Sale of a Partnership Interest Following the Death or Critical Illness of a Partner

by Peter Frankl

Over the past ten years of assisting small and medium sized law firms with their succession arrangements there is one scenario that has consistently proved to be the most challenging. It is when a partner dies.

I am contacted by representatives of the deceased's estate and asked to advise on the value of the partnership share and asked if there is a market to sell the share.

The usual course of my practice broking business is to sell practices outright. Provided I can sell a practice in its entirety there is a good chance that it can be sold even if it is a practice with more than one partner.

In small firms it is also common for a partner who wishes to retire to sell his or her share to someone who is currently employed in the firm. It is more challenging but still possible to find a replacement for the retiring partner from outside the firm.

However when a partner dies or suffers an illness that prevents him or her from continuing work, there are complex issues and conflicting interests that make it difficult for all parties to come to a fair and timely agreement.

The complexity is to do with issues of what is a fair value for the partnership share and what is an acceptable process for all parties to reach an agreement.

The conflicting interests usually arise from the fact that the remaining partner or partners are usually in a dominant position over the outcome of dealing with the deceased’s interest in the practice.

The death or critical illness of a partner is a difficult enough situation in itself without having to deal with these other matters. Usually the longer it takes to reach resolution, the greater the decline in the value of the deceased’s equity.

Some time ago I was introduced to another way of dealing with these circumstances. It is an arrangement known as Business Succession Insurance or Buy/Sell Insurance.

It is an insurance policy combined with a buy/sell agreement between partners. Under the arrangement, when a partner dies or becomes disabled the insurance policy is triggered and provides funds for a pre-agreed purchase/sale of the deceased’s equity.

My role in this has been to provide valuation advice prior to the partners entering into the buy/sell agreement. Working as a member of a team of specialists in this field, we can quickly and efficiently establish this type of arrangement.

The buy/sell documents have been standardised and are able to be provided at a low cost. The documentation has been drafted by a well-known mid-tier law firm. The insurance cover is provided by the insurance arm of one of the big four banks. Valuation advice can be provided by me or by a suitably qualified and experienced accountant.

If you wish to find out more about buy/sell insurance, please contact me. I can answer some further questions and introduce you to our insurance specialist team member.

Peter Frankl Tel: (02) 9328 7676 or click this email link

Disclosure of interest: Peter Frankl is the director and consultant of Peter Frankl Pty Ltd. He works with lawyers, practice managers and support staff to help them achieve their business and professional goals.  Services include accounting, training, practice broking, valuation advice and consulting. Peter Frankl Pty Ltd also publishes Legal Practice Intelligence. Peter Frankl Pty Ltd has a financial interest as an affiliate and also as a provider of valuation advice in relation to the business succession arrangement described in the above article.

© 2011 Peter Frankl