Entrepreneurship
OPM: Other People's Money
By Michael Lechter
May 31, 2006

This excerpt from Chapter 1 of the newest release in the Rich Dad's Advisors series introduces the strategies of using Other People's Money (OPM) for business building.

Chapter 1: What is OPM? What is OPR?

Expanding Beyond Your Own Resources

The basic concept of OPM is simple: You (as an individual or business entity) acquire or build income-producing assets - your business - by using money from sources other than your own.

Are you aware of people using OPM? Of course you are, although you may think of the use of OPM by another name. Have you ever used OPM? You may not realize it, but the chances are good that you have. Have you ever been in the position where you wanted to purchase a piece of rental property but could not just write a check for the purchase price? Did the fact that you couldn't pay cash mean that the property was out of your reach? No. You would typically go to the bank and get a loan.

Getting a loan in order to acquire a rental property is a classical use of OPM. The bank that loaned you the money is the source of OPM. (What if you couldn't qualify for a loan? Throughout this book, we will discuss any number of other forms of OPM that you can use instead of getting a loan or in addition to getting a loan.)

The concept of using OPM applies to more than just real estate. Let's say you have an idea and want to build a business around it but don't have the money to go forward. Or you have a number of ideas and a number of opportunities, but you don't have enough money for all of them. Does the fact that you don't have the money mean that the business opportunity is out of your reach? Do you necessarily have to choose between opportunities? Not at all.

OPM makes going forward possible. You use Other People's Money or Other People's Resources to build the business and purse the opportunities. How do you do that? That's what this book is all about.

Forms and Sources of OPM

OPM can take a number of different forms and come from many different types of sources. In general, OPM is either direct or indirect (i.e., OPR) and tends to be categorized in terms of the particular consideration (payback) that you have to give in return for the OPM. The basic categories of OPM are "debt", "equity", and what I refer to in general terms as "in-kind".

The more conventional approaches to using OPM to start up or build a business involve raising money and are sometimes referred to as "capital formation" or "raising capital". They typically involve taking some form of loan (debt) or selling an ownership interest (equity) in your business

Certain sources of OPM tend to come immediately to mind: high-net-worth individual investors (e.g., "Angels"), financial institutions and funds (e.g., investment banks, commercial banks, savings and loan associations, insurance companies, pension funds, credit unions, venture capital firms), and equity offerings (e.g., ownership interest offered for sale to investors), such as private placements and public offerings. However, there are other sources of OPM that may not be so apparent. These include credit card companies (your personal account or that of your business entity), your friends and family, co-venturers (e.g., vendors that provide favorable credit/payment terms), customers (through advance payments), and government lending programs or grants.

Other People's Money however, can also be provided indirectly - called "in-kind". Instead of providing money directly, other people provide specific services or resources that you would otherwise have to pay for. In other words, you are using Other People's Resources- OPR. Strategic use of OPR can often be the easiest way to get started and the fastest route for a business to get to the "big time".

OPR- Indirect OPM

Other People's Money (OPM) and Other People's Resources (OPR) are flip slides of the same coin. With OPM, you build your business by using money from other people. With OPR, you build your business by using resources paid for by other people - indirectly using the OPM that went to develop or acquire the resource.

You can think of the relationship between OPM and OPR like this (let's ignore the issue of "payback" for now): If someone provides you the money so that you can buy a ticket to the movies, that is use of OPM. If that someone actually pays for your ticket or buys the ticket and then provides it to you so that you can go to the movies, that is use of OPR (the ticket is the resource). Using either OPM or OPR gets you into the movies. And, in either case, you get the use of the other person's money to do so.

Use of OPR typically involves some form of co-venture - for example, a contractual relationship, formation of a joint venture, or a strategic alliance. By "co-venturing", you can acquire virtual resources, virtual employees, virtual manufacturing capacity, virtual distribution channels, and so on. You get the benefit of the virtual resources without having to spend the time, effort and money to develop them yourself.

We'll discuss how you can build a business with OPR later.

The Benefits of Using OPM

OPM lets you do things you would otherwise not be able to do. Using OPM opens the door to opportunities for you. It permits you to participate in "deals" that would otherwise be beyond your resources. It allows you to start up the business of your dreams even though you do not have the means. It permits you to make choices that you otherwise could not make. It permits you to be able to afford opportunities instead of saying, "I can't afford it." In other words, it lets you play in the game.

OPM buys you time - it lets you do things before you would otherwise be able to do them. Have you ever heard the term "window of opportunity"? There are many times when you take advantage of an opportunity only if you can move quickly enough. Using OPM can sometimes let you move quickly enough to take advantage of opportunities that you would otherwise miss.

For example, let's say that you find a potential rental property that is worth $2 million, but the seller is asking only $1 million for it. You know that the "window of opportunity" is short - as soon as the word gets out, someone else will gobble up the property.

Let's assume that you don't have $1 million in your checking account. Realistically, what are your options? Think about it. How long would it take you to save $1 million? Even if you had a million dollars in certain fixed assets, how long would it take you to sell those assets to get the money? If you are like most people, it will take you a while - and probably longer than it would take for someone else to come along and purchase the property.

Now ask yourself these questions: How long would it take you to borrow $1 million? How long would it take you to find someone to go in with you on the property (a co-venturer)? Using OPM gives you a realistic shot at being able to purchase the property before the window of opportunity shuts.

The same type of situation occurs all the time in other types of businesses. Perhaps you have an opportunity for a huge contract to supply goods to a third party. The problem is that you cannot afford to manufacture the goods because you have virtually nothing in the way of liquid assets. Your business may miss that window of opportunity if you have to rely on you own resources alone.