sell

Should your business have 100 or 1000000 shares? How to Buy a Small Business

so Joey has a company with a hundred

shares outstanding he and his wife each

own 50 and peter has a company with a

million shares outstanding he and seven

other people own different numbers of

them how do shares work what is going on

what determines the number of shares and

how can you use them in your deal making

great questions hey everyone it's a

david barnett from the

investlocalbook.com blog site as well as

my David C Barnett YouTube channel where

I answer questions about buying and

selling businesses local investing

personal finance as it relates to

entrepreneurs and anything else that my

viewers want to ask me about over the

course of the past two weeks I've

actually had a couple of different

clients that I've been working with who

have had some problems understanding

exactly how shares work and so I figured

that the problem was probably a little

bit more widespread there's probably a

lot of misunderstanding about shares and

I thought I would do a little video sort

of teaching you how shares work with

respect to a company and we're not going

to be talking about share sales but I've

already done videos on that we're gonna

be talking about the shares themselves

so for example if you were to start a

business and you incorporated a

corporation and you went to a lawyer and

and then went to an accountant what

might likely happen if you were going to

start a small business is that there may

be an arbitrary number of shares

sometimes it might be one share

sometimes it might be a hundred if you

were gonna own a business with other

people for example if a husband and wife

we're gonna own a business together what

their advisors might do in setting up

the company is they might create a

hundred shares and give the husband and

wife each 50 so that they each are 50/50

owners in the company and what I'd like

to get across today is that the number

of shares outstanding

doesn't have to remain static and the

percentage of ownership that people have

can also vary over time important notes

to understand if you're going to be an

entrepreneur and build a company and one

day invite other investors or partners

in to join you so let's take a look at

some of the basics about what a share is

and how they work let's go to the

whiteboard

all right so what I've done is I've

created a basic little example we have a

business and there are a hundred shares

outstanding that were created when the

business was incorporated and in my

example 50 shares belong to Sally and 50

shares belong to John so if we look at

the percentage what that means is that

Sally owns 50 percent of the shares and

John owns 50 percent of the shares and

for most small businesses that's all

that's ever gonna happen

eventually one day the business will be

sold or it'll close or what have you and

even if it's done as a share sale those

hundred shares are gonna be sold to the

new owner now when it comes to shares

you need to think of the business almost

like it is a printing press that has the

ability to issue its own money just like

countries are able to print money the

central bank's create dollars for

example right so this business is

usually able and I say usually because

you can restrict a company when you set

it up in its incorporation papers but

most corporations are set up with the

ability to issue an unlimited number of

shares so so what does that mean we've

got 100 shares outstanding we have two

people involved in this business let's

say for example that there's a lot of

profit in the business and one of the

two partners decides that they want to

get out of the business

now usually people would think of it as

a buyout one person has to buy out the

other but if there's a lot of money in

the corporation one of the things that

we can do is the company can buy back

its own shares and tear them up okay so

what could happen is Sally and John

could agree as shareholders that the

business is gonna buy back John's shares

and cancel them okay what that means is

my corporation now only has 50 shares

outstanding and guess what Sally owns

those 50 shares and Sally becomes the

100% owner of the business without Sally

having to buy John's shares what

happened was the company bought back its

own capital

stock and canceled the shares okay at

the same time the company is also able

to issue new shares whenever the board

decides so let's remove that example

let's say that there are a hundred

shares again and John and Sally each

owned fifty let's say that the company

has an opportunity to grow and John and

Sally decide that they want to introduce

a new partner into the business named

Peter now Peter has some money and the

business needs the money in order to

grow so if Peter says I'll bring the

money into the business but I want to

become an equal partner with you guys

how would you do that well John and

Sally if they sold some of their shares

to Peter such that each of them say own

233 shares well John and Sally would

become the sellers Peter would have to

give the money to them but that's not

the goal they want the money to go into

the company so in this case what would

happen is the business would issue 50

new shares now there's a hundred and

fifty shares outstanding and 50 them are

sold to Peter now each of them owns 50

shares now each of them becomes a 33%

owner in the business now if John and

Sally each own half the business why on

earth would they agree to dilute their

ownership position down to a third well

it's quite simple really the capital

that Peter brings when he puts it into

the company increases the value of the

company because the same company is

still there but now it has more money in

it okay and so now John and Sally are

each happy owning a third of a bigger

organization so if we look at the

example of big companies you know at one

time for example coca-cola probably

started off with a very few number of

shares and as investors came forward and

put more money into the company to build

factories and do the distribution

network etc the value of the company

grew with the new capital being

contributed so those initial investors

whose position ownership is

and starters a shrink maybe from 50 to

40 to 30 to 20% they were owning a

smaller and smaller piece of an

expanding pie so the value of their

percentage ownership was likely

increasing as the company achieved

success so in the past week here's some

misconceptions that I've run into shares

of a company belong to the company they

can't go anywhere else they can only go

change hands of owners so Peter for

example could decide that he wants to

get out of the business he might sell

his 50 shares to Sarah

so now Sarah comes in and of course

share purchase and sale in a private

company is usually governed by terms and

conditions and something called a either

a shareholders agreement or some kind of

partnership agreement depending on the

jurisdiction you're in in the form of

corporation that you use so we can move

shares from one person to another and

shares can come out of the Treasury of

the company or go back in but shares

can't go anywhere else so the client I

was speaking with this week thought that

her and her husband's company could

create with the help of their children

to new companies that had similar names

and they could transfer their shares of

the original company into the new

companies so that those new companies

would somehow be able to automatically

take over the business of the old

company and I had to explain know that

that doesn't happen that way you can't

transfer shares from one company to

another so a company stock only belongs

to that company and we can do certain

things with it but it can't go anywhere

else the other example that I ran into

were some people who had created a

company just like Sally and John with a

hundred shares each and the company has

grown in value and these two partners

believe that their business is not worth

a million dollars and they wanted to

bring on another person who was

interested in becoming a shareholder so

what I advised them to do was what's

called a stock split

to make things easy so instead of a

hundred shares what we're gonna do is

we're going to split each share such

that instead of a hundred shares we

actually have a million shares so these

guys believe that their company is worth

a million dollars so now we're gonna

have a million shares outstanding which

makes our math easier the two partners

then split their 50 shares such that

each of them owns half a million shares

okay

now new partner comes along let's say

it's Sara again Sara brings a little bit

of cash into the business and has to

perform as a new sales director let's

say so Sara brings $75,000 in cash and

she's gonna add it to a business that's

worth a million dollars so how can we

use our tricks of shares in order to put

that money into the company and

represent the the growth and value that

Sara brings easy the company is going to

issue 75,000 new shares to Sara bringing

the total float to 1,075,000 what does

that do over here well it changes the

percentage of ownership so Sara now owns

just under 7 percent because he owns

seventy-five thousand of a million

seventy-five thousand shares so it's

about six percent and these two original

partners who used to be 50/50 owners of

the company have now been reduced to

about 47 percent each now if Sara hits

her sales targets this year and helps

grow the company revenue what they've

said is they're gonna give her a bonus

of issuing her more shares right so

let's say they give her another hundred

and twenty-five thousand shares bonus so

now the company has 1.2 million shares

outstanding and what it does is it

changes the ownership again

so now Sara has two hundred thousand out

of the 1.2 million

shares outstanding which means that

she's going to have basically one-sixth

of the percentage of the company and the

original two partners are going to

divide the other part between them so as

you can see if you want to grow the

company by Braemore resources in or

adding more partners you can do a bite

issuing new shares I know

a large real estate firm whenever they

want and they're publicly traded and

publicly traded entails a whole other

group of rules etc but whenever they

want to buy a new apartment building

what they do is they create and sell

more shares in order to get the down

payment and then they borrow the rest

from the bank and so what that means is

that all of the people who've already

bought shares their percentage ownership

of the business declines but the value

of the company is increased because now

new partners have come on to finance the

down payment of a new building which

grows the overall value of the

enterprise so I hope that helps to clear

things up because this is something that

what I find is a lot of people have

confusion about if you want to learn

more about buying businesses then you

should be visiting my buyer website

which is business buyer advantage com or

you can sign up for my 9 hour online

course which teaches you the ins and

outs of buying a small business and if

you own a business and you think that

you may want to start looking at selling

your business then you really should

visit how to sell my own business comm

which is my sellers help site where you

can get all kinds of free information

and learn how I help people sell their

own business and avoid paying a business

broker's commission as always I would

invite you to go to David C Barnett comm

where you can sign up for my weekly

email list and get videos just like this

one every week before everyone else on

the internet gets to see it and with

that I'll say thanks and have a great

day and for those of you who were

wondering yes I am feeling much better

than I was last week when I recorded the

cranky account in the video thank you so

much for all the little notes get well

emails that I received alright alright

it was bugging me so I wouldn't got the

later when when the performance bonus is

achieved then all of a sudden Sarah will

own 16 percent of the business and the

other two people will each own 40 - talk

to you later