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A 1ng 1ng time ago...
Posted - 04 March 2018 11:51
I am not familiar with this structure, but a couple of obvious points/questions:

- this isn't equity partnership, it's shareholding in a company, so you're not going to be on the hook if things go tits up save to the amount you've paid for the shares

- "withholding of dividends annually for the first 5 years" this rings serious alarm bells for me clive

- will the company pay the interest on your loan?

- is this designed to replicate a true equity partnership - ie do the shares carry voting rights or are they some sort of non voting b-for bitch-share where some fat shunter has all the a shares

- compare the market - call up some chinnies and see if your comp is fair given what you make for the firm (Beermonster is usually happy to give people a steer)
Ballerholic
Posted - 04 March 2018 12:15
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Thanks TLW and I appreciate Sunday morning may not have been the best time to pose this question and that more people may be around tomorrow. In response to your points:-

- It is shareholding but should track comparably against partnership equity (save for liability point as you note)

- The withholding of divis is, I am assuming, similar to the more traditional lockstep model

- That is a very good question

- Yes I believe so (but will obvs check), shares all carry equivalent rights

- Another good idea
Chambers
Posted - 04 March 2018 12:34
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Do you get to keep the shares when you leave/retire? I've seen a few issues around that in LLP / Ltd conversions.
Ballerholic
Posted - 04 March 2018 12:56
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Ah good point, how has it been handled in what you've seen. No you don't here and that was also made clear in the Offer.

They are surrendered for nil consideration - the logic is stated to be that the Offer takes this (and the equal minority holding) into account and is discounted against the true value of the shareholding.

Also I've checked again and the interest on the loan is funded by the firm and is simply for working capital and repaid on retirement (to extent undrawn upon). Not sure I fully understand this aspect I assume it is a way of keeping me on the hook in the same way traditional partnership would
Ballerholic
Posted - 04 March 2018 13:00
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Thanks Buzz

1) Yes commercial lender
2) Not fair value as touched on in my response above, they are withholding Divis to the value of my investment essentially. Withholding was the wrong word as they will be retained and split among other shareholders
3) Interestingly there is an exiting partner (although I am told this does not impact on this arrangement and subject to my tax advice I can either acquire theirs or subscribe for new). I am sure the exit and payout (of his capital contribution presumably from when LLP became Ltd) has something to do with the Offer to me to come in
A 1ng 1ng time ago...
Posted - 04 March 2018 13:06
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Re your answer 2 i am no corporate lawyer but don’t understand how they could do that unless you are buying a different class of share to the money getters? I dont think you can treat holders of the same share class differently even with a shareholders’ ag. Buzz will know better than me
Bodkin
Posted - 04 March 2018 13:06
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Information you would want to see in advance, and annually
Full accounts, not an abbreviated version.
Analysis of WIP.
Shareholders agreement
Split of profits between the 10 directors

Who is taking out the loan to buy the shares? If it is you then you will receive income tax relief on the interest on the loan. Also if it is your loan, then no reason for you not to receive dividends on the shares.

Who owns the properties? Leased? Owned by some of the senior directors and former directors? This can be a problem if the firm wants to move premises, but the senior directors want to stay in existing buildings as they are receiving a good rent. Even worse if owned by the senior directors’ pension schemes.

Up to now you have probably not needed to understand a firm’s accounts, and you may not have seen them. It’s now time to understand them fully, and how the firm’s cashflow works.
FourthPartyRights
Posted - 04 March 2018 13:19
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Leaving aside the structure for a sec - what's the commercial deal? What are they intending to offer you/what do you think they are offering you? In terms of influence/profit share/actual cash money.

Can't really evaluate the merits or otherwise of the structure until that's clear.
Ballerholic
Posted - 04 March 2018 14:11
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Wow everyone out in force on this rainy Sunday - I am very appreciative.

re TLW query I assume Shareholder Agmt will permit this and would be with my acceptance of the offer but as I say my understanding is that all shares will be equal in every respect

Bodkin - agree re full a/c and have requested already together with Shareholder Agmt

Interesting re tax relief on loan - it would be in my name. See above re this being separate to payment for shares

Offices a mixture of leased and owned by majority of other shareholders. Fairly set premises wise but take your point about intentions especially long term

4th party - Influence and profit share would be on equal footing with other shareholders. Deal structured so I would not be worse off than current salary and then after 5 years I would be receiving full dividend (one of my key concerns is that this is predicated on current profitability and would not rise as my salary expectation would over next 5 years)
Ballerholic
Posted - 04 March 2018 14:14
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I should probably also add I have a good understanding of the business of the firm having been salary partner/director for a couple of years now and having seen the abbreviated accounts and WIP levels which are strong and it is in a good place in terms of stability and plans for growth
A 1ng 1ng time ago...
Posted - 04 March 2018 14:17
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You're a director of a Ltd co and you've only seen abbreviated accounts? Another AWOOGA for me clive...
January Sails
Posted - 04 March 2018 14:19
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Are you basically saying they will pay you a dividend but will use it to repay the loan rather than actually paying it to you? That would make more sense to me.

What happens if you want to leave? I got offered something similar by an LLP but then there was nothing in my contract about repayment of my investment if I left, etc. when I'd expect the firm to return my investment so I could repay the loan they were going to arrange. Also bear in mind the fact that you may need to find a way to repay the loan if you move to another firm.
Beermonster
Posted - 04 March 2018 14:34
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Rofemailaddy@gmail.com if you want to chat like wang said
CaptainSwing_jdjh
Posted - 04 March 2018 14:44
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I think there are a lot of unanswered questions here and gaps in the knowledge

Might be a good gig

Might be a crock of

What everyone here is warning you is to do some real due diligence. Any legal organisation will be dysfunctional, and lawyers tend to be very bad managers. Do your homework.

And don't put your house on the line.
Ballerholic
Posted - 04 March 2018 15:16
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"You're a director of a Ltd co and you've only seen abbreviated accounts? Another AWOOGA for me clive..." To be clearer I have seen the accounts but not the exact drawings/dividends declared for equity holders which would be ordinary for a salary partner I would expect?

January Sails - Yes, but FAOD not the commercial lender working capital loan, the 'investment' payment in return for the shares. Very valid points re moving to another firm and that needs to be pinned down

Again all good advice from those above and well heeded
Chambers
Posted - 04 March 2018 19:16
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It doesn't make that much sense to me. Say you buy shares with cash or a personal loan in your own name (that's their working capital), repay any interest on loans yourself. They are yours. Agreeing to surrendure them for nil value means they are not really shares. Buzz and others may know more.
Used Psychology
Posted - 04 March 2018 19:42
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I’m not in private practice, but if anyone tried to sell that to me with a straight face as part of joining a business as an exec shareholder, I would smile politely and then run as far as I could from them.

A 1ng 1ng time ago...
Posted - 04 March 2018 20:22
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If it’s a ltd company there won’t be any “ drawings”.

Ffs
Misshoolie
Posted - 04 March 2018 20:25
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So basically they want you to give them a pile of cash and then sod off empty handed?

Sounds tempting
Misshoolie
Posted - 04 March 2018 20:34
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Er you what not m7?
Ballerholic
Posted - 05 March 2018 09:36
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The nil value at the end is the part I cannot quite get my head around and why I am on here seeking advice and similar comps from anyone with experience.

It makes sense if I work until retirement with the drawings ahem dividends (on current profitability at least and yes I know that may not continue) being fairly impressive but still a lot to stomach otherwise and especially if this is 'not how it is done'

Rest of internet seems fairly bereft of advice and explanation - it's almost as if law firms want to keep this a fairly secretive process..
Chambers
Posted - 05 March 2018 09:48
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If you pay the interest on any loan you have taken out, they are your shares they have to treat you like any other shareholder. You get dividends, they can't do any witholding / tapering stuff and you can keep them as long as you like.

Whether they're worth anything is another matter.
Lydia
Posted - 05 March 2018 09:51
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It would be helpful for people to see other anonymised examples of how it is done in a limited company (which is a solicitors firm).

I have seen quite a few where there is a dispute and things are not too clear - talk about cobblers and their own shoes.

So you basically buy yourself in with the loan. It sounds like it is new shares - not a transfer from an existing shareholder but do check that.

Then in theory you are not worse off to start with despite paying interest on the loan except that you have the liability to repay the debt which you don't currently have.

What is the positon on tax in this kind of situation? Traditionally you would move from employed to self employed when made an equity partner. Here presumably you are a PAYE employee of the limited company like everyone else except that you get some dividends rather than a salary or in addition to salary. Does HMRC let employed PAYE people who own shares in a company like this set the interest off against their earnings in the same way a self employed partner in a partnership could? I would have thought not but I might be wrong.
Parsnip
Posted - 05 March 2018 11:17
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on this matter you have to ask yourself why they are inviting you in. It seems that the arrangement is basically a way of them capitalising the company without passing on the benefit.

A traditional buy in model would give you the debt but you would be paid fully on profits. You could then choose to pay off the debt or not. if you chose to pay it off then you would be paid back your equity when leaving the firm.

the bit that is fishy about the deal is the lack of a payback / the withholding of dividends.

a suspicous person might think that the firm / company is short of cash and this is a way of them bringing money into the business that they are otherwise unable to borrow as a company - and perhaps because the other partners don't want to put their money in.
Captain Mal
Posted - 05 March 2018 11:26
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I should probably also add I have a good understanding of the business of the firm having been salary partner/director for a couple of years now and having seen the abbreviated accounts and WIP levels which are strong

Hopefully a bold bit above - what do you think counts as strong for WIP? and how is it reflected in the accounts?

Ideally the WIP should be fairly tiny - billed instantly and paid promptly in full. In that case profit in the accounts is profit.

OTOH I expect there are some accountants who would let them get away with treating all / lots of the WIP as profit - and if you've got lots of profits only as a result of WIP that the firm is struggling to collect on promptly / at all that would be concerning.
Ballerholic
Posted - 05 March 2018 14:07
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Lots of valid points again.

I would not be paying interest on the loan

Definitely take the point on WIP, cash colllection could be better

Parsnip that is interesting re Traditional model. To my mind the dividend retention is part of overall value of investment for the shares and would be akin to lesser drawings which I believe is how the old partnership model worked

Also agree Lydia anonymised examples would be tremendously useful
Parsnip
Posted - 05 March 2018 14:10
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you would be paying interest on the loan - but it's just that the company would be paying the interest on your behalf.

yes that is how the [old] partnership model worked / works but the issue with what they have put in front of you is that you are buying into something that has no value. in the partnership model you get your equity back when you leave.