Admitting a new partner to your business
When admitting a new partner to your partnership, there are a number of important considerations and steps that you need to take.
First, ask yourself whether the proposed candidate is partnership material?
To run a successful business, it is important that your partnership is made up of people who trust and respect each other, who have a shared vision as to where the business is heading, strong commercial skills and something of value to contribute. The existing partners need to consider carefully whether the prospective new partner is a good fit for your business and what it is that they will be able to bring to the table.
It is also important that your prospective candidate is ready to assume the responsibilities that come with being a partner and to withstand the pressures that they will face. Do they already have appropriate experience? Alternatively, would they benefit from a period of training, coaching or mentoring?
Then, consider whether your existing partnership agreement is still fit for purpose?
If you have not looked at your partnership agreement since the original partnership was formed, then the process of admitting a new partner should prompt a review. Your business will have evolved since it was first established, and it is important that your agreement keeps pace with developments. This is particularly true where you have made tweaks to the way in which your business is managed; if you have acquired or moved to new premises; or if there have been changes to your profit-sharing arrangements.
There may also have been legal and regulatory changes introduced since the agreement was first signed and a thorough review will flag these up and allow for any necessary updating to be undertaken.
Will the new partner be making a capital contribution?
If the new partner will be expected to introduce capital into the business, you need to think about how and when that capital is going to be paid. For example, do you expect to receive a one-off payment upon the new partner’s admission? If not, are you happy to receive several payments over a fixed period of time? The payments could come from private funds, a business loan or by the new partner taking reduced drawings until the contribution has been made.
If it is envisaged that a loan will be taken, discussions will be required regarding whether the partnership is expected to provide any sort of security. The terms of the loan will also need to be scrutinised to make sure that any provisions that impact the partnership are acceptable.
Profit sharing arrangements
It will be crucial to agree what the new partner’s share of profits will be. For example, is the practice in your business to pay all partners a notional salary first and then treat whatever funds are left over as the profit potentially available for distribution, or do you take an altogether different approach? Are available profits split equally between the partners or allocated based on an agreed ratio? If so, is this ratio fixed or subject to variation?
Rights and responsibilities
There should be clarity about the duties that the new partner will assume and about the rights and responsibilities that go with their role. Agreeing at the outset what you expect from the new partner, and what they in turn can expect from you, could save a lot of time and trouble further down the line, especially if a disagreement arises.
It is particularly important that you address the degree of authority that the new partner will have, the management functions that they will be expected to assume, the extent to which they will be managed and have their performance reviewed, and the mechanisms in place to pull them up should they be found to be falling short.
In particular, you all need to be clear about the extent of control that the new partner will be able to exercise, and about how voting rights will be organised regarding day-to-day operational matters and, more importantly, key business decisions.
Documentation of the new partner’s appointment
When admitting a new partner, you should document their appointment, either in a newly drawn partnership agreement or in a deed of admission that sits alongside the existing partnership agreement.
Notify relevant parties and organisations
It is important that people are made aware that a new partner has been appointed. Among the many organisations that should be given formal notification are your bank, HMRC, your professional advisers and the partnership’s insurers. It is also sensible and courteous to let key customers, suppliers and service providers know.
For advice and support in dealing with admitting a new partner, please contact Clare Richards on 01473 611211.
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.
Clare Richards is a partner and corporate law specialist in the business services department at Barker Gotelee Solicitors in Ipswich.