Deals
A deal, in simple terms, can be described as an agreement entered into by two or more people or parties establishing a business arrangement for mutual financial gain. Such deals may include investments in companies, buying and selling of commodities, joint ventures, agency, brokerage, distributorship, dealership, mining arrangements, etc.
Share of financial gain
In these arrangements there has to be mutual financial benefit. Share of financial gain or profit should be agreed on and preferably signed for through for example a shareholders’ agreement, deed of partnership or joint venture agreement depending on the nature of the deal.
Share in terms of shareholding
Number of shares held or percentage shareholding is widely used for sharing financial gain, usually through dividends, in the case of a company. However, this may not necessarily reflect original intentions or preferred way of sharing financial gains but poor deal structuring. Shareholding therefore needs careful structuring initially or subsequently.
Structuring shareholding
However, shareholders may not have equal resources when establishing the business. Below are some tips to consider.
- They can agree on their preferred shareholding and fix it, for example 50%-50%.
- They can fund the business through a cocktail of instruments such as ordinary shares, redeemable preference shares, debentures, shareholder loans, etc. Ordinary shares have residual ownership and voting rights in a company.
- They can bring in their capital in cash or kind, the latter properly valued.
- Where one investor, A, can bring in more capital than B, such excess over B’s contribution can be treated as a loan to the business, convertible to ordinary shares if not repaid. Alternatively, it can be structured as redeemable preference shares, debentures or loan. Debentures or shareholder loans and interest thereon can be repaid from the company’s cashflows before paying dividends to ordinary shareholders. Redeemable preference shares can be bought back by the company.
- Another way is for investor A to loan funds directly to B so that B can pay for his shares in the company. B can use his other assets or shares in the company as security for the loan from A. If B fails to repay then A will take over the pledged shares.
- Where investors are taking over an existing company at a predetermined shareholding structure, for example 50%-50%, they can combine their funds to pay for the shares. If A has more funds than B, by agreement A can loan B what is necessary to maintain a 50%-50% shareholding structure. Investor B can repay investor A from his other sources or future dividends from the business.
- The investors can form a special purpose vehicle (“SPV”) through which they hold the shares in the target company in the preferred ratios. If A has more resources than B he can lend the excess over B to the SPV. The loan to the SPV by A can then be repaid over time or be restructured.
Partnerships
Partnerships are common with law firms and accountants. Factors considered in determining profit share may include, capital contributions, licenses held, goodwill, expected contributions, seniority or experience, specialist skills, client book and eventually what is considered just and equitable. Adjustments may come in the form of different partnership salaries, commissions, interest on capital, interest on drawings, interest on loans by a partner, etc.
Joint ventures
There are various forms of joint ventures or joint operations. Considerations in determining share of financial gain include capital contributions, other expected contributions such as infrastructure, specialist skills, markets, other investment options, risk appetite or minimum acceptable returns.
Dealership, distributorship, agency arrangements
Parties may negotiate and agree on discounts, commissions, maximum prices, subject to regular reviews.
Negotiation
Everything boils down to negotiation.
Godknows Hofisi is a legal practitioner, chartered accountant and corporate rescue practitioner. He also advises in deal structuring, business valuations and tax. He writes in his personal capacity and can be contacted on +263 772 246 900 or gohofisi@gmail.com
