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CHAPTER 9 GROWING YOUR BUSINESS EMPIRE

Note: Private businesses are usually valued by taking a
price-to-earnings ratio (PE Ratio) of 5. This means that
for every $1 the company earns in net profit, the company
will be valued at $5. Let’s imagine in this case that your
company makes $1 million in net profits a year. The
company will thus be valued at $1million x 5 = $5 million.

As a result of listing your company, you would have to issue
new shares to the public in return for their invested capital.
For example, your company decides to issue 50 million new
shares to the public at a price of $0.13 each. The $6.5 million
raised (i.e. 50 million shares x $0.13) can then be used to
fund your company’s growth plans.

Notes: A listed company’s price-to-earnings ratio is
usually 15-20 times. Investors are wiling to pay 15-20
times the annual net profit. So, once your company is
listed, its market value will be about $20 million (i.e. $1
million x 20). Since there will now be 150 million shares
(50 million new shares added to 100 million old shares),
each share will be priced at $20 million 150 million
= $0.13 each.

But notice that the proportion of your shareholdings has been
diluted. Since there are now 150 million shares, you only own
40% of the company (i.e. you own 60 million shares out of
150 million).

However, the great news is that the value of your shares is
actually much higher. Your 60 million shares are now worth
$0.13 each, which equates to $7.8 million! Your wealth has
increased from $300,000 to $7.8 million as a result of listing
your company!

SECRETS OF BUILDING MULTI-MILLION DOLLAR BUSINESSES 287