Loan to buy a stake in company?

[Deleted member 128967]

I have been offered to buy a stake in the company I work for however the stake will cost 40k, I understand banks are reluctant in giving out loans in current climate however the company has been trading for 11 years and has turned over profit each year and still shows signs of growth. With proof of this in forms of the accounts do you think I will have any problems in getting this loan or has anyone had any experience in getting one for this purpose?

Thanks

 

[Tom McClelland]

I'm afraid that I wouldn't expect shares in a minority stake in a business to be regarded as adequate protection for a lender. They don't want to own a minority stake in your employer's business if you struggle to repay the loan. Do you have any other security you can offer them, such as equity in property?

Or might there be a more tax-efficient way to structure the deal all round, such as taking a reduced salary in return for the equity share?

 

[bizloanservices]

The key question the bank will ask is how you intend to pay the loan back. Do you have sufficient surplus income to pay the monthly amount? The would discount any dividends which may be payable because they can be switched off at any time.

As Tom has mentioned, the bank will be looking for security from you. The profitability of the business will be of little concern to them - your personal ability to repay is what they will be looking at - this is purely a standalone transaction.

If you have good credit history and equity in your house (assuming you're a home owner), you could consider an additional mortgage to fund the purchase.

However, before all this, you must consider the risk you are entering into. As an employee do you really know what is going on? What is the underlying reason for the cash-call? Is it emergency funding? Or this there a new project/development which needs funding and the company's shareholders have decided to let employees in on it?

Before the 'how' step back and consider the 'why'.

 

[Chris Ashdown]

You need to understand fully any shareholders agreement that may be in place and also what a minority shareholder involves

For a 40% holding you should be offered a directorship and need to fully understand the legal requirements to do this duty

As before why are they offering to sell 40% at £40,000 you would need to see the full accounts and talk to a independant accountant if you are not familiar with accounts, I would suggest doing this anyway

Somewhere on the forum is a list of what % of shares entitle people to do as shareholders, but normally 51% GIVE THE PERSON THE RIGHT TO DO WHAT THEY LIKE IN MOST CERCUMSTANCES

Dont be carried awa by he offer, £40,000 is a lot to lose, and your position in the company will change even if not a Director, and if fired you could well lose control of your investment or be forced to sell the shares back at a lower price

 

[Deleted member 128967]

thanks for the replies,

The offer is to become a director and the stake is 25% so therefore there will be 4 directors each holding the same amount of the company. My pay would be more than doubled and I was intending to pay off the loan in large monthly chunks by basically earning same as i do now and using the extra wages to pay the loan for e.g if was paid 1k per month now and 2.2k if i were to become a director iwould pay off 1.2k per month of the loan and still take home 1k, therefoe in 3/4 years whan the loan has been paid off i will be earning double what i am now!

I have had access to the accounts and have had an accountant look at them and say they are all good, it is just whether i could get the loan now. Partner doesnt want me risking any of home against it so thats not an option.

 

[smo]

You are highly unlikely to get any loan from a bank without putting up extra security....this is generally your house.

I recently asked the bank for a mortgage to buy our own business premises, we have 19 years profitable trading history and have had business mortgages in the past that were cleared without problems. Our accounts and credit is good - the answer was no, unless I was willing to put my family's house as security. This for me was a big no no, never risk the family home for anything so we are still renting. Daft really but banks are ultra cautious.

 

I have been offered to buy a stake in the company I work for however the stake will cost 40k, I understand banks are reluctant in giving out loans in current climate however the company has been trading for 11 years and has turned over profit each year and still shows signs of growth. With proof of this in forms of the accounts do you think I will have any problems in getting this loan or has anyone had any experience in getting one for this purpose?

Thanks

I would ask why does a profitable business need 40k?

Earl

 

[smo]

I would ask why does a profitable business need 40k?

Earl

Maybe they dont.

Perhaps they see him as an asset and wish for him to have a stake but dont wish to give it away, hence the offer to sell him one. A bit like partners in a GP practice, you buy your way in if they select you to work with them.

 

[Chris Ashdown]

If the company want you to become a Director and are not in a hurry to need the £40,000 then they could sell you the shares spread over the 4 years you suggest, so at the end of the first year as a director you give them £10,000 for say 5% of shares, then following year another 5% and last year for the remaining 10%

Alternativly they give you 25% in unpaid for shares and you buy them over the 4 years

Only really works if they want you rather than the money now

Share voting rights could be drawn up to exclude unpaid shares

Whatever happens you still need to have a shareholders agreement you can live with

 

[bizloanservices]

thanks for the replies,

I have had access to the accounts and have had an accountant look at them and say they are all good ...

You've mentioned a couple of times that the accounts are 'good' but be reminded of the standard investment advice 'past performance is no guarantee of future returns'.

Just because historical trading has been profitable there is no guarantee this will continue. How up to date are the accounts? In the majority of cases, whenever I'm given a set of accounts, they are usually 5 to 7 months old i.e. well after the year-end ... a lot can happen to a business in that time.

You need to be asking for the latest Management Accounts (a warning sign if not available/not being produced on regular basis) and Profit and Loss/Cash Flow Forecasts. Also their Business Plan would be good; you need to understand where the business is heading.

In summary, don't just rely on historic accounts ... be more forward looking.

 

[Tom McClelland]

If the company want you to become a Director and are not in a hurry to need the £40,000 then they could sell you the shares spread over the 4 years you suggest, so at the end of the first year as a director you give them £10,000 for say 5% of shares, then following year another 5% and last year for the remaining 10%

Alternativly they give you 25% in unpaid for shares and you buy them over the 4 years

Only really works if they want you rather than the money now

Share voting rights could be drawn up to exclude unpaid shares

Whatever happens you still need to have a shareholders agreement you can live with

Some kind of deal like that is what I was wondering about.

Some posters complained that banks won't lend without taking the family home as security (presumably in the absence of any other hard security being offered). What they have to ponder is their own commitment. If they're sufficiently uncertain about the deal that they're not prepared to risk their house why should the bank (which has far less control over the success and prospects of the deal than they do) take a risk without adequate security?

Putting up your house isn't just about the security. It is a measure of your confidence that the deal is sound and the bank will get their money back. Why would a bank touch a deal that a borrower (with assets) can walk away from unscathed if the deal goes sour?

 

[smo]

Some kind of deal like that is what I was wondering about.

Some posters complained that banks won't lend without taking the family home as security (presumably in the absence of any other hard security being offered). What they have to ponder is their own commitment. If they're sufficiently uncertain about the deal that they're not prepared to risk their house why should the bank (which has far less control over the success and prospects of the deal than they do) take a risk without adequate security?

Putting up your house isn't just about the security. It is a measure of your confidence that the deal is sound and the bank will get their money back. Why would a bank touch a deal that a borrower (with assets) can walk away from unscathed if the deal goes sour?

That poster wouild be me then!!

My specific complaint is that it was for a mortgage, a loan which is secured on the property being purchased. Why on earth should I offer up another building as security as well??

 

[Tom McClelland]

My specific complaint is that it was for a mortgage, a loan which is secured on the property being purchased. Why on earth should I offer up another building as security as well??

A perfectly reasonable point. I missed that your loan was itself a mortgage.

And I don't know where I got the other posters with the same complaint from... Except that the complaint, "The evil banks won't lend to me without security!" is quite a common one here but it hasn't been made elsewhere in this thread. Apologies.

 

[Rhodes100]

The first point I would like to make is that you have accepted the valuation placed on these shares by the current directors. You have not even questioned whether this valuation is reasonable. The business would need to be highly profitable for this valuation placed on the shares.

Get an independent valuation before you waste any money, and use that as a negotiating tool.

Are these new shares, in which case it is new money going into the company, what do they intend to do with it?

If the shares belong to another existing shareholder then clearly no money will be going into the business but the current shareholders back pocket, it would seem to me that they could finance the purchase and allow you to pay for them over a period of time if they desperately want you on board.

 

[philbate66]

i personally wouldnt try the banks in this climate as they will want some sort of security.
i would try a mortgage/commercial mortgage lender as these are more leniant than the banks and you would have more chance of getting what you want without risking anything.

this company are pretty good they search for your needs and get the best mortgage/loan you need just enquire through the website pm me for url you havnt lost anything

all the best
phil

 

[Andy Alderson]

There's some decent advice here but not much that is going to help the OP with his question!
One thing you might want to look at is the tax relief that you would get under the EIS scheme (Enterprise Investment scheme) Thsi allows any private investor/employee to invest in any shares that are issued after 06/04/2009. And claim, from April 2011, 30% tax relief . Th emax amount invested is £500k and the min £500.

This would mean that you could if timed right take out a longer term loan for £28k and a shorter term one for the 12k tax relief.

I know the co has been trading for 11 years, so to make sure that you comply with the fact that theshares have to be issued after april 2009 the company can issue new shares that are sold to you to make up a 25% stake .

I know this can be done because I did this a year ago with an employee/ inevstor and they are taking advantage of the EIS.

If the company are doing this for the right reasons IE you are a valuable member of the team and they want you fully committed and incentivised, thay may even be able to be creative and provide an employee loan for the tax relief amount . Ok there may be alittle bit of tax on this but it could be the solution that helps you with a large proportion of the funding needed.

If you google " enterprise investment scheme" there's a couple of uncomplicated PDF's in the few couple of results . You can always run this by a decent finacial advisor , but it's worth looking at.

Hope that helps and good luck!