Two directors, one wants to retire. What do you do?
Two directors, one wants to retire, the other is still young with plenty to give. What do you do?
This is a situation we often come across, where a company is run by two owner directors. When one of the directors decides he/she wishes to retire or simply leave the business due to a change in personal circumstance, what do they do?
What are the options?
- The younger director buys the retiring director’s share
- The company hires or promotes a replacement for the retiring director
- The directors sell the company for optimum value, but the younger director remains with the company either as an employee or as director retaining an equity share
Each option has its advantages and disadvantages.
Option 1 avoids the need to go to the open market for a buyer, however what happens if the younger director does not have the financial resources to acquire the others share? How do you value the shares? Finance can be raised through MBI/MBO funders, but how can the retiring director be sure he is achieving full market value for his share of the company?
Option 2 also avoids the need to go to the open market, but the cost of hiring a senior manager will impact on profitability, the retiring director will still have responsibility for the overall business and moreover will be reliant on the company’s continued profitability for income rather than realising what could be a significant lump sum on retirement.
Option 3 will clearly bring about a step change in the nature of the company. However the right buyer will bring both investment and new ideas to take the business on to the next level. Through using the right business broker and finding the best suited buyer for the business, the directors will achieve the optimum value for the company, and both will receive what could be a significant lump sum on completion. And if the younger director remains with the company and retains an equity share, he/she could have a second bite of the cherry when the buyer eventually exits.
This summer, Hornblower sold a successful precision engineering business run by two directors who had worked well together for 20 years. One director was responsible for business development, sales and admin, the other was in charge of operations. The business development director was approaching retirement age, whilst the operations director was ten years younger and still highly driven. Having lined up a range of offers, we sold the business for full market value, with the buyer acquiring the majority of the shares in the company; the operations director retained a significant though minority share. The buyer is highly experienced in the sector and has plans to expand the business two/threefold over the next five years before selling the business again, realising perhaps several times the initial investment for both himself and the operations director.
We consider this a win-win situation, and look forward to selling the business again in five years’ time!