OK – bit of a difficult situation...As is quite common in smaller firms, you have been gifted a minority shareholding to make you feel part of the business. To be honest you are lucky that these are in the form of shares, as it is common for employees to be gifted options which vest over a number of years and expire on the individual ending their employment. Options put a resigning employee in the difficult position of deciding whether to exercise the options (find the money to buy the shares) knowing they will no longer be part of the management team driving the company, plus the shares may never be “sellable” unless the company is taken over or goes through an IPO. With your situation, you already own the shares – that’s a small plus.(As an aside, did you declare the gift of these shares to HMRC on your tax return? As the gift was directly as a consequence of your employment, you should have declared their monetary value in your tax return of the year they were gifted. You will then have to pay capital gains tax on the difference between the declared value at point of gifting, and their value when you sell them).Shares generally have two ways of generating value – resale or dividends. Your problem is that neither are particularly attractive. Your firm is generating a pre-tax profit of £2M and a net profit of £1.1M. That’s a great business but...Are you really paying 45% tax on your gross profits?Is the 5K dividends for your 5%? i.e. total dividends of 100K on all shares? On a net profit of £1.1M that’s a very, very low percentage of profit being returned to shareholders. It implies that the company is either funding very rapid growth (i.e. you need the £1M as working capital – an extra 10-15 consultants being hired this year alone!!) OR the firm is building up a massive cash position.If the former, then I can understand why the recent valuation (of the failed takeover) was five times earnings – you are in rapid growth. Otherwise I’d be surprised if a small privately owned consultancy firm generated a PE of 5 in a takeover. Typically a consultancy firm suffers significant attrition post takeover, thus payback for the acquisition is typically targeted in 2-3 years max – not 5+.If it’s the latter, then the acquisition value is quite likely inflated by a large working capital reserve (obviously cash is acquired at face value!!)Either way, it’s hard to justify a value on a failed takeover. A successful one, yes, but failed implies the price was too much to pay...To a certain extent all this assessment of a fair price is irrelevant as the problem you really face is that minority positions in small privately owned firms are notoriously hard to sell. Who would want to put up hard cash to find themselves in your situation in a few years? With a majority shareholder on 74%, that guy can pretty much do what he wants. I presume he’s the company founder?To be honest, if it was me I’d be resigned to holding the shares for the long term – they cost me nothing in cash terms – I’d be reticent to generate any sort of further tax liability – and in the long term the company is generating profit. That profit has to be released at some point; either through dividends or takeover. The other shareholders cannot legally deprive you of equal treatment to all other shareholders. The only real danger is that the other shareholders divert the profits away from you by paying the profits out as employment salaries and bonuses. However as this would require them to pay 40% tax income tax rather than 22.5% dividend tax, they would be cutting their own throats. 40%-22.5% means an extra 17.5% of the profit going to the tax man, just to avoid sharing 5% with you.The only other option is to find someone to buy the shares, but I’d hold out little hope personally...Food for thought...
