Lionel is an experienced chartered surveyor with many years of experience. He is employed by a large property company where he receives a good salary and a performance-related bonus. He has recently been approached by an old friend, Leo, who is one of three partners in a firm of surveyors. The other two partners are nearing retirement age and they have decided that they need to bring in some ‘new blood’. The partnership has been in operation for nearly 20 years and has carved out a sizeable niche in commercial property management.

Leo tells Lionel that the partnership has been valued by a business valuation specialist at £1 200 000, a figure that includes goodwill of £500 000. If Lionel accepts the invitation to join the partnership he will be required to pay

£300 000 in cash for a quarter share of the business. In exchange he will be entitled to 25% of the profits made by the partnership in the future.

1. Explain to Lionel what is meant by the term ‘goodwill’.

2. Advise him on the type of information he will need to examine in order to be able to make a decision on whether or not to buy into the partnership.

3. Identify the main elements of risk involved in Lionel’s decision.