Speaker 1
Okay. So welcome to part two of how to create shareholder value. Obviously, I’m only giving a few little bits away here that normally we go into a lot more detail on the Harbor Club.
Speaker 1
But last time I shared with you that some of the drivers that we use for creating shareholder value were scale, liquidity, redundancy, and financial engineering. And so today we’re just going to talk about the liquidity aspect and what that means because it’s one of those amorphous terms. It doesn’t really mean anything on its own. It needs to be explained.
Speaker 1
So what I mean by liquidity is the ability to be able to enter and exit your shares. So to be able to sell, buy and sell your shares. So what typically happens with a sale is it’s a binary event. Either it happens or it doesn’t happen, you sell or you don’t sell. And that binary nature makes it very difficult to choose the time when you should sell the business for the optimum amount.
Speaker 1
So if one of the drivers for value is scale, so being bigger, the second driver is liquidity, the ability to buy and sell these shares. Now the problem is if you go to an external investor, they will typically want to invest in the business. They’re not going to want to invest in a new Porsche for you. So it’s very difficult to sell a bit of a company to somebody and then take that money away and go and do something else with it.
Speaker 1
So the way that we like to get liquidity is through capital markets. Now capital markets are stocks and shares for want of a better way of putting it, and there’s a couple of ways you can do this. You can either do something called a public offering, which is where you list the company on the market.
Speaker 1
Now we already talked about how you get scale so you can get the scale to be able to do your own IPO. And you can also through the Harbor Club, we show you how you can do this in a self financing way.
Speaker 1
But you can also do something called a reverse merger. Now a reverse merger is effectively selling your company to an existing public company, but instead of taking cash, you take stock in the public listed business. And then what that gives you is the ability to sell down that stock over time or to exit a bit of it now and a bit of it later.
Speaker 1
It’s also incredibly appealing to public companies, particularly the small to medium sized public companies. By the way, small to medium sized public companies are huge in terms of small entrepreneur run businesses. So we’re talking businesses that are doing $300 to $500 million on the capital markets.
Speaker 1
So you could effectively take stock in one of these businesses and then sell over a period of time. That liquidity has a massive impact on valuation. In fact, you only have to look at businesses for sale in a normal environment, and then their equivalents on the capital markets, and you’ll often see that the valuation is at least double the amount.
Speaker 1
So a good example that I’m doing at the moment is marketing services businesses. Marketing services businesses privately probably sell for five, six, seven or eight times earnings, if you’re really, really lucky.
Speaker 1
Look at a publicly listed marketing services business and it’s probably trading at 15 times earnings, and that 15 times earnings is really driven from partly the scale because these businesses are much bigger than the marketing services businesses I’m talking about, but also partly that liquidity, the ability to exit and enter the stock as you want.
Speaker 1
So that’s my part two is creating liquidity in your stock is a great way of driving loads of extra shareholder value.
Speaker 2
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