Becoming a partner in a LTD

[Safeqaz]

Hi Guys,

I have spoken to a company director who specialises in lettings/mortgage brokering and surveying. Currently they own the busines 100% and need some further funding to expand.

They are willing to provide me 45% of the business for this additional funding ( 50K ).

What concerns me are the following :-

1) The director is taking a salary of £50k
2) The director expenses keep going up ( bringing on extra staff for the business )
3) There is a debt of £20k
4) If i put in the funds i would like 50/50 rather than 55/45 however the director wants control.

Is is possible a shareholder agreement can be created that states profits will be shared 50/50 and if the company wishes to spend money over a certain amount then both parties will need to be consulted?
I will be approaching a solictor to carry out due diligence especially if the company has further debts and also to check the directors financial status.

Is there anything else you guys would recommend or if im missing something here?

Thanks

 

[kulture]

If the business was so sucessful, why are they not simply getting a loan?

The suggestion is that you are being asked to BUY 45% of the company for £50k even though the company has debts of £20k. Is the company actually worth £111K? What assets does the company have?

Why do you think that bringing on extra staff are director's expenses and not company expenses?

 

[Mark T Jones]

You can split profits however you agree (but might need to check if this can all be via dividend)

£50k seems a modest salary for a director- again, unless there is a dividend. As co-owner, part of the balance for you us to ensure that they are suitably remunerated to stay motivated, whilst retaining money for growth and for you.

You may have looked at the back story, but I'd be asking why they are struggling in what has been pretty benign lending and property market, and how they will weather the coming recession, with a very high chance of tumbling property values and a credit squeeze.

 

[Safeqaz]

Thanks for the responses, sorry i meant company expenses rather than director expenses.
Regarding solicitors for due diligence is there any one you recommend?

I will only accept the offer of 45% once the debt is paid off and a salary isnt taken from the business untill i receive my investment back.

Thanks

 

[WaveJumper]

How long has this company been trading

 

[Safeqaz]

Its been trading 2 years, in addition do i really need solictors here? Or can i simply instruct accounting firm to carry out an audit?

Thanks

 

[fisicx]

Its been trading 2 years, in addition do i really need solictors here?

YES!

 

[Bob Morgan]

If you're going to pursue this, you will need to do some thorough detective work and due diligence. Keep in mind also that the property market is due to go through significant change too - Sounds like they are looking for an 'Angel'

 

[kulture]

I am a cynic, to me it sounds like they are looking for free money.

 

[Safeqaz]

Yes seems like they are looking for an Angel, i do anticpate the property market slowing down bringing a decrease which will impact all 3 of their specialities!

 

[tony84]

Thanks for the responses, sorry i meant company expenses rather than director expenses.
Regarding solicitors for due diligence is there any one you recommend?

I will only accept the offer of 45% once the debt is paid off and a salary isnt taken from the business untill i receive my investment back.

Thanks

You want to put £50k into the business and the current owner needs to pay off the debt with that and not take a wage until you get your £50k back. Have I got that right?

 

[MBE2017]

£50k seems a modest salary for a director- again, unless there is a dividend. As co-owner, part of the balance for you us to ensure that they are suitably remunerated to stay motivated, whilst retaining money for growth and for you.

You may have looked at the back story, but I'd be asking why they are struggling in what has been pretty benign lending and property market, and how they will weather the coming recession, with a very high chance of tumbling property values and a credit squeeze.

I wouldn’t consider investing a a two year start up where £20k of debt has been racked up, whilst a director pays himself £50k.

OP, you have identified several concerns, expenditure, debt etc, all at a time whilst property has been booming. Personally I would give this one a swerve, but that’s just my opinion.

If you were to go ahead I would want 50% minimum, a very good shareholders agreement, financial control, and the director to reduce their salary by £20k with immediate effect, until the company returned to profit. I wouldn’t want any investment paying off the debt.

Once in profit, then discuss a profit related bonus to bring his salary back up.

 

[ChrisGoodfellow]

What kind of debt is it? If it's a Bounce Back Loan, the interest is low and they may be holding on to the cash as a buffer. Which takes me to my second question, how much money do they have in the bank?

As noted about, there's a always a need to due diligence to properly understand their position. Get help!

 

[Karimbo]

Thanks for the responses, sorry i meant company expenses rather than director expenses.
Regarding solicitors for due diligence is there any one you recommend?

I will only accept the offer of 45% once the debt is paid off and a salary isnt taken from the business untill i receive my investment back.

Thanks

Id say jog on.

No way is a director going to agree to that. You're asking for a lot. Potentially no salary for director for years.

How is the director going to live if they have no other income.

 

[tony84]

Id say jog on.

No way is a director going to agree to that. You're asking for a lot. Potentially no salary for director for years.

How is the director going to live if they have no other income.

This is my view.
If they do not take a wage, they could clear the debt. In which case they do not need the OPs money...

Heres £50k, but you have to clear the debt and cant take a wage until I have been paid.

 

[Financial-Modeller]

Its a difficult level of investment; enough that you need to do due diligence and pay for proper documentation, but not enough that you can afford to overspend on due diligence and documentation!

Fundamental question though; you say:

...i do anticpate the property market slowing down bringing a decrease which will impact all 3 of their specialities!

but you want to invest in it?

 

[Plumb Spares Direct]

Hi Guys,

I have spoken to a company director who specialises in lettings/mortgage brokering and surveying. Currently they own the busines 100% and need some further funding to expand.

They are willing to provide me 45% of the business for this additional funding ( 50K ).

What concerns me are the following :-

1) The director is taking a salary of £50k
2) The director expenses keep going up ( bringing on extra staff for the business )
3) There is a debt of £20k
4) If i put in the funds i would like 50/50 rather than 55/45 however the director wants control.

Is is possible a shareholder agreement can be created that states profits will be shared 50/50 and if the company wishes to spend money over a certain amount then both parties will need to be consulted?
I will be approaching a solictor to carry out due diligence especially if the company has further debts and also to check the directors financial status.

Is there anything else you guys would recommend or if im missing something here?

Thanks

What does this company have that you want or need? Do they have some good water tight contracts? Do they have qualified, experienced people that would be hard to replace? If not, why not start a similar business from scratch yourself? What are you buying exactly?

 

[Dinky]

General questions - what is the reason a director would take 50K salary vs. minimum salary and dividends please?

 

[simon field]

General questions - what is the reason a director would take 50K salary vs. minimum salary and dividends please?

Salary is pretty much guaranteed, dividends are not.

 

[MBE2017]

General questions - what is the reason a director would take 50K salary vs. minimum salary and dividends please?

You cannot take dividends unless you are in profit, and then you can only take what can be afforded. So in this case, he would be on NMW only.

 

[Dinky]

But he's not on NMW is he as op said he is taking 50k salary. If there is no profits, how is the director able to take 50K salary please? I understand that there could be 50K in profit before the salary is taken leaving company with no profit after, but if there is 50k profit to begin with, why would he take all as salary instead vs. low salary and dividend to minimise personal tax?

 

[simon field]

But he's not on NMW is he as op said he is taking 50k salary. If there is no profits, how is the director able to take 50K salary please?

Maybe there’s no profits *because* he took a £50k salary!

 

[japancool]

But he's not on NMW is he as op said he is taking 50k salary. If there is no profits, how is the director able to take 50K salary please?

Money in the bank, loans, overdrafts, investment money.

He can take a salary, which is a cost to the business, even if there are no profits. He cannot take a (legal) dividend if there are no profits.

 

[MBE2017]

But he's not on NMW is he as op said he is taking 50k salary.

I was replying to the question you asked. Everyone knows he is on £50k pa, you asked why would he take a £50k salary rather than NMW and dividends.

You asked that question, no one else. Try to remember your last post, before posting again.

 

[Karimbo]

Seems like there just general mistrust in the director. Go with your gut OP. You dont trust or beleive in their business practices why invest?

Did you know anyone can be a letting agent or mortgage broker? These businesses have no assets, everything is in contracts. the asets of the business are basically the employees and staff managing the business.

Not sure why you want to be a minority shareholder in this sort of business - they can basically just do a rug pull on the silent partners and just start taking on new clients through another business and the business can be stolen from right under your nose.

Sure you can have agreements in place not to do that. But you have to sue them in court (expensive) to enforce the contract in they do a rug pull.

It's a bit suspect to me how someone is willing to give away such a large equity in a business for not much money when it seems they don't really need the money.

the 45% seems intentional to prevent OP from having any decision making in the business.

 

[Karimbo]

Is is possible a shareholder agreement can be created that states profits will be shared 50/50 and if the company wishes to spend money over a certain amount then both parties will need to be consulted?
I will be approaching a solictor to carry out due diligence especially if the company has further debts and also to check the directors financial status.

It's entirely possible to split the shares 50:50 but then have a agreement where the founder has more voting rights so they have majority control. Vice versa.

If the company does not pay dividends (I assume it doesn't because of the tax inefficent way of paying themselves through PAYE). Then you wont see any dividends money for a while.

You have to have agreements in there on how much the bysiness can reinvest and how much it pays in dividends.

If they are trying to "expand" they wont have retained profits for dividends. The founder benefits from their salary from the business, the silent partner who isn't working in the business gets nothing.

 

[The Resolver]

Dividernds have to be shared out in the exact proportion of the dividend receving shares. One solution to enable profits to be shared 50/50 while he still has shareholder voting control would be for you both to have, say 45% but with him taking 10% as an alphabet share for which the class has voting rights but no dividend or distribuiton rights.

I would however tread carefully with a full Due Diligence, which I can do for you. I have been advising on company matters/issues/disputes on this Forum for over 16 years now. You can search my responses back to 2006. However subject to the accounting records (demand to see them - the bookeeping not just the annual accounts) I may need to brng in an accountant.

A full Shareholders Agreement is absolutely vital (click to learn why) to cover a lot more than deciding on the dividend (in fact the law does not permit a pre-determined dividend since it has to take into account the debts at the time..)

PS If his wish to have voting control is claimed purely to avoid stalemate then another solution is my new (not yet launched) service (born at a UKBF members get together) at www.Mr2percent.com