The Cost of Shutting It Down
We recently removed several towering – but dying – oak trees from around our house. The combination of last year’s drought and this year’s hard freeze has killed a lot of things in mid-Missouri.
It wasn’t cheap.
But while renting a crane is expensive, from a present value/future value perspective, I mathed that having a massive tree fall through the house would be more so (I’m a numbers guy). This is why I hired someone to do this job and – despite loving my chainsaw – didn’t try to do it myself. It’s expensive to get rid of things.
Back when I was learning public markets investing, a popular value pick was Research In Motion – the maker of the Blackberry. Once ubiquitous, its product had fallen out of favor because of competition from the nascent iPhone (these were the days) and the company was losing money. But! It had more net cash on its balance sheet than its market cap, so the reasoning went that you could buy the stock and even if the company just liquidated, you could earn a handsome return.
What this analysis missed – and what I learned from a more experienced investor on a message board – is that actually shutting down the business would be expensive. Even ignoring the fact that the senior operating execs with little equity but hefty salaries had little incentive to liquidate, there’d be severance, warranty obligations, inventory to dispose of, leases to terminate, and more. What’s more, doing those things would consume cash. A lot of cash. And these potential liabilities were not being reported on the company’s balance sheet.
Remembering that point – that it’s expensive to get rid of things – should be in your head if you’re thinking of starting something, but even more so if you’re contemplating paying someone to take something off their hands. Because assets also come with unreported liabilities, so it might be the case that they should be the ones paying you.
– Tim
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