Creative employee buy-in ideas required
Discussion
I'm looking for some creative ideas for an employee to buy into a business. I'll give you some background information:
The business was setup by two directors 10+ years ago. A couple of years ago one decided he wanted to leave but the other couldn't afford to buy him out on his own. So, the remaining director approached two employees and said he'd welcome them to the board if they could raise some cash to buy the 25% that he couldn't afford himself. One employee raised approx $500 but the other couldn't get more than $100 so was "out".
Two years on and the original director has 75% and the new director has 25%. The original director would like to retire in 5-7 years time and has asked the employee who missed out previously if he would still be interested in buying in.
Problem is that the chap still cant raise a lot more than $100k and the value of the business has probably increased by 10% in the last 2 years.
The directors have asked for creative ideas on how the employee could buy-in, maybe some kind of vendor finance deal, some kind of loan to him from the company to give him the money to buy-in, or maybe something else.
Whilst the company has a high turnover, profits can be variable as they deal with low volume, high value, high risk projects. The company doesn't own any property or anything else that could be used as security.
The employee who wants to buy in has no significant security to use to get a bank loan etc. He is a key member of staff with an intimate knowledge of the niche product range.
The business was setup by two directors 10+ years ago. A couple of years ago one decided he wanted to leave but the other couldn't afford to buy him out on his own. So, the remaining director approached two employees and said he'd welcome them to the board if they could raise some cash to buy the 25% that he couldn't afford himself. One employee raised approx $500 but the other couldn't get more than $100 so was "out".
Two years on and the original director has 75% and the new director has 25%. The original director would like to retire in 5-7 years time and has asked the employee who missed out previously if he would still be interested in buying in.
Problem is that the chap still cant raise a lot more than $100k and the value of the business has probably increased by 10% in the last 2 years.
The directors have asked for creative ideas on how the employee could buy-in, maybe some kind of vendor finance deal, some kind of loan to him from the company to give him the money to buy-in, or maybe something else.
Whilst the company has a high turnover, profits can be variable as they deal with low volume, high value, high risk projects. The company doesn't own any property or anything else that could be used as security.
The employee who wants to buy in has no significant security to use to get a bank loan etc. He is a key member of staff with an intimate knowledge of the niche product range.
what is the business valuation based on?
if there is substance behind the valuation then could the retiring director retire, but taper out based on retaining some value / assets / profits / shares etc.?
it seems as though the business was valued at $2m and now $2.2m but profits are risky - so where is the value, all the director needs to do is retain some of that value and then gradually sell it back to the new director over time...
if the new director can't raise more than $100k how will they afford any more later?
too many missing bits of information
if there is substance behind the valuation then could the retiring director retire, but taper out based on retaining some value / assets / profits / shares etc.?
it seems as though the business was valued at $2m and now $2.2m but profits are risky - so where is the value, all the director needs to do is retain some of that value and then gradually sell it back to the new director over time...
if the new director can't raise more than $100k how will they afford any more later?
too many missing bits of information
200bhp said:
He is a key member of staff with an intimate knowledge of the niche product range.
Well, firstly, no company should ever become so dependant upon a single employee. What would happen to the company's profitability if he was hit by the preverbal bus?That said, it is easy to fall into this trap so the next question is just how critically important is he? If he is very important, then a slice of the pie should be given freely to keep him. In the absence of the ability to fund the share purchase, you'd need to assign a cash value to his skills over and above what he earns....how much would it cost the company to replace him? Take this as part contribution to his share.
5 to 7 years is a fair chunk of time so what will he be earning in 7 years time? Take the difference between that and now and instead of cash, pay him in shares; though this will mean in real terms his take-home will fall assuming inflation goes up and probably unlikely to be sufficient to make the full amount.
Thanks for the replies. To answer some of your questions:
The business is in Australia where all parties live and work. They manufacture a niche engineered product which is sold in several countries into what will always be a limited market. By that I dont mean the market is small, its just not going to grow significantly due to the nature of its use.
Of the two employees who were approached to buy-in two years ago, number one could raise $500k easily thanks to wealthy parents who also live in Australia. Number two and his family could raise $100k between them but concerns over losses due to exchange rates were deemed too much of a risk by family members still in the UK. As it happens their concerns were fair and the change in the pound/dollar rate over two years would have resulted in his owing his parents significantly more than he'd borrowed in the first place.
The dollar has since fallen to around the level that history shows it should be so the risk for the UK family members has reduced. This means they may now be more willing to put their hand in their pocket although that cant be guaranteed.
My understanding is the business valuation is based on previous profits and the current order book. At the time the old director left 2 years ago, there was a disagreement over the value and they decided to get an independent valuation and that would be the value used in the sale of his 50%. Unfortunately the independent valuer shaved a few $100k off but they stuck to their word and went with it.
The company only has 20 permanent employees, most of which are shop-floor manufacturing staff. This number is boosted by temporary workers as required per-job. The person looking to buy-in is an engineer who has developed nearly all of the product over the last 3 years. He is the only person sitting on the "manager" rung of the ladder with the two directors above him and the shop-floor supervisor and shop-floor staff below him. He works closely with the 25% director on high value tender submissions, quotes and nearly all non accounting aspects of the business.
The 25% director and he have had discussions over the last couple of years where they have commented how it should be the long-term aim for the pair of them to have 50% each when Mr 75% retires. The 25% director is currently saving as much as he can to buy another 25%.
The engineer earns just under $100k per year from which he would realistically be able to save 10%
The business is in Australia where all parties live and work. They manufacture a niche engineered product which is sold in several countries into what will always be a limited market. By that I dont mean the market is small, its just not going to grow significantly due to the nature of its use.
Of the two employees who were approached to buy-in two years ago, number one could raise $500k easily thanks to wealthy parents who also live in Australia. Number two and his family could raise $100k between them but concerns over losses due to exchange rates were deemed too much of a risk by family members still in the UK. As it happens their concerns were fair and the change in the pound/dollar rate over two years would have resulted in his owing his parents significantly more than he'd borrowed in the first place.
The dollar has since fallen to around the level that history shows it should be so the risk for the UK family members has reduced. This means they may now be more willing to put their hand in their pocket although that cant be guaranteed.
My understanding is the business valuation is based on previous profits and the current order book. At the time the old director left 2 years ago, there was a disagreement over the value and they decided to get an independent valuation and that would be the value used in the sale of his 50%. Unfortunately the independent valuer shaved a few $100k off but they stuck to their word and went with it.
The company only has 20 permanent employees, most of which are shop-floor manufacturing staff. This number is boosted by temporary workers as required per-job. The person looking to buy-in is an engineer who has developed nearly all of the product over the last 3 years. He is the only person sitting on the "manager" rung of the ladder with the two directors above him and the shop-floor supervisor and shop-floor staff below him. He works closely with the 25% director on high value tender submissions, quotes and nearly all non accounting aspects of the business.
The 25% director and he have had discussions over the last couple of years where they have commented how it should be the long-term aim for the pair of them to have 50% each when Mr 75% retires. The 25% director is currently saving as much as he can to buy another 25%.
The engineer earns just under $100k per year from which he would realistically be able to save 10%
Mr 75% wants to retire. Mr 25% still has another 30 years to go.
Both want Mr 75%'s share to go to someone they know. The employee is unlikely to raise the funds himself so needs to "borrow" the money from the company. However this would have to be done in such a way that the company, and Mr 75% benefit from the arrangement as it seems unlikely that the employee will be handed anything on a plate.
Mr 75% would probably welcome some kind of arrangement that would provide him with continued income after retirement, potentially funded by deferred "interest" paid by the employee on the loan amount.
Both want Mr 75%'s share to go to someone they know. The employee is unlikely to raise the funds himself so needs to "borrow" the money from the company. However this would have to be done in such a way that the company, and Mr 75% benefit from the arrangement as it seems unlikely that the employee will be handed anything on a plate.
Mr 75% would probably welcome some kind of arrangement that would provide him with continued income after retirement, potentially funded by deferred "interest" paid by the employee on the loan amount.
Edited by 200bhp on Wednesday 24th June 06:06
spikeyhead said:
Make the shareholder designate a director. Increase his salary to match the promotion and he can use the increase to buy the shares. There is no need to link director and share owner.
I agree with this.Mr 75% retires, but keeps his shareholding, or sells 25% to Mr 25% and keeps 50%.
Mr 0% gets a raise (and promotion to director if everyone wants, but shareholders don't have to be directors and vice versa), but forfeits that raise for say 1% in shares each year. Or if the other directors aren't happy with Mr 0% getting a raise, then Mr 0% could forfeit the 10% he can save each year in order to buy a 1% shareholding each year.
There's really no clever way around this. Either Mr 0% comes up with the cash, or the current directors agree to just give him the shares/lower their valuation.
(NB: Advice given based on my understanding of UK business)
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