Share buy-back advice for SME's
Thinking about a share buy-back?
Whether you are planning for a shareholder’s retirement, tidying up your shareholder base, or managing the exit of a leaver, a share buy-back can be a clean and effective solution, provided it is structured correctly.
Share buy-backs are technical and timing-sensitive transactions, with strict statutory requirements around funding, approvals, documentation and filings. Early preparation is essential to avoid delays, unintended tax consequences or the risk of the transaction being invalid.
At Neves Solicitors, we advise owner managed businesses and SMEs on share buy-backs that are compliant, tax aware and commercially practical. This guide outlines what a share buy-back is, why companies use them and the key issues to consider before starting the process.
This article provides general information only and applies to private companies limited by shares in England and Wales. It does not constitute legal or tax advice. Specific advice should be taken before taking any action.
What is a share buy-back?
A share buy-back is where a company purchases its own shares from an existing shareholder.
Following completion, the shares are typically cancelled, reducing the company’s issued share capital and increasing the percentage ownership held by the remaining shareholders.
Share buy-backs are governed by sections 690 to 708 of the Companies Act 2006 and are subject to strict rules on funding, approvals, documentation, timing and statutory filings.
Why do companies use share buy-backs?
- Use of surplus company funds – Where a company has excess cash available, a buy-back can be an effective way of returning value to a departing shareholder. In some circumstances, a buy-back may be more tax-efficient than paying dividends, although this depends on the shareholder’s individual tax position and whether the relevant HMRC conditions are satisfied.
- Retirement of a shareholder – A buy-back can provide a clean route for a founder or director to step back from the business without requiring the remaining shareholders to raise personal funds. It is often used alongside succession planning arrangements.
- Shareholder exit or leaver situations – Where a shareholder resigns, exits the business or becomes a bad leaver, a buy-back offers a controlled mechanism for keeping shares within the continuing ownership group.
- Increasing the relative holdings of continuing shareholders – Cancelling shares increases each remaining shareholder’s percentage interest, which can be useful where control or ownership simplicity is a priority.
Preparing for a share buy back: the essentials
Before proceeding, a number of key issues must be addressed at the outset to ensure the transaction runs smoothly.
Key considerations include:
- whether the company’s articles of association permit a share buy-back or require amendment
- how the buy-back will be funded, including whether it will be funded out of distributable profits or capital
- the tax treatment of the payment to the selling shareholder
- the required board and shareholder approvals and completion sequencing
- the statutory filings that must be made within strict deadlines following completion
Addressing these points early helps reduce the risk of delay, unexpected tax consequences or the transaction needing to be unwound.
Why choose Neves Solicitors?
- Plain English advice on available options and their implications.
- Joined up working with your accountants to address funding and tax are front and centre.
- Practical project management of the process from start to finish
If you’d like us to review your Articles or enquire about the timescales for buy-backs, get in touch with the Neves Commercial team. We’ll provide an initial view on feasibility and process. Our expert Commercial Team also provides a wide range of services relating to other Company and Corporate matters. Get in touch with our Commercial Law team by calling 0330 0945 500, emailing info@neves.co.uk or completing our contact form and we'll get back to you.
