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How to sell a business (4) – shareholder structures

4 Mins

Six months passed, we exceeded our budget and James was quiet, very quiet. I determined to keep running the business. So our regional expansion continued, our first diversification developed, I launched another new service and re-organised the management team: we had the right people on the bus but not in the right seats. I got salesmen back to selling and the organisers into managing.

I met James a couple of times. He showed me a list of companies that I had heard of and said that they were interested, but nothing tangible. He  then introduced me to the world of buying and selling companies. Not only do sellers have “their people” (ie, James in our case), so do buyers. So James spoke to the buyers’ agent and in September 2011 was introduced to the potential buyer. 

So I got back on the job and updated the business plan. Results had improved and the re-write was positive without exaggerating. I assumed 15 per cent growth of the core business with the newer ventures increasing more rapidly to £1m or £2m of turnoverbefore assuming the same profile.

Another month passed with nothing happening. The buyer’s MD got married (apparently), and eventually they asked Greg to meet me. Greg had worked for them before and clearly his job was to interview me and see if the reality matched the claims. So off we went to the Country House Hotel for the meet. There was a turnaround being negotiated in the other corner and I made sure that I was facing away from them so that earwigging would only be in one direction!

Greg and I got on. We are both interested in motor sports and he runs a business of similar size to ours. I talked about our business and repeated our view, which James had also shared with the purchaser: we are a good, growing business; we’re looking for a down-payment that will go to the founders, and an earn-out that will reward founders and other managers, over a few years. 

As James pointed out, this is unusual. Most vendors want to take the money and run; most purchasers want to keep the management in place for a year or so. By offering to stay, we were underpinning our belief in the company.

This approach helped in other ways: when we started to grow the business, only the founders’ shares had voting rights. Entrepreneurs’ Relief came in after we created this structure, but it was only available to those with five per cent of the voting shares. So the management team, other than the founders, were looking at a 28 per cent tax bill. Not ideal.

However, if we sold the founders’ shares and enfranchised the non- founders’ shares, then after 12 months – ie, the hardest part of the earn-out – the management team’s shares (which will be under option rather than contract for sale) will be eligible for Entrepreneurs’ Relief. 

Big Lesson: whatever shareholder structure you have in place, review it regularly. The regulatory regime changes (and so, sometimes, do your objectives).

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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George Rockett
Barry Houlihan
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