A partner exit settlement is calculated by valuing the company at a fixed date, then adjusting for the partner's current account, prior drawings and outstanding loans. The valuation must capture retained earnings, goodwill and hidden liabilities. Where a partnership agreement exists, it governs the method. Abdelhamid & Co (MOE LC0106-01, FTA TAN 30003958) performs this valuation.
Book value versus market value
Book value is net assets as shown in the balance sheet: assets less liabilities. It measures historical cost adjusted for depreciation, not the current value of the assets.
Market value is the amount a willing buyer would pay a willing seller in an arm's length transaction. The gap between the two arises from three sources:
- Fixed assets, particularly real estate, carried at a historical cost fixed years earlier.
- Intangible assets never recorded in the books, such as the customer base and the trade name.
- The company's capacity to generate future earnings, which is the basis of the discounted cash flow method.
Relying on book value alone therefore understates the exiting partner's entitlement in a profitable company and overstates it in a loss-making one.
Retained earnings, partner loans and prior drawings
Retained earnings represent a subsisting entitlement in proportion to the partner's share. The exiting partner claims his portion up to the exit date, net of the tax liability attaching to it.
Three accounts are settled before the net entitlement is fixed:
- Partner current account balance: added where credit, deducted where debit.
- Loans granted by the company to the partner: deducted at their full outstanding balance with any agreed interest.
- Prior drawings against profit: deducted from his share of retained earnings so the same amount is not counted twice.
Request these statements for the entire duration of the partnership, because brought-forward balances carry movements from earlier years.
Hidden liabilities that reduce the exiting partner's entitlement
Test liabilities not visible on the balance sheet before fixing net assets. The review covers:
- End-of-service gratuity accrued under Federal Decree-Law No. 33 of 2021 on Labour Relations.
- Accrued leave and allowances not yet paid.
- Corporate Tax and VAT liabilities for unsettled periods.
- Administrative or tax penalties assessed but not recorded.
- Guarantees issued in favour of third parties.
- Pending litigation with counsel's assessment of the loss probability and the amount claimed.
Valuing inventory and goodwill
IAS 2 measures inventory at the lower of cost and net realisable value. Request a physical count at the valuation date, test ageing by line item, and identify obsolete and slow-moving stock.
Goodwill arises where the company earns returns above the normal return on its assets. It is measured by one of two methods:
- Earnings multiple: normalised earnings multiplied by a factor drawn from comparable transactions in the same sector.
- Discounted cash flow: expected cash flows discounted at a rate reflecting the risk of the business.
Reported profit is normalised before valuation by removing owner salary above market level, personal expenses, and non-recurring items.
Tax effects on the settlement
The company pays Corporate Tax at 9% on taxable income above AED 375,000. The liability accrued to the exit date must be computed and deducted before net assets are fixed.
Review the company's position with the Federal Tax Authority for periods still open. The exiting partner carries his share of any tax liability arising during his time as partner, even if it surfaces after he leaves.
Settlement agreements address this in one of two ways: holding back part of the payment until the tax limitation period expires, or a mutual indemnity between the exiting partner and those remaining.
The valuation date and its effect on the outcome
The valuation date fixes the numbers the calculation rests on. It is a recurring source of disagreement, because each side prefers the date that favours its position.
Practice uses four candidate dates:
- The date the partner gave notice of his intention to exit.
- The date of the last audited financial statements before exit.
- The month end or quarter end in which the exit occurred.
- The date of judgment or settlement agreement where a dispute exists.
A clause in the partnership agreement resolves this in advance. Where no clause exists, the court fixes the date or refers it to the appointed expert.
Key facts on a partner exit settlement
| Item | Treatment |
|---|---|
| Book value | Net assets at historical cost less depreciation |
| Retained earnings | Added at share percentage, net of tax |
| Partner current account | Added if credit, deducted if debit |
| Goodwill | Normalised earnings multiple or discounted cash flow |
| End-of-service gratuity | Deducted under Federal Decree-Law No. 33 of 2021 |
| Corporate Tax | 9% on taxable income above AED 375,000 |
| Legal basis | Federal Decree-Law No. 32 of 2021 and the memorandum of association |
Our methodology for a partner exit settlement
We perform five sequenced steps:
- Step 1: Read the memorandum of association and partnership agreement and identify the valuation method and date prescribed.
- Step 2: Prepare financial statements at the valuation date, with a physical inventory count and independent bank and receivable confirmations.
- Step 3: Normalise reported earnings by removing non-recurring items and owner costs.
- Step 4: Value the company by at least two methods and schedule hidden liabilities and tax exposure for open periods.
- Step 5: Issue a settlement statement showing the partner's share of value, plus his credit balance, less loans and drawings.
Why the partnership agreement matters before a dispute arises
A partnership agreement resolves most points of disagreement before they occur. A well-drafted agreement covers:
- The valuation method adopted, and whether it includes goodwill.
- The valuation date and how it is determined.
- How the valuer is appointed and what happens if the parties disagree.
- Payment period, number of instalments and security provided.
- Pre-emption rights for the remaining partners.
- Restrictions on the exiting partner competing with the business.
Common mistakes in settling an exiting partner's entitlement
- Relying on book value alone, which ignores property held at old cost and unrecorded goodwill.
- Overlooking the partner current account, which can mean paying out to a partner who owes the company money.
- Ignoring tax exposure for open periods, which shifts the whole burden onto the remaining partners.
- Agreeing a figure without a detailed settlement statement, which leaves its components open to later dispute.
- Valuing by a single method, which weakens the report before a court-appointed expert.
Why choose Abdelhamid & Co
- Licensed by the Ministry of Economy under registration LC0106-01 and entered in the Local Auditors Record under No. 956.
- Registered FTA Tax Agent (TAN 30003958, TAAN 20033908).
- Valuation and tax review combined, preventing a tax liability from surfacing after settlement.
- Experience preparing expert reports for UAE courts and judicial expert committees.
- A detailed settlement statement linking every item to its supporting document and journal entry.
Frequently Asked Questions
Which method governs a partner exit settlement?
The partnership agreement or memorandum of association where a clause exists. Where none exists, the valuer applies at least two methods: adjusted net assets, and either a normalised earnings multiple or discounted cash flow.
Does goodwill form part of a partner exit settlement?
It does where the agreement provides for it, or where the company earns returns above the normal return on its assets. It is usually excluded in businesses that depend on the exiting partner's personal relationships.
Who pays the valuer's fees?
The partnership agreement determines this. Common practice splits fees equally between the exiting partner and those remaining. The company bears the cost where the court orders the appointment of an expert.
Can an exiting partner claim undistributed profits from earlier years?
Yes. Retained earnings remain a subsisting entitlement in proportion to his share up to the exit date. Amounts already drawn against them are deducted, as is the tax liability attaching to them.
How long does valuation and settlement take?
Three to six weeks for a small or medium company. Real estate requiring an independent property valuation, a dispute over the valuation date, or delayed document delivery all extend the timeline.
What happens if the remaining partners reject the valuation?
The parties follow the mechanism in the agreement, such as appointing a third determining valuer. Where no clause exists, the exiting partner files a claim and the court appoints an accounting expert to revalue.
Related Services
- Business Valuation — valuing the company or a stake at a fixed date.
- Forensic Audit — Fraud & Commercial Disputes — expert reports where the exit becomes a dispute.
- External Audit Service — auditing financial statements at the valuation date.
- Corporate Tax Compliance Review — testing exposure for open periods.
- Insights — more guidance on valuation and disputes.
Contact Us
To value your stake or settle a partner exit, call Abdelhamid & Co in Sharjah on 00971065610040 or visit our contact page.
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