Problems with business partner

Discussion in 'General Business Forum' started by MattDirectorUK, Sep 12, 2019 at 10:11 AM.

?

Should we:

  1. Try and turn him around

    1 vote(s)
    33.3%
  2. Get rid of him immediatly

    0 vote(s)
    0.0%
  3. Plan an exit and manage him out

    1 vote(s)
    33.3%
  4. Something else

    1 vote(s)
    33.3%
  1. MattDirectorUK

    MattDirectorUK UKBF Newcomer Free Member

    6 0
    Hi all
    A quick bit of background. Three of us set up our marketing business in 2014, we are all equal shareholders and after a tough (but expected) start we're doing reasonably well, turning over just over half a million and making good money ourselves. The three of us have different skill-sets which were originally complimentary, me, I'm accounts, company management, IT, graphic design and I'm good with corporate clients, compliance etc. Colleague A is good at sales and new business, bring in and expanding clients. Colleague B is/was a good account manager, managing the clients, keeping their repeat and ongoing requests coming and generally looking after them.

    This all seemed to work well but after a few years B started to get funny, he said that he should get more money because he invoiced more (nominally he does, but that is because he manages repeat orders and invoices the bulk orders which come from various corporate stores we operate) and started demanding that he should get more money. We said no but this went around and around with various comments like "only sales matter" and "nothing other than what we invoice is important". He kept demanding some form of commission structure, one which he had designed to entirely favour him, we said no.

    Since we said no his performance has been dropping, he's had 8 quarters of falling sales, he's getting slower at responding to clients, getting less out of them when he does etc. When challenged on this he's had various excuses, but they are no longer plausible (he's now doing less than half the repeat business he was two years ago, although sales figures are actually growing because of the work A and I do and "new and developing" business now represents 60% of our GP). Recently A pulled him up and B said "why should I work hard if I don't get anything for it", the thing is we are all shareholders, we all get out the work we put in. He also seems to be "busy" a lot of the time, but when he has time off it doesn't add up, I was covering his entire day's work in around an hour and a half, the same when A also had to cover his work, yet B is apparently constantly overworked and stressed.

    Myself and A are coming to the conclusion that we are going to need to get rid of him, which we don't really want to do as we regard him as a friend, but on a business case basis he's just not worth keeping with current performance and attitude. We also suspect it will be a huge battle and he either will refuse to sell his share back to the business, or we'll have to issue a few thousand share to devalue his share enough to make it worthless.

    If anyone has had a similar experience where they have managed to turn someone like this around it would be great to hear ideas. Otherwise similarly efficient tips to get shot of him.

    Thanks.

    (Added a poll to see if there's a strong consensus)
     
    Posted: Sep 12, 2019 at 10:11 AM By: MattDirectorUK Member since: Sep 12, 2019
    #1
  2. Lisa Thomas

    Lisa Thomas UKBF Enthusiast Free Member

    3,038 363
    Who are the Directors - all 3 of you?
     
    Posted: Sep 12, 2019 at 11:07 AM By: Lisa Thomas Member since: Apr 20, 2015
    #2
  3. MattDirectorUK

    MattDirectorUK UKBF Newcomer Free Member

    6 0
    Yes, all directors, all equal shareholders.
     
    Posted: Sep 12, 2019 at 11:10 AM By: MattDirectorUK Member since: Sep 12, 2019
    #3
  4. NickGrogan

    NickGrogan UKBF Ace Free Member

    2,006 439
    Why would he sell his shares? Have you valued the company?

    " Indeed, Section 561 obliges a company to offer new shares first of all to its existing shareholders in the same proportions they already hold shares. It upholds shareholders’ right to be protected from dilution if they are willing to pay the price asked for the new shares. Such an offer must be open for at least 21 days"

    "Section 561 can be disapplied, along with section 549, either in the articles or by a shareholder vote, though only by a special resolution (in order to pass a special resolution 75% of shareholders present at the meeting at which the resolution is proposed must vote in favor)."

    https://lawdit.co.uk/readingroom/preventing-the-dilution-of-shares/

    You can only dilute his shares if he agrees, which he is unlikely to do.

    You don't seem to understand the difference between shareholders, directors and employees and the fact that you are all 3.
     
    Posted: Sep 12, 2019 at 11:26 AM By: NickGrogan Member since: Nov 15, 2012
    #4
  5. MattDirectorUK

    MattDirectorUK UKBF Newcomer Free Member

    6 0
    Why would he sell his shares?
    He won't want to, but we are also unprepared to give him a third of profits in perpetuity should we get rid of him.
    Have you valued the company?
    Nominally yes, but a valuation is regarded as difficult due to the fact that the company is run by the three directors, who are also shareholders. We were told 3 years average net profit would probably be the maximum as a valuation, which would value the total company at £750k, but also as an owner operated business those rules don't really apply. The realistic valuation we were given a few months back said that the value of the company was realistically only around £120k due to the direct involvement of the owners in the entirety of the businesses operations.

    If I could get rid of him for £40k I would, I'd probably even push to £100k if it solved the problem, but £250k would be too far.

    You can only dilute his shares if he agrees, which he is unlikely to do.
    We could probably get around that because if we put shares up for sale both I and A have the money to buy them (where as B doesn't), to take us over the 75% threshold, then we would have enough voting power to pass the special resolution.

    You don't seem to understand the difference between shareholders, directors and employees and the fact that you are all 3.
    I'm aware of the difference, getting rid of him as an employee and a director is easy, our shareholders agreement states that if one should resign or be removed as a director that also results in termination of their employment. The issue is that the sale/buyback clause agrees a valuation mechanism for shares which we could enforce if needed and (We would have to go through the formal process) would value his share of the business at around £80k, the problem is it doesn't give us a way to enforce the buyback in these circumstances (an error I'm now aware of), it only applies a valuation if he is willing to sell, if he dies and the shares fall to his estate or on the basis of dismissal as a director due to misconduct (as well as a first offer basis should he want to sell the shares at some point).
     
    Posted: Sep 12, 2019 at 11:53 AM By: MattDirectorUK Member since: Sep 12, 2019
    #5
  6. NickGrogan

    NickGrogan UKBF Ace Free Member

    2,006 439
    Then why did you give him shares in the first place? Presumably, he added value to the business, why do you think he should no longer be rewarded for this?

    And if he offers to buy you out for £40k? £100k? Would you accept?

    And when he hires a lawyer and wins, what then?

    "For the purpose of unfair dismissal, the statutory procedures for removal of a director from office do not comply with the minimum requirements of the ACAS Code of Practice on Discipline and Grievances at Work. As a result, if a director is removed from office and this also terminates his/her employment, the dismissal will almost certainly be unfair. A director who is removed from office may therefore have a substantial compensation claim against the company.

    If the director is also a shareholder then, depending on the circumstances they may also have a remedy for “unfairly prejudicial conduct” of the company’s affairs, under Section 994 of the Companies Act 2006."

    https://www.iod.com/services/inform...ces-and-factsheets/details/Removing-directors

    You're going to need a good lawyer, and it's going to cost you a lot of money.
     
    Posted: Sep 12, 2019 at 12:16 PM By: NickGrogan Member since: Nov 15, 2012
    #6
  7. Mr D

    Mr D UKBF Legend Free Member

    16,097 1,797
    Basically he can stop working and just receive any dividends issued for the rest of his life.
    As can you. As can the other shareholder.
    Its what shareholders do - there isn't a requirement for them to work for the business.

    And a shareholder with a third of the shares has power to block stuff that does not just require a majority vote from shareholders.
    So its in the interests of the other shareholders that he sells his shares. It may not be in his interest however.
     
    Posted: Sep 12, 2019 at 12:26 PM By: Mr D Member since: Feb 12, 2017
    #7
  8. Mark T Jones

    Mark T Jones UKBF Big Shot Full Member

    3,347 987
    In addition to the above valid comments it is seldom a good idea to have s salesperson who isn’t to some extent remunerated with bonus/commission


    Why not work with him to achieve this?
     
    Posted: Sep 12, 2019 at 12:54 PM By: Mark T Jones Member since: Nov 4, 2015
    #8
  9. MattDirectorUK

    MattDirectorUK UKBF Newcomer Free Member

    6 0
    We all took equal shares when we started. For the first two and a half years he did appear to add value, however for the last two and a half he's not added value, he has become a burden.

    No, because I (and A) are worth far more to the business than that, he isn't. For the role he is currently doing (rather than the one he agreed to and should be doing) is worth a fraction of what he is being paid and his "contribution" to the business is detrimental rather than positive.

    He won't, because we won't take any actions without hiring our own lawyers first and making sure we're legally watertight.


    "For the purpose of unfair dismissal, the statutory procedures for removal of a director from office do not comply with the minimum requirements of the ACAS Code of Practice on Discipline and Grievances at Work. As a result, if a director is removed from office and this also terminates his/her employment, the dismissal will almost certainly be unfair. A director who is removed from office may therefore have a substantial compensation claim against the company.

    If the director is also a shareholder then, depending on the circumstances they may also have a remedy for “unfairly prejudicial conduct” of the company’s affairs, under Section 994 of the Companies Act 2006."

    Fine, I don't mind paying, it will potentially be money well spent. He's not fulfilling his role as a director, he's not fulfilling his role as an employee and the requirement for his employment to cease as part of a shareholder should his directorship cease is perfectly legal.

    Are you always so deliberately confrontational?
     
    Posted: Sep 12, 2019 at 1:20 PM By: MattDirectorUK Member since: Sep 12, 2019
    #9
  10. Mr D

    Mr D UKBF Legend Free Member

    16,097 1,797
    Hate to say it but having seen multiple train wrecks of businesses with directors not pulling weight, legal action etc I don't recall seeing any that solved matters on their own.

    Have a look for The Resolver on here. Highly thought of and perhaps able to offer insights or help matters before you go all out attack.
     
    Posted: Sep 12, 2019 at 1:25 PM By: Mr D Member since: Feb 12, 2017
    #10
  11. MattDirectorUK

    MattDirectorUK UKBF Newcomer Free Member

    6 0
    There isn't a valid reason for a commission, we're all selling, we all get a cut of the profits, sell something, get a third of the profits. He wants commission on top of this, his argument was/is basically that he should get around 75% of the GP on everything he sells and a third of the total net profit the company makes, whilst I and A get no commission and only a third each of the remaining profit, despite us bringing in the lions share of the profit and revenue.

    The major problem is his demands have become more and more unreasonable. We're making around £80k a year each, with £200k of reserve in the company (which we would distribute before share sale/buyback) so hardly short of money. However his various "demands" have risen as high as £150k pa for himself, which would mean reducing my and A's remuneration to around £40k pa each, despite the two of us increasing year on year sales, bringing in the vast majority of revenue and GP and doing around 90-95% of the total work.

    Ideally I want him to do what he agreed to do, is contracted to do and should be doing, failing that I want shot of him as he is currently an expensive burden.
     
    Posted: Sep 12, 2019 at 1:30 PM By: MattDirectorUK Member since: Sep 12, 2019
    #11
  12. Mr D

    Mr D UKBF Legend Free Member

    16,097 1,797
    However as a shareholder he can get 1/3rd of the dividends paid out whether he works or not. Same as the other shareholders.

    Could you set things up so that each director got a salary plus commission - and perhaps commission level increases at certain target points.
    Leaving it simply as 1/3rd of dividends does not in any way encourage working at all.

    What you are doing at the moment appears to not work for all 3 of you any more. Can a different system work to the benefit of all 3?
     
    Posted: Sep 12, 2019 at 1:35 PM By: Mr D Member since: Feb 12, 2017
    #12
  13. MattDirectorUK

    MattDirectorUK UKBF Newcomer Free Member

    6 0
    We are not willing to put commission in place. When we first started we didn't all agree with it, but had a small commission for a year, it was originally terminated because he was "adjusting" figures. At the point we caught him out it was June of that year, we found that throughout April, May and June (it was at that point paid at the end of the following quarter) he had gone back and changed figures and project allocations so that profit was inflated and projects which he had nothing to do with were allocated against himself for commission purposes. I took legal advice at the time and because the commission only functioned under a gentleman's agreement, rather than contractually he hadn't legally done anything we could take him to task on, had it been contractual it would have been asset misappropriation fraud.

    I'm not prepared for him to receive any commission, if we get rid of him we just won't pay much in dividend any more and will take the hit on the extra tax by paying it through PAYE, although that's far from ideal.
     
    Posted: Sep 12, 2019 at 1:41 PM By: MattDirectorUK Member since: Sep 12, 2019
    #13
  14. Mr D

    Mr D UKBF Legend Free Member

    16,097 1,797
    Just beware what he can do as a shareholder.
    Including suing for dividends....
     
    Posted: Sep 12, 2019 at 1:43 PM By: Mr D Member since: Feb 12, 2017
    #14
  15. pbdesigns

    pbdesigns UKBF Regular Free Member

    126 9
    Ah, when shareholders get messy.

    As a Shareholder, he's entitled to an equal share of dividends.

    He could walk away and do nothing.

    Let's say profits are £250,000. Nothing stopping the other two directors taking a salary of £100,000 each, leaving £50k profits to be spread 3 ways...

    So it can get messy in a number of ways.

    Maybe it's time to sit down and discuss pay structure. Should it be a mixture of salary, commission and dividends? If he's not bringing in sales in the way he used to, then it seems you'd benefit from this structure - and gives him an incentive to perform more.

    One that needs to be thrashed out between the three of you. But you can't 'remove' his shareholding.
     
    Posted: Sep 12, 2019 at 1:57 PM By: pbdesigns Member since: Nov 23, 2011
    #15
  16. NickGrogan

    NickGrogan UKBF Ace Free Member

    2,006 439
    I always speak directly if that's what you mean.

    You are looking for advice on getting rid of someone and paying them less than they are due.

    Some people would call that fraud.


    If that's what you want to do then fine, but it's going to be complicated and expensive, probably cheaper to come to an honest arrangement.
     
    Posted: Sep 12, 2019 at 1:59 PM By: NickGrogan Member since: Nov 15, 2012
    #16
  17. Financial-Modeller

    Financial-Modeller UKBF Regular Full Member

    364 105
    As a finance guy working in a couple of sales-driven places, the explanation of this type of breakdown is psychological.

    I'm not a psychologist, but in simplification, generally sales people need recognition / commission / bonus / trinkets to mark the achievement of a sale. They seek instant gratification and are less interested in the financial statements and three-year forecast.

    Finance people generally see a growing balance sheet as a goal and may be more risk averse, inclined to provide for the future by retaining earnings etc.

    In this case, if colleague B was originally bringing in strong sales, work to build a remuneration structure that recognises that and pays out commission/bonus in the next payslip. Apart from anything else, removing colleague B and taking on a replacement salesperson would require a change anyway, so better for the company to retain the talent you already have.

    as an aside, @MattDirectorUK you allude to colleague B having less money than the other two, and understanding why may help to understand his repeated demands for cash IYSWIM.
     
    Posted: Sep 12, 2019 at 2:16 PM By: Financial-Modeller Member since: Jul 3, 2012
    #17