How to really finance real estate

By Bruce Firestone | Tiny Homes

Apr 25

-Over the
years, I’ve been involved in a lot of real estate financings. If you can do 80%
to 95% loan to value financings (and occasionally even higher), it means less money down and more properties…
but these days, you have to get creative.

some of the things I’ve tried:


-strive for
decent appraisals

-ask for high
ltv, loan to value, ratios

-do good
quality cma, comparative market analysis—income basis/cost less deprecation/comps

-aim for high
cap rates, drive up value (tech packages, other animations like walkout
basements, coach houses, in home suites, backyard workshops, home offices,
garage offices, micro retail, backyard storage, make residential leases more
like commercial net net net ones, converting residential homes to commercial on
main streets…)

-do some
severances including corner lot severances

and sell off part of the lands

whether to have partners or no partners


a Bit Faster at First with a Partner, Then Much Slower and Plateau Out Sooner

-invite investors
via structured equity and planned exit, eg, Mad River/red circle structure (note the difference between investors and partners is that investors are looking for a return on investment and an exit strategy while partners usually want a say in the business, to be involved on a longterm basis, and (hopefully) they bring more than their money to the venture–they bring time, sweat equity and needed skills)

-acquire strategic

-use second
or third mortgages

-use RRSP
mortgages (Denise and Stuart MacPherson), RRSP mortgage “swaps”

-turn up amortization “heat” and pay
off your principal faster then refinance

-ask for supplier
financing (eg, contractor, trade, sub-trade financing or Leon’s

-get sponsorship
(clients, clients’ clients, suppliers, trades, sub-trades, contractors, marketing
partners, co-branding…)

-sell naming

-host an

-do a
fundraiser/get donations and endowments


-pre-sell signage
and product placement/license fees

-approach BDC
for 100% ltv (based on balance sheet financing)

-set up a HELOC,
home equity line of credit (don’t use CHIP reverse mortgages)

-use scrip
(Bridgehead, Reynolds Bros)


-sell negative
interest rate bonds

-use seller
take back mortgages

-get land

mortgage brokers

with Penfunds, eg, Foundry Capital—deployment of pension fund money (80% LTV+),
insurance companies, REITs, Pub Cos

-approach venture
funds (Canada,,
US and elsewhere,

-do some PPSA
financing (eg, or Meridian Credit Union does PPSA financing for
coach houses)

-ask for a GMP,
gross maximum price, from general contractor

-talk to credit
unions re financing

-approach other
CMHC lenders similar to Foundry

-apply for
government grants for NFP, green investments, affordable housing…

-finance over
6 units, over $1 million with People’s, First National…

-start a family
savings plan

-start a
business, a PB4L (personal business for life) to earn extra income

-get a 2nd

-ask for a
raise at your day JOB

-move in
with your folks or into a less expensive rental to save more

-make your
own lunches

-cut back
on vacations, presents, restaurants etc

your pet (!)

-sell stuff
you’ve collected but don’t need anymore

-get rid of
cable and landline

-sell your
car and take public transit, walk more or buy an electric scooter, which
typically costs about 50 cents to charge and goes 40 klicks, like Prof Bruce


-apply for
a SBL, small business loan

your debt/pay off your credit cards/freeze your credit cards

your credit score

-ask your landlord
for an inducement and a free rent period

construction loan

-use your
credit cards (this contradicts paying off your credit cards but still many
people use this approach as long as it is a bridge to something—a takeout
mortgage or a flip)

-use hard
money loans (
as a bridge to takeout financing or a flip

-get an
unsecured bank loan based on personal creditworthiness

“cashback” from mortgage closing

-put in
costs for construction management/project management to get paid by mortgage
financing/put a fee in for your time and effort

closing date just after the 1st so that seller who has just
collected rents from tenants will have to credit buyer with 29 days of rent and
the damage deposits upon completion

-ask seller
to pay closing costs

negative asset pledging

-get a

-do some
paid consulting

-collect early

-ask a
competitor to cooperate and shoulder some project costs

-consider franchising/branchising




-start an ESOPs
(Employee Stock Ownership Plans)

-sell pre-sold


-start an investor

-obtain retainers

-ask for higher down payments from

-ask for progress

-become a reseller

-buy under
option agreement

-ask your partners
to loan you your share of startup costs


-ask for
larger deposits from tenants (six months in advance instead of one or two)

-find a
lender willing to add rental income to your income

-use a
crowdfunding real estate site, eg,

rights fees (eg, parking rights, F&B, security etc)

financial leasing for equipment and tech

-obtain mezzanine

-put in a
lot of sweat equity

And, of course, animate your
properties/projects by increasing their revenue potential/income streams,

@ profbruce

Bruce M
Firestone, PhD

Century 21
Explorer Realty Inc broker

Senators founder

Real Estate
Investment and Business coach



impossible possible


Bootstrap Capital—The Last Word


How can you start a great business
with no money down? How do you get ‘table stakes’ so you can have a place in
the game? The rule today is, if you have cashflow, you will get financed, not
the other way round.

There really are no ‘no money down startups’; there are
only those with little money down. In reality, every business requires some investment. What we are talking
about is starting a business with an amount of money that is really de minimus with respect to the size of the

Years ago, Mark McCormack showed
how he could start a world-leading sports management business (IMG,
International Management Group) with $500, his law degree and Arnold Palmer as
his first client. Mind you, it doesn’t hurt if your first client is Arnold

Probably less than 1% of all
startups ever get any funding from VCs; that means that at least 9,900 out of the
next 10,000 new enterprises will be compelled to use bootstrapping as their
only means to success. Some observers feel that bootstrapped businesses, ones
that start with ‘nothing’, are actually or can be stronger enterprises because
they are more focused on results and their clients as well as efficiency and
economy of effort. They certainly appear to be hardier if they manage to get past
their first few years.

I defined ‘Bootstrap Capital’ on this way:

Also known as self-capitalization,
this is how most start-ups actually capitalize themselves. Sources of bootstrap
capital include: soft capital (Mom/Dad/Rich Uncle Buck), home equity loans,
supplier credit, consulting, credit cards, retainers, deposits, progress
payments, receivables factoring, partners, sponsorships, guarantors, pre-sales,
launch clients and more. Bootstrap capital allows the ownership to keep control
of their own enterprises and not lose them to VCs and other debt or equity

“Two former students decide to
start a home building business. They have no capital so they: 1. find a
friendly landowner who allows them to set up shop in a field and pre-sell homes
with no money up front to the landowner (who gets paid when the homes sell); 2.
they pre-sell 10 homes and take deposits of $20,000 per home so now they have
$200,000 in their bank account; 3. they get 90 and 120 day terms from their
suppliers so that the suppliers also get paid when the homes sell; 4. they take
their 10 Agreements of Purchase and Sale
and pledge those to the Bank for a LOC (effectively borrowing their clients’
credit scores). After two years, they have $800,000 in the Bank and own 100% of
the business. This example demonstrates five sources of bootstrap capital:
supplier credit, pre-sales, launch clients, deposits and guarantors.”


Synonyms: capitalization/self
starter/start with nothing/soft capital/home equity/start up

Having real cashflow from clients
and customers is the basis on which survival of all enterprises ultimately depends.
Terry Matthews (founder of many tech businesses including Mitel, Newbridge and
March Networks to name a few) tells his acolytes: “Get close to the customer—early and often.” He insists that all new
personnel in his startups spend six months in sales so they understand their
customer better, understand their products and services better and can explain
what it is they actually do in under two minutes. They also get an appreciation
of how hard it is to earn a dollar and how competitive it is so they understand
at a nano scale level that they also have to control costs or they will fail.

We used to do the same thing at
the Ottawa Senators—start everyone in sales so that the next time a star player
or his agent insists on an extra half million, everyone in the organization
understands how many season tickets or hot dogs or signs have to get sold to
actually pay for that.

Perhaps people who win the ‘megabucks’
lottery and the person who inherits their money experience similar fates. Many
million-dollar lottery winners are worse off five years after their big win
than before—by that time, they have blown their dough on ‘can’t miss’
opportunities and they have no J.O.B. to go back to. Moreover, they may have
picked up some bad habits like drug or alcohol addiction along the way. Many
multi-millionaire athletes today also end their careers with nothing.

People who inherit their money may
not actually lose it, although many do. They might just sit on it—old money could
be invested (and usually is) conservatively in, for example, T-bills and it
doesn’t do much of anything. It may earn 3% to 4% these days, less after tax.
In the hands of an entrepreneur, that money would be put to work—typically,
entrepreneurs will earn 20% to 30% on the money invested with them.

Also, someone who has earned it for
himself or herself knows how hard it is to do it and they are less likely to throw
it away.

The number one thing I get asked
in my classes and in the speaking and consulting that I do is: “How can I raise $3 million from Angels or VC
to start my business?
” I often get asked this question right after I have
spoken about self-capitalization or bootstrap capital. So I know the concept is
foreign to most people and that they have a hard time grasping the use of OPM
(Other People’s Money). The only way I know how to get the point across is by
analogy and example. So I will give you a few examples below and then I will
give you a list of sources of self-capitalization. It will be a partial
list—which is all it can be: there are as many varieties of bootstrap capital
as there are ideas out there in the minds of clever entrepreneurs.

Is Lack of Access to
Capital Really the Problem for Startups or is it the Lack of Guts?

Is lack of access to capital
really the main barrier to entry for most entrepreneurs? I believe that the
stated lack of access to capital by many would-be entrepreneurs is more of an
excuse than anything else. Here is my (absolutely unscientific) bar chart of
what I think are the main sources of capital for startups. (I leave it to a
future grad student to prove it or disprove it.)

Home Equity Loans
Soft Capital #
Supplier Credit
Pre-sales/Launch Clients
Credit Cards
Deposits, Retainers ##
Receivables Factoring
Financial Leasing
Strategic Investors/Partners###
Government Grants/Tax Credits
Angel Capital
Accretive Buying/Selling
Patents and Royalties
Collectibles Sales
Business Competitions

# Mom, Dad, Rich Uncle Buck,
## Plus Progress Payments and Draws
### Investment by competitors, near competitors, future clients and future
### Employee Stock Ownership Plans

This is just my experience
talking—who knows I may be wrong but most entrepreneurs are, by definition,
people without money. Again, in my experience, people with money are not
entrepreneurs, they are called ‘old money’ and, as discussed above, old money
anywhere, tends not to do very much—it sits around collecting coupons not
starting high-risk new enterprises.

I always laugh when my students in
entrepreneurship at the Telfer School of Management at the University of Ottawa
go to a Bank for the first time and ask for a loan to start a business—and then
get refused because their only ‘collateral’ is their student debt. It took 2006
Novel Peace Prize winner Muhammad Yunus of the Grameen Bank to realize that a
bank’s real job is to lend money to people who need it—a completely novel
thought, it turns out.

Dr. Yunus also realized that the
way out of poverty for the vast majority of people on this planet is to become
(at least at first) micro entrepreneurs. In fact, Grameen Bank lends on a
priority basis to people who have the greatest need and the least money! And
you know what? Their loan loss ratio is tiny and they make a profit too.

Canadian Banks would probably prefer
to do zero small business lending. It takes very few bank resources to approve
a home mortgage, give out a credit card or make an auto loan. Banks think
nothing of approving a $350,000 home mortgage—if your credit score (or your
Beacon Score) is high enough—in minutes. But go to the Bank for a small
business loan of $350,000 and you will find that: a) they need a massive amount
of data from you and b) they need an expensive infrastructure in terms of
on-the-ground bank managers, loan officers and back office types to approve
your loan application. I believe if it weren’t for the fact that successive
Finance Ministers lean on the Chartered Banks in Canada, they would choose to turn
down every small business loan request.

The reasons most VCs aren’t
interested in most startups are as follows:

1.     Most
business startups don’t have the growth prospects to attract VC funding.

2.     Most
startups are in industry sectors that don’t appeal to VC funds anyway.

3.     Most
startups should be much further along in their development before they go after
VC funding, if they ever do. If their business has real cashflow and real
customers and clients, they are on a much more even footing with respect to
negotiating a fair agreement with VCs, if that is what they choose to do.

4.     Finally,
it is much more efficient for Canada
if VCs fund more mature companies that are at a stage where large capital
injections are: a) less risky, b) more inclined to be put to wise use by (now)
experienced entrepreneurs.

So if you plan to start a business
and you don’t want to give up control and a ton of equity to VCs and Vulture
funds, learn everything you can about self capitalization—you’re going to need
it. And instead of just talking about doing something,
go out there and start your new enterprise and, once you’ve built it, hold onto
to it.

A Few Examples

“…we work in a business of tough competitors,” said Jerry McGuire in the film of the same name. When I
was a boy, there were about 3 billion people on this planet. Now there are
nearly 7 billion. If you are a young person today entering the workforce or
starting a new enterprise, you not only have to compete with more people in
your own nation but all those clever, hard-working folks overseas too. I would
guess, in an inter-connected, Internet-savvy world, it isn’t twice as hard
today; it’s probably more like a factor ten times tougher.

If your city-state is going to
succeed in this Century, it will need a successful entrepreneur class who will
have to be tough competitors. To that end, these city-states will have to
provide far more intensive education for all ages and stages of life. They will
need unconventional mentoring for startups as well as much more effective
promotion and sales of their products and services. Plus, when warranted,
they’ll need to celebrate their achievements.

You’ll note that I didn’t say they
will need more bank financing or more VC funding. That’s because I think that
early-stage companies should focus on and rely on building real cash
flow—finding real launch clients and holding onto real customers. I have been
doing work in this area since 1999 and it proves that, if you wear an old suit
long enough, it will eventually come back in style. And that has happened
here—the world has come to share this view.

Not only is it better for new
enterprises to self-capitalize (since the Founder(s) retain ownership and control
over their companies instead of losing it to VCs), it is better for VCs (they
should be looking for the ‘tall poppies’, i.e., investing in more
mature/profitable companies and more mature entrepreneurs who have built real
businesses) and it is better for your nation as well since the country will see
more employment from more startups that are more sustainable and it will serve
to ration a scarce commodity—capital.

As I said above, most people can
not really grasp the idea of bootstrapping a new business. I can give a three
hour lecture on the subject and a dozen examples but, the following week, I’ll
be asked a question by a student entrepreneur: “Sure, that worked for
but I still need $3 million to start my business, don’t I?”, started by PhD
entrepreneur, Bill Stewart, provides lightweight Internet-based (actually
cloud-based) desktops that use widely-available and proven freeware. Eseri is
based in Ottawa and Montreal and was started with nothing—Bill
still gives $1,000 per day seminars on project management software so that he
can fund his real passion—building a great business of his own. He also uses
stock options to keep his core group of developers on the job. Plus he
leverages what money he puts in with GOC (Government of Canada) IRAP grants.

In the Great Depression of the
1930s, King Clancy built the old Maple
Leaf Gardens
the same way. He paid his workers with script—if the ‘Carleton Street Cash Box’
had failed that script would have been worthless. Fortunately, for their
workers and Toronto Maple Leaf fans, it wasn’t and they were able to redeem it
for more familiar currency and feed themselves and their families.

In the US, the number one source of
finance for SMEEs in 2009 was supplier credit. Sometimes called Trade Credit
(TC), it amounted to $2.15 trillion and dwarfed bank lending to SMEEs of just
$1.5 trillion. As entrepreneurs well know, Canadian Banks have a habit of
lending money only to people or businesses that don’t need it; i.e., they only
lend when they have adequate collateral. Loan to value ratios typically are in
the 50% range for commercial lending—entirely useless to entrepreneurs who, by
definition, start with almost nothing.

Suppliers, on the other hand, want
a new enterprise to be successful—that way they will have helped create a new
client for themselves. If you are going to start, say, a new fencing and deck
company, the way you bootstrap it is: you arrange supplier credit from a
friendly lumber store and you get funding from your clients too.

For example, when former student
Siavosh Noruziaan’s new company, Empire Fences and Decks gets an order for a
new deck for $8,000, he asks his client for a deposit of 50%. The other 50%
gets paid when his crew finishes the job. He then orders $5,000 worth of materials
from his suppliers who have extended credit to him*. Perhaps, for example, they
have given him 45 days to pay for what he just purchased. Now he has got $4,000
in cash in the bank and $5,000 worth of supplies on site—so he has enough cash
to pay his workers and himself until the job is complete and then, with the
balance in hand, he’ll have enough to pay his suppliers…

(*Home Depot actually gives
Siavosh 6 months to pay and Kott Lumber about 60 days.)

If you think through this model
for a minute, Siavosh’s main sources of equity are: a) his clients and b) his
suppliers. His Cash Conversion Cycle is negative (more on this later) and the
more sales he has, the more cash he has on hand, a happy situation.

Some other former students of
mine, Fred Carmosino, a Sprott School of Business grad, and Brian Saumure, a
Carleton University SOA (School
of Architecture) grad
started their successful firm, Maple Leaf Design and Construction exactly this
way—with launch client money and supplier credit.

First, what is cheaper—debt or
equity? Many people think equity is free. Not so. VCs want to see at least a
20% p.a. ROI and Vulture Funds are aiming for a ROE of ~ $40%. But today you
can get a variable rate home LOC for just 2.15% so now you know, debt is much less
expensive. Even if you use 2nd mortgage type debt, you may pay 8% to 12%, still
cheaper than equity.

But what is cheaper than debt?
It’s supplier credit and launch client money! They usually charge you nothing
for it. Clients give you their money in the form of deposits, retainers and
progress payments for free because they want to buy your products and services,
they want you to survive and they trust you.

If you build your business this
way, it will have a Cash Conversion Cycle (basically, Accounts Receivable +
Inventory – Accounts Payable) that is very short or, better yet, negative. This
means that as your sales grow, you generate cash instead of needing to raise
more cash—crucial to entrepreneurial, bootstrapped startups.

Lastly, bootstrap capital is much
faster than going the VC-route or asking Angels for funding. VCs or Angels, if
they will even consider funding you, take 6 to 12 months to make up their
minds. Banks take… well forever*.

(* Canadian Banks only lend money
to people who don’t need it—like people who have inherited their wealth.)

I realized recently that the flip
side to bootstrapping yourself to entrepreneurial success is negative cost

In the case of Maple Leaf Design
and Construction, their source of capital which was essentially supplier credit
is a form of negative cost selling for their suppliers. Let me explain.

Maple Leaf was able to convince a friendly
landowner to provide them with options on their land, basically at no cost. The
landowner would only get paid when Maple Leaf completes and sells a home. So
the lot owner is getting paid by the home buyer not Maple Leaf.

From the lot owner’s perspective,
he had land that wasn’t moving. In effect, the landowner could have gone to a
home builder (Maple Leaf, for example) and said: “You can have an option on my
land for six months for $2 per lot provided that you come up with great floor
plans and designs, put signage and a trailer on my property and sell your homes
to homebuyers…You only need to pay me when the home is built and the property is

For Maple Leaf, they pay $2 for
each lot. (The reason they pay anything at all has to do with common law—an
agreement has to have offer, acceptance and consideration. The $2 is the
consideration without which the agreement would not be legally binding.)

Now if they take a $20,000 deposit
with each home sale, their cost for the lot (in terms of cash) is a negative
$19,998. That is an attractive selling proposition for the landowner to use and
a compelling value proposition in the eyes of Maple Leaf.

Now what about other suppliers
such as drywallers, plumbers, truss manufacturers, electricians, roofers and so
forth? Could they use this approach too? Sure. If you are new to a market, you
can use it as a competitive advantage—go to home builders and offer them terms.
Again, you are prepared to wait to get paid in exchange for helping the builder
win more business.

Now there is risk in this
approach—you may be giving up your lien rights or, if you are the friendly
landowner, what do you do if the home builder collapses mid-project? Half
completed homes on your property may have a negative value. If you have
postponed your Seller Take Back Mortgage (basically, the lot price you and the
builder have agreed to which has been secured by way of a mortgage in favour of
the landowner) to a Lender who is providing construction finance (and they are
in first position), you may get nothing for your land if there is a problem.

Bootstrapping and negative cost
selling may be flip sides of the same coin but both have risks associated with
them. That, of course, is the nature of entrepreneurial approaches to
anything—the risk profile is much higher but it is the only way entrepreneurs
can start a business in a tough, competitive world that really doesn’t want to
give them a break. The harder you work, the luckier you get.

For a nascent homebuilder, like
Maple Leaf, suppliers not only extended credit for everything from concrete
foundation work to trusses, lumber and drywall, lawyers, architects, structural
engineers, surveyors, soils engineers and other professionals may also consider
extending credit for their services until completion of a sales transaction.
The reason they do it? Every time they successfully prop up a startup like
this, they have created a new (often very loyal) longterm client for

Again, Maple Leaf started with two
forms of equity: a) client deposits and b) supplier credit from not only the
usual suspects but the landowner too. For this equity, Maple Leaf paid
nothing—no interest and they gave up no shares in their new firm either. They
also reduced the amount of capital they needed for their first project—from more
than $5 million to zero.

They initially wanted to build 15
homes with average selling prices of $400,000. To do that they required 15 lots
(with an average price per lot of $90k) for $1.35 million. The cost to
construct each home (all-in) was around $258,000 which gave them a gross margin
of 13% on each house sold. So they needed another $3,870,000 for construction
costs. So in a traditional approach, Fred and Brian felt they would have to
have $5.22 million to get their business off the ground.  

But with a friendly landowner
willing to postpone payment for each lot until completion, this amount was
reduced by $1.35 million, right off the bat.

Their suppliers gave them credit
for 50% of construction costs, another $1.935 million in funding. Plus they
were legally allowed to collect $40k in cash deposits from homeowners for
another $600k in funding*. This still left a funding gap of $1.335 million. But
wait, they had contracts with homeowners worth $6 million on which their Bank
would give them an operating line of credit based on a LTV (Loan to Value)
ratio of 50%. This meant they had access to another $3 million which implies a
funding surplus of $1.665 million. So
they actually turned a $5.22 million problem into a $1.655 million opportunity,
an incredible turnaround of nearly $7 million in their situation. Note that the
Bank is not financing them—it is actually financing the homeowners who
presumably (at least at that time) had better credit ratings than Fred and

(* These deposits are insured by
Tarion Home Warranty Corporation in Ontario
to a maximum of $40k per home. The deposits are obviously impressed with a
trust and are not for Fred and Brian to buy fast cars or take a great vacation
in Los Vegas…)

Now Maple Leaf could not have done
any of this without sales, which is the sine qua non of Bootstrap Capital.

Here are the calculations for
Maple Leaf:


Maple Leaf Model




Selling Price



Lot Price






Cost of Home



No. of Homes



Total Sales



Construction Cost



Lot Costs



Gross Profit









Capital Needed



Landowner Credit



Deposits Received from



per home

Trade Credit Available
 Until Completion



Funding Gap



Bank Financing




Funding Surplus



Turn Around



More about Trade Credit

In 2009, trade credit (or supplier
credit) surpassed bank lending as a source of finance for business in the US. TC
amounted to $2.15 trillion that year versus $1.5 trillion in bank lending
(which was down more than 6.5%, year over year) according to data from the US
Federal Reserve.

Trade credit or supplier credit is
a key source of funding for most enterprises and especially for startups, it’s
crucial. Now again, I ask: “Why would they do that?”

•           First
of all, they do it because they trust the business they are providing credit
to, to eventually pay them.

•           Secondly,
they want to expand the market and their market share—one of their key weapons
for doing that is to provide credit to the firms that buy from them.

•           Thirdly,
this tends to lock clients into their business eco-system—once the client has
been approved for trade credit, they tend to buy from the same source over and
over again using their approved credit facility on a revolving basis.

•           Fourthly,
once the client establishes good credit, they can always apply for a higher
credit limit and expand their business further using OPM—Other People’s Money,
i.e., credit extended by their supplier or suppliers.

•           Fifthly,
suppliers expect to be paid not by their clients but by their clients’
clients—in the case of the homebuilder, for example, cashflow is actually
coming from homebuyers. So the supplier is actually funding (indirectly) the
credit rating of their client’s homebuyers.

•           Sixthly,
suppliers want their clients to stick around for a long time. They will often
go out of their way to help out a loyal client who perhaps gets into financial
difficulties by giving them better terms on their financing, forgiving portions
of their debt or even trading debt for equity. If a bank hears you are in
trouble, they’ll more than likely call your loan. Most suppliers will remain
supportive (to a point).

Let’s look at another business—the
promotional products business. We’ll call the business Acme Promotional
Products. Again, Acme’s clients will be a prime source of capital if the
business takes, say, deposits of 50% on each order, up front. The business
might also arrange trade credit with suppliers—maybe they pay 1/3 down with
each order and the balance 30 days after delivery.

Let’s look at Acme’s cashflow.
Let’s assume that they do only one transaction in their financial year in the
amount of $300 and their cost of goods sold is $200. They pay 1/3 of the order
up front to their supplier (i.e., $66.67) but they get a deposit of 50% from
the client or $150.

A good indicator of what their
cashflow will look like is to calculate their Cash Conversion Cycle (CCC)?

The CCC is an important tool for
entrepreneurs to use—if it is 0 or negative, then entrepreneurs can probably
grow their businesses without the need for outside funding.

You can determine your CCC as



CCC* is Cash Conversion Cycle,

ART is Accounts Receivable at Year

INVT is Inventory at Year End,

APT is Accounts Payable at Year

(* To make it easy for you, you
can download a spreadsheet in .xls format from our server at:
You simply insert the figures for ART, INVT and APT and the spreadsheet will
automatically give you your CCC number.

You may prefer using our CCC
calculators in your browser, so we also put them up for you at:

For Acme, we can figure out their
CCC as shown in postscript 2 below. In this simple model, their Cash Conversion
Cycle is a healthy -61 days. What this tells you is that the faster that Acme
grows the more cash they will have on hand.

This is a non-trivial advantage
for them. If they had to rely on their Bank to fund their AR, they are
vulnerable to a change in Bank policy, the appointment of a new Account
Manager, rumors spread by a competitor that might frighten their Bank into
calling their loan and lines of credit or an overall downturn in the economy
that results in a decrease in Bank lending. In this case, Acme is relying
instead on their customers and their suppliers to provide them with their

What if Acme, instead of asking
for half down from their clients only got paid when the order was delivered?
What happens to their CCC? It becomes a horrible +122 days. So even though they
are only giving their suppliers 1/3 down on each order, waiting to get paid by
their customers means that they have to find outside financing for each order
and now they are in hock to and reliant on their Bank, with all the attendant
downsides I described above.

Of course, if they don’t pay
anything to their supplier until they get paid, then their CCC will be exactly
0 which is better than +122 but not as good as the payment plan, receivable
plan and inventory management system we started with. Seemingly small changes
in company policies can produce big changes in your CCC and cashflow so this is
an area that needs more focus and attention.

Most entrepreneurs and many
businesses do not give enough thought to this. We had one client of ours, a top
notch advergaming firm, nearly go out of business despite: a. fantastic growth
in their order book, b. a client list to die for (including several Fortune 50
and Fortune 500 companies) and c. having tremendous technology and creative
resources within the business. Each time they signed a contract, they had to
hire more, highly paid tech developers and build their ‘pipeline’ to deliver
the product. They forgot to get any money up front from their clients and
didn’t even receive progress payments when they hit certain project milestones.
For complex projects that lasted a year or more, they had to wait until
delivery plus 30 days to get paid—it was feast or famine for them.

As a result, they needed huge
amounts of capital from their Bank, which predictably enough put them in a
precarious position. I was called in when the Bank had called their loan and
the firm was threatened with extinction. We got the Bank to agree to a 90-day
standstill agreement and then we asked their client base for help. Practically
all of them came to their assistance.

Now their biz model calls for 1/3
deposits up front with each new contract and progress payments that always put
the firm out front in terms of cashflow. Only 10% is due upon final delivery.
Their CCC went from over +300 days to a -40days and the firm went on to do really
great things.

If you think this only applies to
SMEEs, you’re wrong. Think about Dell for a minute. They don’t build computers
until they have an order and they require that you pay 100% (and sometimes more
than 100%) up front. Once they have your money, your PC is built by a Dell
supplier who only gets paid, say, 30-days after delivery. I guesstimated Dell’s
CCC at -45 days. In fact, it may be better than this—Dells tries to upsell you
on ‘value added’ services like a full, multi-year extended warranty for parts
and service that they hope you will never actually use or they will never
actually have to deliver (remember ‘Dell Hell’?) The impact of Dell receiving
> 100% of the price upfront on their cashflow is a big plus for them, not so
much for you.

So one of the keys to Bootstrap
Capital is to not need startup capital in the first place! You can help do that
by looking for financing in the deal flow itself; i.e., start with a CCC that
is negative. You can get capital from your clients and from your suppliers and
you should try to get as much as you can (within reason) from both.

Sometimes your suppliers can be
coaxed into giving you not only trade credit but cash too. If you are an
automotive company, for example, a good place to look for the cash you need to
fund the required R&D for a new car line would be from your suppliers. They
will ‘sponsor’ your efforts in the hopes of securing supply contracts for the
new assembly line. Think this only applies to large firms? Think again. Many
startups could find funding in sponsorships except that they just don’t think
in those terms.

One of my students wants to start
her own women’s fashion and design firm in Montréal and she isn’t sure where
she will get her startup capital. Every VC and Angel Investor she has talked to
has turned her down—not a field they are interested in.

Instead, we sketched out a program
to ask perfume companies, jewellry firms, fashion magazines and bloggers,
wineries, distilleries, breweries, sunglasses manufacturers and others to sponsor
her first event in Montréal; after a successful launch there, she will go on
tour of major cities in Canada, the US, Europe and Asia and her sponsors will
go with her.

Why would they each contribute
money to this? Again, first of all, because they trust her. Secondly, she is
passionate about what she does. Thirdly, she has a very different approach to
fashion and design which I can’t disclose here. And they want to be associated
with something avant garde like this.

We calculated Acme’s CCC as


CCC Measurement- Promo Products
Biz**  Number           Units

Accounts Receivable at Year End
(AR)        $150

Days Per Year 365.25 Days

AR x Days Per year    $54,787.50 Dollar-Days/Annum

Annual Sales   $300 Dollars/Annum

AR x Days Per year/Annual Sales      182.625           Days    ART

Inventory at Year End (INV) $0

Days Per Year 365.25 Days

INV x Days Per Year  $0.00 Dollar-Days/Annum

Cost of Goods Sold (COGS)   $100 Dollars/Annum

INV x Days Per Year/Annual Sales   0          Days    INVT

Accounts Payable at Year End (AP)   $ 133.33

Days Per Year 365.25 Days

AP x Days Per year     $48,700.00 Dollar-Days/Annum

Cost of Goods Sold (COGS)   $200 Dollars/Annum

AP x Days Per year/Annual Sales      243.5   Days    APT

CCC*  -60.875            Days


** For demonstration purposes

Payables          Down  0.333333333   0.666667         In
30 days

One Sales Transaction

Sponsorship as a Form of Self-Capitalization

When we were trying to Bring Back
the Ottawa Senators in 1990, a team that hadn’t played a game in the NHL in
nearly 60 years, we had a lot of help. We signed up 500 Corporate Sponsors at
$500 each plus 32 Original Corporate Sponsors at $15,000 each for the Ottawa
Senators before the franchise was even awarded. Perhaps more impressively, we
sold 15,000 PRNs (Priority Registration Numbers—reservations for season tickets
for a team that did not yet exist) to the public for $25 per PRN,

Of course, no one buys one season
ticket, so these were sold in groups of two. For their $25, potential season
ticket holders got a nice form signed by Cyril Leeder (now President of the
Ottawa Senators and Scotiabank
 Place) and a bumper sticker. PRNs were sold in
twos and fours, mostly to individuals and SMEEs.

Jim Steele (now head of Sens
broadcasting) told me he got into an argument with a guy on the phone late one
night in November 1990 (the team was awarded by the NHL on Dec. 6, 1990), got
dressed, went down to the bar where the guy was, convinced him of the merits of
supporting the cause and came away with 50 bucks for 2 x PRNs.

What that should tell you is that
sales is not about somehow pushing a button and all of sudden, hundreds or
thousands of clients line up to give you their money. This is about
down-in-the-trenches street fighting for each sale, one by one. That’s just as
true for IBM as it is for the most modest business person like the very
successful middle-aged guy who sells Polish sausages on Laurier Avenue in Ottawa outside the University building where
I work.

When Kevin Rose and his co-founder
wanted to populate their news agglomeration site (the hugely successful and
delightful, they didn’t try to send out a mass email or advertise on
TV, they called 1,000s of people themselves, one at a time, and asked them to
participate in the launch.

There is still no substitute for
‘shoe leather’.

In the case of the Sens, we raised
more than $1.1 million from sponsors and another $5.4 million from land owners
in the form of Seller Take Back Mortgages. STBs are another form of bootstrap
capital—essentially, the landowners who sold us about 600 acres for what would
become Scotiabank Place and associated development, provide some of the
financing for us to acquire their holdings.

The total campaign including the
cost of visiting with all the Members of the NHL’s Board of Governors,
preparing the bid, participating in meetings, buying the site for a MCF (Major
Community Facility) and so forth was about $9.7 million but sponsorships and
STBs significantly reduced that to about $3.2 million in cash.

Oct. 10, 2009 Sens Sponsors: Bring
Back the Ottawa
Senators Campaign

Corporate Sponsors $ 250,000.00
500 $500 each
Original Corporate Sponsors $ 480,000.00 32 $15,000 each
PRNs $ 375,000.00 15,000 $25 each

Total Sponsorship Raised $

Campaign Costs

Scotiabank Place Site and Lands
($7,200,000.00) 600 acres $12,000 per acre
Campaign Costs ($2,500,000.00)
Sub-Total Campaign Cost ($9,700,000.00)
Seller Take Back Mortgages $ 5,400,000.00 75%

Net Cost of Campaign $

Now I hear all the time that this
is fine for larger businesses like a NHL hockey team but that it doesn’t apply
to a small startup. But I find that if you think about it for a minute, you can
apply this practically anywhere.

A couple of guys I know were in my
office last week—they have a series of products they are trying to get off the
ground—a curved golf club, a curved hockey stick, a curved walking stick and a
curved ski pole. Their company (pleasantly called WOW) believes that, for
example, their curved driver helps duffers hit the ball straighter while their
curved hockey stick they say helps make a player’s shot ‘heavier’. (I wrote a
piece of the science behind a hard versus heavy shot in hockey; see Don’t Back Down, the real story of the founding of the NHL’s Ottawa Senators and why big leagues matter.)

I cautioned them against a
GO-BIG-OR-GO-HOME strategy; it almost never works for these types of gadgets. I
told them to use a go slow approach. Build a 10 cent website using a platform
like Yahoo! Small Business (, go to a
few trade shows, ask a few high profile folks to try their wares and endorse
them if they like them (but don’t offer them any money because they don’t have
any to give away), trade links with some friends on the web to boost their
Google page ranking, basically, do stuff that is inexpensive.

Their goal (which I set for them)
is to build a sustainable PB4L (Personal Business for Life) that within a few years
will earn $120,000 per year PROFIT, spilt between the two of them. If one of
their gadgets takes off terrific. If not, a PB4L that produces some income will
be better than nothing and they will take great satisfaction from it.

Their idea when they walked in the
door was to raise $10,000 to $20,000 from, say, 30 people and then blow it all
on big product orders from China, an advertising campaign, a presence in major
retail chains, investment in celebrity endorsements, getting major distribution
players to back them and so forth.

This approach usually spells
disaster. If you have a game you have invented or a gadget of some kind, the
established players in those industries don’t want to hear from you. Parker
Brothers, Milton Bradley, Nike, what have you, don’t want unsolicited
proposals—they will simply return them to you unopened with a form letter
saying ‘we didn’t look at them and don’t send us any more’. The reason? They
are deathly afraid you might claim later that your product is similar to one they
were already developing. They have found juries only too willing to believe
(often justifiably) that a large corporation has essentially stolen an idea
from a small scale inventor and damages (especially in the US) can be huge.

Plus these established players hog
all the shelf space and don’t want to share it with you.

For every Air Hog or Trivial
Pursuit there are millions of ideas, concepts and patents that never amount to
anything and often cost their inventor everything. For every Robert Kearns, the
inventor of intermittent windshield wipers who won a multimillion-dollar
lawsuit against Ford, there are hundreds of thousands who gave up.

I believe you have better odds of
making a fortune by buying a Lotto 6/49 ticket than you do with most gadgets or

So aim low, go slow, don’t risk
too much money and you may get a pleasant surprise on the upside.

The guys also asked me if they
could sell their ideas to one of the established players. To those of you who
follow my writings, you already know the answer to that—no. Ideas are abundant
and cheap. Large players buy cashflow and market share; in my experience, they
won’t pay a farthing for just an idea.

Another thing that can really
assist these guys is for them to get some sponsors. This was a new idea for
them and we discussed how it might work:

1. They believe, and I agreed,
that the curved driver was probably the best gadget to start with.
2. I told them that the golf audience is a highly desired one by advertisers
but hard to reach.
3. What if they put the logos of a few sponsors on the shaft of each driver?
4. Law firms and accounting firms want to reach this audience and they have (at
least in Canada)
restrictions on how they advertise. Adding their logos and website URLs on the
shafts of these drivers would suit them perfectly.
5. Other potential sponsors might include high end autos, a beer company and
purveyors of luxury goods, maybe even resorts and hotels.
6. Every time a golfer drags that driver out of his or her golf bag, they see
these logos—they aren’t zappable like TV ads.
7. They continue to work for the life of the club—maybe five or more years.
8. The clubs might retail for $200 and cost about $60 each. Perhaps they could
put five logos on their drivers for, say, $6 per club so half their costs are
covered by sponsors!
9. If the average golfer plays 12 rounds per season and brings his or her
driver out 18 times, then the cost to the sponsor for 1,000 clubs is $4.63 per
thousand views. This is the fundamental measure of advertising efficiency,
known as CPM (Cost per Thousand, the ‘M’ in the Roman numeral for thousand).
10. That is a very reasonable CPM; CPMs can vary from $5 for newspapers to $15
or more for glossy magazines to as much as $60 for highly targeted web ads.
Mail drops in Canada
can cost 15 cents each when delivered by CPC (Canada Post Corporation) which
obviously works out to $150 per thousand. So $4.63 to deliver a highly valued
audience is a pretty good value proposition.
11. Co-op advertising is the way of the future—more brands will be sharing the
same space. If you are selling a high end car why not have an attractive person
modeling top end clothes and jewelry to help defray some of the costs. That is,
sponsors can have sponsors! Firms will pay to have their products placed in
other ads!

Here is how you calculate CPMs:

Oct. 10, 2009 CPMs for Golf Driver

Average 12 rounds per year
No. of Holes 18
Use of Driver 18 100%
Views of Driver 216 per year
Life of Club 6 years
Views of Driver 1296 during life of club
Cost of sponsorship $6
Cost of sponsorship $6,000 1,000 clubs
CPM $4.63

Sponsors dollars help defray your
costs but sponsors can become delivery channels too. When the guys from WOW
sign up a sponsor, the agreement might look like this:

A. They sponsor 1,000 clubs at
$6.00 each.
B. They agree to sponsor another 1,000 clubs after the first 1,000 are sold.
C. They agree to buy (at a reduced price, say, $175 instead of a retail price
of $200), 20 clubs per year for the next three years.
D. They have to pay 50% of their sponsorship on signing and the balance within
6 months.
E. They pay for their first 20 clubs—50% on signing the Sponsorship Agreement
and the balance within 30 days of receipt of their order.
F. They agree to feature WOW on their Partners Page of their website and all of
the co-sponsors too. They link to all of them and WOW and their co-sponsors
link back to them—they cross promote and raise everyone’s page rankings in

If you look carefully at the
above, you will see that there is an emphasis on cashflow. Under this model, if
they sign up five sponsors, they will end up with $23,750 right up front—enough
to pay for their first order of clubs, go to a few trade shows, set up a simple
website and have some money left over. They will also be expecting another
$23,750 after they deliver the clubs to their sponsor and collect the balance
of their sponsorship.

Here is their simple cashflow

Cashflow Model

No. of Sponsors 5
No. of Clubs 1,000
Cost per club $6
Cost of Sponsorship $6,000
Deposit $3,000 50%
Purchase of Clubs 20
Purchase Price $175 per club
Purchase Price $3,500 for all clubs
Deposit $1,750 50%
Cash on hand $4,750 per sponsor
Cash on hand $23,750 total

Just as important, their sponsors
will do something with the 20 clubs they have been ‘forced’ to buy—they will
give them away at golf tournaments that they host, they will give them to
favored clients and, guess what, they have now become powerful distribution
channels for WOW.

I find sponsorship opportunities
everywhere. A couple of young fellows came to see me recently and I sketched
out a plan for them to do some ZERO COST GOODWILL MARKETING for their new
business, Acme Enterprises in Nashville
(the names and places and numbers have been changed).

They wanted to do a food drive for
the Nashville Food Cupboard and they wanted to offer as an incentive to get
people on board a draw for tickets to a Titans game. They had arranged to get a
private suite from the Titans for $2,000 (a reduced rate from what the normal
commercial value would be) subject to their being able to find the money. They
had 30 days to come up with the dough.

Here is the program we set out for

1. They decided to support the
Nashville Food Cupboard, a worthwhile cause.
2. It would not only help the Food Cupboard which was experiencing a shortage
of food and a simultaneous increase in demand as the economy worsened but it
would also help build their brand and that would help Acme earn the trust in
the community and that would mean that Acme could better compete in a tough
marketplace and sell more of their services.
3. They got a favourable rate from the Titans for a suite ($2,000) but still
had to find the money to cover it—they just didn’t have it in their budget for
this year but knew they needed to do something to help the community and to
help themselves.
4. Everybody who brought in food donations would get one ballot for every
item—you bring in ten cans and you get ten ballots.
5. They would hold a draw and the winners (there would be four of them) each
get a pair of tickets to the suite.
6. Then they would go out and sign up four other local businesses to co-sponsor
the food drive.
7. Each sponsor would throw in $500—for that, they each got the right to accept
food donations in their place of business (driving more traffic to their stores
and offices). Plus they each got two tickets to the suite.
8. The suite holds 20 people—four winners of the draw would use 8 seats, the
four co-sponsors would use 8 seats and the two owners of Acme would each get
one. Plus they held back two seats for the Nashville Food Cupboard—one for the
Executive Director and one for a guest of the ED—presumably a key sponsor of
the Food Cupboard would also like to attend.
9. Donations would be accepted at Acme and the other four locations for three
weeks prior to the game.
10. Every Friday would be dress down day and every employee would wear a
Nashville Food Cupboard t-shirt. On the back would be the names of the four
sponsors and Acme.
11. The employees would receive these really well designed t-shirts for free.
12. Each co-sponsor would pay 125% of the cost of the shirts—Acme would pay
nothing—since they are putting in their share in the form of SE, sweat equity.
After all, they are organizing the whole thing, putting in lots of hours including
helping the Food Cupboard’s truck make the rounds and pick up the donated
items. Plus they are driving a lot of new customers to the four co-sponsor
13. It would be a fun afternoon at a Titans game, hoping they can win a game
this season (the Titans are off to an 0-4 start in 2009).
14. They would also put out media releases—announcing the food drive and later
the winners with happy smiling faces everywhere.

This is the model we sketched out
on a piece of paper for the guys:


So sponsorship applies not only to
large businesses like pro sports teams but to startups and SMEEs as well.


Bootstrapping the Ottawa

In 1987, when the idea of Bringing
the Ottawa Senators, a team that hadn’t played a game in the NHL for nearly 60
years, first occurred to me, Cyril Leeder, Randy Sexton and I believed that an
expansion team would cost $35 million. It tuned out the NHL wanted and would
get $50 million for both the Sens and the Tampa Bay Lightning, granted
conditional franchises in December 1990 and full membership in the League in
December 1991.

Cyril being a CA wanted to know
how Terrace Investments Ltd., our real estate company, would finance this
acquisition. I had a plan to bootstrap it. This involved:

  1. Acquiring
        600 acres of land on a major highway (Highway 417 or, as it is known in Ottawa, ‘The
  2. Buying
        the lands for (what turned out to be) $12k per acre.
  3. Rezoning
        the lands for a MCF (Major Community Facility).
  4. Putting
        a NHL-calibre arena and a NHL team in the middle of this land assembly and
        driving up the value of the surrounding property, now owned by us.
  5. Keeping
        100 acres for the arena (called Scotiabank
          Place today) and the team.
  6. Selling
        the remaining 500 acres for at least $112k per acre realizing a $100k per
        acre premium which would yield $50 million which would then be loaded into
        security trucks and taken to John Ziegler’s office (the then President of
        the NHL) on Park Avenue in NYC to pay for the franchise.


It was a simple plan that went
awry as many plans tend to do. We had an agreement in early 1990 with the
Premier of the Province of Ontario (Liberal David Peterson) to support us by:
a) building the required interchange on Highway 417 at public cost*, b) giving
the rezoning of the Palladium lands (as the stadium was referred to in those
days) a priority review and c) coming to Palm Beach in December 1990 to tell
the Board of Governors of the NHL what a great place Ontario was to locate more
NHL teams…

(* It is difficult to privately
finance a piece of public infrastructure sine the day you complete it, it
becomes the property of the MTO, Ministry of Transportation Ontario. It would
be like me trying to place a mortgage on your home. To this day, the Palladium
interchange is the only privately financed interchange in the Province.)

Unfortunately for us, Mr. Peterson
called an election that summer, two and half years early, with the result that
he was replaced by a NDP government led by Bob Rae.  Mr. Rae and his government had other
priorities which meant the three undertakings given us by the Peterson regime
were set aside and, instead, we had the Government of Ontario implacably
opposed to the rezoning of the Palladium. As a result, after we won the
franchise at the NHL’s winter meetings in December 1990, we faced off against
our Provincial Government in a 13 and a ½ week OMB (Ontario Municipal Board) in
the summer of 1991 which we ‘won’ but it was a Pyrrhic victory for the company
and for me personally—we did get the 100 acres approved for the arena but not
the other 500 acres. As a result, the company took an $80 million write down of
its assets—$50 million on land value and another $30 million for the cost of
the interchange that would now have to be built with private funds.

So we turned to other forms of
bootstrap capital to try to make up the difference:

  1. We
        sold the arena management and F&B (Food and Beverage) rights to New York based
        Ogden Corp for a 30-year term for $20 million.
  2. We
        did a parking deal with United Parking for $1 million.
  3. We
        sold the radio rights to CHUM Broadcasting for a rights fee of $250k.
  4. We
        sold $22 million in season tickets in December 1990 for a team that would
        not play its first game until October 1992.
  5. We
        sold the mid-week TV rights for $5 million.
  6. We
        sold the pouring rights for the new building to Molson for $5 million.
  7. We
        sold the naming rights (first to Corel Corp and later to the Bank of Nova
        Scotia) for $27 million for 20 years.
  8. We
        pre-leased 100 private suites in the new building at $100k per year for
        five and ten year lease terms.
  9. We
        pre-leased space in the new building to the YMCA and a number of
        restaurants and other firms.
  10. We
        sold millions in merchandise both when we had the team and when it was
        only an idea.
  11. We
        sold $25 million in limited partnerships to 62 brave souls who also became
        known as Founders of the team.


In other words, we scrambled.

This was in addition to the money
we had raised when we were just trying to get the team including:

  1. sale
        of 15,000 PRNs (Priority Registration Numbers) entitling the bearer to
        claim a season ticket when and if we got the team;
  2. sale
        of 500 Corporate Sponsors at $500 each;
  3. sale
        of 31 Original Corporate Sponsors at $15k each.


Bottom line, as Al Davis, owner of
the NFL’s Oakland Raiders, said: “Just
win, Baby.

Executive Travel Apartments—Reducing your Capital Requirements

A student recently
introduced me a new form of Bootstrap Capital, or at least, one I hadn’t
considered before. It seems obvious to me now but I think it takes some
creativity to apply it to any business model.

She is in the Executive
Travel Apartment (ETA) business—those are extended stay suites that executives
use and many prefer to a long stay in a hotel room.

It is a very capital
intensive business: she needs equity to buy her units, renovate them and
furnish them. She can reduce her capital needs by mortgaging the units using
high LTV (Loan to Value) ratios and leasing (or leasing to own) the furniture
she needs for each unit. Still her equity requirements are non-trivial.

She came up with a very
inventive method of expanding her budding empire without having to bring in a
partner or sell her soul to finance companies.

A form of bootstrapping is
to lower the level of capital you require in the first place.

She can charge about
$3,500 to $4,500 per month for her ETAs, about $120 to $150 per night for a
one, two or three bedroom unit which is fully furnished, the Internet and TV
work, the VOiP phones are on and there is a starter kit (soap, salt and pepper,
bread, milk, etc.) on hand. Just let yourself in using the lockbox combination,
and relax, you’re home.

Because these are ETAs,
she comes under the Innkeepers Act and not the RTA (Residential Tenancy Act) so
she is much less likely to have trouble with her tenants than a typical
residential tenancy where delinquency is high, collections are tough and
getting rid of them (evicting them) is even tougher.

A typical unit can cost
her $200,000 or more to buy (with anywhere from 5% to 25% equity required),
$20,000 to renovate and another $10k or so to furnish. So each unit can easily
consume $70 or $80k of equity. Other ETA operators solve this problem by
selling the units to investors and keeping management in their hands plus a
share of ownership.

She came up with another
way—what if she went to residential landlords and told them: “I will lease some
(or all) of your units for repackaging as ETAs.” From a Landlord’s POV, that
takes him or her out of the purview of the RTA and he or she now only has to
manage one tenant (the ETA operator). The ETA operator worries about furnishing
the units, renting them out, managing and maintaining them, etc.

In the buy scenario
described above, she will need $80,000 in equity per door. If she rents each
unit out for $4,000 per month and has a mortgage at 6% with a 20 year
amortization period, she will be left with a NOI (Net Operating Income) after
deducting a vacancy allowance, marketing costs, admin and contingencies of about
$1,077 per unit per month.

If she sublets units from
a cooperative Landlord at $1,400 monthly, she is left with less—just $766.49
per month per unit. This is because she is paying less on her mortgage than she
is in rent to the Landlord.

But in the first case, she
needs $80k of equity; in the second case, she only needs $30k.

Now her simple ROE (Return
on Equity) is 16.2% p.a. when she buys her own units versus a whopping 30.7%
when she rents them instead. (See the spreadsheet below.)

Now this model ignores the
wealth effect of owning your own units (the annual paydown of your mortgage
principal, in effect, by your tenants) and real estate inflation (that goes
solely to the equity holder).

If I took those factors
into account, the ROEs would probably be a lot closer*. But that doesn’t matter
if she can’t afford to expand her business because the equity demands of the
first model are too high for her to handle.

So the obvious choice is
to do both—own some units and sublet some. As her cashflow improves, she should
probably be buying relatively more of her units.

But at least initially,
from her POV, her capital requirements have dropped from the $70 to $80k per
door range to $10 to $30k per door and her ability to grow the business faster
has just taken a quantum leap upwards.

Another client recently
showed me how he could acquire inventory for his retail store at a negative
cost to him—other retailers are paying him to feature their products and
services in his outlet store. They pay him a monthly fee for this plus they
give him a percentage of each of their products or services that he sells for
them on consignment.

We are now busy applying
this philosophy to other types of businesses with great effect.

* If we take into account
the wealth effect and the impact of real estate inflation, the two rates of
return (this time measured using the IRR instead of the simple ROE ratio) are,
in fact, closer. In the ‘buy’ scenario, the return increases from 16.2% p.a. to
22.8% while for the ‘sub let’ scenario, the return remains that same at 30.7%.

The latter doesn’t change
because, in this model, I have assumed that when she sells the business at the
end of year 7 (an arbitrary time line, I might add), she realizes exactly what
she put in initially for renovations and furnishings. Of course, in reality
what she gets for the business would depend on what she and a Buyer agree to
which could be greater or less than this amount. Nevertheless, in order not to
bias the comparative analysis, it seemed reasonable to make this assumption.

You can examine the
spreadsheet below or download it in .xls format from my server at:


Buy the Units

Cost per Unit $200,000
Equity ($50,000) 25%
Mortgage $150,000 75%
Interest 6% p.a.
Amortization 20 years
Monthly Payment ($1,089.81) to Lender

Renovations ($20,000)
Furniture ($10,000)
Interest 10% p.a.
Amortization 7 years
Monthly Payment ($513.51)

Total Cost ($1,603.32)
Monthly Rent $4,000
Marketing ($320) 8%
Vacancy ($480) 12%
Other ($240) 6%
Contingencies ($280) 7%
NOI $1,077 per month
Equity ($80,000)
ROE 16.2% per annum


0 ($80,000.00)
1 $ 12,920.15
2 $ 12,920.15
3 $ 12,920.15
4 $ 12,920.15
5 $ 12,920.15
6 $ 12,920.15
7 $ 167,186.31 $ 12,920.15 $ 124,266.15 $30,000
IRR 22.8% p.a. Assumes the business is sold
and the sale price of the biz
R.E. Inflation 2.75% equals the investment in
Selling Price $ 241,825.90 furniture and renovations.
Agency Fees ($12,091.29) 5%
Legal Fees/Closing Costs ($1,105.00)
Net $ 228,629.60
Principal Repaid

1 ($5,436.91)
2 ($5,763.13)
3 ($6,108.91)
4 ($6,475.45)
5 ($6,863.98)
6 ($7,275.81)
7 ($7,712.36)
Total Principal Repaid ($45,636.55)
Mortgage Balance Due $104,363.45
Net to Seller $ 124,266.15 on completion

SubLet the Units

Cost per Unit 0
Equity 0
Mortgage 0
Monthly Payment ($1,400) to Landlord

Renovations ($20,000)
Furniture ($10,000)
Interest 10% p.a.
Amortization 7 years
Monthly Payment ($513.51)

Total Cost ($1,913.51)
Monthly Rent $4,000
Marketing ($320) 8%
Vacancy ($480) 12%
Other ($240) 6%
Contingencies ($280) 7%
NOI $766.49 per month
Equity ($30,000)
ROE 30.7% per annum


0 ($30,000)
1 $9,197.84
2 $9,197.84
3 $9,197.84
4 $9,197.84
5 $9,197.84
6 $9,197.84
7 $39,197.84 $9,197.84 $30,000
IRR 30.7% per annum Assumes the business is sold
and the sale price of the biz
equals the investment in
E&OE. furniture and renovations.

The Last Word

OK, so here, finally, is my list
of Bootstrap Capital sources:


1. Soft Capital: Mom, Dad and rich Uncle Buck; basically this is a friends
(Angel Investors) and family round of financing either formally or informally

2. Home equity loans.

3. Business plan competitions for
cash (e.g., the Wes Nicol Competition or the Celtic House

4. Future customers, clients or
launch clients (e.g., homebuyers in Ontario can be asked for deposits of up to $40k
in advance).

5. Future suppliers can sometimes
be persuaded to extend long term credit to you (e.g., Vendor financing of 30,
60, 90 days or more) or invest cash in your business since they have a lot to
gain if you become another (good) customer of theirs. They will probably want a
long-term supply agreement though.

6. Strategic partners (like Ogden
was for the Ottawa Senators—in return for a 30 year arena management deal plus
F&B deal, they invested, loaned and guaranteed significant capital to/for
the nascent team.)

7. Micro capital lending and grant
programs; for example, the GOC’s SBL Program (Small
Business Loan
 or other
government-sponsored sources of start-up capital like the Ottawa Community
Loan Fund

8. Supplier rights, product
placement and licensing fees (for example, Molson’s purchased pouring rights
for the Corel Centre and the Civic Centre after the City of Ottawa was awarded
a franchise by the NHL in December 1990 but before they commenced play in
October of 1992.)

9. Patent or other IP licensing
fees and royalty payments (e.g., Noma Industries purchase of the rights to LED
Xmas light strings designed by the author.)

10. Consulting services (a lot of
entrepreneurs support their startups by providing consulting services at the
same time, e.g.,

11. Partners.

12. Debentures (mostly a form of

13. Financial leasing of fixed
assets (like computers and phone equipment, photocopiers and the like although
it can apply to almost anything. I have heard of financial leasing for, of all
things, roller coasters.)

14. Receivables factoring.

15. Publisher’s advance on a book
or script.

16. Sponsors (see for example the
signing up of 500 Corporate Sponsors at $500 each and 31 Original Corporate
Sponsors at $15,000 each for the Ottawa Senators before the team was awarded.)
17. Trading activity: buying low and selling high, taking advantage of
arbitrage opportunities (like finding out what percentage of dot-CA holders do not have their dot-COM equivalents and the
dot-COM equivalents are available and then selling them the
dot-COM extensions), building-businesses-to-sell, buying and selling and buying
and selling and trading again to trade
up, … Check out this
This person traded a paper clip for a pen and traded the pen for a … and then
for a generator and then for a snowmobile and then for a truck… His idea was to
eventually get a home for himself.  

18. Credit cards (oft used
strategy but dangerous because of high interest costs and what can happen to
you and your credit rating if you fail to make

19. Scientific R&D Tax Credits
(e.g., SR&ED from the GOC).

20. Extracting upfront value from
your lease for office space: an
example of a services company that got $800,000 upfront

21. Reverse or Negative Pledging
of Assets (e.g., O & Y not pledging the value of an office tower
to anyone and extracting loans from banks based on the value of their real
estate and based on their not agreeing to pledge it to anyone… Another
dangerous strategy because you can end up over-leveraged.)

22. Co-guarantor: borrowing
someone else’s stronger credit rating (e.g., Corel Centre Suite Leases pledged
for construction financing or Mom or Dad co-signing a loan…)

23. Accretive buying: buying
another company with the target company’s balance sheet as collateral where you
end up with more cash than before. (E.g., Disney buys the Mighty Ducks of
Anaheim for $50m: $25m goes to the NHL and $5m per annum for 5 years goes to
the LA Kings. Then could borrow $35m against the asset and, after receiving a
$20m leasing inducement to enter into a 20 year lease for Arrowhead Pond, they
could have more cash on hand after than before).

24. Accretive Selling: sell
products or services with financing in place where you end up with more cash
after the sale than before (e.g., Leon’s
don’t pay a cent until…. (OAC). Leon’s
than turns around and sells the sales contract for cash.)

Employee ESOPs (Employee Stock Ownership Plans).
26. Pre-sold services. (For example, here is an example from Craig deSchneider,
a student in EC 491 (2003): “In looking for some start-up capital for our
automotive related business, myself and my partner offered potential investors
future discounts through our business. In selling automotive parts, we had
accounts set up with distributors, accounts which could only be set up through
having a business license, tax numbers, and some negotiating, so the average
person off the street does not have access to these discounts. We set no
specific investment amounts, simply the most the person could afford. We kept
these contributed amounts a secret among the different investors as we offered
them all the same return. Therefore, in return for a fair investment, we
extended to our investors cost prices for all of their future purchases through
our company. The only limit we set on this agreement was that the investors’
annual purchases could not exceed our company’s sales revenue from our average
monthly sales figure (not including cost purchases made from investors). The
overall idea was to provide our investors a very fair return on their
investment, and at the same time, these investors would promote our company.
Why you may ask, well the greater our monthly sales were, the greater the
amount of goods they could buy for themselves at a cost price.” Ed.:
Basically, Craig and his partner turned their investors into customers and
their customers into investors. Nice going.)
27. Collectibles sales and auctions. Here is a new one. Michael Moshier put the
original version of his SoloTrek flyer up for auction on eBay, hoping a museum
would pick it up. It didn’t even fly but by January 12th, 2003, the bidding on
eBay had already reached $6.5 million USD: money he planed to use to fund his
Trek Aerospace startup. Cool.

28. Extended family savings and
investment fund—an old style of acquiring start up capital is to have the
extended family contribute to a pool of funds to help family members acquire or
build businesses.

29. Seller Take Back (STB) mortgages—typically
used in real estate transactions, the Seller provides some or most of the
financing for the sale by way of a (first or even second) mortgage back to the

30. Sweat equity.

31. Investor syndicate or
investment club.

32. Retainers (typical for
consulting services or legal and accounting services) and deposits on sales.

33. Collecting early and paying
late (boosts cashflow in the short term).

34. Progress payments on

35. Advance ticket sales.

36. Becoming a reseller (this is
big in the Internet age where you can set yourself up for practically nothing
as an agent to resell services such as domain names or web hosting). There are
a huge number of things that can be resold on the Internet—many sites generate
large revenues by reselling ads powered by Google or other providers. Check out
this silly site which generates up to 8,000 ‘facts’ on Chuck Norris and got 18
million hits in December 2005. Really the purpose of the site is to generate
clicks (by asking people to rate the ‘facts’) which generates a new ad and
maximizes revenues for the site’s owner: Or have a look at
this site:
Here the young person (age 21, based in the U.K.)
apparently wanted to pay for his tuition and so he created a million pixel home
page. You could buy an ad for $1 per pixel (minimum ten pixels) linked to your
site. He sold all 1,000,000 pixels so guess what? He got his tuition and a lot
more. I presume the ads are for a limited time so he also has the chance to
resell the million pixels over and over again. The site gets a LOT OF TRAFFIC… Remarkably, this might be
a sustainable business (a Personal
BusinessFor Life

37. Importing.

38. Distributing.


Exploiting signage rights.

41. No
money down, land speculation.

42. Using OPM (other people’s
money)—rasing funds through vehicles such as limited partnerships.

43. Asset flipping.

44. Buying under power of sale
(again, mostly real estate related).

45. Buying distressed companies
and turning them around.

46. Day trading.

47. Asset speculation.

48. Franchising.

49. Branchising.

50. Training and uniform fees
(e.g., required each of their contractors to be “Grade A”
certified before they could provide services to clients and customers and get
access to the billing system and the appointments calendar (a system called
GASnet). To be certified the contractors had to pay in advance to take the

51. Pre-sales in real estate
allows you not only to ask for cash deposits but also may give you access to
Bank or private lender financing. For example, if you pre-sell 50% of your
condo or townhouse project, you can usually qualify for construction lending
where, in essence, your Bank or
private lender is advancing you money to build the condos or townhouses on the
basis of the strength of the credit ratings of your customers (buyers) and not
your credit rating per se.

52. The same type of thing can
help you a lot if you are a manufacturing business—if you have a guaranteed
supply contract with a credible client or customer, you can often finance
against that.

53. Land options—sometimes you can convince a landowner to give you
an inexpensive option to buy his or her land at a fixed price at a later date.
You can then use the time to set up a sale office and begin pre-selling. As
discussed above, you can then take cash deposits (which are impressed with a
‘trust’ in that the money doesn’t really belong to you until you actually have
delivered the condo, townhouse, single family home, whatever), finance against
Agreements of Purchase and Sale executed by you and your clients, approach a
Bank or private lenders for funding (often through a mortgage broker), arrange
for private equity lenders or other investors to invest in your project, etc.

54. I learned about a new method
of bootstrap capital from my (then) 13 year old daughter, Jessica. One of her
best friends lives in a single parent family. Her friend’s parent is unable to
work and lives on a modest income. However, every year they are able to take a
family vacation to a nice destination in a rented van. How do they afford to do
that? Bootstrap capital. They take with them five other kids—each kid pays $250
for a week’s holiday—that’s a total of $1,250, enough for a camping holiday and
some neat adventures too. It pays for the gas, the van rental, food and a few
outings. The kids’ parents contribute cash and their children, Jessica’s friend
and her parent go for ‘free’ but they provide the opportunity. Everyone wins…

55. Finding money in the deal flow
itself. When we built Scotiabank Place, the contractor was able to complete in
22 months instead of 30—the extra 8 months in a larger structure not only
raised revenues over what the Sens could earn in the much smaller Ottawa Civic
Centre, it saved about millions in interest payments owed on borrowed money
during construction.

56. Getting your partners to lend
you the money you need to fund your portion of a new enterprise. (See the

57. Create a Foundation or a
Not-for-Profit to fund a worthwhile project you support.

58. Create one business that helps
launch a 2nd. This is what former student Ryan North did with
Dinosaur Comics which built a big community for and around him which let him
start Project Wonderful which turned profitable 14 days after launch.

59. Run a competition
like did. It was called ‘Build a Business’ and it allowed startups
to build their business on Shopify’s e-commerce platform. The fastest
growing company after 3-months would win $100,000. But during the competition,
nearly 1,400 new stores signed up which generated more than $3.5 million in
sales on their platform and over 66,500 orders. The competition was widely
covered on influential blogs including the NYT. So between margins generated
during and after the competition and the value of the earned media they
received, I would guess that the cost of the competition would, in fact, be negative
and, hence, a source of bootstrap capital.

60. If your enterprise ever gets into trouble,
sometimes you can just ask for cash—from existing clients or suppliers and they
will just gift it to you. Surprised? Don’t be. They have a vested interest in
your survival.

61. Strategic partners. If you look
at your enterprise as part of a business ecosystem, you can often find others
in that ecosystem that will help you. They may not be direct suppliers or
customers, they could be suppliers to your suppliers or customers of your
customers. You may find ways to exploit those relationships even if there are
two or more degrees of separation from you. For example, if your company fixes
windows for commercial landlords where the seals have failed, you might find
that your clients are not only the building owners and their property managers
but the original glass manufacturers, who may be looking for after-sales
service alliances that fix a problem for them and they may be willing to help
you get off the ground.

62. Co-opetition can be a huge
source of capital. When Microsoft was under investigation by US and European
authorities for its monopoly practices, it was to their advantage that the only
viable alternative provider of operating systems at the time (Apple), survive.
Apple’s on-going viability was in doubt and Microsoft loaned the firm the funds
they needed to get through a tough time. Homebuilders like to hunt in packs—if
a potential homeowner doesn’t like your product, they can often march across
the street and buy from an alternative supplier and, of course, vice versa. So
marketing by one becomes, in a way, marketing for all. So if you think you have
a product with a lot of differentiated value, you could perhaps convince an
established player to back you with some of their capital…

There it is. My list. If you have some new forms of
Bootstrap Capital, please add it to the comments below.

Prof Bruce


Recently, I had a chance
to sit down with a former student and look at the deal structure he was
planning to put in place with two partners to open a new restaurant franchise
in Baltimore.
They needed to raise $1.8 million, part of it debt, part of it equity. They
wanted to start with a LTV (Loan to Value) ratio of 50/50 so that meant they
needed to raise $900k in equity. They had already secured (via a long term
lease) an excellent downtown location and a bank loan for $900,000, contingent
on raising the balance in the form of equity.

Each of the other two
wealthy partners were prepared to put in $400,000 and Bill (not his real
name—other facts have also been changed to protect the identity of the
individuals involved) had saved $70,000 of his own money and secured a soft
capital loan from his aunt for the remaining $30k.

This would give each
outside partner 44.4% of the business and Bill, 11.1%. The trouble was Bill,
although still young (just 29), was the only partner with experience actually
managing a pub. So he was expecting to put in the most hours operating the new
franchise and yet he had a tiny share in the enterprise. To assist him, the other
partners were willing to enter into a shareholder agreement that would let Bill
buy more equity over time (to get him to a 20% share eventually) using a
complicated formula based on the FMV of the shares less a certain percentage.

What I suggested instead
was that they all go in as equal partners—1/3 each right, from the get go.
Bill’s concern was, of course: “Where will I get $300,000? I put everything I
own on the table just to get to $100k.”

The answer is that you can
often capitalize a business (or your share in it in this case) right from the
deal flow itself. It’s easy!

I told Bill: “What you’re
going to do is ask your partners to each loan you $100,000 for seven years and
you’ll agree to pay them interest at 6.5% p.a. But for the first two years, while
you’re building the business, there won’t be any principal or interest
payments—interest will be capitalized. Then over the last five years, you’ll
pay monthly principal and interest to them.”

Bill’s next question was:
“Why would they agree to that?” Here’s why:

1. Bill is in possession
of asymmetric information—he is the only skilled operator amongst the group and
they need him. His partners should not even think about going into this
business with no experience—they’ll get eaten alive by the competition. Bill
has leverage he didn’t even realize.
2. In many ways, his partners are better off by lending Bill their money to
become an equal partner. A happy managing partner is a productive one. Plus
they will have a Bill deeply ‘intricated’ into the business—he is on the hook
personally for one third of the loan from the Bank and he owes them personally
$100k each. That means, if the business goes broke, their risk capital has been
reduced by $100,000 each—because Bill still has to pay it back using his own resources,
which means he’ll have to go get a JOB to repay the loans.
3. They are making a return on their capital (6.5%) which isn’t particularly
great but for two middle aged investors, it’s still better than most of their
IRAs and other investments are paying (from 3.15% to 6%).

From Bill’s point of view,
this solution is elegant because, based on his cashflow projections, he will
never actually have to pay these loans back himself. Huh? That’s because Bill
estimates, based on his experience, that the franchise will produce a reliable
stream of free cashflow of ~ $325,000 annually from year 3 to year 7. Bill’s
share of free cashflow is one third or $108,333 less what he has to repay to
his partners over the five years from year 3 to 7 ($54,383 annually). So his
actual distribution is a net of $53,949 per year. So the business is actually
repaying his partners, not Bill.

During that period, Bill
is still seeing a great ROE: he is receiving nearly $54,000 a year from the biz
on his actual out of pocket investment of $100k or nearly a 54% p.a. rate of
return. After he pays off his two partner loans, his ROE (in year eight) jumps
to over 108% p.a.

So Bill has, in part,
bootstrapped himself to a one third ownership position in a valuable concession
by looking for capital in the deal flow itself. He is on his way to becoming
wealthy—he will have created an ‘annuity’ for himself—reliable, reproducible,
recurring cashflow produced by an asset he owns or controls.

Prof Bruce

Postscript 1: Many student
entrepreneurs, when they are building their PBSs (Personal Balance Sheets),
forget to add their equity and sweat equity. Just as Bill should not forget
that he has leverage based on him being the only partner to actually have
experience in this business, he should also show on his PBS (in addition to his
cash investment of $100,000), the SE (Sweat Equity) he has created. To do that
is easy. If we use a capitalization rate of 9% (a pretty typical rate for this
type of franchise and location), Bill’s share of the business can be valued at
$1.2 million after year 7 (when he has retired the partner loans). After
deducting the initial $100k outlay, Bill will have created about $1.1 million
in value through his own efforts after just seven years. It’s hard to save your
way to wealth (hardly anyone can actually do that) but you can invest your way
there as Bill plans to do.

[You can see all the
numbers in my spreadsheet DealStructure.xls. Contact the author for a copy.]

Postscript 2: I was
involved in a transaction like this at about the same age. I had no money but
wanted to buy a 62 acre piece of industrial land in Kanata
(a western suburb of Ottawa).

The Canadian economy was
in a tough recession and, as a famous Frenchman once said (Baron Rothschild in
1871): “Buy (real estate) when there’s blood in the streets.” This is easier to
say than do because: a) people tend to run in herds—there is tremendous psychological
pressure to sell when everyone else is selling and buy whenever everyone else
is buying, b) Banks won’t lend you any money when times are tough—they too are
subject to herd pressures—so financing dries up. The answer? Bootstrap it!

I had the opportunity to
buy the property for just 15 cents per sq. ft.—a price that hadn’t been seen in
Ottawa since
the Great Depression. The landowner, who was in trouble, was willing to finance
half of the transaction for a period of three years. The balance I would have
to find in cash. That meant I needed more than $200k to close.

I managed to find two
wealthy investors, each willing to put up one third and to lend me one sixth.
They wanted 8.5% interest on their loans but were willing to capitalize their
interest for three years. Again, they were willing to help me because they
needed me—I was in possession of asymmetric information and skills. They need
me to find the land, negotiate its purchase, put Seller Take Back financing in
place and then find a Buyer when the markets and the economy came back a few
years later.

We bought the land for
just over $400k and, luckily for us, less than three years later both tech and
the land markets bounced back, we sold the property for about 90 cents per sq.
ft. or ~ $2.43 million. Each partner received their one third share (plus
principal and interest in the case of my two outside partners and one third
less principal and interest, in my case).

[All the numbers are shown
below or you can download the spreadsheet from the link provided above.]

This example demonstrates
a few things about deal structure, deal flow and bootstrapping yourself:

1. Bootstrapping often
involves an early stage of trading—where you trade in whatever markets you have
some knowledge and expertise, gaining advantage from asymmetry. You need to
generate ‘table stakes’ and many entrepreneurs start this way. You have to
watch it—if you keep flipping assets, you eventually will “flip ‘til you flop”
so you have to know when to stop and build and hold instead.
2. Bootstrapping also involves looking for finance in the deal flow—in this
example, I used two sources—the original owner loaned us half the purchase
price and my partners financed me.
3. I was able to use a form of NCS (Negative Cost Selling) on the partners by
showing them what I thought the deal would look like. I used a spreadsheet much
like the one below except I felt a seven year period was more appropriate—land
cycles tend to be five to seven years in Ottawa
and I just felt more comfortable showing a lower return and a longer payout.
The fact that there was a payout in just under three years was a bonus. The
original pitch was that they by investing $100k each, they would see a return
of $650,000 after seven years, an IRR of 30.7% p.a. Their cost of investing? A
negative $550,000! I also realized you can bootstrap finance this way: NCS is
the basis upon which they could borrow from their future earnings to finance me
today. They agreed.
4. Lastly, don’t cry for the original owner—he inherited the land for free from
his family. Don’t shed any tears for the tech company who bought the land—in
the years since they bought it from us, it has gone from 90 cents per sq. ft.
to $8.00! And think how well the two co-investors did. They each put up about
$100k (including the amount they loaned me to buy my share). Less than three
years later, they got each got a cheque for $785,000. This represents an IRR
(Internal Rate of Return) of 97.9% p.a., a heck of a lot better than a GIC from
their Bank which today pays around 3.15%. Of course, my IRR is infinite since I
had no money at all invested. Still I can’t gloat—all that money (and a lot
more) went into the Ottawa Senators, where it remains to this day—only problem
is, the team is owned by someone else!


Feb. 14, 2010 Deal
Structure: Bill and the Restaurant Franchise

Deal A

Capital Required
LTV Ratio 50%
Debt $900,000
Equity $900,000
Partner A $400,000 44.444%
Partner B $400,000 44.444%
Bill $100,000 11.111%

Deal B

Capital Required $1,800,000
LTV Ratio 50%
Debt $900,000
Equity $900,000
Partner A $300,000.000 33.333%
Partner B $300,000.000 33.333%
Bill $300,000.000 33.333%
Loan from Partner A $100,000.00
Loan from Partner B $100,000.00
Bill Borrows from A and B $200,000.00
Term 7 years
Interest Capitalized 2 years
Balance of Term 5 years
Interest rate 6.50%
Amount of Interest Capitalized $13,000.00 year 1
$13,000.00 year 2
Principal Owing after Year 2 $226,000.00
Repayment to A and B ($4,531.95) monthly
($54,383.41) annually

Expected Cashflow from
Operations $325,000 annually from year 3 to 7
Bill’s Share of Cashflow $108,333.33
less amount paid to A and B ($54,383.41)
Bill’s Net Share of Cashflow $53,949.93

Bill’s Equity $100,000
Bill’s ROE 53.9% p.a. from year 3 to 7
Bill’s ROE 108.3% p.a. after year 7

Capitalization Rate 9.00%
Bill’s Share of the Business Valued at $1,203,703.70 after year 7

Bill’s Sweat Equity Valued
at $1,103,703.70 after year 7

Deal Structure: Land
Transaction, Kanata ON

Area 62 acres
43,560 sq. ft. per acre
2,700,720 sq. ft.
Price $0.15 per sq. ft.
Seller Take Back $202,554.00 50%
Term 3 years
Interest 0%
Equity Required $202,554.00
Partner M $67,518.00 33.333%
Partner N $67,518.00 33.333%
BMF $67,518.00 33.333%

Loan from Partner M
loan from Partner N $33,759.00
Term 3 years
Interest 8.50%
Interest Capitalized $5,739.03 annually
$17,217.09 over 3 years

Sale Price $0.90 per sq. ft.
Less Amount Owing to Original Landowner ($202,554.00)
Net to Partners $2,228,094.00

Distribution to M
Distribution to N $785,065.54
Distribution to BMF $657,962.91 $2,228,094.00 check

IRR (Partner M or N)

0 ($101,277.00)
1 0
2 0
3 $785,065.54

IRR 97.9% p.a.

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.