Management buyout difficulties

[Donald1999]

Hi I am looking for some advice thoughts on the following:

I own 9.6% of a thriving business which I have worked for for 20years. There are 4 share holders, the two founding share holders own 48 and 33% of the shares and myself and another director own the remainder.

I became a share holder 10 years ago when the company was turning over 2.5million. About 7 years ago I persuaded the board to create a new division which I have built up with a new team turning over 2.5 million. The two founders and other shareholder have little to do with this line of work. One of the founders MD has been away from the business due to personal issues for 5 years and the other founder has basically just been turning up for work for the the last 10 years and the MD admits checked out quite a while ago. During the MDs absence I built the finances up to 2million in cash at bank thinking at some point the founders would want to leave and could be paid off. 18 months ago the founders pursued the board to move office and we agreed a budget of 750k. They ran the financial aspects of the move and did not provide budget updates. The spent most of the cash.

All was fine until about 18 months ago the MD returned and decided he wanted me to take over the company in a few years and buy him out with the other shareholders.

All good so far, however I said I had no interest in buying him out with my personal money, I had sacrificied a great deal of my own personal time to build up the bank balance which he had spent and actually I didn't have much interest in running the company with the other two share holders who I felt were inadequate.

He then asked me to let him run the division I had built up with me. I refused seeing this as my ace card as he doesn't know the clients pricing structure nor team.

This has lead to a quite bizarre situation where we function as pretty much two seperate companies playing cat and mouse on a daily basis. I figure if he doesn't have the client base he can't sell to a 3rd party. I run the division with two other directors who equally feel aggrieved about putting personal money into the company to pay off the founders and don't want to own a company with the remaining share holders due to their feeling of them being incompetent.

Based on the above what do people think are my options, I would ultimately like the company to continue rather than starting all over again.

Advice please

 

[Chris Ashdown]

Contact the Resolver on this forum, he may well be able to offer some suggestions and also act as a third person

Another person who may be able to help is Clinton who is experienced in selling and buying businesses

 

[Mark T Jones]

Seriously, i lost the will to live about 1/3 of the way throug( the story.

Presen5 5he ha4d facts without opinions and flowering and you will get better feedback. (It may not be the opinion you want, but hey yo7 can make your own choices)

 

[Clinton]

First, I agree with Mark, it's a long and boring story with a lot of unnecessary detail which serves only to complicate the story and make it difficult to unravel.

All good so far, however I said I had no interest in buying him out with my personal money

Reading the above, and reading between the lines of your post, there's a lot of ego getting in the way here.

When it comes to these deals, you need to put your ego aside. Firstly, because you won't get sympathy from us. But more importantly, because it allows you to see clearly and get to where you want to get to. So you don't need all that stuff about how he spent all the money and why you are cross with him. That's irrelevant. So also is all the stuff about who is doing all the work and who is skiving.

From what I understand, others want you to buy their shares ...and you would like to take over the company. That's a brilliant scenario rich with possibilities. So why are you whinging about not putting in personal money? Speak to a good corporate finance professional and see how the deal can be constructed with a seller note, external finance, buy out or some other deal structure that involves no personal funds. Have you tried that? Why not?

 

[Mr D]

The shareholders make money from the company making money. Whether they are active or not doesn't matter. You work all the hours going and they make money on dividends - or by selling the shares on.
Doesn't need to be someone working at the company - the shareholders often don't need to work at the company at all. Ownership and directorship / employee of the company are not the same.

 

[Clinton]

Good point, @Mr D . There does seem to be a lot of confusion in the OP involving terms such as founder, shareholder, MD and director. As you say, a shareholder doesn't need to do any work in the company ... and he still gets rewarded.

The OP says, for example, "During the MDs absence I built the finances up to 2million in cash at bank thinking at some point the founders would want to leave and could be paid off."

This suggests he believes that morally, if not on paper, the £2m cash balance is rightly his! It would appear he fails to understand that if he got a salary for the work he did to generate that cash balance then he has been compensated in full and that the cash balance isn't his and can't be used by him to buy the founders' shares. That money belongs to the company.

But having the cash there is itself pretty cool as it could be potentially used to finance a share buy-back. He really does need to go see a good corporate finance expert .... but that involves paying money so I wonder how this will turn out.

 

[Donald1999]

Dear all thank you for your interesting responses and taking your time to read the post. As you note the post was one of emotion rather than dry facts, which was the intent.

'RE facts all share holders are directors and the share holder agreements prescribes that any director leaving must offer their shares back to the company on a first refusal basis at a value proportional to the balance sheet value of the company.

I have already consulted on corporate finance and have 3 offers as well as paid for legal council.

The overriding comments on the corporate finance side is that had the 2mil not been spent finance could have been offered based on book debt with a minimal hurt money ask. However the offers now require considerable personal guarantees.

The two divisions have equal overall wage totals however the division I no longer am involved with has a declining turnover currently 1.9mil verses the division I run with two non share holding directors has a year on year increasing turnover currently 2.6mil.

So the emotional decisions Im wrestling with are:

1 do myself and the other two directors leave take the staff and clients and form a company with the 2.6mil turnover which will almost certainly put the existing company under. There are legal implications although no non compeat clauses exist

2 do myself and the two non share holding directors make an offer for the whole company and tell the other shareholders take it or leave it.

3 role with the MD's succession plan and mortgage my house to the hilt without confidence that a success can be made of it with the remaining share holders.

So there's the factual yet emotional side of things.

Thoughts welcome

 

[Clinton]

The overriding comments on the corporate finance side is that had the 2mil not been spent finance could have been offered based on book debt...

Er, if the two million had not been spent you would have two million in the bank and not need to raise finance on the book debt. And which dumb ass corporate finance professional did you go to who told you that you need to have £2m in your bank account if you want to raise finance against assets or receivables? Maybe you misunderstood.

Or it's possible your emotions are still getting in the way of you describing the situation properly.

I like to answer questions on MBOs, the finances, the shareholding and earn-out, structuring deals, raising capital and creative ways of solving complex business ownership problems etc.

If it's emotional support you need, that's not my forte, I'm out. Maybe somebody else can help. All the best.

 

[The Byre]

Ha-ha! @Clinton doesn't do emotions, unless we are talking about Brexit and/or socialism, in which case, frothing at the mouth and biting the carpet is to be expected!

This is one of those situations where the Devil definitely is residing within the details (to quote Goethe) and as for the 2m issue, I am not a fan of 'if only' and 'if they hadn't'. You are where you are and I would definitely ask @The Resolver to advise in this issue.

As for the three options, well, as egos are involved, battle lines will be drawn and no.1 will definitely end in litigation (a process where you are a pig when you start, but end up as a sausage!)

Number Two will just result in a flat refusal by the sounds of things and that leaves you with 1 & 3.

Number Three - how brave do you feel? I would run a mile from risking another F-ed up partnership!

 

[Donald1999]

Clinton the 2mil is pretty logical, this is the figure that is needed from the balance sheet to pay off the founders. Beyond this there needs to be about 800k in operating capital which is essentially the financing need.

The company has the 800k operating capital in cash now but 1.3mil has now trasfered to assets and lease.

To put the EGO thing to rest I'm not sure things are particularly that driven by egos. Personally I believe the two divisions together provide a perfect economic cycle balance. I guess however I kick myself now for not asking for a share based performance bonus should the company prosper as the new division grew. However when considering this I thought it unfair to the other minor shareholder who was on long term sick leave at the time of the discussion (you live and learn but no regrets)

The Byre I'm interested in your comments that litigation will certainly ensue (on what grounds) I have gained two legal opinions and both contradict each other.

 

[The Byre]

Off the top of my head, 'pinching' customers from your existing employer just for starters. The client list is company property.

As your employer, I would freeze any assets or payments that you may think may be due (e.g. that buy-out clause) and claim considerable damages. That would leave you having to claim against them and that could put you severely on the back-foot.

 

[Mr D]

The current money of the company if profit belongs to the company. If dividends are paid then whatever is paid is due to the shareholders.
They could offer the shares back to the company - the shares having a value. If the company does not want them at that price they can sell elsewhere at whatever price?
Leaving you with the same problem of other people having shares.

What you will have to watch out for is being removed as director - you would lose control of your division. It's not yours it's the company division. Your shares can still gain you income from dividends if they are paid.

 

[Donald1999]

Mr D

All that you have noted is true, however in Jan I called an EGM to note if the shareholders didn't like that I did not want to buy the shares with my own money they could sell to a 3rd party which I would be happy with as I could then exercise my right to tag along under the agreement and leave at the same time and start my own company.

I also noted that they would find it difficult to find a buyer without me agreeing a lockin clause to transfer client relationships which unfortunately I would not do.

At this point I was threatened with the removal as a director stuff. I noted I would be more than happy to sell my shares back and leave the company with immediate effect. To which the MD noted that is not how it is going to be I'm leaving first and you are buying my shares.

Now you see why it's all a bit of a pickle.

 

[Mr D]

Have you thought of resigning as a director?
Then just be a shareholder?

 

[Chris Ashdown]

You definatly need the Resolver or similar, nobody likes ultimatum especially in business

 

[Clinton]

I also noted that they would find it difficult to find a buyer without me agreeing a lockin clause to transfer client relationships which unfortunately I would not do.

The right answer is never, "I will not do".

The right answer is, "How much is that worth to you?"

Are you focused on extracting value from the business ... or not? If the former, I will state again that you need to put the ego and emotions aside. Till you do that you can't effectively plan strategy and exit.

 

[Donald1999]

Clinton

I understand where you are coming from however I'm one of those strange people that just likes their job, money and value are not really of primary importance.

You have however made me realise from this discussion that both money and value are of primary importance to the other share holders. Which is probably the route of all the issues.

Maybe I need to focus on adjusting others expectations.