April 15, 2014

Q: Was the answer to Poll Question #1 “Agree” or “Disagree”?

Poll Question #1:  It is generally true that a borrower will benefit from cash support provided by related parties rather than face demands for cash support by related parties.  Agree.  Disagree.

A: The answer is “Disagree”.  Cash support may go either way between related parties, depending on the situation of each of the companies in the family.  Circumstances may vary, but it is generally more likely that a borrower will face demands for cash rather than receive cash from the parties within a global cash flow framework.

Q: Shall we use only 50% of the cash flow generated by the companies Fresno Properties and Sequoia Properties since Mr. Schumacher only owns 50% of these two companies?

A: No, since our intent is to define the total cash flow available to service debt for each of the related party companies individually and then globally.  We use full amounts without dilution since Fritz Schumacher is the controlling partner, and we are ultimately seeking to combine the cash flow of the companies with his readily available cash as a source of support.  He's the money man, and the one who makes all the decisions for each of the companies in the family.  The issue one of control rather than share of ownership, and Fritz Schumacher controls the finances and cash flows of all four companies.

Q: If you subtract loans to owners from cash flow, why don't you add back loans from owners?

A: Loans to owners and loans from owners play very different roles in the cash flow dynamics of a company.  Loans to owners are basically a form of compensation to the owner, and there is generally no intent to repay the loan.  These loans are frequently converted to distributions or withdrawals and become permanent cash outflows.  Loans from owners, on the other hand, represent financing often made as a “last resort” when the company is unable to secure necessary third party financing.  A loan from the owner is made with the full intent of being repaid as quickly as possible.  

In summary, we focus on cash available to service interest-bearing debt after accounting for all operating expenses, which includes loans to owners since there are characterized as compensation.  Loans from owners are classified quite differently since they serve a very different purpose, which is to provide financing in the event of a cash flow shortfall.