Chapter 22: Keys to the Door

Twenty-one. I couldn’t quite believe I was going to be twenty-one. That’s still a big deal, right? I mean, I know you’re legally an adult in Britain at eighteen and have been since the sixties, so there’s not much, if anything, that you have to wait until you’re twenty-one to be able to do.

But turning twenty-one is still a big deal.

I’ve got the key to the door, never been twenty-one before. Isn’t that how it goes?

Of course, I’d had the key to my own door—the door of the house I actually owned—for over six months now, but still...

That would have been where I shrugged if I was talking to someone in person. You know me and shrugs.

My birthday was on a Wednesday, so my friends were determined to get me as drunk as possible when we all went out on the Saturday before that.

I didn’t exactly resist.

I’d spent all term buying drinks for all my friends without worry, so it was nice to not have to pay for a single drink all night for once. I wasn’t even sure what most of them were, and I’m certain that any beers I was bought were spiked with one spirit or another.

I wasn’t much use to poor Hannah that night. She, Emily and Mark got me home, and upstairs to my bedroom, then Hannah got me undressed, tucked me into my bed naked, got undressed herself and then crawled in next to me, spooning up behind me while I fell into a deep, dreamless sleep.

I was supposed to meet Will and his family at my sister’s restaurant for a more sedate birthday celebration on Sunday afternoon, but he called me just before lunch and postponed it until the evening of my actual birthday on Wednesday. Shortly after he’d done that, I got a call from Bobby, my financial advisor.

“Paul, how are you feeling? I heard a rumour that you had something of a heavy night last night?”

“I don’t want to talk about it. Or think about it,” I grumbled. “My friends are all bastards.”

“All friends are at your age when it comes to birthdays. But seriously, how are you feeling? Are you up for a fairly serious meeting?”

“Today?”

“This afternoon, if you can. Westell Mill at two?”

“Hang on, is this why Will just cancelled lunch with me?”

“Yep. David and I, and another man I need to introduce you to, have put together a counter proposal to Will’s initial offer and we want to go over it with you. Are you up for that?”

I nodded, even though this was a phone call. “I suppose. How much will I need to concentrate?”

“As much as you can, but we have put a document together for you to take away and look at.”

I smiled. “Of course, you have.” I sighed. “Okay, I’ll meet you at two. Although I might have to bring a few friends who were expecting to be fed today and sit them at another table while we talk.”

“Well, why don’t you come early and eat with your friends, then we’ll meet afterwards. I’ll book you a table for, say, twelve-thirty. How many for?”

Although disappointed that I wasn’t taking them to Vicky’s place because the food there really is that good, I’d mentioned taking everyone to Westell Mill ever since I’d first met Bobby there, so there wasn’t too much grumbling. After we’d eaten and everyone had toasted my health, my friends left and I went to join what I suppose I need to start thinking of as my business advisors in the conservatory at the back of the pub. Bobby and David were both there, as was a third man I didn’t recognise.

“Paul!” Bobby said as the three men stood when I approached their table. “David, you already know, but this is Chris Austins. He’s a...” He turned to the third man. “How exactly do you describe yourself these days?”

The man smiled and reached out a hand to shake mine. “I’m a freelance Business Analyst and Advisor. Basically, I look at what businesses are currently doing and tell them what they could be doing to make more money. Or spend less money. Or both.”

“Nice to meet you, Chris.” I shook his hand, then David’s, then Bobby’s. Then we all sat down. “So, why am I here?”

Chris smiled, “Straight to business—a man after my own heart.” He looked at the other two. “I like him already.” We all laughed at that.

“Okay,” Chris continued as he handed me a document from a small pile in front of him. “This is the counter proposal we’ve worked on.”

I opened the document and flicked through it while Chris handed identical documents to the other two and then opened one himself.

“There’s three things we need to discuss with you.” Chris was clearly in charge of this meeting. I guess that meant he knew exactly what he was talking about. “I’m just going to run through things quite briefly, but feel free to interrupt with any questions. When I’ve finished, we can discuss things in more depth if you want, answer any questions you have, or you can just take this away and have a read through it and we’ll arrange a follow-up sometime next week. That okay?”

I nodded. “Sure. I’m all ears.”

Chris nodded. “Okay. The first few pages are just background, we all already know most of this, but it needs to be in there for the potential funders and for the higher-ups at JMS—”

“They’ll get to see this?”

“Maybe. It’s a working document and so they’ll get to see it eventually but maybe not in this exact form. It depends on how Will and his partners react to our counter proposal. Anyway, take a look at page four. You’ll find two tables.”

I opened the document and found the right page, as did Bobby and David.

“The first table contains all the information we have from Will regarding the investment, borrowing and equity shares of the originally proposed LLP. As you’ll see, the borrowing the others are planning to take on is quite high—eight hundred thousand in total. Add the commercial mortgage to that for the purchase of the building, and it’s just way, way too high. Over three and a half million in total.

“Not only that, but this equity distribution values the company at three million, even though the purchase price for the practice is only just over two million. That makes no sense. And all because they are looking to purchase the building as well as the practice.

“Now, if you—”

“Hold on,” I said. “I don’t understand this equity valuation. It’s supposed to be the value of the money we’re each putting in, right?”

Chris nodded. “Yes, either as the equity they are bringing from their existing shares in JMS, from a cash investment or from borrowing.”

“But, it looks to me like Jeremy is only investing five hundred thousand, but his equity in the new company will be seven hundred and fifty. That can’t be right? Can it?”

Chris nodded. “It is. It’s a fudge. Will and Sally want Jeremy to be an equal partner, so the new company is effectively giving him a gift of two hundred and fifty thousand pounds of shares so that all three of them are equal.”

“That doesn’t seem fair?”

“Maybe. Maybe not. It’s supposed to reflect his value to the business as the head of one of its most profitable departments. Think of it as a bonus in the form of shares rather than cash. Or shares up front in lieu of a higher salary for the next five or ten years.”

I nodded. “Still doesn’t seem fair.”

Chris shrugged. “Take a look at the second table. This, the three of us here agree, is a better reflection of the value of the company on day one. By not purchasing the building, we’re able to reduce everyone’s borrowing and the cash investment that’s being asked of you.”

I looked at the table and nodded. This had me only investing two hundred thousand instead of four hundred and fifty. “But in this table, I’m only getting ten percent of the company and not fifteen? So, I own less of it?”

“But for less than half the investment,” Bobby said. “You pay less than half the price, but only get a third less shares. It’s a sensible proposal.”

“And it means that the two non-lawyers can have a slightly larger share each, which we hope will make the proposal attractive to them. Everyone wins here. You get more value for your investment, the others all get to borrow far less money and the company carries no mortgage debt.”

“But doesn’t own the building? So, what happens to that?”

“We’ll get to that,” said Chris. “This proposal values the company at two million instead of three—just under the purchase price rather than way over it—and instead of creating new equity to make Jeremy an equal partner, it sees Will and Sally gifting some of their equity to not just him, but Carole and Theresa as well.”

I nodded. “So, do you think they’ll go for it?”

“I would expect so. There may still be some negotiation, but this is far closer to how things will end up than their original proposal.”

I nodded, still looking at the numbers in the two tables. “Hey, how come the first table refers to me by name, but the second one doesn’t? What’s PR Holdings?”

“A temporary name for the company we’re going to set up for you to hold both your shares here, the office building and any other assets you might acquire over the coming years,” David said, with a grin.

“Come again?”

“That’s the other two things we need to discuss with you,” said Chris. “But let’s go get another round of drinks first, shall we? My glass is dry.”

I accompanied Bobby to the bar to buy a round of drinks and we carried them back to the table.

Chris took a long pull from the pint of Westell Ale I’d bought him.

“Good God Damn, I miss real beer.” When he saw my quizzical look he added, “I live in America. A small town you’ve never heard of with my wife and kids. It’s a long story. I can do most of my work from there, even the work that’s based here, and I’ve built up a good client base there too, but I still have to come back here for a week or so every couple of months.” He shrugged. “It works. Mostly. And Beth makes it worth the effort. She’s worth the effort.”

I nodded. I understood.

“So,” I said. “Tell me about this company with my name on it.”

Bobby and Chris looked at David.

“Well, first of all, that’s just a temporary name—a holding name, if you like,” David said.

Bobby and Chris laughed at the joke, which, I assume, I’d understand shortly.

“No, seriously, you can call this company anything you like, as long as it’s not already taken by another listed company. The name really isn’t important. Its purpose, however, is.

“Right now, you hold all your assets in your own name, which, I have to say, isn’t very tax efficient. I mean, just look at those five one-million-pound cash accounts. You’re paying tax on the interest on those accounts as if it was income. Which, right now, it is. That alone puts you in the higher tax bracket. And that’s before we get into the rent that you’ll charge the law firm for office building. To continue holding all these assets as an individual just doesn’t make any sense. Tax wise.

“Companies pay tax at a much lower rate. Corporation Tax rather than Income Tax. And then when the profit is paid to you, it’s paid as a dividend, which is also taxed at a lower rate than income. Does that make sense?”

I nodded. “I think so. So, this is all about saving tax?”

All three nodded.

“What we do,” said Bobby, “is transfer the share portfolio I manage for you to this new holding company. Your shares in the law firm too, as well as that five million you’ve got sitting there doing nothing. And then the holding company buys the office building. The dividends from the shares, the interest on the cash left over, and the rent on the building will be paid to the holding company.”

“Then you can offset any expenses that are in any way related to the holding company against the income, which will reduce your tax liability even further. Any expenses,” said David.

“Such as?”

“Well, most obviously, the interest on the mortgage. But also, you are the company. Its whole purpose is to hold your assets, so...” David shrugged.

“I don’t get what you’re saying.”

“Let’s say,” said Chris, “For example, you need a car to attend meetings related to your holding company. Well, the company could buy you a car—or even buy your current car off you—tax it, insure it and fuel it. All that will be offset against the company’s income.”

“So ... Let’s say, the weekly shop for food and stuff. The holding company could buy that?”

Chris shook his head. “No. You need to be able to justify whatever the company spends as a business expense. So, for example, the meal with your friends earlier—not a business expense. These drinks or if we’d had a meal—business expense.”

“Because we’re discussing the business?”

“Exactly.”

“Okay. I think I understand.” I paused. “You mentioned a mortgage. But don’t I have enough cash to buy the building outright without one?”

“You do,” said Bobby. “But it’d be foolish to pay cash if you don’t have to. It’d take the best part of thirty years to make back the cost of the building in rent. If you stump up, say, one million in cash as a deposit and finance the rest, it’d only take about eight or nine years. Of course, you do have to make the mortgage repayments out of the rent, so it’d still take thirty years or so to build up the cash reserves to the same level again, but in the meantime, you’ve still got more money in the bank for other purposes than if you’d paid cash, so...” He shrugged.

“And you’ll have no problem getting a low-rate commercial mortgage,” Chris said. “You’ll be giving the law firm a lease for the same length of the mortgage—which is a guarantee of the income to cover the repayments. At least, that’s how a bank will look at it. Plus, it won’t be you getting the mortgage—it’ll be your holding company. The estimated value is three and a half million. We’ll negotiate that down though. I’d push for a flat three, but JMS won’t agree to that unless they’re stupid. I think three point two-five is realistic though.”

“So you end up with a thirty year mortgage for between two and two and a half million,” David said. “You’ll probably be charging rent at about two and half to three thousand more than the mortgage repayments. Nice little income stream. The rent will be up for negotiation though, obviously.”

I nodded. All this did make a lot of sense. Then something Bobby had said occurred to me.

“Bobby, you said I’d have cash for other purposes. What did you mean?”

Bobby shrugged. “Whatever you want it to mean. This company, whatever you decide to call it, it’s a holding company for your assets, so why not increase your assets? Use it as an investment vehicle. It will already own publicly listed shares once we transfer your current portfolio to it. It will hold private shares in the law firm too. You could use the extra cash to buy more publicly listed shares—shares in safe, profitable companies with a good dividend yield—or you could invest in some more small, private companies, kind of like a small budget, locally based, venture capital firm. Or there’s always property. More commercial property—offices or industrial units, that kind of thing—or even residential property. This is a student town. There’s always a need for private landlords renting to students. You could set up a second company—wholly owned by you Holding company if you want or you could even seek outside investment—and use it to run a small scale Student Housing business. There’re all sorts of possibilities, really. Endless.”

I thought for a moment then said, “This is ... This is serious stuff, isn’t it? Serious business? Serious decisions? I’m not sure I’m ready for all that. Ready for that level of ... I don’t know... responsibility.”

“Well, you don’t really have to be,” Chris said.

“Seems like I do.”

“The thing about a Limited Company like this,” Bobby said, “Is that the Directors—the people with the legal responsibility to run the company—don’t have to be Shareholders. And, similarly, the Shareholders don’t have to be Directors.”

“So ... You’re saying I don’t have to run this company? I can get someone else to do it for me? Just until I feel ready to do it myself.”