Did you buy Facebook at $38 when it came public? Let’s talk about Facebook the stock. It’s now at $21.05. In other words, it’s down $17 or 44%.
Facebook has almost one billion people on their site yet the stock went down. What happened here? Why has the stock gone down and what can you learn from Facebook as an entrepreneur, especially when you are going to sell your business?
1. Facebook’s business was slowing down as they came public. That means their stock wasn’t worth as much because they were making less money than what was previously forecasted. So the stock kept going down to a level where the market thinks it is fairly valued based on its lower earnings. I guess that is $21 and not $38!
If your earnings are trending lower in your business, it will be worth less to a buyer. A smart buyer isn’t going to buy your business just because it has a great story or colorful history. Hype fades quickly and you need to be able to show a buyer that you make money consistently. That’s the first step in making your business actually worth something. Sweet!
2. Be upfront and always do the right thing. It appears that Facebook didn’t disclose that their business was slowing down as they were on the road to sell the IPO to investors. Only the big buyers were made aware of this, which made them sell their stock once it started trading or even cancel their orders. This meant more stock was sold to the smaller investors at $38. At some point Facebook insiders may want to sell more stock to the public through what’s called a secondary offering. But the price they sell it for could be less than $38.
Facebook and the investment bankers didn’t act out of integrity. That’s why many investors just sold the stock, because they were pissed! It takes years for you to build trust and confidence from your clients and customers. You could lose that in just 5 minutes if you don’t act with integrity, and don’t serve your clients in a way that makes them stay with you — something that could make your business worth less.
3. Your profits need to be growing. Facebook insiders sold at $38. They cashed out at pretty much the peak. The public bought at the peak. Perfect for Facebook insiders but not for the public. So what does this mean to you?
If you sell your business, buyers will ask you why you are selling, and will be looking at the trends in your business. Are your profits sustainable? Is your business on fire? You need to be able to show the buyer that your profits are growing, not decreasing.
4. Always re-evaluate your business model. The majority of Facebook’s sales come from advertising revenue. Running a business based solely on ad revenue is very tough — Google is the only other real company that is successful doing this — and investors don’t think Facebook has a strategic plan for its mobile business.
The more ways you can make money in your business, the better. That way you can show a buyer that your business can ride out a storm which may help you get a higher price for your business.
What do you think about Facebook the company or Facebook the stock? Did you buy Facebook stock? Do you want to? Or have you given up on investing because this is just another story about how the big guys make money and the little investors like us lose out?
Justin Krane, a CERTIFIED FINANCIAL PLANNER TM professional, is the founder of Krane Financial Solutions. Known for his savvy, holistic approach to financial planning, he advises his clients on how to unite their money with their lives and businesses.
Using a unique system developed from his studies of financial psychology, Justin partners with entrepreneurs to identify, clarify and meet goals for increasing their business revenue. He works with entrepreneurs to create a bigger vision for their business with education and financial modeling.