We are now 24 hrs past the tweet storm heard round the investing world in which Elon Musk sent numerous tweets discussing how he was considering taking the company private at $420 a share with funding secured. I am not here to debate the legality of those tweets or whether or not the deal is going to happen. However, as an advisor that focuses on analyzing businesses and advising private business owners the whole situation really brings up some important points and questions that business owners should ask themselves right now.
Is this as good as it gets?
We are 8 years into an economic up cycle and bull market in stocks. This is one of the longest cycles on record and valuations in the public market are still higher than average. Let’s just assume that there is some real credence behind the tweet and there are some people willing to provide greater than $60 billion to finance the take private transaction for Tesla. This tells you a lot about private company valuations and the liquidity for financing when you actually look at the fundamentals of Tesla. Tesla is a company that has had negative cash flow and earnings since it went public in 2010. The company has yet to turn a profit and they have constantly had to use the stock price to raise more capital to keep the company operating. In fact, they have done 6 secondary stock offerings since going public 8 years ago. Additionally, they have gone from net debt of -26.9 million in 2010 to 6.85 billion currently. Net Debt is simply calculated by subtracting cash and cash equivalents from total debt, so the lower the number the better financial strength of the company. Let these numbers sink in for a second…….someone is willing to spend $60 billion to invest in a company that has no earnings, negative cash flow, and ballooning debt. This tells me that there is still too much money chasing investments and that at some point the music is going to stop. It also says that people are willing to pay a lot of money for businesses right now and if you are a business owner that is thinking about retiring, selling, or scaling back in the next few years this may be your best opportunity for a long time.
What is the value of my business?
Tesla is a public company that is attempting to go private and might not compare to your private business and thus should not affect your valuation. While the apples to apples comparison of business valuation is not there, the important point to take away is that valuations are high in general and there is plenty of capital to invest. Additionally, because your business is private you do not have an accurate valuation such as a public company. In fact, 98% of business owners do not know the current value of their business*. Business owners do not know there value for two main reasons expense and time. Business valuations cost on average up to $8,000 to complete. Additionally, business owners will put off a valuation because they do not need it in the day to day operations. Elon Musk has just given every business owner the “aha” moment to take a look and see what value a company with real cash flow and earnings can fetch in this environment. The worst case scenario of getting a business valuation is it provides visibility to the owner and allows a starting point for any potential exit planning or if there should be any planning at all. To save you from the first excuse, here is a free valuation tool that can be completed in this online 7 step process Free Business Valuation.
What options do I have to take advantage of these valuations?
As a business owner you are constantly making decisions about your business and thinking about how the business will look 6 months, 1 year, 3 years, and 10 years down the line. With business valuations historically high and capital readily available it is a good time to explore the different options available to taking some money out of your business. This can happen in any number of ways ranging from a complete sale, selling a minority piece, doing a recapitalization, management buyout, ESOP, or inter family transfer. While the scope of how to take advantage of the valuation and provide current liquidity to business owners will be different for each owner it is important to know that these options are available and thanks to Elon Musk now is as good a time as you may ever see.
*IBIS World