The Investment Banker Joke – Douglas E. Castle

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Stereotypes - Douglas E. Castle

Yes, ladies and gentlemen. There is, unarguably, an increasing disconnect between Wall Street and Main Street. And, for the most part, the good folks residing on Main Street (situated somewhere between Lake Wobegon and Anytown, USA) are on the losing end of the misunderstanding, and will probably continue to remain so until a major disruption brought on by Peer-To-Peer lending and financing or crowdfunding takes place.

It seems that most everyone has something negative or nasty to say about investment bankers; sadly, I’ll confess to being conflicted in that both the critics and objects of their criticism are among my friends and acquaintances.

There’s a celebrated joke that’s made its way around business and financial circles over the years. It goes something like this:

An investment banker walks into a room where his colleagues are in a meeting. “I’ve got good news and bad news,” he announces. “The bad news is we’ve just lost $100 million. The good news is, it wasn’t ours.” An associate raises his hand. “What was the bad news again?”

It’s humor, but if you were alive during 2008 to 2009, you’ll know that there is more than a grain of truth to the tale. Whether we’re talking about brokers, bankers, or even your most trusted financial advisor, you are probably finding it increasingly uncomfortable to rely on anyone else to care about your money and keep it safe.

Thank you, as always, for reading me.

Douglas E. Castle

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Why Prices Seem To Be Increasing Everywhere – Douglas E. Castle

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Why Prices Seem To Be Increasing Everywhere

By Douglas E. Castle

The primary forces which are driving prices ever-upward in the United States economy are entrenched flaws in the economic system, which I will endeavor to isolate, identify and describe in this brief “read it and weep” article. While the situation continues to worsen, economic policy steps and changes in consumer habits could go a long way to bringing prices for durable and non-durable goods and services back within the realm of affordability. Please read on:

Flaw 1: Too Much Consumer Credit Available:

While access to consumer credit does increase consumption and can indeed be economically stimulating, it also changes major consumer acquisition decisions regarding durable goods (cars, appliances, homes…) from being cost-sensitive to merely being debt/lease service affordable. If I can drive a $55,000.00 automobile for a reasonably affordable $350.00 per month, I will either lease or purchase the car on installments (regardless of the real “cash” price) without even stopping to think that a car of equal value would have only cost me $27,500.00 five years ago. We’ve become obsessed with monthly payments while becoming irresponsibly uninvolved with real costs, which continually rise in response to the availability of credit. Simply put: More credit availability leads to steeply increasing prices.

Flaw 2: Too Little Personal Saving

The average United States taxpayer saves less than 10% of his or her annual income due to cultural changes, the growing disparity between wages and household expenditures, and due to the irksome fact that an increasing percentage of what used to be disposable personal income is now going toward the servicing of consumer debt. This leads to increased borrowing, which brings us back to Flaw 1, above.

Flaw 3: Third-Party Reimbursement And Payment

Why should I decline a medical test (whether truly necessary or not) or any medical or healthcare protocol when my insurance company will pay for all or close to all of the cost? Medical costs (as well as healthcare insurance premiums) have risen astronomically because prices do not reflect the ability of individuals to pay, but instead, reflect the willingness of third party payers (i.e., insurance companies) to foot the bill. This third-party payment addiction (just like debt addiction) takes the focus off of the real cost and necessity per procedure, treatment or medication, and replaces it with a focus on “how much does my insurance premium cost and how good is my plan coverage?”.

Flaw 4: Too Many Monopolies Or Protected Territories

Without mentioning the names “Comcast” or “Xfinity” (two monikers for one of the least-beloved and most hated companies by users/consumers), government-permitted or inadequately-regulated trusts or constructive monopolies make competition all but impossible for new market entrants to offer better, cheaper alternatives to those offered by the Goliaths which dominate the cable/telephone/ISP service sphere, as well as the consumer spheres for most major utilities – all of which are necessary for ‘normal’ living. Impediments to fair and open markets invariably lead to lower quality and higher prices to consumers.

Flaw 5: The Notion Of “Too Big To Fail” And Resultant Bailouts And Subsidies

When governments selectively elect to print more money, allocate more of public funds or increase taxes in order to subsidize the inefficiency and provide cover for the mistakes and misdeeds of large institutions (under whatever guise that this is done), it activates cost-push inflation as these subsidies and bailouts are paid for by consumers and taxpayers. What is worse, is that these colossal corporate wastrels are all but encouraged to continue behaving poorly as there is absolutely no incentive (either negative or positive) for them to mend their wicked ways. These beached whales (with extensive ties to government policy and largesse) will always be pushed back into the ocean by the governmental administration. Consumers get poorer while the corporate elite continue to receive paychecks and bonuses in ever-increasing, stratospheric amounts. Unconscionable? Yes, indeed!

Flaw 6: Premeditated Obsolescence

The adoption of new technologies is a natural outgrowth of scientific advancement and market demand, and that’s perfectly fine; but when you buy a generational model of something that you use (either a product or a service), such as an iPhone 5 – just to cite one example – and the company which manufactures or provides the product or service stops supplying peripheral support for your version and all but forces you to buy the newer, more expensive version, prices are driven up as unwitting or unwilling consumer hostages line up to trade in the increasingly-useless older model for the shiny new one. This inflates costs (i.e., the new version is more expensive than the old), and increases the requirement to buy replacements, virtually turning a durable good into a consumable, depletable item.

Flaw 7: The Disappearance Of The Middle Class

As the middle class shrinks to an ever-decreasing percentage of the total population, the wealthy become wealthier and can afford to buy more, while the poor proceed to either rely upon government aid (quite inefficient and expensive) or live an increasingly leveraged lifestyle. Please refer to Flaw 1, at the beginning of this article…

As always, thank you for reading me.

Douglas E. Castle

Please join me on LinkedIn.

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What Is Your Burn Rate?

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Burn Notice - Capital Burn Rate Computation - Business Life Expectancy Calculation - Douglas E. Castle

KNOW YOUR COMPANY’S CAPITAL BURN RATE

“It is imperative that your business be operated in accordance with a realistic budget that provides for coverage, in full, of your monthly capital ‘burn rate’.”Douglas E. Castle

The basic definition of Burn Rate (from the ever-notable and perpetually-edited Wikipedia) is as set forth below:

Burn rate is a synonymous term for negative cash flow. It is a measure for how fast a company will use up its shareholder capital. If the shareholder capital is exhausted, the company will either have to start making a profit, find additional funding, or close down.

The term came into common use during the dot-com era when many start-up companies went through several stages of funding before emerging into profitability and positive cash flows and thus becoming self-sustainable (or, as for the majority, failing to find additional funding and sustainable business models and thus going bankrupt). In between funding events, burn rate becomes an important management measure, since together with the available funds, it provides a time measure to when the next funding event needs to take place.

Some entrepreneurs and investors say that part of the reasons behind the dot-com bust was the unsound management and financial investor practices to keep the burn rate up, taking it as a proxy for how fast the start-up company was acquiring a customer base.

The term burn rate can also refer to how quickly individuals spend their money, particularly their discretionary income. For example, Mackenzie Investments commissioned a test to gauge the spending and saving behavior of Canadians to determine if they are “Overspenders.”

Aside from financing, the term burn rate is also used in project management to determine the rate at which hours (allocated to a project) are being used, to identify when work is going out of scope, or when efficiencies are being lost. Simply put, the burn rate of any project is the rate at which the project budget is being burned (spent).

In earned value management, burn rate is calculated via the formula, 1/CPI, where CPI stands for Cost Performance Index, which is equal to Earned Value / Actual Cost.

—————

Perhaps a better working business definition of “Burn Rate” can be found in the august annals of Investopedia, an excellent resource for business definitions:

DEFINITION of ‘Burn Rate’

The rate at which a new company uses up its venture capital to finance overhead before generating positive cash flow from operations. In other words, it’s a measure of negative cash flow.

INVESTOPEDIA EXPLAINS ‘Burn Rate’

Burn rate is usually quoted in terms of cash spent per month. For example, a burn rate of 1 million would mean the company is spending 1 million per month. When the burn rate begins to exceed forecasts, or revenue fails to meet expectations, the usual recourse is to reduce the burn rate (which, in most companies, means reducing staff).

—————

Sadly, neither of these protracted and elaborate definitions show us the true utility for knowing your company’s burn rate. According to the Douglas E. Castle explanation, “Burn Rate” means at least two different things and has several highly useful computations attached to it.

Firstly, your company’s Maximum Capital Burn Rate is the amount of money which you have available to spend per month over a given time frame in order to accomplish financial self-sufficiency or some other objective.

The perfect example would be in the case of a newly capitalized enterprise that had acquired $1,000,000.00 [this number was chosen arbitrarily] and had establish an 18-month time frame in order to be actively engaged in commerce at a profit with its new product. In this case, the Capital Burn Rate would be equal to the capital infused, divided by 18 months, or a Capital Burn Rate (actually “Maximum Capital Burn Rate”) of $55,555.56 per month.

Looking at this same situation in reverse, suppose the company’s management knew that it required $30,000.00 per month in order to sustain itself. It could then calculate its Capital Life Expectancy by dividing $1,000,000.00 by $30,000.00, or 33.33 months, after which the capital would have run out.

Secondly, your company’s Operating Burn Rate is simply the monthly fixed costs (in the aggregate) required in order to keep the company operating without incurring a loss. If your Operating Burn Rate ( based upon experience) were $20,000.00 per month and your company’s liquidity were a declining $1,000,000.00, your company’s Operating Life Expectancy would be $1,000,000.00 divided by $20,000.00, or 50 months.

The only way to reduce Burn Rate is to reduce or eliminate unproductive fixed costs.

Douglas E. Castle

Tags, Labels, Keywords, Categories And Search Terms For This Article:
Maximum Capital Burn Rate, Operating Burn Rate, Operating Life Expectancy, Business, Finance, Capitalization, Fixed Costs, Breakeven Analysis, Douglas E. Castle

NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.

THIS ARTICLE IS COPYRIGHT 2014 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL IMAGES AND LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”


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This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Financial Guarantees, Sureties And Collateral

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The Three Parties To A Surety Bond Arrangement - Douglas E. Castle

 

FINANCIAL GUARANTEES, SURETIES AND COLLATERAL By: Douglas E. Castle

Obligees in a business relationship (such as contractors, subcontractors and sometimes mere payers) are frequently called upon by obligors (the parties for whom they are rendering a service, even if that service is merely making payment) to enhance or further bolster the likelihood that they will perform by bringing in either a third-party guarantee or by assigning the rights to some supplemental collateral (assets which can be liquidated in the unfortunate event that the contractor, payer or other obligor is unable to either perform or pay in full on a timely basis.

In a difficult economy, small- to medium-sized businesses are being called upon to provide these assurances by those parties hiring them or financing them. The tools or arrangements that are utilized to fulfill that need for additional “comfort” are financial guarantees (issued by financially strong third parties), surety bonds and supplemental collateral, which latter may be in the form of a lien on real estate, a hypothecation of marketable securities or any other assets which are not related to or involved in the subject transaction. These are, candidly, easier to obtain for smaller transactions (and newer or smaller companies) than are surety bonds or financial guarantees.

A very select and limited group of companies provide any of these hedges against an obligor’s failure, but any one of these “enhancements” could be the difference between obtaining business or being left out.

Following is a brief treatise on financial guarantees and surety bonds:

Definition: A non-cancellable indemnity bond, backed by an insurance company, which guarantees that principal and interest will be paid in compliance with the underlying contractual agreement or promissory note. Financial guarantee bonds are used by debt issuers as a way of attracting investors. The guarantee provides said investors with an additional level of security that the investment will be repaid/obligation will be fulfilled in the event that the securities issuer is unable to do so. The bond may benefit the principal by enhancing the principal’s creditworthiness thereby lowering the cost of financing. The guarantee “wraps” the security/promissory note with the insurer’s indemnity. Because the bond represents an UNCONDITIONAL GUARANTEE of compliance/repayment, a preferred interest rate is often offered.

There are three types of ‘financial guarantee bonds’. The first category is small “finite” financial guarantee. These are essentially performance bonds with a payment guarantee

element. They may look like license/permit bonds on their face. The bonds often have a small penalty (denomination) and are underwritten like standard surety bonds, with extra emphasis on the principal’s (applicant’s) liquidity and the insurer’s ability to recover any loss paid. Examples are lease bonds and energy broker obligations. The second category is bonding of structured finance, and the third public finance.

Bond denominations within these latter two categories can be enormous. As a result of severe losses in the financial guarantee sphere New York State passed the ‘ Appleton Law’ and quickly other insurance regulators’ policies regarding financial guarantee followed suit with administrative regulations restricting financial guarantee to only MONOLINE insurers. In the U.S. market, there are very few participants. AMBAC, Assured Guarantee, CIFG, Financial Guarantee Insurance Company, Radian, RAM Reinsurance, and Syncora Guarantee carry the majority of this market. These companies specialize in the selection of financial guarantee risks and the ongoing surveillance of their principals.

With some exceptions, financial guarantee insurers DO NOT PARTICIPATE IN PRIVATE, COMMERCIAL TRANSACTIONS. If you are engaging in a person-to- person or business-to-business contract and you seek to enhance your position with a financial guarantee, you WILL NOT OBTAIN A FINANCIAL GUARANTEE INSTRUMENT THROUGH STANDARD FINANCIAL GUARANTEE MARKETS.

Your only alternative is to approach a captive or specialty insurer based outside of the regulatory jurisdiction of the United States where carriers are not hampered by mono- line restrictions. Additionally, the few markets that will entertain private financial guarantee severely limit their exposure on each risk selected.

Financial guarantees for non-government issued securities, or asset-backed securities with very little worth DO NOT EXIST! If you are seeking a guarantee in the hundreds of millions of dollars, I recommend that you do not waste your time. You will not find one. Further, private financial guarantees are written with FULL COLLATERAL SECURITY. Financial guarantee insurers are not interested in promises of indemnity based on the speculation that your transaction, that your proposed project, will be successful, or on the ongoing profitability of your operation.

Financial guarantee bonds are considered to be a much higher risk than standard surety and fidelity products, therefore my due diligence must include a review of the proposed contract, the solvency and identity of the indemnitors, and the collateral that you wish to deposit to support the bond. Premiums are generally fifteen percent (15%) on face value per annum for those bonds up to one million, and ten percent (10%) on face value for those bonds in excess of one million dollars. Collateral security in the form of cash, letters of credit, or highly rated debt instruments (i.e., U.S. Treasury issues, notes, bills, warrants, and highly stable, publicly traded stock or bond issues) will be credited at one hundred percent (100%) of current market value. Unacceptable forms of collateral are REAL PROPERTY (although real estate might be considered by the obligee or lender to supplement or supplant a bond or other guaratnee in certain transactions) and ‘BLOCKED FUNDS LETTERS’.

And now a brief word about surety or financial guarantee bond “Ratings.”

When I receive requests for information about, or regarding the procurement of financial guarantee bonds, I am invariably asked about the carrier’s “rating.” To my knowledge, there are only three financial guarantee insurers with an A.M. Best rating which operate in the United States. Two of those entities are absolutely unwilling to write bonds for private contracts, one will consider them. The former two will only issue financial guarantee bonds to municipalities that collateralize the obligation with bonds or other instruments issued by that municipality, leaving only the third as a “rated” carrier from whom I receive authority.

Given the severe restrictions of financial guarantee to mono-line insurers, carriers that wish to engage in financial guarantee business in addition to other insurance lines are often forced to move to a domicile without those restrictions. Bermuda, Seychelles, the British Virgin Islands, and the Dominican Republic are currently the choice destinations for offshore captives.

There is no ‘automatic’ rating system for non-U.S. admitted carriers. In order to obtain an A.M. Best rating an insurer must ordinarily have certain ‘seasoning’ minimums during which time they are under market surveillance. The carrier’s financial statements and books must be open to the rating agency. These requirements cause problems for offshore captives.

First, by entry (admission) into the U.S. market, a carrier subjects itself to U.S. taxes, precisely one of the reasons for which insurers DO NOT enter. Second, not all insurers wish to share their financial statements with a market surveillance group. So, although I may be able to pair a principal with an A.M. Best rated carrier, you will have a great deal of difficulty identifying any other “rated” entity that will write these undertakings. Unrated carriers WILL provide audited financial statements demonstrating their solvency, and their current certificate(s) of authority.

I hope that my information is helpful in understanding this type of instrument. Please keep in mind that this market has few participants. They do not and will not deviate from the full collateral rule.

Call To Action: Understanding that neither I nor my management consulting companies provide or are licensed brokers for these types of guarantees or bonds (although we do frequently engage in arranging to provide for supplemental or substitute collateral [i.e., in the form of bank deposits, treasury securities, publicly-traded stock and real estate] with which to bring transactions into indirect or derivative compliance with the “full collateral” or “full coverage” rule, or to eliminate the need for surety or financial guarantee bonds entirely), please contact us at http://bit.ly/CASTLEDIRECT, and we’d be delighted to discuss your needs and your best choices for solutions. We pride ourselves on being creative – as we must when working hand-in-hand with small- to medium-sized client companies in this difficult economic climate.

Douglas E. Castle

NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.

THIS ARTICLE IS COPYRIGHT 2014 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL IMAGES AND LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”

http://www.LinkedIn.com/in/douglascastle

http://DouglasECastleBlog.com

http://DouglasECastleConsultancy.com

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D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


The Rule Of 72

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Rule Of 72 - Douglas E. Castle - The Braintenance Blog

THE RULE OF 72

By: Douglas E. Castle

=>A Method Of Estimating How Long It Will Take (In Years) To Double Your Money Using Compound Interest At A Given Rate.

=> A Method Of Estimating At What Rate Of Compound Interest It Will Take (In A Whole Number Percentage) To Double Your Money In A Given Number Of Years.

In finance, the rule of 72, the rule of 70 and the rule of 69 are methods for estimating an investment’s doubling time. The rule number (e.g., 72) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.

These rules apply to exponential growth and are therefore used for compound interest as opposed to simple interest calculations. They can also be used for decay to obtain a halving time. The choice of number is mostly a matter of preference, 69 is more accurate for continuous compounding, while 72 works well in common interest situations and is more easily divisible. There are a number of variations to the rules that improve accuracy. For periodic compounding, the exact doubling time for an interest rate of r per period is

,

where T is the number of periods required. The formula above can be used for more than calculating the doubling time. If you want to know the tripling time, for example, simply replace the constant 2 in the numerator with 3. As another example, if you want to know the number of periods it takes for the initial value to rise by 50%, replace the constant 2 with 1.5.

You can amaze your friends and colleagues by doing compound interest computations in your head (or on a napkin, if you require one).

For example, the amount of time that is required to double your investment at a compound interest rate of 4% would be 72/4, or 18 years, while the time required to double your investment at a rate of 8% would be 72/8, or 9 years.

As another example, the rate of compound interest required to double your money in 5 years would be 72/5, or 14.4%, while the rate of compound interest required to double your money in 10 years would be 72/10, or 7.2% per year.

It’s a very good system for quick and dirty estimates of time and compound interest. Use it, and enjoy it.

 

Douglas E. Castle

 

Labels, Tags, Keywords, Categories And Search Terms For This Article: Rule of 72, computations, investments, ROI, compound interest, doubling money, The Braintenance Blog, Douglas E. Castle, math shortcuts, financial calculations, Douglas E. Castle Blog, Rule of 69, Rule of 70, Rules of thumb, capital recovery, the Payback Method.

 

NOTE: THE INFORMATION CONTAINED IN THIS ARTICLE SHOULD NOT BE CONSTRUED BY THE READER AS BEING LEGAL, FINANCIAL, TAX, ACCOUNTING, ECONOMIC OR INVESTMENT ADVICE. NO OFFERING OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY IS MADE HEREBY, NOR IS A SOLICITATION FOR THE PURCHASE OF SECURITIES OR OTHER INVESTMENT INTERESTS OF ANY TYPE IN ANY ENTITY MADE HEREBY. THIS ARTICLE IS INTENDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND REPRESENTS THE VIEW OF THE AUTHOR ONLY.

THIS ARTICLE IS COPYRIGHT 2014 BY DOUGLAS E. CASTLE, WITH ALL RIGHTS RESERVED. ANY REPRODUCTION, TRANSMITTAL OR DISTRIBUTION OF THIS ARTICLE, EITHER IN WHOLE OR PART, IS UNAUTHORIZED AND MAY BE UNLAWFUL, UNLESS FULL ATTRIBUTION IS GIVEN TO THE AUTHOR AND ALL IMAGES AND LINKS IN THE ARTICLE REMAIN INCLUDED AND “LIVE.”


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Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.


Venture Investors: Optimal Deal Structure

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Venture Investors have been investing more speculatively than necessary — not based upon their selected investee companies or projects — but in terms of their “all or nothing” deal structure, which usually is based upon the occurrence of an event (such as an acquisition, going public or some other exit) which provides capital recovery as well as gain, if any. While waiting for this event, the investor either doesn’t receive cash flow at all, or receives some debt service payments if the deal was structured as a loan of some sort, plus equity. Most important to note is that most investors are not truly looking at the investee’s fundamentals and inherent profitability as a free-standing entity. This not only affects the deals selected (i.e., flash versus fundamentals), but it puts the investor into an uncertain period of little or no income and limited liquidity.

I am proposing a less speculative and more liquid deal structure based upon the use of Revenue-Based Royalties as capital recovery devices (to reduce risk over time) and as a means of generating a stream of positive cash flow to the investor. And this cash flow, if sufficient, can be re-invested to maximize total portfolio return.

The method is simple. Regardless whatever the other particular details of the deal structure, add a net revenue-based royalty (as set forth in the illustration below). This approach can also have the effect of making many a less-than-glamorous early-stage enterprise look considerably more attractive. I believe it would make more money available to small businesses and middle-sized enterprises that are less than revolutionary in measuring their intellectual property or market capitalization potential.

Sample Investment Recovery Chart Template - Douglas E. Castle

This approach is much “cleaner” than profit-sharing in that it does not permit subjectivity or manipulation of the numbers. It’s simply elegant: The investor takes a look at the investee’s bank statement, multiplies the non-investment, non-loan, cleared deposits (ostensibly the proceeds from sales activity), multiplies that number by the applicable royalty percentage expressed as a decimal, and is paid appropriately.

Douglas E. Castle

 


FUNDING BUTTON LINK


QUOTATIONS - Immortal Wisdom - WORDS - The Building Blocks Of Language - Linked Image - By Douglas E Castle














more Quotes

This Day in History


NOTICE









Messy Matrix (Eh, Neo?) Of Social Media Sharing Links
View DOUGLAS E. CASTLE's profile on LinkedIn
Share this page
RT Button
Contact Douglas E. Castle Follow Me on Pinterest
Follow Douglas E Castle on Quora


***************
This site is proudly affiliated with Global Edge International Consulting Associates, Inc. ["GEI”]
Free Subscription to The GEI Business Daily!
Sign Up For Our Free GEI Newsletter!
Receive Our Free GEI RSS Feed!

***Follow GEI's Company Page On LinkedIn!

Respond To Douglas E Castle
http://bit.ly/CASTLEDIRECT

Perspective Is Wisdom - Large
D.E.Castle's Daily Business Advisory Wrap-Up.
Skim It. But DON'T MISS It.
This site is the Management Consultants' and Chief Reconstruction Officers' best all-industry guide to analyzing, diagnosing, devising a strategy, creating either an Action Plan or an Emergence Plan and overseeing and monitoring the successful implementation of either in order to ensure the client organization's optimal, sustainable profitability. These plans are always made scalable to accommodate the size and needs of the client, whether it is fast-growing young company with an aggressive and ambitious agenda, or whether it is an older, larger, well-established business which is experiencing problems or which is at a crucial decision making point in its evolution as an entity, and which requires sound advice (and often implementation oversight and assertive "hands-on" assistance in the form of a powerful third-party representative agent or a an expert in the art of negotiation as its appointed "point person") regarding its next steps. In the alternative, Douglas E. Castle is expert at helping fast-track, rapidly emerging companies to growth through acquisitions, mergers, licensing, branding and both domestic and international strategic joint ventures to access better, more efficient supply chain sourcing and to open up wider global markets to dramatically increase the scope of possible new revenue opportunities.