Business valuation for partnership dissolution
When a partnership dissolves, the business, its assets and each partner’s capital position all need to be established independently. The partnership agreement, if there is one, sets the basis — and where there is none, the Partnership Act and the parties’ conduct fill the gap.
Dissolutions are rarely clean. Partners have usually drawn unevenly, contributed assets informally, and run personal costs through the business for years. Untangling that is most of the work, and it has to be done before anyone can argue about the multiple.
The brief
Who reads it, and what it has to satisfy
The purpose sets the standard of value, the level of documentation and the person the report has to convince. Getting that wrong is the most common reason a valuation is rejected.
Both partners and their lawyers, and the court where the dissolution is litigated.
Fair market value, or whatever basis the partnership agreement prescribes.
The date of dissolution or the date specified in the agreement or the court’s directions.
What the report must contain for this purpose
- The partnership agreement’s provisions, quoted and applied
- Each partner’s capital account position, reconstructed where necessary
- Drawings and contributions, identified and treated consistently
- Personal versus partnership goodwill, addressed on the evidence
- Assets contributed informally, identified and attributed
- The valuer’s independence from both partners, stated
Sequence
How a dissolution valuation runs
The financial reconstruction usually takes longer than the valuation itself, and it is where the disagreements actually live.
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01
Read the agreement, or establish there is none
What it says about dissolution, valuation, goodwill and restraints. Many partnerships operate for years without one, which changes the analysis rather than ending it.
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02
Reconstruct the capital accounts
Contributions, drawings, loans and profit shares across the life of the partnership. This is frequently the first time anyone has done it properly.
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03
Value the business and the assets
The trading business, work in progress, equipment, property and any interests contributed by individual partners.
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04
Address goodwill and restraints
How much of the goodwill is personal to each partner, whether a restraint applies, and what each partner would take with them.
Where it goes wrong
What makes dissolutions expensive
The valuation issues are usually secondary to the record-keeping ones.
The value of an early valuation date
The longer a dissolution runs without an agreed valuation date, the more the parties argue about events after it. Fixing the date early — by agreement or by direction — narrows the dispute to the number itself, which is far cheaper to resolve.
- No written agreement Without one, the default statutory position applies and it is frequently not what either partner expected — particularly on notice, goodwill and the right to continue the business.
- Unreconciled capital accounts Years of uneven drawings, informal loans and unrecorded contributions have to be reconstructed before the split can be calculated. It is slow and it is contested.
- Assuming goodwill splits evenly Where one partner holds most of the client relationships, an even split of goodwill value transfers real value from one party to the other.
- Work in progress ignored In professional and construction partnerships, unbilled WIP is a substantial asset and one partner is usually better placed to bill it than the other.
- Continuing to trade without terms Where one partner keeps operating during the dispute, the value being divided keeps moving. An agreed valuation date early is worth a great deal.
What we need
Documents for this engagement
The financial records are the battleground. Everything below is usually needed, and gaps are documented rather than assumed.
Open the standard checklist →- Partnership agreement Or evidence of the terms actually operating between the partners
- Financial statements — five years Including partner current and capital accounts
- Drawings and contributions history Across the life of the partnership where records permit
- Work in progress and debtors Aged, with billing prospects assessed
- Asset register and ownership Including assets contributed personally by either partner
- Client and referral analysis Who introduced and who services each relationship
The Partnership Act of the relevant state and the parties’ conduct supply the terms. In practice that usually means an equal split of profits and assets unless the evidence shows otherwise, dissolution on notice, and a right to have the assets realised and accounts taken. It is a workable position but rarely the one either partner assumed, which is why the valuation has to address contributions and conduct rather than just the business value.
On the evidence, not by convention. Where clients deal with the partnership and would remain regardless of which partner continued, the goodwill is partnership property. Where a partner personally holds the relationships and would take them, that portion is personal. The report sets out which is which and why, because it is usually the largest contested item.
Yes, on a joint appointment, and it is usually the cheaper and faster course. We are appointed by both parties on agreed instructions, both receive the same report, and our independence from each is stated. Where one party prefers their own expert, we also accept single-party and shadow expert appointments.
It is valued as an asset of the partnership, aged and assessed for realisability. In professional practices WIP is often one of the larger items on the balance sheet and one of the most contested, because the partner continuing the practice is usually the one able to bill it.
Yes. Post-dissolution trading using partnership assets, clients or name raises questions of account that go beyond valuation, and your lawyers will advise on them. From a valuation perspective, it makes fixing an early valuation date considerably more important.
Reviewed by a Certified Practising Valuer
Reviewed by Jarrad Khoury, Director and Head of Valuations — Registered Valuer (QLD, Not Limited), Licensed Valuer (WA, Not Limited), CPV and CBV. Published by Business Valuations Brisbane, the business valuation division of Asset Valuations Group.
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