Selling shares in a private company is a significantly different process from selling shares in a publicly traded company. While shares of public companies are traded on stock exchanges and can be bought or sold by any member of the public, shares of private companies are not listed on public exchanges and can only be sold under certain conditions. This distinction creates several challenges for investors looking to sell their shares in a private company, including limited liquidity, a narrower pool of potential buyers, and the need for approval from the company. Understanding the intricacies of this process is crucial for investors aiming to successfully navigate the sale of private shares.
Understanding Your Options
Selling Back to the Company (Buyback Program)
A common option for selling shares in a private company is to participate in the company’s buyback program. In this scenario, the company repurchases its own shares from the shareholder. This method is often straightforward and convenient as it involves dealing directly with the company.
The primary advantage of a buyback program is its simplicity. The process typically involves fewer steps and less paperwork than selling shares to an external party. Additionally, the company may already have a set process in place for buybacks, which can streamline the transaction.
However, there are potential drawbacks to consider. Companies might have limitations on the number of shares they are willing or able to buy back. The availability of a buyback program can also be dependent on the company’s financial health and cash flow, which may restrict the volume and frequency of buybacks.
See also: When to Sell Your Shares
Finding an Accredited Investor
Another avenue for selling private shares is to find an accredited investor. Accredited investors are individuals or entities that meet certain financial criteria defined by regulatory authorities, making them eligible to invest in private companies.
Accredited investors must satisfy specific income or net worth requirements. For instance, an individual might need an annual income exceeding $200,000 (or $300,000 together with a spouse) for the last two years or a net worth over $1 million, excluding their primary residence.
Engaging with accredited investors can be beneficial as they often have the financial capacity and risk tolerance to invest in private companies. However, finding such investors can be challenging. It requires extensive networking and possibly engaging with intermediaries such as investment bankers or brokers who specialize in private equity.
Utilizing Private Securities Markets
Private securities markets, such as secondary markets for private shares, provide platforms for buying and selling private company stock. These markets are designed to offer some level of liquidity to shareholders of private companies.
While private securities markets can facilitate the sale of shares, they are not as liquid or accessible as public stock exchanges. The number of participants in these markets is limited, and there may be restrictions on who can buy or sell shares. Additionally, the process of listing shares on these platforms often involves meeting specific criteria and may require approval from the company.
Key Steps in the Selling Process
Obtaining Approval
Before proceeding with the sale of shares, it is essential to obtain approval from the company. Many private companies have shareholder agreements or corporate bylaws that outline specific conditions under which shares can be sold. This might include the company’s right of first refusal, where the company or existing shareholders have the first opportunity to purchase the shares before they are offered to external parties.
Securing approval is a critical first step. Failing to adhere to the company’s policies and procedures can lead to legal disputes and potential nullification of the sale.
Valuation
Determining the value of your shares is a crucial part of the selling process. There are several methods to assess the value of private shares, including:
Company Valuation: This method involves evaluating the overall value of the company based on financial statements, revenue, profits, and growth prospects. Multiplying the company’s total valuation by the percentage of shares owned can provide an estimate of the share value.
Comparable Transactions: This approach involves comparing recent sales of shares in similar private companies. By examining these transactions, investors can estimate a fair market value for their shares.
Professional Appraisers: In some cases, hiring a professional appraiser may be beneficial. These experts can provide an unbiased valuation based on various factors, including financial health, market conditions, and the company’s future potential.
Finding a Buyer
Once the shares are valued, the next step is to find a buyer. Several routes can be taken:
Investment Bankers: These professionals specialize in private equity and can help identify potential buyers. They often have extensive networks and can facilitate introductions to accredited investors or institutional buyers.
Direct Negotiation: Another approach is to directly negotiate with interested investors. This can include reaching out to individuals or entities known to be interested in the company or industry.
Private Securities Markets: Listing shares on private securities markets can attract potential buyers looking for investment opportunities in private companies.
See also: How to Buy Rolls-Royce Shares
Negotiation and Agreement
After identifying a buyer, the terms of the sale need to be negotiated. This includes agreeing on the sale price and any other conditions attached to the sale. It is advisable to seek legal counsel during this stage to ensure that the terms are fair and the agreement is legally binding.
A well-drafted sales agreement should cover all necessary details, including the purchase price, payment terms, and any representations and warranties. Legal counsel can help draft and review the agreement to protect the interests of the seller.
Conclusion
Selling shares in a private company requires careful consideration and planning. Unlike public company shares, which can be easily sold on the stock market, private company shares involve more complexity and restrictions. Understanding your options, obtaining necessary approvals, accurately valuing your shares, finding the right buyer, and negotiating favorable terms are all critical steps in the process.
Engaging with professionals, such as financial advisors, investment bankers, and legal counsel, can significantly aid in navigating the complexities of selling private shares. By taking a structured and informed approach, investors can successfully sell their shares and achieve their financial goals.
Disclaimer
This article is intended for informational purposes only and does not constitute financial advice. Investors should consult with their financial advisor or legal counsel to discuss their specific situation and obtain professional advice tailored to their needs.
