Negative Shareholders' Funds

[Exclusive]

Hi,

I'm looking at a Companies House document which is an Annual Accounts Report for the year ended 2010.

The business has made a profit, albeit small.

The 'Shareholders' Funds' is showing (26,000) so Negative 26k.

The business though, has a positive Business Bank Account.

Could somebody explain this to me? Can that negative amount be struck off? I'm looking at buying 50% of the business (I know that it's a struggling company and I can improve it and this is my first business investment, due to the business being owned 100% by a family member) Or does the business need to make the 26k back before any dividends can be made?

Any shedding of light...would be great

Regards

Jim

 

[internetspaceships]

It means that the company has £26,000 more debts than assets.

i.e the net worth is negative. There are acceptable reasons for this as far as I'm aware however don't think you'll get credit terms offered. It's one of the major factors that risk assessors look at.

What loans do they have - what mortgages do they have?

If you're looking to buy a business you need to be at the point where you can read and understand a set of accounts, otherwise you'll end up "in the poo."

If it's a family member why do you need to look it up on Companies House? Can't you just ask for the books?

You need to be asking him/her why it's negative.

I think you need to do a lot more homework on the business, and also the actual running and understanding of one before jumping into this with both feet.

Blunt but honest I am. (in a Yoda voice)

 

[Exclusive]

I could have just asked and I will ask with regards to this no problem at all.

The business only pays rent, some support and contracts for certain things. The only thing is a 7,000 loan currently outstanding which was for new I.T Equipment.

So would I be right in saying, once that loan is gone and say the business has 10k in the bank account, does that mean a dividend payout can be made, or does the business need to get past the 26k mark before any dividends?

 

[Chris Ashdown]

Dividends can only be made when the company is in profit

Don't forget there are other ways for debt to be hidden on the balance sheet like lease of equipment

 

[Truemanbrown]

I could have just asked and I will ask with regards to this no problem at all.

The business only pays rent, some support and contracts for certain things. The only thing is a 7,000 loan currently outstanding which was for new I.T Equipment.

So would I be right in saying, once that loan is gone and say the business has 10k in the bank account, does that mean a dividend payout can be made, or does the business need to get past the 26k mark before any dividends?

A dividend can only be paid out of profits. If there are no profits there can no dividends (legally) paid!

 

[Exclusive]

Maybe I'm missing the mark here.

Once debts have been paid off (as far as I am aware the business only owes about 7000). So once that 7000 has been paid, can we start to pay dividends?

What does that 26k Negative Shareholders' Funds mean?

Regards

Jim

 

[Jenni384]

Maybe I'm missing the mark here.

Once debts have been paid off (as far as I am aware the business only owes about 7000). So once that 7000 has been paid, can we start to pay dividends?

What does that 26k Negative Shareholders' Funds mean?

Regards

Jim

No.

You have to make £26k of profit to cancel out the £26k loss.

Then you can pay dividends from any future profits after that.

It has a long way to go to be able to pay dividends, depending on how quickly it can move into profit.

 

[Jenni384]

Also:

Shareholders funds will typically be made up of share capital and any retained profit (or loss).

Typically companies will have £1, £100 or £1000 of share capital. The balance of the £26k will likely be a loss. It's the loss element (the retained profit) that you need to cancel out and move into a positive figure.

 

[Exclusive]

Also:

Shareholders funds will typically be made up of share capital and any retained profit (or loss).

Typically companies will have £1, £100 or £1000 of share capital. The balance of the £26k will likely be a loss. It's the loss element (the retained profit) that you need to cancel out and move into a positive figure.

So in the future, if for example the business made say £1000 profit, even though all the current debts are gone, because of the retained loss of 26K that will bring it down to 25k?

So once the business has made a profit of then 25k, anything over and above can be paid out in shares?

Don't get me wrong, I'm looking for a long term sustainable income etc so will do everything I can (should I decide to go ahead) to make sure everything is done properly down to the last dot.

This doesn't necessarily mean the business has to have 26k sitting in the bank though before anything can be paid out?

Thanks for all the help so far

 

[internetspaceships]

Can I ask what the annual turnover was on the books that showed the (26,000) figure please?

 

[Jenni384]

So in the future, if for example the business made say £1000 profit, even though all the current debts are gone, because of the retained loss of 26K that will bring it down to 25k?

So once the business has made a profit of then 25k, anything over and above can be paid out in shares?

Don't get me wrong, I'm looking for a long term sustainable income etc so will do everything I can (should I decide to go ahead) to make sure everything is done properly down to the last dot.

This doesn't necessarily mean the business has to have 26k sitting in the bank though before anything can be paid out?

Thanks for all the help so far

Yes, that's right.

Ignore loans, other creditors and bank balances. In terms of what you can pay out of dividends, you just look at the bottom half of the balance sheet.

The balance in the bank is not profit, it's just cashflow and is affected by lots of other factors as well as profits.

I say ignore creditors - obviously dividends should only be paid responsibly and if other people are owed money that should be taken into account before making payments to shareholderse, but generally speaking, what I said above goes

 

[Alan R Price]

I may have missed it but I can't see that anybody has used the term distributable profits yet. Dividends can only legally be paid out of distributable profits, i.e the cumulative total of net profits, after tax, which are retained in the balance sheet from year-to-year - usually shown as a separate line, "Profit and loss account", in the "Capital and Reserves" section.

 

[Exclusive]

Here is some info for you....

Thanks for all your help guys and girls

 

[Truemanbrown]

Has we have said before, the company needs to make post tax profits of £25,878 before you could even consider declaring a dividend.

For a company of this size, the administrative expenses are high especially in 2009. I suspect that the current owner/director paid himself a high salary in 2009 and in previous years, most of which is now shown as a director's loan account within Creditors Due With One Year.

By the way, the 2010 Balance Sheet does not balance.

The accounts show capital and reserves as follows:-

Share Capital-----------------100
Profit & Loss Account-----(25,658)

Total---------------------(25,758)

Clearly the Profit & Loss Account should be £(25,858)!!!

And there has been no accounting for deferred tax which with taxable losses of around £25,000 would reduce the profit and loss account losses by around £5,000.

 

[Scalloway]

The figures that leap out are

1. Admin expenses. They are nearly as much a turnover in 2010 and far more in 2009. Why?

2. The creditors figure is nearly as much as turnover. Why?

If you could double turnover without increasing overheads you would clear the negative profit and loss in a year but to my mind you'd be far better to wind this company up, buy the assets and start from scratch.

 

[Exclusive]

Thanks for your input, I appreciate you spending the time helping me on this one. I really do

If you could double turnover without increasing overheads you would clear the negative profit and loss in a year but to my mind you'd be far better to wind this company up, buy the assets and start from scratch.

How could this be done? I think there are contracts that still have 3 years left for support/maintenance etc?


In terms of paying a high salary/wages. The director has paid themself £135 a week and has done for the past 4 years, the two staff members who only work two and three day weeks, get more than that.

 

[Truemanbrown]

For a business of this size, the overheads are very high. Although, there has been a major cut in overheads in 2010, you would still need to make cuts. Do you have a copy of a detailed profit and loss account?

 

[Philip Hoyle]

You need to find out who it owes all that money to (£29,888). Probably to the current directors/shareholders on their loan account. That's why it's £26k in the red. Have they put private money into the company to cover it's prior year losses? Do they want it back or are they content for it to be written off? If the loan is only £7k, then it suggests the directors loan is around £20k.

 

[internetspaceships]

I can't see much positive about this business from the accounts OP.

 

[Scalloway]

How could this be done? I think there are contracts that still have 3 years left for support/maintenance etc?

I am not an expert on winding companies up but I would guess as there is assets and money in the business you would need to appoint a liquidator who would be paid from the funds of the company being wound up.

 

[Truemanbrown]

I am not an expert on winding companies up but I would guess as there is assets and money in the business you would need to appoint a liquidator who would be paid from the funds of the company being wound up.

On average, a liquidator would cost about £4k!

 

[Tom McClelland]

Guessing from the accounts, 50% of that business would only be worth a very small sum. And that would be contingent on understanding why the business isn't currently making any money and having the control (51% would be much more useful than 50%) to do something about it. No use putting in the money to own 50% and then the other shareholder blocks your attempts to change things. Ongoing contracts need to be checked out, but based on the accounts they don't seem profitable, since the business hasn't been making any money.

If you know how to make such a business work you might be better off putting your money and effort into starting one yourself rather than buying into an unprofitable going concern.

Just my free 2p and your knowledge of the circumstances of the business may make some comments irrelevant.