Offered shares in the company I work for
Discussion
Hi all,
I do not know a great deal about company shares, so I thought I would ask the experts. When I owned my own company, myself and my wife were the only shareholders with 1 share each, so that was simple.
The company I now work for has just offered the option to purchase 10 shares at £4100 each. This is due to one of the directors leaving, and he needs to sell his shares. He doesn't want to sell, but it would be a conflict of interest for him to keep them due to who his new employer is.
There are 100 'Ordinary' shares in total, and they are entitled to receive 66% of the company profits as dividend.
At present, the each £4100 share returns an annual profit share of £390.
Any advice? Pro's and Cons?
My main query is: What would happen if the company was bought out in the future? How does that work with regards to shareholders and shares?
Thanks
I do not know a great deal about company shares, so I thought I would ask the experts. When I owned my own company, myself and my wife were the only shareholders with 1 share each, so that was simple.
The company I now work for has just offered the option to purchase 10 shares at £4100 each. This is due to one of the directors leaving, and he needs to sell his shares. He doesn't want to sell, but it would be a conflict of interest for him to keep them due to who his new employer is.
There are 100 'Ordinary' shares in total, and they are entitled to receive 66% of the company profits as dividend.
At present, the each £4100 share returns an annual profit share of £390.
Any advice? Pro's and Cons?
My main query is: What would happen if the company was bought out in the future? How does that work with regards to shareholders and shares?
Thanks
Interesting scenario!. If it were me and i was (effectively) buying 10% of the business, I'd want a seat on the board so I could influence my investment. If the issued share capital is valued at £410,000, is some of that represented in assets, or is it all goodwill? Was 10% the whole of his share or are they asking other employees to invest?
Is there a majority shareholder? If so, he can sell the the whole of the issued shares of the business and the minority shareholders have to live with it
Is there a majority shareholder? If so, he can sell the the whole of the issued shares of the business and the minority shareholders have to live with it
Edited by Ronstein on Thursday 16th December 12:28
Do you want to own 10% of the company, and (if you do) is £41k a fair price? If the answer to yes is both, then why not? But that’s the basic question you’re asking…
A better question would be how to value this 10%, but sadly I can’t help there!
Edit: and with ordinary shares getting 66%, what happens to the other third. A different class or share I assume - what other benefits does that class of share have, and how might it impact the value of your holding?
Edit 2: if it’s such a damn good deal, why aren’t the holders of the other 90 shares buying them, and/or why isn’t the company buying them back to resolve the conflict of interest?
A better question would be how to value this 10%, but sadly I can’t help there!
Edit: and with ordinary shares getting 66%, what happens to the other third. A different class or share I assume - what other benefits does that class of share have, and how might it impact the value of your holding?
Edit 2: if it’s such a damn good deal, why aren’t the holders of the other 90 shares buying them, and/or why isn’t the company buying them back to resolve the conflict of interest?
Edited by DanL on Thursday 16th December 12:40
Obviously the risks are that the company fails and the shares become less valuable or valueless. In part share prices are driven by demand and you clearly only have a small number of people you could ever sell them to. In a small business this is probably a greater risk than a larger more established business. Things like a key member of staff (a founding director) leaving can have a real impact on the value of the business. Conversely, if the business is performing well then you'll get the profit share (which I assume is in the form of a dividend) you mention and if the business should be sold you'll get your representative (10%) share of the purchase price.
At the current rate it'll take you 11 years to recoup your investment. If you think that looks realistic then maybe it's not a bad deal, especially if the business were to be sold. As others have said though, as 10% equity owner I'd be asking if I could sit on the Board as you then have a say in how the business (and your investment) is managed.
You don't say what sector your business is in but some sectors and business models will command a higher valuation than other - for example a business that receives it's income from recurring revenues (e.g. subscriptions or annual fees etc) will be worth more than a business that has to sell goods to receive a revenue. What I'm getting at here is, how did the business, and so the shares, get valued and do you think it's fair??
Finally, some shares have different "rights" to others so check that your shares are on a par to the others in issue - equal voting rights, equal rights to income, equal rights in the event of corporate events etc
At the current rate it'll take you 11 years to recoup your investment. If you think that looks realistic then maybe it's not a bad deal, especially if the business were to be sold. As others have said though, as 10% equity owner I'd be asking if I could sit on the Board as you then have a say in how the business (and your investment) is managed.
You don't say what sector your business is in but some sectors and business models will command a higher valuation than other - for example a business that receives it's income from recurring revenues (e.g. subscriptions or annual fees etc) will be worth more than a business that has to sell goods to receive a revenue. What I'm getting at here is, how did the business, and so the shares, get valued and do you think it's fair??
Finally, some shares have different "rights" to others so check that your shares are on a par to the others in issue - equal voting rights, equal rights to income, equal rights in the event of corporate events etc
Thanks for the thoughts so far.
To answer some of the queries:
The company has been trading and growing steadily for over 30 years now.
The majority shareholders are two people who founded the business, and the rest of the shares are held by the other directors in varying amounts.
The 10% being offered is the entirety of what the director owned who is leaving. The other directors are apparently keen to purchase them, however they decided that they should be offered to other employees first, as a way to encourage others to take more of an interest and a stake in the business.
There are about 40 employees in total.
The company has generated similar profits over most years previously, although the profit trend is gradually upwards.
To answer some of the queries:
The company has been trading and growing steadily for over 30 years now.
The majority shareholders are two people who founded the business, and the rest of the shares are held by the other directors in varying amounts.
The 10% being offered is the entirety of what the director owned who is leaving. The other directors are apparently keen to purchase them, however they decided that they should be offered to other employees first, as a way to encourage others to take more of an interest and a stake in the business.
There are about 40 employees in total.
The company has generated similar profits over most years previously, although the profit trend is gradually upwards.
Firstly I'd say that (almost) 10% ROI is good. Take a look at the Mems & Arts to see what restrictions there may be in case there are any trap doors.
Good luck with it
Lord Marylebone said:
Hi all,
My main query is: What would happen if the company was bought out in the future? How does that work with regards to shareholders and shares?
Thanks
Regarding a future sale, it depends on the deal. A buyer acquires the shares but there are quite a few ways of going about it. With companies that I buy - even if it's a minority stake, I still want significant control so ensure that a contract is in place for this purpose. My main query is: What would happen if the company was bought out in the future? How does that work with regards to shareholders and shares?
Thanks
Good luck with it
Also to add, I can ask more questions to the business, but at this stage I assume the shares are just the 'brand and goodwill' of the business. The business owns the offices that we operate out of (London and 2 other cities), and these are the pension scheme of the founding directors.
So I very much doubt the shares have anything to do with the offices or other physical aspects of the business, just the 'brand'.
The sector is consultancy, surveying, and financial services to local government and housing.
So I very much doubt the shares have anything to do with the offices or other physical aspects of the business, just the 'brand'.
The sector is consultancy, surveying, and financial services to local government and housing.
I won't go into detail as to my job, but this is pretty much what I advise on day to day.
High level questions I have/ would have are:
1. Will you be made a Director? (as already mentioned above)
2. How has the price been arrived at (issue is that if the price is less than the Open Market Value for tax purposes then you might end up with a tax bill) so I'd probably want some comfort in advance.
3. If you decide you wanted to move on what do the Articles say about 'leavers' i.e. what price would you get back and is the company/ other shareholders obliged to buy them?
4. How well 'covered' is the dividend. A close to 10% yield is good (which might in turn impact on the "value") but how secure is that in the longer term?
Like others had said, assuming all shares have equal capital rights then on an exit you should get pro-rata to the equity proceeds on exit. Aside the dividend this is the real benefit for minority shareholders as a 10% would normally be pretty heavilly discounted so pro-rata offers big upside.
High level questions I have/ would have are:
1. Will you be made a Director? (as already mentioned above)
2. How has the price been arrived at (issue is that if the price is less than the Open Market Value for tax purposes then you might end up with a tax bill) so I'd probably want some comfort in advance.
3. If you decide you wanted to move on what do the Articles say about 'leavers' i.e. what price would you get back and is the company/ other shareholders obliged to buy them?
4. How well 'covered' is the dividend. A close to 10% yield is good (which might in turn impact on the "value") but how secure is that in the longer term?
Like others had said, assuming all shares have equal capital rights then on an exit you should get pro-rata to the equity proceeds on exit. Aside the dividend this is the real benefit for minority shareholders as a 10% would normally be pretty heavilly discounted so pro-rata offers big upside.
Edited by mx stu on Thursday 16th December 13:37
I haven't read the complete post but I would be very cautious, it could of course be good but as a non equity director of a supplier of ours discovered when he bought 10%, the founding family retained 90%.
They have never declared a dividend
They have appointed various family members as directors on salaries
They don't listen or take any notice of him.
In essence he gave over 50K 20 odd years ago and has had no tangible return. The balance sheet is largely unchanged because everything is extracted.
On the other hand, if it's a genuine case of a Director retiring, who knows, as for the notion of a seat on the "board", these are effectively pointless, the controller of the majority ( all else being equal) will do what suits them.
They have never declared a dividend
They have appointed various family members as directors on salaries
They don't listen or take any notice of him.
In essence he gave over 50K 20 odd years ago and has had no tangible return. The balance sheet is largely unchanged because everything is extracted.
On the other hand, if it's a genuine case of a Director retiring, who knows, as for the notion of a seat on the "board", these are effectively pointless, the controller of the majority ( all else being equal) will do what suits them.
Thanks to all who have contributed and given advice.
I have no particular worries about the company having my money and me not having a say in the management. They are a competent group of people, many of whom have been with the business for many years. The directors have recently invited me to partake in some of the decision making processes as they believe in encouraging us to progress and ultimately replace them as they choose to retire.
Financially it is in their interests that the business continues to do well even if they retire.
But yes, I accept that ultimately if the company fell over I would lose my investment in it's entirety. If it kept going as is, I would get a much better return on my £40k than any bank would give me.
Time to do some thinking.
I have no particular worries about the company having my money and me not having a say in the management. They are a competent group of people, many of whom have been with the business for many years. The directors have recently invited me to partake in some of the decision making processes as they believe in encouraging us to progress and ultimately replace them as they choose to retire.
Financially it is in their interests that the business continues to do well even if they retire.
But yes, I accept that ultimately if the company fell over I would lose my investment in it's entirety. If it kept going as is, I would get a much better return on my £40k than any bank would give me.
Time to do some thinking.
If I've understood this correctly there are 100 shares in total and each pays £390pa dividend (which is 66% of profits). That would imply that the total company profits are consistently circa £59k which seems low for a company with 40 employees. It would seem to imply that the profits are being manipulated to maintain that situation, possibly via bonuses?
Obviously as a max 10% shareholder you have no control over the remuneration policy so the ongoing dividend is entirely reliant on the people making the decisions. The dividend is obviously only a part of the value of the shares but in this case I would suggest it makes up a significant proportion.
On the point about the offices, these will be held in a SSAS (or similar structure) pension fund for the benefit of the founding directors. The company will be paying rent to the pension fund which is another draw on the profits you cannot control!
Obviously as a max 10% shareholder you have no control over the remuneration policy so the ongoing dividend is entirely reliant on the people making the decisions. The dividend is obviously only a part of the value of the shares but in this case I would suggest it makes up a significant proportion.
On the point about the offices, these will be held in a SSAS (or similar structure) pension fund for the benefit of the founding directors. The company will be paying rent to the pension fund which is another draw on the profits you cannot control!
gtb4 said:
If I've understood this correctly there are 100 shares in total and each pays £390pa dividend (which is 66% of profits). That would imply that the total company profits are consistently circa £59k which seems low for a company with 40 employees. It would seem to imply that the profits are being manipulated to maintain that situation, possibly via bonuses?
Obviously as a max 10% shareholder you have no control over the remuneration policy so the ongoing dividend is entirely reliant on the people making the decisions. The dividend is obviously only a part of the value of the shares but in this case I would suggest it makes up a significant proportion.
On the point about the offices, these will be held in a SSAS (or similar structure) pension fund for the benefit of the founding directors. The company will be paying rent to the pension fund which is another draw on the profits you cannot control!
That seems to be correct with regards to profit. The turnover is in the millions, and I know this as I am party to the annual discussion regarding clients, growth, turnover etc.Obviously as a max 10% shareholder you have no control over the remuneration policy so the ongoing dividend is entirely reliant on the people making the decisions. The dividend is obviously only a part of the value of the shares but in this case I would suggest it makes up a significant proportion.
On the point about the offices, these will be held in a SSAS (or similar structure) pension fund for the benefit of the founding directors. The company will be paying rent to the pension fund which is another draw on the profits you cannot control!
I have no doubt the directors, assistant directors, and owners, will be 'managing' the profits, and being paid out in other ways such as the rents on the office buildings, generous salaries, bonus schemes, expenses, company cars, and so on.
That is absolutely fine, I understand it, and I would be doing the same. I did do the same when I owned my own business.
I guess I just have to judge the situation and share offer on its own merit as it stands now, knowing what I know.
Biggy Stardust said:
Eggs and baskets- both your day job & a big chunk of your investments are tied to one enterprise.
Thats the bit that concerns me. £40k is not an insignificant amount.Pros:
I would be making nearly 10% on my £40K if business remains steady or growing as it has done (Currently that £40k is doing almost nothing in my bank).
I could potentially receive a windfall if the company was to be bought out by another business (Entirely possible. The founders are at retiring age)
Cons:
Company could fail and I lose my £40k as well as my employment, both at the same time.
Could make it slightly more difficult if I decide to leave the business and not retain my shares. I would have to sell my shares to someone else.
Lord Marylebone said:
Pros:
I would be making nearly 10% on my £40K if business remains steady or growing as it has done (Currently that £40k is doing almost nothing in my bank). I could potentially receive a windfall if the company was to be bought out by another business (Entirely possible. The founders are at retiring age)
If you are important to the business you will likely do well if it it sold anyway (as the new owners will need to retain you).I would be making nearly 10% on my £40K if business remains steady or growing as it has done (Currently that £40k is doing almost nothing in my bank). I could potentially receive a windfall if the company was to be bought out by another business (Entirely possible. The founders are at retiring age)
I think the best thing to do would be to take the £40k out of the bank and put it in low cost equity trackers. You should make at least 5% through the economic cycle with none of the cons you outline.
My knowledge is very limited, so I'm more than happy to be corrected, but from talking to a couple of people who have, or are considering, selling busineses recently, the general guideline seems to be that the valuation of a company for sale is based on around 6x annual profit. On that basis is there c.£60k difference between the share valuation and a potential sale valuation?
Lots of good stuff already.
What you may find is that the Directors own the buildings though a SIPP and lease them to the company. Not a red flag per se, but if the sites are important it does mean that you need to understand more about the terms associated with this (especially whether or not they are protected tenancies).
Personally I'd be expecting that ordinary shares would include the assets of the company rather than "brand and goodwill" unless other assets and liabilities have somehow been explicitly and properly carved out.
Where you end up with the biggest difficulty is around valuation. It feels like a high multiple for a company with such high turnover - unless the profit figure is being very aggressively managed - where slight margin compression could flip from profit to loss...
10% shareholding is a fair bit for a non-director employee. Even if you don't want to sit on the board as a Director, you should probably push for increased information. It's common where there are small shareholders for them to collectively have the right to appoint a representative to act as a Board Observer or Director. You could raise this as something that is relevant to address earlier rather than later if there are other large shareholders looking to follow the same sale path.
Check also on restrictions around how and to whom you can sell the shares if you do proceed. Don't forget the practicalities around what you'd actually need to do in order to sell (for example, anyone considering buying will want access to information that the company probably deems confidential).
There's obviously a lot to consider, but if the company has good prospects it could turn out to be a smart move. Obviously only you can decide!
Lord Marylebone said:
There are 100 'Ordinary' shares in total, and they are entitled to receive 66% of the company profits as dividend.
You need to see the shareholders agreement and any other docs that enshrine this entitlement. Remember that, as others have said, profit is easy to manipulate. I would be a bit surprised if it was an entitlement as businesses often encounter circumstances where they want to build up a war chest for future investment by not paying dividends.Gixer968CS said:
At the current rate it'll take you 11 years to recoup your investment. If you think that looks realistic then maybe it's not a bad deal, especially if the business were to be sold. As others have said though, as 10% equity owner I'd be asking if I could sit on the Board as you then have a say in how the business (and your investment) is managed.
It may take 11 years for the flow of dividends to cover the investment (note though that that neglects tax and inflation) but at the end of that period he will still own the shares...Lord Marylebone said:
Also to add, I can ask more questions to the business, but at this stage I assume the shares are just the 'brand and goodwill' of the business. The business owns the offices that we operate out of (London and 2 other cities), and these are the pension scheme of the founding directors.
So I very much doubt the shares have anything to do with the offices or other physical aspects of the business, just the 'brand'.
Are you sure? Either the company owns them or the Directors do in a personal capacity.So I very much doubt the shares have anything to do with the offices or other physical aspects of the business, just the 'brand'.
What you may find is that the Directors own the buildings though a SIPP and lease them to the company. Not a red flag per se, but if the sites are important it does mean that you need to understand more about the terms associated with this (especially whether or not they are protected tenancies).
Personally I'd be expecting that ordinary shares would include the assets of the company rather than "brand and goodwill" unless other assets and liabilities have somehow been explicitly and properly carved out.
Where you end up with the biggest difficulty is around valuation. It feels like a high multiple for a company with such high turnover - unless the profit figure is being very aggressively managed - where slight margin compression could flip from profit to loss...
Lord Marylebone said:
I have no doubt the directors, assistant directors, and owners, will be 'managing' the profits, and being paid out in other ways such as the rents on the office buildings, generous salaries, bonus schemes, expenses, company cars, and so on.
That is absolutely fine, I understand it, and I would be doing the same. I did do the same when I owned my own business.
You might have done the same when you owned your own business but here it would be happening inside a business that you would own a material share of, but outside your control. Frankly I would not be OK with such an arrangement where I'm "inside the tent" when someone wants to sell shares at an potentially high valuation, but no longer seen as an owner when the spoils are being shared out. If you were a passive, external investor, then you probably wouldn't like it much either. To me, the question I'd be asking would be more along the lines of where on the spectrum between buying a seat at the table (as you would with a partnership) at one end, and passive money at the other, this is intended to sit...That is absolutely fine, I understand it, and I would be doing the same. I did do the same when I owned my own business.
10% shareholding is a fair bit for a non-director employee. Even if you don't want to sit on the board as a Director, you should probably push for increased information. It's common where there are small shareholders for them to collectively have the right to appoint a representative to act as a Board Observer or Director. You could raise this as something that is relevant to address earlier rather than later if there are other large shareholders looking to follow the same sale path.
Check also on restrictions around how and to whom you can sell the shares if you do proceed. Don't forget the practicalities around what you'd actually need to do in order to sell (for example, anyone considering buying will want access to information that the company probably deems confidential).
There's obviously a lot to consider, but if the company has good prospects it could turn out to be a smart move. Obviously only you can decide!
CAPP0 said:
the general guideline seems to be that the valuation of a company for sale is based on around 6x annual profit
Valuation multiples vary hugely between different industries.However, whether you are talking about EBITDA (i.e. a proxy for pre-tax and debt cash flow) or Net Income, 6x is pretty low in the current market environment and would only be appropriate for a low-growth / low-margin business, or particularly capital intensive or maybe with some other issue depressing the value (minority stake alongside a difficult founder etc etc).
Circumstances vary, but buying into my business was my best investment.
10 years later and we're 10x the headcount with a much increased valuation.
Your dividend vs. investment is good. As people said, net profit is highly open to manipulation.
Other posters have brought up many of the issues but in event of sale you are likely in a good position. If you could have 2questions answered with absolute honesty knowing a) is the business going to meander from partner to partner or be sold externally and b) what would happen to your shares in event of sale.
We are currently working at a 4-6x multiple of gross profit which increases beyond thresholds e.g. 4-6x is at £1m gross profit vs. the next threshold £2m etc.
Our business is openly looking to sell in 3-5 years and we are already touting for buyers. This level of transparency may not be feasible.
10 years later and we're 10x the headcount with a much increased valuation.
Your dividend vs. investment is good. As people said, net profit is highly open to manipulation.
Other posters have brought up many of the issues but in event of sale you are likely in a good position. If you could have 2questions answered with absolute honesty knowing a) is the business going to meander from partner to partner or be sold externally and b) what would happen to your shares in event of sale.
We are currently working at a 4-6x multiple of gross profit which increases beyond thresholds e.g. 4-6x is at £1m gross profit vs. the next threshold £2m etc.
Our business is openly looking to sell in 3-5 years and we are already touting for buyers. This level of transparency may not be feasible.
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