DIY Archives - Milton and Cross

Investing in Renovating and Selling homes

Posted on October 18, 2017 by admin in Capital, corporate finance, Development, estate planning, International Investment, investment advisory, Personal Finance, real estate, Small Businesses, strategy, succession, transaction advisory, Uncategorized, upscale, wealth

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Balogun is a banker approaching his 55th birthday. After a 30 year career as a banker, and seeing several people make their fortunes in real estate, he has decided to become a real estate investor.

His plan is to invest in underpriced property, with the objective of renovating the buildings and selling the individual units at a higher value than the amount at which he purchased the property. Balogun is interested in understanding the risks and opportunities of this business and he comes to us for advice.

Some things to note:

Using this strategy, you purchase a building that needs fixing up for N2,750,000 and then you invest N500,000 in improvements (paint, landscaping, appliances, decorator items, and so on) and you also invest the amount of sweat equity that suits your skills and wallet. You now have one of the nicer homes in the neighborhood, and 2 years later you can sell this home for a net price of N4,000,000 after your transaction costs.

small_1376440841-og_living_after — After

Be sure to buy a home in need of that special TLC in a great neighborhood. With most properties, the long-term appreciation is what drives your returns. Consider keeping homes you buy and improve as long-term investment properties.
before

After
This strategy is clearly not for everyone interested in making money from real estate investments. It is not advisable if you’re unwilling or reluctant to live through redecorating, minor remodeling, or major construction;

You may not be experienced or comfortable enough with identifying undervalued property and improving it; so always make sure you get a professional opinion on each property .

You should either have the budget to hire a professional contractor to do the work, or you should have the free time or the home improvement skills needed to enhance the value of a home.
You also need a financial cushion to withstand a significant downturn in your local real estate market, as this investment can be very cost intensive.
Mange your risks as much as possible!!! Make sure you do deep due diligence on the property in order to ensure that you have good title to transfer to a third party, especially since it may not make financial sense to perfect your title if you are not going to hold the property for a long period.

Why Lawyers Make Good Early-Stage Startup Hires

Posted on September 12, 2017 by admin in Compliance, Corporate Governance, entrepreneurship, International Investment, investment advisory, mergers and acquisitions, real estate, rule of law, Small Businesses, strategy, transaction advisory, Uncategorized, upscale, wealth

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By Daniel Doktori and Sarah Reed (culled From hbr.org)

It’s a startup shibboleth that entrepreneurship and formal education don’t mix. For icons such as Mark Zuckerberg and Bill Gates, so goes the lore, finishing a bachelor’s degree would have only stifled the creativity that fueled their companies to stratospheric success. PayPal founder Peter Thiel offers a $100,000 fellowship to “young people who want to build new things instead of sitting in a classroom.” Graduate degrees are thought to merely exacerbate the problem of too much thinking, too little doing. And while high-profile efforts by top business schools to teach and promote entrepreneurship have lessened the stigma around the MBA, the law degree continues to occupy a unique place of villainy among the startup set. After all, YouTube, Uber, and Airbnb, among many others, were founded on ideas that challenged, if not broke, laws and regulations. When it comes to a tech startup, lawyers are a bug, not a feature. Right?

Maybe not. Lawyers can add value in the obvious ways, helping to avoid early mistakes like issuing stock too late in the game, when the company has grown in value and the employees can no longer take advantage of favorable tax treatment. But more importantly, a lawyer on the early team can contribute to a thriving company culture by asking the right questions at the right times, providing perspective on crucial transactions, and getting smart fast on issues where the rest of the team lacks expertise.

Lawyers help startups deal with common transactions and avoid costly mistakes.

Issuing equity to the early team often triggers time-sensitive filings with the IRS. Successfully commercializing a product depends upon clean and clear lines of intellectual property ownership. Raising outside financing requires compliance with complex securities laws. A misstep on any of these items could mean an early exit for a startup company (and not the good kind). A corporate lawyer with a few years of relevant training can help navigate these and other common set-up requirements.

Moreover, lawyers, particularly corporate transactional lawyers, have repeated exposure to the types of deals — and the associated risks — that a startup will face. The dynamics between a CEO and the investors on her board are a function of the legal arrangements articulated in the financing agreements. The relationship between a company and its customers stems from a license agreement governing how users may interact with a product. Partnering with a larger company in a similar industry can, in the best case, open new markets or, in the worst, box a company into a corner, severely limiting options for growth and eventual acquisition. Lawyers understand these transactions and the perspectives of the negotiators involved.

And when the complexity of the particular deal exceeds the expertise of the lawyer on the team, she can play the savvy procurer of legal services, knowing how to target efforts and limit costs. Such experience comes in handy in managing other third-party service providers such as bankers, accountants, and consultants.

While these benefits are valuable, however, they don’t in and of themselves justify a startup hiring a full-time in-house lawyer. Early stage companies — at least those with founders sufficiently experienced or savvy to recognize that they walk a road pitted with legal potholes — tend to manage such standard risks by hiring outside counsel. And while the costs associated with that outside attorney often rank among the highest in a startup’s budget, they do not typically rise to the level of a full-time annual salary. To justify her presence among the first dozen employees, a lawyer must add something beyond legal knowledge to the equation.

Lawyers are trained to ask the right questions at the right times.

Counterintuitively, lawyers can add the strategic absence of knowledge. President Harry Truman famously longed for a “one-handed economist” when presented with the equivocating analysis of his advisers, but executives in politics and business need to understand opposing viewpoints in order to make informed decisions. Legal education and training includes a strong emphasis on questioning assumptions and probing for further information.

Rather than crippling the company through risk aversion and overanalysis, however, having a lawyer on the early team contributes to a data-driven, analytic culture of thoughtful decision making. Further, lawyers are trained as advisers and service providers. They can ask questions, explore options, and execute on answers, but they don’t expect to make the final call. This comfort with playing a supporting role helps avoid the egocentrism that can cripple any organization, particularly a nascent one.

The lawyer’s craft sometimes can be boiled down to a willingness to immerse herself within the “fine print,” offering to read what no one else will on account of complexity, length, or sheer dryness. Trained to ensure that even simple advice is backed by evidence, lawyers read closely to the point of comprehension as a matter of professional responsibility. Such a skill enables a lawyer to take responsibility for a wider variety of important matters. Fledgling startups inevitably have to rely on analysis over experience. Lawyers fit well in such situations.

Not every lawyer is well suited for the gig, however. A lawyer with the qualifications outlined above needs a tolerance for risk. For one thing, she must be willing to give up her plush office and lucrative salary for a computer station at a long table and compensation in the form of prayers, otherwise known as stock options. Her professional risk tolerance must follow suit. An essential attribute of a business attorney is providing “risk-adjusted” advice, and the level of tolerable risk for a startup generally far exceeds that for a Fortune 500 company. Lawyers at startups need to recognize that a workable answer today is often preferable to the perfect answer tomorrow; hand-wringers need not apply.

But risk tolerance must be accompanied by a stiff spine in situations where the company’s momentum (and the CEO’s vision) hurtles on a collision course with the law or the company’s outstanding commitments. In these cases, a willingness to speak up is one of the many things lawyers can bring to the table.

Daniel Doktori is the Chief of Staff and General Counsel at Credly, a digital credential service provider. He previously represented startup companies at WilmerHale, a law firm.

Sarah Reed is the Chief Operating Officer and General Counsel of MPM Capital, a venture capital firm that invests in early-stage life sciences companies. Previously, she was the general counsel of Charles River Ventures, an early-stage technology venture capital firm.

Managing Creditor Risk through Inter-Creditor Agreements

Posted on August 18, 2017 by admin in Capital, Development, entrepreneurship, International Investment, investment advisory, real estate, Small Businesses, strategy, transaction advisory, Uncategorized, upscale, wealth

James is the CEO of HOC Global Logistics, a company which provides shipping solutions to large organisations. Having become tired of leasing cargo ships from large vessel owners, the company desires to purchase its own ships which they can use and also lease to 3rd parties. James approaches Lakeside Bank for a Term Loan to finance the $50 million transaction.

The Bank after reviewing the loan proposal filed by HOC Logistics, informed James that the transaction was larger than Lakeside bank could comfortable handle. However they are able to loan him $20 million on the security of the purchased ship. James accepts the terms and applies for loans from Cityscape Capital Ltd , HSCB, Shanghai Bank and Union Finance Ltd. The individual loans have different terms, interest rates and security interests. The complexity of the transaction is so mind boggling that James sets up an appointment with his Lawyers to advise him on how to manage the relationships between the multiple creditors in such a manner as to enable the company satisfy all its loan liabilities. He is advised to structure and negotiate an intercreditor agreement among the several creditors, thereby ensuring he has a more convenient financing process.

An intercreditor agreement seeks to govern the relationship between a range of creditors providing finance to the same borrower. An intercreditor agreement entered into by senior and junior creditors can be expected to rank the senior and junior security, subordinate the debt of the junior creditors to that of the senior creditors, restrict the junior creditors’ rights of enforcement for a specified standstill period and impose payment freezes on the junior debt in prescribed default situations.

In highly leveraged transactions such as leveraged buyouts and certain acquisition finance transactions, funding may be structured into a number of different tranches of lenders who stipulate slightly different lending terms and interest rates for the funds they advance. Senior lenders and mezzanine lenders usually take security over the assets of the borrower, over shares acquired and over the target group’s assets. In addition, guarantees will be given by the borrower and may also be given by the target group.

The senior creditors tend to have a stronger negotiating position than do the junior creditors, so it is usual practice for the senior bank lenders and mezzanine lenders to appoint a single security agent (or security trustee) to hold the security package on trust for the benefit of all the secured creditors. The intercreditor agreement contains provisions dealing with enforcement of the security, usually requiring the junior creditors (the mezzanine lenders) to desist from enforcement for the standstill period so as to leave the way clear for the senior creditors (the senior lenders and any hedge counterparties) to instruct the security agent as to when and how to enforce their right to the secured assets.

How can you transfer your music copyrights?

Posted on August 1, 2017 by admin in corporate finance, entertainment, entrepreneurship, International Investment, investment advisory, Personal Finance, real estate, rule of law, Uncategorized

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Wale is a music producer. Recently he composed music for a hit track which enjoyed substantial airplay for over 6 months. Consequent upon the success of his track, he was approached by an international music corporation, who requested him to transfer his copyright in the music to the company in return for a one off payment of $200,000 and royalties capped at 5% of global sales for the next 2 years. They assured him that he would enjoy more concert appearances with the allied revenue streams. Wale is confused and requires advice on his legal rights.

Of all the forms of copyright protected works, music is perhaps the most restricted and licensed. Since music was first broadcast on radio, a vast mechanism for licensing music has emerged from the opposing forces of the recording industry and the radio and TV broadcasting industries.

Copyright ownership can be transferred like any other form of property. Copyright is transmissible by assignment, by testamentary disposition, operation of law, as personal or moveable property. however, to give legal effect to that transmission there must be a written agreement signed by the assignor. Any grant by the copyright owner binds every successor in title except a bona-fide purchaser for value without notice (actual or constructive).

This doesn’t however mean that a copyright cannot be transferred verbally, as it is trite law that a verbal agreement to which both parties have agreed all the terms (i.e. has reached completion) is legally binding. It follows then that a verbal agreement to assign, provided there is no dispute as to the terms of the assignment between the assignor and assignee, is valid and copyright is transmissible by operation of basic contract. It is however advisable that the parties sign a confirmatory assignment agreement which refers retrospectively to the earlier assignment.

The transfer could be partial or total, where the rights owner can transfer all of the exclusive rights his or her grants. In partial assignment, a music author may transfer his reproduction, translation and adaptation rights to a publisher. He may also decide to split his rights between different persons.

Copyright assignment agreements can be limited in terms of duration or territory. The author of a literary work could, for example, assign their right to reproduce it in the UK, Nigeria, Ghana and the Gambia for 4 years.

Copyright assignment agreements can be reversionary, in other words, the rights can revert back to the assignor on the occurrence of an uncertain event, such as an unremedied breach of contract. This protects the assignor from the loss of their rights in the event of the occurrence of certain events which may be vitiate the transfer contract.

The transfer of copyrights contains some knotty issues, which could become highly problematic if not properly managed. When faced with a decision on copyrights, it is best that you seek advice from a qualified legal practitioner, so as to ensure that you take the best steps in the circumstances.

Milton & Cross Solicitors provides advice to entertainers, rights owners, rights administrators and merchandisers. We help them make informed decisions that facilitate high value transactions. Contact us for a free consultation.

ARE SALARY DEDUCTIONS LAWFUL?

Posted on July 6, 2017 by admin in Capital, Compliance, Corporate Governance, entrepreneurship, investment advisory, Personal Finance, rule of law, Uncategorized, upscale, wealth

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Donald owns a golf course business run through a company called Great Ltd. The business is performing poorly and there are significantly fewer customers than last year. Donald takes the view that this is the fault of his employees. He decides he will ‘make the business great again’ by firing staff or deducting their salaries.

Donald has never liked one particular employee called Bernard. As Bernard is doing his usual maintenance work on the golf course, Donald walks up and asks him aggressively why he is not working faster. Before he can answer, Donald states that he is going to deduct 20% of Bernard’s salary!!!

Fast forward to the end of the month, Bernard receives his pay check and notices that indeed 20% had been deducted from his salary, after taxes! he was so infuriated and reported the matter to this line manager, who after giving him the runaround, informed him that the order to deduct his salary came directly from Donald. Understanding that he can achieve no objective by working with the company hierarchy, Bernard seeks legal advice on his options.

As a general rule, Under the Labour Act LFN 2004, all amounts payable to an employee in relation to the performance of work must be paid in legal tender and periodically. It should be noted that the Act does not not govern the amount or periodicity of wages, but merely stipulates that the terms should be reduced into writing by the employer.

There are very specific provisions in the Act regarding the circumstances when an employer can make deductions from an employee’s wage or salary and it is important for employers to understand their obligations.

S.5 (1) of the Labour Act provides that except where expressly permitted by law or where loss or injury has been caused to the employer by the wilful misconduct or neglect of the worker, no employer shall make any deduction or make any agreement or contract with a worker for any deduction from the wages or any other moneys to be paid by the employer to the worker, for or in respect of any fines. This suggests that the use of wage deductions as a punitive or disciplinary measure is to a large extent unlawful.

Allowable deductions include;

Pension
Personal Income Tax
Union contributions, where the worker has accepted in writing to make voluntary contributions to the trade Union
Over payment of wages, but only in respect of any such over payment made during the three months immediately preceding the month in which the over payment was discovered.
Deductions which have been expressly approved by the worker, e.g Cooperative contributions, judgment debts which have been duly garnished by the judgement creditor or loan payments due to a 3rd party. The written authorisation from the employee must specify the amount of the deduction and may be withdrawn or varied, in writing, by the employee at any time.
Deductions for goods or services provided by an employer, or a related party to the employer, to an employee in the ordinary course of the employer’s business, and which are provided on terms and conditions that are the same as, or not more favourable than, to the general public.
A deduction which is to recover costs directly incurred by the employer as a result of the employee’s voluntary private use of particular property of the employer, whether the use is authorised or not. e.g cost of items purchased on a corporate credit card for personal use by the employee, cost of personal calls on a company mobile phone

However, it is possible that a situation may arise where the salary of the worker is tied to their work product, in which case, the suspension of an employee’s employment may not be viewed as a salary deduction.

Employers need to be very cautious in effecting payroll deductions,understanding that there is a distinction between a “belief” that there is a right to recover money from an employee, a legal right to recover money from an employee, and the method that the employer can ultimately use to recover any money.

The Law does not simply permit an employer to take the easy option of making a deduction from the employee’s future wages or salary to recovery money which the employee owes the employer.

Further, employers should be cautious in simply seeking to rely on any general deduction wording in their employment contracts. Despite such contractual wording, an employee’s express written authorisation of a specific amount will still be required, unless the deduction is properly authorised by an industrial instrument, legislation or court order.

In addition, employers are prohibited from requiring employees to spend any part of their payment in relation to the performance of work where the requirement is unreasonable. Where employees are required to wear a particular brand or type of clothing and are required to purchase that clothing, then that requirement has to be reasonable to be enforceable and not be in breach of the Act.

Employers should seek professional advice if unsure about the lawfulness of a payroll deduction for the employer’s benefit, BEFORE proceeding, as an unlawful deduction may attract a civil penalty under the Act.

The Legality of Restrictive Covenants

Posted on May 30, 2017 by admin in Capital, investment advisory, Personal Finance, real estate, Small Businesses, strategy, Uncategorized, wealth

If there is a restrictive covenant in effect in the agreement that was signed, the homeowner is not able to do just whatever he or she wants to the land or house. These documents are drafted with specific language in the deed papers or through additional files that specify certain actions for the deed. They have working of running with the land so that anyone that owns the property is affected by the terms.

The purpose of a restrictive covenant is to limit the ability to freely use the property by someone that owns it. These may be placed on deeds by municipalities, land developers and even homeowner’s associations when certain actions are not wanted in a neighborhood or community. It is possible for a private citizen to also impose these restrictions when entering into these contracts so that imposed limitations affect the new owner. The primary reason for these stipulations is to keep the location in order in regard to certain actions such as cleanliness and appearance. The other goal is to increase the property values as much as possible for the entire area.

Community Association

There is a percentage of homeowners that believe that community association has rules that only lower property values based on the regulations implemented. However, most of those included in these organizations are happy and at peace with ensuring the rules are followed. Restrictive covenants may be used as a design to maintain the character of developing land and communities. This may prevent residents from various alterations to the homes in regard to size, appearance and the trees and brush around them. Because being part of a community requires adherence to these regulations, each person must follow the rules. However, homeowners are able to change some of these when they are in good standing with the Housing association.

Due Diligence Before Purchase

There are a variety of sources where restrictions come from on what may be done to the property. This could be the developer when the property is a condo or some building still being constructed. The list of detailed restrictions is provided before the sale in most circumstances so the buyer is aware of these conditions before he or she moves into the home. The title committeemen document is another source of finding the limitations through a restrictive covenant when purchasing a house. The title company usually has these details noted for any limitations that apply to the land or structure that is purchased. A local county deed recorder may supply this information if a title insurance policy is not obtained when the property has been bought. Any applicable restrictive covenants are placed on the face of a property deed as a public record available to anyone. For any additional assistance, a real estate lawyer should be contacted.

Restrictive Covenant Examples

The terms of a restrictive covenant are usually detailed and obvious. This is usually for home bought within certain communities. A covenant affects how high, where and what manner of construction may be accomplished for certain portions of the property. Some require a permit for painting or for decorations. Pets and certain other stipulations such as running a home business may be restricted. Altering the landscape is often limited. Other exclusions may be through adding fences, multiple or large vehicles and materials such as window treatments or solar panels.

Violations and Legal Assistance to Restrictive Covenants

When a homeowner violates a restrictive covenant, the consequences may be as minor as a fine or as severe as suspension of rights on the property. It is imperative that these terms and clauses are fully understood before the homeowner finalizes the purchase of the house or land. To accomplish this, a real estate lawyer should be hired to analyze the wording and how it applies to the purchase. These legal professionals have the knowledge and understanding of how local and state restrictions for both the title and laws affect these terms. Restrictive covenants must be examined thoroughly by a real estate lawyer to ensure what the homeowner wants to do may be done so after he or she buys the property.

More Thoughts on Strategy

Posted on April 21, 2017 by admin in entrepreneurship, leadership, Uncategorized

He should win over those of them who are friendly with conciliation and gifts, those hostile through dissensions and force.

Kautilya

If there is equal advancement in peace or war, he should resort to peace

Kautilya

Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand.

Thomas Carlyle

The enemies should not come to know of his secrets; he should, however, find out the weakness of the enemy. He should conceal, as a tortoise does his limbs, any limb of his own that may have become exposed.

Kautilya

The young man beginning the battle of life should never lose sight of the fact that the age of fierce competition is upon us, and that this competition must, in the nature of things, become more and more intense. Success grows less and less dependent on luck and chance. Preparation for the chosen field of effort, an industry that increasing, a hope that never flags, a patience that never grows weary, a courage that never wavers, all these, and a trust in God, are the prime requisites of the man who would win in this age of specialists and untiring activity.

Major A.R Calhoon

Before you start some work, always ask yourself 3 questions : why I am doing it, what might be the results, and will I be successful. Only when you think deeply, and find satisfactory answers to these questions go ahead.

Kautilya

EXECUTION OF BUSINESS IDEAS

Posted on February 19, 2016 by admin in Capital, corporate finance, Development, International Investment, investment advisory, Personal Finance, transaction advisory, Uncategorized

We all get business or project ideas from time to time, some of these ideas flit around within our minds like moths seeking the light, others run around like puppies seeking expression, and others still pound insistently upon the walls of our minds, giving us no respite until they find expression through our actions.

However, before you go hell for leather chasing each business idea which comes to mind, we have outlined some steps which may aid you in the successful and sustainable executions of your ideas. These tips will also work for the business manager who needs to implement some strategic or operational business objective, as well as the project or team leader tasked with delivering a stated objective.

ASSIGN PROJECT LEADERS WHO WILL DRIVE EXECUTION: This especially applies to medium to large businesses, but may be applicable to small businesses as well. Every idea needs to have a key person who is responsible for interacting with stakeholders and driving the execution of the idea and delivering strategic, operational and tactical objectives to project stakeholders in terms with parameters laid down by project stakeholders. That person needs to be empowered to implement strategies required to deliver tasks that will move an idea forward.

IDENTIFY AND EVALUATE AVAILABLE AND DESIRED RESOURCES: Capital is an indispensable business input, and to many entrepreneurs, it appears to be sole input required to build a business. However, knowledge base, market intelligence, proper product design and the right team are important aspects of the execution process. The business owner/manager/project leader should evaluate which resources are required to execute their strategic, tactical and operational objectives and identify whether they possess those resources in the appropriate quantities required to achieve their stated objectives.

IDENTIFY AND EVALUATE CHALLENGES: The Business owner/ manager/ project leader should strive to identify and evaluate external obstacles (Macro–economic issues, market dynamics, and government regulations) that may impede the successful implementation of the idea. They should also evaluate their internal resources and capacity (financial, operational, legal) to achieve their objectives and mitigate or obviate any detected weaknesses during the planning and implementation process. That will ensure that the idea gets properly executed in the face of foreseen or unforeseen resistance.

SET SPECIFIC TIMELINES: The problem with many new ventures is that they have to fit in among team members existing job responsibilities. Consequently, procrastination project delays may arise as more pressing issues and challenges arise within and outside the project environment. To create time pressure for the new venture, the business owner/manager/project leader should define specific deadlines by which actions and tasks have to be executed and supervise the delivery of team objectives in terms of the laid down timelines. In laying down these timelines, the team leader should consider the critical path required to achieve defined objectives at the highest quality, with negative impact on team members or team resources.

CREATE A MASTERMIND NETWORK AND BRAINSTORM: As you go about your daily life and business activities, identify and cultivate individuals who possess the requisite knowledge base, technical skills, energy, edge, and entrepreneurial experience that you will need to effectively and efficiently deliver your present and future objectives to work with you and have fun while doing it, as the saying goes, no man is an Island.Your mastermind network can as an advisory board to your business or project.

BELIEVE IN YOURSELF: Informed Self-belief is an essential requirement for any business owner/manager or project leader. This requires gathering information sufficient to understand the key elements of the project, the project drivers, the project environment, your internal resources, strengths and weaknesses and how your available and obtainable resources will enable you successfully achieve your objectives. Provision should also be made for the consequences of your decisions or situations where events that are uncontrollable or unforeseen negatively affect your expected outcomes. Anytime you assume the responsibility to create something that had not existed before an opportunity to become a reality, you become accountable for your actions.

ALWAYS HAVE A PLAN ‘B‘ AND BE READY TO START ALL OVER: Although we would always want to believe that all will be well, life sometimes happens. Sometimes, despite your best plans and efforts, your expected may not materialise. In such a situation, you may either take a breather, evaluate your mistakes and do it better, or where the cause of the failure was systemic (e.g a regulatory change, irreversible market evolutions, change in consumer tastes) it may be advisable to know when to cut your losses and jump ship or change your product or marketing strategy to fit the changing market.

Udoka

LEVERAGING DIVERSIFICATION FOR INVESTMENT GROWTH

Posted on May 1, 2015 by admin in Personal Finance

Diversification is the best protection investors have from the risks of capital investment. Modern portfolio theory requires that investors diversify their holdings by investing in firms or assets whose financial returns are influenced by different factors. That has traditionally meant investing in firms in different industries. The object is to identify the factors that could cause a firm’s return to vary from what is expected and to invest in firms that differ with regard to those elements of risk. By employing this investment strategy, investors can “diversify away” firm-specific risks.

To further explain the concept of diversification, let us assume that Milton and Cross is in the business of real estate development and had invested all its capital in the development of real estate assets during the period preceding the global financial crisis in the hope that the investment would produce substantial profits, as was the case at that time. It consequently follows that the financial crisis would have caused Milton and Cross to suffer immense loss (or even enter insolvency!).

However, let us assume that Milton and Cross had divided up its investment portfolio, investing 50% of its capital in real estate, 25% in the stock of highly profitable pharmaceutical companies, 15% in 91-day Treasury Bills and 10% in a high yield mutual fund. In this situation Milton and Cross would suffer less negative impact in the event of any economic shock affecting the Real estate sector. The company may lose some money, but it would still be able to hold off the Grim Reaper for a while.

We have often been advised to avoid placing all our eggs in one basket. The best course of action would be to invest in creating another basket and placing some eggs in there, thus preventing you from losing all your eggs in the event that something happens to the first basket.

Milton and Cross Commercial Solicitors provides due diligence and advisory services to individuals, companies and unincorporated organizations desirous of creating, changing or effectively implementing their diversification strategies. We may be contacted by telephone on +2348036258312 or by email at miltoncrosslexng@gmail.com.

Hope you enjoy this post.

Chimezie

OPM, COST OF CAPITAL AND THE FIRM

Posted on December 1, 2014 by admin in Uncategorized

The introduction and exploitation of new ideas, the source of all major growth, requires considerable capital investment. Consequently, the degree to which an organization will develop is highly dependent upon its ability to marshal and direct a consistent flow of external funds towards the development and marketing of new products and services. This is the concept of using OPM (Other Peoples Money).

The Pecking order theory of financial management states that all things being equal, a company with high prospects of success is more likely to finance its investment projects using internally generated capital, followed by debt finance (mortgages, debentures), and finally equity based financing (common stock, preferred stock). This is premised on the view that the company would be able to generate sufficient income from the project to refund the monies borrowed and the interest thereon.

However the ability of a firm to invest in new projects is directly tied to its cost of capital; that is, the interest rate at which the organization may raise finance from a bank or financial entity. As a general rule, the higher the risk free interest rate, which is the interest rate at which 3-Month Treasury Bills are sold in the money market, the higher the cost of capital within the economy.

Look at it this way, if a bank could receive a sure return of 10% per annum by investing its funds in Treasury bills, wouldn’t it require a higher rate of return from a prospective borrower who presents a substantially riskier project? Banks are assumed to be risk averse, and consequently they are likely to penalize borrowers for each additional unit of risk in the form of increased interest rates.

Money is expensive and when we look at balance sheets of Nigerian companies it becomes readily evident that the cost of loans is a growing problem. A high cost of capital has the effect of stifling innovation and often leads to capital flight and domestic unemployment, as companies seek greener economies with more favourable costs of capital.

Fortunately, alternative means of finance presently exist which seek to circumvent the high costs of capital imposed by banks (who by the way need to finance their high overheads by charging high interest rates on loans to customers). These means include Peer to Peer Business lending, SME financing programs (especially for entrepreneurs in the agricultural space), Soft loans and Business support grants from non governmental organizations. Furthermore, most states have in place business empowerment programs which provide low interest finance to entrepreneurs who have viable business plans.

The concept of using OPM still exists, but unless management can objectively justify the assumption of debt, it is advisable that the use of debt financing be minimized whensoever Treasury bill yields are high. It is also advisable that firms invest in Capital projects designed to boost its revenue base, as opposed to revenue expenditure, which only serves to deplete the organization’s capital base.

If you feel you need to discuss options for capitalisation of your business, feel free to discuss with one of our consultants by calling +2348036258312 or send and email to miltoncrosslexng@gmail.com and someone will get back to you.