Читать книгу The Value Equation - Christopher H. Volk - Страница 19

During my business career, I gained something of a reputation for creating financial models. Not to be outdone, Mort Fleischer—my mentor and business partner for most of those years—created “Mort's Model,” which he had framed, and then freely passed around, and which I will immortalize here. Mort's Model embodies the notion of less equity is more, and goes like this:

“Yenem's Gelt” is Yiddish for OPM, and “∞,” otherwise called a “lazy eight,” is the mathematical notation for infinity, which is supposed to be the resultant equity return. The formula is intended to convey that a business generating cash flow and funded entirely with OPM will yield an infinite rate of return to the owners of the business. Of course, equity rates of return would not be computed this way. Instead, operating cash flow would be divided into the equity investment of zero to arrive at an effective infinite rate of return. Mort simply wanted to make the point of the importance of OPM. Saying it in Yiddish elevated the amusement level. In my years in business, I have seen a number of people successfully start or buy businesses with no equity. It is possible, but not easy.

Consistent with Mort's Model, forming a capital stack begins with a determination of the maximum amount of OPM you can get. In the end, you may not want to maximize your use of OPM, but it is good to know the art of the possible. As I noted in the conclusion to the last chapter, companies go out of business because they run out of cash. So, understanding where liquidity can be accessed outside of business operating cash flow is important. Plus, understanding how to maximize OPM will give you the best shot of minimizing equity and achieve something close to Mort's Model.

At a high level, when it comes to the puzzle of how to assemble an equity stack, there are just three simple steps:

Step 1: Start with money that has the longest repayment requirements. Hard assets like real estate and equipment can be financed for a long time and may even be leased.

Another area where long-term money is to be found is with asset-based loans (ABLs), whereby lenders advance money against accounts receivable and inventory. Such loans are often in the form of lines of credit that can mature in a year or two. However, they require no repayment and can generally be readily extended, since they are based on accepted formulaic advance rates against assets that can be easily valued. Accountants often think of such credit lines as short-term, owing to their debt maturity time frame. Finance experts tend to think differently, because they know such lines to be readily extendable.

Another source of long-term money, if you are buying a business, can be in the form of notes payable to the prior owner, which are often unsecured corporate obligations.

Financing assets through OPM that involve long-term repayment (as in equipment or real estate loans) or modest to no repayment (as in equipment leases, real estate leases, or ABL facilities) provides several benefits: OPM can be maximized, monthly payments can be minimized, and the capital stack can be stable.

OPM that is repaid quickly will alter the capital stack over time to elevate equity. That may sound nice, but an altered capital stack will tend to lower equity returns and potentially lessen corporate cash flow that can otherwise be invested in expansion. Repaying OPM and tilting the capital stack to 100% equity is fine, so long as your business has nothing more productive to do with the cash.

Step 2: Your next step is to turn to short-term money. In general, this will be money that has limited collateral and is repayable from free cash flows expected to be thrown off by the business after all the other OPM obligations have been met. Such loans will tend to amortize more quickly and represent a more volatile form of OPM because they are less universally available. Economic cycles come and go, lender risk tolerance rises and falls, and corporate cash flow loans are the most vulnerable to such changing environments.

There may be an order of operations to determining OPM and a capital stack, but there is no standard OPM portion of a capital stack. Daymond John was declined 26 times for bank loans before finally borrowing money from a subsidiary of a South Korean conglomerate that he would not have found but for his newspaper advertisement. Indeed, commercial banks are not all the same. Likewise, there are a myriad of equipment and real estate leasing companies having diverse views of investment risk. And then there are non-bank lenders, such as small business investment companies (SBICs), business development companies (BDCs), and a host of non-bank direct lenders that collectively amounted to over $800 billion in assets at the end of 2019 from less than $30 billion in deployed capital in 2000.

When it comes to OPM, there is a lot to choose from, which means that it's important to be informed and selective. Take time to shop.

Step 3: Your final step is to determine the amount of equity required. Once the OPM portion of the capital stack is determined, then the amount of equity you require is simple. It's the difference between your required business investment and OPM.