out a partner may be the only option. On the whole, only lawyers win if you go to court.

Emotion versus practicalities

A partnership agreement should cover most eventualities but it doesn’t take account of the emotional toll on partners. After all, you may have dedicated much of your working life to building up your practice and the emotional effects of letting it all go, for whatever reason, should not be underestimated.

I have seen grown men near tears over sales or buy outs. Much of my job as a broker involves seeing them through this difficult time, being sympathetic and understanding, while offering practical solutions to make any sale or buy out as painless as possible. Of course, as a broker I have to be scrupulously fair to both sides but the emotional toll on the seller is often overlooked.

If you are about to retire, a feeling of being on the heap or having outgrown your usefulness is common, and even the most optimistic will feel some pain. If involved in a dispute with a partner or partners, it is easy to feel bitter and that the world is against you. Very few (even those wanting to give up and hit the golf course) sell without feeling somewhat bereft. After all, for many accountants this has been their life and a major part of their identity for so long that even if a sale, merger or other solution works well in their financial favour, they may feel more upset than they admit.

There are four main reasons that accountancy practices come up for sale:

  1. Retirement.
  2. Giving up (because you want to do something else while still active, have been offered a job you can’t refuse, or you are truly fed up with the ever increasing red tape).
  3. A dispute that can not be reconciled between partners.
  4. Ill health and death.

Keep staff and clients happy

Like a divorce, leaving a practice can be emotionally draining, even if parting is the only viable solution for yours and your partners’ sake. As with a marriage, there are always people caught in the middle. Instead of children, a partnership has its staff and clients. Whatever the reason for a sale, merger or buy out, staff and clients should be kept happy for as long as possible, and as far away as possible from any dispute or hint at an impending sale or split. You do not want good staff to start deserting the ship at the first sign of potential trouble or change.

Similarly with clients, the last thing you want is for a mass exodus if they get wind of changes too early. Clients leaving could reduce the value of your firm or your share in the firm and could affect any clawback clause. The need for confidentiality is paramount, which is why I do not advertise practices for sale – it doesn’t take a genius to work out who they are. The primary objective of any sale of all or any part of a firm is the continuation of the business and to secure a good price for it.

Plan ahead for all eventualities

You should have a written, legally binding partnership/shareholder agreement in place at the start of any partnership. This is as important as having a will and it applies to all businesses, not just accountancy practices.

Agreeing a plan with other partners will prevent all or part of the practice from being sold from a position of weakness. Partnerships or shareholders agreements should cover exit, retirement age, timescales, and what to do in the case of ill-health. It should clearly state whether there will be a goodwill payment for a partners’ share of the business and how that value will be reached. As remaining partners will rarely want to pay more than they have to, it can be worth involving an independent broker in the valuation.

The agreement may state that you have to continue for a specified hand over period. It may give the option to continue a few days a week or to act as a consultant to the existing partnership. It is likely to include clauses preventing the leaving partner from operating within a geographical distance or from poaching clients or staff. However, do remember that any partnership agreement should not lead to ‘restraint of trade’, i.e. not allowing the leaving partner to earn a living in his/her chosen profession.

There is also murky water surrounding the issue of targeted clients; i.e. those on your wish list who have not yet joined the practice. There have been several court cases where companies have tried to stop the person who has left approaching anyone on their target list. Most have failed. After all, you could just copy every telephone directory and call that your list. It may be worth putting the departing person on gardening leave for while, so they sit at home for a few months (the practice pays for this), and can’t join or become a competitor immediately, thereby giving you time to approach prospects and compile new prospect lists to which that person has no access.

If a successor has been identified within the firm, your plan should specify how long the hand-over period will be. Existing partners/shareholders may be keen to continue and take over your role, or even bring in someone new. You may feel some resentment if existing partners suddenly become excited about future plans which no longer include you, but it is important to try to emotionally distance yourself. Make your own plans instead and concentrate on those.

Your partnership agreement may state that you have a say in the choice of a successor or new partner, but you may find other partners trying to override your opinions. If your agreement states you will receive a goodwill payment and it includes a clawback clause, it is in your interest to ensure the right choice of person to replace you, so fight your corner.

If there is no partnership agreement, now is the time get one, although by mooting it to other partners you of course run the danger of alerting them to the fact you may be thinking of departing. However, without one, you are in a very vulnerable position. Unless otherwise agreed, under the Partnership Act 1890, it can take just one partner to lead to the dissolution of a partnership and the loss of a valuable asset.

Good partnership agreements and advance planning will reduce the emotional toll any such change will bring and should ensure the continuation of the practice and your future financial (and mental) health.

Article written by Nicola Draper from Draper Hinks.

To contact Nicola Draper please email her on n.draper@draperhinks.co.uk