Advice for investing in local company

Malky

I work for a local limited company and have been there for nearly 3 years. There is 4 directors/shareholders, all of whom I know very well having worked with them before in previous employment years ago. Two of the directors are retiring next year and I have been asked if I would be interested in buying a share of the company. The company is almost 7 years old and has done pretty well the last couple of years despite the recession. I have seen some figures for the last 2 years and it has been a profitable company (as it has been the 5 before) so I feel confident in investing. The thing is, where do I start? The company has a rough value of £1.2m so how do you find out what a share is worth? The 2 directors retiring own 65% with the other 2 owning 17.5% each but are going to try and up their share leaving me with a possible 20%. How do I fund this? I have £3000 in savings, own a house with around £80k equity, an endowment worth around £30k but doesn't pay out for another 7 years and some shares in SL worth around £2.5k. I do not have any debts other than my mortgage if that makes any difference.

gozomark

"The company has a rough value of £1.2m" says who ?

gozomark

how much are they asking you to pay for 20%, is this to buy out existing shareholders, or is it through the creation of new shares ?

what has the profitability been for the last few years ? What is the net asset value of the company ?

redmalc

Malky,please be very careful,who as valued the company at 1,2 million ?
I would have thought the two retiring directors would keep their shareholding if the company was so good,the dividends would finance there retirement.
I have a friend who did a similar thing a few years ago,he bought the shares of a retiring director and after approx 8/10 months a number of issues came to light which have not allowed any dividends to be paid to date and the company was not as profitable as first thought,actually they have had to introduce further funds to prop the company up.

Malky

The value is a rough estimate. I don't know the actual cost to me for 20% of the company. This will be to buy out existing shareholders. Even though they are retiring, they still want to have an interest in the company but just a lesser share. The profitability over the last few years has been a net 7% on a turnover of £3m on average per year. Before the recession, was more like 8 or 9%. The company doesn't have many assets and did have me wondering how they reached the valuation figure. I've heard that to get a rough value, you take the net annual profit and multiply by 3-8 times. Have you ever heard of such a thing?

JohnRo

I know nothing but it does sound like a tragedy in the making.

Malky

Thanks for the input redmalc. This isn't a decision I'm taking lightly no matter how good it sounds. I'm open to all suggestions and comments even if it's things I don't want to hear lol.

Malky

JohnRo wrote: »

I know nothing but it does sound like a tragedy in the making.

I was expecting varied comments but nothing as negative as that.
If you know nothing, why post?

JohnRo

Malky wrote: »

I was expecting varied comments but nothing as negative as that.
If you know nothing, why post?

Fair point, not very well worded. I'll rephrase. Please be very, very, very careful.

Malky

JohnRo wrote: »

Fair point, not very well worded. I'll rephrase. Please be very, very, very careful.

I intend to be hence looking for advice here

spacey2012

A bank will value a company by
Over 3 years trading Net Profit x 6 = Value.
So this company should have a Net profit of £200,000 per year after everything, including loans and debts are paid.