How to Buy Closely Held Stock

by Leslie McClintock

Closely held companies are those which do not sell shares of stock to the public over the stock exchange. The vast majority of corporations are closely held companies. They can be risky, since the government does not require the same level of disclosure from these companies. It can also be difficult to find a buyer should you wish to get your money out of the company. If you do decide to purchase stock in a closely held company, there are some things you should consider prior to purchase.

Contact the current owner or owners of the company you would like to invest in.

Perform due diligence. This is your own independent research in the company. You can hire a third party, such a business-valuation firm, to do this for you, or you can do the research yourself. Inspect the company's balance sheet and recent cash flow statements, and check the information against recent tax returns. Ideally, the company's financial statements will be audited, though many small firms do not have third parties conduct an independent audit of their accounting. Inspect the company's physical plant and talk to workers and managers as well as the owners. You can also expand your due diligence to include key customers and vendors or suppliers.

Discuss a buy-sell agreement with the other partners. The buy-sell agreement is a contract among business partners that governs how the partners will exit the business and how their shares will be valued at that time. The plan should discuss what happens to a partner's shares in the event of death, disability or retirement.

Structure the deal. If you are interested in buying the whole company, you should discuss whether you are buying shares in the corporation or if you are simply buying the company's assets. As a buyer, asset purchases tend to be more favorable than stock purchases, since you do not take on the company's liabilities and you also benefit from a step-up in cost basis on the assets when they transfer to your control. Stock purchases tend to favor the seller. The seller may ask a premium to sell assets, rather than stock, since the seller will still need to pay off the business liabilities with the proceeds.

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