I hate to break it to you, but your collection of potato chips that look like celebrities isn’t worth anything. And this is coming from the potato chip guy. Feel free to snack on those.
Mostly though, your assets are probably pretty easy to value. You can find out the value of your mutual fund or stock or ETF in about 48 seconds using the Google and just a bit of your grey matter. Real estate is a little tougher to value, but there is a market for most properties, so you can make an educated guess.
Valuing private companies are always a little harder. I know a guy who runs a sports collectible store. He’s the first to admit his store only exists to fund his sports collectible habit. I’d bet every nickel of profit gets spent on autographed memorabilia or rare cards. Don’t worry, he’s retired with a good pension. He’s no Leonard. His store might be cool, but it’s not worth much more than the value of the inventory.
Sometimes, when you own something, you tend to think it’s worth more than what it really is. That’s called subjective value, and it’s most commonly seen with somebody’s house. Since most people have the vast majority of their net worth tied up in their house, they have an interest in valuing this asset aggressively. When your local real estate agent comes over, she might say it’s worth less, and you’ll probably yell at her because you’re kind of a jerk. Call her up and apologize already.
When you value your own assets, it makes it difficult to value objectively. You’re inherently biased because, you know, you own the damn thing. This is why real estate appraisers exist, and it’s essentially what stock analysts are trying to do. We could argue the effectiveness of both those methods of valuation are spotty, but here we are. I’d still take the opinion of a stock analyst or a real estate appraiser over Megan from Guelph’s opinion.
This brings me to the story of two bread salesmen. What’s the hell do two bread salesmen have to do with assets? Relax, sparky. I’ll get there.
First, a little about the bread business. Basically, the bread salesman has two types of customers – grocery stores and restaurants. There are two main bread companies in Canada, with kind of a Pepsi/Coke type of relationship. Local restaurants are free to choose whichever bread company gets them excited in the pants, while big nationwide restaurants sign on with one or the other. The same thing happens with grocery stores, usually inviting both to share the space. This means that each of the bread salesmen has consistent customers, and since bread is a staple, consistent business.
Each bread company sells franchises to prospective bread drivers. The driver then creates his own little company that owns a truck and a contract to sell bread throughout a certain territory. The driver gets paid commission, has certain expenses (mainly gas and truck maintenance) and then gets paid the rest. After that there’s the usual taxes and junk, and then the bread man gets paid the difference.
Bread guy #1, Jimbo, (not his real name) made approximately $135,000 gross last year. Once you deduct all his expenses, Jimbo made approximately $90,000 pre-tax. He works hard, obviously, but I bet there are quite a few readers of this blog who would gladly take that type of income.
Jimbo has been a bread guy for like 30 years, and he’s starting to get tired of selling bread. He’s had a knee operation, and needs the other knee operated on. Kneeling on the hard floor for 30 years takes a toll on your knees. Or, you know, (sex joke). Anyway, he’s looking to sell, so he put up his franchise for $90,000.
This was six months ago. He’s since reduced his price to $75,000, but there’s little interest. How cheap is Jimbo going to have to reduce his route before someone buys it?
Meanwhile, Jimbo’s competitor Ralph is on the opposite end of the spectrum. He’s looking to buy bread routes, hire a guy to run them, and pocket the net profit. Ralph has proven this model works, as he just added another route to the two he already owns. Ralph runs one route, has hired guys to run the other 2, and figures he’ll make an additional $50,000 before tax from those other 2 routes. It really isn’t that hard to scale the system up to own 4 or 6 different routes. Guess how much he paid for each of these other routes?
That is not a typo. If it’s so easy to make money at these routes, why aren’t there tons of guys snapping them up at $1? It’s simple. It’s because they can’t afford the $40,000 outlay to buy the truck. They don’t want to take the risk of the truck breaking down and having a $4000 repair bill. They don’t want the hassle of doing all the accounting or paying quarterly taxes. People don’t want to take the risk.
So, let’s review. The bread business is steady, can be scaled up, doesn’t require any special training to get into (it’s just bread) and has the potential to be pretty lucrative. It’s not such a bad business, yet the routes are basically worth nothing.
And yet, we have a certain somebody who seems to think a bunch of blogs are worth 5.2 times earnings. What would you rather invest in?