Partner wants to buy me out

[Philsy]

Hi, a while ago I posted here when my partner wanted to leave the business, and I got some very helpful replies.

A lot has changed and he is now offering to buy me out, paying me a monthly sum for a number of years. The business at present has little value, so he is being generous. He’s younger than me and a good friend who wants to help me in my retirement - I’m 61.

He suggests that I relinquish my shares and directorship at the start of the agreement. Is this usual?

Any advice on how to do this and any pitfalls we should be aware of would be much appreciated.

Thank you.

 

[fisicx]

This is on for @The Resolver to advise on.

But yes, resigning and handing everything over when you sell is perfectly normal.

 

[Mark T Jones]

Agree, certainly one for @The Resolver

My gut feel (and what I did), would be that shares are transferred in line with payment. But I'm certainly no expert!

 

[Lisa Thomas]

What happens if you hand over the shares and he doesn't pay/stops making the payments at some point? Will you have any security built into the sale agreement?

 

[BubbaWY]

From memory, when I was going to be doing something similar, one option was to convert the value of the shares into a Directors Loan, and then the Directors Loan can be repayed out of company funds over a period of time.

 

[Newchodge]

This is on for @The Resolver to advise on.

But yes, resigning and handing everything over when you sell is perfectly normal.

Perfectly normal when payment is made at the same time!

 

[WaveJumper]

Until he phoenixes the company and your left with nothing, read up on all those who owned garden centres and GOTS shafted.

Personally I would would payment up front (let them take out a loan and take on the risk) or drip feed the shares in line with payments. Agree with others check in with the @theresolver

 

[numbersrule]

Hi, a while ago I posted here when my partner wanted to leave the business, and I got some very helpful replies.

A lot has changed and he is now offering to buy me out, paying me a monthly sum for a number of years. The business at present has little value, so he is being generous. He’s younger than me and a good friend who wants to help me in my retirement - I’m 61.

He suggests that I relinquish my shares and directorship at the start of the agreement. Is this usual?

Any advice on how to do this and any pitfalls we should be aware of would be much appreciated.

Thank you.

I am not an expert in this type of thing but I do have a couple of observations to draw to your attention.

You have said there is little value in the business so if you retire how will ongoing payments to you be funded? For example would you be willing to divulge the approximate turnover and number of employees? It seems to me that if you are currently a significant contributor to turnover then your business partner will need a new employee(s) to generate income that you are no longer contributing. Or have I got this wrong and the company is sizeable and can absorb your departure?

On a seperate point, most financial transactions are based on the universally understood 'exchange concept'. Normally for the type of agreement you have referred to this would involve your company gradually exchanging your shares (buy back) for cash paid out to you personally. However, if you are correct that there is little value in the business then there is no value in the business to exchange your shares for.

However, it seems to me that what the business is indeed offering to 'give up' is the benefit of your input in your remaining years in what might otherwise be a delayed retirement. But as per earlier paragraph can the company afford this?

It seems to me that your business partner may be considering taking on additional borrowing to fund the share buy back.

As per other posters The Resolver may be able to offer other insights.

 

[Philsy]

Thanks for the replies. There is lots of uncertainty to this plan. More thinking needed.

 

[The Resolver]

I have done some delayed sales with contractual terms to regulate the drip feed but generally they are best avoided so far as the seller is concerned. As others have said there remains substantial risk that payment in full will not materialise. Pressure should be placed on the other shareholder to seek other solutions such as a loan.

If its a buy back ie company buys, then you need a personal guarantee. However if the company doesn't have the funds to pay in full then the whole deal is at risk of not satisfying HMRC as to the requirement in law that buy backs can only be paid out of currently distributable profits,which clearly it will not have. There is a department at HMRC that can give an off the record guidance on their response to delayed buy backs especially if can show a series of separate buy backs rather than delayed payments.

At best you could perhaps have agreement by the other shareholder that, until all shares have been paid for, not to pass any of a specific list of Resolutions without your vote in support ("golden share") . However, for obvious reasons, that may be rejected. But the other shareholder's response would provide an interesting test of trust between friends.

There may be better and safer arrangement dependent on the nature of the business. For example might it be possible for you to set up a second company of your own that enters into a trading arrangment continuing unti final payment and share transfer that sees your company receving all income direct from customers/clients and paying over to the main company after retention of the agreed periodic payment? Lots of side issues to cover there but not impossible. However I imagine they may be tax disadvantages from such an arrangemente, although possibly with workarounds.

Happy to explore further (with knowledge of the nature of the business )on a free advice call (book in on link in my sig below)

 

[Porky]

This is a tough one. I’m with @WaveJumper on this on. Drip feed it and transfer shares as you get paid.

The big elephant in the room is that once he owns +75% of the voting rights he could pass a resolution and dilute you to oblivion with a big share issue, so you need to protect against that.

Really it would be better for him to get a loan pay you off in full and repay the loan. I certainly wouldn’t give up my shares and directorship on a promise - sounds foolish to me tbh. Unfortunately, not everyone plays with a straight bat these days, what might start off as good intentions can evolve into resentment later paying you when they took your shares and directorship a few years earlier especially if trading takes a further slump. Be careful

 

[Craiglincs]

Until he phoenixes the company and your left with nothing, read up on all those who owned garden centres and GOTS shafted.

I'm curious about this but my Google fu is failing me

 

[Ivanzyt]

The pitfall is that as soon as you relinquish your shares and directorship he can do whatever he wants (more or less). You might well be good friends but what if the business goes through a rough patch in a couple of years and he really does not feel he can pay you what was agreed?

There are a number of contractual ways you could set this up to offer protection and it is quite common to have delayed or staged payments BUT you need a lawyer to look at this properly and get the right mechanism in place whether that's a company share buyback over time, director loans, or something else. You do need proper legal advice on this as it is really not a good idea to give up all your power on the hope that everything will be ok even if he is a good friend.

Also, he will need some advice as well as to what is legal, especially around company share buybacks. There are various rules around what you can and can't do here. Generally speaking, a private company must fund buybacks from shareholder funds (retained profit) and can't fund this through debt. So, if he was thinking of getting a company loan out to buy back your shares that's generally not allowed. A private/personal loan would be fine.

Regardless of the exact mechanism you use for share transfer, I think you really need good professional advice here. I hate being negative about human nature because generally, it is good to trust people but when it comes to things like this you never know what might happen and even good decent people can come to very different conclusions as to what is the right thing to do, especially over a long period of time. You never know what will happen in a year or two's time and it would be a massive shame to end up ina huge argument with someone you clearly care about because of a difference opinion on the rules of the game. Get the rules written out now so everyone knows what they need to do.