Buying out shares. How does it work?

[regulus]

Simple question really. The following example is hypothetical and not fact.

Let's say myself and another guy is in business together. We own the company 50-50. It has a million bucks in the bank. 200k worth of other assets. Now, let's say I want to leave and my business partner has to buy me out. How much of the million pounds and assets am entitled to? How would you calculate that? Is it 600k? Or is it not that simple?

 

[scorza]

Not that simple, as far as I can see, it basically boils down to how much your partner is prepared to offer and how much you're prepared to accept. There's no simple formula to determine a company valuation. The assets belong to the company, not the owners - you can't just seize half the assets without going into liquidation. You need to consider the liabilities too.

 

[Kemik]

A company is worth the sum of all it's future profits.

Now just divide that by 2 and you're sorted! haha

 

[Vonhelmet]

As said, you'd need to consider liabilities. There's also goodwill to think about, and minority shareholding discounts for which there are no hard and fast rules.

As kemik will no doubt attest, the company could buy the shares back from you, effectively cancelling them, though this would require your fellow shareholder's consent, as it means bleeding a load of assets/cash from the business. If it's done solely for trade purposes and the consideration is cash, then it's a very tax efficient way of making an exit.

 

[[TW]Fox]

You are not entitled to any of it - but he must purchase your share from you. It is therefore up to you and him to determine its worth.

 

[Beren]

Ugh, the above is normally mostly true. If the Company was properly set up you should have a shareholders agreement. In it there should be a section regarding one party wishing to sell their shares.

Again the 'normal' way to value a business is to look at the 'net benefit' gained by the owners and to then attach a multiple to this based on risk and involvement of the owners + any cash & fast moving stock value. If the business is being operated by a working owner normally it is 2 times the profitabilty, if it is a fully managed business and the owner is sat in an office playing solitaire and making lots and lots of profit it can be up to 5 times.

However if it is you looking to get out of the business you have to take into account what the other party can afford to pay, because they can normally offer you whatever they want to. Often the easiest way out of a situation like this is to accept staged payments that allow the Business to continue and the other party being able to buy you out... say 10% of the shares every quarter for instance.

If you go that route, best plan is usually to draw up an agreement between you and both sign it when you are both happy... then get a properly trained solicitor to draw up a simple document which gives you both some protection... you are probably not going to get a lot of change from two grand for that.

Be aware that removing any money from a ltd company may also make you liable for Capital Gains Tax.

That clear as mud?

 

[regulus]

Ugh, the above is normally mostly true. If the Company was properly set up you should have a shareholders agreement. In it there should be a section regarding one party wishing to sell their shares.

Again the 'normal' way to value a business is to look at the 'net benefit' gained by the owners and to then attach a multiple to this based on risk and involvement of the owners + any cash & fast moving stock value. If the business is being operated by a working owner normally it is 2 times the profitabilty, if it is a fully managed business and the owner is sat in an office playing solitaire and making lots and lots of profit it can be up to 5 times.

However if it is you looking to get out of the business you have to take into account what the other party can afford to pay, because they can normally offer you whatever they want to. Often the easiest way out of a situation like this is to accept staged payments that allow the Business to continue and the other party being able to buy you out... say 10% of the shares every quarter for instance.

If you go that route, best plan is usually to draw up an agreement between you and both sign it when you are both happy... then get a properly trained solicitor to draw up a simple document which gives you both some protection... you are probably not going to get a lot of change from two grand for that.

Be aware that removing any money from a ltd company may also make you liable for Capital Gains Tax.

That clear as mud?

It's clear enough. I was wondering if there was a set formula to calculate these things but there doesn't seem to be.

 

[Beren]

It's clear enough. I was wondering if there was a set formula to calculate these things but there doesn't seem to be.

Unfortunately not really, I could happily tell you with a reasonable ammount of certainty what the whole Business is worth on the open market. However, 50% of a business rarely equals half of the value.

It's a good lesson to learn, however almost always stings someone at least once. If you are going to go into business with anyone you should define exit strategies before you even set out - and write them down in a proper document to ensure it stays that way.

 

[regulus]

I'm actually 'advising' a friend on this matter. He is a 28 year old kid that has managed, with the most incredible turn of fortune, stumbled upon a business in need of a director due to the other partners hiding from the CSA and passing themselves off as minimum wage employees, whilst my mate 'owns' the business. The business figures is roughly what I said in the original post. The offered him a 100k for his share of 25%. He is reading to rip their hands off in eagerness. I'm thinking there's more on the table.

 

[PhillyDee]

I'm actually 'advising' a friend on this matter. He is a 28 year old kid that has managed, with the most incredible turn of fortune, stumbled upon a business in need of a director due to the other partners hiding from the CSA and passing themselves off as minimum wage employees, whilst my mate 'owns' the business. The business figures is roughly what I said in the original post. The offered him a 100k for his share of 25%. He is reading to rip their hands off in eagerness. I'm thinking there's more on the table.

The usual and normal way is to only pay directors the minimum wage. Then you get the rest as a dividend. Thats the tax efficient way of doing it!

 

[Paul11]

that is more complicated then

either

a) he follows the moral route which means that he really was nothing to do with the business and just a share holder in paper so that he could help someone else out

b) he goes by the legal route and doesn't sign over his shares back to his mate and plays hard ball to negotiate more money out of him

the actual worth (if he were the true owner/shareholder) is dependent on the type of business, but its probably 3- 5 x the yearly profit + half the assets (this is not what is in the bank.. this is what the business owns- what is owes)

The usual and normal way is to only pay directors the minimum wage. Then you get the rest as a dividend. Thats the tax efficient way of doing it!

its not the directors that matter in this case, its the shareholders

directorship is nothing. he can be fired as a director by the shareholders.

you say he owns 25% of the shares, his shares are probably worth a lot more than 100k


but like anything in life, something is only worth what someone else is willing to pay

if the companies balance sheet is very healthy and if the future looks good for the business, then they are worth a lot more than if it is has a lot of debt with slacking off sales

 

[PhillyDee]

its not the directors that matter in this case, its the shareholders

Just pointing out another reason for minimum wage.

To be quite honest, 100K is a decent amount of cash, the business must be worth a considerable sum, and its up to him if he asks for more. It may quickly sour, and he may then be entitled to nothing. Tread carefully!

 

[regulus]

He has absolutely nothing to do with the business side of things. He just signs all the documents and makes all the right noises as director of the company when they need him to. It really is an ideal situation. His business partners is guys he has known for years, making negotiations all the more awkward. I'm not sure why they want him out as he is not even drawing a salary as I understand, only dividends as a thank you for what he is doing. Anyway, not the question here.

I'm thinking he is looking at 200k+

 

[Paul11]

Just pointing out another reason for minimum wage.

To be quite honest, 100K is a decent amount of cash, the business must be worth a considerable sum, and its up to him if he asks for more. It may quickly sour, and he may then be entitled to nothing. Tread carefully!

yes, i get the minimum wage thing but if he owns the shares and they want them, they will have to pay to get him out

i cant see how he will be entitled to nothing ?

worst case is they dont offer to buy the shares and just leave him as a shareholder but as time goes on the shares will become more valuable (assuming the business carries on at the same rate)

they will want him out sooner than later, although being 75% majority does give them decision making powers to over rule him in certain things but he is still in a strong position

morally, if they asked him just to be the name on paper , is another matter

 

[Paul11]

He has absolutely nothing to do with the business side of things. He just signs all the documents and makes all the right noises as director of the company when they need him to. It really is an ideal situation. His business partners is guys he has known for years, making negotiations all the more awkward. I'm not sure why they want him out as he is not even drawing a salary as I understand, only dividends as a thank you for what he is doing. Anyway, not the question here.

I'm thinking he is looking at 200k+

well, if he plays hard ball he might lose the friendship..

if he doesn't work and had nothing to do with the setting up of the business and just signs the paperwork for them, he should take what they offer and say thank you

the reason they want him out is that they are scared that the longer it goes on the more he will have a right too financially and the more it will cost them to buy him out (even just as a thank you for helping us pay off)

 

[theron]

how much did he pay for the shares? how much did he invest? sounds like a free 100k to me? not much to complain about.

its better than a kick in the nuts

 

[Kemik]

As said, you'd need to consider liabilities. There's also goodwill to think about, and minority shareholding discounts for which there are no hard and fast rules.

As kemik will no doubt attest, the company could buy the shares back from you, effectively cancelling them, though this would require your fellow shareholder's consent, as it means bleeding a load of assets/cash from the business. If it's done solely for trade purposes and the consideration is cash, then it's a very tax efficient way of making an exit.

Yup.

You definitely need to seek professional tax accounting advice either way. You have things like entrepreneur's relief to consider, buy back of own shares by the company is another option.

The list is endless and you can either be raped by tax or pay hardly any.

 

[Beren]

If your friend only owns 25% of the shares not the 50% as in the original example then I would advise your friend to step very carefully with the idea of playing hardball. My real advice is that if you are going to play that kind of game then your friend really needs some proper legal advice from a solicitor with specific commercial law knowledge - one who can look through the existing paperwork and make sure what ground you are standing on.

75% Shareholders normally have the right to absolutely over rule a minority shareholder in many instances. If I were the majority shareholder in that situation it could become far easier to force the sale of the company through after removing various assets or declaring uneven dividends than to pay out an extra 100 grand, as a for instance.

+1 on the tax advice. As a Share sale your friend should get tax relief and only need to pay 10% tax on the capital gain, but not certain if this holds for a minority shareholder.

Bottom line is that irrespective of the worth of the company, a fair deal is one that your friend is happy to accept as payment for his time and service - and that the Buyers are willing to pay.

At 28 that kind of cash could easily make a massive difference to his life as a lump sum anyway. I would probably push a little more, but not very much, these are friends we are talking about and having done no work your example seems extremely mercenary.