The primary readers of this blog are business owners and advisers to business owners. In this post, which introduces my new book, Unlocking Private Company Wealth, I’m talking to both groups.
Now and Then – The Bookends
Think about yourself for a moment. That may be difficult for some of us, but think about yourself. Think about where you are and what you’re doing, and where you seem to be headed. Take a moment and put some color to your thoughts about you right now. You are where you are and that is the result of lots of actions, decisions, luck, bad luck, or whatever. The mental picture of yourself now is your current status quo.
Think about what it is you ultimately want to do in terms of retirement – selling a piece of a business that you own or selling the business that you own – to outsiders, insiders, or family. If you don’t own a piece of a business or a business, think about what your retirement will be. Take a moment and put some color to your thoughts about your retirement. The mental picture of your self then, at that future date, is the picture of your end game with respect to your business life – but certainly not your life!
Your current status quo and your end game provide the bookends within which things will or won’t happen.
Think about these bookends, your current status quo and your business end game. They are separated by time, so think about the years in between. You and I know that we all have to go to work. Every business owner has to run a company, and every adviser has to run a business and a life. I’m not talking about those activities. I am talking about the fact that for each of us, there are a few key things that we must accomplish if we want to satisfactorily achieve our end games.
We should all be thinking about those few key decisions or actions or initiatives that must be set into motion to assure the successful achievement of our end games. You may know what they are and are procrastinating in making the necessary decisions or beginning the critical initiatives, or taking key actions. You may need to think about what the keys to your end game are with the help of friends, family and advisers.
In 1973 Elmo Wright was a wide receiver for the Kansas City Chiefs. He is believed to be the first professional football player to celebrate a touchdown by dancing in the end zone in such a memorable fashion. That dance and the ones that followed defined his football career. But think about the image of dancing at the end game for yourself. Unlike Elmo Wright, who could dance simply because he made a touchdown, there are likely a few key things need to happen in your life and business so you can be dancing at the time of your end game.
The Academics Nail it re Managing Private Company Wealth
A number of years ago I read an article in the American Economic Review (Moskowitz, Tobias J., and Annette Vissing-Jørgensen. 2002. “The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?” American Economic Review, 92(4): 745-778). The American Economic Review is a very scholarly journal, so the article was pretty serious.
The professors wrote about their study of private business. They said:
We find investment in private equity to be extremely concentrated.
That probably corresponds with what you notice about yourself or your clients. They went on:
About 75% of all private equity is owned by households for whom it constitutes at least half their total net worth. Furthermore, households with entrepreneurial equity invest on average more than 70% of their private holdings in a single private company in which they have an active management interest.
They are defining many of my typical clients. If you are a business owner, they likely have you pegged. In my experience, it is not unusual for the value of an owner’s business interest to account for 70% to 90% or more of their wealth. So, they’re focused on that single company.
Now, we get to the thrust of what caused me to start thinking and writing about managing private company wealth:
Despite this dramatic lack of diversification, the average annual return to all equity in privately held companies is rather unimpressive. Private equity returns are on average no higher than the market return on all publicly traded equity. What we hope to convince the reader is that a complete theory of household portfolio choice should emphasize both public and private equity.
The professors are making two critical points for business owners:
- High concentrations. Business owner wealth is typically very highly concentrated in the stock of the companies they own. Said another way, business owners tend to lack diversification in their investment portfolios, which include their private business ownership and any other assets they own.
- Inadequate returns. Private businesses perform, on average, no better than a market return from a diversified portfolio of public securities. What this means is that on a risk-adjusted basis (because of generally smaller size than public companies and lack of diversification), returns to private equity are, on average, inadequate.
The American Economic Review article and the evolving nature of my personal business encouraged me to write a booklet several years ago. It was titled The One Percent Solution. The subtitle of this booklet was “An Introduction to Wealth Managers and Business Owners to the Concept of Managing Pre-Liquid Wealth.” The key idea of the booklet is that business owners should manage the wealth in their private companies with the same degree of attention and respect that is typically accorded to their retirement funds and other liquid assets.
It offered the idea that owners should think in terms of setting up a budget for managing private wealth based on the value of their companies. We sold or otherwise distributed many thousands of these booklets.
A New Book on Managing Private Company Wealth
Last year, I started to write a second edition to The One Percent Solution. As I began to write, I realized that the new book should do more than just talk about managing private company wealth, and that its greatest value would be in providing tools and strategies and perspectives for managing private wealth. Unlocking Private Company Wealth, which just became available, is the result of this updating of the original booklet.
The book has three sections and twenty chapters. The sections are:
- Section 1: Managing Private Company Wealth. The chapters in the first section compare and contrast the management of private company wealth and liquid wealth, including retirement funds and other liquid assets. The myth that owners are managing their private company wealth merely by running their businesses is dispelled. Private company wealth should be managed with focus and respect. The One Percent Solution is reintroduced as Chapter 5, and an overview of private company wealth management activities is provided. The last chapter in the section discusses valuation concepts that are important for ownership and management transitions.
- Section 2: Tools for Managing Private Company Wealth. The second section of Unlocking Private Company Wealth introduces a number of tools and strategies for managing private company wealth. While the tools are actually tools of modern corporate finance, the chapters are understandable and accessible. The role of dividends and dividend policy is discussed at length, and we learn that every company has a dividend policy, whether it is stated or not. The use of reasonable leverage to accelerate shareholder returns and to enhance ongoing returns is discussed in terms of leveraged dividends, leveraged share repurchases, and leveraged ESOPs. There is an important chapter on buy-sell agreements and life insurance.
- Section 3: Perspectives on Managing Private Company Wealth. The third section puts the wealth management concepts of Section 1 and the tools and strategies of Section 2 into perspective. We talk about transferable value, or value that others with capacity will pay for. Transferable value is fueled by identifiable earnings, or earnings that can be seen as believable and repeatable. We look at the ways that the next investors will look at your company, reaching the conclusion that you should look at it the same way. There is a chapter titled “Bad Things Happen to Good Companies.” Focus on minimizing risks and concentrations while there is time, and on doing those things that are necessary to manage private company wealth when you can, because “If you wait until it is too late to diversify, it will be too late.”
In his forward to Unlocking Private Company Wealth, Jim Clifton, chairman of Gallup, and author of The Coming Jobs War, suggests strongly that private companies in America should subscribe to the tools and strategies outlined in this book. He says that if that happens, the world might be changed for the better. Gallup has certainly changed for the better as have many other private companies for implementing one or more of the strategies discussed in the book.
I don’t know about the world, but your fellow owners will be better off if you will consider and adopt some of the tools during the interim time that you have between now and your ultimate end game. The same is true for advisers, who can help owners in the process of managing private company wealth.
This book is particularly focused on baby boomer business owners. Why? There are just so many of us. There are more than 75 million baby boomers in the U.S., 25% of the total population. Baby boomers own two-thirds of all businesses with employees, Strikingly—this last statistic is stunning—the oldest of the baby boomer generation began turning 65 in January 2011 at a rate of 10,000 birthdays a day and this trend will continue for the next twenty years or so.
Unlocking Private Company Wealth is focused on all business owners but especially baby boomers. If you think about the concept of the interim period between now and our ultimate end games, baby boomers just have less time so we and they need to focus. Business ownership in America (and elsewhere) is highly concentrated in private companies and owners are not diversified. So long as this situation exists at your company, you and your family are at risk. Remember, bad things can happen to good companies, even yours.
So think about the bookends, now and your current status quo, and then, the time of your business end game. Think about the few key things that have to be done, and decisions that have to be made, plans that must be initiated between now and your business end game. Let this new book help you focus on the right decisions, initiatives and actions that will maximize your business end game results. Like Elmo Wright in 1973, you will be dancing in the end zone, or dancing at the results of your end game.
Naturally, I recommend Unlocking Private Company Wealth because I wrote it. In this wrap-up, let me share what one business owner shares about the book in the “Praise” section:
I have been in and around privately held family businesses for over 40 years. I believe every family member owner, especially those who don’t work in their family’s business, needs to read Unlocking Private Company Wealth. It is an excellent framework for understanding the importance of their investment and provides essential concepts to assist them in understanding and measuring for themselves the value of what is, for most, the largest asset in their investment portfolio. I plan on sharing it with our Family Council as a great educational tool for our family owners.
–Dan Hatzenbuehler, Chairman of the Board, E. Ritter & Company, Marked Tree, AR
Unlocking Private Company Wealth is now available. Read about it here. If you purchase the book now, you will also receive (be able to download) the following ownership transitioning resources in pdf format:
- My book, Buy-Sell Agreements for Closely Held and Family Business Owners. Buy-sell agreements are important ownership transition tools.
- Buy-Sell Agreement Review Checklist. This resource has been downloaded thousands of times and is a tremendous tool to assist in talking about buy-sell agreements.
- Checklist for Shareholder Promissory Notes. Check the note in your buy-sell agreement against the features and terms mentioned in this checklist.
As always, do call to discuss any valuation-related matter in confidence, or if you wish to talk about ownership or management transition issues (901-579-9700).
In the meantime, be well!