Local Investing Interview with Earll Murman of LION

The Local Investing Resource Center presents this interview about local investing between James Frazier and Earll Murman of the Local Investing Opportunities Network (LION) of East Jefferson County, WA from August 2013.  The following topics are discussed at the times noted:

  • [0:31] Evaluating & making local investments
  • [4:02] Local impact investing
  • [5:02] Building a local investing portfolio
  • [7:10] Investing alongside other investors
  • [9:07] Pros & cons of local investments
  • [11:17] Stories of success & failure
  • [17:24] Lessons learned


James Frazier: Hello and welcome to the Local Investing Resource Center interview series. My name is James Frazier and joining me today is Earll Murman, a member of the Local Investing Opportunities Network out of Port Townsend, Washington. Welcome, Earll.

Earll Murman: Thank you James.

Thanks for joining me on this beautiful summer morning.

Well thank you. It's a pleasure to be here and to share some of the things we've learned from this experience.

Absolutely. Thank you. If you could, just start out and tell our audience a little bit about your background and your interest in local investing, and how you came about the concept. How did you come to local investing?

OK. So my wife and I moved to Port Townsend in 2006. I retired as a professor, and she as a director of education for a theater company. And this is our community now. We learned about local investing because of a public meeting on the LION program, and we'd actually not ever thought about local investing until then. 75% of our assets are in property or retirement type accounts, which gave us some flexibility with the remaining 25%. So we decided to set some objectives. The first one was to create jobs in the community. And then we wanted to diversify our investments and to earn a modest return. We're looking for modest, reliable returns. From there, we just waited until the first LION investment opportunity came along.

OK. So once you got your first opportunity you were evaluating, what was your process for looking at that and deciding if you wanted to do it?

Well, of course, the first thing was did it meet our objectives. And not all have. So we haven't looked at all of them.

So you've passed on quite a few?

Yes, we've passed on quite a few. The first one we invested in, we really got interested in the business and the people running it. It's a cider company and it's run by a dynamic young couple. We just said this looks like something we'd like to be a part of. And that was about it.

OK. So you didn't do a deep dive on the financial statements, it was more of a feeling with the people and their history?

We did. We looked at their business plan and we talked to some other people, but in the end, like you make any decision, you make a decision based upon your gut feel. And if it doesn't feel right, then you don't do it. So those other things help you arrive at something that feels right. But I think a business plan is just a plan, and none of the business plans that we've seen have played out exactly as expected. Some have done much better and some have done worse. So you can't base it just on the business plan.

Of course. I find it really compelling that an MIT professor is saying that an investment decision comes down to the gut. I mean, it's true, you know? In the end, you have to make a decision.

Yeah. And you go on your best judgement.


And something I'll tell you as we get going in some of the stories, you have to accept that there is risk with all of these. You have to be comfortable with the risk you're taking. Some of our investments are higher risk than others.

Right. How do you evaluate the risk and decide if it's appropriate for you?

Well, again, it's kind of a gut feel, and the riskiest ones we've had are the ones that, as I said, our objective was to create jobs in the community. So we've taken greater risk on the ones that would create more jobs.

OK. That's really admirable. You know, there's a lot of people doing what's called impact investing right now, which that's exactly the point, is to create a job, create a social good or environmental good, and it's really interesting that you're able to do that with a portion of your retirement portfolio through local investing.

Yeah, and why do we do that? Because this is our community.

Right. You care.

Yeah. We want to have a community that's multi-generational and with multi-economic levels. So instead of sending money to Wall Street, and it goes to someplace, I have no idea where, at least I can see what’s happening here. It's very visible what's happening.

Yeah. And you get to enjoy those results if they're good.

And if they're not good, you lick your wounds and at least you helped your community.

Right. So your results, have they generally been good? I mean, you're sitting here talking to me so I guess you're not completely frustrated.

Let me give you a quick summary. My wife and I, all these investments are together. We've invested in 11 different organizations.

Wow. You've built a portfolio then.

Yeah. It just happened. So here's the portfolio. Two are restaurants. Two are non-profits. Two are construction/repair-type industries. Two are food or beverage. One is professional services, and maybe I left something out, I don't know.

Wow. So that's a really diversified portfolio. I mean, it's all in your community, but within the community, you've diversified across different sectors.

Yeah. And let me just say for the benefit of the audience that those are 11 investment opportunities out of probably 60 or something.

40, 50, 60, yeah.

60 that we've had. So it's not like you've taken every opportunity to come along.

No, not at all. You have to be selective.

We have 11 investments we've made, and one of them was returned because the business didn't get started. So they just gave the money back. One was a line of credit to a non-profit, and they never called on it. And one just happened this past month, so we have no results to report yet. So that leaves eight. Six of those eight have had perfect payment records. If there has been any slippage, they have let us know that it's going to be 15 days late or something. I consider that a perfect payment record. By the way, all the investments were loans. One converted the debt to equity because they needed to improve their balance sheet so they could raise additional capital. And one went bankrupt. I didn't do the counting ahead of time, but probably of the 11 investments, nine of them, maybe eight of them had been multiple investors. That is, we'd been investing along with other people.

OK, great. And those are LION members that you're investing alongside of?

I think one or two of them may have had some non-LION investors.

OK. Has that group process been helpful overall? Are you cooperating with other investors to work together on evaluating, and then working with the investees?

In the spirit of LION, we all make our individual investments, so we have not really cooperated in the sense of meeting as a group and saying, "Let’s all share our information how we're all going to invest." But there's been cooperation, in the sense that we usually have the same structure to the loan. So it helps the business if they're paying five people, it's the same amount and that type of thing, or the same interest.

Got it. So it’s a kind of group negotiation?

Yes, and probably the greater benefit has been that—and maybe I have a chance to explain some examples later during the interview—most of these investments, we've become, I wouldn't call business partners, that's too strong a word, but we've become part of a business. We've become part of a business organization.

You're stakeholders.

Yeah. We're stakeholders. And so we get involved in mentoring or providing guidance, and having multiple perspectives has been a big benefit there, both for us and for the business. Multiple perspectives are always good.

Yeah, absolutely. It seems like a real win-win for both the investors and the business owners, and the community as a whole, to create those relationships and that community where there wasn't anything before. Like if you just set your money in an IRA, none of this would be happening, really.

None of it.

So that's really interesting. Is it then a lot of work, would you say overall, to go and do this, or is this the kind of thing you'd enjoy doing anyway?

Well, some of the businesses, a couple of businesses, we actually spent quite a bit of time with. And that wasn't time I'd budgeted for.

Were those the troubled ones, or...


Not necessarily?

Well, yeah. I mean they're ones that need additional time investment along with financial investment. I wouldn't say they're all troubled, they just...

Need some additional support.

Yes. So in that sense, a couple of them have been a lot of work, a lot more work than just getting statements in the mail every month and that type of thing. But it's not been something... it's been something that's been enjoyable. I've gotten to know these people. I've gotten to know the other investors, so one of the things that comes out of local investing, which I didn't realize until I did it, is it's all part of community. The other investors are now friends. Some of the people we've invested in have become personal friends. We see each other walking down the street. And so the time we spend doing that is part of building community. It's not time... it's not like punching a clock or something.

Sure, yes. It's enjoyable and interesting, and it's different every time, and then you get the results are tangible.

Yes. As I said, it's very visible.

Yes. You can't really say that about your typical Wall Street investments.

I don't know about you, but when I invest in Wall Street, you get a prospectus. I mean that's like reading the telephone book. I read these prospectuses and I can't cognitively understand what I'm getting in to.

Right. This is a whole different experience.

This is a whole different thing. You just go down and you have a cup of coffee. So it's totally different.

Very cool. So would you mind telling me a little bit about some of these specific investments that you've made? I'd like to hear a success story or two, maybe a typical situation, and a challenge. You know, not necessarily a failure, but what does a challenge look like?

I could tell you about every investment, but we don't have time for that. I mean, each one is a story by itself. But let me tell you, to start with, a success story; it's a roofing company. A young couple with a young kid who's buying out their family business that had collapsed financially with the 2008 collapse and all that. For them, it was either they buy this business, or they leave town. So here was clearly not only an investment in a business, but an investment in the community.

And a family.

And a family. They had an excellent business plan. We met with them. Fve people invested in it, in their business. We met with them one evening in their living room. You could just tell that they deserved an opportunity to try and do this. They were going to face challenges, but we felt they'd do well. So we invested in them, and they've exceeded their business goals. The first year, they got a very large government contract, a million dollar contract. They needed additional financing to handle the cash flow for that, so more people invested. And they've paid back everything on schedule. Business is growing, they employ a lot of people, working people. Most of their employees are single families and they're the single provider for the family. We've become personal friends with them. They've been to our house, we have barbecues. And we go to their house. When their son has a birthday party, they invite us, and that type of thing. So it's just a huge success story. Now on the other side, the failure, I need to tell you about the failure, this was a biotech company. And they had a product, it was a manufacturing company, and the product developer is local, lives in the community. Very sharp guy. And again, this all, like the roofing company, had multiple investors. But the business partners were not from this community. They were from out of town, which bothered me a little bit, but we did a due diligence and checked references, and they seemed solid.  Then it turned out that they had several products that they were manufacturing, one of which they had bought from a previous owner. That contract got into a mess. It got entangled with that. The previous owner fell out, they person they bought it from fell out with the people we'd invested in, and that previous owner then started meddling in the business to the point where the sales couldn't be made. And the whole thing collapsed. We lost all our money, plus some because we had to pay lawyers. So what I learned from that: I learned that we didn't make a local investment.

The partners were not local.

We didn't know those people.

You're just knowing one person out of many that were key people.

Yes. So that's what we learned. Most of the things have been in between those two. Let me give you an example of where it's in between. This is a local restaurant. The restaurant's been there for a number of years. It's an excellent restaurant in town, and she had a bank loan which was paying 10.5% interest and was just killing her. So she applied to LION for refinancing, and four of us, actually me and five invested in her restaurant, and it was like giving her a new energy. When she found out her community wanted her here, it just energized her. Her business soared revenue wise... well, not soared, but had healthy gains revenue-wise. Her cuisine is excellent. She's getting excellent reviews on the TripAdvisors and all those things. But it's a restaurant business, which is a struggle.

Yes. Lower margins and…

Lower margins, struggle to make a profit, a lot of competition in this town for restaurants. So what's happened is the investors, not just us but some of the other ones, have become like mentors for her. And we meet with her regularly and go over her financials, and talk about how she could trim costs here, increase profits there, and she's told us that she's never before been able to talk about the business operation with anybody because she's been scared to. But she knows that she can trust us. And so she'll tell us anything.

Because you're on the same team.

Yeah, we're on the same team. And she's doing fine. She's now making a profit, and...

And she's got this amazing mentorship resource now.

Yeah, and again we're like friends. We are not as close as we are to the roofing company people, but we see each other, we hug each other, and that type of thing. So I'd say those span the whole gamut. There's one business we invested in just to get that business through the down season here, and had we not done it, it would be gone. So, you know, it wasn't a big investment, but it was an investment that was needed just to get through the...

Well, it seems like the roofing company would have been gone too. It seems like you've played a part in saving a few businesses and keeping them here, and giving them a new chance.

So that kind of leads to: what do you learn from all this? Well, certainly from an investment point of view, we learned what we knew when we started, which is that there's risk in this. You’ve got to go into it understanding that, like any investment, there's risk. The risk is more manageable. Well, unlike a market investment, where you have no way to influence or manage that risk. The only way you can manage a risk in a market investment is take the numbers they give you for what's high investment and what's low investment and make a portfolio. What you can do in local investing is actually engage in the business. And you know occasionally, of these investments we've had, we’ve had one or two follow-up investments in them when they needed additional help. So you can...

It's an ongoing relationship.

Yeah. And you can actually help change the risk factors.


But there is risk, so nobody should get involved in this if they can't accept that…

…and afford to lose money, because it happens.

You can get half a percent in the bank with no risk, if you want... So that's one thing we've learned. And the other thing I think I've learned, which I really would never have appreciated until I got involved in it, is the loan has the principal, which we expect to get back, and the interest. But there's this dividend which is building the community. And it just feels good. I mean, it simply feels good to know that we're helping the community evolve.

It pays off in good relationships.

We've never gotten it with any other kind of investment.

Of course not. Yeah. That's great. And are you also getting payments in kind for anything, like for the restaurant are you... do you get like a discount when you go in or anything like that?

No. No. We don't. We pay because we don't want to…

Yeah, you want to help them out.

I mean, we get a cup of coffee now and then or a glass of cider.

I've seen some things like that though.

Yeah. I know there are some people who take dividends in-kind type thing. But no, with all our investments, we've said that we want to make them succeed.

OK. Just keep it on a cash basis.

So, what's the future? I don't know. We just got two new opportunities this week, and so we just wait and see what comes.

Keep looking at them. OK.

So it's not strategic, it's opportunistic investing.

Absolutely. Yeah. You have to be patient if you don't see any good opportunities. You might wait a year or more until something comes.  Then you can look at it or not.  And other times, there could be a flurry where you're just looking constantly.


It's really exciting like that. So any final bits of advice for any local investors out there that want to follow your lead?

Well, we're very happy we've done it. I guess the advice is: don't put all your eggs in one basket. I mean we've not put all of our investment locally. And what we've put locally, as I've explained, we have quite a portfolio. And furthermore, most of those investments have multiple investors. So that's just part of risk management.

So yeah, those things don't go out the window when you're investing locally, not at all.

No, no, no.

Even more important perhaps.

And, you know, you have to be prepared that something like the bankruptcy we had might come along. We learned something from it. Hopefully LION learned something from it, too. But I think that's the only complete business failure LION’s had. There are many examples where loans have been restructured. We've done some of that. But I think the one we... there were six or eight investors in this one. It's the only one that was a complete failure. And the main lesson there was it wasn't a local investment. We thought it was, but it wasn't. Had it succeeded, it would have created a lot of jobs in the community.

Sure, right. You can never really predict. So I guess not putting too much in any one business probably makes a lot of sense.

Yeah. So if you're going to go into local investing, you want to have enough resources that you can have multiple investments if you really want to do it. If you have a limited number of resources, fine, pick one that is very safe.

OK. Great.

Thank you James.

Yeah, absolutely. Thanks for joining me.

Well, thank you for what you've done to make something like this happen for us.


You know, without you, we wouldn't be doing it.

Happy to do it.

Or the other people who started LION.

Yeah, right on. Thank you. So again, this is Earll Murman joining me today. I'm James Frazier. Thanks so much for joining us, and until next time.

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