Case Studies
A Professional Lifeline To Accountants

 

It is still true to say that of all the accountancy practices in this country over half do not have a partnership agreement in place and a far fewer number have an agreement which is old and needs revamping. Remarkably, partnership disputes are relatively rare and when it comes to retirement issues there is nearly always a satisfactory outcome for both the retiree and the on-going partners. But not always.

 

John Smith was a senior equity partner in an 11 partner firm which did have an agreement in place. For a variety of reasons at the age of 58 John wished to retire earlier than the default age of 65, clear some debt and move on. Over the best part of 40 years with the firm he had trained, qualified and been made partner. He had always run his portfolio on minimising work in progress and debtors and quick turnaround, and had just got on with things. It had been an enjoyable career.

 

Accordingly he gave the required 12 months notice in writing per the Deed and set out his stall to assist his partners with client hand-over and induction of the ear-marked replacement. The Deed was very specific about his entitlements on retirement: goodwill and property were to be revalued and accounts prepared on a consistent basis with past years, all to confirm the sum due and payable on retirement date. What could be simpler? The previous retiree had gone two and a half years previously and a goodwill and property valuation made, so there were value indicators to relate to.

 

After six months there had been no discussion on handover and no indication from the managing partner of any preparation for the revaluations. A second partner (Sam) had also given notice, and then it transpired that another senior partner (Bert) had also given notice! The remaining partners had pushed on with plans to incorporate at the beginning of the next financial year, and excluded John from the discussions on the grounds that he would not be a party to the change as he would have retired. Their plans included a valuation of goodwill and a retirement pay out arrangement that was not the same as in the partnership Deed. Partnership meetings, due monthly, lapsed and there were lengthy “incorporation meetings” to which John was not invited. What was going on?

 

Another three months and still no response to John’s increasing agitation “I need to have some certainty for when I retire”. The managing partner and the other partners increasingly ignored him, he received no news about what was happening in the firm and he was not invited to meetings. With two months to go to his retirement, John was suddenly presented with a take it or leave it offer: have goodwill repaid over nine years at a figure well below the previous valuation! Bert had cut a deal to accept this, but Sam was mortified and could not accept and did not know what to do. Given that turnover and profits had held up, what was this all about? How could this progress matters? The “offer” was unacceptable to John as it failed to follow the Deed. 

 

It finally became clear that the partners had cash flow and personal borrowing pressures and insufficient funds to pay all the retirees at the same time, and this was driving their approach. John refused the “offer” but did write and agree with the other partners that property and goodwill would be professionally valued for use in the retirement settlement. However, procrastination still reigned. No reply had been received to John’s letter with only a couple of weeks left before the retirement date; and there was certainly no discussion or agreement on who the acceptable valuers would be. A lawyer’s letter before action was John’s next warning shot to the partners, but this produced an unacceptable reaction in reply (at least he had a reply!) that sought to impose retirement conditions which were outside the Deed and which echoed the partners’ proposals of three months earlier.

 

The case is now headed to court, with (at present) no timely or acceptable solution in prospect. John rejected the idea of mediation as the Deed was clear as to his entitlement, was in place and signed by the partners and was not there to be broken simply because some of the terms were inconvenient to the on-going partners. John also anticipated that his partners would not want to approach his figure and would only settle for a lower figure.

 

What are the lessons to be learned from this case? One could say “don’t trust your partners”, except trust is the essence of partnership. Perhaps the initial negative reaction received should have prompted a conciliatory solicitor’s letter being sent earlier, but in the absence of a written response from the partners it was difficult to see what more could be done. 

 

(We will keep readers informed of developments).