You may recall that I drafted the Heads of Terms, summarised them and shared them with the management team, Charles and Harry included. I asked for comments and got very few. So that’s agreed then?
Well, no. Although they sat there and said that they agreed, they have now emailed me and asked me to re-consider by removing the cap on their salaries.
My first reactions were unprintable because an agreement is an agreement, and if you can’t trust your senior managers, then who can you trust? And then there’s a simple calculation that says that if you get (say) £10,000 extra in salary, you lose £50,000 in share value (because we are valuing the business at five times earnings).
But it’s not that simple, because salaries and shareholdings are not in proportion – far from it. Salaries relate to the size and responsibility of the job shares relate to, well, chance almost. When did you join? What were we doing then? What did each party think is a good deal? Reconciling the two is never going to accord with logic.
So it was back to the spread sheets. Four hours later, I have a spread sheet which shows the following:
If Charles and Harry got what they wanted, they would earn a quarter of a million more over four years.
If they stick with the deal they will earn quarter of a million in one year and over half a million in four years.
Then consider the tax position. The quick thing is to assume top rates of income tax and Entrepreneurs’ Relief. BUT you can pay £50k into a pension scheme and therefore pay zero per cent tax.
So I took the pension contributions that they’re making and recognised the tax that they would actually have to pay if they contributed the maximum. Then, when calculating the tax on the share sale, I included this tax relief as well, because you can take your net receipt, pay up to £50k into your pension scheme and get tax relief on it that way.
You have to question their numerical capability. But you could also recognise that, as I said at the outset, people do strange things at this time. So I’m taking a deep breath, sharing my frustrations with my wife, but keeping this away from the rest of the team who I’m sure would react badly.
All I have to do now is get them to accept the logic. Straightforward, you might think, but I’m still not sure where they’re coming from. Their actions are not logical but very emotional, and I’ve learnt to expect the unexpected. I’ll let you know how I get on.
You may be wondering where the purchaser is in all this? I’m told he’s busy and, frankly, I believe him. Acquisitions may be important but in acquisitions by businesses, as opposed to private equity, they are seldom urgent.
More in the coming days. Register here for the Real Business newsletter, and you’ll receive my updates direct.If you’d be interested to talk to our mystery vendor direct, email or tweet the Real Business team.
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