The Business Owner Mindset

Business owners think and act differently than investors — Being a business owner is a long-term commitment — Investors must adopt the business owner mindset.

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THE BUSINESS OWNER MINDSET

Many investors strive for an "ownership" mindset, setting themselves apart from short-term market traders. But this ownership mindset falls short.

The business owner mindset, taken from the inside view of a real owner, is far superior to the more passive “ownership” mindset of investors. Business owners are true experts, love their businesses, see their long-term potential, and appreciate the real options created by controlling assets.

Investors can benefit by taking the extra step to adopt the business owner mindset.

The Inside View

Successful families and entrepreneurs frequently build their wealth from single business entities. They operate these businesses for decades and accrue wealth through growing dividends. 

Business owners become experts in their fields, sacrifice short-term profits for long-term customer loyalty or business growth, and never jeopardize their ownership with excess leverage. 

By having all their eggs in a single basket, business owners have clarity of mind when making their investment decisions and a keen recognition of risk versus reward. 

The Business Owner Mindset

Being a business owner brings a unique mindset. The first priority is making the proper decisions to maintain and grow long-term value. The daily grind of running the business eclipses considerations regarding capital structure or valuation multiples.

The business owner mindset is rarely about ownership at all. For owners, there is a single opportunity, over a lifetime, to exit an investment. This decision is often spurred by generational transition or life goals as opposed to valuation multiples. In stark contrast to the daily exit opportunities provided to public market investors, business owners often have no intention of selling and, therefore, little desire to even know the (perceived) value of their business.

Real Options

Imagine being in the fortunate position of being born to a family that owns a business. From this inside view it is clear that the value of the business is far greater than simply the earnings times a multiple.

The real options embedded in business ownership are enormous. Acquisition opportunities can arise at any time, dividends can be extracted or reinvested depending on the market environment, employee time can be allocated to moonshot projects or immediate needs; the possibilities are endless.

The pursuit of these real options focuses the business owner exclusively on improving and growing their business. Awash in potential value creation, it is no surprise that many families keep their businesses for decades or generations.

Harnessing The Business Owner Mindset

Applying the business owner mindset to the public markets sets a portfolio apart from even ownership-oriented investors. The business owner mindset supports truly long-term hold periods. The recognition of the option value embedded in each ownership stake dwarfs the seductive but ultimately short-sighted desire to sell at a set multiple.

Intellectual horsepower can then be shifted to investment diligence as opposed to valuation watching. With the business owner mindset, a shareholder’s time is spent building expertise on the business and market in which it operates. While it is unlikely for a shareholder to bring any revolutionary ideas to management teams, this approach allows for richer discussions.

The business owner mindset also deprioritizes short-term "value creating" efforts such as outsized share buybacks, divestitures, or other financial engineering. True business owners are undistracted by capital market opportunities. While balance sheets should be optimized and capital released from permanently bad businesses, these one-off opportunities are rarely as valuable as long-term business growth.

The Management Imperative

The primary barrier to investing in public markets with the business owner mindset is the lack of control over the business itself. Real business owners are perfectly incentivized to grow long-term business value. The same cannot be said for many public market management teams, and passive investors are often powerless fix this problem.

For passive investors to successfully operate with the business owner mindset, management teams must also behave as true business owners. Although this situation is rare, when it arises it creates opportunities for remarkable investment returns.

So Be A Real Owner

When these management teams are identified, passive investors should operate with the business owner mindset by falling in love with businesses, viewing stock ownership as a generational privilege, and thinking creatively, in conjunction with management, about long-term value creation. Passive investors can then recreate the true business owner mindset and reap the long-term ownership rewards so often generated by family businesses.