Reviewing the partnership agreement

The first step is to revisit the existing partnership agreement. It’s essential to confirm that the agreement clearly outlines how profits and loss sharing ratios are apportioned, what capital contributions are expected, how drawings are managed, and what provisions exist for partner exits. Consider if there are any updates are needed before proceeding.

Determining capital contributions and valuation

A key financial consideration is the capital contribution required from the incoming partner. This figure should reflect the value of the business and the share being offered. Planning how to use the new capital strategically — whether for expansion, technology upgrades, talent acquisition, investment in new services, or to improve cash flow — can help maximise the benefits of the partnership’s growth.

Understanding the value of the partnership and the working capital requirements can help determine what the capital contributions should be. Considerations include structuring the capital contribution in a way that works for both the firm and the new partner, for example a lump sum payment or a staged approach, depending on the circumstances.

Financial and tax considerations

Introducing a new partner has wide-reaching financial implications.

From a tax perspective, profits are typically taxed as personal income, so you may want to consider tax-efficient ways to extract profits. We can provide tailored advice to help optimise profit extraction.

Establishing a clear drawings policy helps manage expectations and ensures fairness among partners, if taken too early or in excess, they can create cash flow pressures.

Financial modelling, budgeting and cashflow forecasting can be invaluable to assess the impact of different profit-sharing structures and capital requirements, ensuring that any changes are sustainable and equitable for all partners whilst compatible for the partnership as a whole.

Once the new partner is on board, regular reviews of the partnership’s key performance indicators (KPIs) to monitor the progress and growth of both the partnership and new partner, is recommended.

Other considerations

For law firms, regulatory compliance is a critical part of the process. The Solicitors Regulation Authority (SRA) has specific requirements for approving new managers, owners, and compliance officers. Firms must notify the SRA of any changes and ensure that the new partner is formally approved. Additionally, the firm’s professional indemnity insurance should be reviewed and updated to include the new partner.

Beyond the financials, adding a new partner can affect the firm’s operations. Compliance roles such as the Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA) may need to be reassigned or updated. It’s also important to ensure the new partner understands their responsibilities and is aligned with the firm’s strategic goals.

Appointing new partners is a complex process that touches every part of the business from legal and regulatory compliance to financial planning and cultural fit. It’s not a step to take lightly, and seeking professional advice for your own circumstances is essential.

Our specialist team is here to support you through every stage of the process. Whether you need help with financial modelling, tax planning, partnership valuation, regulatory compliance, or strategic integration, we’re ready to guide you. If you would like further information or advice with expanding your partnership, please reach out to our team of professional services experts today.