Welcome to the second episode in our Falling out over Finances series, which focuses on Partnership Problems.
In Episode 1 ‘Shareholder Strife’, we discussed the pitfalls experienced by shareholders due to a lack of a formal shareholder agreement. We looked at how Experts can resolve deadlock scenarios by providing a forensic business valuation for the purposes of a dispute.
In our experience, a lack of formalised agreements in partnerships can lead to significant financial distress. It can also lead to a misunderstanding of what each partner is entitled to.
Partnerships form where individuals have a common goal or business interest. Shared knowledge or a prior relationship is considered to be an asset to the partnership venture.
Some partnerships arise from tradition, especially in farming partnerships and families. Parents pass their business onto their children and additional members of the family. Alternatively, individuals may join or leave the partnership as their roles within the farm change over time.
Naturally, these relationships lend themselves to trust between partners. They can dismiss the importance of a formal agreement in order to save costs. Partners, especially when related by family, think they can amicably resolve matters themselves. However, relationships inevitably break down under stress and pressure.
The partners are focused on developing their business and doing what they are best at when a partnership is new and experiencing a growth phase. They may overlook the potential implications of disputes or failures.
Solicitors may prepare simple partnership agreements upon the formation of the partnership. Some partners opt to limit the content of the agreement by omitting terms in respect of a dispute resolution process. This can be to reduce the time costs of solicitors preparing the very document designed to protect their interests.
This short term view and lack of foresight can prove costly in the long run. It is wise to instruct experienced professionals to assist in resolving a dispute at a later date.
Absence of an Agreement
In the absence of a formal agreement, partners may attempt to rely on The Partnership Act 1890. This governs the rights and duties of individuals conducting business in partnership. However, a one size fits all approach is too simplistic and does not necessarily produce a settlement for partners who cannot resolve their differences.
It can be difficult to unravel partnership structures in order to identify each partner’s interest in the partnership and to confirm the accurate balance of their capital accounts, particularly where historic information isn’t available.
Tait Walker’s forensic expertise can assist in dealing with partnership disputes. We can understand changes in partnership structure and the financial position of the partnership and its underlying trading.
A quasi partnership is a company which possesses the characteristics of a partnership, but the partnership is operated through a limited company. Quasi partnership disputes can be complex and involve a special set of considerations when valuing the business in a dispute resolution scenario. The instruction of forensic experts is essential in this case.
Forensic specialists can provide expert valuation of all partnership types. Experts look at partners’ capital interests to agree a settlement between parties or a potential exit strategy.
Our Forensic Services team deals with all aspects of Estate management and taxation, including liaising with third parties to report on personal tax implications.
Please contact our Forensic specialists on 0191 285 0321 to discuss further.
Next Week’s Episode…
Next Friday, please look out for in Episode 3 in the series, ‘Inheritance Issues’. We discuss how the death of a partner or individual may lead to disputes within an Estate if beneficiaries are unable to agree on the distribution of assets. We have been involved in Estate disputes surrounding significant land and asset ownership, which we look at in the next episode.