Exit plans, directors, shares and fighting for your life!

[Beaniecheese]

I'm looking for specific advice regarding moving forward with the business I am currently a small share holder and director of.

A bit of backstory. I joined the business several years ago, which was struggling at the time to pay wages and had a turnover in the region of £150k. I was joining as a designer, but having worked for myself for 20 years and freelancing for many companies and seeing what works and what does not, I realised that what they offered as a service was unique and that I could do something more here than just be a designer.

A few years ago his plan was that when he retires that he just wants a wage from the business and that he would leave it to the staff, of which there were just three of us at the time.

Fast forward to today and I'm Sales and Marketing Director with a 5% share (three staff have 2.5% share each). The company is turning over £700k, and if I keep pushing the company into the right direction I can see it turning over maybe £1m or more in the next year or so, maybe £2m in 6 or 7 years. However, getting my directorship was problematic. The MD told me that he wanted to make me a Director in the coming year, but after a delay of 12 months it never came. I brought up the subject agin and he said he would get back to me. Then one day he came in early and told me that he did not want me as a Director! I was direct and told him that in that case I would leave and set-up my own company in direct competition. A week later he changed his mind and made me a director.

This was really upsetting for me as I trusted this man to deliver on his word and he failed.

The idea now, is that when he retires (3 years) I will be MD. However, when I brought the subject up of his 'exit plan', he did not have one. I asked about his shares, which between he and his dad own 87.5%. But he said he is keeping his shares and has no plans to give them away!

So here I am, looking at not just protecting my future, but also the staff. He could tell me his 'exit plan' and possibly change his mind.

My choices are to stay and hear his exit plans, and get something to make them concrete (as he has changed his mind in the past) if they are good. Or leave and start my own venture with one or two of the staff.

Has anyone got any thoughts on this, any expertise in shares, directorships or exit plans?

I wait your knowledge and advice.

 

[Ozzy]

Have you broached the option of an MBO with them both? (Management Buy Out)

Without an exit strategy the business will die with them when they die, or become too old or unhealthy to work. So they must start to think about their exit strategy if they don't have one, and if they aren't looking to sell out to an external buyer an MBO is a good option to grow their "legacy" which might appeal to them.

 

[Beaniecheese]

I have not discussed a buy out as of yet. He's always said he just wants a wage from it when he retires. When I had to fight for the Director position I emphasised that if he wanted a wage when he retires who better to be MD than I to assure that he keeps earning. However, that would prove difficult if I keep building the business at only 5% share. If an MBO is an option how would a service led business be priced?

 

[Ozzy]

how would a service led business be priced?

That is where you and they both get experts/advisers in to represent each others interests. Your advisers would say £10 and their advisers would say £20, and then you negotiate and end up at £15.

Just a word of advice for the future from my own experience, if you reach that stage, it's not personal. It's just a business negotiate and remember everyone will be looking at things from their perspective, and each of your advisers will be looking to protect their client. It's not personal.

 

[Mark T Jones]

This was really upsetting for me as I trusted this man to deliver on his word and he failed.

he said he is keeping his shares and has no plans to give them away!

I think your answer is above.

Not that they should 'give shares away', but from your perspective you need a clear strategy/plan to be agreed in writing, which includes the basis on which shares can be bought or earned.

Unfortunately, from the experience of several of my customers, being MD of a company where the original owners still hold controlling shares is an unsatisfactory place!

It's a tough conversation, but one that is definitely needed

 

[Ozzy]

It's a tough conversation, but one that is definitely needed

I wonder @Mark T Jones whether the existing owners simply haven't considered their options nor thought more long term about the business. It isn't unusual after all, so many people do go into business and just think about what's immediately in front of them - never think about what if I get by a bus, will I want my spouse to be burdened with the business, etc, and do i want a "lump sum" to retire on, etc.

Either way I completely agree with you, a tough conversation needs to be had so the OP can consider their own options.

 

[Beaniecheese]

Not that they should 'give shares away', but from your perspective you need a clear strategy/plan to be agreed in writing, which includes the basis on which shares can be bought or earned.

So far they have been bought and earned. I suggested years ago that the seniors get shares to help with loyalty. We got 2.5% of shares as which we paid for at around £300. They are a specific share that gives us a specified lump of money twice per year at £2,500. As a Director I was offered an additional 2.5% which I have.

I wonder @Mark T Jones whether the existing owners simply haven't considered their options nor thought more long term about the business.

They have not considered anything, or they are hiding it completely if they have (when I say they, I mean the MD and his 90+ year old father). The MD is not business minded whatsoever.

 

[Ozzy]

So far they have been bought and earned. I suggested years ago that the seniors get shares to help with loyalty.

This is not unusual, as @Mark T Jones stated shares are not "given". The most common method is through EMI options where the staff are given the option to buy the shares at a tax efficient discounted rate. You'd never (almost never) be just given shares, and even with EMI options they are usually linked to performance targets.

The MD is not business minded whatsoever.

Again, this isn't that unusual either when it comes to considering exit options. I'm having a few coffee's (mentoring) a business owner in their 60's who has just for the first time started to realise they have a business with no succession plan in place for them to exit. It's more common than you may realise for business owners to start to think of this too late in the day.

 

[DontAsk]

I would get out and start your own business if you are the confident. They will probably have a vastly over-inflated opinion of the value of their shares, given that most of the company value seems to be in you.

 

[Beaniecheese]

So let's say the MD does want to retire, and does want to pick up a wage of some sort (dividends whatever), and does want me to take over as MD. IS there a formal way of doing this?

I'm not formerly trained in anything, so my brain just tells me that I need to be the majority share holder in order to move the company in the right direction and be able to put all my efforts in. Otherwise, I may as well just leave with a member of staff and start again.

 

[Beaniecheese]

I would get out and start your own business if you are the confident. They will probably have a vastly over-inflated opinion of the value of their shares, given that most of the company value seems to be in you.

If myself and a colleague left and took our clients with us. This unfortunately would break the current business completely. That's not what I'm about though. But that's what would transpire.

 

[MBE2017]

I think the biggest red flag for myself is the current owner stating he did not want you as the Director initially, and MD going forward.

This means either he questions your competence, or he has other plans IMO.

Once the trust has gone in any relationship it is hard for it to survive, you sound like you were made a Director just to keep you and others at the company. Could you trust anything these people will say in the future?

You have to decide whether you want your own business or prefer being an employee. Staying as an employee things will stay the same, striking out on your own would involve a huge learning curve, or getting yourself the right help.

 

[Ozzy]

I'm not formerly trained in anything, so my brain just tells me that I need to be the majority share holder in order to move the company in the right direction and be able to put all my efforts in.

This isn't necessarily that important, just my opinion. If I had the right investors and board of directors in the business I currently run I wouldn't care if I was the majority shareholder if it mean't the value of the business overall was worth more.

 

[Beaniecheese]

Once the trust has gone in any relationship it is hard for it to survive, you sound like you were made a Director just to keep you and others at the company. Could you trust anything these people will say in the future?

He made me a Director as he either did not want me to leave (probably did not even consider it), or he did not want me as competition, or he did not want me to take my clients with me. Or a mix of all three.

I mentioned to him a couple of months back that some friends of mine suggested that whats stopping him from just selling the business when he retires. He got very angry at this and said they do not know him. I reminded him of his mind changing and if there are any trust issues, he's earned them. The only way he can earn trust back is to do an exit strategy that we agree to and have it concreted. Or, as my gf suggested, why wait, why not just do it now.

 

[Ozzy]

Or, as my gf suggested, why wait, why not just do it now.

He might "love" his business and feel people are trying to take away his baby that he feels he has worked so hard to build up...or something like that. He may be taking this all very personally.

 

[Beaniecheese]

You have to decide whether you want your own business or prefer being an employee. Staying as an employee things will stay the same, striking out on your own would involve a huge learning curve, or getting yourself the right help.

It would be a colleague and myself who would leave. I've ran small businesses before and freelanced for over 20 years. So not that much of a learning curve. Plus we have clients we can take with us and should be able to hit the ground running. But like I said, I'd rather it just worked out and then I could cary on building what I started and the rest of the staff would have a good future.

 

[Beaniecheese]

He might "love" his business and feel people are trying to take away his baby that he feels he has worked so hard to build up...or something like that. He may be taking this all very personally.

I get that completely. But if he was to take off his rose tinted spectacles he would see that the growth was not down to him. He was riding on a single client model and hardly gaining any new business for over ten years. I arrived, changed everything, and now we're reaping the rewards with 4 enquires every single day (was 1 per month).

 

[MOIC]

Once the trust has gone in any relationship it is hard for it to survive, you sound like you were made a Director just to keep you and others at the company. Could you trust anything these people will say in the future?

You have to decide whether you want your own business or prefer being an employee. Staying as an employee things will stay the same, striking out on your own would involve a huge learning curve, or getting yourself the right help.

Sound advice.

Go it alone would be my choice.

 

[SillyBill]

Am struggling to see what cards he holds and why you would even contemplate anything other than a very small offer for his shares. Whomever has the contacts/does the work in a company of that size owns the value, beyond that is there very little IMO, to none. No sub £1M business is ever worth having a non-involved shareholder, retired, and drawing an income in perpetutity, retired means redundant/fiscal drag in a business of that size. Can only assume he thinks you are naive enough to provide him with this lifetime benefit and/or don't have the cajones to actually go it alone. Perhaps he is right?

FWIW I did a MBO, it was my offer (which was generous in the circumstances) or nothing considering I could do it on my own. And this reads to me as the same. Given I was young and hungry then and my counterpart was at the death of his career, and non-involved, and I held the contacts, it is an incredibly strong hand to have. Provided you set the tone in any negogiation that you'd walk if the terms aren't met (rendering the operation without a management) then unless he is stupid (or am not seeing something) he'd take what is offered. I can't even begin to imagine being a MD for a small business with an owner who is retired and taking money out. Absolute worst of all worlds. "Bend over" comes to mind. I really hope when my time is up I don't lose my marbles and understand I've had enough out and it is time for someone else. Chuck me a few quid and take the reins...Those who feel like they're owed until death, as if they've created a pension fund, are deluded IMV.

 

[HFE Signs]

You really need a plan whereby you buy all of his shares over time - this would guarantee him an income for x years while you are paying him out. The big problem you have with this man is trust.

 

[MBE2017]

...Those who feel like they're owed until death, as if they've created a pension fund, are deluded IMV.

A guy near where I live sold his small restaurant chain, only 2-3 sites, but they were popular and well supported. He decided to sell, and took a cash offer, plus a sizeable portion of whatever the VAT quarterly bill was.

I reckon he made more in retirement than he ever did building the business. I wouldn’t have agreed to the deal myself, but the buyer knew the owner and the business very well.

I can’t blame the original owner for selling his business so shrewdly.

 

[WaveJumper]

I can't really add anything to the advice above other than to say you need to follow your own plan and make sure your future is secure. Personally not sure I would trust the current owners, they clearly are only looking at their own interests and if you think at some point in the future they will be handing over the rains in one form or another I think your going to be very disappointed.

Set out your own plan, whether a MBO or other, tackle it now, if you hit a brick wall youre going to know where you stand and have time to move on to pastures new. Just don't rely on empty promises.

 

[Beaniecheese]

You really need a plan whereby you buy all of his shares over time - this would guarantee him an income for x years while you are paying him out. The big problem you have with this man is trust.

I think that is brilliant advice.

 

[Beaniecheese]

I have just checked my share certificates and I have class C and Class D. So both non-voting. I now see myself as a Mickey Mouse Director.

 

[MBE2017]

I have just checked my share certificates and I have class C and Class D. So both non-voting. I now see myself as a Mickey Mouse Director.

Sorry to say I am not suprised. I think you are just being thrown the odd bone to keep you happy, until the next time.

So, you either go it alone, or sit down with your boss and explain what is required to secure you staying, both are potentially dangerous, both versions could result in you leaving, or being sacked etc.

Alternatively stay quiet and keep working. Just my viewpoint.

 

[Casually made]

He / they will never sell them shares

Small family businesses are seen as legacy's the reason he didn't want to make you director probably was to avoid giving you too much control over the business

This will cause a lot of wasted time and money via legal battles in the future

Leave now go on your own if you think your vision is that sound

 

[Beaniecheese]

I sat down with the MD yesterday and I made it clear that I do not want to continue building a business that I do not get anything back from, as I can easily start my own company. So we have formerly agreed to a MBO. No figures have been discussed as of yet.

So my question now is does anyone have experience with MBO's and how to go about them?

 

[DontAsk]

Just beware he will have a vastly inflated opinion of the business's worth.

 

[MBE2017]

I sat down with the MD yesterday and I made it clear that I do not want to continue building a business that I do not get anything back from, as I can easily start my own company. So we have formerly agreed to a MBO. No figures have been discussed as of yet.

So my question now is does anyone have experience with MBO's and how to go about them?

I wish you well, but I hope this is not more time wasting to hold onto you as long as possible.

 

[Clinton]

I sat down with the MD yesterday and I made it clear that I do not want to continue building a business that I do not get anything back from, as I can easily start my own company. So we have formerly agreed to a MBO. No figures have been discussed as of yet.

So my question now is does anyone have experience with MBO's and how to go about them?

Yes, but I'm not taking new clients at present.

However, go to any decent corporate finance firm and they'll be able to advise you.

Be prepared to spend a few grand. It's not simple stuff, this MBO business!

 

[NickGrogan]

Sorry, but this makes no sense.

You're talking about a company with 5? staff that turns over £700kish.

So turnover is around £100k per person - turnover, not profit.

You are the sales and marketing director and if you and your friend leave the business will collapse, and you could easily start on your own.

So what you would actually be buying is yourself.

Have you had any dividends from your 5% shares? What authority do you have as a director? I think he's been stringing you along.

Many many moons ago I did an "MBO"

The company turned over about £500k (service based) and had 2 staff (me+1), 2 contracted advisors, and 3 self-employed salespeople. The owner got a job and didn't want the hassle of being a director as well as his new job. I managed and controlled pretty much everything.

We discussed the options and agreed he'd sell the business to me. The price? I made him a coffee.

I'd say your business is worth about the same, possibly less as you have more overheads.

 

[Beaniecheese]

We've made 100k profit this year, my projection for next year is £150k to £200k.

 

[NickGrogan]

OK, and what are the hidden liabilities?

My price of one coffee still stands.

It's not big enough for him to sell and it's too small for anyone serious to buy.

What do you think it's worth?

 

[Newchodge]

We've made 100k profit this year, my projection for next year is £150k to £200k.

May I suggest that you try to assess, objectively, the pros and cons of a management buy out and setting up fresh. I wonder if you are over-keen for a buy out for emotional rather than business reasons.

 

[Beaniecheese]

My assessment is in very simple terms – Assets plus a payment to the value of what my colleague and I feel very hard work in setting up a new company for what effectively would take a year or two is worth.

So let's say assets are 100k and extra hard work for 2 people for 2 years is worth 100k then maybe 150k MBO. Does this seem logical?

There is a bit of emotion here, but that is not affecting my judgement. It's simply my lack of experience in these matters, which is non-existent.

 

[Newchodge]

My assessment is in very simple terms – Assets plus a payment to the value of what my colleague and I feel very hard work in setting up a new company for what effectively would take a year or two is worth.

So let's say assets are 100k and extra hard work for 2 people for 2 years is worth 100k then maybe 150k MBO. Does this seem logical?

There is a bit of emotion here, but that is not affecting my judgement. It's simply my lack of experience in these matters, which is non-existent.

Pros and cons, not values.

However, What are the assets that are worth £100K?

 

[NickGrogan]

My assessment is in very simple terms – Assets plus a payment to the value of what my colleague and I feel very hard work in setting up a new company for what effectively would take a year or two is worth.

So let's say assets are 100k and extra hard work for 2 people for 2 years is worth 100k then maybe 150k MBO. Does this seem logical?

There is a bit of emotion here, but that is not affecting my judgement. It's simply my lack of experience in these matters, which is non-existent.

Sorry, first you said that you and a partner could walk away with the clients, now you're saying it would take a year or two of very hard work. Those are very different statements.

What about the liabilities? What does the company actually do?

 

[BubbaWY]

My assessment is in very simple terms – Assets plus a payment to the value of what my colleague and I feel very hard work in setting up a new company for what effectively would take a year or two is worth.

There is obviously a value on good will i.e. if it is a reputable business with a long and stable trading history. How do you put a value on that though?

 

[MBE2017]

There is obviously a value on good will i.e. if it is a reputable business with a long and stable trading history. How do you put a value on that though?

£100? How long is a piece of string.

Goodwill is seriously overrated, I would cost out starting from fresh personally and control the whole lot from day one, chances are this guy will string you along as long as possible and pull out of the sale last second.

It will take you several months as a bare minimum doing due diligence before completing IMO, and you would be working those two years anyway.

I do wish you well, but I think this sounds an almost non sellable business for most buyers, you are probably the only one truly interested in it. It’s hard to offer any true advice other than general since the forum has no clue what the assets are, liabilities, the field you are trading in etc.

 

[NickGrogan]

There is obviously a value on good will i.e. if it is a reputable business with a long and stable trading history. How do you put a value on that though?

If the OP could take the clients with him as he claimed, then most of the Goodwill is actually with him, not the company anyway.

Plus it's only generating about £100k profit which suggests it's not worth much, either way.