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We are in the process of buying out our majority shareholders and want to sell the shares onto several new investors. Should the money used to purchase the % shares reflect in the company accounts as a loan account ? From what I understand the loan account would be used when an investor put's money into the account not when buying equity.
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Last edited by filunt1; 26-Sep-18, 10:20 AM. -
A business is funded by two types of money.
1 Share capital
2 Loan capital
Loan capital can convert to share capital by negotiation, usually under stressful cashflow pressures, or when lender covenants are in danger of being breached. A bank may lend to the company on the condition that the cash flow ratio be maintained in a range. If the condition is breached, the loan can be called, or the interest rate hiked, or something else terrible.
(This is the problem Eskom has. Its covenants are all in a shambles, and so the ratings agencies are are punishing them, and investors will only lend on terrible terms - sub investment grade)
So your investors cannot have their pie, and eat it. It is either share capital at risk at the most basic level, or it is loan capital at slighty less risk, but on defined terms. -
What they could do, is lend money to the company to buy back the exiting shareholders' shares which are returned to treasury.
Then in a simultaneous transaction, buy those shares from the company. But getting the ratios right between share capital and loan capital can be tricky. And it is a tax minefield.
Or
They could create a special purpose vehicle which lends the money to the company for the repurchase of the shares. The SPV can secure the loan by way of pref shares which rank above the ordinary shares. And there are all sorts of recipes for that transaction as well.
Essentially the SPV can earn interest, and be guaranteed first call on the profits. But they will not necessarily benefit from the upside beyond the coupon rate.Comment
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Are the majority shareholders natural persons?Comment
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