Gupta, Sharma and Khandelwal are partners in a firm engaged in trading activities. They share profits and losses in the ratio of 2:2:1 respectively.…

Important steps involved in conducting the investigation by Mr. Ankit on behalf of Mr. Jain, the incoming partner are the following: Ascertainment of the history of the inception and growth of the firm.Study of the provisions of the deed of partnership, particularly for composition of partners, their capital contribution, drawing rights, retirement benefits, job allocation, financial management, goodwill, etc.Scrutiny of the record of profitability of the firm's business over a suitable number of years, with usual adjustments that are necessary in ascertaining the true record of business profits. Particular attention should, however, be paid to the nature of partners' remuneration, which may be excessive or inadequate in relation to the nature and profitability of the business, qualification and expertise of the partners and such other factors as may be relevant.Examination of the asset and liability position to determine the tangible asset backing for the partner's investment, appraisal of the value of intangibles like goodwill, know how, patents, etc. impending liabilities including contingent liabilities and those pending for tax assessment. In case of firms rendering services, the question of tangible asset backing usually is not important, provided the firm's profit record, business coverage and standing of the partners are of the acceptable order.Position of orders at hand and the range and quality of clientele should be thoroughly examined, which the firm is presently operating.Position and terms of loan finance would call for careful scrutiny to assess its usefulness and implication for the overall financial position; reason for its absence or negative impact should be studied.It would be interesting to study the composition and quality of key personnel employed by the firm and any likelihood of their leaving the organisation in the near future.Various important contractual and legal obligations should be ascertained and their nature studied. It may be the case that the firm has standing agreement with the employees as regards salary and wages, bonus, gratuity and other incidental benefits. Full impact of such standing agreements would be gauged before a final decision is reached.Reasons for the offer of admission to a new partner should be ascertained and it should be determined whether the same synchronises with the retirement of any senior partner whose association may have had considerable bearing on the firm's success.Appraisal of the record of capital employed and the rate of return. It is necessary to have a comparison with alternative business avenues for investments and evaluation of possible results on a changed capital and organisation structure, if any, envisaged along with the admission of the partner.It would be useful to have a firsthand knowledge about the specialisation, if any, attained by the firm in any of its activities.Manner of computation of goodwill on admission as also on retirement, if any, should be ascertained.Whether any special clause exists in the deed of partnership to allow admission in future of a new partner, who may be specified, on concessional terms.Whether the incomplete contracts which will be transferred to the reconstituted firm will be a liability or a loss.