Key Idea: Sell Into the Private Equity Market (8)
Steve Watkins tells us how businesses are selling their securities, the stock certificates we got when we incorporated, within the Private Equity Capital Market. More... Related...
Peter took the anonymous road and Lorraine took the friendship path. Peter wrote an ad (just like an advertising man, right?) and ran it in the Wall Street Journal. He described the type of person he was looking for which was the way he found a person like himself.
Lorraine told her banker friend that she wanted to sell and it turned out that she had more than one offer. The person who "won the right" to buy the business told Lorraine that he loves plants and that was the opening of the buy-sell negotiations. Because she was able to sell to a plant lover, Lorraine felt good about the sale. She felt that the employees and customers would be happy because the new boss is in simpatico with the founder.
The big bonus for Peter and Lorraine is they didn't just get money for their businesses; they transferred the business to a person that they felt would keep the business much like they found it.
Start acting more like the big boys without going public. You can do that by selling shares of your company to private investors. Most of us would love to capitalize on the sweat equity in our business. Most often it is part of the intangible assets and doesn't even show up on the balance sheet. And, we all know that our simple Book Value (NAV) is way too low!
All the intangibles within Big Business get valued within price/earning multiples -- usually beginning around 6x -- they're hot over 100x earnings. So, what Steve Watkins is doing is shaping a P/E for privately-held businesses!
With the advance of the Internet, not only is this possible, but it really has to be done. If we can take even 20% of the people in group #1 and move them into this group or any of the others above, a major small business revolution will have begun. We will begin reversing the failure at the end to transfer the most important assets of a business, its knowledge base.
Q: What is preventing us from being a little more creative?
A: 1. We're doing our business. Too many of us are working in our business and not working on the business. We can all get so involved with the details of day-to-day that we just don't pull away to look at the strategic and long-term pictures.
2. It is too much work. The learning curves are too steep. And it all costs too much! In the public market and IPO/DPO markets, it seems like every time you turn around, the market makers want another $30,000, so we ask, "If I were to take that $30,000 and $18,000 for maintenance and put it into a mutual fund, would I be ahead in ten years?" It is a legitimate question.
3. Our idea is not big enough. Especially among the sole proprietors, millions of our businesses are lifestyle business. We have a body of work we do as an independent agent for a select group of clients and much of it is based on who we know and how well they know us. It is not a transferrable asset as it stands. We are not going to let this answer or the first two answers stand. This web site and the television show are focused on the learning curves and the infrastructure so you can more readily exercise one of the last three key ideas.
Q: Why haven't we seen a dozen Entrex examples?
A: We have. They've come and they've gone. Many people have tried doing what Steve has done and they failed. Steve has had the history and depth (money) to carry his vision forward so Entrex is real and they are doing deals. This is what they say on their web site: "Entrex works through an SEC sanctioned market to create a "public shareholder marketplace". Collectively we serve as a: "PUBLIC MARKET for PRIVATE COMPANY SHAREHOLDERS" By creating a central information platform for this market we help to provide liquidity options for stockholders beyond the traditional route of IPOs, mergers and/or aquisitions. Through an SEC sanctioned exchange, your company stock can be listed, traded and even distributed on financial tickers out to the financial brokerage and investment banking community. Some of the advantages to participants in this market can be:
- Trade existing shareholders publicly -- without a public offering.
- Raise private capital with planned liquidity for investors.
- Give existing shareholders and founders a new exit opportunity. Founders can potentially cash out as part of the program.
- Increase the earnings multiple for your company when being valued for potential merger/acquisition opportunities. Use your company stock as a currency for acquisitions."
Think about it
What can you do with this information?
Clip from: From Equity to Exit Strategies - 8 Possible Paths
The world: Most of us small business owners do OK competing with the big businesses in our industries or we don't survive. But when it comes to our exit strategy and succession planning, most of us fall on our face.
This episode is to explore business valuation and exit strategies.
An exit strategy is just like doing a will, but here you try to maximize the dollars you get out of your life's work. Nobody wants to see you liquidate. That's getting pennies on your dollars. Tangible assets get sold (fire sales) and the intangibles are lost forever. Liquidation is the worst kind of liquidity.
Most of us will sell our business through merger or acquisition. But, if we get much over two-to-three times sales or six times earnings, we all think we've done very well. Yet, when big business sells, they usually begin at six times earnings. Then we see 40 times and even 300 times earnings on the open markets. Why should we be satisfied with so little?
Go to all the video clips within this episode...
Go to the homepage of this episode...
We all must prepare today for the invevitable tomorrows.
Small Business Owners Everywhere in the world, We all will exit our business someday.
Visit our web site: http://smallbusinessschool.org/page1107.html
Sell Into the Private Equity Market (8)
HATTIE: Number eight. Sell over time into private equity capital market.
This is the new business revolution that is opening up small business investments, making us attractive for qualified investors, yet the general public is not excluded. There are now many secondary markets where your sold stock will be valued and can be resold. You can be taking your equity out slowly, over a period of time and not have the pressure groups -- particularly the venture capitalists or the angels -- poking around in your day-to-day business. Upon your final exit, your business is in the hands of management and owned by a diverse public.
It is a public offering without doing an IPO or a DPO. This is huge. It is important, so we will spend a little more time examining the private equity market. This is one of the beginning points for creating substantial wealth.
STEVE WATKINS: The message here is that wealth is made through transactions and equity.
HATTIE: (Voiceover) Steve Watkins, founder of ENTREX speaks to the Boston CEO club about what he calls the fourth market.
STEVE: Company value is a function of exposure. It’s a function of credibility and in the end it’s a function of the liquidity options that the buyers have for your company. So let’s talk about those liquidity options. You’ve obviously got the public market, you’ve got the New York Stock Exchange, the NASDAQ and you’ve got American Stock Exchange.
In the private market place -- what we’re trying to create here -- is a fourth market, a market for the public trading of private shareholder interests. So we have gone out and worked with an SEC-sanctioned exchange to create a reporting infrastructure and then a trading infrastructure that supports the shareholder’s interest in these companies. We call that the fourth market.
Its the public market for private company shareholders. By creating this mechanism that allows private companies to report through this informational platform and by working together with and SEC-sanctioned exchange that can now get your company symbol and knowledge out across the investment marketplace it allows the investment community to work through their broker dealers to learn about these private companies that have publicly traded shareholder interests.
My job is to try to bridge that arbitrage gap between the multiples of private companies and the multiples of public companies. The fundamentals have to be the same. It’s not a miracle. But it’s by putting the effort behind that we can end up providing some exposure, creditability and liquidity for your company. Our intent is to do that through this 4th marketplace.