Selling a stake

[DuaneJackson]

A well known and well respected business figure has asked to have a metting with me next week with a view to possibly investing in my business.

If myself and my partner own 50% each of our limited company and the investor wants to buy a chunk, say 40% for £1m, so we each drop our shareholding to 30% - where does that money go?

Obviously it's being invested in the business to speed growth, but as the shares are owned by myself and my partner as individuals, wouldn't the money go to us instead of the business? Or would we take a nominal amount for our shares and the rest goes into the business?

 

[Enigma121]

Can't you just organise to issue more shares? That way his money goes in and you don't need to worry about stamp duty on transferring shares around.

Suspect the answer will depend on your Articles, so have a look at those.

40% would give your investor a controlling share, so you may want to consider decision making carefully.

 

[Alpha]

Duane

You have one of two choices.

You can issue new shares for the investment. The shares would have the same nominal value as the shares currently in issue with the cost over and above the nominal value being a share premium. The full value of the investment must then stay within the company

or

You and your fellow shareholder can sell a proportion of your shares. In this case the money belongs to the individuals that sell the shares, however, depending on how much is received for the shares, there may be capital gains tax to pay (In your example of £1m there would be a lot of CGT!!)

If the proportion of the shareholding becomes 30:30:40 then non of the shareholders individually would control the company and so for most resolutions it would require the agreement of two shareholders.

Of course you could issue new classes of shares that were non voting but still had full dividend rights, this may not be attractive to an investor.

On another point 40% is probably a high proportion of equity for a minority investment where there will be no involvement in the day to day running of the company. You should look more at around 25-30%.

 

[DuaneJackson]

Thank you, that makes it clearer to me now.

Regarding the percentage - there would have to be day-to-day involvement. We've been offered a straight forward capital injection before and turned it down.

I've said to this person that we'd only be interested if it's 'smart money' and comes with a lot of his skills, guidance and contacts. He's already used his influence and contacts to help us out in a big way and from what I have know about his background he's certainly not lacking in skills and experience.

I hope it all goes well so that I can make the big announcement and say who it is! It's hard to keep my trap shut but I have to because I don't want to upset the apple cart. Still early days.

Thanks again for your explanations.

 

[gj]

With regard to how the deal is structured, your investor will have strong views on whether he is putting that money into the company our paying the two of you for it - in the first case the money is there for expansion etc, in the second case it goes to you to do with as you like.

A combination of the two could be sensible.

With the amounts involved and the different tax implications of different scenarios, plus issues over control. influence etc. it sounds to me like you should be talking to your accountant and your solicitor fairly soon.

Graham

 

[babybiz]

I agree with Graham, if you're talking that kind of money and handing over such a large stake in your business you want professional advice all the way on this. I wish you all the best with it though it sounds really exciting (p.s if anyone out there is reading this and enjoys playmats and teething rings I'm open to approach ROFLMAO!).

Tashxx

 

[Marina Stone]

This is just a suggestion:

If the investment, lets say £1M is for the growth of the business, then it wouldn't make sense if you and your partner took this out of the business! So how about...

You and your partner sell the agreed amount of shares to the investor. i.e. the money is yours, however you re-invest the £1m back into the business under the 'directors loan account'.

This way business is benefiting from capital, and you and your partner can still have the money which you will be able to withdraw once the business is booming! Everyone is happy. Investor has his money well invested and you both get your share!

Check the tax situation, may have to be paid at the time of selling shares.

Marina

 

[DuaneJackson]

Thanks for the responses. I didn't actually want to take the money myself, i just didn't understand how I could not - the issuing of new shares hadn't occured to me.

This deal is a lot closer to being a done thing now. Less money than in my example and also givng away a lot less equity.

 

[Marina Stone]

Good luck Duane.

I hope it all works out well for you both.

Marina