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Thomas R. Lawrence
Capital Consultants
456 South 10th Street
Opelika, AL 36801
334-737-2727
tom@cap-consult.com

As I See It!
The Newsletter for
Capital Consultants Company
August 2010 Volume 1, Number 2

In This Issue:

Welcome from Tom

The Private Equity Market

As I Like it!
Ribs and Special People
I would like to express my appreciation to everyone who called and expressed delight and enthusiasm for my inaugural newsletter. I love both of you. I hope I can carry this wave of support forward as I prepare the second edition of AS I SEE IT!

I’ve been fooling around with business for nearly fifty years in one form or another. I have lived through the post war boom (that will be WWII for you youngsters) and the recession that followed the oil embargo. I have seen the DJI as low as 570 in the early 70’s and over 14,000 in this decade. I’ve been to several log burnings and hymn singings and dinners on the grounds. This ain’t my first rodeo.

The markets go up and the markets go down and the analysts analyze and the economist pontificate. The talking heads assume very serious demeanors and tell us what the analysts and the economists really said. The Fed prides itself on appearing Delphic and the administration du jour assures us that they have everything under control. They all would like for us to believe that they, and only they, really understand why the markets are doing whatever they are doing.

The media buys into it all because they have space and air time to fill. The pundits can tell you why the market performed as it did on any given day, but it is always after the market closes. I keep waiting for one of them to come on before the market opens and tell me what’s going to happen today. The whole spectacle looks like a Chinese fire drill

Fortunately, I know why markets go up or down. If there are more buyers than sellers they go up and if there are more sellers than buyers they go down. That is the sum total of what I know about markets and as Forrest Gump said,

“That’s all I have to say about that.”

The Private Equity Market

In my last newsletter I spoke of the changing landscape of Small Private Company financing and attempted to contrast the pre crash availability of capital to the present day post crash situation. There have been two major changes. A change in the type of project that is financeable and a change in the appetite of those who provide the capital. Revenues and margins are the focal points of gaining new capital and cash is king to the investors.

Revenues and margins are more important than hitting home runs. Capitalizing a start up business today is a function of how soon can the company become cash flow positive and begin to throw off distributable cash. The speed to cash flow positive operations is a function of revenue creation and ample margins. In the past sexy technology that could transform an industry or market, was essential to attract investors. The more disruptive the technology, the greater the appeal. Investors were looking for the next Gator Aide or Viagra. Capital was willing to wait five years or more to hit that next big product or service.
Today’s investor would rather supply plain round washers to a large number of customers with good margins than develop the cure for cancer. They are looking for mail box money. They want to recover their investment within 36 months or less, and then enjoy a cash stream afterwards. It has always been easier to block an opposing lineman in the directions that he wants go, than to attempt to overpower him and force him to go the other way. Investors are pretty much the same.

If you are starting a new business that requires any research or development to get to market you are going to meet a very cold shoulder in today’s private equity market. Your product had better be ready to roll off the line immediately. The same is true if you plan to sell a new disruptive product into a stable and established marketplace. No investor wants to pay your tuition while you learn how to sell. If there are any regulatory hoops to be jumped through, no matter how small, you can pretty much forget private equity.

At this point the funding of a new or expanding business through private equity sounds dismal and near impossible. Not so. There are any number of small companies that can raise private equity and do it at a reasonable price. It just depends on the business model and how it is presented. It goes back to blocking the investor where he wants to go.

If you can present your business model to conform to the structural preferences and return parameters of today’s private equity investor there will be ample capital available, at a reasonable price, to fund your business.

Let’s talk just for a minute about the price of capital. In the past if you asked an investor how much his capital would cost, he would answer with an “all in and all out” Internal Rate of Return number. It was a pretty simple calculation. Line up all of the goes inzas and goes outzas in their proper sequence in time and solve for IRR. For a start up IRR’s between 35% -45% would be typical for a pure equity investment.

This will still work for the very sophisticated investors, but the average guy looking for private equity investments can’t get his head around the time gap between “all in and all out”. He would much rather put his money up today, start getting it back tomorrow in the form of loan amortization and have a cash distribution for a certain period of time after the return of his capital. The distributable cash element is highly negotiable and can take the form of a preferred equity distribution or participating cash payment. The all in cost of this type capital is in many cases less on a raw IRR basis and becomes particularly attractive when you consider the prospect of recovering equity at some future date.

Yes, it takes some skill to structure the transaction and express it in an attractive way in the business plan and the pro forma operating statements, but it can be done. If you have an interest in securing more information on this type of capital give me a call at (334) 737-2727 and we’ll talk.

As I Like it!

When last we met I had held forth on Morris’ BBQ in Eads, Tennessee proclaiming it the best in the galaxy and so it is. I left you with the promise to discuss BBQ Ribs at our next session. Well, here we go. Ribs are a little more complicated than shoulder. There are two preparations of BBQ ribs that merit mention. The “Memphis Dry Rub Rib” and the regular deep smoked rib. Both are best enjoyed “dry”, that is without sloped on BBQ sauce. Ya’ll know how I feel about BBQ sauce so there is no need for me to rant on about it.

The Rendezvous in Memphis is the home office of the “Memphis Dry Rub Rib”. You can reach the Rendezvous by walking out of the door of the Peabody Hotel onto Union Street and follow your nose across Union and down the little alley opposite the Peabody. Nestled among the garbage cans and empty rib boxes littering the alley, the rendezvous will be on your left mid way down the alley. It looks a little scary, but you are in for a real treat.
I happen to agree with the adage “white men can’t jump”. I also am confident that “white men can’t cook BBQ” Charlie Vergos, the founder of The Rendezvous, was smart enough to handle the business and promotion end of his enterprise and leave the cooking to a staff of black folks who consistently produce the very best dry rub ribs you will ever sink your teeth into. Over the years they invented their own dry rub and each juicy slab is generously coated with it prior to cooking. The ribs are then slow cooked until the meat is all but falling off the bone. The ribs are served in their own cooking juice and provide a level of flavor and tenderness that is unsurpassed.

There is a bunch of other stuff on the menu, but with the exception of the grilled lamb riblets there is nothing of note. The slaw is worse than ordinary and the beans are just beans. Sliced Wonder Bread is hardly a treat. Stick with the pork ribs and you will experience the best dry rub I have ever found. Be sure and wash up carefully, you should be covered with dry rub and juice when you finish.

In the category of regular smoked pork ribs there is only one place I have found that consistently produces a superior product. The Cozy Corner, again in Memphis, Tennessee is a black, family owned BBQ joint close to the downtown area. Raymond and Desiree Robinson spent twenty five years perfecting their system and passing it on to other family members. Since Raymond’s death Desiree has run the business and has maintained the same high standard of quality product and friendly courteous service.

The Cozy Corner uses a bigger cut of rib and slow cooks it without sauce. The finished product has the best deep smoked charred flavor, but does not have the burned chemical after taste that slow cooked ribs often seem to pick up while smoking. As in most really good BBQ joints it’s all about the ribs, I have never tried the slaw, beans or sauce, just bring on the ribs. Bon Appétit.

Special People

I am in the process of writing a “quasi memoir” of sorts. I have had the privilege of spending a great deal of time with my grandson, Jackson. We’ve collected stamps, shot skeet and sporting clays and played a good bit of five card stud. I have been trying to teach him to be a sportsman and someone you’d want to spend some time with. In the course of trying to be a mentor and positive influence on Jackson I have had to opportunity to look back on people who have been kind enough to spend some time with me and help me understand life and its many pitfalls and opportunities.

Both of my step grandfathers were very important role models for me and I am filled with pleasant memories of both of these loving men. As I reminisced about others who have had a deep influence on my life I realized that one of my favorites is a man that I have only known for six years. Dr. Will D. Carpenter.

Will and I may have a relatively short relationship, but we share a common background and heritage. We both grew up in Sunflower County Mississippi, Will in Moorhead and me twenty miles away in Ruleville. My grandfather was a very progressive cotton farmer and Will’s Dad was the County Agent. I’m sure they knew each other. Will and I grew up hunting fishing and playing high school football. He went to Mississippi State in the fall of 1948 and I came along in 1957.
There are a lot of similarities between Will and me. We were both Boy Scouts. Will earned his Eagle and I didn’t. We both joined the military when we were still in high school. Will the Naval Reserve and me the Mississippi National Guard. Will ended up with a ROTC commission and was discharged as a Captain and I finished my eight year obligation as a Corporal. Will graduated from Mississippi State with an Ag degree and went on to get his PhD in Plant Physiology from Purdue. I finished State with a history degree after being invited out of Petroleum Engineering. There are a lot of similarities and some major differences. Will Carpenter is apt to finish what he starts.

Will and I met in 2004 when I needed some serious help starting a company to commercialize University based technologies and Will was recommended by people whose judgment I trusted. I asked Will to join our board and amazingly he accepted. Will had retired from the Monsanto Company as Vice President and General Manager of the New Products division. Will’s many professional achievements are far too many to list here. Suffices to say, Roundup, the pesticide that has changed agriculture was developed on his watch and he was the U.S. representative that successfully negotiated the chemical warfare treaty. He holds many international awards for his work in agriculture and the chemical industry. Will is to agriculture as Ted Williams is to hitting a baseball.

While Will’s scientific and governmental expertise proved to be invaluable to our company, it was his personal advice and guidance that won my respect and admiration. First and foremost, Will is an honorable man. He is a teacher and a mentor. I had the honor to be invited to a tribute to Will and his lovely wife Helen this past year and I met dozens of people whose lives had been changed by working for and with Will Carpenter. In the words of the late John C. Stennis; Will has plowed a straight furrow. His Dad would be very pleased and proud of him, and to Will, there could be no higher praise. I treasure his friendship.

Until next time…