Valuation of a business

BartyBoy

motorguy wrote: »

I cant help but think this isnt going to end well?

I kind of see their point. Being a "good employee" is very different than driving profit for a company as a director / shareholder.

I don't think it went well when I started asking for a salary review over a month ago. I was told a lot of unpleasant things by the other directors after my request was made, I was very shocked with their responses to be honest.

If everybody is seen here as an employee, shouldn't the salary be based on what sort of skills, experience, roles, responsiblilities, etc. each individual has? Let's say, my abilities was in level one 6 years ago, and now it moves to level two, am I right to think the salary should also move up one level?

Out of interest, you mentioned you see their point, do you mind to explain more to me about what you see there please? Thanks for your comments, very much appreciated.

Malthusian

BartyBoy wrote: »

I briefly mentioned my plan to the admin person here, she told me not to go to the company accountant as he will act the best interest of the company, so his valuation will be lower. She told me to go with an independent one and said she would give me a helping hand for 'necessary info'.

As it seems more or less established that the company / the other directors are the only entity that will be interested in buying your shares, an "independent" valuation seems of academic interest only.

They say the current money that I am receiving, I will not be able to get it somewhere. I was really shocked when they use this reason to cap my salary, rather than claiming I was lazy, or I made lots of errors, or I made losses on jobs, etc..

I can't see why this should shock you. If you are indeed being paid more than the going rate - whether this is dividends or salary is secondary - why should you be paid more? People don't get salary rises for good behaviour, they get them so they don't get poached by another company.

It does sound as if the other directors hold all the cards given a) if you sold the shares they are the only ones who would realistically be willing to buy b) if you held on to them, they could simply outvote you and change the remuneration structure so that they are paid via salary rather than dividends.

First of all you need to decide whether you are willing to take a cut in income to get out of this job - I gather that the £5k extra salary you might receive would not compensate for the loss of dividends. Then you need to take a realistic approach to how much the others might be willing to pay you for them.

At some point down the line the company might get bought out by a competitor or other party, and if you'd still clung on to your shares, you would then be entitled to 20% of the windfall. So they might be willing to buy you out at a reasonable valuation to ensure that you don't get a larger cut later down the line. Only you will know whether there's a realistic possibility of this ever happening.

sjbrun

BartyBoy wrote: »

I don't think it went well when I started asking for a salary review over a month ago. I was told a lot of unpleasant things by the other directors after my request was made, I was very shocked with their responses to be honest.

If everybody is seen here as an employee, shouldn't the salary be based on what sort of skills, experience, roles, responsiblilities, etc. each individual has? Let's say, my abilities was in level one 6 years ago, and now it moves to level two, am I right to think the salary should also move up one level?

Out of interest, you mentioned you see their point, do you mind to explain more to me about what you see there please? Thanks for your comments, very much appreciated.

But everyone can't be seen as an employee, someone must be managing the business, driving it forward, dealing with finances, submitting accounts, dealing with HMRC etc

It just looks like a bit of a mess, what made you enter into it in the first place?

Yoga_cat

What are the company's growth prospects?

What is the ratio currently of your yearly salary to dividend?

Could it be that the dividend will grow in the next few years by so much that you will receive much more than the £6k by which you currently feel you are underpaid?

My strong impulse is that you should accept your current situation, rather than let yourself be forced out. Do you think it's possible that the other directors are conspiring to get rid of you, so that they won't have to continue sharing dividends and the proceeds of any future company sale?

Swallow your pride, put up, and don't let yourself fall into their trap to force you out!

BartyBoy

Malthusian wrote: »

I can't see why this should shock you. If you are indeed being paid more than the going rate - whether this is dividends or salary is secondary - why should you be paid more?

Based on that, I may as well just be a 9 till 5 worker, because anything that I do extra will not be taken into account for a pay rise, why should I work extra then, right?

Malthusian wrote: »

People don't get salary rises for good behaviour, they get them so they don't get poached by another company.

So working hard and extra is simply unnecessary? Those who don't get poached by another company should always stick with their salary from day 1?

BartyBoy

sjbrun wrote: »

But everyone can't be seen as an employee, someone must be managing the business, driving it forward, dealing with finances, submitting accounts, dealing with HMRC etc

It just looks like a bit of a mess, what made you enter into it in the first place?

I think I have mixed up 'employee' and 'employer' here.

You are right that it is a real mess here. I only joined the gang because we were all made redundant at the same time by the old boss. As I have been working with other guys for over a decade and I did not expect things would get as bad as they are now, so I agreed to invest £5K to set up the business together. Obviously if I knew my salary would be capped and a pay rise only applies to selected directors, I would never put a penny to join the gang.

steampowered

BartyBoy wrote: »

Based on that, I may as well just be a 9 till 5 worker, because anything that I do extra will not be taken into account for a pay rise, why should I work extra then, right?

Because you are a shareholder of the company.

The amount which a small company can afford to pay is going to be dictated by how much profit the company makes more than anything else.

The mindset you need to have as part of a small team running a company is very different to the mindset of an employee in a larger organisation. Owning shares is usually part of people's remuneration package rather than an added bonus, and you will get a lower salary as a result.

I'm also not sure why you think you should be entitled to a salary in line with market conditions AND a dividend?

BartyBoy

Yoga_cat wrote: »

What are the company's growth prospects?

What is the ratio currently of your yearly salary to dividend?

Could it be that the dividend will grow in the next few years by so much that you will receive much more than the £6k by which you currently feel you are underpaid?

Like what I was described here earlier, I have absolutely no clue about this business here.

I think the profit will grow next few years but I doubt the dividends will also be increased accordingly due to the new tax rule from the government on dividends. So in that sense I would say the dividend will remain the same no matter how much more profit the business generates. Those directors who have a higher salary than me always have a big issue of getting more money from the company, because they will end up paying more income tax. It is a great frustration to me here, these guys are happy with a smaller dividend to balance their larger salary, and someone like me has a lower salary will always lose out.

steampowered

BartyBoy wrote: »

It is a great frustration to me here, these guys are happy with a smaller dividend to balance their larger salary, and someone like me has a lower salary will always lose out.

This is very true.

You now have a decision to make as to whether you want to leave the business for a higher salary with no dividend; or whether you want to stay put.

If there is a shareholders agreement or the articles have "good leaver/bad leaver" provisions then leaving the business is likely to mean forfeiting your shares.

Businesses of the size you are describing can often be sold for large sums of money, so if a potential sale is on the horizon and you have 20% of the shares, that could be an argument for sticking with it.

BartyBoy

steampowered wrote: »

I'm also not sure why you think you should be entitled to a salary in line with market conditions AND a dividend?

Because everyone else is getting paid at the market rate but not me.

Like my example before, I receive a £10K salary doing a £15k position, while other directors receive £15K-£20k salary also doing a £15K position.

Am I the odd one to think it is not right?