In my last post, I criticized the question, “Would you rather own 100% of a $2,000,000 company or 10% of a $100,000,000 company?” The speaker was trying to justify business partnerships by implying that they guarantee growth. Wouldn’t it be nice if growth were that worthwhile and that easy to come by?

The original question is simplistic, because the speaker neglected to offer timelines and a discount rate alongside the question. (Not to mention considerations over split decision-making and partnership conflicts.)

But still, why is it a silly question?

The Short Answer

Historically, money has lost 90% of it’s value over the last 30 years. (What cost $1 in 1979 now costs, on average, $10.)

So if it’s a choice between $2,000,000 today and $10,000,000 thirty years from now, I’ll take the $2,000,000 today. Chances are good that it’s worth twice as much — i.e. $2M likely has twice as much buying power today as $10M will in 30 years.

A More Thorough Answer

First, the value of a business should be determined by the lifetime of its discounted cash flows and then modified by risk factors. It should not be determined by its gross sales or by how much someone is willing to pay for one share.

In small business, the typical risk to capital is so high that getting three times earnings as a sale price is exceptional. That being the case, a small business selling for $2,000,000 would need to demonstrate consistent normalized earnings of $666,666 or greater and very little risk to those earnings in the foreseeable future. Sounds like a great business to me, so why would you then want a partner?

Second, the time and effort it would take to grow a business (with or without partners) from $2,000,000 to $100,000,000 — even just in gross sales (rather than in net profit or business value) — is Herculean and frought with risk. The chances of it succeeding are extremely small. Perhaps better odds than buying a lottery ticket, but I’m not sure by how much.

Third, as I said, money has lost 90% of it’s value over the last 30 years…

The Real Question

What the speaker was really asking was “Isn’t giving up some control of your company worth the almost certain growth [in his opinion] that will come from it and the untold riches that you’ll realize when you eventually get acquired [in his opinion] by a much bigger company?”

Uh… frankly… NO. It’s faulty logic. The implied cause and effect — between the compromises in control for the benefits of growth — are non-existent.

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