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Cash Is King

Case In Point

Here's how Fernald and Moore went about raising $200,000 of investment capital to help Terralink turbocharge its sales.

Rather than tap individual investors, the two approached the Greater Portland Building Fund and Coastal Enterprises Inc., both quasi-public economic development organizations charged with developing business in the state. Instead of a loan, they sought an "advance" of $200,000 for Terralink against its future sales. If the advance was made, each of the investors would get 3 percent of Terralink's sales for 10 years, or until they received payments totaling $600,000. This $600,000 would represent the original $200,000 investment, plus $400,000 more.

In the broadest sense, for the investors to get their money back by the end of the agreed-upon time frame, Terralink would have to generate total sales of $10 million over 10 years. Fernald says the company's historical track record of doubling sales each year since inception was a big selling point. "In addition," he says, "the fact that every company in America that generates a hazardous waste stream, some 300,000 in all, are potential customers also [assured] investors that the proposed returns were achievable."

Moore says the underlying numbers provide an intriguing return as well. If Terralink repays the advance over 10 years, investors will earn a compound annual return of 11.6 percent on their investment. If, however, the company's sales mushroom and $600,000 is paid to the investors in five years, their compound annual return will increase to 24.5 percent.

The deal, which Fernald and Moore began structuring during the first quarter of 1997, closed during the summer. Moore says one of the key features of the transaction was that royalties didn't start to accrue until 90 days after the deal closed and that royalty payments to the investors didn't have to be paid until 60 days after the revenues were recognized. "There will be five months between the time Terralink received the financing and the first payment is due," says Moore, "which gives them the time they'll need to put the capital to work and start producing sales."

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This article was originally published in the December 1997 print edition of Entrepreneur with the headline: Cash Is King.

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