There are many reasons why a part owner of a business wants to leave the business: retirement, ill health, wanting a new direction or challenge, or in more difficult circumstances, the break down of the business relationship between the owners themselves. Regardless of the situation, it is important to take advice on what are the best options going forward. Working closely with your company accountant will help you establish what financial approach to take – how is any buyout being financed? Various options include transfers for consideration, such as a cost per share, but how is that calculated exactly? Other options include a share buyback, where the company repurchases the shares from the exiting partner. Whether this option is available to you however will depend on a number of rules and cash availability in the company.
It is worth keeping in mind if, if you so happen to find yourself in this situation to consider some of the following points:
- How are you going to finance the transfer of any shareholding? Is this to be carried out with a loan from a bank, raising funds from family members or using your current assets as security?
- Are you purchasing the shares separately or together? It may be worth considering working with other business partners to finance a management buy out.
- Consider whether you have a shareholders agreement in place – this is always a good starting point. A well drafted shareholders agreement will usually contain provisions on how to calculate the fair value of shares. As there can be many calculations to value shareholdings, having this major point agreed from the outset can help eliminate any disputes, and speed up the process.
- In the absence of any shareholders agreement or clauses that identify what the fair value should be, agreeing the value of the shares will be key. It is often a point of contention between the parties, so it may be sensible to get a solicitor acting for you in place, to assist with the negotiations. Look for an advisor you trust, who you can speak open and honestly with, but still gives you sound legal advice.
- Always get any exit from the company documented. This will help clarify what was agreed between the parties, as well as include things that ultimately protect the business you are taking over. This includes restrictive covenants (i.e. restricting what the person leaving can do, to protect the goodwill of the business), confidentiality provisions, dealing with hand over of particular property or ending certain company benefits and so on.
These are just a small number of considerations that need to be thought about while bringing a matter such as this to a timely end. If you find yourself in a similar situation, no matter how difficult, get in touch with our Business Law team today who can help you with buying out a business partner, regardless of how difficult or strained the relationship has got. We can almost certainly add value to your transaction with our sound, timely legal advice.