Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
While many college students were out partying, Connor Wray and Erik Brust, were starting a business.
Wray and Brust, respectively the CFO and CEO of JonnyPops, balanced class with figuring out how to grow their fresh, all-natural frozen treats company.
“We were committed to the idea,” Wray says, adding that Brust had previously intended to start the business with a cousin who passed away. “The idea had gotten set aside. … We took back up the torch.”
The now six-year-old company, incorporated in November 2011 and opened five months later, started in the basement of Brust’s dorm room, where he and a handful of college friends began testing recipes.
JonnyPops has since penetrated all the major local grocery stores with its treats and has achieved approximately 5 percent penetration nationally.
That solid progress has opened several doors for financing even further expansion going forward. But it took some time getting here.
First, as the winners of the student division of the Minnesota Cup competition and the Ole Cup student competition at St. Olaf,
they used the grants they won to support the company’s initial efforts. Some family and friends also helped out.
To improve cash flow, Wray says, JonnyPops did a lot of farmers’ markets.
It didn’t take long before the company needed a bit more money to move forward. When the company made its first sale to a customer in Northfield, the product, which at the time consisted of three flavors, sold out in 48 hours, Wray says, that provided justification for their belief they had a business with good growth potential.
“That was what we considered to be an astounding success,” he says. “We had very strong feelings we had a good product from the beginning. In food, if you have a good product, there is an opportunity for it to be a successful business.”
The Minnesota Cup win was also a springboard into an angel investing seed round of financing. Wray won’t disclose details related to who invested, but does say the company used the roughly $500,000 it raised to expand manufacturing facilities, which was necessary because JonnyPops makes all of its products. JonnyPops was then able to start working with grocers and retailers like Target, Costco, Cub Foods and SuperValu.
“Those were immediate results of being able to set up the structure that was needed,” he says. “We were able to make significant investments in 2014 and 2015 that built a solid platform on which we could continue our growth.”
The company was okay giving up some equity. It had few options, he notes, given that the owners were, at the time, college students and had no collateral for a bank. And Wray acknowledges that JonnyPops has benefited from the immediate feedback it received from many of the potential investors its officers met with and from insight gleaned from those who ultimately did buy in to that round.
The upgrades resulted in revenue growth and improvements in margin and cash flow that allowed JonnyPops in 2016 to begin seeking non-equity sources of capital. The company got just over $500,000 to invest further in equipment and production expansion from KLC Financial. And in 2017, the company was growing fast enough that it went in search of a banking partner through which it could establish a credit line and start leveraging some debt.
After talking with many potential partners and receiving several recommendations, Jonny Pops settled in with Venture Bank.
“Doing the hard work to find the right partner, that’s always been part of our value proposition,” Wray says. “That’s why you talk with all the people, to find the right people. … It seems like it doesn’t matter which type of capital you’re looking for, you are looking for similar things.”
While the company hasn’t ruled out further equity financing going forward, Wray says he and Brust also want to maintain ownership. It would be a case-by-case decision.
“You have to make the right decision for the right circumstance,” he says.
Kevin Doyle, vice president and commercial banker at Venture Bank, says when a company indicates they’d like to do some banking, he wants to start with a face-to-face meeting.
“We like to get to know the management team,” he says. “We tell them we want to hear their story. If you are looking for financing and you want to do business with Venture Bank, we want to get to know you.”
The company is interested in its partners’ successes and, sometimes more importantly, how they have handled struggles.
“Failures are sometimes more important or a better prognosticator of future success than past success,” he says. “People who have failed and gotten back up on their feet are typically better and stronger.”
If everyone starts to feel comfortable and the cultures mesh, the company and the bank will start talking about numbers, business plans and projections.
Either way, Doyle will try to give companies an honest, objective assessment. He’s told some who come to see him that they might be better off trying to find an equity buyer. But he’s a believer in debt when it’s an option.
“We try to be objective, but we always say borrowed capital is less expensive than giving up equity,” he says.
Entrepreneur-turned-angel-investor David Russick is currently managing director at Gopher Angels, a group of accredited investors who want to help create and grow Minnesota businesses. Previously, he was founder and president of Tubs Inc., a family-owned waste and recycling business in the Twin Cities and co-founder of Bagster LLC, a nationwide waste company that sells tarp-like bags through home improvement retailers.
During the growth of those two extremely different companies, Russick says, he’s used both debt and equity financing.
One factor at play when deciding what model will work best for your company, he says, is the speed at which growth must happen.
At Tubs, the growth was totally organic.
That company grew through the investment of Russick and his wife, Sara, and with assistance from vendor debt, bank debt and U.S. Small Business Administration loans.
“By the time we started Bagster, Tubs had operations in Denver, Cleveland and Minnesota,” he says. “We funded it with our own dollars and through debt.”
Bagster was a different animal.
The Russicks felt there was a need to get to market quickly, so they brought in equity partners. And within three years the company was in 15 markets throughout the U.S. The speed was necessary, Russick says, because despite having a patent on the bag, it would not have been difficult for someone else to create a similar product and beat the Russicks into stores.
“At the time the concern was – and it was valid – whoever was going to steal that shelf space for a dumpster bag was going to have the market.
We knew we couldn’t sit there waiting for organic growth. We had to be aggressive,” he says. “We developed a go-to-market strategy that was outstanding and worked. But nonetheless, it would have been easy for someone else to come into the market with a bag.”
Speed to market was one factor in Russick’s decision to seek an equity partner for Bagster. Another was collateral. Banks aren’t risk takers, he says. When they lend, they want collateral. When he borrowed from banks to start Tubs, his family home was on the line “which is a hell of an incentive to make sure you don’t fail,” he adds. “I happened to have, when we started Tubs, the collateral I needed.”
Vendor financing also came into play with Tubs. His vendors had financing arms to help companies buy their equipment.
“We were able to get fully set up vehicles with cranes, dumping mechanisms and everything we needed, financed through the vendor,” he says. “If you are an IT company, there is no collateral, unless it’s personal. The bank can’t attach much to lend against.”
A third factor in deciding between debt and equity financing is a company’s business plan.
If the goal is creating a regional or local business that you stay with for the long-term, Russick says, it probably doesn’t make sense to bring in equity investors. If the plans are for a bigger splash in a shorter time period, finding someone willing to invest equity might be a solid plan.
“If you are looking to quickly grow and your mindset is you want to grow it, exit and then do another one, then equity financing makes sense, because it will speed the whole process up” he says. “It really depends on your strategy and what your personal goals are with your business.”
The Russicks started Gopher Angels after selling Bagster in 2013.
They have since sold Tubs, as well. The group of investors are industry agnostic. They look for a good management team, a business concept that has scalability and an exit strategy. The portfolio to date is about 40 percent health care companies and 30 percent to 40 percent technology companies with the remainder in food, agriculture and other companies.
John Thwing, senior SBA lendar at Anchor Bank, a division of Old National Bank, is also known as the SBA Guy. He thinks business owners focus too much on what tool they are going to use and not enough on the basics that will interest someone in providing the necessary financing.
“To some degree,” he says, “I don’t care if it’s rich Uncle Bob’s money, if it’s conventional bank money, if it’s SBA money, if it’s angel, venture, equity, whatever. To me the number one thing is fundamentals. What is happening? What does somebody want financing for? And what does the financial context look like?
It’s always fundamentals first, the funding tool second.”
So, what are the fundamentals? There are several. Cash flow is one. If the business owner has enough to support debt, bank financing might make sense. If there is no cash flow, that person probably needs to go the equity route.
“If you don’t have cash flow, a bank or an SBA lender are not going to lend to you,” Thwing says.
How about liquidity? Can the business put some of its own resources into the deal?
With few exceptions, “an SBA or a bank loan are almost always going to look for an equity contribution,” Thwing says.
Even after considering such factors, Thwing adds, there still is room for significant overlap in funding mechanisms.
“Most bankers think there is conventional financing and then there is a hard stop and then SBA starts,” he says. “My point of view, as an SBA lender, is that there is bank financing. Then about halfway through that range, SBA starts and then that extends beyond where conventional wouldn’t go. There is significant overlap where it’s really a matter of preference for which one is a better tool.”
Thwing also says there risks inherent with each type of financing and borrowers should go in with eyes open.
Equity partners want an exit in a set timeframe with a significant return on investment. Traditional bank loans might come with shorter repayment terms or with greater reporting requirements than SBA loans. And sometimes a deal might benefit from a piecemeal approach. “All forms of capital have strings attached,” he says. “The key is understanding the fundamentals of the situation. If the deal has good fundamentals, there will be sources of capital available.”
While most financing discussions focus on debt or equity, there are some additional lesser known and, perhaps, underutilized sources of funding available to business owners if they take the time to look. Justin Erickson, a principal with Essex Capital LLC, says most communities have some economic development assistance available for businesses, especially if they are willing to relocate or look in communities that might be a bit off the beaten path.
Erickson says economic development advisers in those areas may be able to help them with financing and other business needs.
From large cities like Minneapolis to small towns, economic development officials want to keep existing businesses happy and build their tax base by helping those expand or by bringing new ones to the market.
“They want to bring new companies into town,” he says. “It doesn’t have to be a corporate headquarters, but something that will add to that job and tax base.”
And to do so, they’ll typically find ways to incent a newcomer to the area. “They want to get their money back, but they are willing to employ different types of capital,” Erickson says. “Their primary source of motivation is getting activity going in their community.”
They have access to capital, in the form of loans, grants, performance-based or forgivable debt, cost mitigation and more, that companies can use to grow, says Erickson, whose Essex Capital owns the Community Venture Network, a platform he uses to expose business to these opportunities.
Additionally, he notes, in larger projects, it’s rare that funding comes solely in the form of bank financing, equity investments or economic development incentives. “Most of my projects will have some combination,” he says. “Economic development may fill a gap.”
One such community organization is the Worthington Regional Economic Development Corp., which is a public-private partnership in southwestern Minnesota with a budget of around $250,000 annually. It provides technical assistance to businesses, entrepreneurs, people with ideas and others.
Abraham Algadi, the organization’s executive director, says the potential benefactors of such services often don’t know they exist.
“They call it non-traditional because they are not necessarily the obvious solutions,” he says. “The burden is on people like myself to reach out to entrepreneurs, something we are trying really hard to do, to let them know what is out there.”
While much of what the organization does isn’t related to financing, it can help in that area. In recent times, it provided a $442,000 loan at 1 percent interest to PurNet, a women-owned business that tries to find solutions to challenges faced by ambulatory surgery centers and surgical hospitals. That loan added 18 new jobs and counting in Worthington.
Another low interest loan of $115,000 to Sailor Plastics helped keep the doors open for that company, maintaining 10 manufacturing jobs in nearby Adrian. The organization’s overall loan portfolio is just under $1.2 million and those funds have helped around 25 businesses in the last half-dozen years. It’s primarily gap financing on anything from helping a construction company buy a trailer to helping construct a new building.
“The resources we bring on board,” Algadi says, “are really a function of our ability to work with foundations, with cities, with state government and other resources to bring about funding.”
CONTACT
Abraham Algadi, Worthington Regional Economic Development Corp.: 507.259.9676;
in****@*******************ta.com;
www.worthington-minnesota.com.
Kevin Doyle, Venture Bank: 763.398.5813;
kd****@***************ne.com;
www.venturebankonline.com.
Justin Erickson, Essex Capital LLC: 612.281.4648;
ju****@*************lc.net; www.essexcapitalllc.net.
David Russick, Gopher Angels: 612.810.9166;
da***********@**********up.com; www.gopherangels.com.
John Thwing, Anchor Bank: 612.505.9751;
sb****@********nk.com; www.anchorlink.com.
Connor Wray, Jonny Pops: 651.243.0705;
wr**@*******ps.com; www.jonnypops.com
As the name suggests, Owatonna-based Kamp Automation looks for customers with a process they’d like to automate. It could be a small, inconvenient, tiny part that people can’t assemble. It could be a high-volume product so needed that the customer can’t find enough labor to produce it in the necessary quantities. “We’ll work anywhere from medical device companies to the seed industry for corn and soybeans,” says Kent Patterson, co-founder, president and CEO. “We just jump all over wherever there is custom automation.” The company started in his garage. Patterson and his partners built a machine. The company started to grow to the point where now it has 48 employees — and had a bunch of people and stuff in different locations. “We went from a garage to a shop to a shop and just kept moving to new places and signing leases,” he says. “We got to a point where it’s like, OK, this is getting big enough and sustainable — we felt that we wanted to look for our own space.’”
