How to make a smooth exit from your partnership

If you are a partner who is planning to leave your partnership, you will want to ensure that the departure process is as seamless as possible whilst protecting your personal interests. Whether expected by your colleagues, such as via succession planning, or unexpected, it will have an impact on the whole partnership. Consequently, the departure should be handled with careful consideration and with the benefit of legal advice to ensure a positive outcome for all.

As an outgoing partner, you can sometimes find yourself in a disadvantageous position where it can seem like it is you versus the partnership. As such, it is vital that you prepare well in advance. There are many things to consider; from repayment of your capital account to restrictions on your future trading. To avoid pitfalls and disputes, you should appoint an expert solicitor as soon as possible and discuss all the issues with them.

In this blog, we discuss what is involved in leaving a partnership, what to look out for, and why planning ahead can help lead to a smooth exit.

What happens if there is a partnership agreement in place?

If your partnership has the benefit of a written partnership agreement, this will be of great help. It is likely that the agreement will contain clauses detailing the exit process and the procedures involved, and naturally these must be followed or you will find yourself in breach of contract.

Firstly, your agreement will set out the applicable notice period and process. As this can typically be as long as 12 months, it is critical that you understand any contractual terms that will bind you during that period.

Next, the partnership agreement will also detail the process regarding the partnership accounts. Usually, the outgoing partner will be required to sign off a set of leaving accounts which will set out the financial picture of the partnership as at the date of departure. This is a vital aspect to the process, as final profit and loss figures will be recorded and tax liabilities finalised.

Further, from a monetary perspective, your partnership agreement will contain provisions relating to the repayment of your capital account. The relevant clauses will set out how these sums will be paid. For example, it may say the money is paid by way of four equal six-monthly payments over a two-year period. Naturally, you need to know this payment schedule for your own financial planning purposes.

Finally, the agreement will set out the terms of any applicable restrictive covenants. These are restrictions on your ongoing trading activities, and usually include which businesses you are restricted from being involved in and which clients, suppliers and employees you are prevented from poaching. It may be possible to negotiate these restrictions or agree lists of contacts that are ‘carved out’ from the restrictions, but that will be entirely a matter for negotiation between you and the partnership.

We will be able to analyse your partnership agreement, explain in clear terms what it requires and ensure your interests are protected.

What happens if you do not have a partnership agreement?

In the absence of a written partnership agreement, the provisions of the Partnership Act 1890 will apply. This can cause serious difficulties when a partner exits a partnership, as the Act does not provide for such a situation other than by way of partnership dissolution.

Clearly, dissolution is not usually in either party’s interests. In these circumstances, it is paramount that all the partners get together to thrash out some agreed terms of departure, and then set these out in an agreement. These terms are likely to cover the key points as set out in the section above, together with any other bespoke terms agreed between the partners.

When you are attempting to exit a partnership which does not have a partnership agreement in place, it is even more important to reach out to a trusted legal professional since the path forward will not be as clear cut, and therefore the possibility for disputes arising is heightened.

Key legal issues to look out for

Some of the key legal aspects to look out for when leaving your partnership include:

• Tax obligations – what are the tax liabilities and who is responsible for paying them? Has the partnership been setting aside funds for each partner’s individual income tax liability or have all drawings been made gross? If there is a fund set aside, is it sufficient or will there be a deficit?
• Indemnity – as an outgoing partner, you will want an indemnity from the remaining partners protecting you against any liability for future trading liabilities of the partnership.
• Restrictive covenants –this can become a central issue, particularly if you, as an outgoing partner, are looking to set up a new business in the same industry, either alone or with others.
• Press / PR statements – it is helpful if you can agree the wording for any press releases etc, so that the public relations side of the exit can be handled in a positive manner.
• Return of partnership documents and assets – as a partner you may well have in your personal possession various items belonging to the partnership and confidential documentation. It is sensible to have an agreed handover of any such items.
• Deed of retirement – this deed allows all of the agreed departure terms to be documented and made legally binding.

How we can help

Our solicitors will guide you through the entire exit process, answer your questions and handle all the legalities on your behalf. 

This will include reviewing matters at the very outset such as assessing notice requirements and drafting the relevant notice. It will also involve analysing the requirements of the partnership agreement (or devising a strategy in the absence of one), liaising with your accountant regarding any taxation matters and advising on any restrictions, and their enforceability.

Finally, our expert team will be able to draft or advise upon any relevant documentation, including the deed of retirement.

If you are thinking about leaving your partnership, for an informal conversation, please contact a legal advisor in our corporate and commercial team.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.