Experienced personnel and loyal management are thin on the ground. Money, bonuses and other cash resources no longer suffice to entice young educated people. They can earn money anywhere. And for you ten others. But shareholder returns can be very interesting.
A package of shares in the company gives a long-term commitment. And you get to have a say in the future of the business.
Corporates in business services such as lawyers, consultants and accountants usually work with salary and equity partners. In those types of businesses, roadmaps for purchasing in the enterprise are ready and there is not much to negotiate.
In SMEs, the purchase of shares by managers and talents is not a regular occurrence, so there is a lot to negotiate. There is a conflict of interest. Here are our top six pitfalls:
1. Waarde
If you want to know what something is worth, you have to have a valuation made. That is different from looking up EBITDA x multiple in a database. You have to look at the future of the business, the earnings model and the risks. Our rule is: without a comprehensive analysis or independent valuation report, you don't know what you're buying. A seller's valuation report is usually not independent and deserves a second opinion.
2. Price
The valuation report assumes a sale to a third party. If incumbent management is the buyer, a lower price is usually agreed upon. This discount on the price can be as much as 40% of the value. After all, as a manager, you actively helped realize that value, so why should you pay the premium price?
3. Financing
A manager or employee has insufficient means of his own to pay for the share package. He is dependent on payment in installments or financing from the seller. The financing offered by a seller must be commercial. That means: a substantial equity contribution, an arm's length interest rate, fixed repayments, a term of up to 5 years and collateral for non-payment. Impractical financing terms create a tax risk.
4. Director
If an employee becomes a director, his legal position changes. As a director, you have the task of managing the company and you are given powers to perform legal acts. Against these powers are liabilities. A management agreement and liability insurance is therefore necessary. Directors enter into a management agreement with the company and receive a management fee instead of salary.
5. Voting rights
As a minority shareholder, you usually don't have much say. You can increase your influence by including in the shareholder agreement (a contract between all shareholders containing the most important agreements about share ownership) that certain important decisions can only be taken unanimously. You then have a de facto veto right. In addition, with 10% of the shares you can also initiate an inquiry procedure or submit a request for withdrawal to the Enterprise Chamber.
6. Resign
Most shareholder agreements list dismissal by the shareholders' meeting as a reason to compulsorily offer your shares, sometimes at a steep discount ('bad leaver'). You should therefore have a provision included that you cannot simply be dismissed against your will or at least not be forced to sell your shares.
With the Instituut voor Zakelijke Mediation, we guide such procurement processes. The valuation, pricing, financing and shareholder agreement are all dealt with. As an independent expert, we help reach good agreements between buyer and seller.
