Shareholders approaching retirement are often concerned that their options to leave their business, and extract some value, may be limited, especially if they are in business with other shareholders who have different exit timetables.
For most shareholders, the options are:
Sell your shares to the other shareholders;
Sell the entire business to a 3rd party;
Sell your shares to a 3rd party;
Wind up the business; or
(drum roll) a Share Buyback!
Options 1-4 may not be attractive to your fellow shareholders because:
they may not have the money to buy you out;
they may not be ready to sell to a 3rd party and either walk away from the business or become an employee of their own business rather than its owner;
they may not want to welcome a newcomer into the business; and
winding-up the business rarely realises its true value.
That leaves the Share Buyback – so what is it and how does it work?
A Share Buyback is where the company itself purchases your shares. The shares don’t have to be redeemable, any share class can be bought back, and shares can either be bought back out of distributable profits (the funds that would otherwise be available to pay a dividend) or capital. The procedure for buying back shares out of capital is more complicated, and public, because creditors are given a chance to object, but it is reasonably straightforward, although it does take a little longer than a repurchase from distributable profits.
The Share Buyback therefore enables you to sell your shares, and have the Company pay for them from the profits of the business, rather than oblige your fellow shareholders to dip into their pockets.
The law does require that shares bought back have to be paid for at the time of purchase (so deferred payment is not possible) but you can still buy back shares “on the drip” by buying them back in instalments, and paying for each instalment at the point of purchase. This means that, if the company does not generate sufficient profits to buy your shares in one go, you can agree to sell them on an affordable repayment basis, which also means that you keep hold of those shares (with their attendant voting and dividend rights) which the company hasn’t yet bought.
Entrepreneurs’ Relief is normally available for Share Buybacks, which would reduce your effective CGT rate to 10%, but be aware that the Conservative manifesto in the last election contained a commitment to reform this relief, because the government favours tax reliefs that help in the creation of new businesses, rather than the sale of old ones. Entrepreneurs’ Relief may therefore be on its last legs, and could disappear as early as the Budget set for 11th March 2020.
So, if you are looking for an off-ramp but your fellow shareholders want to keep going, consider the Share Buyback.
For further details please contact our corporate partner, Iwan Emanuel, on 01494 893570 or at email@example.com