---

• If a shareholder wants to retire early, one of the easiest options is for the company to buy the shares back itself.
• Should the remaining shareholders have sufficient personal funds, then they could purchase the departing shareholders’ shares directly.
• If there is no way for the existing shareholders to raise the funds needed and the company cannot carry out a buyback, then the parties may want to consider approaching an external buyer who would replace the departing shareholder.
• Another option is for the current shareholders to use a Holding Company, which defers the need for all the funds to be paid upfront. In practice this happens when the remaining shareholders form a new company. This new company makes an offer to all original shareholders to acquire 100 per cent of the issued share capital.
• It is important to understand the different methods available for valuing shares in a company to ensure that a fair valuation is achieved.

---

Not every shareholder will be on the ‘same page’ when it comes to the time it takes to grow a business and the tough decisions and sacrifices that go with it.

If one or more of your shareholders wants to exit the business earlier than originally anticipated – whether through differences of opinion, choosing to retire early or other reasons – then one of the easiest options is for the company to buy the shares back itself (known as a “share buyback”). Under the Companies Act 2006 (“CA06”), a company can use its reserves to repurchase and then cancel its own shares providing certain legal and financial conditions are met.

Buyback

One of the benefits of a share buyback is that the exiting shareholder obtains the market value for their shares and all of the money when the transaction completes. Shares bought by a company as part of a share buyback must be paid for at the time they are purchased (s691(2) CA06).

This excludes the possibility of deferring payment through the use of a loan or loan notes issued by the company as consideration for a share buyback but doesn’t prevent agreeing future staged tranches. Company law requires the company to have sufficient distributable funds whilst the company needs to make sure it has enough money to meet ongoing working capital requirements.

Shareholders should take specialist tax advice to ensure the buyback is treated as a capital gain by HMRC and this may be done through the Advance Clearance Procedure to ensure the deal meets the necessary tax conditions.

Buyout

If for any reason the buyback is not the most suitable route and the remaining shareholders have sufficient personal funds, then they could purchase the departing shareholders’ shares directly (and would be able to structure the transaction differently so as all shares are transferred on completion whilst consideration remains outstanding through loan notes or otherwise).

If considering a buyout, then a formal valuation of the company may be needed to determine the value of the shares owned by the departing shareholder. However, as with the buyback, the parties may already have a value in mind.

A buyout can be a fairly straightforward transaction, and it is up to the departing shareholder to report on and pay Capital Gains Tax.

Third-party investment

If there is no way for the existing shareholders to raise the funds needed and the company cannot carry out a buyback, then the parties may want to consider approaching an external buyer who would replace the departing shareholder. Bringing in a third-party shareholder has its pros and cons, and the remaining shareholders may feel they have little control over the terms of the deal. This however could throw a lifeline to them and also enable them to bring in someone with a new set of skills and experience to help them to grow the business further.

Holding company structure

A further option is for the current shareholders to use a Holding Company which defers the need for all the funds to be paid upfront. In practice this happens when the remaining shareholders form a new company. This new company makes an offer to all original shareholders to acquire 100 per cent of the issued share capital. The shareholders who are remaining receive their shares in the new company typically for the same value as the shares in the original company (usually referred to as a “share for share exchange”). Unless  tax clearance is obtained, the holding company will have to pay 0.5 per cent Stamp Duty on the value of the whole transaction.

The shareholder who is leaving receives the same value, but the payments to them can be split into instalments over several years (in a similar structure to a buyout) to enable the business to raise funds through trading activity to pay for their exit. The shareholder exiting will be liable for Capital Gains Tax.

Valuation of a company

It is important to understand the different methods available for valuing shares in a company to ensure that a fair valuation is achieved.

There are numerous factors which can affect the valuation figure, including, but not limited to, gross earnings and profits, asset base, levels of cash, debt and working capital, customer and supplier base, employees, the industry you operate in and market conditions.

Whilst there are a number of ways in which a company can be valued (depending on type of company/ business operated), the most commonly used method is the EBITDA multiple: this involves applying a multiplier to the EBITDA of the business (earnings before interest, tax, depreciation, and amortisation). The multiple to be applied will vary by industry sector and guidance will need to be sought from a financial intermediary.

Early professional advice is encouraged for both the departing and remaining shareholders to ensure a suitable exit can be agreed by all.

Toby Walker is an associate solicitor at Taylor Walton Solicitors.

Read more

Growth shares vs ordinary shares – what’s the difference? – Here, we’ll delve into growth shares and ordinary shares and establish which is best for where your business is at

Why you need a shareholders agreement when starting a company – Writing a shareholders’ agreement may save you time, money and stress in the long term, says Catherine Feechan, a partner in the corporate department at law firm, Brodies.

How to sell your small business when you want to retire – The key to a stress-free succession planning is to think ahead, says Keith McAlister of Thomson Snell & Passmore