Home – New Forums Money matters Exit strategy help needed!!!

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  • #983300
    franky
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    Just discovered this site and forum and can’t believe how great it is! I’m in a bit of a pickle and was hoping for some help!

    My friend and I are starting an online business and are having a hell of a time coming up with an equitable exit strategy as he might be moving overseas at the end of this year.

    Initially we are splitting the business 70/30 – I am provided 70% of the capital, 70 % ( roughly) of the work hours, the suppliers and the expertise. I am bringing my friend on board because I value his intelligence and ideas and also think we will make a good team.

    The problem is that he might be leaving the country at the end of the year if his wife gets a job overseas. He will, however, stay if the business is going really well and expects to come on board full time with a 50/50 equity split.

    How do we split the business at the end of 2013 should he leave? One of the suggested exit plans is that he get 30% of the value of assets + 30 % of 2013 and 2014 profits .

    Any help would be greatly appreciated!!

    #1141666
    James Millar
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    franky, post: 161798 wrote:
    Just discovered this site and forum and can’t believe how great it is! I’m in a bit of a pickle and was hoping for some help!

    My friend and I are starting an online business and are having a hell of a time coming up with an equitable exit strategy as he might be moving overseas at the end of this year.

    Initially we are splitting the business 70/30 – I am provided 70% of the capital, 70 % ( roughly) of the work hours, the suppliers and the expertise. I am bringing my friend on board because I value his intelligence and ideas and also think we will make a good team.

    The problem is that he might be leaving the country at the end of the year if his wife gets a job overseas. He will, however, stay if the business is going really well and expects to come on board full time with a 50/50 equity split.

    How do we split the business at the end of 2013 should he leave? One of the suggested exit plans is that he get 30% of the value of assets + 30 % of 2013 and 2014 profits .

    Any help would be greatly appreciated!!

    Hi Franky

    You can address this in a shareholders agreement. For example it should prescribe the outcome for a shareholder if they decide to cease employment with the company (and in some cases it can prescribe alternate outcomes depending on whether the person is a “good leaver” or “bad leaver”).

    In this case you would probably include a provision to the effect that they must sell back to the remaining stakeholders at XX value. The valuation methodology could include a range of different variables. At early stage an earnings based valuation may be problematic. With no runs on the board, everything is based on forecasts and these can obviously be highly subjective. It could just be easier to strike a price and say that anyone departing within the first 3 years gets X% of their cash invested back and that’s it.

    Also keep in mind that there are different mechanisms that can achieve this. Do you include in the shareholders’ agreement? Do you have separate options agreements? Can this transaction be structured so as to legitimately avoid capital gains tax on the exit?

    You get the picture. You need a good accountant and a good lawyer. Ideally working together.

    Good luck with it all.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1141667
    franky
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    Thanks for responding James!

    #1141668
    OOZEL
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    Great advice James!

    I would just like to add that overall, you can add anything you want into a partnership or shareholder agreement and in many ways it will depend upon the way the business is structured.

    For example you can include something that says your partner is able to leave the business for up to one year overseas and during this time the following conditions would apply. Such as he/she may keep financial interests but not have voting rights on decisions etc.

    Before going to see an accountant and a lawyer; I would suggest doing a lot of the research yourself using google. Look for different agreements that other people have used and see if there components that you like or that would apply.

    The reason I say this is that Lawyers and accountants are very expensive for a startup, if you go in there with no outline or goal the longer it takes them the more it will cost you. If you have a clear outline, goals and objectives of the agreement it will streamline the process and make it cheaper.

    Also make sure the agreement is worded in a way that is clearly understandable (or as close as possible); ambiguity is not your friend in something like a partnership agreement is is best that all partners have a clear understanding.

    Hope this helps guys. Goodluck

    #1141669
    MH08
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    Word of advice (unless you explained it incorrectly) from experience in partnerships.

    He will, however, stay if the business is going really well and expects to come on board full time with a 50/50 equity split.

    If that is your business partners mentality, he sounds like an opportunist, huge red-flag, a business partner shouldn’t be given the ‘opportunity’ (that word again) to stay onboard just because the business will be doing well.

    If you can survive on your own, do it on your own.

    Cheers bud,

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