Value of 50% shares in Limited Company - Help!

[Stevebike87]

Good Morning,

Today my business partner resigned as managing director. He owns 50% shares, and still remains a director.

We looked at ways he could carry on with the business but we have decided to sell his shares so I can continue with the business on my own and try and make it work.

We sell bike parts and ship D2C. We have 60k in stock, 40k in further assets, 8k in the bank, 55k in debts, we don’t take a wage, we have no staff, and the company hasn’t turned a profit in a while.

Asset value of his shares I guess would be about £26.5k, but considering the company is not in a good position, I assume his shares are worth considerably less? I can’t pay for his shares personally, but I hope to negotiate a deal so the company will pay him off, by selling the shares back to the company. For this to happen, I still need to make sure the business can function and trade. If he takes a large sum of money now, the business will collapse. Even if we agree for a few years down the line, it’s not realistic, if I want to start taking a wage myself to keep the business going.

We are a limited company in the UK.

Any advice or ideas on share value and my options would be great.

Thanks,

Steve

 

[The Byre]

We have 60k in stock, 40k in further assets, 8k in the bank, 55k in debts, we don’t take a wage, we have no staff, and the company hasn’t turned a profit in a while.

This is how an outsider will see your company - Take a look at the fire-sale value of the stock and other assets and start thinking in terms of hours spent and wages you should be getting and the answer to your question about the value of your partner's share is almost certainly zero.

The best your partner can hope for is a modest (no more than £10k) paid over a couple of years.

The alternative is to fold and put all that stuff on eBay or wherever and maybe that will leave you both with +/- nothing.

Sorry to be such a wet blanket, but that is the realistic view that I, as an outsider and not knowing the details (e.g. turnover) must take.

 

[Alan]

Firesale value of stock and assts at 10%
£6k
£4k
Cash in hand
£8k

Total £18k

Debts
£55k

Value - £37k


'Trade Sale' of stock and assets at 40%'
£24k
£16k
Cash in hand
£8k

Total £48k

Debts
£55k

Value - £7k


I think either he gives you the shares for zero or you fold.

 

[cjd]

To an external buyer, your company as a business worth almost nothing I'm afraid, if it can't make a profit without paying a salary it's worthless.

But it might be worth something to you if you think you can make a go of it. You could offer him a few thousand for the shares but no more. Otherwise shut it down, sell the assets, pay off the debts and if there's anything left start again.

BUT, the important question first of all, do you have a shareholder's agreement?

 

[Stevebike87]

Thanks for the responses guys. It seems to be in my favour that he won't walk away with too much, and won't affect the business moving forward. I see potential in future growth, so it seems a good time to sell his shares, in favour of me as I will be taking on a large risk continuing. I don't want to fold, and happy to pay him off if we can agree on a sum.

One issue we have noted is that he will be pushing for a valuation on intangible assets such as:

website domain
social media accounts (Facebook, Instagram, LinkedIn, TikTok, Twitter, YouTube)
client base: the quantity as well as considerations such as loyalty
market influence and market penetration
value of information and intellectual property obtained by the business, ie the means of production
the trademark
affiliated personel, ie the Ambassadors and the Athlete Team
growth potential of the brand
the media assets owned by eg video and photo content

It's a popular brand, if you were to look at it, but can that account for much?

I have asked our secretary for all official agreements and she says we only have the articles of association which are pretty standard. So no, I don't believe we do.

 

[WaveJumper]

@cjd took the words right out of my mouth first things first reach for the shareholder's agreement. You mentioned that you looked at ways for him to continue in the business is there reason why this is not possible

 

[WaveJumper]

Thanks for the responses guys. It seems to be in my favour that he won't walk away with too much, and won't affect the business moving forward. I see potential in future growth, so it seems a good time to sell his shares, in favour of me as I will be taking on a large risk continuing. I don't want to fold, and happy to pay him off if we can agree on a sum.

One issue we have noted is that he will be pushing for a valuation on intangible assets such as:


It's a popular brand, if you were to look at it, but can that account for much?

I have asked our secretary for all official agreements and she says we only have the articles of association which are pretty standard. So no, I don't believe we do.

Can have all the tangible assets you like but the bottom line is the business has not turned a profit as an outsider why would I see any value in these.

 

[Stevebike87]

I terms of him continuing in the business. It could be possible, but at the minute I can't see a way it would work. He doesn't enjoy the job, we don't get on, our directions are different, it'll be much easier if I continue alone, and he is happy to sell his shares to allow this.

Noted about the intangibles. I can see this being the issue when it comes down to making a deal. It'll be hard to argue about the tangibles that are on paper, but the intangibles will be difficult.

 

[Stevebike87]

We do have a shareholders agreements, it's all in the articles of association, which I am reviewing now.

 

[The Byre]

Noted about the intangibles. I can see this being the issue when it comes down to making a deal. It'll be hard to argue about the tangibles that are on paper, but the intangibles will be difficult.

Just because you have created a shed-load of multimedia content does not mean that it is worth anything. Intellectual property only has value if it helps a company with the making of profits.

The hard truth is that most of the sport and fitness market has failed to take advantage of the various C19 lockdowns and online sales are disappointing, to say the least. (Just look at the disastrous performance of Peloton and their stupid clothes rack with an iPad bolted on! They are losing vast sums of money, hand-over-fist!)

It's a popular brand, if you were to look at it, but can that account for much?

If it were genuinely popular, it would be profitable, or at least you would have interesting turnover figures and market share to report.

The brand and the company may or may not have 'potential' but right now, people are worried about the future (and rightly so!) They are cutting back on needless expenses and bracing themselves for high inflation, higher taxes and a loss of purchasing power.

 

[Stevebike87]

Thank you. Reassuring to hear (in terms of this sale at least). Much appreciated.

 

[cjd]

He's walked away from the company and his responsibilities to it and expecting you to compensate him for it - if the company was profitable with positive net assets, he might be in a position to negotiate, otherwise not really.

If you threaten to do the same he might understand that point as the company has no real external value. Ask your accountant informally for a valuation - that might help too.

Intangible assets can be ignored if the business itself is not a going concern - a company that can't pay either dividends or salary is not a going concern.

 

[Stevebike87]

Great points thank you very much

 

[Chris Ashdown]

You are under no obligation to buy his shares, he can resign and still keep his shares hoping you can make a profit in a few years and pay a dividend

Presumably the shares are 50/50 no nobody has a controlling interest he cannot fold the company without I think 75% of the shares, but could be wrong.

You could based upon figures above make say £2000 per year to him to slowly buy his shares whilst still not killing the company

Fireside auctions are very poor returns unless you are very lucky, selling fees vat and your 10% or so is all you are likely to get on the cost you brought the goods at

Are your assets and goods values at selling price or cost price, selling price is irrelevant as any buyer would buy from the suppliers at wholesale price

 

[Stevebike87]

Cheers Chris. Correct, 50/50 split. Assets and goods at cost price.

Your top point is interesting, but he is "refusing to relinquish the entirety of the decision-making power that accompanies the role of a Director in the company" and wants to have a say in all financial matters until a sale is complete. I understand why he would say that, I would do the same. My only worry is that this is going to limit what I can do with the business until a sale is confirmed. All financial matters covers alot...

I wonder what other people think of this too

 

[UKSBD]

Start new company

Buy all stock and assets at a realistic firesale value £10k

If you are brave enough and think you can do it legally extract £9k each

Spongebob the business

 

[MikeJ]

The company's not insolvent, so you can't "Spongebob" it. And assuming the debts are to his current suppliers, you really don't want to upset them ahead of starting a new business.

 

[Stevebike87]

The company's not insolvent, so you can't "Spongebob" it. And assuming the debts are to his current suppliers, you really don't want to upset them ahead of starting a new business.

true

 

[NickGrogan]

Thanks for the responses guys. It seems to be in my favour that he won't walk away with too much, and won't affect the business moving forward. I see potential in future growth, so it seems a good time to sell his shares, in favour of me as I will be taking on a large risk continuing. I don't want to fold, and happy to pay him off if we can agree on a sum.

One issue we have noted is that he will be pushing for a valuation on intangible assets such as:


It's a popular brand, if you were to look at it, but can that account for much?

I have asked our secretary for all official agreements and she says we only have the articles of association which are pretty standard. So no, I don't believe we do.

55k in debts, we don’t take a wage, we have no staff, and the company hasn’t turned a profit in a while.

If the company can't pay either of you, anyone else, or make a profit then how would the intangible "assets" have any value?

Presumably, you've been trading for a while, what is going to change in 2022 that's going to make the business profitable and why didn't you do it before?

 

[Stevebike87]

If the company can't pay either of you, anyone else, or make a profit then how would the intangible "assets" have any value?

Presumably, you've been trading for a while, what is going to change in 2022 that's going to make the business profitable and why didn't you do it before? Can this value be decreased legally anyhow?

True, to an external buyer 0 value.

But what about the roughly £26.5k in asset value that would technically be his as he owns 50% of the business? I cant pay that, business can't pay that either without folding

 

[cjd]

Have you done a business case so that you can show that the business can actually work?
You've been trading so you know your costs and income - what are you going to change to make this work? It must be something really significant if it's loss making without paying salaries.

 

[Alan]

True, to an external buyer 0 value.

But what about the roughly £26.5k in asset value that would technically be his as he owns 50% of the business? I cant pay that, business can't pay that either without folding

Well the value is zero. So 50% of zero is zero.

If he wants out the he has to give you the shares at zero and resign as a director.

He can keep the shares 50% of nothing and resign as director, if so If you don't like the idea of working for nothing in order that at some point your other shareholder MAY benefit from future profits, then you can resign as a director and employee too and keep your 50% of nothing, or give them to the other shareholder, and the company will eventually be put into liquidation by the creditors.

Another alternative, he can try an sell his 50% shares to another party, good luck with that.

I may be slightly wrong here, but I don't think I'm too far wrong.

This is the way I would approach the conversation

"The company is worth nothing, we can either fold it or you can give me your shares and I'll just see if I can make it work on my own'

A simple choice for the other guy, get out or be involved in folding it.

 

[Ozzy]

Picking up on the earlier comments I think it's established that the business doesn't have any real book value; so I guess the real question is...what is his 50% worth to you @Stevebike87 ?

Then before handing over that money, which you might have to be prepared to take out a bank loan to pay; what could you achieve with that money in your bank if you walked away from this business?

There is a point where it isn't worth it and only you really know what that point is for you.

 

[NickGrogan]

True, to an external buyer 0 value.

But what about the roughly £26.5k in asset value that would technically be his as he owns 50% of the business? I cant pay that, business can't pay that either without folding

The assets aren't worth the figures you've used. That's what you paid for them, not what they are worth today.

If you had to sell everything by the end of the day, what would you get?

we don’t take a wage, we have no staff, and the company hasn’t turned a profit

Does this mean that you're selling the product for what it's costing you? Not making any money at all?


Or is the profit going elsewhere?

 

[Stevebike87]

Well the value is zero. So 50% of zero is zero.

If he wants out the he has to give you the shares at zero and resign as a director.

He can keep the shares 50% of nothing and resign as director, if so If you don't like the idea of working for nothing in order that at some point your other shareholder MAY benefit from future profits, then you can resign as a director and employee too and keep your 50% of nothing, or give them to the other shareholder, and the company will eventually be put into liquidation by the creditors.

Another alternative, he can try an sell his 50% shares to another party, good luck with that.

I may be slightly wrong here, but I don't think I'm too far wrong.

This is the way I would approach the conversation

"The company is worth nothing, we can either fold it or you can give me your shares and I'll just see if I can make it work on my own'

A simple choice for the other guy, get out or be involved in folding it.

Noted thank you.

I would love it if the conversation went that easy, but I doubt he will leave with nothing, or just make life very difficult until he does. I'm 100% committed to making the business work without him on my own.

If I tell him to try and sell to an external party, when he comes back with no luck, it could put me in a better position.

Obviously to get nothing out of him with all the above arguments will be my number 1 move, then perhaps offer him a fee to get rid of him that is paid over a set amount of years.

 

[Stevebike87]

Picking up on the earlier comments I think it's established that the business doesn't have any real book value; so I guess the real question is...what is his 50% worth to you @Stevebike87 ?

Then before handing over that money, which you might have to be prepared to take out a bank loan to pay; what could you achieve with that money in your bank if you walked away from this business?

There is a point where it isn't worth it and only you really know what that point is for you.

Good points to think about, something I will mull over!

Bank loan, or could the company pay it over the next few years perhaps?

 

[Ozzy]

Bank loan, or could the company pay it over the next few years perhaps?

The company could, perhaps, but what would you personally be prepared to get yourself into debt for (perhaps even secured on your family home)?
Having that as a barometer is a good way to help focus your mind on how far you are prepared to go for this business.

 

[Stevebike87]

The assets aren't worth the figures you've used. That's what you paid for them, not what they are worth today.

If you had to sell everything by the end of the day, what would you get?



Does this mean that you're selling the product for what it's costing you? Not making any money at all?


Or is the profit going elsewhere?

Good way of putting it. Perhaps half that amount. Thats changed my way of looking at that thank you.

We've just been re-investing in stock. We are also due to make a fair amount of money from events, which when covid clears off will all be back in progess, but has been putting a damper on things.

 

[Stevebike87]

The company could, perhaps, but what would you personally be prepared to get yourself into debt for (perhaps even secured on your family home)?
Having that as a barometer is a good way to help focus your mind on how far you are prepared to go for this business.

Cheers Ozzy. Noted

 

[Financial-Modeller]

Without knowing the terms of your shareholder's agreement, he can sell his shares to whoever he wants, so invite him to do so.

The value to you of buying his shares is basically the cost to you of closing down and opening a NewCo to continue to operate from without his directorship. Probably a couple of thousand pounds.

If he thinks that his 50% is worth more than that, ask him how much he would like to pay you for your shares! The answer to that question will be illuminating. If its significantly higher, you've missed something that he hasn't.

 

[The Byre]

Right now, neither of you is earning so much as tuppence and the realisable value of the company to an outsider is either nothing or very little.

The value of a company of any sort is (a) the actual market value of any assets (b) a multiple of profits, (c) minus all liabilities.

Bearing in mind the salient fact that at least one director has to work for the company, selling stuff and doing admin and marketing, that person should be earning money and that is a liability. It belongs in the P&L. Even if that activity is only part-time, a figure has to be included in the P&L - like it or not!

Right now, the two of you are subsidising this turkey and that is neither sustainable nor is it being realistic.

Both of you would be better off if the company was not there - that (whether he likes it or not) is the bottom line.

By trying to walk away, but wanting his 'share', he is tacitly admitting that the company is not viable as things are right now.

Imagine I was thinking of buying your company. The alternative would be to start a similar company. Why would I buy it? What is it that I get? Does it have any meaningful turnover? The answer seems to be no. Does it have valuable assets? That seems to be another no. I can import sports articles from the Far East at stupidly low prices, even today.

Because an outsider would have to sink large costs into your company to get it up and running again (appoint a manager, oversee the books and the running of the company, buy new stock, fix/replace the website, make decent videos, find warehouse space and a thousand other things) any value you place on the company pales into insignificance when looked at with sober business eyes.

If you really want to hang onto this turkey and turn it into an eagle, offer him a small amount to be paid over a couple of years. He will of course refuse a profit-share because he knows in his heart-of-hearts that the company is never going to be profitable in its present form and will need considerable investment (time AND money) to turn it around.

Good luck and let us know how you get on!

P.S. Pay close attention to what @Financial-Modeller has written above! He is spot-on (as usual!)

 

[Stevebike87]

@Financial-Modeller & @The Byre thank you! Well received and noted!

I shall keep you updated.

 

[Stevebike87]

I was going to pay a lawyer at £300 an hour to review my case and support communications, but i'm now trying to work out if I need to or not! I think if i just get an accountant to review the company so I have that in preparation, I can then use the information on this forom to develop a good supporting argument myself. Thank you all.

 

[Alan]

Just FYI a few years ago I bought a 'business' in a similar state - except it did pay the director £8k a year, no debts.

It had £40k of assets at cost which I paid £20k for and I paid £2k for the website, brand assets, customer list and goodwill.

With hindsight I over paid for the assets, should have paid closer to £10k.

( remember no debts here )

 

[Stevebike87]

Just FYI a few years ago I bought a 'business' in a similar state - except it did pay the director £8k a year, no debts.

It had £40k of assets at cost which I paid £20k for and I paid £2k for the website, brand assets, customer list and goodwill.

With hindsight I over paid for the assets, should have paid closer to £10k.

( remember no debts here )

Thanks Alan, good to know.

 

[Chris Ashdown]

How much of the assets have sat on the shelf for years

How good and how much money will you have to market the new company. If you steal his customers he can sue you unless its done after a few months of you leaving

The Big question others have asked before is "what would you do differently to make a profitable business that pay a good wage, and why have you not done that already with the old company". If you just changing company our kidding yourself the grass is greener over the hill

 

[Talay]

I look at maybe 30 to 50 companies a year and usually I buy one a year. I throw out 90% straight away as being pure lies and worth next to nothing. I visit perhaps 10 a year and get into negotiations with 2 or 3. I walk when I smell the bull that comes with most small business sales.

I'm often criticised for saying that a business is only really a business if you can walk away and it continues to operate profitably. If it needs you there, it is a job. Nothing wrong with buying a job but don't pretend it is a business.

Yours is neither a job as there is no salary nor a business as there is no profitable business. To an outsider, it is worth zero. Truthfully, it is worth less than zero.

However, you cannot continue trying to make this company work without a salary so award yourself £100k a year and push that through the accounts. Of course, as he has resigned, he has no job and must wait for dividends that will never arrive as your salary will always grow to max out any profits.

If you really need a deal to get him out, then a couple of grand now as a goodwill gesture is it. Alternatively, he agrees you need a salary to continue and you draw up a deal where he gives you the shares and he gets 50% of profits after you have drawn down £50k or whatever a year.

 

[The Resolver]

We do have a shareholders agreements, it's all in the articles of association, which I am reviewing now.

Whatever is in the Articles of Association , it cannot amount to a Shareholders Agreement (SHA) These are different animals. A SHA is a mutual agreement signed by ALL shareholders and binding on each fo them personally. Further it can only be amended with the Agreement of all shareholders

In contrast the AoA does not need the agreement of all shareholders howver they are bound by its rules by virtue of its status as the AoA. If you do not submit an AoA on registration of the company then the Model Artciles are imposed by default. But no agreement to such is required. Often, company formation companies impose their own bespoke AoAs that Directors often do not read. If change is sought the AoA only needs the agreement of 75% of the shareholders. So whilst the AoA can govern whether you agree with them or not, the SHA cannot govern without you sprcific signed agreement.

Now I appreciate that in a 50/50 company , the difference is less dramatic since change of either type of document effectively needs 100% but I wanted to clarify for readers generally.

It is also important to understand that whereas the AoA is a public document that anyone csn obtain and read from Companies House the SHA is a private document . This is very important because the SHA is where you place rules you do not wish the public to see, eg whether a shareholder can be forced to sell his shares and how valuation is obtained, usually by determination of a third party valuer (as well as the method of valuation including whether or not to apply a minoroty/50% discount).

So it is vital to understand what it is within the AoA that can be of help here. If its the Model Artciles they will be of no help. If you PM or email me the name of the company I iwll have a look at the AoA . Book in a free 30 mn advice call (see below) and I can talk you through anything of relevance and also advise you into how to negotiate the best direction for you.