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  1. #11
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    Good discussion there FTG & SBQ
    If I could also add

    Do your utmost to avoid legal routes. It destroys goodwill

    If one was looking to buy into your situation. Q for yourself
    Does the SH agreement stipulate revaluation of the business every year & its methodology?
    If SHA has one what is the profit multiplier for its goodwill valuation?
    How much of the profit is paid out as dividends?
    What is the likelihood of private equity wanting to buy into/buy the company?
    What is the likelihood of listed company wanting to buy into/buy the company?
    Can the company buy out exiting partners shares?
    Can the company guarantee SH loans to buy shares?
    Does the bank have personal guarantees from shareholders?

    How are you going to get a return on your investment?
    Dividends or revaluation returns or a mixture of both?

  2. #12
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    Quote Originally Posted by kiora View Post
    Good discussion there FTG & SBQ
    If I could also add

    Do your utmost to avoid legal routes. It destroys goodwill

    If one was looking to buy into your situation. Q for yourself
    Does the SH agreement stipulate revaluation of the business every year & its methodology?
    If SHA has one what is the profit multiplier for its goodwill valuation?
    How much of the profit is paid out as dividends?
    What is the likelihood of private equity wanting to buy into/buy the company?
    What is the likelihood of listed company wanting to buy into/buy the company?
    Can the company buy out exiting partners shares?
    Can the company guarantee SH loans to buy shares?
    Does the bank have personal guarantees from shareholders?

    How are you going to get a return on your investment?
    Dividends or revaluation returns or a mixture of both?

    These too are very good questions that will take me time to think through and answer.

  3. #13
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    These comments from now three posts are very timely and hugely beneficial to reflect on and consider. There is a retreat meeting among the six directors next weekend in the Wairarapa where succession is on the agenda (again). Gaining a wider perspective from these posts at this stage is very helpful for that discussion. I am not a business person, I could not have written those questions, but I am a person in business. I'm good at what I do and seen as a safe pair of hands by clients, but the founding directors who went into business together straight out of grad school have learnt the craft of business. They've had help too. I've been an employee for them with the other mid-tier director (who didn't go through grad school), and then given the chance as a director in 2016. I have added a great deal of value, but largely the innovation that the company benefits from was introduced by a founding director. I've adapted and reaped the financial rewards. Prior to my entry, they had introduced a partner and it went sour. Lawyers were called in, dispute clauses raised, and they paid him out with a years salary (I overlooked that in earlier posts). You're absolutely correct to concentrate on the spirit and sentiment of the agreement, rather than the letter. In that dispute, watching as an employee, the spirit went out the window. I was a light touch when the offer of his shares came. And yes, the company could buy the shares if needed (in response to one question from kiora).

    Ironically, I see the spirit of the professional service I offer as being under threat, partly from doing business. Every day I am fighting on fees, on service, on understanding to get the project over the line, often in close collaboration with other professionals. Because that is so contentious and polarising, I won't be naming it. We do make money (and I'll get more specific with questions from Kiora), but it comes at a huge effort that takes a toll on spirit and goodwill. Grinning and bearing it, I have just acquiesced on fees from a government quango (an essential government service, but funded from both commercial and public funds) after they demanded we reduce service fees for the project (the lesser of two evils) because the build cost had come in too high. The way people treat each other with aggression and domination is another thing.

    Such high level questions that have direct influence on a very specific set of circumstances (largely unknown to you) can only be a testament to their wider relevance, hopefully for others. I'm very grateful, it is not easy work being in business.
    Last edited by Fred114; 10-09-2021 at 11:51 AM.

  4. #14
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    Good discussion there FTG & SBQ....agreed


    Do your utmost to avoid legal routes. It destroys goodwill..agreed

    Does the SH agreement stipulate revaluation of the business every year & its methodology?....no it doesn't, one of the directors with the company accountant dreamt it up. It stipulates an accountant is involved.
    If SHA has one what is the profit multiplier for its goodwill valuation?.....buried somewhere
    How much of the profit is paid out as dividends?.....only a portion, divided among business, employee pool of earnings, and directors.
    What is the likelihood of private equity wanting to buy into/buy the company?...high, and there have been broad overtures from one larger crowd at the encouragement of one founding director, but I pushed back because I didn't like them. Subsequently I have worked more closely with them and respect between us has increased.
    What is the likelihood of listed company wanting to buy into/buy the company? Nil
    Can the company buy out exiting partners shares? Yes, cited in SHA
    Can the company guarantee SH loans to buy shares? Not stated, unclear.
    Does the bank have personal guarantees from shareholders?...possibly. A broker I used to refinance private mortgages went to a bank that held the accounts for the business. They were able to include company dividends I receive in the calculation, however, I found out later that the bank views that arrangement (for private finance) as a business loan and consequently won't offer private banking services (should I need those services). So possibly there is a guarantee of some sort between the company and the bank on a personal level. The broker didn't disclose that arrangement. I'm yet to look into all this.

    How are you going to get a return on your investment? Dividends or revaluation returns or a mixture of both? Mix of both.
    Last edited by Fred114; 10-09-2021 at 08:40 AM.

  5. #15
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    Interesting discussion and some very useful points. I don't have anything on the technical side to contribute but I think there are broader aspects for you to consider that might help balance the technical ones. I am a working director and shareholder in my organisation (involved in IT). I have worked in a number of roles pretty much since the company started and have been a director/shareholder for the past 20 years or so. In our case:
    - There are 3 of us, including the founder
    - We own different classes of shares
    - The SHA defines how the value of those is calculated should I leave or the business be sold

    We have, as I expect you do as well, a very high trust level in the working relationship that the 3 of us have which can make these conversations interesting!. Introducing others into this mix is challenging/impossible as the relationships are simply not repeatable. As you have identified it can be very fraught and once lawyers get involved everybody loses. About 10 years ago my wife and I did some serious planning around retirement in terms of when, how, why etc. As part of that we were forced to front up to what we wanted from my involvement in the company and therefore how we would achieve that. Those plans have been hugely useful in:
    - Helping me separate what I want from my day job, my shareholding, my directorship. It is easy to think these things will always align but for me on occasion they don't
    - My wife to understand those things as well so when under pressure in any of those areas we can relate it to 'the plan'
    - I am clearer on what I want/need when discussing difficult issues at director/shareholder level because again there is 'the plan' so I am clear on my position personally. e.g. What dividend should be declared, should we invest in the business etc
    - The 3 working shareholders have discussed succession plans and timeframes which again back to the plan I can articulate to have the best chance to get what I need personally
    'The Plan' includes the outcome based on me walking away, versus the company being sold and the conditions that I need in each case, so again those discussions/decisions are clearer.

    I guess that is a very long winded way to say that I would encourage you to:
    - Be clear on the outcome you are looking for in the long term
    - Define or understand the options/strategies have you got available to get there?
    - Know how would you execute on those
    - Think about scenarios if you can't
    If you are comfortable and clear on that stuff the the answers to the detail questions will hopefully be easier.

    Good Luck and thanks for raising the topic, it has given me some things to think about as well.

  6. #16
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    Fred
    If shareholders are looking to maximize their returns when they sell then they should be looking at maximizing the goodwill component of the valuation and the multiplier. I have previously been involved with private Co where the multiplier was 4 x and in others where buyouts where multiplier was 10 x This understandably a HUGE difference
    It will vary depending on the potential future buyers. Listed companies will potentially pay a higher multiple
    From your posts
    "The constitution states that you cannot own shares without employment in the company, so he will have to sell if he wants to retire from work."

    This caps the future potential valuation. Can the company change this?

    On another note I an involved in other Co where the shareholder agreement is.
    A value is put on the shares for sale as per S/H agreement OR by exiting partner
    Company has first right of refusal on exiting partners shares. For any shares not taken up by Co then rest offered to existing shareholders for next right of refusal.
    Only then if all the shares not taken up can they be offered to outside shareholders at the agreed price.
    The existing shareholders have the right to agree to the new S/H coming on board. If they don't agree to the new S/H then the existing S/H must agree to purchasing the shares

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