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  • Jay Standish

Putting an End to Terminal Value

In finance lingo, “terminal value” is the amount of money something is worth at an end date, usually the sale of the asset. An asset produces cash flows throughout its life, and then when it is sold, the sale amount is dubbed its “terminal value.” 


Here’s the challenge with terminal value: it turns natural, real-world things, communities and places into abstract financial assets in a spreadsheet. In physical reality, a business is a group of people (staff) being helpful to other people (customers). When we put our finance hats on, we reduce the business to a series of cashflows in an IRR calculation. And the big number at the end, the holy grail of 20th century capitalism, is the Liquidity Event. This is like a quiceañera for investors and entrepreneurs. All the years of risk are finally paid back, hopefully with a substantial increase, an occasion for sparkling drinks and cake. 


Super cute. Nice dress, really. But here’s the problem. When people make investments based on a plan to cash out entirely, our economy experiences a musical chairs of ownership. Private equity firms buy companies, cut costs, merge them, and sell them 3-7 years later. Small-time real estate investors buy houses, re-paint them, plant some hydrangeas and flip them for a profit 6 months later. Durable value is not being created. All that happened in physical reality is a few people lost their jobs, and a house now has generic landscaping. Temporary value is being created and then captured and extracted as quickly as possible. The temporary value is extrapolated into projections of new, larger cash flows, which amplifies the terminal value. Short-term thinking leads to decisions that temporarily bump the asset value, but don’t necessarily create value for real people in the real world.


Does this endless cycle of musical chairs have to define our economy? Could there be a better way that’s practical, not just an idealistic slogan? Well, steward-owned companies are doing something about this, and taking the terminal value off the table. Some steward owned companies are taking the quinceañera off the table. They make the company legally impossible to ever be sold. Sound crazy? Keep reading, because real bread-and-butter companies are doing this today.


Here’s how it works. A new company is started, and an investor puts in $1M and the founder agrees to give them 50% ownership. After 5 years, the company turns profitable and is now generating $250k in profit to the investor and the founder each year. At this point, they could sell to the highest bidder, or they could convert the company into steward ownership, essentially selling it once and for all. Under steward ownership, a financing deal is put together to assemble the cash to buy out the stakes of the investor and the founder at a fair market price. This financing is usually based on a significant amount of debt, but the company then uses its existing, regular cash flow to pay off that debt over a number of years. Now the company is owned free and clear, but by whom? A trust. And that trust dictates who get the profits, is managed by a group of stewards. Within the legal documents of that trust, the stewards are legally binded from ever selling the company. What this means is that they only own the cash flows, they don’t own the terminal value.


Imagine if even 30% of our economy was made up of companies that would never be sold. Instead of huge sums of capital put to use each year playing musical chairs, that money was re-invested into the communities, people and places that enable that business to thrive. Private equity sharks would have to get a real job producing real value in the real world. And maybe they would like that. Perhaps the spreadsheet game is unfulfilling because it’s not real, and that’s why the titans of capitalism can’t seem to stop their addiction, because they never get any real satisfaction. Maybe they would get more satisfaction from helping people rather than converting life into cells on a spreadsheet. They are just people, after all.

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