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Valuing premises shares

Q: Our partnership has an agreement that covers what happens to a partner's premises share if they die, retire or are expelled. The continuing partners must buy out that partner's share at 20 times the annual share of notional rent, or for another amount that is agreed by all parties. One partner wishes to sell their share while continuing at the practice. How would you advise us to proceed?

A: When the original agreement was signed our formula seemed a fair gauge of value but, in today's economic climate it seems pretty high and does not reflect actual value.

Your formula is a very haphazard method as the notional rent should first be netted down to remove the premises repair element. Then the multiple will vary depending on the type of property and the state of the market (in turn affected by the country's economic state).

A multiple of 20 would show a net initial yield of 4.73 per cent and much lower than is really sustainable in the market. Over the past three years the range has been about 5 to 7 per cent.

At present, with adopting your approach there is serious danger of being regarded as including an element of goodwill in the value. This is prohibited under NHS terms.

The fair way for partners, whether or not they are leaving, is to adopt the fair market valuation. The GPC recommends a market valuation should be obtained that has regard to the level of notional rent but excluding any element of goodwill.

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