Owning part of a private company?

[cbloom]

Say I own a piece of a private company (around 1%). What can I do with that to turn it into value? How can I sell it? Is there any standard way to value a private company, or is it just a matter of what price I can find a buyer?

Also, what recourse do I have if the majority owners are spending company money on themselves and/or have themselves on salary with questionable value? Is there a requirement to make the accounting public in any way? (obv. they don't have the transparency requirements of a public company)

[midas]

cbloom:

The only way to sell is to find a buyer yourself or to sell it back to the Company. Company value is set by what a willing buyer is willing to pay at any given time. The smaller the Company the harder it is to sell.

When you are a minority shareholder you have very little recourse on how management runs the Company. If Management doesn't own much stock you could rally other shareholders to wack management if you can assemble a majority position. There is no way to force a Company to disclose financials but most will disclose to shareholders if requested.

[cbloom]

Thanks midas

[Tupacia]

Yup, private companies differ from public ones in that they don't have to disclose financial statements, are immune from SarbOX, and there isn't an ongoing open-market bidding process to determine their market cap. Because of this, higher returns are possible in private investing over the long-term than in the public markets (think private equity and venture capital funds) because the private markets by definition are less efficient.

[DespotInExile]

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what recourse do I have if the majority owners are spending company money on themselves and/or have themselves on salary with questionable value?

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The answer here depends in great part on the form of the company, in particular, whether it is a general partnership, a limited partnership, or a corporation. You'll have the most remedies in a GP.

[cbloom]

When I'm negotiating my portion of ownership, would it be reasonable for me to demand access to the finances as a condition of my ownership? (of course if I find something rotten there's not a lot I can do anyway)

As for selling the share, it seems like it could be a big problem if there are only a few owners & it's not a very big company. The most likely buyers of my stake would be another owner, but if there are only a few and they're friends with each other they're not going to fairly bid up the price to its real value.

[Tupacia]

You don't sound like you trust the management of the company Cbloom. So why invest?

[cbloom]

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You don't sound like you trust the management of the company Cbloom. So why invest?

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In my experience pretty much everyone who runs a small private company illegally pays themselves from the business' accounts, I just don't want it to be too far out of hand.

[Tupacia]

IMO I wouldn't invest with any CEO who did that.