How to sell s corporation shares
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
