Pitfalls of buying into a small ltd co
Discussion
Hi all,
An ex colleague of mine has a fledgling business (set up in last 6 months, has just won its first contract). He’s approached me for some consultancy work as it’s in my area of expertise.
I’ve thought about setting up on my own in the past, and coupled with that he’s intimated over the phone that he’s looking for more investment.
Naturally I’m now thinking that rather than charge a day rate for the work, I could buy into his company.
I’m not sure how much money he wants/needs but I imagine it would be £10-20k. The market leader (who I’ve also worked for heavily in the past) makes approx £1.5M profit per year and there’s no reason my ex colleagues business can’t grow as big.
My question is, assuming he is open to me joining him, what are the pitfalls I need to look out for? Is there any due diligence that needs to be done prior on my part prior to buying into the ltd co?
He’s an ex colleague but I don’t know him that well, only on a professional level and not really personally.
If I invested say £20k, and bought 30-50% of the company, could he close the business and run with my money?
Anything else I should be aware of?
An ex colleague of mine has a fledgling business (set up in last 6 months, has just won its first contract). He’s approached me for some consultancy work as it’s in my area of expertise.
I’ve thought about setting up on my own in the past, and coupled with that he’s intimated over the phone that he’s looking for more investment.
Naturally I’m now thinking that rather than charge a day rate for the work, I could buy into his company.
I’m not sure how much money he wants/needs but I imagine it would be £10-20k. The market leader (who I’ve also worked for heavily in the past) makes approx £1.5M profit per year and there’s no reason my ex colleagues business can’t grow as big.
My question is, assuming he is open to me joining him, what are the pitfalls I need to look out for? Is there any due diligence that needs to be done prior on my part prior to buying into the ltd co?
He’s an ex colleague but I don’t know him that well, only on a professional level and not really personally.
If I invested say £20k, and bought 30-50% of the company, could he close the business and run with my money?
Anything else I should be aware of?
Bit like Dragons Den comes to Pistonheads!! Before you invest you really do need to do your "due diligence". I would start by examining his business plan in detail. You will need to get a clear picture of what your involvement is to be and the basis of your partnership. I made a mistake of buying into a friend's company once and although I thought it was a potentially good (and profitable) business, the amount of cash needed to get it going properly was more than he could raise and I lost my investment. There are such a lot of factors to take into account and it depends on your appetite for risk and whether you can afford to lose the money. Short term I would do as Eric suggests
Edited by Beggarall on Monday 17th February 14:09
Eric Mc said:
Just bill him for your work. You can walk away as and when you want to.
Thanks Eric. Yeah I could do that. I’ve been doing this for years with multiple companies in this sector. What I want is a bigger slice of the pie, and would like to be a major shareholder if and when the company starts making mega bucks....I refer you back to my original question
Sorry I edited my post to include some thoughts. The business plan and the basis of your partnership are two important issues. A careful "swot" type analysis plus appraisal of your prospective partners abilities and his investment. Understanding exactly what your contribution is to be. It sounds like you are already quite familiar with the industry. It depends on your attitude to risk. Good luck!
Firstly, just be fully aware that you could very easily lose every penny of your investment, with virtually zero recompense.
Do not invest what you cannot afford to lose and not worry about.
If you are perfectly fine that, then you can look at proceeding.
You need to decide if you will be a silent partner or get involved in the running of the business. Your next step should probably be speaking to your potential new business partner and sounding him out on what exactly he would be looking for. He may not be interested in the slightest in you becoming involved.
Do not invest what you cannot afford to lose and not worry about.
If you are perfectly fine that, then you can look at proceeding.
You need to decide if you will be a silent partner or get involved in the running of the business. Your next step should probably be speaking to your potential new business partner and sounding him out on what exactly he would be looking for. He may not be interested in the slightest in you becoming involved.
Edited by anonymous-user on Monday 17th February 14:37
Lord Marylebone said:
Firstly, just be fully aware that you could very easily lose every penny of your investment, with virtually zero recompense.
Do not invest what you cannot afford to lose and not worry about.
If you are perfectly fine that, then you can look at proceeding.
You need to decide if you will be a silent partner or get involved in the running of the business. Your next step should probably be speaking to your potential new business partner and sounding him out on what exactly he would be looking for. He may not be interested in the slightest in you becoming involved.
Thanks for this, it’s the type of advice I was looking for. Agree, he may not be interested, and if he’s not that’s fine. Do not invest what you cannot afford to lose and not worry about.
If you are perfectly fine that, then you can look at proceeding.
You need to decide if you will be a silent partner or get involved in the running of the business. Your next step should probably be speaking to your potential new business partner and sounding him out on what exactly he would be looking for. He may not be interested in the slightest in you becoming involved.
Edited by Lord Marylebone on Monday 17th February 14:37
You need to really learn about his business principles.
There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
langtounlad said:
You need to really learn about his business principles.
There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
I totally agree with all the above.There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
Even if there are no 'cash jobs' involved in a particular business, it often becomes a 'free for all' with regards to buying stuff through the business.
It's all too tempting for someone to make their business pay for everything they fancy buying for themselves. A new MacBook, new iPhone, new camera, new TV, new furniture, trip away with the wife 'on business'... Then it becomes a pickup truck or other family car that can be put though the books as a commercial vehicle.
To a certain extent, that is all fine as long as it's wholly your own business, but when you are sharing it with someone else, you need to have some agreement over what they spend as it is coming out of your pocket.
The point about having an exit strategy from the moment you start the business is also important.
langtounlad said:
You need to really learn about his business principles.
There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
Thanks very much this is great advice. There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
Lord Marylebone said:
langtounlad said:
You need to really learn about his business principles.
There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
I totally agree with all the above.There are lots of temptations for a small business in handling cash and potentially avoiding the tax implications.
For some business owners, that approach becomes a way of life and corrupts the ethics of conducting the business.
Be sure that you both share the same outlook, goals and timeframes. Also, textbook stuff is that when you get into a business you should also be planning the exit point as that becomes your strategic goal.
Even if there are no 'cash jobs' involved in a particular business, it often becomes a 'free for all' with regards to buying stuff through the business.
It's all too tempting for someone to make their business pay for everything they fancy buying for themselves. A new MacBook, new iPhone, new camera, new TV, new furniture, trip away with the wife 'on business'... Then it becomes a pickup truck or other family car that can be put though the books as a commercial vehicle.
To a certain extent, that is all fine as long as it's wholly your own business, but when you are sharing it with someone else, you need to have some agreement over what they spend as it is coming out of your pocket.
The point about having an exit strategy from the moment you start the business is also important.
DSLiverpool said:
Why not set up on your own, you would own 100% and save £20k you can use to get rolling.
A 6 month old biz with one client is worth ?
Lack of time is my main reason for not setting up on my own. I would want this other guy to run the admin side of things for me, winning contracts etc.A 6 month old biz with one client is worth ?
There is much too much to consider than can be addressed in a forum post, and £20k is an awkward amount; too much to treat as disposable, but not enough that you will want to spend half of it on legal fees, etc.
One suggestion is to think like the business that you aspire to become, and one absolutely fundamental requirement is a good Shareholder's Agreement.
In thinking like the £1.5m t/o company, what will the company need to get there in terms of time, money, effort, commitment from both of you and others (employed, outsourced, etc) You'll need a business plan, and you'll need to agree how deviations from it (good or bad) will be managed.
Then thinking about your relationship with the other shareholder, you need to agree in advance how to handle the inevitable difference of opinion when one of you decides to change direction, sell up, retire 10 years early, bring their spouse on board, pass the business to their kids etc etc.
As @Lord Marylebone suggests, you need to understand the needs and aspirations of the existing business owner first.
One suggestion is to think like the business that you aspire to become, and one absolutely fundamental requirement is a good Shareholder's Agreement.
In thinking like the £1.5m t/o company, what will the company need to get there in terms of time, money, effort, commitment from both of you and others (employed, outsourced, etc) You'll need a business plan, and you'll need to agree how deviations from it (good or bad) will be managed.
Then thinking about your relationship with the other shareholder, you need to agree in advance how to handle the inevitable difference of opinion when one of you decides to change direction, sell up, retire 10 years early, bring their spouse on board, pass the business to their kids etc etc.
As @Lord Marylebone suggests, you need to understand the needs and aspirations of the existing business owner first.
Edited by sideways sid on Tuesday 18th February 16:12
I've invested in a number of Ltd companies over the years and with the exception of one, lost big chunks of money.
Two pieces of advise
Plan upfront for the downside , exit plan, what happens if you fall out, he gets a perm job doesn't want to work in it anymore, salary caps, dividends policy, treatment of personal expenses, employment of connected persons etc etc etc
TAX plan - Consider EIS, or if applicable SEIS, half your money back, and any gains tax-free (subject to it being a qualifying type of business), and tax back on losses.
Turned a £100k investment (that all went south) into a real out of pocket loss of about £15k (after-tax and capital gain relief)
Two pieces of advise
Plan upfront for the downside , exit plan, what happens if you fall out, he gets a perm job doesn't want to work in it anymore, salary caps, dividends policy, treatment of personal expenses, employment of connected persons etc etc etc
TAX plan - Consider EIS, or if applicable SEIS, half your money back, and any gains tax-free (subject to it being a qualifying type of business), and tax back on losses.
Turned a £100k investment (that all went south) into a real out of pocket loss of about £15k (after-tax and capital gain relief)
JapanRed said:
Thanks SidewaysSid and Wilmslowlad. I think you’ve helped me talk myself out of the idea
But the other side is... I invested in a new Ltd Co and it worked out well.I invested £30k capital and also signed up to having a new business premises lease in my personal name, which was another £30k of liability on me if the business had failed (£10k a year, break clause after 3 years)
I was 50:50 with a partner. I brought the money and some business sense, and he brought his skills, experience and contacts.
Within 18 months the business has paid back my £30k investment and the landlord agreed to transfer the lease to the Ltd company, so after that point all the risk had gone and it was all profit.
I sold out after 4.5 years and walked away having done well out of it.
JapanRed said:
Eric Mc said:
Just bill him for your work. You can walk away as and when you want to.
Thanks Eric. Yeah I could do that. I’ve been doing this for years with multiple companies in this sector. What I want is a bigger slice of the pie, and would like to be a major shareholder if and when the company starts making mega bucks....I refer you back to my original question
Personally I'd rather be a part of something bigger but then I'm an entrepreneur.
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