David Blacher, November 14, 2019 3 min read
This is a guest post from David Blacher, Partner & Head of Media and Technology at RSM. RSM is a Tech Nation growth programme partner.
Things change. For many fast-growing technology businesses there will come a time when the founding shareholder structure will have to flex. A co-founder leaving a business might not be the most spoken about topic, but it’s a much more regular occurrence than you might think, and it’s important to know what to do if it happens to your business.
Whatever the trigger, exiting shareholders is a delicate act. 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. But 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.
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.
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?
Exiting a shareholder usually 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.
The IP held by a shareholder in a fast-growing tech 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.
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.
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 business to release ongoing income payments. Each has different tax implications. Overlooking these during negotiations can create extra and sometimes unexpected costs.
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 the latest announcements.
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.
It can be a challenge to engage entrepreneurs in discussions about ownership structures. Think about how information and updates are presented. Make sure key messages are communicated in a way that motivates and inspires open discussions.
If it comes to the departure of an early shareholder or member of the founding team, know that it’s an event that happens regularly, for which there is plenty of expertise and support and than need not end acrimoniously. Do your research, ask for help, and keep communication channels open. It might just turn out to be the best result for both parties.
