Restructuring business advice/options

billy2shots

Follow up.

 I accidentally deleted a long detailed post so excuse my short reply now.

I requested a formal meeting to discuss succession planning with my parents (we see each other 3 times a week anyway).

I made it clear that family relationship and happiness should be our priority over money. I had previously asked them to decide on how much they would be happy to extract from the business when leaving so certain restructuring options could be ruled in or out.

They have decided on £650,000 which is approximately half of the business value with all its assets. This is a minimum figure and could rise depending on the bank balance at time of departure.

Quick recap. Parents took a mortgage (£160k) and paid £20k cash to buy our first business property. They receive £36k a year rent from the business ( historical average (£32k). My mum and me run the business (valued at £0 when we started) and I have autonomously run our second home for 16 years (£50k profit last year, our worst year) Mum and dad are sole share holding directors, I am a non share holding director.

On average over 20 years my salary has been £32k annually (£47k now) with 5% employer pension contribution I am PAYE. My parents have on average taken £120,000 a year from the business each year on top of the rent which I obviously I don't begrudge.

In short I feel (and I obviously am biased) my value and contribution to the success of the business has not been reflected in my rewards.

I feel like an employee after all my efforts and sacrifice but held on to what they always told me. It will be my turn when they move aside.

Rather than move aside I feel the business is actually buying them out. In an era where profit margin is shrinking rapidly, we head into recession and house prices could tumble, I (the business) would need to fund £650k + by stripping assets (selling one home and raising the bank balance) or taking a mortgage out of around £540k with all that risk.

Succession practices don't have a single route. Some families are happy to step aside and leave what is in place and others restructure which is the route we seem to be going.

One final important thing. They would prefer to leave £30k in the business and retain 50% shares. I could then buy the remaining shares for £30k if the business is doing ok and can afford it. This was pitched as a safety net for me. I was asked to sign and agree this.
I clarified who could trigger this process and could it be done on day 1 by taking a larger mortgage for example. They said I would have complete control in triggering it. However the document said no such thing so I asked for that to be made clear before I sign anything

At the end, the business would own its own property (one home no mortgage or two with a debt) and I would be the only share holder.
I can't help feeling after all these years that I'm paying a high price to take over a business I helped build thats best days are behind it.

Savvy_Sue

billy2shots said:

I can't help feeling after all these years that I'm paying a high price to take over a business I helped build thats best days are behind it.

And you may well be right ... business owners are often very optimistic about the value of their business when it's time to sell. Just a quick skim of this thread tells a not untypical story. 

However, hopefully you can treat what's been put on the table as the starting point for careful negotiation. It's always very tricky when family and business meet, but they are at least familiar with the business and know what challenges you've faced and will continue to face. 

You and they are going to need independent advice, by the way, that's two separate lots of independent advice. And the mindset you need to retain is "Would I buy into this business on these terms if I was negotiating with anyone but my mum and dad?" And you also need to keep asking "Is what they are asking for a fair representation of what their share in the business is worth now?" 

Best of luck ... 

Annisele

 I *think* your parents are asking for £30k from you in exchange for something they believe is worth £370k - but I don't really understand the numbers. I'm particularly confused by your comment that they want to "leave £30k in the business and retain 50% shares".

I'm pretty clear that your parents own 100% of the shares. I'm less sure of their valuation of the business - you say that they think £650k is half the total value (implying the whole thing is worth £1.3m), but you also say that they already own £560k of property in their own names. So for this sake of this argument I'm going to assume your parents think the limited company has £740k of assets (£1.3m less £560k).

If they want to sell you half their shares, then aren't they saying they'll exchange £370k worth of shares for £30k in cash?

Of course your parents' valuations might be well off the mark. And more fundamentally, I suspect I've horribly misunderstood the position. But I'm explaining my misunderstanding anyway, because others might share it.

billy2shots

Annisele said:

 I *think* your parents are asking for £30k from you in exchange for something they believe is worth £370k - but I don't really understand the numbers. I'm particularly confused by your comment that they want to "leave £30k in the business and retain 50% shares".

I'm pretty clear that your parents own 100% of the shares. I'm less sure of their valuation of the business - you say that they think £650k is half the total value (implying the whole thing is worth £1.3m), but you also say that they already own £560k of property in their own names. So for this sake of this argument I'm going to assume your parents think the limited company has £740k of assets (£1.3m less £560k).

If they want to sell you half their shares, then aren't they saying they'll exchange £370k worth of shares for £30k in cash?

Of course your parents' valuations might be well off the mark. And more fundamentally, I suspect I've horribly misunderstood the position. But I'm explaining my misunderstanding anyway, because others might share it.

Sorry it's my explanation. I was quoting the value of the business as a whole as in that's how much they would get (potentially if it was sold) including the sale of the property they own 4/5 of. So if I get a loan and 'buy them out'  the value would be £1. 3m minus the debt of £560k mortgage so £740k. But still £1.3m to a future buyer. 


The £30k is just a token number. It represents no value of the 50% share of the business they currently own. The £30k wouldn't be buying the shares, the shares would be gifted. 
The £30k is put to me as £30k if I needed it and would be left as a safety net. Originally £100k was going to be left as we always  have contingency funds ,  that's now going to be £70k left of business money and £30k for them when the business can afford it. That would then trigger 'gifting' of the remaining 50%

The elephant in the room is that I probably have the right to be aggrieved at never having owned any shares. 

Annisele

billy2shots said:

One final important thing. They would prefer to leave £30k in the business and retain 50% shares. I could then buy the remaining shares for £30k if the business is doing ok and can afford it. This was pitched as a safety net for me. I was asked to sign and agree this.
I clarified who could trigger this process and could it be done on day 1 by taking a larger mortgage for example. They said I would have complete control in triggering it. However the document said no such thing so I asked for that to be made clear before I sign anything

Definitely don't sign anything without taking proper advice! It sounds to me as though you need your own advice from both an accountant and a lawyer.

I think you're saying that, on your parents' valuations, the shares alone are currently worth £740k. They plan to gift half of those shares (£370k) to you now. In future, they plan to somehow take £30k out of the business (dividend? loan repayment?), and once that happens they will gift you the remainder of the shares.

If everything is as your parents believe it to be, then it sounds like you'd be getting a valuable asset (though whether that's worth the work you've done in the past is another question). But in your shoes I'd have some questions (though bear in mind I know nothing at all about care homes, and I'll be missing a very large number of relevant issues):

• What's happening about tax? I'm thinking of capital gains tax on your parents' disposal of their shares, as well as inheritance tax should they die within 7 years. I think it's possible that a tax charge on the 'retained' half of the shares might be triggered immediately or later, depending on exactly what is agreed.
• If your parents were to sell their shares to an unrelated party, how much would they get?
• If you were doing the work you do in another care home, where you weren't related to the owners, how much would you get paid?
• Would you consider the option of having your parents sell to a third party and have the new owners keep you on (TUPE you across)? I'm guessing that's not what you want - but having clear in your own mind why you do or don't want that might be helpful.
• Could the business borrow enough to buy your parents out? 80% LTV on a commercial property sounds fairly optimistic to me in the current lending environment.
• Would it make sense for you to buy one or more of the properties personally, and hold them in your personal name? (Taking money out of a business in the form of rent can be pretty tax efficient, which I suspect was why your parents did it that way in the first place - though only owning 80% of a property is a bit unusual. In your shoes I think I'd want to understand why they made that decision before deciding to bring the ownership of the whole property into the ltd.)
  

Savvy_Sue

Annisele said:

Definitely don't sign anything without taking proper advice! It sounds to me as though you need your own advice from both an accountant and a lawyer.

<snip>

• Could the business borrow enough to buy your parents out? 80% LTV on a commercial property sounds fairly optimistic to me in the current lending environment.

Annisele is talking a lot of sense, from a far more knowledgeable position than me (not that it would be hard in my case!)

These two things stand out to me, the bits I've put in bold especially, and make clearer some of the stuff I was alluding to in my post earlier today. You need someone independent of the business - not the company accountant - in your corner for any valuations, and then you need an independent solicitor to check the terms of what's agreed. You know what your parents WANT, but even without an allowance for what you've put into the business over the years, the business may not have enough resources to let them have what they want. 

billy2shots

Annisele said:

Definitely don't sign anything without taking proper advice! It sounds to me as though you need your own advice from both an accountant and a lawyer.

I think you're saying that, on your parents' valuations, the shares alone are currently worth £740k. They plan to gift half of those shares (£370k) to you now. In future, they plan to somehow take £30k out of the business (dividend? loan repayment?), and once that happens they will gift you the remainder of the shares.

If everything is as your parents believe it to be, then it sounds like you'd be getting a valuable asset (though whether that's worth the work you've done in the past is another question). But in your shoes I'd have some questions (though bear in mind I know nothing at all about care homes, and I'll be missing a very large number of relevant issues):

• What's happening about tax? I'm thinking of capital gains tax on your parents' disposal of their shares, as well as inheritance tax should they die within 7 years. I think it's possible that a tax charge on the 'retained' half of the shares might be triggered immediately or later, depending on exactly what is agreed.
• If your parents were to sell their shares to an unrelated party, how much would they get?
• If you were doing the work you do in another care home, where you weren't related to the owners, how much would you get paid?
• Would you consider the option of having your parents sell to a third party and have the new owners keep you on (TUPE you across)? I'm guessing that's not what you want - but having clear in your own mind why you do or don't want that might be helpful.
• Could the business borrow enough to buy your parents out? 80% LTV on a commercial property sounds fairly optimistic to me in the current lending environment.
• Would it make sense for you to buy one or more of the properties personally, and hold them in your personal name? (Taking money out of a business in the form of rent can be pretty tax efficient, which I suspect was why your parents did it that way in the first place - though only owning 80% of a property is a bit unusual. In your shoes I think I'd want to understand why they made that decision before deciding to bring the ownership of the whole property into the ltd.)
  

Many thanks for taking the time to reply. 

Parents held 100% of the property but the business bought 20% a few years ago to free up some money for a quick family property deposit. Yes , far more tax efficient taking rent than divis. 

The £30k future take out will be by divi which is why they need to hold the shares. 

Depending on how you value a business, our accountant offered up 4xnet profit as a guide price but we had an unofficial offer at 2x net profit so the business = £250k -£500k. The business assets = 100% of one property £550k and 20% of the other ~£700k so (£140k)

Total = £940k - £1.19m

Obviously property price plays a huge role here. Which is a risk if I mortgage heavily band keep 2 placed. 
I wouldn't run one as a care home as it's too much for 1 person to oversee (3 of us doing it Currey). I would lease it out to a company who would run sheltered accommodation so my income would be far less. 

No , I wouldn't be prepared to work for a new owner in a business I helped build. 

My wages in earlier years were below the going rate. That evened out and now I am at the higher end for an equivalent job, I wouldn't argue if someone said my wages were better than the average similar role. 
My employer pension contrition is £325 a month. Pretty poor IMHO. Both parents maxed contribution last year. 

I could not afford to buy one of the properties privately. I am crunching the numbers to see if I can buy 1/5 so the business needs  a mortgage for 3/5 (currently owns 1/5). 



Just some previously typed up thoughts

In an ideal world the shares could/should have been split up earlier. The value and therefore CGT could have been worked out more efficiently.
I was quite frank when we met on the weekend. I said in my opinion they had withdrawn money from the business in the most tax efficient way all these years however that might result in not the most tax efficient way of stepping away. Unfortunately I think they are taking more out of the business to offset the tax penalties.
So they win at my expense during 20 years and win at the business (my) expense on the way out.
Feels weird terming it as winning/ losing but that's how I'm beginning to feel.

I would be more than happy for them to remain part of the business with me holding a fair share allocation for being the only active member of the family. I would be equally happy for them to remain as owners of the premises.

The two things that stop that are

1. They want a large lump sum to by a country pile. The have good monthly income through previous career pensions that they will live on. They have £200k emergency fund and mum has built up a SiPP (through our/ their business) of £400k which is an emergency emergency fund. They never want to touch these and they are earmarked for 6 grandchildren. 

2. We have unfortunately suffered through my sister's actions since very young. Too many things to mention but headlines are constant theft of money, credit cards, belongings and physical assault on my parents. Parents have made provision for her children in their will but not directly to her.
I am so scared that if my parents continue to hold shares or the property, she will contest everything on their death. She has come and gone (fired) from the business 6 times (don't ask) and my parents also chose to pay her £35k a year for the last 3 years even though she didn't step through the front door in all that time. She has contributed nothing but hassle in her combined 7 years (officially, the reality is less) but a court might feel she deserves something.


It's all a bit of a mess.

billy2shots

Just for clarification

I have gone way off topic here, 20 years of pent up frustration I think. 

I am happy with my pay as an employee to the company. 
I will be extremely grateful for the position I am in once my parents have moved on. 
Their 'gifting' me the business is not something I take lightly and will always cherish their hard work and generosity. 

My gripe is how I am thought of within the business i.e I am an employee only. The fact I am being given 'everything' sticks in my throat. From day one I literally helped build (renovations and redecorating) the business. 20 years later not even holding say 10%-20% of business shares and needing to be given 'ALL' that's 'theirs' brings back feelings of resentment. 

This has nothing to do with money. 

Annisele

Is there an option for the larger home to be sold to a third party? I'm wondering if your parents could sell their 4/5 of the physical building and the business could simultaneously sell its 1/5 to the same buyer. Your parents don't seem to want any money for the half share they are gifting you in the ltd, so selling to a third party might produce more cash that selling to the ltd.

Of course, that's only a might. I think it's unlikely you'll find an investor willing to buy only 80% of the property from your parents (though that might be a possibility worth exploring). And 80% of a property is usually worth a fair bit less than 80% of the whole property (because you don't get control). Having the home lease its property from an urelated party would come with its own issues - and I suspect it's something to be avoided - but it might be worth thinking about.

I'm still not understanding the £30k thing. Unless you're planning to create different classes of shares, then if you each hold half the shares then you'll have to take out £30k yourself at the same time your parents take their £30k. And if they have the money as a dividend, they'll still keep the shares. £30k is a very small amount of money amongst the figures we're talking about here, so I really don't understand your parents' intention with it - especially as they seem to think it will somehow protect you. How will the protecting you part work?

I'm not sure there's anything you can do about the likelihood of your sister contesting your parents' wills. It sounds as though the intention is that they will have significant assets when they die (regardless of whether those assets consist of shares in a limited company, a 4/5 of a care home, or a country pile). So there will be plenty for her to contest. And tbh if somebody was paying me £35k a year while they were alive, I would certainly argue that they were maintaining me and should therefore make provision for me in their will.

I can completely see why your parents' treatment of your sister stings. You get £47k a year for working long hours at the expense of your family. Your sister gets £35k a year for doing nothing at all. It's hard to see the fairness in that.

But it does lead to another question. Will your parents expect the business to continue paying your sister £35k a year? If they continue to own half the business, they can probably insist on that. (Though that's before we get into any potential tax issues of paying a family member for work that hasn't been done...a whole other kettle of fish! If your parents have been claiming your sister's £35k was wholly and exclusively for business purposes - as salaries usually are, and hence they're deductible against tax - there may be a tax bill in the company's future.)

billy2shots

Annisele said:

Is there an option for the larger home to be sold to a third party? I'm wondering if your parents could sell their 4/5 of the physical building and the business could simultaneously sell its 1/5 to the same buyer. Your parents don't seem to want any money for the half share they are gifting you in the ltd, so selling to a third party might produce more cash that selling to the ltd.

Of course, that's only a might. I think it's unlikely you'll find an investor willing to buy only 80% of the property from your parents (though that might be a possibility worth exploring). And 80% of a property is usually worth a fair bit less than 80% of the whole property (because you don't get control). Having the home lease its property from an urelated party would come with its own issues - and I suspect it's something to be avoided - but it might be worth thinking about.

I'm still not understanding the £30k thing. Unless you're planning to create different classes of shares, then if you each hold half the shares then you'll have to take out £30k yourself at the same time your parents take their £30k. And if they have the money as a dividend, they'll still keep the shares. £30k is a very small amount of money amongst the figures we're talking about here, so I really don't understand your parents' intention with it - especially as they seem to think it will somehow protect you. How will the protecting you part work?

I'm not sure there's anything you can do about the likelihood of your sister contesting your parents' wills. It sounds as though the intention is that they will have significant assets when they die (regardless of whether those assets consist of shares in a limited company, a 4/5 of a care home, or a country pile). So there will be plenty for her to contest. And tbh if somebody was paying me £35k a year while they were alive, I would certainly argue that they were maintaining me and should therefore make provision for me in their will.

I can completely see why your parents' treatment of your sister stings. You get £47k a year for working long hours at the expense of your family. Your sister gets £35k a year for doing nothing at all. It's hard to see the fairness in that.

But it does lead to another question. Will your parents expect the business to continue paying your sister £35k a year? If they continue to own half the business, they can probably insist on that. (Though that's before we get into any potential tax issues of paying a family member for work that hasn't been done...a whole other kettle of fish! If your parents have been claiming your sister's £35k was wholly and exclusively for business purposes - as salaries usually are, and hence they're deductible against tax - there may be a tax bill in the company's future.)

Paying my sister came to an end in May as that was requested by me. I didn't want that expense or complication and not to mention comeback when I take over. 
My sister will contest everything in their name which I accept. I can't accept her having a chance to own or take more money from this business. 

I will try and explain the £30k thing. 

They originally were going to take all the cash out of the business (whatever is there at the time ) but leave £100k there. I would have been gifted all the shares. 
They have changed the goal posts now. They have decided £70k will now be left. However as an extra safety net they will leave the whole £100k but £30k will be taken by them once the business shows it is sustainable in its new form. To get this out they will remain share holders and take it as a dividend. The last 50% would then come to me via a gift. 
I am probably overthinking this and should be pleased they are leaving an extra £30k there as a fall back just in case. 

My thoughts on this. 
As you point out the business will need to give up £60k as £30k will automatically have to be paid to me. The business in its new form whichever route is taken will be less profitable so £60k may not be quickly forthcoming. 

I also think they look at me like my sister and are scared I will sell it straight away. Holding 50% will stop this. 

The letter they wanted me to sign didn't mention who could trigger this next step. They said I have complete control and if the money is there to take over and above their bottom line £650k in total then it would happen at once. 

Even if this is reworded to say exactly that, it's not a legal document so they could always decline in the future and keep their shares.