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Limited company - Exit Plan


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Hi, i'm new to The Property Hub and looking at starting a limited company with me friend to begin creating a property portfolio.

 

We need to create an Exit Plan for when one of us decide they either want to leave the company and cash out or if death occurs.  As there will be significant assets in the company how would we best plan for this?

 

Hoping you can help! 

 

thanks

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  • 3 weeks later...

Hi Aidan,

 

Having just written my business plan a few months ago, I can share some of my considerations on this topic. I went into business with a partner where I own the majority stake and he owns a minority. It was difficult planning for an exit because both of us were so excited to start the business, we didn't want to think about how it ends!

1. Death - the first option is obviously family. The best thing to do is make a Will and appoint your beneficiaries. They will simply inherit your share of the business and be entitled to your profits going forward.

2. Sell - if one of you decides to sell their stake of the company in the future, I would advise on certain conditions that I put in my shareholders agreement - a.) that should one of the shareholders decide to sell any or all of their stake, they must first offer it to the other shareholder, b.) That the directors have to approve each sale (I have 3 directors - me, the other shareholder and an independent acquaintance).

3. Close - You can decide to close down the business and each of you takes their share. If you're no longer co-investors, it may be more beneficial for you to operate as a sole-trader going forward.

 

Have a look at the below, which has a pretty good guide:

http://www.lawdonut.co.uk/business/business-ownership-and-management/shares-and-shareholders/issuing-and-transferring-private-company-shares-faqs

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Thanks for the reply Stoil.

 

I appreciate the feedback. I probably should have been a bit more specific as to what my questions are.

 

Regarding item 1 - Death - for example if my partners beneficiary was his wife, who had no experience in property investment, they would automatically become my new business partner and 50% shareholder? I'm not sure that is necessarily a good thing? what if they weren't interested in the business or not suitable to be a partner (experience wise)? In that case, is there a way that in the event of death, the partners beneficiary's could be compensated for the value of his share? and then for his shares to pass to me? Most likely the company or myself personally would not have the cash to do that, so is there some sort of insurance for this eventuality?

 

 

Regarding Item 2 - Sell - both points a) and b ) make obvious sense. However, most of the money in the business would tied up in assets (the houses and properties in the portfolio) built up over time, so where would either partner get the money to buy out the others share?

 

For arguments sake, say the portfolio is worth £1,000,000 and 75% mortgaged. Leaving £250,000 equity in the company (ignoring cashflow). 50% share would be £125,000. 

So if i was buying my partners share, i would need £125,000 cash to buy him out? Again, its likely that the company or myself would not have the cash to do that?

 

 

Regarding item 3 - Close - Unless someone bought the company from us as a whole in one deal, with all the property portfolio included, i can see it being difficult to sell off all the assets quickly. If we sold the company and all its assets (houses and property), would the buyer be liable to pay any stamp duty? as technically the property isn't changing hands, as it will still be owned by the same LTD company (but with a new owner/shareholder)? Obviously we could sell each property off individually, but that could take a while so would slow down our exit.

 

I'm very new to all this, so please excuse my naivety! 

 

Many thanks for taking the time to respond though. There is some useful info on the link you sent,

 

Cheers

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21 hours ago, aidan mccormack said:

Thanks for the reply Stoil.

 

I appreciate the feedback. I probably should have been a bit more specific as to what my questions are.

 

Regarding item 1 - Death - for example if my partners beneficiary was his wife, who had no experience in property investment, they would automatically become my new business partner and 50% shareholder? I'm not sure that is necessarily a good thing? what if they weren't interested in the business or not suitable to be a partner (experience wise)? In that case, is there a way that in the event of death, the partners beneficiary's could be compensated for the value of his share? and then for his shares to pass to me? Most likely the company or myself personally would not have the cash to do that, so is there some sort of insurance for this eventuality?

 

 

Regarding Item 2 - Sell - both points a) and b ) make obvious sense. However, most of the money in the business would tied up in assets (the houses and properties in the portfolio) built up over time, so where would either partner get the money to buy out the others share?

 

For arguments sake, say the portfolio is worth £1,000,000 and 75% mortgaged. Leaving £250,000 equity in the company (ignoring cashflow). 50% share would be £125,000. 

So if i was buying my partners share, i would need £125,000 cash to buy him out? Again, its likely that the company or myself would not have the cash to do that?

 

 

Regarding item 3 - Close - Unless someone bought the company from us as a whole in one deal, with all the property portfolio included, i can see it being difficult to sell off all the assets quickly. If we sold the company and all its assets (houses and property), would the buyer be liable to pay any stamp duty? as technically the property isn't changing hands, as it will still be owned by the same LTD company (but with a new owner/shareholder)? Obviously we could sell each property off individually, but that could take a while so would slow down our exit.

 

I'm very new to all this, so please excuse my naivety! 

 

Many thanks for taking the time to respond though. There is some useful info on the link you sent,

 

Cheers

 

Hi Aidan,

 

I hope I can answer your questions, but I am no expert either. There is no substitute to some professional advice, and many tax and legal companies can give you a free consultation.

 

What I found through the process was that for a private company, the range of what you can agree with your shareholders is very wide, and you can add a lot of conditions to the agreement, which will aid you if there is a split down the road.

 

On item 1) - what you can do is stipulate in your shareholders agreement that in the event of death of one of the partners, the shares will be split into 2 categories Voting and Revenue. The surviving partner keeps 100% of the voting shares, which means they make all the business decisions and run the day to day operations, whilst the deceased partner's beneficiary get the proportion of dividends they are entitled to. I have decided to do this split in my company from day 1 - because my partner is just in it for the income and isn't necessarily interested in picking the investments or doing any of the operational work.

 

On item 2) I think this is also related to item 1 should the deceased's beneficiary decide they want completely out of the business. I would suggest in order to avoid a lengthy legal dispute which may bring down your company, you stipulate in your shareholder's agreements that a partner can only get out if they have a ready buyer for their stake. So in your example, they would find someone who pays them £125,000 and replaces them as 50% owner of the company. If you want to buy your partner out but did not have the funds, you would have to get a loan (as an individual, not the company) and pay your partner. Then you become 100% owner of the company, and you have to pay back your loan, but you also now get 100% of any dividends (hopefully 50% of the dividends will be greater than the interest on the loan). This obviously is contingent on the size of the 50% stake - you might have to secure the loan against the shares if the amount is very large.

 

On item 3, I am afraid I do not know the answer, although that is a really good question. From my understanding, because the company is a separate legal entity to you or your partner, changing the owner/shareholders should not mean any stamp duty is paid - this is because the legal owner is the company, not you, and the property is not changing owners.

 

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Hi Aidan,

 

On item 3:

I own shares in a number of companies in a stocks and shares ISA. This enables me to pay no tax whatsoever on any dividend income or CGT on any growth no matter how large. The only drawback is the maximum limit you can invest into an ISA per annum. However all share purchases incur a stamp duty charge of 0.5%. I believe that if any shares were sold then stamp duty at that rate would be paid on the value of shares. The property as you said will not be exchanging hands and the owner of them will still remain as the company.

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