An increasingly common form of business acquisition is the sale of shares to employees. The following is an example of what is also called employee participation. It is a case from my own practice.
Erik one of the two shareholders of an installation company with 18 employees, is somewhat older than his associate and has reached the age to arrange his succession. The shares of the operating company are held by the holding company and through a personal holding company, Erik and Peter each have 50% of the shares of the holding company.
They have planned to sell 49% of the shares to the staff. On the one hand to let them benefit from the success of the business and on the other hand to bind them more to the business. Peter does want to retain control and therefore wants to buy at least 1% more. All staff members are invited to participate.
Loan to employees
My valuation of the business based on the discounted cash flow method came to €1.5 million. Now that the price per share was known, there were 10 interested parties. The interests they wanted to acquire ranged from 0.5% to 4.9% - to stay below the substantial interest limit. Except for Mark, nephew of Peter, now too young, but intended successor, who took 20%.
Erik and Peter are willing to provide loans to employees who want to buy more shares than they can finance themselves. The Tax Office has strict rules for employee participation. The price must be in line with the market, loans by the owner to staff must also be on market terms especially with regard to interest, and the purchase amount may never be borrowed in full by the owner. Part of the purchase price must be financed by the employee from his own resources or through a loan from someone outside the business.
If this is deviated from, there is a good chance that it will be seen by the tax authorities as favoring an employee and then income tax will be levied on the benefit enjoyed.
Fiscal unity
In the end, besides Mark, only 6 employees participated. Of course, they still had a lot of questions. I arranged a meeting at the business with Erik, Peter and all the prospective participants. I explained the valuation to them and we talked about the whole process.
With an eye to the future, on my advice it was decided that the participants would participate at the holding company level and not in the operating company. You miss benefits such as forming a tax unit otherwise, and banks prefer to see it that way. I drafted the employee participation agreements and the shareholder agreement and then discussed the drafts with Peter and the new shareholders.
This yielded only a limited number of comments including on quorum and shareholder meeting decision-making.
At the notary
On the date we set at the notary to sign the deed of transfer, the employee participation agreements and the shareholder agreement were also signed. At the latter, all those involved were present at the notary's office.
An impressive moment for the participants. Erik and Peter were especially happy and satisfied that what they had envisioned had now come to fruition. We know all about installation, but this would never have been possible without you, they said as they said goodbye.
