A Fair Valuation of Partnership Assets

Do you value your partnership and your respective share in the partnership assets? If so, you are encouraged to read on. 

In the recent case of Drake v Harvey & Ors [2010] EWCH 1446 (Ch), the Court held that where the partnership deed was silent as to the basis of valuation for the purposes of drawing the accounts the amount payable to an outgoing partner had to reflect a “fair value” of the partnership assets and should be based on the current value of the assets rather than an historic value. 

The facts of the case involved a partnership consisting of two parents, their son and daughter owning farming land. When the son died, a clause in the partnership agreement was activated under which the deceased partner’s share in the partnership should accrue to the remaining partners. Shortly after, the parents both suffered strokes and subsequently triggered the same clause (requiring a retirement payment to be made to the parents because of their incapacity). The partnership deed provided for an outgoing partner to be paid his share of the capital of the partnership as shown in the "last annual general account prior to his retirement death bankruptcy or becoming a patient". 

A dispute arose as to whether the book value or the market value of the land should be used in the accounts for the purposes of determining the sums due to the parents and the son’s estate. There was a considerable difference in price between the book value and the market value, in particular of the land (£2.5million). 

The Court determined that the accounts to which the outgoing partners or their estates were entitled were accounts which reflected a fair value: and the fair value in this case was the market value of the land. 

The case confirms the need for a partnership agreement to cover the basis of valuation in any exit provisions. Disputes will inevitably head straight to the court room where there is no certainty of terms. Getting the contract right (with appropriate terms) in the first place will avoid the unnecessary expense of having the matter determined by the Courts.

In the non-farming business it is also important to consider the value of the goodwill and/or the intellectual property rights to be included within any valuation of your partnership.