NOVEMBER 2020

WHAT IS A SHARE, REALLY?

Part 1

THE STORY OF TADIWA

Let me tell you a story about the entrepreneurial Tadiwa, his analytical
friend Buhle, and how they learned first-hand why companies choose to
issue shares and why investors love to invest in them.

Meet the Entrepreneur

Tadiwa owns a small shop in his village – the Superthrift Supermarket. It’s
an ambitious name, and Tadiwa is an ambitious man. He sells maize meal,
sugar, soap, batteries, and candles. He even has a small refrigerator so that
he can stock ice-cold bottles of cola and beer.

People enjoy shopping at Superthrift because the prices are reasonable, the
goods are plentiful, and Tadiwa greets each person warmly when they enter.
So, as the years go by, the shop does quite well. Tadiwa saves up enough
of the profits to buy a small, used truck which allows him to transport a
greater quantity and variety of items to sell. Soon, customers are coming
from neighboring villages to shop at Superthrift.
With profits accumulating rapidly, Tadiwa hires workers and opens another store ten
kilometers down the road and then yet another a few years later.

Then one day Tadiwa hears some interesting news from his friend, Buhle, a math
teacher at the local high school. She tells him that a large textile factory is being
built near a small village 50 kilometers away. Many people were moving to the area
in the hopes of finding jobs.

Opportunity Beckons

Tadiwa senses opportunity. Surely, all of these people will need a place to shop
when the factory opens. Unfortunately, Tadiwa has next to nothing in his bank
account, having just bought several solar panels to provide electricity to his stores.
It would cost $10,000 to build and stock a new Superthrift Supermarket near the
factory.

If he waits until he has saved sufficient funds, there is a risk that some other shop-
owner may discover the opportunity. He decides that he can’t afford to wait and
calls his bank to request a loan.

Borrowing Isn’t Always a Viable Option

The banker gives him good news and bad news. The good news is that he will
happily lend him $10,000. The bad news is that he will charge him an interest rate
of 25% on that amount.

“Twenty-five percent!” Tadiwa exclaims, “That amounts to $2500 per year and will
reduce my profits to almost nothing!” The banker sympathizes but explains that he’s
simply unable to offer a lower interest rate.
The Venture Capitalist

Later that same day, Buhle stops by Superthrift after school to buy her two favorite
snacks: pilchards and Weetabix. She notices that Tadiwa is frowning over a ledger
book and punching numbers into his calculator. He is so preoccupied that he forgets
to even greet her when she walks through the door.

“Why the glum face, Tadiwa?” she asks. After explaining his plan to open another
shop near the textile factory and his frustration with the bank’s lending terms, he
jokingly asks Buhle whether she might be able to lend him $10,000 at a more
favorable rate.

“I’m afraid I don’t have $10,000 to lend, but I do have an idea,” Buhle replies as she
pulls a pen and paper from her purse. “Tell me, Tadiwa, what is the price of your
business?”

A Valuation Exercise

The shopkeeper makes a puzzled face. “I’m sorry, but Superthrift Supermarket is not
for sale.” “No, No. How much is Superthrift worth?”

“Ah, I understand you now,” says Tadiwa and puts his hand to his chin as he takes a
mental inventory of his business assets. “Well, each of the three shops are sturdy
buildings and located along busy paths between villages. Together, I estimate they
are worth $60,000. Plus, they each contain about $5000 worth of goods and
equipment. And, I also have my old truck. I’m not sure of its precise
value, but my cousin offered to pay me $5000 for it last week.”

Buhle sums all the assets on the piece of paper. Three Superthrift Supermarket shops
($20,000 x 3): $60,000,

Store inventory and furnishings ($5,000 x 3): $15,000

Truck: $5,000
Intangibles: ???

“That’s a total of $80,000,” she says, “but you have forgotten to estimate the
value of your intangible assets.”

“Intangible assets?”

Indeed!” says Buhle. “You’ve built up a very loyal customer base because you offer fair
prices, and your staff greets them warmly every time they walk through the door.
Superthrift is becoming synonymous with good service. You’re also a great
businessman, which is proven by how quickly your business has expanded. These
intangible qualities are easily worth $10,000 all by themselves!”

A Capital Injection

Buhle was true to her word. Two days later she returned to Superthrift, greeting
Tadiwa excitedly.

“I have a business proposal for you,” she said, as she reached in her purse and
slowly counted out $1000 in $100 bills. “Thank you very much, Buhle. That is very
generous of you, but I’m afraid I need much more than that to open another
Superthrift Supermarket.”

Buhle ignored him, reaching into her bag and counting out another $1000, and
another, and another, until there was $10,000 in cash sitting on the counter. “Where
did you get all of this money?!” Tadiwa gasped.

“It was quite simple,” said Buhle. “I told the other teachers at the high school about
your situation, and they were all eager to help. John, Susan, Sharon, Isaac… Ten of
us altogether have formed an investment club. We each contributed $1000,
because you are an honest man, and we think Superthrift is a business with great
potential.”

Tadiwa shook his head slowly. “I am very thankful for this. But I’m not sure how
quickly I can repay it. Can you accept a lower interest rate than the bank?”
This is not a loan, Tadiwa,” Buhle chuckled. “We are proposing to buy a portion of your
business.” She continued, “Two days ago, you told me that Superthrift was worth a total
of $90,000. With this $10,000 capital injection, the new value of the business would be
$100,000.

Only instead of owning 100% of Superthrift, you would own 90%. The remaining 10%
would belong to me, John, Sharon, and the other teachers. We would each own a portion
of each shop, each refrigerator, each solar panel, the truck, and even the intangible
assets. And you would be the majority shareholder.”

“But how will you ever receive a return on your investment?” asked Tadiwa, perplexed.

Dividends on the Horizon

“Aha! Excellent question,” Buhle replies. “As part of the agreement, we ask that you
provide us with a financial report every quarter. This will show all of Superthrift’s sales,
expenses, assets, liabilities, and cash flow. You will also make a judgement each quarter
as to how much of the company’s profits should be saved for future expansion. If there is
any money left over, we ask that it be distributed to shareholders in an amount
proportionate to their ownership stake in the business. Because you own 90% of the
company, you would receive 90% of this profit. The teachers and I would receive the
other 10%. This is called a dividend.”

Very interesting,” says Tadiwa, “So, the better Superthrift performs, the more money you
and the other teachers will earn.”

“Exactly.”

Tadiwa rubs his chin. “I like this proposal, Buhle. You have yourself a deal.”

“Fantastic!” exclaims Buhle. “I will run and inform the teachers that we are now part-owners
of Superthrift Supermarkets. But before I go, may I please buy a can of pilchards and a
package of Weetabix?”

“Of course, partner,” says Tadiwa, and they shake hands as she leaves Superthrift
Supermarket #1.

What’s Next for Superthrift?

Will Tadiwa successfully expand Superthrift’s operations? Will the teachers receive a good
return on their investment? Will we ever discover why Buhle ikes pilchards and Weetabix so
much?

To be continued……