What to consider when purchasing shares of an LTD

[John Mathew 01]

Hy,

reading here since a while an now I gathered enough faith to write my first post.
I wan' to buy shares of a "LTD by shares" company which is quite new in buisness (Retail).

Since I am not an acountant nor a laywer I ask myself several questions:

1. Which ways do I have to buy the shares and what are my legal options (become a director, be only a shareholder, influence on voting rights, etc.)
2. Where do I see how much money is on the companies account before investing to ensure it's not already bancrupt?
3. Which liabilities do I have after i purchased let's say 30% of the shares?
4. How can I control operations so they don't spend all my money on expensive cars or hotels
5. What's the best way to generate income? (Dividend, monthly salary, 6-month payout)

Hope somebody can give me some direction.

BR
John

 

[S2K]

Nobody can give you reliable advice based only on the information you provided.

1. It depends on what you want to do. I would surely recommend that the shares you buy will have voting rights, although it depends what you can do with those voting rights, otherwise the risk to lose the money is very high as it is an investment in a new business.

2. Ask the company to provide you information about ALL their bank accounts and to give their bank authority to disclose the information to you. Bear in mind that the fact that a company has money in the bank account doesn’t mean it is not financial difficulties. Ask for a cash flow prediction, review the liabilities and other commitments, such as leases … and the list can go on and on.

3. Again it depends on the arrangements.

4. By signing an agreement.

5. It depends on your specific circumstances.

 

[Clinton]

I would suggest you start by appointing a professional adviser. Never, ever go into your first deal without expert assistance.

Also, if it's a new business then it's highly risky as most new businesses fail. Don't rely on the existing shareholders' optimism. Do your own research on the viability of the business.

You've got to check a lot, lot more than you seem to think!

Start by requesting a copy of their business plan, their industry and competitor analysis, their cash flow forecasts, their shareholder agreement and their management accounts to date (sales, cashflow, bank statements etc). You need to identify whether the business is viable, whether the people running it are capable of delivering on the BP, whether it has enough working capital, whether it has been properly setup, whether it is keeping the right records, whether it has a good accounting system in place...

There is much to be verified before you even start thinking about some of the questions in your OP. And if they can't provide, at the very minimum, all the information mentioned above - walk away!

 

[Paul Norman]

As above.

You need a clear understanding of the business, and you find that out by a lot of research, done by someone who really understands business.

Otherwise, you would be better off doing the lottery.

But the detail of the approach depends on exactly who's shares you might acquire. Buying .002% of the shares of Ford is different to buying 50% of my company.

But really, if you are not an expert, you really need to hire one. Because shares in small companies are often worthless. I was tempted to say normally, but that is harsh. Fair, probably, but harsh.

 

[John Mathew 01]

Thank you for your answers. I know I have to be cautious.

I am thinking about the "worst case" scenario and the "best case" scenario.

Is my liability is limited to my share capital and I invested 10k GBP - How can I make shure not to loose more e.g. in case of bancrupcy?

Would you recommend to get an adviser that is a lawyer or an accountant?

Best case of course would be to generate stable income.

BR

 

[Clinton]

In case of bankruptcy of the company you lose only the money you've invested - that's how limited companies work. However, you may still potentially be on the hook for various things if you take on a director position.

Would you recommend to get an adviser that is a lawyer or an accountant?

What is the size of the investment you're considering? If it's large enough I would say neither of the above, hire a corporate finance adviser.

 

[mhall]

Buying shares in a Limited company is something that is fraught with danger, which is why so many people stick to buying shares in Plc's instead. Most Ltd companies are owner run and if they are new, the owner/Director would love the injection of cash that you are putting in, but there will be almost zero chance of you getting any dividend out of the business for quite a while- and unless you have a majority share you have no way of forcing the issue. You could insist on becoming a Director but, as Clinton says above, that may well put you on the peg if anything goes wrong with the company and the Directors have not acted legally.

1. You can have whatever voting rights you want, unless you are the majority shareholder you can, and will, be ignored
2. "You can prove anything with figures"- a new business will not have any decent figures you can rely on. I am guessing you are buying "potential"- very dodgy
3. You will have no liabilities if you stay a shareholder. 30% shareholding is still worth zero if the 70% shareholders decide not to issue a dividend.
4. By all means get them to sign an agreement- what will you do when they break it? - Call a shareholders meeting and get out-voted?
5. Unless you are being paid a salary (in which case you are simply buying yourself a job), there is no real way that you can control any re-payment. The Directors of a small Ltd company will almost certainly also be the shareholders. You will need a very tight shareholders agreement to ensure cash comes your way (and they could always change it with a majority vote)

If you really want to support a Ltd company it may be better to simply lend the company some money with an agreed interest rate and Directors personal guarantees. At least you can take them to court if they don't pay up.

 

[Mr D]

If buying in as an investment then act as an investor - percentage of the company for the level of risk and money. Can even be over 50% of the shares.
Figure out how you will get your money back and by when - typically you would be looking at a return high enough to make it worthwhile for you and to cover bad investment.
eg provide £50k investment for a £150k payout in 5 years. Merely an example, some don't go that low a return.

Most businesses have potential, not always issues that can be resolved by money.

 

[John Mathew 01]

Thanks for your informative replies. The amount I want to invest was around £10k which would come to around 20% of the total share capital. Director of the company would hold the other 80%.
For this amount it is probably not wise to get a professional buisness agent involved since his fees would reduce my capital to almost nothing.
As far as I understood by not beeing a director, I cannot loose more than I hold in share so this would be my "worst case". As a director, even your private wealth can be in danger (for another ones fraud)

Thx
John

 

[Clinton]

For this amount it is probably not wise to get a professional buisness agent involved since his fees would reduce my capital to almost nothing

Then save more capital.

It would be foolish in the extreme to make high risk investments without expert advice. This forum is littered with stories of people who thought they would wing it and then lost all their money.