I’ve been around long enough to face this challenge:
“How to Know What You Know?”
Knowing what I don’t know that’s easy. But what about what I do know - meaning the lost bits? What is unlikely... is that I'll come up with a solution to a problem before being faced with it. It is only then that I might think of something. In other words, what would initiate the response? I would likely only start thinking about the 'mystery of it all', problem or opportunity when confronted. How about you?
Example: It was 2004. A Client and I were looking at a moth-balled Pulp Mill that we thought might be for sale. He needed to relocate his business. The eighteen acres that came with this 'turn-key plant' seemed suitable. As we toured the facility, I asked our Host (Regional Manager representing the prominent US Forest Products Owner) what they wanted regarding value. His answer: “Well, if they can get book value out of it, I think they would be happy”. After five minutes of hiding my excitement, I responded: “Sold!”
What prompted my response? What did I know? Well, I knew that ‘Book value’ was less than Market Value. Would I have thought of this if not confronted by the situation? Maybe, but at that moment, having just been told, I knew the Owner had had the property for over 20 years! This meant comparable real estate values would easily place the value far higher than the book value. It was a 'no-brainer'! Although challenged by my client, I assured him that if he wanted the property, there wasn’t much to worry about! And if he didn't, I'd buy it!
After that, and in summary: An Interim agreement with a five-thousand-dollar deposit secured our $1 Million purchase position. That agreement also gave us six months to appraise the property (which came in at $5 Million+), along with time to find a production contract for the Pulp Mill, look into the funding needed for property upgrades, and structure it into a viable finance package.
It took two stages:
1. Armed with an accredited, Independent Appraisal, a local Credit Union funded the initial $1 million property/pulp mill purchase. Then, we faced the more significant hurdle of financing the planned improvements. Answer:
2. Enhance the financial situation: First, we secured a fiber-processing/supply contract (cash flow). This was coincidental with bringing the $5 Million asset base (freshly appraised) onto the Balance Sheet and securing the required funding from a major lender.
Like magic: The $5 thousand deposit plus a Credit Union loan bought the land and pulp mill. Then, applying a not-so-well-known “Section 85 Rollover” Provision offered under the Canadian Tax Code realized the additional $4 Million of Value. This was the difference between our purchase price and the Appraisal Value, forming the equity base needed to bring our overall plan to fruition.
So, how did we know to do this? ...bringing us back to the opening question:
“How to Know What You Know?”
How did we know about “Book Value”? Then how did we know how to 100% fund the Purchase, let alone bring about that fancy “Section 85 Rollover” provision stuff that followed? Well, two things come to mind.
The first is ‘mileage’. Sometime in the past, previous to the described event, I was exposed to an equipment/net asset value versus land “book value” scenario. Still a 'youngster' at the time, it was an education surrounding what the rules could mean to a business or a purchase transaction. Also, ten years before the ‘18 Acre/Pulp Mill’ purchase, I encountered an opportunity involving 80+ acres of raw land. This was another 'intriguing' project...
Acknowledging that it was a 'challenging property', requiring rezoning approvals, negotiated water rights, a neighbouring community 'up-in-arms', etc., the owner was willing to ‘play’. Then, with the help of a 'creative' tax guy who called upon the above-mentioned “Section 85 Rollover" rule, the same property owner became my minority partner, which is how this rule works. Land value increase: Exceptional!
So, that is where that piece of 'know-how' came from. This manoeuvre primarily served to “unlock the mystery” of the subject property, legitimately folding the appreciated value 'into the deal' establishing the equity base and precursor to what became a 143 half-acre-lot subdivision project.
The second is ‘entrepreneurialism’ - learning to “listen to the deal” and gathering the knowledge/information needed to harness the opportunity. But even if one knows the answer... or how to find it... it doesn't just appear from nowhere. First, there must be a challenge: a problem to be solved or an event of promising potential to be exploited before one recalls what to do or how. No?
And therein lies the conundrum. I don't know what I know! Without first knowing the challenge, how would I have an answer, regardless of whether there might be a solution 'stored away' or not? Conversely, such creative development work is difficult to value without first being able to qualify the outcome. Concepts aside, only results count.
So, I'll continue with the stories, the good and the bad and the... and should you have a need, perhaps one of them will sufficiently pique your interest to start a conversation or debate if you will!
Whether you’re seeking to launch a business, secure break-even or growth, need help with an expansion, turnaround or sale, and think I might be able to offer some input or support, please get in touch. If needed, we'll recruit the help of some friends and see if we can't find the right solution!
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