Perhaps you have experienced this:
I asked my boss for a raise from $15,000 to $18,000. He appreciated my contributions, and said, “That would be more than a 10 percent increase, and no one gets more than 10 percent.”
Rules are rules, but I was confused. I worked for a company that owned the first private satellite. The local VP came and went by helicopter. We took the company jet to an extravagant dinner that, in today’s dollars, would be $1,400 for four people.
At a 3 percent annual increase, it would be a long time before I could live a decent life in New Jersey.
I was in the wrong economy.
Most of us focus on the day-to-day sales and profits of companies that have a total activity of about $21 trillion — the U.S. Gross Domestic Product (GDP). We work in this GDP economy, and our compensation is narrowly defined by the owners of our company — that is, the shareholders who own the asset that employs us.
The other “economy” is the Asset Economy — stocks, real estate, bonds, and assets that may increase in value — perhaps $280 trillion in total U.S. market value — 13 times the GDP. This is where the real money is made.
The five richest people in the U.S. — the founders of Microsoft, Amazon, Berkshire-Hathaway, Facebook, and Oracle — are flush not because they are well paid, but because their stock is valued as a multiple of sales. Facebook (FB) had sales of $56 billion last year; its market cap — the total of all shares times the current price — is $529 billion. CEO Mark Zuckerberg’s Facebook shares are worth $69 billion.
The generous multiplier applied to growing public companies is just one of the excellent benefits for asset owners. As the company grows, the value of the shares grows, but, unlike your salary, the value is not taxed every year: asset owners pay only when the asset is sold. The company can use some of its cash to acquire its own shares, which reduces the number of shares, and can further increase the value. After years of building value, a shareholder might sell shares, which, because they have been held more than a year, will have a maximum tax rate of 20 percent.
Now consider the employee in the GDP economy. The median household income in the U.S. this year is perhaps $64,000, on which the household will be taxed about 23 percent to yield a take-home pay of $49,000. From that, today’s employees often pay a good chunk toward healthcare. Their pensions have been replaced by 401(k) plans. The median 401(k) balance for people from 60 to 69 is only $63,000, which, unless you plan is to die quickly, will never generate the $2,500 a month that, with social security, might support your household in retirement.
TV commercials encourage employees to save millions of dollars (how, on $64,000?), but the other problem is that employees must now manage their own investments, an unfamiliar task. This has been a boon for the financial services sector, which grew from 2.8 percent of GDP in 1950 to 8.3 percent in 2006.
In the GDP economy, you make this bargain: you trade opportunity for greater certainty. The company will pay you on a regular basis, and the owners of the company will accrue value in the accumulation of assets and the rising price of their shares. However, if the company does not pay you a living wage, or fires you in your 50s, or leaves you without a means of support in your dotage, you’ve made a bad bargain. These are real concerns for today’s work force, and, I think, one reason for the uncivil political discourse. Many people in the GDP economy are frightened and angry.
Two caveats: (1) If you are fortunate enough to work in a growing public company, you may be granted stock options as part of your pay package that can make a meaningful difference in your life. (2) Creating a successful business is extremely challenging — especially in New Jersey, where costs are high.
Let’s say you decide to join the asset economy by starting a company and creating your own equity. Here’s a company almost anyone could have started: Planet Fitness (PLNT), a gym operator that sells memberships for $10 to $20 a month. I once talked with a Planet Fitness manager who said their location did $90,000 a month — not a bad cash flow for a cheap space with a handful of employees.
The big news at Planet Fitness is that so many retail stores are going out of business that Planet Fitness has its pick of locations and lower rents. The other news is that Americans are heavier than ever, and, even if we don’t actually work out, millions of us will throw $120 a year at a gym membership.
Planet Fitness had sales last year of $530 million and earned $88 million. If you owned the whole company, you could have pocketed $88 million, but, if you took it public and owned, say, a third of the company, you would be worth $2.4 billion. Big difference, but that’s how the public multiplier creates value in assets.
Unfortunately for Marc and Mike Grondahl, the founders of Planet Fitness, that didn’t happen for them. How you finance your company is as important as what you create. Here is their story.
The Grondahl brothers hated their jobs in accounting and real estate, and decided to buy a bankrupt Gold’s Gym in 1992. It was a bad location with little parking, and they were soon evicted. In 1993 they set up Coastal Fitness in that hotbed of innovation, Dover, New Hampshire, and later changed the name to Planet Fitness.
At that time most gyms competed for the same few customers: musclebound lunkheads who live to workout. The Grondahls wanted to appeal to ordinary people, so they installed a “lunk alarm” to shame show-offs. They tested different pricing models, and found that people liked $10 a month. Planet Fitness had no salespeople, no classes, no daycare, and was open 24 hours. The Grondahls defined a simple formula that could expand quickly.
In 2003 Planet Fitness opened its first franchise. The 100th location opened in 2006 and the 500th in 2012. In 2013 the Grondahls held a “mini-auction” among private equity companies and sold the company for $505 million to TSG Consumer Partners. You can read the step-by-step sales process on govinfo.gov because investment bank AGC Partners filed a law suit claiming it was owed a $3.5 million transaction fee.
After the sale Mike Grondahl stepped down as CEO. TSG Consumer Partners took the company public in 2015 at $16 a share. The Grondahls have been written out of the company history on the Planet Fitness website, and Planet Fitness stock is now $76 a share, giving it a market cap of $7 billion. No one is crying for the Grondahls, but they left a lot of money on the table — billions that TSG picked up a few years later.
The Grondahls might have taken their company public themselves. When Google went public, the founders decided that, rather than pay big fees to investment banks, they would hold a “Dutch auction” that enabled bids to begin at high prices and decrease until the price that the total offering could be sold. The OpenIPO Auction used in the Google offering was designed by WR Hambrecht & Company, founded by William R. Hambrecht, who, as a founder of Hambrecht & Quist, also helped bring public Apple, Netscape, Amazon, Genentech, and Adobe.
Hambrecht was a Princeton history major, Class of 1957. Perhaps he studied Will and Ariel Durant’s life’s work, “A History of Civilization.” In 1968 the Durants summarized what they had learned in “The Lessons of History.” Over the broad sweep of history, they note, “The men who can manage men manage the men who can manage only things, and the men who can manage money manage all. So the bankers … rise to the top of the economic pyramid.” The asset economy has always been the place to be.
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