Resigning as a director - how to get a fair settlement from my business partner?

[Blackisthecolour]

I set a business up with a friend 3.5 years ago which has gone from strength to strength and is now decently profitable, making over £40k a month (15k profit).

I haven’t taken much out of it in terms of dividends or expenses the last few years and am about 20k behind my business partner.

Due to a number of reasons I’ve decided to resign. It’s a long story but I can’t keep doing this. It’s making me ill. All I’ll say is that If I was an employee I would be on sick with stress but unfortunately as a director I don’t have that option.

How on earth do we work out a valuation for my business partner to buy out my shares? (We’re 50/50 and they wish to continue). And if they can’t afford to pay me out (and they have already expressed that this might be an issue) how do we manage that situation?

I’m desperate to get out but I’m also not willing to walk away with nothing to show for all those years of hard work. Equally I don’t want to squeeze my partner financially to the point where she they continue - they have also has worked incredibly hard and deserve to be able to carry on and make a success of things.

Any advice on how to negotiate a solution we will both be happy with would be very gratefully received. We don’t really want to go down the legal route because there’s no animosity and because we don’t want to pay big legal fees.

I suggest that you speak to an accountant. You'll possibly be able to take out the money as a loan/dividends over a number of years. But first you need expert advice.

Yeah I’d discuss being a silent partner and slowly getting paid off whilst shares are being reduced

The business can afford legal fees to ensure its directors are appropriately remunerated.

You cannot afford to get this wrong!!

You don't have to resign - you can stay as director and take dividends etc but obviously not a salary if you're not working day to day.

Also there’s basic ways of valuing a business as it currently stands…. I can’t actually recall the formula without googling it but it’s based on turnover and profit to give a ball mark figure to work from

An accountant or business valuer will help. To get the best price it will take several years to extricate yourself mist likely, unless you partner wants to buy you out

If you’re a 50:50 shareholders then firstly the business owes you dividends to the same value as your business partner has taken out of it, so that’s the first thing.

Is your business a limited company? If so then your company articles should say something about sale of shares. It can be quite complicated and I’d probably recommend having a chat with your accountant in the first instance if you don’t want to go down the solicitor route

If she can’t afford to buy you out and can’t get a loan to buy you out then you need to try to negotiate an agreement where you no longer work there but still get an agreed percentage of net profits as a dividend. You can perhaps agree she gets a certain salary or bonus depending on turnover/profitabilty to make sure her earnings are fair.

She may decide to buy you out in future or carry on with a percentage of profit going to you as 50% owner or she might decide neither of those options work for her.

Coming to an agreement will depend on how easy it will be for her to take on all the work when you quit or if she’ll need staff , reducing profits. It might make more sense for her to wind up your current business and start her own company taking your clients with her.

We’ve got a meeting with our accountant soon so hopefully I will know more.

Our accountant is my accountant for my (owned solely by me) business, for my partners business (owned solely by them) and our joint business too so I’m hoping they’re going to be fair in their suggestions. They (accountant) seems to think we can do this without involving legal.

One good thing is that I’m not desperate for an immediate payout. I could definitely take it over years with no issue but I absolutely do want my share.

Not necessarily, the shares can be 50:50 and not rank pari passu for dividends (or more accurately can be capable of having dividends declared independently on them if they are different classes).

Does the company have enough cash to buy you out? You could sell your shares back to the company. If it doesn’t, then you could sell them to your business partner in tranches over time, but depending on your wider income this might not be tax effective overall.

You can resign as a director without doing anything about your shares though.

I don’t think my partner would dissolve the business as it has built a market leading reputation in our niche industry.

It’s a limited company

We’ll also continuing to work together in some capacity in the future (not in that business) so not in either of our interests to upset or be unfair to the other.

What happens to the profit that’s sat in the bank - can I take my share? Is their any value given to future profit? I have no idea how to work any of this out 😕

The accounts to date should show the dividends allocated and directors loan balances.These figures and PAYE salary is the only ways she should have taken money out the business and presumably your dividends have been equal. If there is dividends due to you that you haven’t taken yet then write that cheque. It there is cash sat in the bank not being used for stock or needed for other reasons just divide it between you as dividends, she can use this to repay her directors loan if necessary.

@Blackisthecolour

1. Valuing the Business

a. Business Valuation Methods:

• Asset-Based Valuation: Calculates the value based on the company's assets minus liabilities. This is straightforward but might not reflect the business’s earning potential.
• Income-Based Valuation: Uses the company’s income to estimate its value. The Discounted Cash Flow (DCF) method is commonly used, projecting future cash flows and discounting them to present value.
• Market-Based Valuation: Compares the business to similar businesses that have been sold recently.

b. Engaging an Accountant:

• Since you’re meeting with your accountant, they can provide a detailed valuation using one or more methods. Ensure they consider both tangible and intangible assets, including the business's reputation and customer base.

c. Agreement on Valuation:

• Both partners should agree on the valuation method and the final figure. This ensures transparency and fairness in the buyout process.

1. Negotiating the Buyout

a. Payment Structure:

• Lump Sum Payment: The partner buys out your shares in one payment. This may be difficult if your partner is financially strained.
• Installments: You could agree on a payment plan over several years. This approach eases the financial burden on your partner and ensures you receive fair compensation.
• Equity Swap: If appropriate, you might receive equity in another business or venture as part of the settlement.

b. Handling Future Profits:

• Profit Distribution: Typically, your share of the business’s current profit should be included in the buyout. Future profits can be trickier, as they depend on the business’s ongoing performance.
• Agreement on Future Profits: You can negotiate a percentage of future profits for a defined period, or you might agree to a final settlement amount based on the current profit and asset valuation.

c. Addressing the Profit in the Bank:

• You are entitled to your share of the profits and assets accumulated in the business bank account. Ensure this is factored into the buyout settlement.

1. Managing the Transition

a. Drafting an Agreement:

• While you prefer to avoid legal routes, a written agreement outlining the terms of the buyout, payment schedule, and any other considerations is essential. This document protects both parties and clarifies expectations.

b. Transition Plan:

• Develop a plan for transitioning your responsibilities to ensure the business continues to operate smoothly. This might include a handover period or training for your successor.

c. Future Collaboration:

• Since you plan to work together in another capacity, maintain a professional and amicable relationship throughout this process. Clear communication and mutual respect will aid in preserving your professional relationship.

You could also consider whether employing someone to take over the workload which is causing you the stress and staying as an active participant in the business might be a better option.

I remember three partners once. One wanted out so the accountant worked every out equitably. Over the next decade the business thrived. The other two partners walked away millionaires. The partner who sold out is bitter to this day.

So please accept that this business may grow and grow without you.

@justasking111 I’ve accepted that. I can’t continue as things are and I’m happy to take the risk. There’s a good chance the business will continue to be successful but I’ve decided it’s worth it to have my life back.