Buying out a business partner
Discussion
trickywoo said:
A value of their shares has been agreed at £20,000. No problem with this.
Problem is they are asking me to buy their share including current assets (mainly cash in bank). This puts their 40% value at approximately £40,000 in total. Their rationale for this is that they will benefit from the 10% Entrepreneurs' Relief and not have to pay income tax on the dividends that would be paid normally out of the cash.
This doesn't make sense, either the shares are worth £20,000 or they're worth £40,000. Problem is they are asking me to buy their share including current assets (mainly cash in bank). This puts their 40% value at approximately £40,000 in total. Their rationale for this is that they will benefit from the 10% Entrepreneurs' Relief and not have to pay income tax on the dividends that would be paid normally out of the cash.
As the majority shareholder the declaration of dividends is in your hands and you don't just add it to the value of the shares willy nilly.
If he wants £20k, and the company has £20k in the bank, alter the articles to enable share buy backs and get the company to buy the shares back for £20k.
Ean218 said:
If he wants £20k, and the company has £20k in the bank, alter the articles to enable share buy backs and get the company to buy the shares back for £20k.
Seems sensible. Are there any implications as regards the company owning 40% of itself for a (possibly) prolonged period of time?If I find someone else to buy in to the company will they be obliged to buy the shares (should I choose to offer them) at the same price as the company paid originally or can I essentially decide this, within reason?
trickywoo said:
Seems sensible. Are there any implications as regards the company owning 40% of itself for a (possibly) prolonged period of time?
If I find someone else to buy in to the company will they be obliged to by the shares (should I choose to offer them) at the same price as the company paid originally or can I essentially decide this, within reason?
I feel sure that a semi-decent accountant and lawyer will be able to structure the deal so you use the cash currently in the company to fund the deal.If I find someone else to buy in to the company will they be obliged to by the shares (should I choose to offer them) at the same price as the company paid originally or can I essentially decide this, within reason?
desolate said:
I feel sure that a semi-decent accountant and lawyer will be able to structure the deal so you use the cash currently in the company to fund the deal.
This is looking like the favourite option. Although amusingly 40% isn't happy as apparently this scenario means that Entrepreneurs' Relief can't be used and they will therefore have more tax to pay.trickywoo said:
This is looking like the favourite option. Although amusingly 40% isn't happy as apparently this scenario means that Entrepreneurs' Relief can't be used and they will therefore have more tax to pay.
I can't see why that would be the case if structured properly.As a buyer I have done that a few times.
trickywoo said:
Seems sensible. Are there any implications as regards the company owning 40% of itself for a (possibly) prolonged period of time?
No, it won't own any, they would be immediately cancelled, the share capital would be reduced and you would own 100% of the remaining shares.coyft said:
Have I got this right? You run a business with your partner, the deal has been to spilt the profits 60:40 in your favour. You distribute those profits by paying a dividend. The shareholding is 60/40 in your favour.
The business is valued at £50k excluding the £50k cash in the bank. (Total £100k).
Your partner expects you to buy him out for £40k (40% of £100k). That seems reasonable and fair to me assuming you can afford to do it and there are no liabilities.
nearlyThe business is valued at £50k excluding the £50k cash in the bank. (Total £100k).
Your partner expects you to buy him out for £40k (40% of £100k). That seems reasonable and fair to me assuming you can afford to do it and there are no liabilities.
the £50k value is based on a 3rd party buying the business to include BOTH staff
by one staff member retiring the company simply doesn't have that value... he is a part of that £50k purchase value.
the 40% share holder has nothing to lose by digging his heels in and claiming whatever value he wants
however he is bluntly wrong in his valuation, the company doesn't have that value - if both staff left the company its only value would be the assets in the bank...
the OPs offer of £20k is an honourable and generous offer - if Mr 40% complains, a little bit of reality should be explained - the alternatives are:
- OP closes the business and redistributes cash after costs = less than £20K payout
- the whole business is sold to a 3rd party - without staff it is not worth £50k, so he might get a couple of thousand if that, the assets belong to the business, not to the shareholders directly.
- the OP says 'toodle pip' and lets him leave and allows him to keep his 40% but dividends are paid only to a different class of share in the future... Mr 40% will get nothing for his efforts...
as a minority shareholder Mr 40% seems to think he can call the shots - not sure it actually works that way.
the reality is that £20K as a 40% share of the cash asset is not unreasonable
The shares in this company have no intrinsic value - their only value is as a share of the assets / earning potential of the staff
- the assets are only cash which can be split
- the earning potential of the staff is being split by his retiring
so to ask for £40K is to request the value twice - once for the share of assets and once for the shareholding - which is the share of assets
What about diluting the shares? He currently owns 40%, but you could issue a further 100 shares as the majority shareholder and purchase them yourself. Then he will only own 20% of the shares. You could then adjust the dividends accordingly...
Not honourable though, pretty rotten trick IMHO and if there is a shareholder agreement it might not be possible.
Not honourable though, pretty rotten trick IMHO and if there is a shareholder agreement it might not be possible.
Interesting thread and one with a few issues that affect many businesses, the prime one being that someone thinks the business is worth more than it is.
As posted above, he needs to consider his alternatives. I suspect that the company is of very little value without the main two people in it and trying to sell it would be very hard and who is going to manage that sale?
As posted above, he needs to consider his alternatives. I suspect that the company is of very little value without the main two people in it and trying to sell it would be very hard and who is going to manage that sale?
Cyberprog said:
What about diluting the shares? He currently owns 40%, but you could issue a further 100 shares as the majority shareholder and purchase them yourself. Then he will only own 20% of the shares. You could then adjust the dividends accordingly...
Not honourable though, pretty rotten trick IMHO and if there is a shareholder agreement it might not be possible.
Seen this happen a few times to a few friends that don't go into an agreement properly, help build up a business then get forced out by dilution of shares and nothing they can do about it.Not honourable though, pretty rotten trick IMHO and if there is a shareholder agreement it might not be possible.
Last one lost a few hundred £££ on that one.
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