Buying In—Need To Know

Dear Dave
I am a relatively young engineer at our firm but will likely have the opportunity to become a shareholder in the near future. What issues should I be considering when it comes time to buy in? What is the minimum type/amount of financial disclosure information I should expect the firm to provide me while making my decision? Should I obtain the services and advice of separate legal counsel or an accountant on the matter?
TD MS

Dear TD
Before you get to the attorneys and accountants, first and foremost, be sure to fully understand and appreciate what being an “owner” means. What criteria were used to select you as a potential owner? Will additional stock be available to you in the future? If so, when and under what conditions will this occur? If you elect to go forward with the purchase of any offered shares, what effect (if any) will this have on your daily, weekly, monthly duties and privileges at the firm?

Are your expectations of what ownership is and isn’t shared by the existing owners? At too many firms the fundamental elements of ownership are not very well thought out or explained and often lead to disappointment and contention down the road. You may think you’ll be involved and consulted for any significant future decisions the firm may make; the selling principals, on the other hand, may view your purchase as strictly an opportunity for you to enjoy the financial benefits of ownership with little or no real participation in management or decision making.

Do you have confidence and faith in firm management and the prospects for the firm’s future success? How do you feel about others who may also be offered ownership? Are you comfortable with these individuals as partners? If the existing principals are getting up in age, or are singularly important to the ongoing success of the firm, are you convinced they have a credible program in place to smoothly transition themselves out of the firm?

Once you understand the nature of what is being offered, look at it in purely economic terms. How much will I pay for the ownership stake being offered? How was the stock price determined? If I make the purchase, from what sources will the payback on my investment come? Will I get a raise? Will I receive dividends or special additional bonuses? Knowing the intended source of the payback for your investment, ask the firm to demonstrate, using the past two to three years of firm financial history, just how the payback would have worked out had you been an owner over that period of time.

As a prospective purchaser, at a minimum you should receive the previous two years of firm financial reports. You should also be offered a copy of the firm’s shareholder buy/sell agreement detailing the rights and obligations of stock owners for review. Read this information carefully and more than once. Don’t be embarrassed to ask for clarification or explanation for anything you’re not completely comfortable with.

Rather than hiring your own attorney and/or accountant as a first step, seek to meet with the professionals involved with putting the documents together in the first place for review and explanation. Your company should not have any problem giving you access to these individuals for assistance. Having done this, should you still have lingering concerns, or if the amount of the overall commitment is terrifying, you may wish to retain your own advisors to confirm your understanding and allay your fears.