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Hidden Assets

Off-balance-sheet financing lets you raise money and protect your equity.

Neil B. Swartz, chairman and CEO of Microleague Multimedia Inc. in Newark, Delaware, is a man in a hurry.

Microleague competes in the searing hot market for interactive multimedia entertainment. And the company's primary niche, sports simulations, just adds more sizzle to the Microleague story. After all, we're talking America here, a nation that elevated sports, sports licensing and sports broadcasting into major growth industries.

In this context, Swartz's rush-rush approach is easily understood. "We want to build [market] share now so our leadership position is solidified as the market expands," says Swartz.

It's also not surprising that when it came time in 1994 to raise capital to finance two new multimedia sports simulations, one for baseball and one for horse racing, Swartz wanted to get the deal done fast. How best to do this? "Make sure investors get a fast return on their investment," he says. After all, almost anybody can put together a deal where there is no return for five years. "Engineering a quick hit for investors," says Swartz, "required some creative thinking because conventional techniques just weren't right for us at the time."

For instance, issuing straight equity in a private placement--that is, selling shares directly in the company--might have been feasible but would hardly have offered a quick return to investors. After all, it might have been years before the company achieved the size and the momentum needed to complete a public offering. In the meantime, private placement investors would simply have to hang in there. Besides, if the products failed, Microleague might have found itself saddled with some unhappy shareholders.

Getting a loan was an option, but only in theory. Given Microleague's early stage of development, it's doubtful the company could have found a lender venturesome enough to do the deal. Besides, significant debt at that stage of the game would have choked the company.

To strike the right deal--meaning one that would entice investors but give Microleague the room it needed to grow--Swartz borrowed a chapter from Hollywood. He used off-balance-sheet financing to raise the approximately $212,000 he needed to develop Sports Illustrated Presents Microleague Baseball and Hooves of Thunder.

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This article was originally published in the January 1997 print edition of Entrepreneur with the headline: Hidden Assets.

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