Valuation

Principles of Valuation

Many volumes have been written on the topic of valuation, and this brief essay is not intended as a comprehensive discussion of the topic. It is intended, however, as a brief primer to several of the key elements of valuation, especially as those elements apply to ELP franchises.

Income:

In valuing any financial asset, the future income that is expected to be produced by that asset is of paramount importance. Typically, secure income streams are of more value than risky revenue streams, and income streams that are expected to increase are of more value than those that are expected to remain constant, and constant income streams are of more value than those that are expected to decline.

Interest Rates:

Prevailing interest rates have a profound impact on general valuation of all assets, including financial assets. Lower prevailing interest rates translate into generally higher valuations, and higher interest rates tend to push values lower. In the current marketplace, interest rates are relatively low when compared with historical rates over the past 25 years.

Risk:

Typically, when all other factors are held constant, the more risky the investment, the more uncertain its anticipated income stream, and thus the lower its value.

Anticipated Appreciation:

Assets that are expected to appreciate more quickly typically command higher prices than assets that are expected to appreciate more slowly.

Profitability

All other things being held constant, businesses whose profit margins are high in relation to their expenses command a higher value than businesses in which the reverse is true. Because an ELP franchise can be operated with almost no out-of-pocket overhead the "risk-reward ratio" from an ELP franchise is favorable in that the greatest risk a new franchisee faces is the investment of his or her time (not significant amounts of cash).

Leverage:

Leverage refers to the amount of borrowings that are required to make a particular investment. The higher the leverage (i.e.. the higher the borrowings), the more risky the investment. Highly-leveraged investments (such as purchases of common stock "on margin") provide the potential for much higher profits than non-leveraged investments of similar type. However, with leverage comes an increased risk of loss if the investment falls in value (or, for that matter, if the asset fails to appreciate over time).

Transferability:

All other things being held constant, a more easily transferable asset will tend to have a higher value than a similar asset that not so easily transferred. In other words, an asset for which there exists a ready market (i.e. an asset that is deemed "liquid") tends to have a higher value than a market than a asset for which no definable marketplace exists.

Valuation and ELP Franchises

One of the stated objectives of ELP is to help its Publishing partners create value in their franchises. As such, the ELP business model contains the following components that are designed to assist Partners in that endeavor:

	Exclusive Territories: With the assurance of exclusivity, franchisees can build their revenue streams over time without the fear that other ELP Publishers might infringe upon territories and reduce revenues.
	Emphasis on Recurring Revenues: Many ELP books are designed to be "annual" in nature. As such, the revenues generated from a significant percentage of these books can be considered recurring in nature.
	Expanding Product Lines: Over time, the management of ELP intends to expand the products and services that are available to franchisees. If such plans are successful, then the overall revenue from an ELP franchise has the potential to increase substantially over time.
	Referral Fees: Publishing partners are encouraged to refer other partners to ELP. Significant referral fees can be earned under this program.
	No leverage: Since the ELP franchise fee is only $1.00, no borrowings are required to own a franchise
	Transferability: Although no guarantees can be made concerning the future value of ELP franchises, ELP will use its best efforts to help franchisees sell their franchises through postings on the ELP Partner's web page. Franchises may be transferred with the approval to ELP, and that approval will not be unreasonably withheld. Furthermore, the right to receive referral fees is also transferable (see "Franchise Agreement")

In summary, ELP seeks to help its Publishing Partners create value in their franchises by:

	Creating the opportunity to create revenues that have a high probability of being recurring;
	Operating a business that requires little or no fixed overhead;
	Offering the opportunity to generate recurring revenues from Referral fees;
	Offering a business model that limits risk because it requires no up-front cash or borrowings.
	Offering the potential for expanding revenues based upon increased product lines in the future.
	Offering exclusive territories that provide certain protections of market share.
	Assisting in the potential transfer of Franchises (although the future value of those rights cannot be guaranteed).