Buying into a business 50/50 - legal costs & mitigating risk

[UncleDave]

Hoping someone might be able to shed a bit of light on this and maybe give a little advice. It's really not an area in which I have any experience!

I'm currently in the Wedding/Events business (Bands/Entertainment) and have recently been given the opportunity to buy into a company I work closely with which will result in a 50/50 partnership. It seems at face value like quite a reasonable price and has potential based on my projected ROI. I'd ask for advice how to best value the business but I suspect it may be a 'worth whatever someone is willing to pay' situation.

The businesses assets will be restructured before the purchase goes through which concerns me a little as it feels like we will have less control. The plan is to sell off its current assets (bands) to a third party (band members), but charging an ongoing commission to retain exclusive management rights of those assets to said third party. Paying a sizeable sum for half a company that no longer has any 'tangible' control of its income generating assets concerns me a little and something I've not had to weigh up before. Is this just the bread and butter of your average commercial solicitor? I'm quite honestly also unsure if these contracts will cost hundreds or thousands to draw up.

The same goes for the actual buy-in itself. Is it just a case of finding a decent solicitor that is able to draw up a contract for the partnership? How water tight is all this, and what are the likely costs involved here? Has anyone ever had any issues with this all going pear shaped? I trust the guy, but I don't want to remain naive to the potential risks and I'm sure a few of you experienced business people might have some different thoughts or perspectives on all this!

Obviously various exit strategies will be covered which sounds like a minefield in itself, and I'm aware of the risk of getting into disputes as equal partners can break a business. I'm thinking (as he founded the company) giving him a 51% control whilst remaining 50/50 owners would be a good plan just in case of any major disagreement. Not sure if that's a good idea as it means I'm immediately going in submissively, and if that would mean he could decide to oust me from the company (though I'm sure the solicitors would forewarn me on that one!). Either way, ideally I would rather find a third party to mediate in the event of a disagreement, though I think we'd both find it hard to find and agree on a third party beforehand that is impartial.

As I say, there is certainly trust there now but I can't help the pessimist in me taking over when looking at a big (for me) deal like this. What is he decided he's taking a total back seat and doesn't lift a finger - how can 'having the motivation to work on the business' possibly be written into a contract? I know this works both ways, but I absolutely scares the hell out of me as I've never had to share before :lol:

Any kind of advice would be incredible. I'm comfortable with the trading side of things as it's my own area of expertise, it's just this uncharted territory on the partnership and legal side of things that's got me in a bit of a mess.

Thanks in advance,
Dave.

[KingKongIV]

Small business valuations are based on multiples of earnings as a base and negotiate from there.

I am not an expert, but the restructuring of the business's assets is a warning sign for me. Why would the current owner want to sign over the main assets of his business? What's to stop the bands from disbanding and re-grouping under a different name to void the contract / how expensive would it be to enforce any contracts?

You won't be an equal partner if you give him 51%. There's really nothing you can do to stop him from taking a back seat if you're buying into a Ltd co. If it's a partnership then you can dissolve the partnership.

[trickywoo]

I did a very simple management buyout a few years ago. I can tell you the legal fees will be well into the thousands.

The contract I had was very simple and transparent but I still wanted proper legal advice. The fee just to review the contract and advise any adverse clauses was 10% of the purchase fee. Admittedly the purchase fee was only £20k but it just goes to show on a simple low level transaction how much lawyers cost. The selling party had their own lawyers draw up the contract and that would have been thousands too.

When we made minor changes I saw an itemised legal bill from their side detailing £15 a minute for phone calls to their lawyers.

[madmover]

budget 5-10k for legal costs
ensure you have a shareholders agreement
make sure you have articles which reflect what it is that you're agreeing
ensure you have clauses to cover key decision making if you don't control the board.

Good Luck! I've bought 2 companies thus far which has proven to be stressful as feck. However, i don't regret either and have learnt a huge amount.. not only about business, my industry etc but myself and what value i place on spare time!

[akirk]

some good comments above, and also good to see that you recognise that 50:50 has potential issues... main question for me:
- why is the investment opportunity availaible?

is the investment to grow the business / so that the seller can reduce input ie semi-retire
what will the money be used for
are you putting the money into the business, diluting shares so that you end up with 50:50 or are you buying shares from the current owner...

it would concern me hugely that assets are being stripped out / that there would be any major change at this time - why are you being asked to buy into a company, but immediately it will be a different shape?

a few too many questions at this point...

[StevieBee]

UncleDave said:

Has anyone ever had any issues with this all going pear shaped?

Ooh, yes!

UncleDave said:

The businesses assets will be restructured before the purchase goes through

This is the first 'red-flag'. When you buy or buy into a business, its assets are one of the driving things that determine its value and the likely return you can expect on your investment. There are two things to consider here:

1. Are you going to have a say in how the restructuring is going to work? If not, can you exert any influence.
2. The value of the business and your interest in it should be done post-restructure, not before.

The second is that you are working with 'bands'. In my experience, this is fraught with challenge but you'll know this better than me! :-)

UncleDave said:

Is it just a case of finding a decent solicitor that is able to draw up a contract for the partnership? How water tight is all this,

Pretty much - although you may also want to appoint an Accountant to undertake due-dillegence to see if there's any financial skeletons in the closet.

What is absolutely vital is a Shareholder's Agreement or Heads of Agreement. Producing this is one of the most unpleasant things you can do in business as you sit in front of the person you are working with, who you might have a very good relationship with, as you work through each possible scenario of them ripping you off. They have to do the same. Unpleasant it is, but almost every story posted in this forum about businesses suffering through managerial dispute is rooted in the absence of such a document.

How water tight is it? Not a lot is the honest answer. Agreements are broken all the time, promises are broken, deals turn sour, people fall out. However, it is better to have something than not as you at least have a framework of reference to refer to when these things happen.

UncleDave said:

Obviously various exit strategies will be covered which sounds like a minefield in itself

This is a priority discussion to have. Do you both want the same thing? If you are looking to sell up in 10 years and retire to Barbados and the other chap sees the business as something to hand over to his Children, then you're going to have a very different approach that will be unlikely to work well.

UncleDave said:

giving him a 51% control whilst remaining 50/50 owners

This is a recipe for disaster. Whilst you can establish systems for quick dispute resolution, that 1% has the propensity to bite you on your bum. Business is all about risk management and that 1% could easily put your investment and ownership liabilities at risk if he vetoes a decision or forces one that you don't agree with.

In essence, he will have 100% of the control but only 50% of the risk.

Is there someone else you could give a minority shareholding too. It is always good practice to have uneven numbers of people on a board.

UncleDave said:

how can 'having the motivation to work on the business' possibly be written into a contract?

Easily. The contract needs to be specific on how this is manifested and written but that's what you pay a solicitor for. Look upon rather like a job description; a check list of obligations on behalf of both parties.


Don't let any of that put you off, though. Many partnership business prosper and prosper well but better to move forward with eyes very wide open.

HTH and good luck.

[KevinCamaroSS]

I am not sure how you can determine what a fair price will be until the 'restructuring' is complete. Sounds to me like the owner is removing nearly all the assets before selling 50% of almost nothing. Your future income stream sounds a bit debatable from what you have said if the 'assets' are sold off to become agreed management instead. Easy to avoid that by simply disbanding the band and starting again (as somebody else pointed out).

[UncleDave]

Massively appreciate the help so far!

I was shocked by the mention of 5-10k legal fees! Luckily given a solicitors a call for a ballpark and they reckon 8-10hrs work would cover a shareholders' agreement and the bill should be somewhere in the region of 1600-2500, provided I/we can sort out the allocation of extra shares and the changing of funds ourselves - which I wouldn't have thought would be an issue though I may be missing something obvious here!

The 51/49 is a definite no-go. I appreciate that now, and thanks everyone who mentioned it for helping me get my head straight on that one. Worst comes to the worst if it all goes horribly wrong I understand we can employ a mediator (at great cost) to impartially solve any sticking points with the business. Otherwise, we'd presumably have the shareholders' agreement to fall back on in the majority of cases such as someone dying, leaving the business, not pulling their weight or wishing to sell their stake.

On the band side of things that a lot of people have mentioned, the actual 'Name' of the band I suppose is the valuable asset that will be retained in the company. Merely the equipment and the right to perform the gigs will be sold off, leaving any maintenance and other oddities at the mercy of the new band owner. There would then be a management fee payable by the band for each booking secured. This company would retain all right to the name, website, etc so and there wouldn't particularly be any motivation for said bands to leave and find their own work as the company provides them with so much via. the (competitive) management fee. If that were to happen, I'm confident that we'd quickly be able to source another good band to fill in for any groups that decided to leave/void their contract as they'd be effectively abandoning that whole income stream and starting from scratch. I'm sure a lot of performers would jump at the chance to go to a high number of gigs from a standing start. I think that alleviates any potential issues there.

akirk said:

why is the investment opportunity available?
is the investment to grow the business / so that the seller can reduce input ie semi-retire?

Eventually this will be the plan yes, though he intends to keep working on the company day to day for at least a year to keep things running and gain a bit more momentum, and more likely he'd remain active until a 'goal' in terms of turnover or net profit is hit before eventually taking more of a back seat. I wonder if this 'figure' for turnover/profit may be something that could be written into the shareholders' agreement, actually?

akirk said:

are you putting the money into the business, diluting shares so that you end up with 50:50 or are you buying shares from the current owner...

Not sure how this would affect things, but there is only 1 share issues at the moment. AFAIK it would be a case of issuing a further share to me and exchanging of the cash and updating of the shareholders' agreement. This may well be a far oversimplified look at it though, and I'd be happy for someone to point out my idiocy The cash will go to the director personally rather than be retained in the business. Which actually now I say it, I'm not sure if that might cause a bit of an issue as presumably the share would have to be issued to the existing director THEN bought by me. Maybe a question for the accountant as to the acceptability of paying money for a share that technically doesn't already exist.

StevieBee said:

This is the first 'red-flag'. When you buy or buy into a business, its assets are one of the driving things that determine its value and the likely return you can expect on your investment. There are two things to consider here:

1. Are you going to have a say in how the restructuring is going to work? If not, can you exert any influence.
2. The value of the business and your interest in it should be done post-restructure, not before.

1. Not at all, though I am yet to find any flaws in the plan should sufficient contracts be in place for the bands upon restructuring.
2. Absolutely, he's submitted his own projected figures for my perusal, and luckily as I have close access with the company and its accounts I've been able to form my own, which actually tally up rather closely. Even my pessimistic figures aren't a million miles off the figures he's given and still promise quite a reasonable ROI but it's all the fees and hoops to jump through to safely get my foot in the door that is causing me the most aggravation at the moment rather than the profitability of the business in its proposed new format.

I've been up all night crunching numbers again this week, and all this is happening in the busiest month of the year. Working 14 hours a day, 7 days a week certainly takes its toll on your decision making abilities so please do feel free to stick your oar in if you're still reading this as I'm struggling a bit!

Edited by UncleDave on Tuesday 21st August 23:26

[akirk]

the big difference between buying a share off the director and investing in the company is where the cash ends up, ie does the company have the use of the cash...

if investing 50k into a business worth 100k then arguably (until spent) you still have 25k in cash in the bank... buying a share from the owner means that you have far less liquidity, and the business has no extra funding...

buying from a current owner means you are simply buying rights to future dividends / profit share etc...

both can be valid, but they have different values

[KevinCamaroSS]

UncleDave said:

Massively appreciate the help so far!

On the band side of things that a lot of people have mentioned, the actual 'Name' of the band I suppose is the valuable asset that will be retained in the company. Merely the equipment and the right to perform the gigs will be sold off, leaving any maintenance and other oddities at the mercy of the new band owner. There would then be a management fee payable by the band for each booking secured. This company would retain all right to the name, website, etc so and there wouldn't particularly be any motivation for said bands to leave and find their own work as the company provides them with so much via. the (competitive) management fee. If that were to happen, I'm confident that we'd quickly be able to source another good band to fill in for any groups that decided to leave/void their contract as they'd be effectively abandoning that whole income stream and starting from scratch. I'm sure a lot of performers would jump at the chance to go to a high number of gigs from a standing start. I think that alleviates any potential issues there.

This makes no sense to me at all. Surely a band is the conglomeration of the individual performers, the music and the name. E.g. festival/gig organisers book the band because of who they are and their music. This is not a right to perform, but a request to appear for a fee. I do not understand 'right to perform at gigs'.