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I was pondering the following example.

Suppose you can run a small Yoga studio on the following (average) annual budget:

Revenue: £100k (fees)
Expenses: £85k (£45k teachers' wages, £20 admin costs, £18k space rental, £2k maintenance)
Profit: £15k

Alternatively, you can buy the space for, say, £250k and pay the £18k/yr in mortgage payments.

Is there a non-toxic way to raise the £250?

One could value the business at £750k put it in trust, sell £250k worth of "equity shares" to buy the property, and pay 1/3 of the revenue (the total of "rent" and "profit" above) to the holders of the equity shares.

At the other extreme, one could value the business at £1.39M, put it in trust, keep £210k worth of equity shares for oneself, and sell £250k worth of equity shares to outside investors. This results in paying 18% of the revenue to the external holders of the equity shares, and 15% to oneself.

In the first case, the equity shares have an expected return of 13.3%, and in the second of 7.2%

Am I totally off?

The problem, in any case, is finding people who, collectively, have £250k to spare. The mortgage solution just requires (say) £25k, together with the "bank magic" of (say) 10% "reserve requirement".

"It's the statue, man, The Statue."

by Migeru (migeru at eurotrib dot com) on Mon Mar 26th, 2007 at 07:08:27 PM EST
[ Parent ]
  1. you can't just "value" a business at 750K or 1.4MM.  You have to find someone willing to take the other side of such a valuation (ie an investor who agrees that the business is worth that much and buy some % at that valuation).  With a profit of only 15K/year and a building worth 250K, I don't think too many investors will be excited to cough up the rest of those large sums as "goodwill".  Those ROR calcs are meaningless unless you can find someone who will accept the risk on that basis.

  2.  There is no "bank magic".  They are taking titular ownership of the building in exchange for 250K of depositor/bank stockholder cash.  The money doesn't come out of thin air despite what the anti moneylender crowd say.  To create leverage, banks have to borrow too.  Perhaps it's a house of cards, but there is no magic.

What makes borrowing 250K to buy a building from its owner toxic?  Paying interest?  In that case is paying rent to a landlord also toxic?  Getting the use of something without buying it or making it yourself costs something.
by HiD on Mon Mar 26th, 2007 at 09:46:47 PM EST
[ Parent ]

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