Ring fencing existing clients in a LTD from new director
Discussion
I’m joining an existing business as a director and shareholder.
Is there a type of legal agreement that allows the current/main director/owner to retain and keep the profits from his existing clients to date once I have joined the company as director and shareholder?
In other words example , limited company has one director called A with 100% shareholding and has 5 existing clients bringing in revenue of 100k and profit of 40k. Director B joins business as director and 50% shareholder is there any way for director A to ring fence his existing clients so that director B wouldn’t be entitled to these profits or revenue from these clients (some sort of legal agreement )?
Obviously going to speak to a lawyer but thought I would say what pistonheadsSays first
Is there a type of legal agreement that allows the current/main director/owner to retain and keep the profits from his existing clients to date once I have joined the company as director and shareholder?
In other words example , limited company has one director called A with 100% shareholding and has 5 existing clients bringing in revenue of 100k and profit of 40k. Director B joins business as director and 50% shareholder is there any way for director A to ring fence his existing clients so that director B wouldn’t be entitled to these profits or revenue from these clients (some sort of legal agreement )?
Obviously going to speak to a lawyer but thought I would say what pistonheadsSays first
jonny70 said:
I’m joining an existing business as a director and shareholder.
Is there a type of legal agreement that allows the current/main director/owner to retain and keep the profits from his existing clients to date once I have joined the company as director and shareholder?
In other words example , limited company has one director called A with 100% shareholding and has 5 existing clients bringing in revenue of 100k and profit of 40k. Director B joins business as director and 50% shareholder is there any way for director A to ring fence his existing clients so that director B wouldn’t be entitled to these profits or revenue from these clients (some sort of legal agreement )?
Obviously going to speak to a lawyer but thought I would say what pistonheadsSays first
Anything is possible- you could have a shareholders agreement specifying this, but its complicated and sound hellishly messy. Is there a type of legal agreement that allows the current/main director/owner to retain and keep the profits from his existing clients to date once I have joined the company as director and shareholder?
In other words example , limited company has one director called A with 100% shareholding and has 5 existing clients bringing in revenue of 100k and profit of 40k. Director B joins business as director and 50% shareholder is there any way for director A to ring fence his existing clients so that director B wouldn’t be entitled to these profits or revenue from these clients (some sort of legal agreement )?
Obviously going to speak to a lawyer but thought I would say what pistonheadsSays first
Perhaps easier would be to have 2 classes of shares which pay out different dividend each year- you'd have to be adult enough to agree what those were though. Its a source of potential future conflict mind!
jonny70 said:
IIs there a type of legal agreement that allows the current/main director/owner to retain and keep the profits from his existing clients to date once I have joined the company as director and shareholder?
Why would you want to sign such a thing? Or is he/she asking you to?They’re not the director’s clients. They’re the company’s clients.
You could simply pay the director a bonus equivalent to the profit from those clients (which is probably the better way to do it). Or, as others have said through multiple share classes but that’s got much more admin/ongoing issues associated with it.
But I’d see it as a warning sign for the new director that the old one may not necessarily see the company in the correct light.
For example:
What happens when a new client comes on board? 50/50 split of that profit (even if the existing director is spending time servicing his existing clients?) or whoever reeled ‘em in gets it?
Or if the existing guy leaves, does he take “his” clients?
Or what is the impact of any behaviour/arrangement on future growth or sale?
Buying in to a business can be tricky. Helping someone go through it at present.
There’s sometimes a tendency for the original party/parties to be territorial, which isn’t entirely surprising if they’ve spent time building something and you walk in expecting money (that they see as theirs) from day 1 but it can also be down to simple economics. Growing smaller businesses is tough, the extra mouth to feed is expensive and could well dent the exiting guy’s earning to an extent he can’t tolerate until things have started to grow.
You need to understand really behind the request and then figure out a solution that works. For example. it could be that you put in money/something else or value up front, or that the current guy takes an extra £x per annum bonus for y years (which you could taper or link any reductions to business growth).
The key, if it’s ending up at 50/50, is that it’s seen as a proper partnership. BS around owning clients will almost certainly cause issues further down the track if you don’t resolve early on. After all, if the other guy has a choice of focussing on client A (where he gets all of the profit) or client B where he has to split it, which way do you think some people would lean?
If putting in money, think about how you’re doing it. New money into the company can help it grow but isn’t always seen by small business owners as helping them directly. Sometimes it makes sense to directly buy shares off the current owner so that they feel they actually got something for their hard work prior to you becoming involved. (Obviously it doesn’t need to be either/or).
Ultimately, you need to know whether it’s a warning sign about behaviour/expectation or something purely practical and then address accordingly.
You could simply pay the director a bonus equivalent to the profit from those clients (which is probably the better way to do it). Or, as others have said through multiple share classes but that’s got much more admin/ongoing issues associated with it.
But I’d see it as a warning sign for the new director that the old one may not necessarily see the company in the correct light.
For example:
What happens when a new client comes on board? 50/50 split of that profit (even if the existing director is spending time servicing his existing clients?) or whoever reeled ‘em in gets it?
Or if the existing guy leaves, does he take “his” clients?
Or what is the impact of any behaviour/arrangement on future growth or sale?
Buying in to a business can be tricky. Helping someone go through it at present.
There’s sometimes a tendency for the original party/parties to be territorial, which isn’t entirely surprising if they’ve spent time building something and you walk in expecting money (that they see as theirs) from day 1 but it can also be down to simple economics. Growing smaller businesses is tough, the extra mouth to feed is expensive and could well dent the exiting guy’s earning to an extent he can’t tolerate until things have started to grow.
You need to understand really behind the request and then figure out a solution that works. For example. it could be that you put in money/something else or value up front, or that the current guy takes an extra £x per annum bonus for y years (which you could taper or link any reductions to business growth).
The key, if it’s ending up at 50/50, is that it’s seen as a proper partnership. BS around owning clients will almost certainly cause issues further down the track if you don’t resolve early on. After all, if the other guy has a choice of focussing on client A (where he gets all of the profit) or client B where he has to split it, which way do you think some people would lean?
If putting in money, think about how you’re doing it. New money into the company can help it grow but isn’t always seen by small business owners as helping them directly. Sometimes it makes sense to directly buy shares off the current owner so that they feel they actually got something for their hard work prior to you becoming involved. (Obviously it doesn’t need to be either/or).
Ultimately, you need to know whether it’s a warning sign about behaviour/expectation or something purely practical and then address accordingly.
OP - are you buying into the business (i.e. buying 50% of the existing business)?
If you are then you're also paying for the existing clients/profits. If not then it makes sense that he wants to retain the business that he's generated but for there to be a separate profit sharing arrangement for new business that you both create.
I know a couple of people who have what sounds like a similar arrangement. Both pay towards the running costs of the business (premises, staffing ) but both have their own clients that they have brought in. Each keeps the profits HIS clients generate. However theirs is a Partnership rather than LLP
If you are then you're also paying for the existing clients/profits. If not then it makes sense that he wants to retain the business that he's generated but for there to be a separate profit sharing arrangement for new business that you both create.
I know a couple of people who have what sounds like a similar arrangement. Both pay towards the running costs of the business (premises, staffing ) but both have their own clients that they have brought in. Each keeps the profits HIS clients generate. However theirs is a Partnership rather than LLP
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