Whilst there are a number of criteria to consider when researching a company to invest in, one of the most important criteria is that there is a visionary founder owner who still works in the business and has skin in the game by which I mean ideally a shareholding of at least 10%. It is possible to invest in an excellent business that doesn’t meet this criteria, in which case the management must behave like owners.
Why is this so very important? Well, sadly it is because most businesses do not look after their shareholders like the founders do.
Most companies’ managers are paid based on the EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) of the business they work for. The problem with EBITDA is that it is so manipulable by clever accountants and management. Some of the greatest stock market scandals over the years have been from dishonest and unreliable accounts. Think Enron, Maxwell and Madoff to name just three.
Great visionary founder owners focus on free cash flow (cash from operations minus capital expenditure, a competitive advantage (a financial moat), return on invested capital (ROIC) and capital allocation rather than EBITDA. Such data is far more reliable and accurate than EBITDA. These things are very difficult to mislead investors over, especially free cash flow and ROIC. That’s because you cannot lie about the cash flow of a business because the money that flows into and out of a company cannot be adjusted or estimated under an accounting convention.
A moat cannot be found on the company’s balance sheet as it is not an accounting entry. Capital allocation by which I mean how the company’s money is spent can be found in the accounts and the cash flow statements within the accounts e.g. the purchase of another company, the payment of dividends, the buyback of the company’s own shares etc.
Visionary founder owners with skin in the game really look after their shareholders. After all you are not going to screw the shareholders if you yourself are one of them and you have a significant enough shareholding in the business yourself.
So what are the traits of the best visionary founder owners?
- They are usually frugal people
- They usually take very modest income from the business and sometimes nothing
- They go out of their way to look after shareholders
- They have great knowledge of the business as well as great vision for it
- They are far more interested in the long term future of the business and not looking for quick wins to please the stock market
- They are often shy of publicity though not always
- They are great capital allocators
- They think outside of the box
- They are determined and persistent
- They are brutally honest
Are all of these traits apparent in every visionary founder owner with skin in the game? No but all such owners I have studied have most, if not all, of these characteristics. Some of the ones that have impressed me the most are Warren Buffet, Jeff Bezos and Mark Leonard to name but three.
So when investing make sure there is a visionary founder owner with skin in the game still working in the business and find out everything you can about this person. If the owner meets all, or most of the personality traits listed above, the chances are you have found a winner. You will of course need to back this up with the rest of your research. You know it makes sense.
Tony Byrne, Managing Director
If you want to learn more about this topic, please find the link.
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
