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Owning a slice of a company

Taking ownership: taste of success or pie in the sky?

Part 2 — the New Bermuda Investment Primer Series: the Concept Of Capital Equity, following a successful mom-and-pop pizza business.

Stocks constitute equity in a company. The shareholders of the company are owners of these shares, somewhat akin to a tiny slices of a very, very large pizza pie. We’ll get to whether the shares are sometimes nothing but a pie in the sky later on.

Simple enough, you say, but how does a stock evolve into a capital market investment, or say a mutual fund of many stocks in your pension? Where does a business start? Very, very small! We will demonstrate with Ms Zina (MZee) and her family decision to open MamaZina’s Pizzarina Bermuda (hypothetical firm).

Bermuda is still in the middle of the annual Cup Match festival of remembrance. Two days gone, but camping-out traditions and parties continue. Halfway in, too, all the homemade goodies have been eaten, while picnic food supplies are running real low. No one in these summer doldrums wants to return home to cook. Flashpoint! Let’s let someone else cook — the chant goes up — get takeout pizza.

What is the most popular food on the planet — pizza! Three billion pizzas are sold by more than 70,000 pizzerias every year in the US alone. That is nine pizzas a year for every man, woman, and child, annually — even that does not seem like the top for the average American family. http://theweek.com/articles/483784/americas-pizza-obsession-by-numbers

The pizza business generally can become quite successful, both in takeout and in sit-down establishments. Pizza is composed of a few simple ingredients: flour, yeast, water, sauce topping, then cheese and pepperoni embellishments. Cooked in specialised super-high temperature, high-speed pizza ovens, many rounds can be turned out in minutes. Minimal space is required, keeping overhead costs manageable. Great hot oven-turned-out pizza is amazing, just outstanding particularly compared to lukewarm spongy microwaved substitutes. Crunchy crust, stringy cheesy middle oozing flavour and aroma, everyone, well almost, everyone loves pizza.

Pizza production ranges the gamut — from tiny, tiny corner nooks in large cities routinely punching out hundreds of slices per day to examples of two powerhouse pizza chains.

Is pizza profitable? You bet. Read about Herman Cain’s success story (former chairman and chief executive officer of Godfather’s Pizza, 1986 to 1996, and Republican candidate for the US presidential election of 2012) and Tom Monaghan, former owner of Domino’s pizza chain. Domino’s was sold for an estimated $1 billion.

Each of these pizza businesses started out as small fledgeling operations. Mr Cain built the Godfather pizza into a powerhouse chain during his time in charge, while Mr Monaghan and his brother grew a tiny local pizza store in a small town to an international household name.

And how did they accomplish these financial feats? Both men are very, very smart businessmen. However, in order to be financially successful, your company has to consistently deliver exceptional service and good products. Mr Cain, while employed at Pillsbury (owner of Burger King at that time), established the successful BEAMER programme for Burger King employees — “when you smile, your patrons will smile, too”.

These companies flourished and capital investors noticed. Did they ever? Both companies had huge growth in customer sales. Today, Domino’s pizza is a publicly traded stock listed on the New York Stock Exchange (NYSE: DPZ), while Godfather’s pizza is privately owned, still holding the number five largest pizza chain position in the United States.

Public and private ownership will be discussed many times during this Investment Primer series.

Stocks (shares) signify as tangible evidence that a shareholder has equity ownership in a company, a slice of pizza out of the whole pie. How many shares, what owning them means and what ownership can do for you is followed through the Mamazina Pizzarina business saga. This illustrative story is not intended to resemble any individuals living or dead — it is used for hypothetical purposes only.

We introduced MamaZina, her husband, George, and her family Sonny, Juliana and Desmond, the beginning of the New Year. http://www.royalgazette.com/article/20160102/COLUMN07/160109998

Their narrative begins anew as we pick up again on their ambitious plans for the pizza business started in their garage. Read background in Moneywise of July 9, 2016. http://www.royalgazette.com/martha-myron/article/20160709/introducing-new-series-on-investing.

MZee, to all her friends, has now been widow for two years. While she and George considered their business a company, given that the three adult children also put money into the business, it was actually a partnership that dissolved once George passed on. Now a sole proprietorship, all the legal / financial burdens are square on MZee’s shoulders.

The children and their cousin — who has the biggest personal stake in loaning them $20,000 — have become extremely concerned. What happens to their stakes (and loan) in the business if MZee passes unexpectedly. They don’t even have any “real paper” to prove their financial and personal commitment to plus the family home is mortgaged as collateral for the supposed company loan.

It is time for a consultation with an astute Bermuda company lawyer.

Why incorporate? There are four age-old very significant reasons (and some others) to do so:

• A corporation is a legal separate entity (body) from you; it has unlimited life thereby remaining in operation even when shareholders die.

• It establishes rights of ownership and allows easy transfer of shares.

• It protects you from personal liability, generally.

• It allows the entity to raise investment capital on its own record.

Next — Which type of Bermuda company is best for the business? Who will have controlling interest? Who should be the shareholders and directors? How can they include their cousin without giving up the immediate family control? Stay tuned.

Sources: Wikipedia, Herman Cain, https://en.wikipedia.org/wiki/Herman_Cain; Tom Monaghan, https://en.wikipedia.org/wiki/Tom_Monaghan

Martha Harris Myron CPA PFS JSM: Masters of Law — International Tax and Financial Services. Pondstraddler Life™ Financial Perspectives for Bermuda Islanders with Multinational Families and International Connections on the Great Atlantic Pond. Contact: martha@pondstraddler.com