Partnerships are traditionally funded by partners’ fixed capital and standard debt funding, both from term loans for specific purposes and from working capital facilities to cover the time taken to convert WIP to debt to cash.
There is no set level of capital that partners put in – it depends on the size, nature and risk profile of the business. The gearing ratio, the ratio of debt capital to equity capital, will be different for every practice, but as a guide, debt providers will look at a maximum of 1:1. However, in recessionary times, as seen in domestic mortgage lending, funders will frequently want to be less exposed than owners.
In order to get a better measure of the total funding required, we recommend every practice to have a meaningful balance sheet. It need only be a simple approach, but should cover recording a fair value for all assets, including a realistic valuation of WIP and accrued income. A goodwill valuation is seen more often these days but needs careful handling. We often recommend that such large capital items as cars and to an extent property are kept outside of the business partnership, but again, this will depend on individual circumstances. Be aware that there are tax implications attached to many of these suggestions, so detailed advice should be sought.