Company Law
Do you need to buy out a business partner?
Here you will learn about the solutions to your troubles!
Sometimes life happens and a partner/shareholder in your company should or needs to leave.
So how do you go about it? There are indeed challenges when faced with such a situation,
and here are concrete actions and tips to solve them.
Buying out a partner
Perhaps its one of a few shareholders in the private company you are a co-owner in, that wants out.
The most straightforward way would of course be for you to buy the shares from the leaving partner/shareholder. But this can be hard to accomplish because you might not have the cash to buy the shares on the spot, and you might not want to go into debt, or take the risk it entails to increase your investment and ownership in the company at hand. And things get even trickier if the company is scaling and the valuation has become significant.
Here is a quick overview of two main options. Of course, remember that there will most likely be relevant clauses in your shareholders agreement ("SHA"). There could e.g. be a vesting period under which a departing shareholder is obliged to sell back (vested and/or non-vested) shares at some form of a discount.
So, aside from such SHA regulation of any transfer of shares, here is a download of solutions to the trouble.
You, as in the other shareholder(s) - buy the shares
Easy, right? Well, as indicated above, if it is a prospering company and the stake is not only a minor fraction of it, the biggest challenge with this solution will typically be cashing up. A way to solve this could be a down-payment where the shares are bought together with a payment plan. In order to create sufficient comfort for the selling shareholder the shares that are not fully paid for should be pledged, and recorded as such in the company's share ledger, until the payment is completed. See further below under 3. as regards more things to consider.
Redemption of the shares
In Sweden, private companies may not own their own shares (with some rare exemptions). Hence the company may not buy back its shares from the leaving shareholder. However, the company may do a redemption of shares. This is where it basically withdraws the shares and cancels them. In order for this to work, the company must have sufficient liquidity and the company must have sufficient unrestricted equity. The upside is that you - as a shareholder - do not need to present any cash, and the redemption will also create concentration of shares (compared to if an external party would buy the shares and would gain the same degree of control rights and economic rights as the exiting shareholder). So your relative stake in the company will increase with the redemption alternative.
More key take aways
The first option - you buying the shares - is also beneficial in the sense that it can be done through a so-called share purchase agreement ("SPA") between you and the exiting shareholder. The design of the SPA is in principle up to you both to decide together - without formalities and publicity (however keep in mind that the share ledger is public). The second alternative - redemption - requires a decision at a general meeting, and registration with the Swedish Companies Registration Office (but it does not require any cash from you as does the first alternative).
Also, a key challenge in both alternatives will be the valuation. When it is a private company there is no fair market value to refer to on a daily basis. You might hence need to do your homework as regards various valuation principles and why your price per share offer is the right one (as the exiting shareholder will most likely opt for for a valuation principle that results in a higher price per share than the one you find to be the most appropriate).
Other things to think about
When the departing shareholder is your partner in business - there could also be other risks you need to address, apart from financing the shares in some way. Not least is this the case if other key terms and conditions are imposed through the SHA that your partner will no longer be part of when selling the shares. While such SHA regulation might state that it will be in force also for a period after a shareholder exits the cap table, the shareholder will not be bound for longer than that period (presuming there is such a period at all). So consider if there are for example non-compete, non-solicitation and non-disclosure requirements that you want to impose on the exiting shareholder as a condition when to you buying the shares. Also consider if the exiting shareholder has such a key position in the company that you need to ensure that the shareholder sticks around and contributes in some form during an off-bording period (e.g. because there is a need that the shareholder trains a successor or you need to make a soft transition as regards key clients/partnerships that the shareholder has been in the contact person for). If there are such concerns, make sure to work a solution to such issues into the SPA (or a buy-out agreement in parallel with the redemption process) so that you have it in place before the shareholder has cashed out with little incentive left to contribute to the welfare of the company.
There is always a solution - in addition to the above one may of course create more elaborate buy-out and payment structures (including deferred payments, debt finance, earn-outs, and e.g. call options in cases where future value and risktaking could create more room for negotiation between the parties).
Stockholm, 2023-10-02
Author: Katarina Strandberg
Buying out a partner
Perhaps its one of a few shareholders in the private company you are a co-owner in, that wants out.
The most straightforward way would of course be for you to buy the shares from the leaving partner/shareholder. But this can be hard to accomplish because you might not have the cash to buy the shares on the spot, and you might not want to go into debt, or take the risk it entails to increase your investment and ownership in the company at hand. And things get even trickier if the company is scaling and the valuation has become significant.
Here is a quick overview of two main options. Of course, remember that there will most likely be relevant clauses in your shareholders agreement ("SHA"). There could e.g. be a vesting period under which a departing shareholder is obliged to sell back (vested and/or non-vested) shares at some form of a discount.
So, aside from such SHA regulation of any transfer of shares, here is a download of solutions to the trouble.
You, as in the other shareholder(s) - buy the shares
Easy, right? Well, as indicated above, if it is a prospering company and the stake is not only a minor fraction of it, the biggest challenge with this solution will typically be cashing up. A way to solve this could be a down-payment where the shares are bought together with a payment plan. In order to create sufficient comfort for the selling shareholder the shares that are not fully paid for should be pledged, and recorded as such in the company's share ledger, until the payment is completed. See further below under 3. as regards more things to consider.
Redemption of the shares
In Sweden, private companies may not own their own shares (with some rare exemptions). Hence the company may not buy back its shares from the leaving shareholder. However, the company may do a redemption of shares. This is where it basically withdraws the shares and cancels them. In order for this to work, the company must have sufficient liquidity and the company must have sufficient unrestricted equity. The upside is that you - as a shareholder - do not need to present any cash, and the redemption will also create concentration of shares (compared to if an external party would buy the shares and would gain the same degree of control rights and economic rights as the exiting shareholder). So your relative stake in the company will increase with the redemption alternative.
More key take aways
The first option - you buying the shares - is also beneficial in the sense that it can be done through a so-called share purchase agreement ("SPA") between you and the exiting shareholder. The design of the SPA is in principle up to you both to decide together - without formalities and publicity (however keep in mind that the share ledger is public). The second alternative - redemption - requires a decision at a general meeting, and registration with the Swedish Companies Registration Office (but it does not require any cash from you as does the first alternative).
Also, a key challenge in both alternatives will be the valuation. When it is a private company there is no fair market value to refer to on a daily basis. You might hence need to do your homework as regards various valuation principles and why your price per share offer is the right one (as the exiting shareholder will most likely opt for for a valuation principle that results in a higher price per share than the one you find to be the most appropriate).
Other things to think about
When the departing shareholder is your partner in business - there could also be other risks you need to address, apart from financing the shares in some way. Not least is this the case if other key terms and conditions are imposed through the SHA that your partner will no longer be part of when selling the shares. While such SHA regulation might state that it will be in force also for a period after a shareholder exits the cap table, the shareholder will not be bound for longer than that period (presuming there is such a period at all). So consider if there are for example non-compete, non-solicitation and non-disclosure requirements that you want to impose on the exiting shareholder as a condition when to you buying the shares. Also consider if the exiting shareholder has such a key position in the company that you need to ensure that the shareholder sticks around and contributes in some form during an off-bording period (e.g. because there is a need that the shareholder trains a successor or you need to make a soft transition as regards key clients/partnerships that the shareholder has been in the contact person for). If there are such concerns, make sure to work a solution to such issues into the SPA (or a buy-out agreement in parallel with the redemption process) so that you have it in place before the shareholder has cashed out with little incentive left to contribute to the welfare of the company.
There is always a solution - in addition to the above one may of course create more elaborate buy-out and payment structures (including deferred payments, debt finance, earn-outs, and e.g. call options in cases where future value and risktaking could create more room for negotiation between the parties).
Stockholm, 2023-10-02
Author: Katarina Strandberg