I have been fortunate to call myself a small business owner for almost 15 years. There have been successes, an exit, and quite a few failures. During this time, I was also launching businesses throughout the ZIRP (zero interest rate policy) era of the Fed.
Throughout the earlier years, people would tell me to focus on top line growth. “Think profit later!” they would say. “Start thinking about what you will tell people on CNBC during an interview” was an actual phrase tossed out many times. I’m not kidding.
Pre-covid, I was very much operating under a new belief system. Profit matters. The cash I take home to provide for my family matters. For a small business owner, paper valuations matter very little. Cash in your pockets is what matters most.
During my first exit attempt, our law firm and advisors that we hired had valued one of my businesses at 1.5x revenue. That would have been a nice pay day. Unfortunately, the only offer we received was 1x EBITDA. Receiving that offer was crushing, but it didn’t break me. I was still thinking growth.
It wasn’t until I was completely on my own, the arbiter of my own path, that I realized that valuations are mostly made up and based on vibes. They also only mattered if you one day decide to make an exit. This whole mindset takes you from a “business owner to a business seller” (h/t to Daniel Peris for the phrase). That might work for the ultra wealthy, nepo babies, and trust fund kids, but not me. Today, tomorrow, and for the foreseeable future, I need cash.
The idea of business ownership as a small business owner or mom and pop real estate owner is pretty simple; you need cash in your hand. One day you might sell, but cash is king.
This, for a variety of reasons, has become an unpopular opinion when it comes to publicly traded companies. Why? As a shareholder, you are taking a minority position in a company as an owner. How is it that cash in your pocket is no longer important?
Business ownership, whether through stocks or small businesses, has been well documented as a key driver for wealth creation in the United States for over a century. While cash is popular among SMB owners, stock owners have moved away from dividends and distributions.
After nearly 15 years of SMB ownership, I’ve received my fair share of stock based comp (SBC) for a variety of services – they have never ended in a payday at the end of a rainbow. Those businesses have typically folded within a year or two. Call me jaded, but I feel as if I’ve wised up over the years.
Interest rates will most likely not dive down to Covid-era policy – if they do, something bad has happened. With ZIRP gone for the foreseeable future, business owners need to rethink that pot of gold at the end of the rainbow. Employees tempted by SBC might need to recalculate the real risk. The era of businesses paying owners (shareholders) in cash in hand that goes up and to the right might become more important than stock valuations going up and to the right.
