Should shareholders have an exit date?
Many of our clients are private companies with multiple (non related) shareholders. Given the ageing of the baby boomer population, we are increasingly being asked to provide advice on whether or not shareholders, that are no longer active in the business, should continue to be shareholders.
In professional services firms, such as lawyers, accountants and engineers, most partners cease to be owners in the firm upon their retirement. This is natural as the firms desire that the owners and the partners to be aligned. However for manufacturing, distribution and other businesses this may or may not be valid.
The dangers of not renewing the shareholders is that as we get older we typically are more focussed on near term dividend income and less on the growth of the business. These investment strategies are entirely valid for a self-funded retiree, but may do damage to the business as it is not sufficiently investing in longer term projects that will defend and grow the business.
There are a number of ways of renewing the shareholder base. Many of our clients are introducing new staff shareholders to assist with succession planning and providing founding shareholders with some liquidity.
We are also seeing groups of high net worth investors being more active in seeking to invest in private companies in the enterprise range of $2M-$15M. They can invest in business of a reasonable size with some management depth at prices well below that of larger listed companies.
A phase in / phase out investment strategy works for both the founders and the new shareholders. The founders can realise some of their investment initially and them more over time and the employee and other investors can increase their shareholders as they get more comfortable with the prospect of the business.
Please contact Remy Morello at remy@endeavourcapital.com.au or 0411 222 730 if you are either a founder seeking to partially sell down or an investor seeking opportunities.