Fortunately, most shareholders get on well with each other in SME Netherlands. In our advisory practice, however, we do run into issues where shareholder A wants to part company with shareholder B, sometimes even against the will of shareholder B. And so are other complex situations. What to do in such a case?
Sometimes a split between shareholders is unavoidable. How do you come to a solution that satisfies every shareholder? Below is an (anonymous) example from our practice.
Valuation
A shareholder split can come in as a complete surprise. The latter happened recently, when a shareholder A (let's call him Jan for the sake of convenience) told his associate, shareholder B (let's call him Piet), in front of the staff of course, with an emotional tirade that he no longer wanted to continue with him.
A somewhat - euphemistically put - clumsy action, but it did lead to the start of a separation between shareholders.
Less than a week later, Jan had an adviser perform a valuation in order to take the first step towards buying out Pete. Given the speed, it was already clear that there was a deliberate attempt to force the separation.
The valuation was so low - and hardly founded - that there was no point in talking about it. Piet engaged us as advisers to assist them with the possible follow-up process. I mention "possibly" here deliberately, because of course Pete does not have to sell, as the shareholder agreement also revealed.
Sell shares?
Then the conversation starts with Pete; does he want to sell? How does he see the future with the business? What are his ambitions? In the end it turned out that he either wanted to continue, or, with a fair offer, to sell. He had no intention of buying out Jan, and found the situation extremely unpleasant for both the staff and himself. Especially the way the bombshell was thrown by Jan was a thorn in Pete's side.
We then started working on a valuation anyway, if only to make him understand what his business would be worth. Of course, this could be done using a - the theoretically most correct - Discounted Cash Flow (DCF) method, in short, discounting future cash flows at a discount rate, but we also looked at how much x EBITDA is paid in the market for similar businesses.
Conclusion: for the amount that came out of the valuation, Pete was willing to sell to Jan.
The valuation differed greatly in amount - as to be expected - from the valuation of Jan's adviser. Since the valuation was provided to us by the adviser in question (unsolicited, by the way), we also gave "our" valuation to him. Incidentally, I am - normally - not in favor of this, because it all too often leads to pointless but endless discussions about starting points, calculation methods and assumptions.
Realistic valuation
We then indicated that there was no point in continuing to talk given the widely differing price expectations for Pete's equity stake. Two days later there was an amended, increased offer.
Only then did the actual negotiations begin; where the final price was virtually the same as our valuation. This is not to pat ourselves on the back, but actually to show that a realistic valuation is important, but in this case Jan's strong will to continue without Pete was even more important in order to reach a result. And again, Pete didn't have to sell.
By the way, Jan had not thought about financing Jan's buyout. Engaging a bank would take too much time. Pete came to the rescue with a piece of loan over the purchase price. But with the debtors pledged and an interest rate appropriate for this type of loan. Repayable in 12 months.
Lessons learned
What are the lessons learned from this case?
1. Think before you begin; the bomb that Jan dropped on Pete should have been handled differently. A better starting point is to have a calm 1-on-1 discussion and to indicate in a nuanced way that you are dissatisfied with the cooperation (without pointing fingers). That way you avoid the additional emotions that were already present this highly emotional process.
2. An inside joke, and of course a sermon to your own parish: bring in a specialist adviser. If Jan had engaged an adviser early on who could have helped him come up with a realistic price and thought about financing in advance, a lot of bumps would have been removed.
3. Know your position as a shareholder; Jan clearly had not thought about the fact that Pete did not have to sell. In addition, he threw a bomb under the cooperation in front of the staff, causing unrest. Something Jan wanted to quell as soon as possible, to restore peace. Result of all this: an extremely strong negotiating position for Pete.
4. Preserve - especially for the outside world - the status quo. As difficult as it can be, let everyone just do their job as long as there is no agreement between parties.
5. Last but not least, manage the emotions; a role for a specialist adviser. As an adviser, dare to be realistic, point out future scenarios and don't be a yes-man to the client. Especially in this process extremely important, because there was considerable tension with both shareholders. If necessary, put your client with both feet on the ground.
