Nine golden rules to successfully cash out a shareholder

Things change. For many fast-growing TMT businesses there will come a time when the founding shareholder structure will have to flex.

Perhaps a shareholder wants out so they can retire or pursue the next big thing. Maybe ownership structures need to better reflect director contributions or be updated to motivate younger talent coming through the business.

Whatever the trigger, exiting shareholders is a delicate act. One wrong move can create significant costs, limit growth opportunities and cause the loss of valuable intellectual property. 

Here we set out nine golden rules to find solutions that are right for the departing shareholder and the business.

1. Be honest about your aims and objectives

Shareholders’ aspirations are unlikely to be the same on day one as two years down the line. Once a business is viable shareholders must have honest conversations about their plans: is everyone still in for the long haul? Having these discussions each year creates a culture of openness that shields a business from surprises. 

2. The solution will be multifaceted

There’s never just one way to exit a shareholder; solutions will always be influenced by individual circumstances. Buying back shares is just one option. Could the ownership structure be updated to ease the shareholder out over time? Could the shareholder continue as a consultant, or are bonus or earn-out arrangements possible? 

3. Can you afford it?

Exiting a shareholder costs; any solution must be cash flowed and within budget. If this is handled in the wrong way, the negative impacts can dampen productivity for years to come. Businesses without the spare capacity to exit a shareholder straight away can sometimes reach an agreement to delay payments for a time-limited period. 

4. Protect the business’ intellectual property

The IP held by a shareholder in a fast-growing TMT business is often vital to its ongoing success. Steps should be taken to ensure valuable IP doesn’t disappear out the door with the exiting shareholder. Transitional arrangements can be a useful way to satisfy the needs of the departing shareholder while also securing the IP they hold. 

5. Secure critical relationships

Owners that bring in revenue through strong client relationships will find it difficult to sell their shares and exit a business. Preparation is key. In the months before leaving, owners should start introducing core contacts to others across the business. Successful handovers are crucial to demonstrating that the business is not reliant on the people looking to exit. 

6. Remember tax considerations

Any exit is a negotiation: solutions must benefit both the shareholder and the business. Departing shareholders typically want one-off capital payments. However, it’s often more viable for a businesses to release ongoing income payments. Each has different tax implications. Overlooking these during negotiations can create extra and sometimes unexpected costs. 

7. Think about government support

Government-backed schemes, such as EMI Options and Employee Ownership Trusts, are available to help businesses set up tax-efficient ownership structures. They can be a useful way to make significant savings while also ensuring compliance with relevant regulations. Scheme rules change, however, so it’s important to keep up with latest announcements. 

8. Don’t lose sight of the commercial objective

It’s easy for negotiations to become quickly bogged down by the demands of vocal shareholders or a push to find the best tax outcome. But solutions should always be shaped by what is commercially right for the business. If this is forgotten, the wrong answers may be found. 

9. Communicate effectively

It can often be a challenge to engage creative entrepreneurs in discussions about ownership structures. But businesses must find a way to have these conversations. Think about how information and updates are presented. Go beyond legalese and make sure key messages are communicated in a way that motivates and inspires open discussions.

For more information please get in touch with David Blacher or Simon Adams.