Legal News

And Goodwill to all partnerships....?
Tue 10th Aug 10 - 8:56

Goodwill in Partnerships

You no longer speak the same language, or share the same dreams.  Sadly, the only common vision you now share is witnessing the abrupt end of your business partnership.  But what about the goodwill?

A learned judge back in 1901 concluded that goodwill is very easy to describe but very difficult to define.  It is made up of all those intangible assets that help the business run effectively, such as its brand name, reputation, contacts, people and location.  Positive marketing activities, including customer care, sponsorship and charity involvement, all serve to strengthen goodwill.  Essentially, as the learned judge phrased it; 'it is the one thing which distinguishes an old-established business from a new business at its first start'.

The accountants fairly simply state that goodwill is the difference between the net value of the tangible assets of the business and what anyone is willing to pay for the business.  It's what the business is worth over and above the value of what it owns.

Goodwill, although not a separate entity, can attract significant value.  When a partner leaves a partnership, he or she may be entitled to a share of this value.  Some partnership agreements specifically exclude this.  The difficulty resides in realising the true value of goodwill.  It is not easy to estimate what an index file of client contacts could be worth, or how valuable your image is in generating new business.  Goodwill could be calculated as a percentage of the annual turnover, or be devised according to profit, assets, or the cost of replacing key individuals.  Whatever calculation is used, it eventually boils down to how much a buyer is prepared to pay for it.

There are specialists in valuing every type of business.  Trading businesses will have their specialist valuers and professional partnerships - solicitors, accountants, doctors, dentists, surveyors, architects etc. – also have specialist valuers.  There are specialists in valuing GP surgery premises and accountants who specialise in medical practices.

The key difference on how goodwill is valued depends on whether the aim is to allow a retiring partner to leave without dissolving the partnership or whether all the partners are selling to a third party.  Goodwill is often excluded in professional practices for retiring partners, although on third party sale it is key to realising the value the partners have built up in the business.

Ralli Partnership Law, a specialist team at Manchester solicitors Ralli, advises partnerships of all shapes and sizes and has good relationships with specialist valuers.  If you want to know more contact us at www.rallipartnershiplaw.co.uk or speak to Mark Briegal, Partner at Ralli on 0161 615 0720, mark.briegal@ralli.co.uk.