Staff buyout

karlostheunhappy

Hi, I am looking for advice on the risk I might face if I join in a staff buyout of our small private limited company.

We are about to have a succession planning away day soon, and I want to be clear about the risk of taken on a share in the company. It is expected that no capital will be required and the shares probably divided equally to remaining staff.

I think the proposition will be that we be two lump sums to the current owners, first from the reserves and then, a few years later another lump sum.

Before we even entertain that strategy and agree on a value for the business, can anyone advice as to what risk we might face if the business folded under our tenure, bearing in mind it is a limited company and we have no capital stake.

Cheers.

InsideInsurance

Will you simply be a shareholder or will you be a director?

As a shareholder in a limited company your liability is limited to the amount paid for your shares (if you haven't already paid for them). So if you have a company that has 100 ordinary shares sold at £1 each and you own 10% then your liability is £10.

As a director you can both be asked to give personal guarantees for credit and can be held liable for negligent behaviors that resulted in an incident. These are fairly rare at this point but insurers are selling increasing amounts of Directors & Officers insurance so there evidently are concerns by some already in the these positions

cazziebo

I was involved in an employee buy out in 2004 - best thing we ever done.

It sounds like the company is taking on the debt to buy out current owners. That means that employees won't have to put up the cash which is one thing you don't have to worry about. However, it's not usual to divide shares equally amongst all staff. That would just create issues when employees want to sell their shares, especially when it's unlikely the company will be unable to buy back when it has the current owners to pay off first. The more usual way is to have some shareholding put into an Employee Benefits Trust with employees names as beneficiaries and some shares distributed to employees by a tax effective share plan.

I've PM'd you some sources of info and you might want to look at some of the case studies [STRIKE][STRIKE]here[/STRIKE][/STRIKE] They will also be able to put you in touch with other organisations who have done this (and there's lots eg John Lewis Partnership, Arup, Tiptree Jams, PA Consulting, Pertemps Recruitment Partnership, Divine Chocolate,)

One thing you do want to be clear on is that the business is being sold at a fair price. If the price is inflated then the company is likely to be carrying an undue burden of debt which means employees will not be able to realise some value for quite a long time.

To answer your question - if this is a straightforward employee buy out then employees themselves have no liability - that rests with the Board who have the usual responsibilities as with any structure. If employees aren't putting money in then there is no financial risk.