195. How to turn a $10 million revenues business into a $1+ billion empire with the stock markets - Warren Buffet is no stock picker
The working of the stock markets is often misunderstood by private company shareholders.
Suppose you have a $100 million in revenues company. On the private investment market the P/E ratio (Price versus Earnings) is worth $200 million. Private companies are thus purchased for 2 times their annual revenues.
However, for the public stock markets, when you do an IPO, P/E ratios are at least on average 20 or even 40+ for tech companies.
What does this mean? A $100 million revenues company is worth $2 billion after an IPO.
Then if 30% of shares are sold to the public at 20 P/E valuation, $600 million goes into the bank account of the company, after the IPO.
What happens if this $100 million revenues company has $600 million?
- They can boost marketing of their business for $50-$100 million per year, so it doubles or more in revenues in 1 year or less, so then the stock price doubles as well, and the business is worth $4 billion, and continues to grow...
- They can acquire private businesses (like at 2 P/E purchased, and your business is 20 P/E on the stock market), like buying another private company for $200 million (which also has $100 million in revenues): the result, your company has $200 million in revenues and is worth double, $4 billion, and continues to grow with private acquisitions. This is what Berkshire Hathaway does; Warren Buffet buys private companies, often undervalued and profit-negative businesses he can make profitable and buys them undervalued at 2 P/E or lower and puts the revenues into his holding company, which runs at 20 P/E, so he instantly 10-folds his investment!
So Warren Buffet is no stock picker, but a clever investor who buys private companies for cheap and lets his holding company boost their revenues. That's also why BRK.B, Berkshire Hathaway keeps on beating the stock markets, as his revenues of his holding company keeps on growing each year, he beats the S&P return. Berkshire Hathaway is no hedge fund, but a holding company...the secret of Warren Buffet's success is revealed!
Even if your company is not making profit, but is losing money each year, you can do an IPO if the revenues keep on growing, that's what matters most, P/E or price on earnings, the more you boost your revenues, the more your company is valued, even if the company is not profitable yet.
Now that you understand the power of the stock markets, you can turn a $10 million revenues business into a $1 billion company... you use the money from an IPO to boost marketing and thus revenues of you business from $10 million to $100 million in revenues or through acquisitions (but this is for bigger public companies)
So for all those shareholders who believe going public and letting "lose control" of their business going public brings fears, don't worry, your gains after an IPO will be much bigger than what you think you will lose and you will have the capital for your business to turn your $10 million revenues business into a $100 million revenues business in only a few years time. You turn your $20 million business into a $1+ billion business.
The cost of an IPO and to maintain the IPO may be $1 million per year, but don't worry, you have the capital after an IPO!
With this article, 1,000ds of more companies will go public each year and 1,000ds of private acquisitions will happen in the USA each year!