When speaking to business owners in management interviews, I always ask a couple of question: What has been your dividend policy in the past? And, what do you expect it to be going forward? Interestingly, many business owners reply that they don’t have a dividend policy. At that point, I reply that they have had a dividend policy historically, and that they will have a dividend policy prospectively. Considering this, we seek to answer what is a dividend payout ratio and what are the types of dividends?
This post focuses on the earnings retention rate and its impact on growth. In many previous posts, we have discussed the concept of dividends and dividend policy. Dividends represent the portion of earnings that is available for distribution after the payment of all taxes and accounting for all net reinvestment in the business.
The idea for business owners is to get both sides of this balancing act right. It is good to reinvest for future growth. It is not good to reinvest in unproductive assets. This lowers expected returns and postpones current returns in the form of dividends.
If a business has productive reinvestment opportunities, it is good to try to grow through reinvestment. Reinvestment, as we see, lowers the potential for current returns in favor of future returns gained through growth.
Take your pick. Current returns or future returns or both. Your results will be determined by your earnings retention policy and the mirror dividend policy.
Recently I spoke with a business owner who had almost sold about half of his company to a private equity investor a few years ago. The facts will be changed in this story so that neither he nor I should be able to recognize his company. However, the conversation highlights a potential opportunity for owners […]
The issue of whether private companies should pay dividends is an important one. Many private company business owners (and boards) resist paying dividends because they desire to retain flexibility at their companies and do not desire to incur risk from leverage (or slower ability to repay debt). The interesting thing about this position is that it creates polar opposite effects on private companies and their shareholders. What follows are ten good reasons to consider paying private company dividends and five things that some folks say represent the downside.
Special dividends, to the extent that your company has excess assets, can enhance personal liquidity and diversification. They can help increase ongoing shareholder returns. I have always been against retaining significant excess assets on company balance sheets because of their negative effect on shareholder returns and their adverse psychological impact. It is too easy for management to get “comfortable” with a bloated balance sheet. We explore the decision of special dividends and their effects through a short anecdote.
During this webinar sponsored by the American Society of Appraisers to be held Tuesday, February 24, 2015, Chris will walk through key portions of his new book, Unlocking Private Company Wealth, and talk about the implications for business owners while relating the content to business advisers. He will discuss not only ideas and concepts that will enhance the quality of conversations you have with business owners, but will provide real-life examples of these concepts in action. Learn more about it here.
On Tuesday, November 18, 2014, Chris Mercer will conduct a 100-minute webinar on the topic of “Unlocking Private Company Wealth: A Tutorial for Business Advisers.” The webinar is being sponsored by Valuation Products and Services and begins at 12:00pm (Central). For more information on the content of the webinar, view the video from Chris. There is also a link to register.
Corporate finance can be confusing if you are a private company. Much of what we think about comes, directly or indirectly, from corporate finance ideas and concepts developed around the public markets. This post looks at what is called the Modigliani-Miller theorem, makes a few observations, and then, attempts to relate them to closely held and family businesses, i.e., the private company world. We cannot blindly assume that all of the assumptions of the M-M theorem hold in the real world of private company finance. Capital structure influences the level of shareholder returns to equity over time. Dividend policy determines the current returns to owners over time. The combination of a reasonable capital structure, a reasonable dividend policy, and paying attention to the needs of various owners make real differences in the long-term success of many private companies.