Potential purchase of private closely held stock

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jerome99
Posts: 193
Joined: Tue Jan 10, 2012 8:38 am

Potential purchase of private closely held stock

Post by jerome99 » Thu Nov 19, 2015 10:07 am

I would like some help regarding the above. There is the potential where my employer will allow for the above. Details are below.

Some key employees are being gifted 1% ownership in the company with the ability to buy an additional 2%.

My main question would be what sort of information is considered standard to provide to those being offered the opportunity?

1. Most recent audited financials?
2. Other ownership details? Who and how much owned (%).
3. Existing debt?


I'm sure there is plenty of items I haven't mentioned and I would like any other opinions. Company is $20M of revenue with 150 employees and I think around $2M of annual profits before debt service.

psteinx
Posts: 2844
Joined: Tue Mar 13, 2007 2:24 pm

Re: Potential purchase of private closely held stock

Post by psteinx » Thu Nov 19, 2015 11:42 am

I don't know what is standard, and in any case you may not get it and may need to operate somewhat on guesswork/trust.

But what you SHOULD have is the key financials:

Income Statement
Balance Sheet
Cash Flow Statement

Preferably each going back about 3 years (In terms of history, I guess it's more important to have history on the income statement and cash flow statement - the balance sheet is more of a snapshot - so a single recent balance sheet (rather than several) is ok, if that's all you can get).

The balance sheet should show debt and equity.

You need to understand how many shares are outstanding, and if there are multiple share classes. Simplest is if it's all common stock. Then it's easy to compute how much of the business you're buying, if you buy X shares (or, you can convert the business fundamentals to $/share).

Keep in mind that valuations on small, illiquid, closely held companies are generally lower, sometimes much lower, than public equivalents. Also, pay attention, if possible, to compensation of top officer(s), and think about how that might change as the company moves from (perhaps) owned by a single person or family to a somewhat broader group...

RadAudit
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Re: Potential purchase of private closely held stock

Post by RadAudit » Thu Nov 19, 2015 11:45 am

You might want to think about who to and how are you going to sell the stock when the time comes. How will the price be determined?
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The Calvary isn't coming, kids. You are on your own.

jerome99
Posts: 193
Joined: Tue Jan 10, 2012 8:38 am

Re: Potential purchase of private closely held stock

Post by jerome99 » Thu Nov 19, 2015 11:54 am

Thanks- all good info. are there crazy tax complications possibly too?

psteinx
Posts: 2844
Joined: Tue Mar 13, 2007 2:24 pm

Re: Potential purchase of private closely held stock

Post by psteinx » Thu Nov 19, 2015 11:57 am

FWIW, I think that there are CPAs that specialize in private company valuation, and I would guess there are also books and websites on the topic. Probably worth a little research...

psteinx
Posts: 2844
Joined: Tue Mar 13, 2007 2:24 pm

Re: Potential purchase of private closely held stock

Post by psteinx » Thu Nov 19, 2015 11:58 am

Re: Taxation - another topic that may be worth research. It probably depends in part on how the company is structured, legally. C-Corp? S-Corp? Partnership or LLC of some sort? You may need to deal with a K-1 each year...

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