24 NOVEMBER 2018 • FOGHORN BUSINESSMATTERS Some Thoughts on Finance By Bob Shaw, Industry Consultant A Wall Street muse once said that 99 percent of physics can be explained with three laws, while 99 laws explains three percent of finance. Maybe this is why we have financial meltdowns, or why the Los Angeles Clippers (once the perennial doormats in the NBA) sold for $2 billion. Unfortunately, there are many great companies whose final journey ended with bankruptcy or liquidation. Given these wide ranges, the reality is that your business is “worth” what the beholder thinks. Let’s dust off our ac- counting 101 notes and see how they apply to our maritime operations. Banks initially lend based on your Asset Values. A bank might loan 80%+ of the appraised value of the boats, and most excursion boat businesses are simply worth their assets less any outstanding debt. Our vessels don’t depreciate much in value; for example, a vessel that was built for $2 million 30 years ago is still worth low seven figures. This looks great compared to your new car, which can lose half its value in three years, or a restaurant that, if closed, loses 95 percent of its initial investment. But compared to real estate – especially waterfront real estate, which I have wistfully pined away for in my career, there is no asset appre- ciation. With the safety of long vessel lives, banks will conservatively lend seven-year vessel loans with 10-year amortization. It’s worth remembering that precise vessel values are subjec- tive given a thin resale market, so don’t believe that appraisals are the magic answer. Indeed, some jokingly refer to the Member Appraisal Institute (MAI) group as “made as instructed.” The top operators in our industry transition from an asset-based borrower to one based on Cash-Flow Values. The shorthand for cash-flow is EBITDA(earnings before interest, taxes, depreciation and amortization) or the cash-flow generated before paying capital expenditures, loans and taxes. Historically banks would lend three to four times your annual EBITDA (with careful analysis to make sure it is recurring and strong). Imagine a fleet worth $6 million with an EBITDA of $2 million. In good times, you PFI Marine Electric LED Deck Lighting Join The Fleet! 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