Loans for buying out a company director leaving the business

When a director leaves a business, they have to make a decision over what to do with their shares. For the business to continue operating, shares must be sold back to the company or to another director. In some cases where smaller organisations only have one director, an employee may be asked to become a director by buying out the existing one. 

Regardless of the situation leading to their departure, whenever a director is leaving your business, you need to make a decision over how you'll purchase their shares. You need to make sure you have the cash available to make the purchase, which often requires finance. 

If raising adequate finance takes time, patience can fray and frustration can rise. Directors looking to leave generally prefer shares to be bought quickly so they can move on. Here at Rangewell, we can help you understand the process behind buying out a director, but more crucially we can arrange finance for you quickly, which means you can complete the sale and facilitate a brighter new future for the business. 

Can a director sell shares?

Though an active director can't be forced to sell shares, the same can't be said for a departing one. If a director is leaving the business, shares must be sold back to the company or another director to enable the business to have full ownership of its shares. This is, of course, only relevant to limited businesses and not PLCs. 

For most limited businesses, there are articles of association that dictate how a departing director must sell their shares. These articles will also stipulate who they may sell them to and at what price and how long the process might take. 

The Articles of Association may contain a valuation formula or at least a set of assumptions to be used where a shareholder wants to sell their shares. Other shareholders may have what are called "pre-emption" rights - essentially the right of first refusal.

There are a large number of rules when the company wants to take shares back. Failure to comply with such rules may mean the buy-back will be void, meaning the shareholder is treated as having never sold his shares and the officers of the company may be personally liable for the default.

Legal advice may be essential but, even if you have the right to buy the shares, the greatest challenge may be to provide the funding required.  

How you structure your purchase and how you raise finance depends on whether the company buys out the shareholder, or the director sells shares to another director... 

The two options for buying out a shareholder in a limited company

There are two possible routes to allow the shares to be purchased:

Director selling shares to another director

The first is simply for co-directors to buy the shares at the market rate. This is a flexible option as it allows you to raise private finance to fund the purchase and ensures you're assuming full control of the departing director's shares. This is known as a share purchase.

Share buyback from the company

Can a company buy out a shareholder? Yes - through a system called share buyback. This is a more complicated process because there are rules that limit how a company can use borrowed money. So if you're asking can a company borrow money to buy back shares, the answer is more complex - it's dependent on finding the rare lenders who will finance it. 

Instead, when a company is trying to buy out a shareholder, it usually has to issue new shares that are sold to other directors. This raises new capital which is then used to fund the share buyback. HMRC have set restrictions on company share buybacks, and especially on those using deferred consideration.

In most cases, we'd recommend a director selling shares to another director as it allows for private financing. Provided you can secure a loan, which we can help you with, you'll be able to purchase the departing director's ownership stake and gain more control over your business's future. 

How to raise finance to buy out a shareholder

The cost of buying out a shareholder will, of course, depend on the value of the company. It is rare that a co-director, or a managmeent team, will have sufficient funds on their own, and external finance will be needed.

Lender criteria for loans for shares

Lenders will usually view an existing business with trading history as a safer investment, meaning they'll be more likely to offer a loan as the perceived risk is less than for a new business. However, there are some specific things a lender will expect to review if you're aiming to raise a loan for buying out shareholders. 

• Business plan: lenders will want to see evidence of a business plan that accounts for the impact of a departing director and plans for the future. Make sure any historic business plans you have are updated to reflect the departure. 
• Financial records: for a lender to issue finance, they want to see evidence of a business' trading history to determine how risky it may be. The better performing your business, the better potential offer you can receive. 
• Personal information: some loans may be secured against personal assets such as property, so lenders typically need to review the personal history of any applicants looking for a loan. 

Borrowing money for buying out company directors 

The first step is to negotiate a price with the departing director. This should be based on the agreed market price, though some renegotiations may be required if the departing director tries to extract more value. 

Once a price is agreed, you'll need to raise the cash required to make the purchase. This usually requires a combination of debt and equity that is derived from the buyers, financiers and sometimes even the seller, and can be structured in a number of ways by a combination of funding sources:

The buyer’s contribution: if it's a director selling shares to another director, some people choose to use personal funds to complete the transaction. If you don't have cash in the bank, you'll need to sell off assets, remortgage or sell property.

Business loans: business lenders may offer Unsecured Loans, repayable over three to five years, or a larger scale of lending and a longer term with a Secured Loan, with the security provided by other business assets.

Private Equity: Private Equity firms may be able to advance funding but may impose strict conditions. Their funding often includes stipulations about how the company must be run and may include financial and other objectives.

Vendor Loan: the vendor can help support the transition by leaving some of their equity in the company as a loan, which will be repaid over time. This will only be possible if the departure is amicable.

Why you need Rangewell to finance the deal

When a director is leaving and you want to buy their shares, the best method is for you to buy them out as a co-director. To finance the purchase, you'll need to approach lenders who will look into your business and its financial performance, as well as reviewing your future business plan to ensure the departure won't negatively impact the business. 

So not only do you need to find lenders best suited to this type of share purchase, but you also need to navigate the pitfalls associated with the application. 

To make sure you get the best possible offer, work with Rangewell. We can help you understand the financing options available to you, identify the right lenders, help you strengthen your business plan and ultimately negotiate the best offers for you. 

When costs are high, we can work with you to tailor the kind of complicated ‘Jigsaw’ Funding plan required. We understand the challenges of share buyback and the solutions to them. Call us now to get our experts working to provide them for you.