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Building and growing a partnership can be a great experience. In contrast to many limited liability companies, partnerships involve multiple owners making critical decisions and driving the business forward. Accordingly, agreeing on suitable conditions for sale can sometimes prove more difficult because of the need to satisfy various partners. This article will explore some essential legal considerations before you sell your UK partnership. Considering these factors should help you and your business partners achieve an advantageous sale arrangement for a reasonable price.
1. Ensuring Full Agreement Between Partners
The first step in any prospective partnership is for the partners to agree on a suitable sale price.
Asking multiple individuals to agree on a sum of money is always challenging, and it is the same between business partners. Most partnerships of a decent size (i.e. with three partners or more) will likely contain various perspectives and personalities. Furthermore, the larger the partnership, the greater the risk that some partners may not even want to sell.
The usual step is to arrange a partnership meeting and discuss a proposal to sell up. Partnership meetings are formal meetings in compliance with the Partnership Act and the terms of any partnership agreement. As with all formal partnership meetings, you should record any positive comments or objections within the meeting minutes.
2. Ensuring a Fair Business Valuation
Once the relevant partners have decided to sell the business partnership, the next step is calculating a suitable sale price.
There are three main ways of valuing a UK-based partnership, which include:
1. Asset Valuation Method
This method values a partnership’s physical assets (including vehicles, machinery and stock) alongside non-physical assets (such as copyright, goodwill and Intellectual Property). Naturally, there is little point in using this method if your partnership has few assets.
2. Income Valuation Method
This calculates a reasonable purchase price by considering current sale figures and potential future profit margins. You will likely want to use this valuation method if your partnership has positive projections as to future income and profit.
3. Market Value Approach
This valuation approach involves a comparison of your partnership against other similar businesses in the same industry and geographical area. Suppose you run a dental partnership. The method will likely involve a comparison against similar size dentists in the same region.
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3. Partnership Assets and Property Included in the Sale
Prospective partnership purchases are motivated by various reasons, some of which may include the following:
- the partnership having a large customer following;
- wishing to benefit from the partnership’s large customer following;
- the positive local goodwill for the general partnership;
- the partnership has valuable assets; and
- high projections of future profit.
Naturally, it is essential to ensure that any sale negotiations (and written agreements) are transparent on which parts of the partnership will be sold (and any parts which will not).
You should contain these decisions within a partnership sale and purchase agreement.
LegalVision’s Buying a Business: Guide to Negotiating Terms allows you to protect yourself by understanding which key terms to negotiate when buying a business.
4. Will Any Partners Become Employees or Act as Rivals?
Contrary to popular belief, some partners are also employees within the partnership. However, many partners act in a role more similar to Director than a standard employee.
Nevertheless, it is common for some partners to wish to assist the partnership even following its sale. The partners should discuss this before finalising the sale.
It is certainly worth knowing that the sale of a partnership does not automatically preclude the selling partners from assisting a limited liability partnership going forward. In fact, some purchasers would prefer this to the individual partners getting bored and starting up in competition.
Key Takeaways
Partnership sales usually involve a lot of legal hurdles. Even if the partners agree on selling the partnership and a suitable valuation method, negotiating sale terms can be challenging and lengthy. Due to this, it is common for partnerships to obtain expert legal advice to get sales across the line.
If you need help negotiating and documenting the sale of your UK partnership, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Partnership sales can prove convoluted because the remaining partners can query and express different opinions on the sale price and conditions of sale. Whilst it is common for an entire business to have one business owner, partnerships must, by their very nature, have multiple owners.
The shares held within a partnership are usually detailed within a partnership agreement (otherwise known as a partnership contract). This document should clearly state the percentage share of each partner.
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