Alex Tabatabai is Co-founder of Fernbank Partners (http://www.fernbankpartners.com). During this segment, he discusses what do to with the profit generated from your business. These tips will help small business owners choose weather to reinvest or distribute the profits.
- Compare opportunity costs over the long term
- Evaluate ROI vs. other opportunities
You as the business owner, really have an investment management decision to make. You may not realize it but you're also a capital allocator. When your business earns a profit you have to do something with that profit and you have a decision to make. Do you re-invest in your business or do you pay that money out to your share holders and let them pursue a different opportunity. And, like many things in the financial world it's a cold-hearted calculation.
You need to look at the opportunity cost. Are your investors better served better served with a reinvestment in your business or they better served by having their capital returned to them so they can pursue other opportunities. This requires you to know a lot of things about your business, intrinsic value, what is future cash flow is maybe, what it's assets are worth and you need to compare that to the other reasonable opportunities your share holders have and do what's best for them. If it's better for them to reinvest that incremental dollar in their business 'cause they got a $1.50 back, wonderful. If the business put a dollar and you only get back 85 cents, give the money to share holders. Let them figure out what to do with this.
So, to recap you as a business owner or an investment manager for your business and you have a decision to make. Should I reinvest the money my business makes in my business or do I distribute it out to the share holders and let them find the better opportunity?