In our previous article, Securing Your Legacy: Ownership Succession Planning with Worth.Business, we discussed the importance of planning for the future to ensure the longevity and success of your business. A key element of this planning is offering shares to employees and key managers, turning them into shareholders invested in the company’s success. However, the affordability of these shares remains a significant hurdle. At Worth.Business, we’ve spent considerable time understanding these complexities and developing solutions to make share ownership more accessible for these new shareholders.
The Challenge of Affordability
Often, employees and key managers are not financially able to purchase shares at their fair market value. The upfront cash required can still be prohibitive even when shares are offered at a subsidised or reduced price. Furthermore, reducing the value of shares to make them affordable can be unfair to existing shareholders, leading to diluting their investment in the business.
Even if shares are purchased through a loan from existing shareholders, this presents its own set of complications. Sellers face the burden of capital gains tax (CGT) on the sale, even though they may not receive the actual payment until later. This creates adverse cash flow implications, making the process financially challenging for the sellers.
Worth.Business’s Approach to Affordable Share Ownership
Over time, we at Worth.Business have honed several strategies to address these challenges. Here are some insights into our approach:
- Value Reduction Mechanisms
We have developed mechanisms to effectively separate existing value from future value growth. This makes having a stake in future growth more affordable while ensuring that the reduction is structured to maintain fairness for existing shareholders. We understand the importance of protecting all parties’ interests, and our strategies are designed with this in mind.
- Financing Mechanisms
The business can effectively finance a predefined portion of the shares, with future investment returns redeeming the loan. This aligns the repayment schedule with the actual financial gains derived from the investment, making it more manageable for the buyer.
- Tax Deferral Strategies
Deferring tax liabilities associated with share purchases can alleviate the immediate financial impact. This strategy ensures that sellers do not face immediate CGT, thereby reducing adverse cash flow implications and aligning tax obligations with the actual receipt of payments.
- Fair Commercial Terms
Ensuring that the terms of the share sale are commercially fair for both the buyer and the seller is crucial. This balance helps maintain trust and equity among all shareholders, fostering a sense of shared success and mutual benefit.
- Adaptable Solutions
We’ve developed solutions that can be adapted to fit each client’s unique circumstances.
Sharing Knowledge for Better Outcomes
By sharing these insights, we hope to shed light on some of the obstacles in the complex landscape of affordable share ownership for employees, key managers or even family members. It is possible to overcome these obstacles for existing and new shareholders without the associated undue financial strain, ultimately contributing to the business’s long-term success.
We’re always open to discussing how shared ownership can be engineered as an achievable and rewarding reality for your team.
If you think we can assist, feel free to set up a meeting here.