Capital Consultants September 2010 Newsletter


Thomas R. Lawrence

Capital Consultants

456 South 10th Street

Opelika, AL 36801


As I See It! TM

The Newsletter for Capital Consultants Company

September 2010
Volume 1, Number 3

In This Issue:

Welcome from Tom

Investing in Private Equity

A Sad Occasion

As I Like it!TM

Fried Chicken and People I Like

It would appear that the relentless heat wave of 2010 has subsided, at least for the moment. Praise be to a merciful God! There may be more ninety-degree days, but I suspect the one hundred-degree period is finally over. To paraphrase Winston Churchill; this may not be the beginning of the end of summer, but it is surely the end of the beginning. That sounded much better when he said it.

Well, if the end of summer is upon us, then football season is just around the corner. In fact, by the time you receive this epistle, most SEC teams will have played one and it some cases two games. I am a Mississippi State fan living in Alabama. Starkville could be in the outer regions of Neptune if you follow our local and state-wide papers. I have read little or nothing about the 2010 Bulldogs, other than to know that they are scheduled to be cannon fodder for Auburn and Alabama later in the season. We are picked to end up eighth in the six team SEC West.

I don’t know much about our second year head coach Dan Mullen, but I can tell you what Nick Saban had for breakfast this morning. I am also privileged to live in Auburn during the reign of Head Coach Gene Chizik. Those awful years under the now widely defiled Tommy Tuberville have slipped into the obscurity they deserve. Tiger fans, Plainsmen or War Eagles, whatever they are, can try to forget an overall record of ten consecutive winning seasons, including a perfect 13-0 in 2004. That miserable period has now faded into the fog of time, along with 8 Bowl games, 5 of them on New Year’s Day, and six consecutive wins over Alabama. The phrase “don’t fix it if it ain’t broke” comes to mind.

No matter how the 2010 season goes, it will be fun to watch. The SEC will probably remain the best league in the country. Now I’ve done it. I have opened Pandora’s Box. I have touched the third rail of Southern culture. I have mentioned Southeastern Conference Football. I will now have to listen to a cacophony of rebuttals. Oh well, I’ll just be getting what I deserve. The devil made me do it.

Investing in Private Equity

In my previous newsletters I have addressed the current situation in the Mini-Cap Private Equity Market from the prospective of the entrepreneurs that are seeking funding in the $500,000 to $2,000,000 range. Today I would like to visit the investor’s interests. Value has returned to our retirement accounts if we did not sell in panic at the bottom. We have reconciled ourselves to the new deflated value of our homes and real estate. We are adjusting to the parameters of a tight credit market. We are learning to play by the new rules. Yet, there is a pall of uncertainty hanging over us. This uncertainty tends to make us cautious where our money is concerned. I hear this over and over again.

Businesses and professional practices continue to throw off excess cash flow, but the instinctive thing to do is salt it away. Keep your powder dry is the mantra. Don’t chase anymore wild rabbits that may be a home run, but just as easily could be a total write off. Cash is king!

I certainly agree that cash is king in this environment. Liquid cash can be deployed to buy a variety of underpriced assets. I see examples of the discounted value of business assets every day. It brings to mind my grandfather, O.B Rainer of Sunflower County, Mississippi. Mr. Rainer was managing an ice plant in Ruleville, Mississippi when the Great Depression hit and asset values tumbled. He firmly believed in the power of compound interest. He wanted to receive it, not pay it. He was a prudent business man and had managed to save $10,000 during the roaring twenties. He was not much of a roarer.

In 1931 the price of cotton stored in the Federal Warehouse System reached a low of several cents a pound. Mr. Rainer took his $10,000 and bought cotton. Later in the 30’s, with war in Europe on the horizon and the European nations engaging in an armaments race, he was able to sell his cotton at sixty cents a pound. He cashed in and made a stack. This enabled him to buy the ice plant form his employer in time to be owner during the war years. He made another stack.

There are these kinds of opportunities available to the investor that is willing to do his homework and place a prudent investment. There are many of us who do not have the time or expertise to seek out these opportunities. Mini-Cap Private Equity can offer an acceptable alternative.

Capital Consultants is constantly seeking what I refer to as “Mail Box Money” investments. I want to invest a reasonable sum in a business that is cash flow positive or will soon be cash flow positive. I want my investment to be used to either grow a successful business or be the catalyst for an emerging company to attain cash flow positive operations. I want my investment to be structured as a three to five year secured and fully amortizing loan, with an equity kicker that will bring my overall return above 20% IRR. While this is initially troubling to the potential entrepreneur, it is better than no loan at all. I always tell them, if the bank will do the deal, don’t even consider my offer.

I am currently working on at least a half a dozen prospective deals. If I can make them fit my parameters, I will invest. If you have an interest in this sort of investment give me a call and we can talk it over.

A Sad Occasion

Today, in a very small way, we were all diminished. Generally I eat breakfast at home, but on the mornings that I come to my office early, it is my habit to drive just down the street to a locally owned restaurant with a drive through window and order a pretty darn good sausage and biscuit. They are the only place in town that has decent calf liver and gravy, and I usually eat lunch there once a week.

This morning, I drove by to get my sausage and biscuit, and the parking lot was deserted. I did a double take because they usually do a big breakfast business and a group of old coots sit around a big round table and discuss the world’s problems. This morning I noticed the marquee out front said, ”Thanks for forty two great years, we are closed.”

I was overcome by a sense of sadness way out of proportion to my personal stake in this.

Looping through the empty parking lot I noticed the former owner walking to the building from the dumpster out back. I pulled up, rolled down my window and asked him what had happened. In a very sad and defeated voice he said that he had suffered a severely reduced volume of business since the recession started, and he finally ran through his life savings in his attempt to stay open.

“I just don’t have anything left. I had no choice but to close it down.” He said.

“What do you plan to do?” I asked.

“I have no idea, but when God closes a door, he opens a window somewhere else. I’m nearly sixty years old, but someone will need an honest manager to run their restaurant.”

“Well, I’m sorry to see you close down, I always enjoy eating with you. Good Luck!” Off I drove to my little office up the street.

All day the conversation with this man, whose whole world had been turned upside down, stuck with me and I finally realized that when bad things happen to good people, we all die a little. The closing of this little business is sad, but not unexpected. He could no longer compete with the better located, better financed, fast food establishments. You could say he was a victim of the laws of evolution. Tragic, but explainable.

The episode would not leave my mind and finally I realized what was troubling me so much. Yes, the loss of this small business is terrible, but the real tragedy is that this very scenario is being repeated over and over again all across America. Small businesses are closing in record numbers. The landscape of our country is quickly changing. In the long run, this may be for the best. Replacing the outdated and inefficient with modern concerns. The only problem with the march of progress is that it leaves a bloody wake. Not only did my little breakfast spot go away, but the three dozen men and women that prepared and served the home cooked meals are all out of a job. They too do not know what they will do to make a living.

As for me, I will soon forget the whole incident and go ahead with my life, a little less for it, but go ahead I will. I will also begin my search for “Liver is Us” or whatever fast food turns up.

As I Like it!TM

You can’t talk about Southern cooking without mentioning fried chicken. Fried chicken has been a staple of the Southern diet since colonial times. The Second World War can be used as the watershed event in the history of Southern Fried Chicken. The post war period heralded the beginning of the fast food industry and with this came the invention of the deep fat fryer. This, in conjunction with the introduction of the mass produced rubber chicken, has resulted in hundreds of varieties of deep fat fried latex chicken that only has the taste of what ever flavoring or spices were added to the coating.

Anyone that is the least familiar with the chemistry of cooking will agree that the deep fat frying process does not allow the cooking chicken to breathe, thus changing the flavor of the end product. It may be further fouled by frying catfish, hush puppies and French fries in the same cooker. Strange flavors often result.

The modern mass produced chicken had the flavor bred out of it years ago. Today, it is simply cheap white protein. This chicken has to be seasoned to have flavor in much the same way curry is used in India to mask the taste of spoiled meat. Colonel Sanders realized this forty years ago and came up with his secret blend of herbs and spices that give the coating on his chicken a distinctive flavor. If you go out to eat and order fried chicken, chances are you will get a tasteless blob of protein, coated in a deceptive armor of artificial flavors and cooked in stale, burned grease. The sad thing about this is that we all have been conditioned to accept this mess as Southern Fried Chicken.

Let’s take a look at the pre war fried chicken. My grandmother, Kate Rainer, remains to me the quintessential Southern cook. I had the opportunity to watch her prepare many of our meals and I especially remember her fried chicken. She began with a yard chicken. What’s a yard chicken you ask? Well in ain’t an organic chicken, nor is it a free range chicken, though I will agree that both of these are superior to the junk available in our super markets. Organic means that the chicken was raised without chemical additives, certainly a step in the right direction. Free range means that they were not kept in little cages, but allowed to walk the carefully prepared ground. Both are fed a diet of grain.

A yard chicken is allowed to run loose in the backyard and eat insects, worms and God only knows what else. Occasionally, cracked corn or table scraps would be scattered if the dogs didn’t get them. These chickens were physically active and developed muscle structure, their dark meat had a distinctive gamey flavor and the whole bird had some taste. Yard chickens were fresh, we usually watched the lady that supplied our chickens wring their neck, pick ‘em, clean ‘em and cut ‘em up. They would be in the skillet within an hour of their demise.

Notice, I said skillet, like big, black and cast-iron. My grandmother would prepare the chicken for frying by soaking it in a buttermilk and egg wash seasoned with salt and pepper, then coat each piece in plain flour mixed with more salt and pepper. She would fill the skillet with a mixture of Crisco shortening and bacon drippings so that the pieces of chicken would be half in the grease and half out. Over medium heat, she would cook the chicken until golden brown, turning it only once. The finished product was to die for. She would then make a roux with the remaining grease and make fantastic chicken gravy, but that’s for another time.

If anyone knows where one can buy yard chickens, or better yet, where someone is pan frying yard chickens, let me know and I will pass it on in my next edition.

People I Like

About fifteen years ago, while I was still one of the owners of Delta Capital Partners, Inc., we undertook the financing of Spire, Inc. in Atlanta. This was our first project in the Atlanta area and since it was my responsibility to actually raise the needed capital, it was my lot to go to Atlanta and hopefully meet an entirely new group of private equity investors.

I met with a very talented young man, John Cox, who had conceived the idea for Spire; and between us, we came up with the business plan needed to capitalize the company. When I explained that I would need him to introduce me to wealthy individuals in the Atlanta area, he quickly suggested that I should talk to his Dad. John said his Dad knew everybody in Atlanta and arranged for me to meet them the next morning for breakfast.

I met John and his father, Cary Cox, at a local breakfast joint. As soon as Cary ordered “streak-o-lene” 1 I knew we were going to be great friends, and we were. I moved into Cary’s office in suburban Atlanta and he began to introduce me to no less than a hundred prospective investors for Spire. We soon had the deal done and I continued to come to Atlanta regularly as a board member at Spire.

As I got to know Cary better, it became clear that we shared a great many interest. Cary was a history buff and was very well read. He did not talk about himself very much and as such, it took a year or two to really understand his background. He had grown up in rural southeast Georgia in a middle class home. Cary was an outstanding high school football player even though he weighed less than 200 pounds.

1 Streak-o-lene is salted pork belly.

In 1941, legendary Clemson coach Frank Howard offered Cary a full scholarship and he reported for fall practice. Cary played enough to letter in the 1941 season and was scheduled to be the starting center in 1942, but World War II intervened and Cary and a lot of his teammates entered the military service. Clemson did not have a Navy V-12 Program, but the University of South Carolina did. Coach Howard agreed to allow his players to transfer to USC with an understanding that they would not play football.

The President of USC had a different idea and gave them the choice of playing football and finishing the V-12 program, or getting drafted. They became Gamecocks. Cary was elected Captain of the 1943 South Carolina Gamecocks.

Cary completed the V-12 program and was commissioned an Ensign in the U.S. Navy. He served as an Officer on several different LSTs and participated in many of the island invasions of 1944 and 1945. His last ship was hit by a Japanese suicide bomber and sunk. Cary survived and returned to Clemson in the fall of 1945 to finish his degree and complete his football eligibility. Cary was elected captain of the 1946 Clemson Tigers, thus becoming the only man to have captained both Clemson and South Carolina. For many years following his graduation, Cary did the color commentary for the Clemson radio network. He and Coach Howard remained close until Howard’s death in 1996.

After his career in radio and a short stint as director of sports activities in Anderson, South Carolina, Cary joined a regional investment firm and wound up in Atlanta. He was very successful in the investment business and served as the investment banker for the sale of a local chain of independent gas stations to a major oil company. After the sale was completed, Cary left the investment banking business and became the seller’s chief investment officer.

I had the pleasure of watching Cary produce outstanding returns on the funds under his care right up to his retirement. Cary and I became good friends. I depended on him for strategic advice in business and we shared many very personal moments. I was a guest in Cary and his wife Barbara’s home on many occasions and he always made sure we would have streak-o-lene for breakfast. Cary was a good friend and I think about him often and miss him very much.

Until next time…

Copyright© 2010 Capital Consultants Company. All rights reserved.

Categories: Newsletter

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