To sell private shares in a private company involves finding the right buyer and getting the best deal possible. While hiring a professional will benefit you dearly, knowing about the transaction itself is important to ensure that you know if you are getting the best deal possible and that you won’t have to face any problems after the sale is completed.
There are several differences between public and private company shares. Private company shares of stock are more challenging to attain. For publicly listed companies, all you need is capital then you’ll be able to purchase shares of stocks in the stock exchange.
To buy shares in a private company, you will have to contact the company itself or you could approach a current shareholder of the company to buy the stock since the shares are not available to the public. However, this still doesn’t guarantee anything because most private companies have a right of first refusal (ROFR), meaning they can reject you becoming a shareholder of the company.
The most common type of share comes with voting rights and influence or control over company decisions.
This share does not come with voting rights. However, preference shareholders are the priority in receiving company dividends compared to ordinary shareholders.
As the name implies, holders of non-voting shares receive dividends but cannot influence the company’s decisions.
This type of share comes with specific “restrictions” or conditions in exercising the rights of owning the shares.
This type of share is only available to the founders of the company and protects them in the event the shares are diluted.
A type of benefit offered to employees or investors as a type of reward, and only when the company’s growth exceeds their threshold set.
Selling a public share would be as easy as how you bought it, but you would need to negotiate the price with the purchaser to sell private stocks. The gain you would realize from the sale will be subject to Capital Gains Tax since the buyer will sell it privately and not through the stock exchange.
Since the private company stock is not publicly traded, it does not have a fair market value because there would be no public transactions on which to base the price. The first step is to determine share value, ensuring that the seller realizes the most amount of gain possible.
The next important step is to gather necessary documentation. This will provide the buyer transparency in the negotiation phase, providing details of what owning those shares entails from shareholder agreements, the company’s financial health, and their business contract dealings. Additionally, before selling, the seller must understand tax implications of selling shares of stock through a private sale, which would result in a capital gains tax if you realize a gain from the sale.
As mentioned earlier, most companies have an ROFR, meaning they can influence to whom you could sell your stocks. Private entities usually consider selling stock to their existing shareholders rather than having an unknown third party own it, at the same time. Some require shareholder approval before any movement of ownership within the company. Understanding these legal and regulatory requirements is essential to sell private company shares.
Can you sell shares in a private company? The answer is yes, but to sell shares of a private company, even with the benefit of being only liable for the number of shares you own, will still involve a lengthy process.
Challenge: Limited market for shares, making it difficult to find buyers.
Solution: Look for a potential buyer within the company.
Challenge: Valuation disputes.
Solution: An independent valuation from a qualified professional will give a strong foundation for the deal negotiations.
Challenge: Shareholder agreement restrictions.
Solution: Engage and maintain a good relationship with stakeholders to make the process easier if approval is needed in any decisions you make during the selling process.
Challenge: Tax implications.
Solution: Hiring a tax advisor will help significantly to properly structure the deal, making it unlikely for you to face implications later on.
Additionally, there are benefits of stock options, usually for the company’s current employees and investors are the ones entitled to it, which could also make the company a possible buyer of the shares you have for them to have a share to offer when they don’t currently hold any treasury shares.
As mentioned earlier, it is much more difficult to sell shares of a privately held company than shares of public companies. Here are the methods you can use to sell private companies’ shares to simplify the process:
There are several ways for you to sell stocks. However, the most important thing to note would be to ensure that the price you will receive is the best price you could get, considering the current financial health of the company you own ownership in.
The best way to do something you are not an expert in will always be working with professionals. They can perform the best approach in terms of the valuations for the share price and the proper precautionary steps to ensure you receive the best deal possible.
Professionals are also well-versed in negotiation strategies, conducting due diligence on how much the buyer can afford to buy your shares and justifying the valuation you will be asking for.
Another critical factor to take note of is maintaining confidentiality throughout the deal. Premature disclosure to a buyer not looking to make a serious offer could negatively affect the company if competitors and stakeholders are made aware out of the blue that a shareholder wants out of the company.
A promising new venture to enter after private ownership is getting into public trading since you know first-hand what affects a company, and if it’ll be able to grow. You’ll be able to do the same in the public stock exchange, though with a lot easier liquidity process.
Understanding the required paperwork and legal restrictions is essential to ensure compliance and not incur any penalties during or after sales. Sellers must ensure the deal complies with regulatory bodies like the Securities & Exchange Commission SEC, and disclose the necessary financial information to adhere to investor protection laws.
Sellers should also take note of the transfer restrictions in the company’s bylaws, as several companies have a ROFR. Reviewing share transfer agreements also helps identify both parties’ obligations during and after the sale.
Q#1: What is the most common problem in selling shares in a private company?
A#1: A handful of private companies do not allow sellers to issue shares to new investors, so you must review your shareholder agreements and restrictions before looking to find any potential buyers.
Q#2: Do I need approval from the Securities and Exchange Commission SEC to sell my shares of stock?
A#2: Depending on the country you are residing in, the SEC may require you to file documents of the sale before you get approval to share your sales. Hiring a professional will help ensure you comply with any regulatory bodies.
Q#3: What is the fastest way to sell private stocks?
A#3: The easiest way to sell your shares in a private company will always be to look for a buyer within the company, either you sell it to another company shareholder or the company itself.
Q#4: What are the tax implications of selling privately held shares of stock?
A#4: When realizing a gain after selling private shares, it results in capital gains tax based on how much the gain you recognize in the transaction.
Several important considerations are the legal and financial regulations and ensure that the market conditions are at their peak to get the highest valuations possible during the sale. Those looking to sell shares private company should work with professionals as they are knowledgeable enough to make the process less of a burden on the seller.
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