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Articles from the tag of Businesses
LinkedIn got screwed?
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Wednesday May 25, 2011 at 1:08 PM   (-07 GMT) | Comments (5)
Tags | Businesses, | Economy, | Stocks | Categories: | Financial Markets - Stocks, | Economy - United States
So, wow - don't know if you followed the LinkedIn IPO- what a story - and perhaps a message for us too.

It was set to go public at $38 or $40 - something like that and when it was issued it immediately hit about $85 before hitting $115. I think a day or so later it was around $85 again.

So, what does that tell us? Well, a couple of things.

One is that LinedIn got screwed. The company itself got the $40 a share - they didn't participate in the run up to $115 or even to $85. The company got whatever it contracted for - the Initial Public Offering price of $40.

So, whoever set the IPO price of $40 should be flogged if not worse. It didn't take a braniac to figure out this stock would take off.

In fairness though, let's look at what happened. When a private small business is sold it's typically sold at the price of 3 to 7 times earnings - plus the assets. So, if the business is making $150,000 a year (after an owner's salary) and has $10,000 in equipment and $50,000 in assets then a good starting point on a price might be between $510,000 and $1,110,000 or (3 or 7 times $150,000) plus ($10,000 + $50,000). So, again, 3 to 7 times earnings plus assets.

A public company will usually go for a higher multiplier - so you'll probably find them selling for 5 - 25 times earnings.

If you think of it like this it might help to understand it. If a company is selling for 5 times earnings, then in theory you'd make all your purchase price back in 5 years and would still have your investment. A great deal.

Now, if it is at 20 times earnings - well, in theory that's 20 years......

But, what are earnings? Well, they can be based on the prior few years or using the current year as the basis for your projections. Or, you can base it entirely on projected earnings. Which is correct?

Let's say the earnings in the last 3 years were - Loss - $65,000, Loss - $22,000, Loss - $5,000. Let's also say the current earnings are $70,000. How would you determine how to value it?

It's not hard to see that since the earnings are one of the multipliers then it's probably more important in the formula than the assets in a sale. So, how this is determined is critical.

Usually, a buyer is going to want to use the lowest, most pessimistic earnings projections while a seller will paint the most optimistic projections of the future. Probably, a good number is somewhere in between.

So, as I indicated, usually in private companies 3 - 7 times earnings and in public companies 5 - 25 times earnings with the lower number 'usually' meaning a better bargain - assuming the earnings you're basing it on are reasonable.

In the LinkedIn situation, my understanding is that it reached 500+ times earnings. Oh, wow. In my simple mind, that told me it will really need a turn around to greatly increase the earnings to make that price be anywhere near reasonable. A lot of pressure on this stock - that's for sure.

This reminds me of the tech crash. When companies where coming off the IPO's (and even regular trading) and the prices were 200 times earnings - or in a lot of cases had 'never' turned a profit - I just could not understand it. It really went against all my years of training - and defied logic. But, like a dope - I finally caved in and bought into the tech bubble because even taxi drivers were making more in the market than me - not long before it did crash. (No offense to taxi drivers - it's a subtle reference to the taxi driver stock 'guru' who is now in jail)

So, 500 times earnings is like - wow. Is this the start of a new movement for stocks?

When you look at what happened, it's hard to blame the underwriter for letting the stock come out of the gate at $40 - to set it higher would have been irresponsible, but if I was LinkeIn - the company - I'd be annoyed that extra money - or some of it - didn't find it's way into the company.

Who got it then? Well, the big industrial investors got the IPO's - so they pretty much had a lock - they knew they'd be buying at $40 and selling at probably $80 - at $115 - after one day - a banker's kind of wet dream.

Of course, the founder's do well too. But, they are limited on how much stock they can sell for a few years, so they are happy to see it go to $85 or whatever. Great for them. Hard to be critical here - but notice I didn't say that about the industrial investors. But, without them a lot of lesser know IPO's might not happen.

The whole idea of a public offering is to get money for the company to expand - to do things they couldn't do without a huge infusion of cash - the kind you don't have to repay - and that only comes from a stock offering. Too bad they missed out on hundred's of millions - but all is not lost - the big Wall Street guys made out ok! Unfortunate there isn't a better system for us all to be able to participate in an IPO - I mean - what does that second letter stand for? Public I think...

All in all - an interesting side note to today's economy and perhaps a sign of optimism - a sense that better times may be coming.

Joseph E Poff, CPA

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Comments

Posted by Elly from United States posted at Thursday, November 24, 2011 15:46
Comment from Elly is -
Many many quality points there.
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Posted by Regina from United States posted at Sunday, July 10, 2011 15:45
Comment from Regina is -
Please keep throwng these posts up they help tons.
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Posted by Kaylynn from United States posted at Sunday, July 10, 2011 04:41
Comment from Kaylynn is -
Great stuff, you helped me out so much!
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Posted by Benon from United States posted at Saturday, July 09, 2011 20:00
Comment from Benon is -
Wow! Great thinking
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Posted by Jas from United States posted at Tuesday, May 31, 2011 13:21
Comment from Jas is -
Great!
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Trademarks - who needs them?
Posted by: Joseph E Poff, CPA CITP from Auburn Software, Inc. on Tuesday July 20, 2010 at 11:22 PM   (-07 GMT) | Comments (0)
Tags | Businesses, | Intellectual Property | Categories: | Businesses - Operations, | Businesses - Product Development, | Intellectual Property - Trademarks
Trademarks - that really doesn't apply to me. Or does it?

Why is it that the things you know the least about are the things that will get you. For tests - I'd shy away from the parts that seemed like I didn't understand - but then I learned that I could get a bigger percentage increase in my score by studying those parts rather than perfecting my knowledge on something I already knew. I felt better when I studied the stuff I already knew - I could even do something else while I was doing it - but not a smart way to do it. Not having a concept about trademarks could be one of those gotcha's.

For a relatively small fee - considering the downside of not doing it - you can file with the US Patent and Trademark office your business or product name. Prior to doing so you'll want to make sure that your name isn't already taken. If it's a pretty straight forward name - then it's probably already taken. What are the consequences of using a name that's already registered? How about all the profits you made from the use of that name - yep - all of the profits. Oops.

So, let's say that you started a company and made hot dog carts in 2008 and called the carts Joe's Hot Dog Cart. You start selling them and man oh man - they are selling like crazy. In 2010 you surpass 3 million in sales and it looks like it will go higher.

Only one problem - someone else is making hot dog carts and while their sales are only 2 a year and yours are 2,000 - they filed and received a trademark from the USPTO in 2007 on the name - believe it or not -  Joe's Hot Dog Cart.

So, now the person that has the valid trademark finds out that you - oh, you lucky dog - you've got a very successful business now using his trademarked name. Boy, the attorneys smell money here. You're in some hot chili.

Another situation is where you're marketing the hot dog carts and this time you were smart enough to get a trademark on it. You have a website - JoesHotDogCart.com and things are great until you discover one day there is a website JoesHotDogCart.net or Joes-Hot-Dog-Cart.com or one of the many variations. Having your name trademarked gives you vast power in forcing whoever is hosting the offending site. I've had ones shut down in less than 24 hours.

On those kind of sites, it's not just that they may be trying to sell a competing product - they may be a look a like site where they are taking orders and money from the poor souls that go to the .net version of your site instead of the .com. If you've got a .net site - well, unless you have the .com site too - people will 'really' get confused there. Registering your trademark goes a long way toward protecting you and your customers. As a side note - it's probably a good idea to register .com's and .net's when you register a name.

The protection of your trademark will continue for years and will be an additional valuation item of your company.

To file an application, you need to choose a class for your trademark. For example the hot dog carts would probably fall under class 7 - machines and tools. So, someone else could file under another class such as class 2 - paints - and then they could use Joe's Hot Dog Cart for a type of paint. So, when you file, you need to make sure you have the right class and have looked at whether you need more than one class.

You describe your product or service - mostly from canned choices from the USPTO and then pay your fee. After it's reviewed (3 months to 1 1/2 years) you'll have your Trademark - assuming all goes well. You must be using the name to file or you can file an 'intent to use' and then use the name within a year. That's a helpful option if you wanted to make sure you'd get your name approved before you printed up $200,000 worth of advertising material and then find out the USPTO rejected your name or it was contested.

There are issues related to foreign registration that I've not covered in this article. And I need to say that it's in your best interest to seek professional help in preparing and analyzing your company issues. There is a wealth of information at the USPTO site - http://www.USPTO.gov be a patent on how the cart is Also, patents - which may often be confused with trademarks - are filed to protect a design or process. For example, on the hot dog carts there may 'also' be a patent on how the cart is actually built - its size - components - special features.

Copyrights are often confused with these two also. A copyright is usually associated with someone's writing - such as this article or any article on The Blogs of Economics 411. Copyrights are awarded the moment anything is published - in book form or such as being on a website or handed out at a public meeting. Copyrights can also apply to designs.  More about patents and copyrights in future articles.

Joseph E Poff, CPA
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