James Joseph Ling was a man who was acknowledged to have mastered the technique of using other people’s money (OPM). James Ling used other people’s money to climb to top prominence as head of one of the biggest electrical construction company in the 1960s. He built his business empire Ling-Temco-Vought or LTV using funds from equity investments.
Ling’s Approach to Using Other People’s Money (OPM)
Ling used other people’s money or OPM mainly in the form of equity. He borrowed money, too but it was the equity style that made him famous. It works this way.
You stumble into a bright business idea that looks very promising. You need money to get the venture started but you have little or no spare cash of your own. So, what do you do?
You can borrow what you need. Or, here is the other way. You go to a few well-heeled friends—five, maybe—and you present your idea and ask them if they’d like to risk some money as co-partners or shall say, incorporators. You stress the word “risk.” You are not asking to borrow the money; nor you are promising to pay it back. The five friends are going to be co-owners of the business along with you -— in other words, they will be stockholders in an informal sense. If the business succeeds, each one will earn his proportionate share of the profits. If the business fails, each one says goodbye to his money.
Lets assume that your idea is a sound one and you’re a good talker. Each friend puts up $10,000, so the infant company is capitalized at $50,000. Each friend informally gets one share of stock. You also get one share, though you’ve put no money yourself. The agreement is that you will earn your share by doing all the work—in fact, you have already earned a substantial part of it by developing the idea in the first place. You are the idea man and the chief operating executive (perhaps the only). Your five friends, having full time jobs of their own, will not take part in the day-to-day management of the business. They are simply venture capitalists.
Thus you’re in business, with your small company and six shareholders, through the use of OPM. From then on, you will collect one-sixth of the net profits, if there is any.
If the venture succeeds, you can go into many directions. You may keep the company closely held if you and your other shareholders do not want outside interference. Or, if the time comes when you or your partners want to collect some capital gains in cash, you can widen the circle of shareholders or even go public. You can split the original six shares into dozens or hundreds or thousands having an equivalent value, and you can sell off some of the stock at whatever price the market will bear. (If the venture is truly successful, the original investors will of course sell their stock for much more than their original $10,000.)
Under the right conditions you can create new stock, sell it to the public and bring new working capital in to help the company grow. Or, you can hold some shares as treasury stock and use that stock in place of money to pay for other, smaller companies that you growing enterprise maybe eyeing to buy.
Ling’s fortune has long fallen though, and the business community had long abandoned and forgotten the once awesome wonder of how it was done. Still, the achievement is worth talking about. After all, he has shown that you can build an empire—build it all—or almost all, on other people’s money.
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Category: Finance a Business