Top 10 tips for buying out shareholders.

Buying out other shareholders can be complicated. Corporate Finance Partner, Matthew Katz, shares his ten tips for a smoother experience.

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One of the hardest things for a business is when shareholders' objectives are no longer aligned. This can happen for a multitude of reasons but it is a fairly common occurrence. Doing nothing about it is very rarely an option as that most frequently creates divisiveness in the longer run.

One of our main specialisms is helping broker a deal between shareholders to enable them to part amicably. Some of the things we have learned over the years of doing this are summarised below:

  • Understand what you are both looking to achieve, think about the business and staff and try to keep it as a “corporate” negotiation as opposed to making it “personal”.
  • Try to reach an agreement before getting lawyers fully involved.
  • Use an independent expert to objectively look at valuation and possibly broker a deal between yourselves.
  • Agree heads of terms covering all financial/non-financial elements. There are many different ways to close the differences between the two parties. As an example, if selling we would always recommend an anti-embarrassment clause to protect against a sale at a higher value in the near future.
  • For the buying shareholder, start looking at fundraising options as this may guide the final agreement.
  • For the exiting shareholder, be pragmatic about the amount of money that the business can raise, the worst scenario for all is over gearing the business. Deferred consideration is a very likely outcome.
  • For the buying shareholder, step back and consider the business as a whole – is there an opportunity to raise more money to assist growth or use some of the exiting shareholders shares to incentivise staff e.g. share options.
  • When you are ready to agree, use lawyers who are well-versed in corporate transactions.
  • If you can’t reach a deal, set a deadline after which you will agree to try and sell the business, with the buying shareholder having the opportunity to match the best offer if they wish.
  • Accept that there has to be an element of compromise to get deals like this agreed. Both parties are taking risks – the buying shareholder who has to work hard to see a return and the selling shareholder who will usually perceive they haven’t got the best deal and may be relying on the future performance of the business to see their full value.

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