Episode Description
If part one left you wanting more, this one’s for you!
Have you wondered about business valuations? Or ever struggled to understand the mystery behind ESOP account values?
Are you craving a clearer concept of what influences your account value and how to maximize it?
In this episode, Chris Fredericks, CEO of Empowered Ventures, and Emily Bopp, Chief of Staff at Empowered Ventures, return with the second part of their discussion on the factors that affect ESOP account values.
In this episode, you’ll learn:
- How factors like future revenue, profits, and cash flow estimation drive the valuation of a business.
- The importance of the rate of return on your share price and how it reflects how your investment is growing or changing.
- How your account values are determined can foster a deeper connection to the business, enabling you to feel more invested in your contribution to its success.
Jump into the conversation:
[01:29] Catch up with Chris and Emily[03:03] How do I know what’s in my account?
[03:51] Valuation of a business
[09:54] How is the value of my shares determined?
[12:47] Want more information? Reach out!
How to Listen or Watch
Listen below or wherever you listen to podcasts.
Watch below or @Empowered_Ventures on YouTube.
Read the full transcript below the media links.
Episode Transcript
Chris Fredericks: So if you think about what’s the point of a business, the point is to earn money. And the business has a track record of revenue and profit from the past leading up to today, let’s say. And then each business also can have essentially an estimate of what the future holds for that company. The future revenue, the future profits, the future cash flow that the business can generate.
Chris Fredericks: Welcome to Empowered Owners, the podcast that takes you inside Empowered Ventures. I’m your host, Chris Fredericks. In each episode, I’ll have a discussion with one of our employees to discover and highlight their distinct personalities, perspectives, and skills while also keeping you in the loop with exclusive news, updates on company performance, and a glimpse into the future plans of Empowered Ventures. This is an opportunity for me to learn more about our amazing employee owners and an opportunity for you to hear regularly from me and others from within Empowered Ventures. On this episode of Empowered Owners, which is part two of our two part series about what impacts ESOP account values, Emily and I talk about the major factors that drive EV’s valuation and share price. We talk about how businesses get valued and how it is similar in some ways to when a home gets appraised, and also how it’s different. Let’s get to it. Hi, Emily.
Emily Bopp: Hey, Chris. So I heard a story that I want to hear more of. Snowshoeing?
Chris Fredericks: Yeah.
Emily Bopp: You went snowshoeing? Who goes snowshoeing? Isn’t that something from like the 18 hundreds who does that?
Chris Fredericks: Yeah, I live in Vermont now. I don’t know if everyone knows that, but moved to Vermont in the last couple of years and never been a real snow sport person. I mean, I’ve skied a little here and there. I think I tried to do a snowboard once and I couldn’t do it at all.
Emily Bopp: Yeah, you catch the edge of that thing wrong and you’re in trouble.
Chris Fredericks: I can’t do anything where you’re going sideways. Skateboarding, whatever. But anyway, I love hiking, as you hear me talk about it more than I probably should. But in the winter, obviously in Verma, it can get pretty cold and snowy. And I tried hiking once when it was pretty snowy and it was impossible. It was just way too much work. So I was like, oh, this is why they make snowshoes. And people in Vermont talk about snowshoeing all the time. Or cross country skiing. They actually go out on trails and cross country ski the way people go hiking. So, yeah, we finally got some snowshoes and got out this past weekend and did a fair amount and just absolutely loved it. It was so much fun.
Emily Bopp: That’s so cool. I picture like a tennis racket on your foot with this long thing coming out the back. Is that still how it is?
Chris Fredericks: I think they’re fancy. You can get some fancy ones now. They’re super light and they’re easy to put on and yeah, actually really neat. I enjoyed figuring out how to get them on. At first I was like, I don’t know how I’m going to get these on my feet and then figure it out. And there’s any really easy way to do it, so it’s fun.
Emily Bopp: I’m glad you got to go. I know how much you love being outside and very cool. Now I’ve got a thing on my bucket list. I might have to try. Might have to try. Snowshoeing today is a part two to what we introduced in part one, which is, how do I know what’s in my account? Why is it there? Account value. Like we said a lot of times for folks who have retirement accounts, it can seem like this opaque yay when it goes up, but I’m not really sure why. And bummer when it goes down, but I have no idea what’s going on. Well, that can be very different in our employee ownership environment, where we can really explain and talk about a lot what influences our account value. And so this time I think we’re going to dig into valuation and rate of return and stock price. Where do you want to kick us off? How should we get started?
Chris Fredericks: Oh, gosh. And this is such a fun topic for me, being an accountant, but I also know this isn’t something everyone thinks about all the time. So one way I like to analogize this topic, and also in other ways as a business, is to owning a home. Real estate we’re talking about, everyone’s account value is based on the businesses that we own. Those are our assets. These businesses that empowered ventures owns. Similar to when you own a home. It’s an asset. It’s something that can go up in value. It can go down in value. It’s a meaningful asset. When people go to sell their home or buy a home, a lot of times there’s going to be an appraiser involved. So someone who is hired, who’s an outside kind of expert in home values, and you bring them in and they ultimately determine kind of an estimated market value for that home. And that influences what you can sell or buy it for. It influences like if you have a loan or a mortgage on the home, like how the banks look at the value of the home. Our businesses are really similar in terms of we go through a process every year of hiring essentially an appraiser. We call them a valuation advisor, but they come in once a year and they put a value on everything that empowered ventures owns. And I think that’s really important for people to understand is that’s the value that ultimately is directly correlated to the stock price or the share price that is on everyone’s statement that comes literally directly from that appraisal.
Emily Bopp: That’s so interesting to me. All of the things that must go into figuring out what ultimately a business is worth, because it makes sense. With a house, you’ve got a structure and a thing in a certain neighborhood with a certain amount of land, and it’s all very tangible. But with a business, there’s a lot that is just making assumptions that next year people are going to buy what they bought last year, and everything’s very fluid and very moving. So that’s fascinating that you can put a value on a business, but of course you’d have to because businesses are being bought and sold all the time. So, yeah. Is there more that you can help us understand? How is it different with a business than with a house? Because you’ve got all these moving parts.
Chris Fredericks: So what’s different with a house? I would say there’s two main things an appraiser thinks about replacement cost. So what does it cost? To go and build a similar house is going to be a big factor in how they think about valuing a home. Ultimately, their goal is to think about what is the market, what are they willing to pay for similar homes lately? So you might hear a real estate agent talk about comps. We go look at comparable home sales in the region or the neighborhood in recent memory, and kind of they’ll calculate out and use some different ways of comparing those. But ultimately, those two kind of pieces of information are what they’re generally using to estimate the value of a home. Businesses, again, are similar. So comps, there’s actually data out there of businesses that get bought and sold. So our valuation advisor goes and finds lists of businesses that have been bought and sold in similar industries and uses that information to inform what our businesses might be worth. And then where this breaks down, but is also useful is the idea of replacement cost with a home doesn’t really translate, right? There’s no way to think about, oh, this is how much it would cost to build this business again from the ground up. So instead of that, there’s more of an estimate of the value of the earnings of this business. So if you think about what’s the point of a business, the point is to earn money. And the business has a track record of revenue and profit from the past leading up to today, let’s say. And then each business also can have essentially an estimate of what the future holds for that company. The future revenue, the future profits, the future cash flow that the business can generate. So every year, we and our financial teams and all of our companies prepare like a schedule, the future financial performance we’re expecting for each business, we will provide that to the appraiser, to the valuation firm, and they use that information, the expected future financial performance, to calculate what they think the current value of those future cash flows might be. Essentially.
Emily Bopp: I love the analogy. So, a house’s point is to give you shelter. A business’s purpose is to make money. And so the way that we’re going to assign how much this business is worth is based on how much money it is making, not dissimilar from how much this house is worth, is how much shelter is this house giving. Like the bigger ones are giving more? That’s a really helpful way to think about it. I think for folks who maybe haven’t thought about this before, but it still sounds like a guess, ultimately, it still sounds like this isn’t necessarily an exact science.
Chris Fredericks: It’s not an exact science where every year, though, we are able to see the current year financial performance, how that compared to expected financial performance, and you could say even like a budget. So every business is going to have a budget on an annual basis. Revenue and profit and cash flow. If we’re hitting our budget on an annual basis, that shows the appraiser, the valuation advisor, that our estimating is actually effective and that our future estimates are reliable. So they can rely on those. Yeah, so it all fits together.
Emily Bopp: That’s really interesting, because me as an EVer, the longer I stick around and the more I’m an EVer I might start to learn about my company’s revenue and profitability and cash, and cash flow, and to understand that it’s really important what our budget is, what our projections are, and that we meet or exceed those. Because ultimately, that’s what this appraiser or valuation firm is using to determine what our business is worth, which is what is determining what my shares are worth. Is that a good segue into shares?
Chris Fredericks: Yeah, that’s a perfect summary. And the way it goes to shares is as empowered ventures is a corporation, corporations have shares of stock. That’s how corporations work, is the owners own shares of stock. Our ESOP owns 100% of the shares of empowered ventures, and we have a million shares. It’s actually pretty simple. There’s a million shares of empowered ventures stock. Whatever our share price is, the total value of empowered ventures divided by a million. So that gets down to like a per share value. And then on each person’s statement, it’s going to say, here’s how many shares you have of empowered ventures stock, and multiplied by this per share value.
Emily Bopp: That’s really simple. I had never heard that we had a million shares in our corporation. There’s a cool thing that’s easy math. Like, you get the share price and multiply it times a million, and that’s what the valuation firm thinks we’re worth. Very interesting. So then what is a rate of return? And how does that factor into all of this?
Chris Fredericks: Yeah, so there’s rate of return on like, a share price. Well, rate of return would be a couple of different ways to look at it. You could take our share price and however much it goes up could be considered a rate of return. So if our share price is $80 and it goes to $100, that was a $20 increase. That’s a 25% increase in share value. That’s probably the rate of return that most people would be thinking about.
Emily Bopp: Got you. What influences my account value? And this time we’re talking about how we understand what all of the businesses together are worth. Because remember, we’re not just looking at our company.
Chris Fredericks: Every business and real estate. We actually have some real estate, too. I don’t know if everyone knows that we have real estate. So the value of our real estate will get appraised every couple of years, too.
Emily Bopp: Got it. And then that determines the share price. The rate of return is how quickly or not that share price is increasing. It’s probably another way to look at that. And then just to tie it all together with what we were talking about last week, that benefit level is a certain percentage of our income, annual compensation, annual compensation. Thank you. Use my words correctly. Yeah. This is just really fascinating how this all comes together. So when someone gets their statement and is looking at some of these various pieces, what should they do if they just still don’t really understand where these numbers are coming from?
Chris Fredericks: Ask us. Definitely reach out and just say, hey, I still don’t understand. I want to understand more about what’s driving these numbers and what they mean. We’re happy to keep talking about it and also maybe point to other resources. There’s websites out there that talk about various elements of these topics we could point people to. Yeah, that’s what comes to mind for me at this point.
Emily Bopp: Yeah, awesome. Thanks for explaining some of this. And again, congratulations on the new hobby. Looking forward to hearing about the next time that you take off cross country with tennis rackets strapped. Sounds like fun.
Chris Fredericks: Thank you, Emily. Appreciate it.
Emily Bopp: See you next time.
Chris Fredericks: I hope you enjoyed that conversation. Thank you, Emily, as usual, for joining me and Share Your Genius for producing this episode. Remember, we want to hear from you. To reach us, send an email to [email protected]. Thanks for tuning in.
