When drafting partner exit clauses, it can be helpful to include some flexibility in deciding the basis on which a departing partner’s final payout will be calculated.

Many LLP agreements specify that a departing partner’s final profit share will be based on a set of accounts “prepared on the same basis as the annual financial statements of the LLP”. In practice, this can cause unnecessary delays, when an altogether swifter option could achieve much the same outcome. The process involved in compiling a firm’s annual financial statements is complex and can take several weeks or even months to complete. This is because significant adjustments are often required to bring an internally generated set of accounting records to the level of accuracy required for the statutory financial statements. Such adjustments can include provisions against unbillable WIP or unrecoverable debtors, accruing future income or expenditure, and recognising potential liabilities - all of which impact on profit and, consequently, a partner’s final profit share. A partner who leaves mid-year will likely prefer not to have to wait weeks or months to receive their final profit share, residual undrawn profits and remaining unused tax reserve. To avoid this delay, an interim payout based on internal management accounts could be agreed upon, followed by a final “true-up” payment once more accurate financial statements are available. To permit this sort of flexibility, exit clauses in LLP agreements will need re-drafting.

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If you need guidance on LLP agreements or partner exits, please reach out to Claire Watkins or your usual Buzzacott contact, and we’d be happy to help.