Buying out a shareholder in LTD company.
Discussion
Evening gents (and ladies). I'm looking for some advice regarding buying out a shareholder in my ltd company.
There are 3 equal shareholders and 3 directors. The company was formed in 2013 and has been performing well with substantial profits and continued growth up until a stagnant period around 1 year ago. Profitability (bottom line) is roughly the same as it was 12 months ago.
The 3 of us work full time at the business and take an equal minimal salary (£1000 a month) and a monthly dividend to 'top up' our wage to a total of £2,500 each month. On top of that monthly 'wage' we regularly take lump sum dividends as and when we see fit (it's not scheduled, but when there is plenty spare money we might take 10k or so each a few times a year).
One of the share holders has raised that they'd like to leave the company to do their own thing and would like to sell his portion of the company to me and the other remaining share holder.
What advice can you give on the best way to do this? I'm concerned that a company valuation will be artificially high because a large proportion of our take home pay is by way of company dividends rather than a traditional salary, so in effect it doesn't account for the true wage bill for 3 full time members of staff. Are there things in place during a company valuation to account for this? Also, how do we determine the correct wage for the remaining 2 directors in order to fairly calculate the profits after the true wage bill?
Another point is that because the company is reasonably successful I doubt that the other share holder and I will have enough money to stump up and buy him out. He's raised the possibility of taking a back seat and becoming a silent shareholder and dropping his share ownership percentage to 20% and selling me and the other owner the rest.
Id rather just buy him out completely but don't have the money to do this. Is it possible for the business to borrow the money to buy his shares, then distribute them equally to the remaining share holders?
Any insight or advice would be appreciated.
There are 3 equal shareholders and 3 directors. The company was formed in 2013 and has been performing well with substantial profits and continued growth up until a stagnant period around 1 year ago. Profitability (bottom line) is roughly the same as it was 12 months ago.
The 3 of us work full time at the business and take an equal minimal salary (£1000 a month) and a monthly dividend to 'top up' our wage to a total of £2,500 each month. On top of that monthly 'wage' we regularly take lump sum dividends as and when we see fit (it's not scheduled, but when there is plenty spare money we might take 10k or so each a few times a year).
One of the share holders has raised that they'd like to leave the company to do their own thing and would like to sell his portion of the company to me and the other remaining share holder.
What advice can you give on the best way to do this? I'm concerned that a company valuation will be artificially high because a large proportion of our take home pay is by way of company dividends rather than a traditional salary, so in effect it doesn't account for the true wage bill for 3 full time members of staff. Are there things in place during a company valuation to account for this? Also, how do we determine the correct wage for the remaining 2 directors in order to fairly calculate the profits after the true wage bill?
Another point is that because the company is reasonably successful I doubt that the other share holder and I will have enough money to stump up and buy him out. He's raised the possibility of taking a back seat and becoming a silent shareholder and dropping his share ownership percentage to 20% and selling me and the other owner the rest.
Id rather just buy him out completely but don't have the money to do this. Is it possible for the business to borrow the money to buy his shares, then distribute them equally to the remaining share holders?
Any insight or advice would be appreciated.
You need to work out what you'd be willing to pay for the shares and then find a way to justify your valuation. If you and the other director that are going to remain argue that in fact you've also had enough then the company's effectively worthless, right? I'd start from this position.
Dividends don't have to be paid in the same proportion as the share holding so you could pay him off by awarding him extra dividends. You'll pay for it by reducing your dividend but at least you won't have to find an immediate lump sum.
Dividends don't have to be paid in the same proportion as the share holding so you could pay him off by awarding him extra dividends. You'll pay for it by reducing your dividend but at least you won't have to find an immediate lump sum.
You need the advice of your accountant but we had a very similar situation when two shareholders wanted to leave.
Our accountant helped us to value the shares then worked out a payment structure using dividends-as suggested by Sparkyhd-meaning we didn't have to borrow a large sum to buy them out. Also because they were married and could use their allowances jointly, it meant they avoided Capital Gains Tax.
Our accountant helped us to value the shares then worked out a payment structure using dividends-as suggested by Sparkyhd-meaning we didn't have to borrow a large sum to buy them out. Also because they were married and could use their allowances jointly, it meant they avoided Capital Gains Tax.
mk1salami said:
What advice can you give on the best way to do this? I'm concerned that a company valuation will be artificially high because a large proportion of our take home pay is by way of company dividends rather than a traditional salary, so in effect it doesn't account for the true wage bill for 3 full time members of staff. Are there things in place during a company valuation to account for this? Also, how do we determine the correct wage for the remaining 2 directors in order to fairly calculate the profits after the true wage bill?
I'm in the final stages of selling my business and we have had a similar scenario with dividends, where they could be construed as replacing salary.Both our advisers and the buyers valuers identified a relevant market salary and made the appropriate deductions in profit. The adjusted profit was used as the basis for applying multiples etc.
You'll likely not see this as helpful but in the scenario you describe the 'value' is where the least he will take meets the most you will pay.
Whats to stop you and the other shareholder winding up the business, distributing any profits and starting again without paying any 'extra' for the perceived value of the business?
I was in a very similar position and unfortunately had a competitor who put a value on the business by offering to employ my colleague so I was obliged to pay them out an amount which in no way would align with any traditional valuation method.
There is very rarely a right answer to these questions and its something I'd advise anyone looking to go into partnership to have agreed at the outset. Everyone will then have a fair out when the time comes.
Whats to stop you and the other shareholder winding up the business, distributing any profits and starting again without paying any 'extra' for the perceived value of the business?
I was in a very similar position and unfortunately had a competitor who put a value on the business by offering to employ my colleague so I was obliged to pay them out an amount which in no way would align with any traditional valuation method.
There is very rarely a right answer to these questions and its something I'd advise anyone looking to go into partnership to have agreed at the outset. Everyone will then have a fair out when the time comes.
trickywoo said:
There is very rarely a right answer to these questions and its something I'd advise anyone looking to go into partnership to have agreed at the outset. Everyone will then have a fair out when the time comes.
I've seen valuation methods/basis included in all the AoA I've seen recently. Admittedly it's not a lot but seems that more people are following your (sound) advice.My preference would to be a bit more random in your dividend payment. I would also reduce the PAYE amount to £8164 pa.
Are your share classifications all the same?
The valuation would probably be based on ebitdar or one of its derivatives with an allowance for dividends. Your accountant is good for this.
As above, no need for loans here if structured correctly.
Seriously consider a Shareholder Agreement once this transaction is complete.
Are your share classifications all the same?
The valuation would probably be based on ebitdar or one of its derivatives with an allowance for dividends. Your accountant is good for this.
As above, no need for loans here if structured correctly.
Seriously consider a Shareholder Agreement once this transaction is complete.
trickywoo said:
You'll likely not see this as helpful but in the scenario you describe the 'value' is where the least he will take meets the most you will pay.
Whats to stop you and the other shareholder winding up the business, distributing any profits and starting again without paying any 'extra' for the perceived value of the business?
I was in a very similar position and unfortunately had a competitor who put a value on the business by offering to employ my colleague so I was obliged to pay them out an amount which in no way would align with any traditional valuation method.
There is very rarely a right answer to these questions and its something I'd advise anyone looking to go into partnership to have agreed at the outset. Everyone will then have a fair out when the time comes.
Agree with this. You need to discover the acceptable price.Whats to stop you and the other shareholder winding up the business, distributing any profits and starting again without paying any 'extra' for the perceived value of the business?
I was in a very similar position and unfortunately had a competitor who put a value on the business by offering to employ my colleague so I was obliged to pay them out an amount which in no way would align with any traditional valuation method.
There is very rarely a right answer to these questions and its something I'd advise anyone looking to go into partnership to have agreed at the outset. Everyone will then have a fair out when the time comes.
A company I was associated to was valued at £3m by the accountants but I managed to negotiate a value of £150k and the transfer of 20% of the shares between shareholders. I got a fee for my services.
The accountants are fairly useless in my opinion. How much do they charge for multiplying your profit by 10 or 15? You really understand your business and should be able to construct a coherent argument to justify either a low or high value, depending on whether you're buying or selling.
Firstly, without teaching you to suck eggs...The way you describe your remuneration package is on dodgy ground tax wise. Monthly dividends like you describe are pseudo salary so can land you with tax issues so worth mixing that up a little but that's another issue.
I agree that complete buy out is better option but can be tricky to find funds. If the business has fixed assets it can be easier. Other option is invoice discounting to raise funds based on your debtors book.
One way that can work (that I have done before) is stump up the cash you can afford as a down payment and have a loan note for the remainder. This obviously requires trust from the seller and only really works if not a readily available market for the shares elsewhere.
All of the above scenarios obviously result in the ownership becoming 50:50 as it's the company buying the shares back. Can you raise the cash personally? Family? Bank? that way you can become controlling shareholder.
Regards,
Dave
I agree that complete buy out is better option but can be tricky to find funds. If the business has fixed assets it can be easier. Other option is invoice discounting to raise funds based on your debtors book.
One way that can work (that I have done before) is stump up the cash you can afford as a down payment and have a loan note for the remainder. This obviously requires trust from the seller and only really works if not a readily available market for the shares elsewhere.
All of the above scenarios obviously result in the ownership becoming 50:50 as it's the company buying the shares back. Can you raise the cash personally? Family? Bank? that way you can become controlling shareholder.
Regards,
Dave
D7PNY said:
All of the above scenarios obviously result in the ownership becoming 50:50 as it's the company buying the shares back.
The 50:50 is correct, but, it is NOT the company buying back the shares, it is the other two shareholders buying the shares. Big difference, and, IIRC, there are specific rules concerning the buy-back of shares by a company.Gassing Station | Business | Top of Page | What's New | My Stuff