Accounting advice

paulsturgess

Anyone on here know about accounting and specifically valuing companies? I've been offered opportunity to buy shares in my company but it's complicated and doesn't seem to stack up financially. Badly need some advice and wondered if there's a helpful fellow Addick out there who might be able to help me out in some way...!

cafcfan

cafcfan

I can't give you any advice. Merely say what I would consider.

It seems to me that there are two different things. One is getting freebie shares by way of bonus or option; the other is buying shares in the company you work for.

What's not to like about the former but what is the upside of the latter are the questions you need to ask yourself.

Personally I'd be very wary. If only because having both your investments and your employment all with the same business is very much a placement of all your eggs in the one basket. Worse, unless the company is listed, the shares will be very difficult to sell unless you are fortunate enough to seek out a matched trade and what would be the likelihood of that? Also do they pay out a dividend?

If an individual has money to invest the key is that diversity is king.

This link is an old American case on a mega scale which illustrates the issues. There have been similar instances in the UK but I can't find a link at the moment. Whatever, it's a cautionary tale. https://wsws.org/en/articles/2002/01/enro-j14.html

cafcfan

American again, but still worth a read. forbes.com/sites/lawrencelight/2013/01/14/the-riskiest-stock-to-own-your-employers/

Addicted

I agree with cafcfan in that unless there's an easy way to sell them and/or theres a decent annual return I's be very wary

Dippenhall

There is a difference between buying existing shares from existing shareholders and buying a new issue of shares.

A shareholder never sells his shares willingly unless he wants to get out before the value of the business falls, or is cashing in his profits, or is desperate for cash to keep the business afloat.

If it's new shares, it's could be because the business needs cash and doesn't want or can't get credit and cash flow means it can't service debt through issuing bonds. Issuing new shares "dilutes" the value of existing shares (e.g a £1m business divided across 100 shares is better than being divided across 150 shares) so existing shareholders only agree if the new cash is certain to increase returns, or they are desperate for cash to keep the business afloat.

A profitable expanding company will prefer to issue bonds (i.e you lend the company money for a fixed period for a fixed return), that way the business gets the cash it needs to expand without giving away any of the business and the profits made from investing the cash increases shareholder value.

Most shares acquired in a company you work for are given in return for your efforts and a means of getting your full commitment to work in the interests of shareholders, and a tax efficient alternative to bonuses.

I would look at the motives for inviting you to buy shares, if "buying" is what is happening rather than being gifted shares for work effort.

Deals can be complicated because the value of a business is entirely artificial but money is real. There will be terms on which you might be able to sell the shares back and what price that will be at and conditions that means you might even lose the shares for no compensation. Quite honestly, unless you are being gifted shares, you should not enter into a shareholder agreement without independent legal advice.

cafcdave123

I am currently buying into my companies employee share scheme and know about that but it sounds like you are being offered something different?

bobmunro

Paul, I would want to see the last 3-5 years P/L and Balance Sheet, and future order book if possible (although that depends on the nature of the business). I would also want to know what the company's plans are for using any funds raised by the share issue, what the issued share capital is and what class of share they are offering you.

If you get the answers to the above then any accountant would be able to value the company and by definition the value of each share.

P.S. I'm assuming it's a private company and therefore not quoted.

redman

There are a whole raft of issues that determine a fair value for shares. It would be helpful to know the sort of business, what sort of stake is being envisaged. In addition to Bob's suggestion some sort of future financial forecast would be useful; you are buying the future not the past. The past is important as it should give some sort of confidence about the future.
However even information request depends on sort of business; facebook would be valued very differently to Joe Bloggs the independent gardener!

Addick Addict

Why don't you ask RD? He must have some very creative accountants. How else would one explain the amount we paid for the likes of Polish Pete?

Bryan_Kynsie

Is it just you getting this opportunity or is there some sort of scheme - in which case get a copy and read the scheme rules and the tax consequences. Generally small minority holdings in unquoted companies are not worth very much at all unless there is a clear strategy for the sale of the whole shooting match in a reasonable timescale. Caution advised.

Also watch out for a number of tax traps in relation to employee share ownership.

paulsturgess

In answer to some of the questions above:

- yes it's a private company (consultancy so based on service / fee income rather than tangible assets);
- it's not a share scheme - I am being offered to purchase 10% of the company from the MD who is slowly selling out his shares (aged 66);
- it's complicated because there was a restructure 2 years ago where the "original" company was sold out by the 3 main original directors to a new company of 6 directors, including 3 of my colleagues who are 2 years older than me. They paid less than a quarter of what I paid but took on a huge debt to the old company, which has now dropped but there is still a significant amount on it. The issue is this means the dividends being paid out are poor at the moment;
- I'm not sure about how valid the valuation of the company is;
- If I buy in, the terms of the shareholder's agreement are that I am essentially tied in (minimum 3 years to get fair value back for shares and even then can't leave to another company for 2 more years).

It's a huge commitment and I have no money to actually put towards buying the shares - would essentially be taking a vendor loan which means ultimately I wouldn't potentially realise any dividends for 4 or 5 years - but after that I would then potentially be getting full dividends (as the debt would be cleared) and of course the company may (probably will) grow in the meantime too, hence an increase in value of the shares and if the company was ultimately sold as an entire entity I suppose I could realise significant profit.

It's essentially a "golden handcuff" I think. Anyone had a similar situation? Not sure whether to buy in now before the prices rise more and play it for the long-term, or try and negotiate a better salary / bonus scheme etc and keep my freedom to see how things pan out...

LenGlover

How confident are you in the abilities of the new board and how much of the Company's business is tied in to the 'goodwill' of the gradually retiring MD?

In my experience (accountancy) blocks of fees can be bought and sold but in reality a significant percentage of clients will bugger off elsewhere because their ties were with the vendor. Hence the importance of goodwill and confidence in the successors to get new business to replace the natural wastage.

cafcfan

paulsturgess said:

In answer to some of the questions above:

- yes it's a private company (consultancy so based on service / fee income rather than tangible assets);
- it's not a share scheme - I am being offered to purchase 10% of the company from the MD who is slowly selling out his shares (aged 66);
- it's complicated because there was a restructure 2 years ago where the "original" company was sold out by the 3 main original directors to a new company of 6 directors, including 3 of my colleagues who are 2 years older than me. They paid less than a quarter of what I paid but took on a huge debt to the old company, which has now dropped but there is still a significant amount on it. The issue is this means the dividends being paid out are poor at the moment;
- I'm not sure about how valid the valuation of the company is;
- If I buy in, the terms of the shareholder's agreement are that I am essentially tied in (minimum 3 years to get fair value back for shares and even then can't leave to another company for 2 more years).

It's a huge commitment and I have no money to actually put towards buying the shares - would essentially be taking a vendor loan which means ultimately I wouldn't potentially realise any dividends for 4 or 5 years - but after that I would then potentially be getting full dividends (as the debt would be cleared) and of course the company may (probably will) grow in the meantime too, hence an increase in value of the shares and if the company was ultimately sold as an entire entity I suppose I could realise significant profit.

It's essentially a "golden handcuff" I think. Anyone had a similar situation? Not sure whether to buy in now before the prices rise more and play it for the long-term, or try and negotiate a better salary / bonus scheme etc and keep my freedom to see how things pan out...

If you did realise a significant profit some time in the future, consider that you might well also get a significant capital gains tax bill too! (£11,100 allowance for the current tax year; thereafter either 18 or 28% tax.)

Covered End

I don't think you can take advice on here, for what you are asking.

As you say, you need to see a specialist in this field.

As private shares are not traded, they are potentially worthless.

A little bit like owning Charlton shares, when they were no longer a PLC.

Yes, they could earn you a fortune, but could earn you nothing. You need a buyer from somewhere, as there is no market to trade them.

Anyway, I'm confident you know all this anyway.

In summary, you need to speak to an accountant presumably, who specialises in these matters.

http://www.valuemybusiness.co.uk/?gclid=CKDlooqQ78YCFeHMtAodkB8FSA

http://www.investopedia.com/articles/fundamental-analysis/11/valuing-private-companies.asp

http://web.stanford.edu/dept/OOD/RESEARCH/top-ten-faq/how_do_you_determine_the_value.html

paulsturgess

Cheers both. Yes I am CE, just wondering if there was anyone on here who knew about accounting or had any experience of a similar type of thing and how they perceived it / how it worked out..

Covered End

I've just added some links above, after a google search.

paulsturgess

LenGlover said:

How confident are you in the abilities of the new board and how much of the Company's business is tied in to the 'goodwill' of the gradually retiring MD?

In my experience (accountancy) blocks of fees can be bought and sold but in reality a significant percentage of clients will bugger off elsewhere because their ties were with the vendor. Hence the importance of goodwill and confidence in the successors to get new business to replace the natural wastage.

In answer to this one I think the fee generation of the new firm is now largely derived from the current incumbents (and increasingly me); the MD started stepping back years ago. So I'm confident about it's stability, just a bit less so in it's future growth potential (and whether I even want it to grow significantly). My feeling is I'd rather not tie myself down (at the age of 29) for the long haul; but... I will probably end up sticking it out here for the foreseeable anyway and don't want to regret missing out if it's sold for a fortune in a decade!

Like any investment it's a gamble so there's no right or wrong answer at this stage.

CharltonKerry

I have been through this and you do need independent advice. We used a Charlton supporter who used to advertise at Charlton, his name and company name is Graham Sargent in Swanley his phone number is 01322 614681, I'm sure someone there can help you. You might not like what they say, but listen and take note, you will also need some legal advice as well. Be certain what type of shares you are buying, and what percentage, this is vital as dividends are paid by % of number of shares and voting rights. Good luck and make sure you get all the advice you can, most professionals will give you a free chat but you don't learn that much, so assume it will cost you.

IA

Buy high, sell low. That's my advice.