Excerpts from the book "Time Really Is Money: How To Work For $5,000 Per Hour," Burn the Boats Press.
For reasons that aren’t entirely clear to me, I spent four years writing a large textbook, then another year or two updating it. Along the way, I felt the need to author hundreds of articles that filled in gaps, and/ or divided all of the information into bite-size pieces. The book, "Private Capital Markets" (Wiley), is now used around the world, mainly to teach MBAs that most of what they have learned in their other finance courses is wrong. Somehow, I’ll summarize the 640-page behemoth here in just a few paragraphs.
Public and Private Capital Markets are Not Substitutes
This is a major deal and overturns 30+ years of academic doctrine. These markets differ in most important aspects, such as: risk and return are unique to each market; liquidity within each market is different; motives of private owners are different from those of professional managers; underlying capital market theories that explain the behavior of players in each market are different; private companies are priced at a point in time, while public companies are continuously priced; public markets allow ready access to capital, while private capital is difficult to arrange… just to name a few of the differences.
Capital Markets are Segmented
Small, lower-middle market, middle-middle market, upper-middle market, and large companies have unique costs of capital, differentiated behavior of players in the segment, and correlated valuation metrics. Don’t over-generalize.
Middle Market Finance
Private Capital Markets (PCMs) introduce a new field called “middle market finance,” the study of how managers of middle market private companies make investment and financing decisions. Middle market finance theory (also created in the book) is a holistic theory that shows how business valuation, capital formation, and transfer are inter-related and interconnected.
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Value relativity reigns supreme in the private markets. This means that private business valuation is relative to the reason one needs to know its value. Another way of saying this is that a private business value is relative to the value world in which it is viewed. Reasons select value worlds. Each value world yields a unique value. There are dozens of reasons why a private business value needs to be determined; thus, there are dozens of value worlds.
Private capital is allocated via the rules of a flea market, as opposed to the supermarket of securities enjoyed by large public companies. The private bazaar does have structure, however, as capital providers organize themselves based on risk and return goals. For the first time in history, the private capital markets have been thoroughly surveyed. I partnered with Pepperdine University to conduct the Pepperdine Private Capital Market surveys. The Pepperdine Private Capital Market Line depicts an empirical cost of capital line for the middle market.
Private Business Transfer
This comprises all possible ways to transfer a private business interest. Transfer channels and methods are organized as the Business Ownership Transfer Spectrum. PCMs introduced this spectrum, which provides the intellectual structure for what is now known as Exit Planning. Transfer methods select value worlds! This means that once an owner decides how to transfer part or all of the business, the owner has (usually unknowingly) chosen the value as well.
This last point is aimed at all of the so-called exit planners who think all transfer methods are valued using the same methodology. They should be sued for their ignorance and I will gladly (and freely) give my time to help business owners get legal satisfaction. One of the most important contributions of this book is the further description of the Private Cost of Capital (PCOC) model. John Paglia at Pepperdine and I created this new discount rate model. PCOC redefines risk in an empirical and highly useful way. So, if you are out there presenting yourself as an expert in valuation, capital raising, or transfer advisory, and you haven’t read PCMs, you are most likely clueless and a danger to yourself and your clients.