The Value Equation

Chapter 3The Capital Stack and Two More Variables

Devising how to fund your business investment typically involves multiple capital sources. Those capital sources are mostly evident from the right side (or so it's always called) of the financial statement balance sheet, which is where liabilities and shareholder equity are reported. In finance vernacular, the various sources of capital used to finance business investment are often referred to as the “capital stack.” In the case of Daymond John, his capital stack was simple: He personally borrowed $120,000 on a second mortgage loan on his home and then infused that cash into his company as an equity investment. Typically, capital stacks are far more intricate.

The Right Side

I have found that most investors and entrepreneurs spend far more time focusing on the left side of the balance sheet than the right. In the case of STORE Capital, the most recent company where I served as founding chief executive officer, the left side of the balance sheet was loaded with profit-center real estate assets the company owned and leased on a long-term basis to service, retail, and manufacturing companies across the country. Most of the questions I fielded from investors and analysts stemmed from these investments.

When it comes to evaluating the right side of real estate company balance sheets, many corporate observers are simply inexperienced. For one thing, most public real estate companies have similar sorts of borrowing, with the resultant ...