How To Sell Or Buy A Private Company Minority Shareholding

About Jonathan Lea

Jonathan is a specialist corporate and commercial solicitor who has over 11 years of experience at both large international City firms and smaller practices. For the last two years he has worked on a self-employed basis with a network of other freelance lawyers focused on entrepreneur-led businesses. If you'd like a competitive quote for any legal work please send an email to the address on the home page. You can also follow him on Twitter @jonathanlea

Difficulty in Selling Minority Shares in a Private Company

Unfortunately, it is difficult to sell minority shareholdings in a private company, other than to existing shareholders.

Firstly, there may be provisions in your company’s articles or shareholders agreement that limit your ability to sell to third parties outside the company, such as pre-emption rights in respect of share transfers.

Secondly, because in private companies control rests with the majority shareholders and the board of directors, and unlike a listed public company there is no easy way to trade/sell shares, it is difficult to find a third party interested in acquiring a minority shareholding. You could well spend more marketing your shares than you would receive for them if you were to find a buyer. Even if you did find a buyer the board of directors could then refuse to register such buyer as a shareholder.

It should be noted that the most motivated people who would want to buy your shares are normally your fellow existing shareholders as by acquiring your shareholding they would benefit from increasing their control (voting ability), being able to pay themselves larger dividends and if and when they sell the company being able to have a larger share of the capital gain made.

There are no brokers I know of who are interested in trying to sell private company minority shareholdings. One potential solutions I have come across is the Asset Match platform that can carry out an auction for your shares, although they tend to only take on quite established private companies and would need the buy in of your other shareholders in order to carry out such auction/sale.

Valuation of shares

Whether you would like to sell to your existing shareholders or try to find a buyer outside, as a starting point a seller would try to work out what their shares might be worth.

Note that there is no market value as such for minority shareholdings in a private company as there is no market which they are traded on. Often buyers and sellers can give and justify very different figures for what they think the shares are worth.

If the company’s constitutional documents or any contract between the parties contain no provisions setting out how a valuation should be carried out, then traditional valuation techniques that could be considered are as follows:

a) a valuation based on turnover;

b) a valuation based on profit;

c) a valuation based on assets;

d) a valuation based on dividends and expected return;

e) a discounted cash flow valuation; or

f) a valuation based on previous fundraisings.

It is often argued that a discount should be applied when valuing minority shareholdings. In accordance the ACCA Technical Factsheet 167 a holding of less than 10% would be discounted by between 60% and 75% while in the case of Re Lynall, Lynall v IRC (1971) 47 TC 375 it was suggested that the lack of marketability of a private company’s shares would mean the valuation would be reduced by 25% to 50%. Bear in mind, of course, that if you continue to hold your shares then if there is an exit event in the future and all of the company’s shares are sold you will be entitled to receive a pro rata share of the sale price in proportion to your shareholding and such a minority discount will not be applicable.

However, what your shares are ultimately worth depends largely on if the existing shareholders want to buy your shares and if so whether 1) the company has distributable reserves/profits and/or 2) the remaining shareholders access to personal funds (and the company/shareholders ability to access finance) in order to increase the price they can pay for your shares and thus facilitate a sale.

Deferred consideration

It might be that your other existing shareholders are not currently interested in buying your shares as the price you want to sell them at is too high for them.

A solution to this might be to offer to sell the shares for a lower price at completion, but then subsequent ‘deferred consideration’ payments are made over a period of, say, one to five years following completion to spread out their payment obligations and increase the amount you can otherwise receive for the shares. This could work better for both you and them.

Anti-embarrassment provision

If you think there are any plans to sell the company you should consider an ‘anti-embarrassment’ clause in the share purchase agreement if you sell your shares now to the existing shareholders. This means that if the company is sold in the future and your shares are thus sold for a much higher share price, you’d be protected. The clause would enable you to receive a proportion of the increased valuation between what you sold your shares for now and what the buyer(s) then manage to sell them for when they sell the company as a whole.

Sell to investors

If the minority shareholding is in a startup company that plans to raise successive rounds of equity funding then, working with the company’s board, there should be an opportunity to sell some or all of your shares to an existing or new investor as part of an investment round, particularly if the fundraising round is oversubscribed.

We have also acted for an existing investor looking to buy a co-founder’s minority shareholding in a well established UK tech startup outside of an investment round and after the investor was initially informally approached by the co-founder with an offer. However, in this particular instance the deal fell through after due diligence we carried out on the financial information supplied to the investor which was deemed to be insufficiently accurate.

Why the phrase ‘a bird in the hand is worth two in the bush’?

When advising those thinking of selling their minority shareholding we often use the phrase ‘a bird in the hand is worth two in the bush’ to describe an opportunity presented by a buyer where invariably the offer price is not as high as the seller would have liked.

A seller might want to otherwise hold onto their shares in case of an exit event, but this could well never happen or in some cases the company might even become insolvent in the future. Whereas if the seller accepted the offer being tabled by a buyer this amount could well be used or invested productively, despite the sale price otherwise being considered ‘low’, while also saving the parties potentially years of aggravation.

Next steps

If you would like to discuss your particular situation we are happy to arrange an initial no cost and no obligation 20 minute phone call (please see our contact page).

Over the years we have acted for many buyers and sellers in respect of minority shareholder private company deals. Our work usually involves advising on strategy, liaising with different parties, producing offer letters, structuring deals and putting together and negotiating formal legal documentation to complete a transaction, including a relevant short form share purchase agreement.

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