Turn Apples into Cash


One of the first financing deals I helped organize was for a farmer who specialized in growing apples. He was a brilliant man and knew that the best apples in the world were grown in the Columbia River Valley. He was also a botanist who understood why the apples grew so well there.

Last week’s message at http://www.garyascott.com/archives/2003/04/24/810/looked at the importance of being flexible when you need to raise cash for a business. This message looks at one of my first fund raising efforts to show the importance of creating confidence.

As a farmer and businessman, he also understood that orchards in the Columbia River Valley were expensive. He had the brilliant idea to look for land that duplicated the conditions of the Columbia River Valley, but where prices were much lower. He found it in Arizona high up on some hills. He bought thousands of acres and set up an orchard. The apples grew well and he discovered they ripened earlier than Columbia River ones.

It did not take him long to realize that he was hundreds of miles closer to the major California markets so he could get his apples there cheaper and earlier. This farmer was doing fine but wanted about a million dollars to expand his operation. His deal though was too unusual for banks. Bankers in the Pacific Northwest knew apples, but in Arizona?

The loan presentation we developed was one that became a standard for many other deals I helped put together. It contained a simple four page introductory brochure, made from one piece of paper, folded once and then an in-depth prospectus or offering circular that covered all the facts and figures. The idea was that the simple brochure would provide all the key facts and was designed to excite the prospective lender enough to get into the deal, or to excite his curiosity enough that he would want to invest and would look at theoffering circular to answer any questions he might have.

After giving the loan considerable thought, I decided that what had to be sold here was first-APPLES! And so the deal told about apples, not the loan. I recognized that the private lenders we would approach did not understand how apple growers made money. They needed this knowledge before they could have confidence in the deal.

The second factor we sold was the man. This farmer was famous as far as apples go and had considerable experience and a reputation in this industry, so we wanted to use his background to develop confidence in the loan.

We started our marketing by placing advertisements in newspapers in Hong Kong (this was where I lived at that time) with a headline “Make a fortune from apples while enjoying the safety of real estate”.

We knew that Hong Kong investors like real estate and had set up the deal so that the loans were guaranteed by the real estate of the orchard.

We created a substantial interest and sent a batch of investors from Hong Kong to meet the apple grower and to see his orchard. The deal failed, as far as I know, because I talked to lots of potential investors that answered the advertisement and put in touch with the farmer, but never heard from him nor saw that commission that would have been due if the money had been raised.

This failure is important for several reasons. I spent considerable time and money to little avail, but gained important knowledge from the effort. I believe the deal was sold well. The brochure looked good and clearly explained why apples would be profitable. The market was right. This was the early 1970’s in Hong Kong and there were many wealthy investors there who wanted to put money into real estate and/or land related deals in the U.S.

There were also plenty of inquiries. I was living in Hong Kong at the time [which was why we started in that market], and I visited them all personally.

Here is why I think the deal didn’t work and what I would do today if I were doing the same deal. First, I cannot totally dismiss the possibility that the deal did work, and the farmer didn’t tell me. I originally didn’t keep control of the deals I put together until I found one where I knew for sure the money had been raised and I had not been informed. From that time forward, I always set up vehicles for collecting the money and I kept control over these vehicles. But in this case I was new in the business and thus give the farmer the benefit of any doubt.

The first lesson then is keep tight control over every aspect of the loan process, including the account where the investment will go. Set up an intermediary company between the borrower and the lender and keep record of each payment to the borrower and watch how the money is spent (to make sure it is used as requested).

We were looking for just one or two investors and few of the potential investors I interviewed had that kind of money. Also, we never put together a specific deal. We sort of said here is a great way to make money, do you want to make a loan, buy some equity or what? The offer lacked a clearly defined way for the project exactly what he might make and when he might make it. In retrospect, I would have organized two offers, one equity and the other loans secured by the property. I would set up a Hong Kong finance company to collect the money and lend this to the farmer in Arizona. The use of the Hong Kong company would have given both the Chinese investors and the farmer tax benefits in those days.

This second lesson is to offer a specific deal. In other words ask for a specific amount of money. Offer a specific interest rate or percentage of equity and set out clearly defined collateral and explain exactly how and where the proceeds of the loan will be used.

Third if I were doing this today, I would look for large enough lenders or investors where I could fly those interested in the project to Arizona so they could take a look before committing their money. I would offer to pay for their flight if they invested.

This makes it more likely that they will invest or lend if they go, or they would feel more comfortable that the deal is good because they can fly and see it. This increases the likelihood that even if they don’t fly over they will invest anyway.

The final step I would take today would be to improve the power of the reputation of the farmer. He really was a celebrity in the world of agronomics and apples, but in Hong Kong, who knows anything about apples?

I would first, find an accounting or law firm in Hong Kong that could vouch for the accountant of the apple farmer or even have a well known Hong Kong firm or affiliate of a well known Hong Kong firm audit the farmer’s books, even if the audit was very limited.

Also, I would fly three or four prominent citizens of Hong Kong to the orchard, show them around and give them some equity or give a special deal to get them involved so that could have referred investors to these people. These centers of influence would be of particular value in a country where investors are suspicious as can be.

Overcoming suspicion is one of the key factors in raising money and learning this fact led me to success on another deal in Brooklyn that we cover in the next business message next week.

Until then, may all you business be good.

Gary

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