This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
We cannot here enter into a discussion of the technical points and subjects which are covered in the investigations of many different projects, for their range is infinite. A well-known engineering firm has had under consideration within the last two years such various projects as: irrigation work in Brazil; a steam railroad in the Philippines; a street railway in South Africa; and hundreds of proposals within the United States. Every one of these proposals that seems worth while is reported upon at great length by a trained engineer and investigator. The stock of information which is included in the reports filed with the head office of this firm is enormous. It includes many studies of sociological and political conditions, as well as of more technical considerations of construction and engineering. Each one of the more elaborate reports is well illustrated with photographs pasted into the typewritten pages. Often a report will run from 50,000 to 200,000 words and yet will contain only essential information boiled down to as brief a space as possible.
* New York Annalist, July 20, 1914.
Some general statements as to questions to be considered in an investigation are included in a paper on "Initial Financing of an Enterprise" by E. K. Chapman, president of the Hudson Trust Company of New York City, which was read at a meeting of the Efficiency Society in March 1914. According to Mr. Chapman, in promoting a corporation which is taking over either tangible property or patent rights, copyrights, good-will, and the like, there are eight points which should receive careful consideration at the outset.
1. The validity of the patents, copyrights, and other titles and rights, or the soundness of the claim of good-will.
2. Strength and dangers of present and potential competition.
3. Likelihood of securing for the new company the proper grade of managerial talent.
4. Sufficiency of capital and dependable resources; this should be enough, not merely to get along if everything goes well, but to include the expenses and losses of the early experimental stage. It is generally not desirable to apply a second time to the people who subscribed the original amount of capital stock.
5. The par value of the capital shares, which should be low if the appeal is to be made to small investors, and not less than $100 if the appeal is to be made to large investors.
6. The contract between the corporation and the promoter; the promoter should be reimbursed in cash for his actual cash expenditures, but the compensation for his services should be in the form of shares in the corporation. 7. Necessity of investing a large sum of capital in constructing a plant for manufacturing the proposed product; ordinarily it is less risky to start by having the product manufactured under contract by outsiders or by assembling the parts which have been manufactured under contract.
8. Probability of securing capital from men with experience in similar lines of business or with special information.
It is well for a banker, or investor, or anyone else who has to do with financing new enterprises, to have some such list as Mr. Chapman's before him in order to make sure he is not overlooking any essential point. It may be of some value to comment briefly on a few cases in which the writer was called upon to make a preliminary analysis and to indicate what information ought to be had.