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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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.


Valuation Of Your Privately-Held Business

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Establishing a valuation for your company is a crucial process. You’ll need a valuation for the following purposes (and these are just several): sale of the business to a third party; taking your private company public; merging with another company or acquiring another company; for a buy-sell agreement; for the issuance of such incentives as stock purchase options… your company’s valuation is important. What is equally important is that the valuation is properly documented, the computation strongly justified and supported, the actual process is undertaken and overseen by an impartial, objective third party with the appropriate credentials. Valuation of a company is a target which moves and changes over time depending upon the company’s performance and other variables, so periodic valuations of your company are important to stakeholders, creditors and potential investors or acquirors.

If the business is passive, and merely serves as an ownership vessel for income-producing property, equipment, securities or the like, establishing a valuation can be relatively easy. Simply take the combined Fair Market Values of all of the assets, reduce this amount by the total liabilities on the books (and perhaps some contingent liabilities in certain cases), and you have a basic valuation.

If the business is an operating entity (usually in the form of a partnership, an LLC or an IRC SubChapter S corporation), and income from operations is generally being swept out to the maximum extent possible to the stakeholders who work for the entity, the valuation issue is somewhat more complex. The business’ books might reflect very little in the way of appraisable assets, making a Fair Market Value approach untenable. The business’ true value is in its Human Capital, which is unreflected (lamentably) on its books.

Most of these operating entities must be valued on a more subjective, judgmental basis, which usually involves some capitalization or discounting approach based upon the entity’s distributable income prior to any distributions made to the owner-managers.

Several prospective methods (all variations on the Net Present Value theme) are offered for your consideration, with the caveat that these methods assume [and we all know what happens when we assume] that the business being subjected to the valuation has been in operation for a period of no less than five consecutive years:

1) Simply add the most recent 5 consecutive years’ distributable income together to arrive at a value;

2) Average the most recent 3 consecutive years’ distributable income and multiply that result by five;

3) If the business has shown a pattern of consistent growth, you may consider using a weighted average method, where, for example, you’d take (say) 50% of the most recent year’s distributable income, 30% of the prior year’s income plus 20% of the earliest of the three years’ respective distributable incomes, take that weighted sum and multiply it by 3 , 4, or 5.

My inclination is to utilize the third approach because it gives effect to growth and affords the most recent income-generating period the highest weight.

Douglas E. Castle


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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.”

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http://DouglasECastleConsultancy.com

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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.


International Business Update: Wiring Funds And Banking

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Banking Is Becoming More Challenging In A World Aflame

International Business Update: Wiring Funds And Banking

If you are either conducting business internationally or are contemplating conducting any type of business which may require international electronic or SWIFT transfers of funds (i.e., funds transfers inbound or outbound via wire) the current terrorist threat levels are already creating additional diligence and reporting on the part of depositary institutions, as certainly as it will now take you longer to go through airport security clearance protocol on any international flight due to the prevalance of consciousness relating to possible terrorist or Ebola virus-related problems throughout the world.

Following are several suggestions to provide your banker, or your recipient’s banker – as well as the host of regulators to which they now answerable – with additional comfort regarding the nature of your transactions, business and funds. While you may see these steps as “overkill,” rest assured that they are not, and that they will reduce the likelihood of any holds or restrictions on your funds. Again, these are not legally mandated, but are just an extra step of precaution:

  1. Do not, under any circumstances, accept any inbound transfers, or make any outbound transfers by wire (or by check, for that matter) to businesses or other organizations located in any of the prohibited jurisdictions on US Ex-Im Bank’s most recent publication of the Country Limitation Schedule (a link to which which follows for the purposes of example) or which happens to be on the Department Of The Secretary Of State’s “Watchlist” (a link to which follows for the purposes of example) ;

  2. Pre-advise your bank, via email to your account officer or manager, if you are anticipating any transfer into or out of your account in any amount in excess of $1.0 million US;

  3. Have any transferor execute the following undertaking [or one in a format suggested by your legal counsel] in a signed writing and either fax or email the same to your banker (in the form of a PDF attachment) with your own covering letter to accompany it: “ _________________ is transferring funds in the amount of _____________________ to ________________ [recipient name] via SWIFT [or even via check, if you’d like to take that extra precaution when you are accepting a check drawn on a foreign bank in payment for goods or services]. This transaction is made using clean, cleared funds of non-criminal origin, and is being transferred in compliance with applicable laws; further, these funds are free of all liens, taxes, encumbrances and other claims of any sort, and are being conveyed to be utilized for legal purposes.”

The above steps will help to keep both you and your bankers in the best possible standing. Should you wish to view Ex-Im Bank’s latest updated Country Limitation Schedule (CLS), go to http://www.exim.gov/tools/countrylimitationschedule/index.cfm.

Should you wish to find out if the country with which you are considering doing business is “watchlisted” by either the Department Of State or the Department Of Homeland Security, go to either http://www.state.gov/ or http://www.dhs.gov/ respectively. Both websites offer you telephone numbers to contact helpful civil servants to answer any of your questions.

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 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.
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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.


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

 


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Respond To Douglas E Castle
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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.