As a partial illustration of some of the principles which have been set forth above, it will be of interest to review an actual proposition recently presented to a number of banking and brokerage houses, and to summarize the reasons which influenced all of them to decline to take up the proposition.

Over sixty years ago two brothers established a flour mill in the State of Missouri. The enterprise was successful and the brothers, being men of exceptional ability, took over from time to time other enterprises. In the course of years they became very wealthy. It was agreed between them that after their deaths the properties which they then owned should be vested in a trust and held intact over a period of years for the benefit of their heirs, and this arrangement was carried out. One brother died about twelve years ago and the other about ten years ago. At the time when the proposition was formulated for presentation to banking houses, the period of trusteeship was about to end and, unless some other plan were worked out, the estate was to be appraised and distributed among the heirs.

The property held in trust comprised 3,000 acres of land, a flour mill, an ice plant, an electric light and power plant, and a manufacturing establishment. The power for the industrial enterprises was furnished by the electric light and power plant, and they were also located so that they could best be operated under a single administrative management.

To break up the estate was certain to involve considerable loss in values. Seeing this situation, a young business man of ability and good standing in the community secured from the heirs an option to purchase the whole estate for $1,500,000. A record of earnings during the preceding five years showed an average of approximately $120,000. It was stated, however, that the estate had been loosely managed and that by the use of modern business methods it could be made to yield an annual profit of at least $300,000. It was estimated that about $500,000 cash would be needed in order to modernize the plants and to provide ample working capital. The promoter wished, if possible, to bring out a bond issue of $1,500,000 and was himself prepared to raise the additional $500,000 required by the sale of common stock.

After presentation of this proposition to a number of bond houses, the following summary of their objections was drawn up:

1. The earnings for the past five years are neither sufficiently large to be attractive to a clientele of small investors, nor to guarantee unbroken interest payments on the bonded indebtedness proposed. In other words, if your outstanding bond issue is guaranteed to yield 6%, on the showing made by the property for the last five years, you have too narrow a margin. The property should be made to yield earnings at least twice the amount of the fixed charges before the proposition would be in shape.

2. The cost to investigate the reliability of the entire property in all its phases would surely be heavy, and might be disproportionate if unexpected obstacles were encountered.

3. The property has for about sixty years been a family affair. You have probably already met with hesitancy on the part of bankers to have any financial relations with matters involving families. While this attitude is, of course, not always justifiable, it is unquestionably-true that the guiding of a proposition through the intricacies of family relations is oftentimes extremely difficult.

4. The fact that it is proposed to put a blanket bond issue on several widely different types ,of assets adversely affects the proposition. While the bond issue is to cover one property, it is easy to conceive of the trouble which might arise from the administration of several highly different types of organization under one management. Not only might this mean inefficiency in handling these properties, but it would be almost impossible for the bondholders to determine whether each property was yielding a reasonable return or whether it was eating into the profits earned by the other companies.

5. Finally, in the opinion of the bankers, the whole matter is as yet in an embryonic state. It is now a capitalist's, not an underwriter's, opportunity. The proper plan would be to raise at least $1,000,000 by the sale of stock and to pay the owners of the estate by giving them $500,000 in cash plus a five-year secured note for $1,000,000, with the understanding that within the fixed period mortgage bonds would be sold and the note of the estate would be paid off. If this were done, the bonds could now be authorized, but would remain unissued for, say, two or three years or until such a time as the company becomes a smoothly-running, well-oiled mechanism showing a return of 15 or 20% on its valuation. Then, if the bonds were offered, we believe it would be a comparatively easy matter to float the issue.

The plan above outlined did not prove acceptable and the whole project has since been dropped.