October 13, 2015

Q: If a personal guarantor owns less than 100% of a related company (say 60%), then should I conduct all cash flow analysis on proportional basis for the global DSC calculations? Should I include only 60% of the cash flow and debt payment from that related company when the guarantor owns 60% of the business?

A: No, your analysis should include all cash flows and debt service requirements for each of the related party companies. Recall that companies included in a global cash flow computation are those companies effectively controlled by one entity or party. If control is established, then include all the cash flows and all the debt service in the computations. If control is not established, exclude the company from the global cash flow computations.

In this respect, note that Fritz Schumacher was only a 50% owner of the two partnerships we used in the computations. Nonetheless, we had established that he controlled both companies because of his financial interest in each. Therefore, we included all partnership cash flows and all partnership debt service in the global cash flow computations.

Please recall that as a general partner or guarantor, Fritz Schumacher is contingently responsible for all partnership debt, which is a further reason that global cash flow calculations should not be diluted to reflect pro-rata ownership shares of the business. To do so would distort the results and create an incomplete view of the individual company performance relative to the partner’s or guarantor’s overall financial strength.  

The same distortion would apply if we pro-rated partnership cash flows.

Q: Does the Global Cash Flow Webcast case assume that there are corporate guaranties in place between the companies?

A: No. There are no assumptions about corporate guarantees as part of the Fresno Properties case. Each of the businesses analyzed in the Global Cash Flow Webcast are included because they are effectively controlled by Mr. Schumacher.