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Wednesdays With Redchip April - Shareholders Agreements & Business Exits

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- Why shareholders agreements are important
- The problems shareholders agreements solve when it comes time to exit
- Preparing for a business exit
- What is an adviser's role during an exit?

Published in: Law
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Wednesdays With Redchip April - Shareholders Agreements & Business Exits

  1. 1. Wednesdays With Redchip WELCOMETO
  2. 2. Shareholders Agreements IANTINDALE IanT@redchip.com.au
  3. 3. MikeTyson Born 30/06/66 0 – Father abandoned family 13 – had been arrested 38 times 16 – Mother passed away 18 – First pro fight 20 – Heavyweight boxing champion 40 – Retired
  4. 4. “EVERYONE HAS A PLAN, UNTIL THEY GET HIT” Mike Tyson, 1987
  5. 5. Everyone has a plan until… • No one starts with a plan to fail • Plans to succeed are nothing more than ideas until the business takes a hit:  Lack of sales  Unforeseen market forces  Regulatory change  Internal disputes Slide 5  Competition  Lack of capital  Poor management
  6. 6. What business owners typically do: Slide 6 Plan Implement
  7. 7. What business owners should do: Slide 7 Plan ImplementDocument
  8. 8. Which documents?  Business plan  Cashflow forecasts  SWAT analysis  Shareholders Agreement Slide 8
  9. 9. Why? Shareholders Agreements:  Give certainty  Provide processes  Minimise disputes  Give protection for shareholders and their families Slide 9
  10. 10. How?  Parties can discuss issues in a safe environment without pressure  Look at issues objectively  Get practical advice upfront document those decisions Slide 10
  11. 11. What?  Who will be a director  What decisions shareholders will make rather than the directors  How the business plan will be funded  Who will own the IP that the founders create  How disputes get resolved  How the parties are restrained from competing  What if a party breaks their obligations  How meetings will be run Slide 11
  12. 12. The Good  2012 –The Plan • Larry, Curly and Mo planned to import a product from a foreign manufacturer • Sell it to mining companies • Expected turnover: $200,000 • Expected profit: $75,000 • Top up salaries by $25,000 each 2019 –The Reality • Larry, Curly and Mo import a single product from foreign manufacturer • Sell it to mining companies • Turnover: $8 million • Profit: $2.5 million • Salaries $Nil • Business profit $800,000 each Slide 12
  13. 13. The Good  The Hit • Larry wants to retire • Curly wants to buy and: • Introduce a second product and expand the business • Get his son involved in the business • Mo (our client) is not keen on having one person (Curly) controlling everything The Document • In 2012 all parties signed a Shareholders Agreement • Imposes a process for Larry to follow before selling his shares • Mo has leverage to negotiate an outcome to protect his interests • No document = no protection for Mo Slide 13
  14. 14. The Bad  The Plan • Bill and Ben – primary school friends saw an opportunity in the security industry • 2000 – established a successful retail store • 2005 – saw opportunity to franchise the system The Reality • Built and promoted franchise • Gained up to 10 franchisees • Turnover several million Slide 14
  15. 15. The Bad  The Hit • 2016 – Ben had mental health issues and a run in with the law • Ben’s problems became public knowledge • Couldn’t sell franchises • Business saw drastic decline The Documents • NONE • Bill can’t remove Ben from the business • Bill can’t take the business in a different direction without breaching obligations as director • His hands are tied Slide 15
  16. 16. The Ugly Slide 16 “You’re smart too late and old too soon” Mike Tyson 2006
  17. 17. Business Exits Shareholders Agreements typically deal with: Slide 17 The sale of the business The sale of shares by shareholders Death,TPD or trauma event Retirement of a shareholder Ejection of a shareholder Definition of default and process that is followed to buy their shares Process for sale of share to existing shareholders Mandatory sale of shares by departing shareholder Drag along clause Who can make this decision
  18. 18. Slide 18 “Discipline is doing what you hate to do, but nonetheless doing it like you love it.” Mike Tyson, 2010
  19. 19. Business Exits PETER MCLAUGHLIN PeterM@redchip.com.au
  20. 20. What does business exit mean? Involuntary • Sickness/death • Insolvency • Retirement without succession plan • Downturn in the market • Loss of key customer Voluntary • Selling out completely • Selling down partly • Management buyout • Equity investment
  21. 21. Remember: Exit is a natural part of the business lifecycle Slide 21
  22. 22. What does a business exit look like? • Asset sale or share sale? • Sale to third party • Sale to employees • Progressive sell down • Outright sale • Sale with earnout Slide 22
  23. 23. What is the process? Slide 23 Preparatory Phase Pre Due Diligence Phase Due Diligence Negotiation & Signing of Contract Performance of Contact Settlement Post Settlement Obligation Identifying potential buyers Seller and advisers conduct due diligence investigations Term sheet signed Preparing and signing NDAs Setting up data rooms Buyer due diligence investigations Q&A / requests for further information Management meetings Honouring warranties and indemnities Restraint of trade obligations redundant entities What’s next?
  24. 24. An adviser’s role • Focus the client – what a sale looks like for them • $ in hand • Tax outcomes • Life after sale • Rally a team • Proactively start the conversation early – no “renovation rescue” • BUT – don’t take your eyes off the ball Slide 24
  25. 25. Seven steps for sellers Slide 25
  26. 26. Have a plan Slide 26
  27. 27. Have a plan Strategic plan: • Articulate purpose and direction of the business • Buyers are buying the future of the business so map it out Sale ready plan: • Tactical priorities • Who does what when Slide 27
  28. 28. Slide 28
  29. 29. Get the numbers right • Pretend you are advising the buyer – what do you want to see? • Past, present and future numbers • Monthly management reports • Up-to-date balance sheet (clear out lifestyle assets) • Lay it all out for the buyer Slide 29
  30. 30. Implement a leadership team Slide 30
  31. 31. Implement a leadership team • No one-man show (unless it’s a true owner- operator business) • Can you demonstrate a robust ownership succession plan? • Would a non-executive director add some management firepower? Slide 31
  32. 32. Highlight the blind spots Slide 32
  33. 33. Highlight the blind spots • Revenue/product concentration • Unresolved or pending disputes or litigation • Incomplete records and unsigned contracts • Articulate to a buyer any obvious business risks and how they are being managed • Don’t give the buyer ammunition to negotiate price down Slide 33
  34. 34. Get the structure right Slide 34
  35. 35. Get the structure right • Are the assets in the right entity? • What are the tax outcomes? • Restructure? • Ties into the decision of asset sale -v- share sale Slide 35
  36. 36. Get ready for show and tell (due diligence)Slide 36
  37. 37. Get ready for show and tell • Plan in advance – what does a buyer want to see? • Seller due diligence – identify and clean up issues before the buyer comes along • How to manage the sharing of information (not by email!) • Lead this process with the both the seller and the buyer • Make sure documents support the value drivers Slide 37
  38. 38. What do buyers want to see? • Understanding the quality of historical earnings • Key customer and supplier relationships • Working capital and capex requirements • Strength of the management team • Employees • Technology and intellectual property issues • Other issues that may be specific to business/industry Slide 38
  39. 39. Slide 39
  40. 40. Put the team together • Accountant • Financial adviser • Lawyer • Deal adviser Get on the same page early Slide 40
  41. 41. Takeaways Slide 41
  42. 42. Questions? Slide 42
  43. 43. 9 May: Property Event – Owning your game 15 May: Liquidation & Bankruptcy 19 June: Personal & Business Structures 17 July: Property & BusinessTransactions FUTURE EVENTS
  44. 44. Wednesdays With Redchip THANKS FOR ATTENDING

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