Brendan Burgess
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This question is asked from time to time and this thread will attempt to deal with the main issues. This is a work in progress so comments welcome and will be incorporated in this post.
You must take professional tax and legal advice
This advice should be taken well in advance of the purchase of the shares. A badly planned deal may have adverse tax consequences.
Buying a minority stake in a company is dangerous
The majority shareholder can do what they like with the company. Borrow money, sell assets, pay themselves higher salaries. There is very little a minority shareholder can do about it.
There is legal protection in the Companies Acts to protect minority shareholders, but it would require a long and very expensive legal case to enforce those rights.
You should insist on a Shareholders' Agreement
More information in this post
How do you value the shares?
There are long text books written about the valuation of shares in private companies. At the end of the day, it depends on what dividends or other cash flow you can expect to get for your shares.
As a very rough rule of thumb, a business is valued at 6 to 10 times its after-tax earnings. The multiple used depends on a lot of factors - the industry or whether the company is growing or not.
Has the company significant assets? In a well run private company, the owners will own any property personally and rent it to the company.
What dividends will you get?
Many private companies don't pay dividends - preferring to accumulate the profits instead of distributing it. Others distribute all earnings as salaries as this is often more tax effective. A dividend policy will be part of the shareholders' agreement.
You will need to do a Due Diligence
As a minimum you will get the latest set of audited accounts. Don't take them at face value. You will have to employ an accountant to verify them. A lot of small companies are no longer required to have an annual audit, so the accounts probably mean a lot less.
Are there any liabilities not in the accounts e.g. legal claims against the company. Have the directors been honest in their tax returns? If not, a Revenue audit could cost the company a lot of money.
How do I raise the money to buy the shares?
A bank will not take shares in a private company as security. You would have to give some other form of security e.g. you may have to remortgage.
In certain circumstances, you can get full tax relief on any interest paid on money borrowed to buy shares in the company. I think you may have to buy at least 25% of the equity to qualify for this.
Am I entitled to be a director if I am a shareholder?
No, it does not carry an automatic entitlement. However, it could be part of the deal. Becoming a director brings very heavy responsibilities, and you should check out this thread first.
You must take professional tax and legal advice
This advice should be taken well in advance of the purchase of the shares. A badly planned deal may have adverse tax consequences.
Buying a minority stake in a company is dangerous
The majority shareholder can do what they like with the company. Borrow money, sell assets, pay themselves higher salaries. There is very little a minority shareholder can do about it.
There is legal protection in the Companies Acts to protect minority shareholders, but it would require a long and very expensive legal case to enforce those rights.
You should insist on a Shareholders' Agreement
More information in this post
How do you value the shares?
There are long text books written about the valuation of shares in private companies. At the end of the day, it depends on what dividends or other cash flow you can expect to get for your shares.
As a very rough rule of thumb, a business is valued at 6 to 10 times its after-tax earnings. The multiple used depends on a lot of factors - the industry or whether the company is growing or not.
Has the company significant assets? In a well run private company, the owners will own any property personally and rent it to the company.
What dividends will you get?
Many private companies don't pay dividends - preferring to accumulate the profits instead of distributing it. Others distribute all earnings as salaries as this is often more tax effective. A dividend policy will be part of the shareholders' agreement.
You will need to do a Due Diligence
As a minimum you will get the latest set of audited accounts. Don't take them at face value. You will have to employ an accountant to verify them. A lot of small companies are no longer required to have an annual audit, so the accounts probably mean a lot less.
Are there any liabilities not in the accounts e.g. legal claims against the company. Have the directors been honest in their tax returns? If not, a Revenue audit could cost the company a lot of money.
How do I raise the money to buy the shares?
A bank will not take shares in a private company as security. You would have to give some other form of security e.g. you may have to remortgage.
In certain circumstances, you can get full tax relief on any interest paid on money borrowed to buy shares in the company. I think you may have to buy at least 25% of the equity to qualify for this.
Am I entitled to be a director if I am a shareholder?
No, it does not carry an automatic entitlement. However, it could be part of the deal. Becoming a director brings very heavy responsibilities, and you should check out this thread first.