Becoming A Share Holder

[JElia]

Does anybody have any experience with becoming a share holder of an engineering company? I work for a company that is owned by 8 people (as an S-Corporation), all of which actively work in the company. I have been with the company for about 8 years and have been told that I will become the next shareholder of the company. However, the owners have yet to give me a when and how (how much longer to wait and how much will it cost me).

My question is: How does this process occur? Do I buy into the company? Do my years of service count toward the investment? I'm sure it is a little of both plus many other factors.

My main concern now is roughly how much I can expect to pay to "buy into" the company. I don't even have a clue what a ballpark figure might be, but I would like to generate one so I know whether this is something that is doable right now.

I'm at the point in my career now that I could start my own business and have enough clients, contacts, and know how to at least scrape by for 6 months to a year until the business takes off. But, obviously this is much riskier than buying into an established business that would give me a guaranteed salary and provide medical insurance. But on the other hand, I don't want to wait around for 2 more years to find out that the buy in price is some rediculously high number. In which case, I would be better off using the money to start my own business, and would have wasted 2 years.

Does anybody know of good books/references where I can read up more on this valuation process to go into the negotation process with some knowledge?

Also, what is a reasonable time to expect to wait after the buy-in before my shares of the company profit have completley offset the intital buy in amount? Should I be thinking 5,7,10 years? Or is it something shorter like 2 or 3 years?

I look forward to your comments and adivce.

Thanks,
J Elia

 

[GregLocock]

You are in a similar situation to buying in to a partnership. In the experience of those I have talked to this is not necessarily a shoo-in. Get good independent legal and financial advice.

If you really have the get up and go to start your own company, why would you consider buying in to somene elses?


Cheers

Greg Locock

Please see FAQ731-376 for tips on how to make the best use of Eng-Tips.

 

[dadof3]

I am in a similar situation, but with only two owners. Posting a similar thread earlier did not amount to much help either. Have you had any luck finding info on your own? My question is why would they offer you ownership? To retain you? With eight shareholders you may be better off doing your own thing. Maybe this posting will stir up some interest for the subject.

 

[zdas04]

The rules for an S-corp are a bit looser than for a regular corporation with publicly traded stock. For full-fledged corporations they have very strict rules about pricing stock options and employee stock-purchase programs. The S-corp guys have similar rules, but they just don't have the dynamic stock pricing mechanism.

Basically, the value of the stock is whatever they say it is. I took a consulting job once where they paid half my fee in stock in an S-corp. They said the stock was worth $8/share and I "paid" $1/in work for $1/in stock. When I was having some cash-flow problems a couple of years later I tried to sell the stock I was told that the company would buy it back for $2.50/share. All perfectly legal, just kind of stupid on my part.

The directors of the S-corp can offer you a large number of shares at a low price or a small number of shares at a high price, or any combination they deem prudent. At that time you'll have to decide if it is a good deal or not. Frequently employee buy-in programs are VERY good deals, but sometimes they suck. Get a copy of the company's K-1 form to see if they really are making money and how much is going back to the owners.

David

 

[GregLamberson]

J Elia

The company should have a stock valuation plan. Ask them how the stock is valued, they should have a basic calculation that is used. And it should be contained in the corporate by-laws and not just something that old Joe goes into an office every quarter and comes out with a number. You can then see if the stock is over valued or not.

It's very similar in buying stock of a publicly traded company, now the rules that govern them are very different, but the way of determining if it is a good deal or not is basically the same. What is the basis for cost? Do a little due diligence on the company.

Another thing to check is what are the guidelines for stock ownership (because they are not traded and do not fall under SEC guidelines, the rules are very general), what are the buy back guidelines. Is there a separate formula for calculating buy back price (as zdas04 pointed out there may very well be). Is there a limit on number of shares to sell in a given period of time? A vesting period before selling?

Also, are these preferred shares in that they pay dividends? If so, at what rate?

They should be able to answer all of these questions. If they cannot, I would not invest a cent.

Greg Lamberson, BS, MBA
Consultant - Upstream Energy
Website:

http://www.oil-gas-consulting.com

 

[jhill72]

I was a stockholder at my former company. It was a privately held c-corp (with 600+stockholders), so that may not relate to your situation. But, I have a friend who was just offered to be a stock holder with his consulting company and they are smaller.

How much stock will they offer you?
All depends on what the current stock holders vote on. It varies per company. When I was a stockholder it was highly recommended that 5% of my salary went to purchase stock (but I also could buy as much as I wanted). My friend was initially offered XX amount of shares and he had the option to buy them or not. Then periodically through out the year he will be offered to buy more shares. The amount of shares you are offered is based on your seniority level or if they like you.

When they offer it to you ask for the ROI for the last ten years to see if you even want stock in the company.
ASk them to take a look at last years annual report.
Talk to one of the existing stock holders and pull him or her aside and get the scoop.
Ask directly and tell them you want to begin saving to buy stock so can they give you a range of how much they may offer you.
Negotiate a raise when they offer the stock to you. Often you end up taking a pay cut to invest in company stock unless there is a raise that goes along with it.

I did all of the above so that I was informed before it was offered to me...Yet I still didn't know it all. With some things I had to wait and see.

If you can save up close to a years salary in the bank..I say go out on your own. That is managed risk. I just found out that health insurance and prof. Liability insurance are both manageable. Those two items were my biggest fears to going out on my own. But now that I am out hear it isn't that bad. On the flip side if you like the company, Like the people, like your pay why not be patient.
The gain you establish by becoming a stockholder could help with start up when you decide to go out on your own a few years down the line. Becoming a stockholder will help you gain insight on how to run your business.

 

[lkjh345]

Jelia:

I agree with jhill72. Ask them what the ROI (return on investment) is over the last 5 to 10 years. I would be looking for a least 17%, and perferabble 20%. Obviously, more is better. Much better!!

Small firms are inherently risky. One major clients decides to take their buisness elsewhere and the firm could fall on some hard times. You should be compensated for that risk with a farily high ROI compared to publicly traded stocks you can buy on the stock exchanges.

I am a shareholder in a small consulting firm. The investment has been VERY worthwhile. When times are good, they can be very good! But also when times are bad, you can wonder what where you ever thinking when you decided to buy in.

Good luck!

 

[RDK]

The value of a business can be determined in two ways.

The value of the assets if the firm was split up and everything sold is the first. This is the lowest value that the firm will have.

The second is the net present value of the projected profits over the planning horizon. The longer the planning horizion the larger the value will be but the increases will be less for profits farther in the future than for near term profits.

Past profits are not of much value as that money is not available to use to give you some return on your investment. Their only value is to be an estimate of what is possible.

Do some number crunching and see what sort of ranges you come up with. You may want to hire an accountant who specializes in company evaluations to help you come up with a price.

Some other concerns.

Ownership in a small business may be difficult to sell. You may need permission of the other owners to get out of the company. You may have to sell if you quit the company and that price may not reflect what the firm is worth at that time.

How will you finance the buy in? Pay money directly into the company or take it as a part of your salary? Borrowed money or savings? (This will affect the return on investment that you need to get on the money)

If a buy in what will the other owners do with the money? Pocket it or use it to expand and develop the business?

Consulting businesses sell the time and expertise of their employees. If several key employees left what effect will this have on the firm’s profitability and viability?



Get some professional independent advice from financial and legal professionals who specialize in this area. Just as you will not want an accountant designing a bridge, you don’t want an engineer doing financial analysis this specialized.



Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com