You are the proud CEO of Best Lemonade Stand Inc. (BLS), a single lemonade stand in an affluent residential neighborhood. It is so successful that, believe it or not, it’s listed on the New York Stock Exchange.
BLS has just closed a phenomenal deal with Total & Complete Lemons Inc. (TCL), a lemon supplier which, go figure, is also listed on the NYSE. For five years, TCL will supply BLS with $50 million worth of lemons. Nearly 50% of all lemons picked by TCL will now go directly to BLS.
But there was something else exchanged in this deal besides lemons. You see, in this contract, TCL isn’t just obligated to supply BLS with lots and lots of lemons—it must also grant BLS a block of company shares. Your army of lawyers, accountants, analysts, and consultants call it a “Strategic Equity Investment,” but your PR and Marketing Team prefers “Strategic Alliance.”
The Market Reaction:
Over on Wall Street, investors hear the news and think, “Oh wow! Oh God, oh Man! The largest lemonade stand in the world is buying lemons for five years from this supplier! BLS must be selling a lot to need so many lemons! And TCL is set for five years! Both their stocks are sure to rise!”
So investors buy, and both companies’ stocks soar. And just like that, BLS recoups (in market value) double the $50 million invested for the next five years. Meanwhile, TCL can double, triple, or even quadruple its market valuation, which, in turn, adds even more to BLS’s balance sheet thanks to the TCL stock it owns.
And that’s it. You just made your company hundreds of millions of dollars in a few days. I know, I know it sounds fake, but it’s true…check the balance sheets, it’s all there! It’s like printing money!
But why stop here?
Do you remember Big Plastic Cups Inc.? Remember how they’ve been hounding you to become your official plastic cup supplier? Well, how about this: sign a contract to buy millions of dollars’ worth of cups from them, but require them to give you “warrants.”
These are like discount coupons that let you buy a chunk of their company’s stock at the price set when you signed the contract. Then, it’s the same ol’ game—you make a big announcement, their stock goes up and up, and all you have to do is buy their shares with the discount coupons… instant profit!
Or how about Squeezy Inc.? You know, that lemon-squeezing robot start-up? Go to them and propose the following: you will invest tens of millions of dollars of BLS’s money into them, you will promote them, and their name will now be attached to the big BLS brand.
In return, I’m sure they can develop their robots to only be able to squeeze your lemons. They’re smart, they’ll find a way… but they’re not your lemons, they are the lemons you bought from TCL, in which, coincidentally, you ALSO own a portion.
The Super Juice Play
One more, one more. Suppose EZPZ, a small lab, invents a “super lemon juice” that’s always fresh, but they can’t afford to build a factory to process it. You step in and offer to build the factory and sell the product for them.
This will be a “premium lemonade”, for which you can charge extra. In exchange, you take half of all profits, and own 20% of EZPZ (the boring name is equity stake).
When super lemon becomes an instant hit for its freshness and deliciousness, the lab’s value triples, your stake goes up accordingly, you sell a ton of premium lemonade, you sell even more standard lemonade because it’s comparatively cheaper, which means that your stocks increase in value, which means you buy more lemons, yada, yada.
Now, I know this all sounds super exciting, because it is! But most importantly, you are making millions without selling a single lemonade! You could just leave it be, right? You could say, “Well ain’t this swell, I’m making all of this money from investments, selling lemonade is extra.” But you are missing a big, big part of the opportunity that has just landed in your lap.
The Kill Shot
Because all this extra capital means you don’t really have to bother much with the money from selling lemonade. Not only are you making a ton of money, but you’re also growing, buying more businesses, and expanding your lemonade empire. But, at the end of the day, you will have to sell lemonade… I mean, that’s kind of the whole point of you.
So why don’t you do this: cut the prices of your lemonade. I mean really cut it. Screw profits. Minimal profits, no profits, negative profits.
You can take the hit with all of this extra capital—but can Mom & Pop Lemonade? You know, the stand on the other block? You know they aren’t as savvy as we are here, they aren’t as smart, they don’t have all these neat tricks. Can they compete with you? Can they afford to slash prices by 50%? 30%? I mean, can they even survive 10%?
I don’t think so…
Ain’t this fun?