Joining two (or more) LTD companies

[Michael14]

Hello,

I own a restaurant which operates in multiple locations under same name but different LTD companies.

This was done to make it less risky in case of new locations not working well. In that case, I can just close that LTD company without impacting other profitable locations.

The first restaurant has two shareholders where one was just an investor (non active role), and other units have also two shareholders, but second shareholder in those units (I am a first shareholder in all units) is different to the second shareholder in first unit.

Now, if we decide to somehow join all the companies, how would that work? How would different shareholders of individual ltd companies know what % of the group should they own/receive.

My questions are:

1. Do we need to make a holding company or we can make a new LTD company which would somehow become owner of other companies?

2. What would be the best way to structure this?

3. Assuming that all shareholders are reasonable, would it be better to award ownership % based on sales in all units or profits? If we were to sell a restaurant group and use EBITDA multiple to determine total value, I am assuming that total sales per unit are not that relevant.

If it will make it easier for calculations we can assume that I am person A, shareholder in first unit is person B (and owns 40% of that unit) and shareholder in other units is shareholder C (and owns 30% in those units). I own 60% in first unit and 70% in other units.

Unit 1 (with shareholder B) does 30% of total revenue and 40% of total profits.

Thanks!

 

[brucegreig]

You could do this:

Agree a value for each company and therefore a value for the entire enterprise.

If you value based on profits, you could call it £1m for the first company, £1.5m for the second company, so £2.5m total. (I have no idea of the actual numbers, these are just examples such that first company is 40% of total value given that that company generates 40% of total profits)

So A owns shares worth 60% * £1m = £600k, + 70% of £1.5m = £1.05m. Total = £1.65m
B: 40% x £1m = £400k
C: 30% x £1.5m = £450k

Set up a new holding company ("Newco") which will acquire all the shares, in return for issuing its own shares to each existing shareholder in the correct proportions. So A would have 66.6% of newco, B 16%, C 18%, to reflect their existing share of the entire enterprise.

I think it would be tough to do this without legal / accounting advice, though, would end up being quite messy if you accidentally did something wrong.

The hard part is getting everyone to agree on a value for their shares, and on agreeing to do the transaction (B and C might not want to be exposed to the fortunes of the other units).

 

[Mark T Jones]

Firstly, follow @brucegreig's advice.

However the 2 really important parts hare are the discussions/negotiations with respective shareholders and the legal/financial advice around it.

And, of course GET A SHAREHOLDER AGREEMENT

 

[2020Lawyer2020]

Is there any reason to do this joining of all the companies though? Could you not just leave as it is but in any event put in place written shareholders' agreements for each company which any lawyer on here could draw up for you.

 

[MBE2017]

The real question is why join them at all?

Sometimes it’s better not to fix something that is working well.

Let’s say you did merge the companies, and one site starts doing terrible, the person running it does not do the hard work And turn things around, are the other people going to be happy seeing their profits eroded, whilst the poorly performing site gets subsidised?

 

[Michael14]

@brucegreig Thank you so much for your detailed response! I was thinking something among those lines but wasn't sure if it can be done without tax implications. So, to clarify (assuming that accountant is capable and that all shareholders are agreeable and reasonable), there should be no tax implications (any sort of payments) here at the moment of creation of new holding company and issues of new shares?

@Mark T Jones thanks for your response! Yes, we would all agree that we need to do this so that it is legally binding and solid. I do not think there will be any issues.

@2020Lawyer2020 and @MBE2017 I absolutely agree that something that is working fine should not be fixed. The reason why I am asking this is that in case we want to sell business, then we would need to sell all locations at once and split the profits from sale. Obviously, in order to attract serious investors who will determine value mostly from EBITDA and multiple, we all agree that it is the best to have one company to sale which will include all locations. Until we come to that point though, we will probably continue opening each unit as LTD, but we would like to know our options since we already started getting some attention from investors.

 

[MBE2017]

I hadn’t appreciated you were considering selling, it wasn’t clear from the original post.

I would think @brucegreig advice above is the way I would look at myself, but consult a very compent tax accountant and let them know the reasons behind your idea.

 

[The Resolver]

I thnk the key is for you to retain control over all restaurants whilst giving the individual managers the significant ownership shares they already have,

1. Do we need to make a holding company or we can make a new LTD company which would somehow become owner of other companies?

That is the same thing, The new company will own the majority of shares in each of the other companies.

2. What would be the best way to structure this?

As above,

3. Assuming that all shareholders are reasonable, would it be better to award ownership % based on sales in all units or profits? If we were to sell a restaurant group and use EBITDA multiple to determine total value, I am assuming that total sales per unit are not that relevant.

Best to retain current %s as the others will natirally object to any de facto reduction. But turnover si more related to how each 'front of house ' is managed whereas EBITDA is based on how the back office/taxation is managed , stock bought for the group etc,You will want to have full control over this latter.

You need clesar rules showing the IPR in teh name is under the sole control of the holding company rather than vaguely shared amngts seprate companies. You therefore need an inter-trading Agreemet as well as Shareholders Agreemenst for each restsurant company,

But I think the big initial question right now is what do you see for the future, Tradition in restaurnt expansion is surely via franchising which gives you much more de facto control than your current model. . You seem to have achieved base 2 in franchising in that you have proved the business mode with initial network restaurants, Have you gven enough thought as yet to a comparison of the franchise model with your cirrent and proposed lmodels?