small-ropeDental accountant Susan Hutter offers some advice when ending business partnerships

When it comes to ending a long-running business partnership, with one partner retiring or moving away, there are a number of things which should be done to ensure the split goes as smoothly as possible.
It’s best to ensure that there is some planning in advance of, and also during the changeover. It is vital to have an agreement of either, partnership, members or shareholders, depending on the structure of the practice. The agreement should be drawn up when everything is operating on a ‘friendly’ basis as it is far easier to make an agreement before you have a disagreement! In this context, the mains areas that the Partnership Agreement should cover are:
•    Profit-sharing arrangements
•    Expense sharing
•    Capital contributions
•    What happens to patients if one of the principals leave?
•    What happens to the goodwill of the retiring principal?
•    Notice period

Scenarios

The exact circumstances of the retirement of the principal will have an important bearing on how the matter is handled. The two main scenarios are retiring from the profession completely, or moving on to new pastures.
In the former case one would expect that a reasonable notice period would be given and hopefully this is catered for in the agreement. This would then mean there would be time to hand over patients, ‘know how’ (where applicable), and relevant administrative information.

In the case of a principal who is leaving to either to join another practice or to set up on their own, the way this is handled will very much depend on the Agreement and the circumstances of the departure – is it on a ‘friendly’ or ‘hostile’ basis? Either way, one cannot really force patients to stay with a dentist that they do not want to be with and one has to look at this in a practical manner.

If there is no Partnership Agreement governing the terms of a retirement then it is important to behave as sensibly as possible, otherwise the issues will turn into a heated dispute and in these circumstances only the lawyers get rich!

Question of value

One of the sticking points tends to be the valuation of the practice and whether or not the outgoing partner is entitled to be paid for their goodwill. Incidentally this is also relevant if they are retiring from the profession completely as some may feel they are entitled to a pay out when they leave.

Many practices agree that on retirement, for whatever reason, the retiree would only be entitled to undrawn profits and nothing further. This is the simplest way of dealing with the situation and at least everyone knows where they are. You may be in a practice that has valuable tangible assets. If these assets have a residual market value, then there may be scope in the Agreement for them to be valued and the outgoing partner to receive a payment in lieu of their share. However, it should be borne in mind that most assets depreciate at quite an alarming rate and therefore the valuations tend to be quite paltry after a few years.


Susan Hutter s a partner at Shelley Stock Hutter. She provides specialist accounting, taxation and business advice to the dental profession. Website: www.sshllp.com