Local News

26 July 2011

What are your options when family members want to exit the business? Buy out or new shareholder?

Funding

For the continuing family members to buy out the exiting member/s will probably mean a buy back of shares by the company and often this will be too expensive. The company will require a mixture of bank loan, perhaps debt factoring - and probably the exiting family member will need to accept some deferred consideration. In the current lending climate the bank borrowing may be very difficult to arrange and deferred consideration always has a degree of uncertainty as to whether it will ever get paid.

Alternatively, the continuing family members could buy the shares personally but they will face the same funding challenges.

A new shareholder who could deliver the cash within the required timescales may be the only answer.

Whilst ‘keeping it in the family’ may be the preferred option as it ensures control of all shares and the way that the company is run, a new shareholder also provides benefits. They may be able to bring new ideas and energy to take the business forward; they will have business contacts with customers and suppliers – and they have the potential to introduce further funds to help with capital investment, working capital and other expansion.

Valuation

Normally the company’s Articles of Association set out how the shares would be valued if a shareholder wishes to sell internally, or there may be a shareholders’ agreement which sets out a calculation. Selling to a third party may give a larger sale price because they may be willing to pay a premium to enter the company.

Tax

The seller’s tax position will probably be the same regardless of who buys the shares. Entrepreneurs’ tax relief will apply if the seller has held the shares and worked in the company for more than the last year but the conditions are complicated and advice should be taken.

For details on Haines Watts Young Entrepreneur of the Year competition 2011, visit www.hwye.co.uk or follow us on Twitter @HWYE2011 and Facebook: search for Haines Watts HWYE.

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