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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
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