Buying into small business

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petsodly

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Hi all. I am currently a Director of a small consulting firm. As I generate most of the business I have asked the owner to sell me a 25% stake of the business, which he agreed to (probably a little reluctantly) for 33k. As regards the mechanics of finallising the deal what paperwork should I look for? Is a shareholders agreement necessary? Do I need legal advice? What documents should I ask for which show I am a shareholder? Any guidance much appreciated. Thanks
 
You definitely need legal advice from someone who specialises in the area.

Not to be too alarming, but a minority shareholding in a private company can be completely valueless, even if the company is thriving.

Think very carefully before doing this. Ask some basic questions (like: how will you ever get your 33k back? why are you doing this in the first place?).
 
Other questions would be how was the 33K calculated. Was it professionally done using one of the accepted methods ( too technical to go into here but an accountant or advisor with experience in company valuations would be able to explain ) or did he "reluctantly" just throw out a figure ?

Any shareholding results in either transfer or issue of shares with appropriate adjustments in the CRO and issue of certificates or transfer certs. Again you need good face to face advice on this.
 
Cheers for the replies. The valuation was done independantly and I am happy with same, so that's no really an issue. I had a small shareholding already so I am over the 25% shareholding, so the other shareholder can't pass a special resolution without my approval. I would presume that being over the 25% shareholding would eliminate most of the minority shareholding disadvantages, but I am open to correction on this. Regarding my reasons for buying in I see it as a good investment and I want ownership in the company...
 
Believe me, there's lots that can be done without special resolutions that could make it difficult or impossible to realise any value.

The main thing to keep in mind is that the shares are normally not tradeable. If you decide you want to realise your investment at any stage, you could well find it impossible to sell to anyone.

Even with a good shareholders agreement, you can find yourself in situations where the shares are effectively worthless.

As an excercise, try asking a bank to take them as security for a loan, and see what value they place on them.
 
Trawl back through previous posts on the is subject. I think I answered a similar question about what should be in a shareholders' agreement. The key thing is how profits are calculated and distributed.

Brendan
 
If you are bringing in most of the business, why don't you start up alone. The money you have could be used to finance the operation and you might have some change.
 
I'm with mercman if you have all the contacts in place and are generating most of the business you should have no trouble in starting your own business, a share holding in your bosses business is only as good as its weakest link, if you start your own company you will have full control and will see the return a your 33k a lot sooner. I am no financial wizard or tax guru as the majority of the posters here seem to be but I started a small IT company last year under similar circumstances and I am doing very well. A little added pressure but worth it in the long run.
 
Obviously I have considered setting up on my own but I don't want to go down this route for a number of reasons. Who should I seek professional advise from then? A Commercial law solicitor? Accountant? So when do my shares become valuable? Only if/when I get up to 50%? Maybe I'm better off investing medium term?
 
The fact is, and you probably don't want to hear this, is that in a close company you might never be able to sell your shares or declare a dividend or increase your shareholding or in fact do anything whilst you remain in a minority situation. Take a situation whence the company is making good profits and the Director who is a majority shareholder decides he needs a whopping big salary. You know what you minority shareholding will do -- give you an anxiety attack !!! If you are bringing in as much business as you say I would ask the Boss about selling all and sundry (check with your Bank and accountant first). If he says no he will either tell you to take a hike or sit down and work out a deal.
 
By the way, at this stage I would speak with the Accountant. It is to early to waste the money talking with a solicitor.
 
Another thought: how much did this other person pay for their shares?

Was it at the same price? if not, why not?

Asking someone to part with real cash for a minority stake in a private company that they're working for sounds all wrong to be honest, though without knowing the circumstances it's only a guess.
 
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