Finance for shares from departing directors

Disputes in the management team, a better opportunity elsewhere or even retirement: there are many reasons why directors of a company might wish to sell their shares.

It may be written into the articles of association that a departing director must sell their shares. A Shareholders Agreement may dictate whether the departing individual can sell their shares, who they may sell them to and at what price and how long the process might take. 

Whatever the contractual obligations, acquiring shares in your business may be essential to let you keep control of it. 

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.  

Buying as a co-director - or through the company?

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

The first is simply for co-directors to buy the shares at the market rate. This is a share purchase.

The second is for the company to buy the shares in a share buyback. Funding share buybacks with borrowed money is not usually permitted for private companies, and the usual alternatives are for the company to raise money by issuing new shares and using the cash raised to fund the company share buyback, or to provide a staged buyback. This allows all of the shares are bought back by the company but with payment deferred over a period of time. HMRC have set restrictions on company share buybacks, and especially on those using deferred consideration.

In most cases, therefore, the simple solution may be for co-directors  - or an incoming director who is acceptable to existing owners - to raise the necessary cash. 

The funding solutions

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.

Lenders may be sympathetic - a business that is already trading successfully represents an excellent risk - but the high costs of acquiring a valuable business will remain.

Once a price has been agreed, it 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 – The directors remaining will usually need to use their own personal funds as evidence of the commitment to the business. Selling off assets or getting a second mortgage on their home may be necessary.

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

Many lenders will be happy to lend if you need to buy shares from a departing director. You may need to prove the viability of an existing business with accounts and order books, and to demonstrate that the departure of a director will not present a major disadvantage for the business in the future, but the position may be similar to that of a Management Buyout. Your status as a director helps ensure that your proposals represent a good business risk.

But not all lenders will be able to offer the most competitive terms or provide the flexibility that you need.

Looking for the most appropriate deal across the entire lending market takes time and expertise. At Rangewell, we know the market - and the lenders who can offer the most competitive rates.

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.