Present Condition Of The Enterprise

An examination in this respect can be divided into three classifications: first, of the property; second, of operation; and third, of the finances.

The Property

To begin with the first, has the property any value and how has the value been estimated! The answer to this inquiry will determine the measure of conservatism or exaggeration back of the enterprise.

If the properties or rights are owned outright, the more certain is the foundation on which the enterprise is being built. Less assured is the future where the properties are held under lease, license, grant, option, or otherwise, for the failure to comply with some terms is liable to break the contract and result in the loss of the property. If the property is owned outright, the titles should be perfect. If there are any encumbrances on the properties or rights, the investor should know it, and what the amount is. If they are not owned outright, the holding papers should be in proper form and it ought to be known also if the holding terms are reasonable, satisfactory, and safe.

With this knowledge some idea ought then to be formed as to what the property is likely to bring in case liquidation is forced; with all these facts before the investor, he can form an intelligent conclusion regarding the present condition of the enterprise.

The Operations

Coming to the second consideration as to operation, the first thing to be answered is: What have been the operations up to the time when the investor is asked to purchase the shares? Then, what have been the results and to what extent have they proved profitable 1 Another fact to ascertain is whether difficulties have been encountered, and, if any, their nature. Find out about the demand for the product or the operation of the enterprise and what is its present status financially, as well as physically. Then, are the books properly kept and are they open to the inspection of the shareholders ?

The Finances

The third consideration, and one which relates to the very heart of an enterprise, is the state of the finances.

First, there are the assets as they exist - their character and their actual value. At least, an investigation of the assets will guard against a later discovery that they are mostly of paper value and not real. It is important to have a clear knowledge regarding the debts, claims, fees, rents, royalties, or other payments or obligations due and which must be met.

When this is known, the next step is to ascertain the resources available, out of which these debts are to be paid. Who handles the money and what safeguards are provided to prevent improper disbursements? It is also important to know what, at present, the running expenses are and what they are likely to be, including the salaries of the officers and managers, to ascertain whether these important outlays are upon a conservative basis.

Officers And Directors

Then there are the directors. Who are they? What is the past record and present business standing of each? Who are the active members of the board? Who, if any, are inactive? Are the meetings held regularly and are they fully attended? Who compose the executive committee, if any, and what are their powers? Above all it should be ascertained if the directors are stockholders to a material amount. It is but reasonable to suppose that if they are financially interested in the prosperity of a corporation, they will be more conservative in their management.

Who are the officers? What are their previous records? What are their special present qualifications? Are they able to work together without friction? What compensation do they receive or are they to receive, and are they interested in the enterprise beyond their salaries?

What is the general plan of operations they have mapped out for themselves and what led to their adoption ?

Some General Questions

With a clear understanding of these matters, there still remain some general features which should be thoroughly investigated. Serious consideration should be accorded to the previous history of the enterprise or the property or undertakings on which it is based. If inventions enter prominently, what is the previous record of the inventor? By whom are the statements made, and is the person making them reliable? Finally, are there any contracts or obligations not now effective by which the enterprise may subsequently be affected?

With all these facts before the investor and carefully considered, he is at least assured against falling a prey to every financial sharp. Neither they nor their enterprises could furnish a clean bill of health where probed by an examination as thorough as this. While they are by no means a complete assurance against loss, since an honest enterprise may meet with difficulties, they do raise sufficient safeguards against downright dishonesty. In conclusion, it may be said that the investor should demand, before parting with a penny of his money, a complete financial statement, including item by item the assets and the liabilities, the earnings and the expenses, of a going concern.

In another section, a specimen statement is submitted to demonstrate how figures sometime can be made to lie in a way to do credit to a Baron Munchausen. If investors will conduct an investigation such as has been here proposed, there will be very few who will, if they exercise a little bit of intelligence, have cause to complain that they have been victimized. They will have locked the stable door before the horse has been stolen.

Swindlers operating in the financial field are unable to reply properly to all these questions, and even if they should their answers would not hold together well. Discrepancies would show themselves here and there so glaringly as to eliminate at once their proposition from the consideration of intelligent investors.

It is possible to deceive a person with one lie, but a half dozen or more lies will not stick together. In fact, conservative bankers employ this searching investigation to determine to their satisfaction the character and possibilities of an enterprise proposed to them to underwrite its securities. If they depend upon this information, why should not investors?

The Character Of An Enterprise. Test Questions

1. What is the estimated annual loss to American investors as a result of predatory finance?

2. Why do these losses occur?

3. What factors should a prospective investor consider about the nature of the enterprise in which he contemplates an investment?

4. Why is it desirable to investigate the plan of organization and control?

5. What three factors should be considered in regard to the present condition of the business?

6. Why should the investor consider the officers and directors of the enterprise in which he contemplates to place his money?