Pease porridge hot, pease porridge cold,
Pease porridge in the pot, nine days old;
Some like it hot, some like it cold,
Some like it in the pot, nine days old.
So many of my clients have upward of 50% of their pensions tied up in their small businesses. Some of those are very big pensions, while others are going to be in trouble if they don’t remove thumbs soon. Too many of them tie their own perceptions of business value (and therefore their pensions) to the price earnings ratio on the stock market.
This is why is not a good starting point:
- For the most part, stock exchanges are just that; places where people are able to exchange stock (securities, shares, equity) easily and quickly.
- Stock markets are very regulated in controlling how businesses operate.
- Stock markets put such a high hurdle in place of actually doing business that we can be fairly sure that a lot of reputation stands between the investor and disaster.
- Investors are just that; investors. They are not required to get involved in the management of the invested company.
- Disclosures are mandatory, and they can all be found in a single place, in a standard presentation.
- Management is generally out of the top draw; professionals who are well qualified.
- Audits are conducted to the highest standards
By comparison, this why the same does not apply for small, closely held businesses:
- It is very difficult to sell a small business. It almost always has to be done as a 100% deal. An investor cannot buy 1%, let alone 0.000001% and know that he has made a good investment which he will be able to sell without too much fuss next week, if necessary.
- Small businesses are regulated by law. Sometimes they are taken to task. Since small businesses have lobbied for less red tape there have been several concessions made, most notably in the Companies Act of 2008. If your PIS is below 100, then you are regulated like the old close corporations, essentially.
- You and I can open a small business before lunch tomorrow. We can close it down on next Friday.
- Small business ownership amost always involves running the place as well. Those with the best values are those who surmount this irritation, but even those rely on their owners for regular input and butt kicking.
- Disclosures? Well you know…
- Management is often very good, but not always. When it is good, it is often more as a result of life experience than formal training. I have come across so many small business owners with standard 8, more capable and clever than some of the CAs and MBAs I have worked with over the years. But sometimes it is not good. Not because some people cannot sell a product and get it delivered, but because they just leave so much money on the table… or take too much off it. Good or bad those poor buggers would never be able to dust off a CV, and get a job.
- Thousands of small businesses no longer need to be audited, be they the old close corporation or proprietary limited company. This means that in the build up to the sale of a business, they need to make some plans to appease their eventual purchaser, and assure him that he is not buying a sinking ship.
So back to the first paragraph. If you have 50% of your pension tied up in SATRIX, you investment advisor may suggest that you are being either too risky in your outlook, or too conservative in your growth needs. At least though, you and he have a good idea of the actual value, and you can make some coffee table calculations.
But if you have 50% of your pension tied up in your own small business, your investment advisor may not even ask what your business is really worth. Do you think that he or you would be able to justify any particular value assumption, if necessary? How do you really know it is 50%? Perhaps it is 10% – of an even smaller pie. When it is too late to do anything about it – What then?