Partner leaves law firm

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Gannons advised a partner leaving a law firm. This involved negotiating a fair price for his company share, and resisting attempts by the remaining partners to undermine the potential value of our client’s share.

Our client was the head of a department at the law firm. The partnership had enjoyed year on year profit, but the previous year had been weaker than other years. The firm was still profitable during the current year though. Despite this, the partners had collectively decided our client’s department was no longer profitable. Our client accepted that he would leave the partnership. The resolution of the issue depended on the value placed on his partnership share. We advised our client not to resign until the value was agreed, and commenced the negotiation process with the law firm.

Problematic partnership deed

The partnership deed was very old and frustrated the six on-going partners. It lacked many provisions typically found in modern, well-drafted partnership agreements. This meant it was silent on how partners could be removed from the partnership. It contained no clause dealing with how capital would be returned for when a partner left, and so we had to build that aspect of the process from scratch.

A particularly frustrating aspect of the deed was that these six partners could not easily force our client to leave without dissolving the partnership. This was not a commercially attractive course of action.

Law firm valuation

Our first challenge was to propose a method of valuing our client’s minority equity share upon which everyone could agree. The remaining partners engaged a specialist to advise them and negotiate on their behalf.

Business share valuation

Our method of valuing the law firm took multiple factors into account. Firstly we reviewed the profits of the firm, and averaged them out over the course of many years in order the dilute the impact of the poorer year. We then looked at the income from recurring fees the firm was receiving. We also factored in recent cost-cutting measures the business had implemented (further outlining how cost-cutting could be exercised in the future), as well as the net margins of comparable law firms. Finally we looked at goodwill.

Goodwill

Goodwill was the most valuable asset simultaneous being the most difficult asset to value, as it was not apparent on the balance sheet.

We valued goodwill based on gross fees received, to which a multiplier was applied. The multiplier figure caused considerable negotiation. In effect, this figure dictated a large proportion of our client’s share value.

Negligence allegations

In these cases, as is a fairly common occurrence, the ongoing partners attempted to undermine our client by raising allegations of negligence. The ongoing partners attempted to attribute bad business decisions that were taken by the whole partnership to our client personally.

Defence against allegations

Having seen such tactics before, we were able to deal with the allegations robustly. Our past experience enabled us to advise our client, that whilst stressful, such allegations must be ignored. We pointed out that since his employer had not previously raised these allegations, they were unfounded. Thanks to our advice on the matter, our client did not feel compelled to resign before concluding the share value negotiations.

Outcome

After a long period of negotiation, we achieved a capital payment for our client worth four times his average annual earnings. As this was a capital payment, only a 10 rate of capital gains tax was applied to it. In addition to the lump sum payment, our client received full drawings for the period of negotiation.

New legal partnership

Our client secured a position with a new partnership. He asked us to review the LLP agreement. The new business was structured as an alternative business structure and regulated by the Solicitors Regulation Authority.

We took our client through the obligations he would inherit and drew his attention to the risks he was taking on. This knowledge empowered our client to negotiate better terms right from the start of the new relationship.

  • Gannons worked really hard to secure me a favourable position in the negotiations, following all of the excellent groundwork they laid during the valuation process.