Advice for investing in local company

Malky

spacey2012 wrote: »

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.

That's the kind of advice I was looking for and confirms how they came to the value. The company has no loans or in its overdraft. All bills and invoices paid in full and on time every month.

oldtoolie

Putting your life savings into the company you work for is a big risk. Company fails and you have no job and no savings.

Since you don't have the money to pay £240k for a 20% share, the question is moot.

Malky

I'm aware there are many pitfalls. Investing in anything is a risk but investing in a company you work for can be life changing.

Thrugelmir

What's the nature of the business?

Malky

The nature of the business is irrelevant to my questions. I think I've supplied enough info already

innovate

Malky wrote: »

I intend to be hence looking for advice here

if you are indeed "very very very careful" then I hope you are seeking more than opinions from an Internet forum. E.g. have you discussed it with a Solicitor, and Accountant, an IFA?

You are not saying what sort of shares you would get - e.g. would you have the same voting rights / decision making powers as the rest of the shareholders? or would you effectively just give them a risk-free loan? (risk free for them, not for you!). In what form will you get returns for your investment? Dividends? Additional shares? Automatic re-investment of all profits in the company? Guaranteed pension rights? Will you become a Director of the company? Will you assume personal liabilities if you own one fifth of the company? etc etc

oldtoolie wrote: »

Putting your life savings into the company you work for is a big risk. Company fails and you have no job and no savings.

Couldn't agree more. There's also no mention of any existing pension provisions.

oldtoolie wrote: »

Since you don't have the money to pay £240k for a 20% share, the question is moot.

Good point

innovate

Malky wrote: »

The nature of the business is irrelevant to my questions.

If you were to disclose the nature of the business, you might get additional comments as to the perceived viability of the business. Mind you, for any meaningful assessment, you'd also need to say where the business is, and I understand you might not want to provide this info on an open forum.

That's just one of the reasons why you should seek personal investment advice.

Malky wrote: »

I think I've supplied enough info already

I beg to disagree. Anybody who wants to invest quarter of a million must have a lot more information, and a lot more questions, than you have posted so far.

Malky

I will be seeking further legal advice no doubt about that. The reason I posted here was to test the water and gain some views from someone who had perhaps done a similar thing.
Innovate, you are asking some interesting questions and will do my best to answer them.
The current 4 shareholders are all directors. This is something I would like also. I'd certainly like to have some say in the company if I am investing my money in it. I am also aware that there's a big difference between being a shareholder and a director. I believe there is dividends being paid but don't know how much and how frequent but I'd like to think that I would also get a share of any dividends paid. This is something else I need to find out. I have had a company pension in place for the last two years.
Your other questions I can't answer at this time but have given me food for thought.

I appreciate all comments so far and am doing my best to answer all your questions with the limited knowledge that I have. I am keeping note of what I see are some important questions and they will be raised when a meeting is arranged after the New Year.

somethingcorporate

If you do not have the money (but the company does) could there be the possibility that the company can give you the money to buy a share of the company?

Lots of the big partnerships in the city work this way and the repayment is then deducted from future payments (dividends etc).

Personally, I'd get a number of opinions on the true value of the company. If it has few assets and not masses of cash putting a value on it is very subjective.

I don't think saying banks value something at "net profit x 6" is actually of any use. One bank may use that but to suggest every bank uses the same methodology is not accurate and it is something you could value in a number of different ways. One such estimated used to be 10 times average profit but then for a company as massive as amazon would be valued at pennies when in reality they are valued by share capital at billions.

Plus, profit is an enormously manipulable figure - just ask any accountant! changing the valuation method for stock can wipe out millions off a balance sheet or slash profit figures dramatically.

Thrugelmir

Malky wrote: »

The nature of the business is irrelevant to my questions. I think I've supplied enough info already

Very difficult to assess the value of a business without at least knowing its primary trading activity. Much of the value of the business could be in the 2 retiring Directors\Shareholders. Which is often the case in SME's.