Purchasing small shareholding in private limited company

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Wetdufflecoats

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Hi all,
I'm in the early stages of researching an option to buy a small shareholding in a private limited company at the moment and I was hoping that I could lean on the knowledge here!
A shareholder has recently sold her shares back to the company and I was wondering where this transaction is covered in the company Financial Statements and if there was a way of working out how much was paid for the shareholding?
Is there any advice on how to go about researching the value of a shareholding in a private limited company?

Thanks all!
 
I don't think you will find this easily in the public accounts

In any case, it is irrelevant - what matters is what you think a small shareholding is worth. This would normally be based on expected future dividends and/or capital gains if the company is sold in the future

Not sure that a small shareholding in a private company is wise - as you will have little or no say in the management
 
jpd said:
I don't think you will find this easily in the public accounts

In any case, it is irrelevant - what matters is what you think a small shareholding is worth. This would normally be based on expected future dividends and/or capital gains if the company is sold in the future

Not sure that a small shareholding in a private company is wise - as you will have little or no say in the management
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Thanks very much for the reply...much appreciated. I currently work for the company and was interested in having some skin in the game but its just the working out of the price of the shareholding which is proving difficult.
 
Wetdufflecoats said:
Thanks very much for the reply...much appreciated. I currently work for the company and was interested in having some skin in the game but its just the working out of the price of the shareholding which is proving difficult.
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What does it do and what are the revenue and profit numbers?
 
We often see recommendations on AAM to sell stock units asap that contributors here receive as part of their compensation and benefits for working company x.

Those recommendations to sell asap are made because if you are already relying on your employer for salary then also keeping stocks of the company can lead to over exposure to a single asset/ income stream. Think alll eggs in one basket. By selling the stock that risk is somewhat mitigated.

Maybe take this aspect into consideration too.
 
Wetdufflecoats said:
Engineering company...turnover of about 4million with an estimated profit of c. 600k
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Real back of the envelope stuff. Assuming nothing silly in the profit number (e.g. €4m into the owner’s pension and his wife’s), 100% is probably worth €5m-ish, and you’d apply a discount to a minority shareholding. So maybe €300k for 10%?
 
Gordon Gekko said:
Real back of the envelope stuff. Assuming nothing silly in the profit number (e.g. €4m into the owner’s pension and his wife’s), 100% is probably worth €5m-ish, and you’d apply a discount to a minority shareholding. So maybe €300k for 10%?
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Theres nothing too mad in the directors pension figures quoted in the account so its ok there. I would be concerned that there is some shenanigans going on with Directors putting day to day expenses through the books but i guess a certain amount of that goes on in every business where accounts aren't audited strictly.[/QUOTE]
 
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That is relevant but probably not hugely so. Multiples have probably compressed a bit and ‘engineering’ is a wide enough space, but I’d guess it’s in the €4-6m range and that for a small shareholding (e.g. 5-10%) you’d apply a 20-40% discount.
 
Buying a share in a private company is very different from owning shares in an employer like Google or AIB which are publicly quoted.

In the case of a public company, you should definitely sell down your shares if they form a significant part of your wealth.

I don't think that this applies to the same extent to a private company. If you see yourself as a long-term employee and possible director of the company, it is ok to own shares in it. In fact, it is probably a good thing. It gives you a say in the direction of the company. You are part of the company, a bit like a partner. Yes, there is a risk that the company might go bust and you lose a significant part of your wealth, but at the right price, it is worth doing.

But there are big downsides

Company shareholders often fall out. If one person, usually the founder, has a majority stake in the company, they can dominate the others. So while you might own 10% of the company, in effect, you only have persuasive power and that might be worth nothing.

There are clauses in the Companies Acts to protect minority shareholders, but do you really want to go to the High Court to enforce it?

The dominant director can mess about by giving themselves a very high salary which wipes out profits, and you might not be able to do anything about it.

If you decide to leave the company, it will be very difficult to sell your shares. And if you are setting up in competition with them, they might make it even more difficult.

You might get on great with the founder today. But in 10 years, maybe the founder's son comes into the business and wants you out.

Or you might get on great with the founder today, but what happens when the company hits tough times and salaries have to be cut?


So, if you progress, then you must have a shareholders' agreement. This would cover, amongst other things:
  1. How salaries are to be determined
  2. Rules on calculating profits
  3. How the shares are to be valued on exiting the company especially on retirement.
  4. Access to the accounts and direct access to the auditor - who should be genuinely independent and not a member of the same golf club as the founder
  5. How big decisions such as the sale of the business are to be decided.
  6. Rules on borrowing
  7. Rules on appointment of directors
  8. Employment of relatives and friends of the directors
  9. Major investments and company strategy

Brendan
 
Another thing to consider is that in some firms the Directors will take pay cuts first before other staff. If there are lean times for a while, you might need this addressed in the agreement. In relation to Brendan's point, the dominant director can also throw company money into their pension pot.
 
Brendan Burgess said:
You might get on great with the founder today. But in 10 years, maybe the founder's son comes into the business and wants you out.
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Or they can just get old and out of touch and not keep up with the market or technology and wreck the place before they die. A lot of businesses are a reflection of the founders personality, ability and ego. It can be hard to let go.

It's very hard to give advice on an issue like this without knowing the dynamics involved. The accounts will only tell you so much. If it's a new company or one with significant Brand or Intellectual Property value then that's a different story and a different equation but many of the same pitfalls apply.
 
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