The importance of a partnership deed

A recent case had all the ingredients of the famous 'prodigal son' story except that there was no older brother and, sadly, no forgiveness.

A family farming business in Somerset appeared to be doing everything right. Dairying was booming and the business, originally started by a couple, was being successfully supported by their son. They did things by the book and, although there was a kitchen table over which many family decisions were made, the three of them took the prudent step of signing a partnership deed.

But it wasn’t all easy going, especially when the son, who had been working in the business for 16 years, decided that enough was enough. He wanted to make decisions about the business which were often at odds with the views of his parents. As he grew more experienced, he found them reluctant to relinquish control. Relationships became strained until the son wanted out, and to take his fair share.

The partnership deed determined what the value might be…or did it? Unfortunately for the parents, the deed was poorly drafted and the family ended up in Court, unable to resolve the dispute by themselves. The son argued that his share was to be valued on the basis of a full market value of the business at the time; his parents made the case that it should be at book value, without the need for an updated valuation.

The detail of the partnership deed did not adequately deal with the valuation provisions and the Court was asked to find a separate special agreement between the son and his parents. They could not.

The Court agreed with the son but with some reluctance as he would receive, in the Court’s words, 'a windfall'. The practical effect was that the parents either had to find a six figure sum to buy out the son or break up the farm.

There are all sorts of ways in which so much heartache can be avoided. Of course a properly drawn up partnership deed would help but there are many steps a family can take before referring to a written agreement.

A written document will not just record the issues upon which the parties have reached agreement. In the drafting of such a document, the parties, if getting proper advice, should expect to be taken on a journey of decisions that will be important to defining their futures. The process of drawing up the agreement is as important as the document itself so that the issues are fully considered. Once completed, the agreement can be left as a reference point if ever the family has to face fires in the future.

As was the case in Somerset, valuation provisions need to be given special care and the details confirmed as being workable. Investment in proper advice should avoid involving the Court. In a complex business, such as farming, full consideration needs to be given by experts to secure the outcomes that the people in the business want to achieve.

For more information please contact me on +44 (0)1392 685384 or email [email protected]