Friday, December 9, 2011

- It's All Just Words... Empty Useless Words.

I had a friend who once tried to set up a factoring firm. A factor is really only about one step above a loan shark. If you have a small business, the factor will buy your receivables at a discount, and then when the money is paid in, he keeps it all. This can be a big help to some small businesses who have trouble getting lines of credit for operating cash, but it comes at a steep price. The rates they charge are hefty.

Anyway, he was looking to set up this factoring firm. He was a fairly prominent Houston area lawyer and had lots of appropriate sized business contacts and an office staff that could manage the work. He was looking for a very small investment, and he was my friend. We had made money on other small deals together so when he asked me about this one, I was happy to sign on.

A few months went by and I asked him how it was going?

“Great” he said. “I’ve bought some receivables, we got lucky and they’ve all been paid, and the cash has been rolled over several times, with a double digit return each time. We’re well on our way to a multiple on the original capital”.

“Awesome” I said, “Can I see the numbers on it?”

“Sure … Stop by anytime and I’ll show you the paperwork.”

I saw him a week or so later and I had to admit, except for the fact that most of the business had been done with a just a couple of customers (which was really quite understandable given how young the business was) he was doing very well.

“I’ve got to tell ya buddy – this looks pretty good. How are you keeping the cash separate from your legal practice – is it just going in a separate account?”

“What do you mean?” he said

In my mind the red light went on even if the sirens didn’t go off.

Well you can’t just put the money from this firm in the account with the income from your legal practice – frankly I’m shocked you don’t already know this.” I told him.

“I’m not sure I understand.” He said.

“Well… what exactly are you doing with the money that is paid when you collect the receivable?”

“Oh we’re not doing the collection… the client does that.”

“What?!” I gasped (then the sirens began...)

“Well I gave the cash to XXX in exchange for their receivables, and when they told me that the money had been collected I marked it paid. But they had other receivable and still needed operating capital, so instead of them writing a check and then me turning right around and writing them another one, we just agreed to roll the money over right there.”

The long and short of all this story is that he had been had. There were no receivables. The businesses he had bought the receivable from had taken his check and tried to turn it into income in a couple of different ways – none of which worked out. In the meantime they were keeping the wolf away from the door by giving him more fictitious receivables, and as soon as I got on the phone and tried to verify even a little bit of the story, the whole thing fell apart.

It wasn’t much money and I wasn’t upset about the loss. He was a friend, and we had made money on other small deals. Net on net, he was still a winner for me by a wide margin. But he learned an important lesson that I thought was absolutely transparent already. It’s all about the money.

What this has to do with the world is this:

The Euro leaders have a deal that includes sanctions and other political devices for the member countries that don’t play by the rules. And in as much as they put any faith in them at all, they remind me very much of my friend.

It’s all about enforcement. It’s all about the money. Italians will be collecting Italian taxes and throwing tax cheats into Italian jails. (you know… theoretically.) There will be no ‘actual’ enforcement from Brussels - and that means that Brussels cannot actually make the rules. They will have no guns, no troops and no jails – just politicians. And whatever the words they agree to say or mean, until they change the fact that they have no specific enforcement capabilty, it won’t be worth the paper it’s printed on.

I wonder if my lawyer buddy would like to set up a deal setting “Treaty of Lisbon” toilet paper. It should do great so long as we can find an inexpensive way to translate the Ad copy.

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