Opportunity to become a Director

C

Chiggles

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Hi all.

My company has offered me the 'oppertunity' of becoming a non shareholding director with a view to become a 20% owner in 2 years.

My salary will increase to match the other directors but I wont gain any voting rights or profit share for the first two years.

In 2 years time I will have to buy the 20% from one of the existing directors who is retiring in 4 years. My payment will be made by foregoing subsequent profits after share transfer. If the current rate of profit is maintained it will take approx 6-7 years to pay for the 20%.

The company does not have any assets as such. Profits are withdrawn annually and offices/equipment is rented. its only real asset is its reputation, knowledge base and 'goodwill'. We are a service company within the construction industry.

I currently generate approx 20% of earnings from my clients and I see this as an attempt to stop me leaving to set up in competition. Other than the existing directors I am the most experienced member of staff.

I'm not experienced in company law. Are there any obvious pitfalls to the proposal? As you can see from the time of the post, I'm loosing sleep trying to decide if it is a good deal. Any sound advice is appreciated!

Thanks

C
 
I would recommend you get professional advice. However my own feeling is that this is a good deal. You are being offered "free finance" to purchase this 20%. It's clear the company value you as what's to stop them insisting you finance the purchase yourself? I notice you use the phrase "my clients" but they are not your clients, they are the firms clients. Would they leave with you and are there anti-compete clauses in place to stop you doing this? Also, economies of scale exist...can a business such as this survive on 20% of the existing turnover? The fact that your salary will rise immediately is also a positive. The negatives are whether you feel you could do better on your own (which is debatable and quite risky) and the responsibilities which will fall on you as a director which you should read up on. Best of luck whatever you decide.
 
Thanks john. You have made some good points there.

Some of my concerns are:

If profits don't continue (construction sector) I could be forever paying the thing off and as a non shareholding director initially (minority shareholder later) I wont have any real say in how salaries are divided later.

Are there any negative implications in becoming a director for the first two years without profits? Without a shareholding, would I still be liable for losses if the company got into trouble?

I am also finding it difficult to get my head around how the purchase price is to be set as the company dont actually 'own' anything. How do you put a price on goodwill/existing client base? We are not market leaders in our field by any stretch of the imagination. Is there an industry standard for valuing this type of thing?
 
Chiggles, from what you have written I think it is a rotten deal you are been offered. From the day you become a Director you will be unable to do your own thing so to speak. The company has no assets other than Goodwill - of which you make up a large part of this. The construction industry is on a downhill route for IMO the next 12 / 18 months at least. Depending on what sector of the industry you are in, profitability may remain reduced for quite some time. The question is and bearing in mind that it appears to have taken senior management to recognise your ability a long time, would you be better on your own.
 
Have read your original Post again- so they are giving you 20% and telling you to pay for it yourself although you are bringing in 20% of the business. Really nice guys !! Do you have an S marked on your head ??
 
Me again. Have you worked out how much it would cost you to set up by yourself, properly and in a professional manner ?? Would it take you 7 years to recoup the investment ?
 
Hi Mercman

Thanks for the input.

Its a professional service company (QS) so wouldnt cost a lot to set up.

As correctly identified by JR, there is a bit of uncertainty on the 'economy of scale' issue though. While I have introduced most of my customers to the company and most only deal with my part of the office, I'm not sure they would all deal with a one man band.

Has anyone else here had any experience of this?
 
Well what about a reverse takeover of the existing company. As things wind down, profitability will be effected and then might be the time to try and purchase the shares of the existing shareholders.
 
Chiggles said:
Hi Mercman

Thanks for the input.

Its a professional service company (QS) so wouldnt cost a lot to set up.

As correctly identified by JR, there is a bit of uncertainty on the 'economy of scale' issue though. While I have introduced most of my customers to the company and most only deal with my part of the office, I'm not sure they would all deal with a one man band.

Has anyone else here had any experience of this?
Click to expand...

Chiggles,
I am also a QS, I work for a construction / Development Company. It has been in my mind for a number of years now to make a leap and go out on my own. I have recently been offered directorship of the company and turned it down. Lack of effort and imput on the other directors behalf was my main concern. I have now instructed a webdesigner to set up a website and my accountant to setup a Ltd company and I fully intend to jump in the next 12months. If you are a main player in the company and feel anyway tied down or restricted then leave, if not then stay, its not a bad deal.

Joejoe
 
How is the value of the shareholding that you are being set up to buy determined? Effectively you will be buying out the retiree of his share of the company based on he getting your profit-share for the next x years until some notional sum is reached. What if the share-price of the company (the value) tanks during that time?

How many other directors are there?

Have you looked into the tax implications of this? Is there any way you could be liable to pay tax on the profits after the shares have transferred?

I also think this is a poor deal. You are talking all the risk for an uncertain deferred reward.
 
It's too open ended. If you want in then buy in now, even if that required a personal loan. If they want you enough then you should be able to get a better price.
What it comes down to is do you want to be in business with the other partners? Do you think that together you are more than the sum of your parts? The answer to both of these questions should be yes.
You should also talk to an accountant and a solicitor.
 
Hi All

thanks for the replies.

Mercman, you make some very good points.

yoganmahew, there are two other directors. After the 2 years it would be a 50/30/20 split.

I feel the 30% share holder adds most value to the deal. I also feel that the 50% share holder is on the winddown. His only real value is his client base (not that i underestimate the worth of this) so it will be a case of owning 20% and doing 40-50% of the work and business development.

The company is not very well structured at the moment and actual structure and internal processes are minimal.

The more I think about it the less its actually worth. I dont think they could find a buyer externally and none of our other staff have my customer base, so in a way its only worth what I am prepared to pay for it. Or am i missing something?

Im thinking that jojoe's route is a good option. Any advice on how to go about setting up, basic pitfalls to avoid etc? Also, would there be any legal implications to trying to get work from existing customers?
 
Chiggles - as long as you are not a Director, you can do your own thing. Have you thought about approaching the 30% shareholder concerning purchasing the 50% shareholder out and then to leave the two of you with an equal share and the 50% person with a Consultant role, with the last payment for his shareholding paid at a later date,
 
Hi Chiggles,

The 20% of clients you won might be reluctant to switch from an established company to a start-up that might not be there in six months. How many would really give you their business?

Could you get the same volume of new clients or more? Are they out there?

How will the construction industry slowdown effect market demand?

As mentioned before, are there anti-competitive restrictions in your contract? If so, how long before you can set-up a business? What will you do for money in that time?

Can you get a better deal, what package would you say yes to?

If you expect to be doing 40%-50% of the work, would they agree to a performance bonus or commission system as part of a deal?

If you can negotiate a better deal it might not be a bad idea to stick with the company and go for it.
 
Hi Peter.

'How will the construction industry slowdown effect market demand?'

This is probably my biggest fear. I am confident in my ability and have a very good relationship with my customers but am a little concerned with the way the industry is going. However, if it drops off as a whole the outlook is not positive for either scenario but as Mercman pointed out, i wont be able to 'walk away' from a bad situation, if one developes, after buying into the proposal.

I dont have any specific anti-competitive restrictions in my contract so could trade straight away. In fact, i dont actually have a contract!

I dont think I can get a better deal as the retiree will probably just work on to make up the money if he does not get his way. He is quite beligerent.

'If you expect to be doing 40%-50% of the work, would they agree to a performance bonus or commission system as part of a deal?'

I have broached this and its not a runner. Its basically a take it or leave it deal. They seem to think that I should be biting the hand off them!

I have spoken to someone else about this recently and they advised me to take the directorship offer for the initial two years and see what happens. at worst it would be a good 'career move' (on the basis that (a)if it did not work out clients are more likely to move with a 'director' and (b) future opportunities may be opened at director level elsewhere).

I had thought about this but am not so sure about being a director without profit share! Any opinions on this?

Finally, can anyone recommend a professional who coud advise on these matters. A 'face to face' might be beneficial.

Thanks again.
 
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