Director wanting out of a ltd co
Discussion
Scenario:
Two friends have a ltd co of which they are 50:50 shareholders and equal directors, there is £50k of cash in the business and the business owns properties worth £500k (of which £300k is mortgaged). So £250k in assets and cash in total.
If one of the friends/directors wants out of the business how would they go about this? What are the practicalities?
Two friends have a ltd co of which they are 50:50 shareholders and equal directors, there is £50k of cash in the business and the business owns properties worth £500k (of which £300k is mortgaged). So £250k in assets and cash in total.
If one of the friends/directors wants out of the business how would they go about this? What are the practicalities?
JapanRed said:
Scenario:
Two friends have a ltd co of which they are 50:50 shareholders and equal directors, there is £50k of cash in the business and the business owns properties worth £500k (of which £300k is mortgaged). So £250k in assets and cash in total.
If one of the friends/directors wants out of the business how would they go about this? What are the practicalities?
As directors, resign using a form from companies house, I assume it can be done online these days. As shareholders, just find someone to buy the shares.Two friends have a ltd co of which they are 50:50 shareholders and equal directors, there is £50k of cash in the business and the business owns properties worth £500k (of which £300k is mortgaged). So £250k in assets and cash in total.
If one of the friends/directors wants out of the business how would they go about this? What are the practicalities?
The reality is this is a shareholder issue, not a director issue (as the director could just resign and that would largely be that).
1st thing they need to settle on a value for the 50% of the equity
It could be much higher than 50% of the net assets (or lower)
- if the business is not likely to be as successful going forward without the departing 'director' then the remaining 'director' may value his stake much lower.
- next the remaining 'director' needs to raise the funds to buy the shares from the departing 'director', he might be able to get a business loan to do this, or even as the departing 'director' to turn his equity into a loan note, which could be paid down over the next 5 years or so (with a set interest rate).
- selling his equity should be much more tax efficient for the departing 'director' than drawing down the cash of the business, but ultimately if they can't settle on a value, then they could liquidate the company and take the net assets.
1st thing they need to settle on a value for the 50% of the equity
It could be much higher than 50% of the net assets (or lower)
- if the business is not likely to be as successful going forward without the departing 'director' then the remaining 'director' may value his stake much lower.
- next the remaining 'director' needs to raise the funds to buy the shares from the departing 'director', he might be able to get a business loan to do this, or even as the departing 'director' to turn his equity into a loan note, which could be paid down over the next 5 years or so (with a set interest rate).
- selling his equity should be much more tax efficient for the departing 'director' than drawing down the cash of the business, but ultimately if they can't settle on a value, then they could liquidate the company and take the net assets.
Building on Wlmslow's point there a key element missing from what we've been told so far. What's the business of the company and what income/profit stream is generated from those assets.
Where someone wants to exit from a company that's essentially a quasi-partnership, an "earn-out" arrangement is not unusual. In other words, the leaver might not get completely bought out in one go. He might get half his expected cash day one with the other half to follow over, say, the next 5-10 years assuming the company continues to generate profit/cash - and the amount he receives might vary subject to the level of profit achieved.
At the end of the day it's all down to negotiation.
Where someone wants to exit from a company that's essentially a quasi-partnership, an "earn-out" arrangement is not unusual. In other words, the leaver might not get completely bought out in one go. He might get half his expected cash day one with the other half to follow over, say, the next 5-10 years assuming the company continues to generate profit/cash - and the amount he receives might vary subject to the level of profit achieved.
At the end of the day it's all down to negotiation.
Thanks guys this is all really helpful.
The business is a buy to let residential business.
10 houses average value about £50k each.
Average mortgage of £30k with £20k equity on each.
Pre-tax profits of approx £40k per annum.
So there is £200k equity in the 10 houses. Plus £50k in bank. £125k each if splitting 50:50.
One director wants £125k to walk away, selling his shares to the other director and resigning. Staying on director can fund £25k through a directors loan but needs to finance The remaining £100k if completely buying out the other.
The business is a buy to let residential business.
10 houses average value about £50k each.
Average mortgage of £30k with £20k equity on each.
Pre-tax profits of approx £40k per annum.
So there is £200k equity in the 10 houses. Plus £50k in bank. £125k each if splitting 50:50.
One director wants £125k to walk away, selling his shares to the other director and resigning. Staying on director can fund £25k through a directors loan but needs to finance The remaining £100k if completely buying out the other.
An earnout would basically take the form of £x now and then £x / period until the agreed total had been reached.
The shareholding of the leaver would be transferred across in stages to reflect the progress of the earn out
Does the person wanting to depart have any personal guarantees on any of the loans?
Are the two parties in agreement on the valuations and is the person remaining happy with the split?
Similar things come up here from time to time and every one of them serves as a reminder of the usefulness of a shareholder agreement in such situations
The shareholding of the leaver would be transferred across in stages to reflect the progress of the earn out
Does the person wanting to depart have any personal guarantees on any of the loans?
Are the two parties in agreement on the valuations and is the person remaining happy with the split?
Similar things come up here from time to time and every one of them serves as a reminder of the usefulness of a shareholder agreement in such situations
JPJPJP said:
An earnout would basically take the form of £x now and then £x / period until the agreed total had been reached.
The shareholding of the leaver would be transferred across in stages to reflect the progress of the earn out
Does the person wanting to depart have any personal guarantees on any of the loans?
Are the two parties in agreement on the valuations and is the person remaining happy with the split?
Similar things come up here from time to time and every one of them serves as a reminder of the usefulness of a shareholder agreement in such situations
Thanks this is helpful. I assume it is just between the two individuals to decide how much is repaid and how often and over what period? The shareholding of the leaver would be transferred across in stages to reflect the progress of the earn out
Does the person wanting to depart have any personal guarantees on any of the loans?
Are the two parties in agreement on the valuations and is the person remaining happy with the split?
Similar things come up here from time to time and every one of them serves as a reminder of the usefulness of a shareholder agreement in such situations
I think the leaving director would be happy with a 40:60 split in favour of the director remaining.
RE shareholder agreements. Is there a set template? I guess it’s hard to know what scenario will raise its head many years in future. Both directors may initially plan to stay in the business for decades but people get ill, divorced and move away. How is a shareholder agreement drawn up when no one knows what the future holds? Any one of a number of possibilities could arise where one needs “early” access to “their” equity in the business....
Edited by JapanRed on Saturday 8th August 15:32
JapanRed said:
Thanks this is helpful. I assume it is just between the two individuals to decide how much is repaid and how often and over what period?
I think the leaving director would be happy with a 40:60 split in favour of the director remaining.
RE shareholder agreements. Is there a set template? I guess it’s hard to know what scenario will raise its head many years in future. Both directors may initially plan to stay in the business for decades but people get ill, divorced and move away. How is a shareholder agreement drawn up when no one knows what the future holds? Any one of a number of possibilities could arise where one needs “early” access to “their” equity in the business....
Hi mateI think the leaving director would be happy with a 40:60 split in favour of the director remaining.
RE shareholder agreements. Is there a set template? I guess it’s hard to know what scenario will raise its head many years in future. Both directors may initially plan to stay in the business for decades but people get ill, divorced and move away. How is a shareholder agreement drawn up when no one knows what the future holds? Any one of a number of possibilities could arise where one needs “early” access to “their” equity in the business....
Edited by JapanRed on Saturday 8th August 15:32
You can get templates online, such as here:
https://www.netlawman.co.uk/g/shareholder-document...
The whole point is to cover all future eventualities. Often this involves insurance policies (though this is not applicable in your friend's case).
At the end of the day he needs to agree an exit deal and (as has been said) this will be based upon the value of the business assets and a multiple of the profitability of the business itself.
Give me a shout if your would like to chat about this.
Cheers
JapanRed said:
Rockin’ - can you tell me more about the earn out scenario, as this maybe plausible.
TBH it's a detailed and time-consuming subject best dealt with by getting a commercial solicitor on the case. With those relatively modest numbers you want a solicitor who's "competent but not too expensive". As in all walks of life that combination can be tricky to find.JapanRed said:
Rockin’ - can you tell me more about the earn-out scenario, as this maybe plausible.
I am not sure an earn-out is relevant in this situation, they are often used if a seller is sticking around for a period or the ongoing performance of the business has some doubt (e.g. could be adversely affected by the departing shareholder or seller price assumed future growth etc)In very simple terms it is an element of the selling price that is deferred for a period. (one or two years) and the amount is subject to performance criteria (profit/ sales/ growth, successful handover etc)
A loan note is very different, it is as the name suggests a simple loan to the company, for a set amount at a set interest rate (occasionally rolled up to the end of the period). The amount returned is independent of the future performance of the business, or the seller.
As it's an asset business (BTL), I would think the departing shareholder has a fair claim to 50% of the net assets, as if the business was liquidated this is close to what he would get.
A deal might be able to be struck, where the company buys his equity from him, using most of the £50k cash, together with an extension of the mortgage (if possible), plus him extending a loan note.. something like
£40k from cash
£40k Mortage extension
£40k loan note (which can be paid in 2 years time either from cash or a further extension of the mortgage)
The remaining shareholder would then own 100% of the ltd co, without having had to put any extra of his own money in, the departing shareholder would have received a fair price, (£80k upfront and £40k deferred at a decent interest rate and secured 2nd charge against the properties)
Needless to say, there are tax implications to work through.
Would also suggest getting your accountant on board. It's also possible (depending on the balance sheet of the company) for the company to buy the shares back (and cancel them), so shareholder 1 still has 100% in effect.
That avoids the need for the remaining shareholder to extract the money from the company to buy the shares personally (unless he is funding the remainder from personal assets, not the company assets) - so need to consider the personal tax position there.
Also need to consider the tax to be paid by the outgoing shareholder, as if still a Director at the point of disposal and holding 5% or more of shares for previous 24 months, then he may be able to only pay 10% tax on the remaining capital gain - with some conditions, which includes some on the potential amount of funds which could be loaned back to the company - from memory, 30% comes to mind, but would need to recheck my books on that.
Would suggest you have that conversation and see what the accountant's views are on the overall position - it could make quite a dent in the amount he walks away with (or increase/decrease what the remaining shareholder needs to find).
Once that's straight and agreed, you can then get the solicitors to formalise everything.
That avoids the need for the remaining shareholder to extract the money from the company to buy the shares personally (unless he is funding the remainder from personal assets, not the company assets) - so need to consider the personal tax position there.
Also need to consider the tax to be paid by the outgoing shareholder, as if still a Director at the point of disposal and holding 5% or more of shares for previous 24 months, then he may be able to only pay 10% tax on the remaining capital gain - with some conditions, which includes some on the potential amount of funds which could be loaned back to the company - from memory, 30% comes to mind, but would need to recheck my books on that.
Would suggest you have that conversation and see what the accountant's views are on the overall position - it could make quite a dent in the amount he walks away with (or increase/decrease what the remaining shareholder needs to find).
Once that's straight and agreed, you can then get the solicitors to formalise everything.
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