A client of yours is forming a partnership and has asked you to review a draft of the partnership agreement. In particular, the client is interested in your thoughts regarding the section dealing with the withdrawal of a partner. Your client also anticipates that on an ongoing basis individual partners will draw significant funds out of the partnership after the fiscal year-end. These withdrawals will be based on a percentage of production fees generated by each of the partners. Selected excerpts from that section are as follows:
A withdrawing partner must notify the partnership of his/her intent to withdraw by registered mail. The partnership has the first right to acquire the withdrawing partner’s interest in the partnership and must Exercise its right within 60 days. If the partnership is not interested in acquiring the withdrawing partner’s interest, then the interest may be sold to an individual partner or another individual. However, any sale to another individual requires the approval of the existing partners. If the partnership Exercises its right to acquire the withdrawing partner’s interest, consideration paid for the interest will be equal to 60% of the partner’s interest in the capital of the partnership as of the end of the fiscal quarter preceding notification to withdraw. Capital balances will be measured in conformity with generally accepted accounting principles. The consideration due will be paid to the withdrawing partner as follows: one-third upon withdrawal and the balance to be paid in equal installments over the next 24 months.
Required
Prepare a memo to your client that communicates your thoughts regarding the agreement.