What Does the Name “Nicholas Schorsch” Mean to You?

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Here are two choices:

  1. A pioneer in high yield, non-traded REIT’s
  2. A crowdfunding entrepreneur

I’ll dispense with the suspense … the answer is both A. and B.

Mr. Schorsch’s impressive fortune building career (now 10 figures) hit the big leagues in 2002, not that long ago, when he teamed up with Lew Ranieri (of mortgage backed securities fame) to launch his first REIT.  And he certainly played a smart “product” card by subsequently specializing in non-traded, high yielding REITS that had an innovative twist … built in liquidity events to enable retail distribution.

With that pioneering change in non-traded REIT structure, this category of asset backed, alternative investment became very successful, in large part because of its comparative risk/return benefit and the increasingly low interest rate environment.  It also didn’t hurt that sales of non-traded REIT interests carried high fees, making it pretty easy to build retail distribution network relationships.  Mr. Schorsch’s company, RCS Capital, is now the industry leading wholesale broker-dealer in non-traded REIT investment products.

Fast forward to 2014 …. RCS Capital just launched “We R Crowdfunding”, a CF platform that includes an integration of investor relationship management software from Trupoly, which RCS acquired earlier this year.  Initially, the platform will be real estate focused, and they are “cutting their teeth” on placements of RCS Capital’s REIT investment product offerings.  Perhaps more importantly, it is a “curated” CF model, leveraging the research and origination capacity he has built (and is expanding) in his empire.

The Trupoly acquisition is only one of many completed at RCS Capital recently.  It has also purchased several independent broker-dealers that together house nearly 9,000 advisers/reps and over $200 Billion in assets under administration.  And they have acquired teams who originate or manage investments in other subcategories of the alternative asset class.  It is all part of Mr. Schorsch’s strategic objective, to become a retail broker-dealer power house that is integrated with a broad based alternative asset investment product pipeline.

So, how do you get from being the leading wholesale broker dealer of non-traded REIT’s to becoming a crowdfunding entrepreneur?  It’s an interesting tale of strategy development and execution.  RCS Capital has committed itself to growth through acquisition of firms in the alternative investment and advisory services vertical.   But it has also adopted a view on what role crowdfunding technology will play in the future of the primary focus of this strategy, retail advisory services.

The potential payoff is huge.  Look at LPL Financial’s growth and returns for a guide.  And one should not underestimate RCS Capital’s interest in crowdfunding.  The plan certainly includes using crowdfunding technology to differentiate themselves from the competition.  But true to Mr. Schorsch’s innovative past, the intent is to emphasize crowdfunding to such an extent that RCS Capital (according to President Michael Weil) “leads the crowdfunding revolution”.

For those who play in and around RCS Financial’s newly defined sweet spot, it would be wise to keep tabs on developments.  This has all the makings of a landscape changer.  And even for those with only peripheral interests, there is plenty of intrigue, not the least being what rising rates might do to the core, non-traded high yield REIT business.

A big thanks and credit to my new associate, Rob Klein of www.jesterfinancial.com for his contributions to these thoughts.  And as always, thoughtful comments to any post at www.JCJCo.net are invited and appreciated.

Crowdfunding at its Best!

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My very good friends at Zylie the Bear just launched a Kickstarter campaign! Check out https://www.kickstarter.com/projects/mattmccrty/kiki-the-koala-an-adorable-adventure-toy-that-unpl

They are definitely on to something big with their “inspiring kids to unplug play” marketing program too. You can see Mary Beth, this award winning toys founder, talk all about it at TEDxWilmington right here! https://www.youtube.com/watch?v=egziCEFpzBs

Qualitative Elements of Business Value:

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How much is your business is worth? Business owners often assume it’s simply a question of finding recent sales of similar businesses, or looking at industry averages, and using the implied market value multiple, such as a Price/Net Income, Price/EBITDA or Price/Sales ratio, to calculate a value for their business. That is a dangerous view to take, one that leads to bad decisions when buying or selling a business, or a loss of hard earned value when taking on a new partner or investor.

Importantly, while understanding value is aided by the use of market comparisons and multiples, the derivation of business value is based on corporate finance theory, all put into a series of mathematical constructs used in corporate finance analysis, and it’s not so simple. Those mathematical constructs were used to develop the dangerously oversimplified valuation ratios such as P/E and P/Sales, and proper use of these ratios requires a thorough understanding of the underlying corporate finance theory and math.

More importantly, simplified valuation ratios inherently imply an assumption that your business is exactly like the business or businesses you are comparing yourself to, that you are “qualitatively” exactly the same as all the others. Obviously this is not true, as each business has unique strengths and weaknesses, and unique market risks and opportunities. So, to answer the question “what is my business worth?” you must not just understand corporate finance, you must also have a thorough understanding of these qualitative elements of business value.

So, what are the “qualitative elements of business value?” To demonstrate, let me offer a list of some questions that need to be answered when assessing value, organized by the 4 core parts of any business enterprise: its customers, its products and services, its organization and its assets.

Strength of Customer Base:
• How many customers are in your market, and what share do you have?
• How reliant are you on one or a few customers?
• Are all of your customers exposed to the same market risks?
• How important are you to your customers’ success?
• Do you have unique knowledge of your customers’ needs?
• What is the length, depth and breadth of the typical customer relationship?
• What is the likelihood that typical customer characteristics and relationships will change?

Strength of Products and Services:
• How many similar products or services are available in the marketplace?
• Do you compete on the basis of quality or price?
• Can your product or service be easily copied?
• How important is brand or image to buying decisions?
• Does the need for your product have seasonal or cyclical characteristics?
• Is the market need for your product or service changing?

Strength of Organization:
• What is the relative level of knowledge and skill in areas critical to business success?
• How is capacity affected by the organization?
• How difficult or easy is it to expand or contract the organization?
• What is the likelihood of a critical individual or part of the organization being lost?
• How does management philosophy, process and controls impact likelihood of success?
• Is there a need for a type of manpower that is in short supply?
• To what extent does the organization have access to external knowledge and resources?

Strength of Assets:
• How do owned or controlled assets affect competitive position?
• How sensitive is capacity to ownership or control of assets?
• Is it difficult or easy to acquire or gain control of required assets?
• Is it difficult or easy to divest assets?
• To what extent do existing liabilities limit the business’s access to the value of assets?

Keep in mind that the simplicity of earnings or sales multiples makes it very difficult to capture the qualitative elements of business value in a multiples based valuation. On the other hand, a forecast of future financial performance is well suited to the task, with the forecast model designed to reflect all of your business’s unique “qualitative” characteristics.

Also, this list of qualitative questions is not intended to be exhaustive, and the appropriateness or importance of any given question is certainly impacted by the nature of the business, or its stage of development.

For example, organizational strength is likely to be more important to the value of an early stage, high growth business. In considering the value of a more established, moderate growth business, product strength can be key. And for a mature business, its value can be most sensitive to customer and asset strength. Finally, for a business in decline or distress, organization strength takes on heightened importance again, as it will define the business’s ability to change, address its problems and return to health. If the organization is not up to the turnaround task, business value is defined by asset value.

Thoughtful comments to any post here at www.JCJCo.net are always invited and appreciated.