Your Stock Price Matters and You Don’t Know It
Stock market volatility gets a bad rap.
Hear me out. It’s a feature, not a bug, that public stock prices move up and down every day. While that’s not because those movements are any reliable indicator of a businesses’ long-term value, it is because they are useful real-time indicators of how well millions of people (and admittedly some number of computer algorithms) perceive a business to be performing.
Alas, this is not a luxury available to most small private companies. They have no public stock. They have no stock price.
But free from the tyranny of short-term market swings are these companies liberated to make decisions that optimize for the long-term? Perhaps…
People want to work for a business whose value is going up, not down. If you can’t show people that together you are creating value, good luck holding onto them…the good ones anyway. In that sense a stock price can function like a scoreboard. It can help employees understand if you all are winning together or not and that can be an important detail to know.
The title of this Opinion is a deliberate double entendre. If you own or work at a business that is not a listed public company you probably (1) don’t know your stock price and (2) don’t realize that it matters. But you should and it does.
Our experience is that most business owners punt on trying to value their own business. Given that this is likely their biggest asset, that seems crazy, but valuation is esoteric and hard so we get it.
But do it. It’s worth it.
If you want help doing it, Permanent Equity has a calculator online called Instant Appraisal. You could also hire an independent investment bank or accounting firm. Or see if some business school nerds at your local university might take on the project for fun.
Neither our nor their answers will be precise, but they should all provide a roughly right range. From there, if you keep the methodology consistent, you can at least figure out how much incremental value your business gains going forward by updating your valuation and comparing it to the previous version.
This exercise should also help identify the factors that drive valuation gains – and it’s not always top or bottom line growth. For example, being more efficient with working capital can free up cash and cause a business to increase in value.
Then once you know what your business is worth and how much more it is worth now than it was worth before, you can start allocating to the sources of that value creation whether they be people, processes, or assets, which hopefully becomes a virtuous cycle. And then you can compensate people based on how much value they are creating, which is hugely aligning. This is why your stock price matters and you should know it. We are all just looking for a way to know if we’re succeeding and then share in that success.
— By Tim Hanson