Creating an Internal Demand-Driven Market for Private Company Equities
Following a “True Corporate Model™ ”
By David M. Cooper, CPA, CVA
This is a value-added consulting service developed by me over twenty years. The service teaches principal owners and key employees of private companies a process for “Creating an Internal Demand-Driven Market for Private Company Equities” following a True Corporate Model™ .
Most of America’s successful private companies are controlled by principal owners who are in their 40’s to 60’s with no formal transition plan. These principal owners are less likely today to sell to third parties or to go public for three principal reasons. One, third party buyers expect higher rates of return on private equity investments, ranging from 22% to 28% pre-tax, which means lower price to earnings multiples. Unless they go public, almost no private companies will be paid 8 to 10 times earnings today for their business. Second, most 40 to 60 year old private company owners do not like giving 25% to 30% of their hard earned private company equity for taxes from its sale. And, they are equally concerned about trying to live for 30 or so years on pre-tax returns from publicly traded securities. Annual returns from public security investments typically range at 7% to 12% on average per year over a long-term, depending upon the risk assumed. Third, the cost of going public and of maintaining publicly traded security status is very high. Many publicly traded companies are today going private.
The best market for most successful private companies’ equities, in my humble opinion, is a sale to key employees. Problem, the key employees generally are not perceived by the principal owners or the private company’s bank and vendors, at least initially, to be qualified buyers. The key employees can become qualified buyers, however, by following a True Corporate Model™ for a period of 5 to 7 years from when initiated.
The process for this, which I call a True Corporate Model™ , is not an estate planning concept for transferring wealth to a second generation of family members. Key employees may or may not include family members of the principal owners. The process: a) grows key employees into qualified buyers; b) increases enterprise value; c) creates an annual dividend paying culture; d) and creates an internal demand-driven market for a private company’s equities. By following this process, the principle owners of the private companies can one day sell their equities at a very favorable price to key employees. Or, if the key employees agree and there is need their continued equity investment, principle owners and their family members may continue in ownership as private equity investors with reduced management responsibility and risk.
Following a “True Corporate Model” does not dilute the principal owners’ earnings per share or value per share. To the contrary, through empowerment of key employees, it almost always enhances both the principal owners’ and the key employees’ earnings per share and value per share, as it reduces the principal owners’ ownership percentage and overall risk.
The process extends the time period a principal owner may continue to own an interest in the successful private company. No one today knows how much wealth is enough to provide income and security after age 65 because of increasing life expectancies and because of increasing costs for health care. Retaining equity of principal owners in the private company facilitates continued growth of an already successful business, which generally works well for both the current principal owners and for the new key employee owners. Strategically: Why split the pie into smaller pieces? Why not perpetually grow a bigger pie?
I have successfully implemented this process more than 20 times. Most private companies operate following a “Control Model”, which is quite different from a “True Corporate Model”. My “True Corporate Model” is not a novel concept. It implements general business principles that have evolved over two centuries to release the restrictions and limitations imposed by a “Control Model”.
To learn more about the “True Corporate Model™ ” and to get a free evaluation and proposal for your successful private company, please call me.
March 22, 2010
Copyright 2010 David M. Cooper, CPA, PA. All Rights Reserved.
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by copyright law. For non-personal use or to order multiple copies, please contact Dave Cooper at 1-208-899-4666.