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.
Knowing goal comes first when looking for financing
by Beth Ewen Leslie Frecon left a top finance job at General Mills to start LFE Capital in 2001, a private equity firm in Minneapolis that provides expansion capital and advisory services to smaller middle-market companies.
She’s seen enough deals since then to nearly complete one fund and get ready to start a second. Her advice to small-business owners seeking financing: “No one will lend you money or invest their money if you don’t know what you want.”
Upsize: I heard you say at a recent seminar that the state of the capital markets for business owners is the best in recent history. Do I have that right?
Leslie Frecon: This is a good time to go out and find capital. Compared to recent history, most people would say the capital markets are quite unsettled because of concerns about the war, the military, the churches, the deficit and upcoming elections. You have all those things overhanging, so the markets are quite fragile.
With that said, capital is available, because of, No. 1, the private-equity overhang, this $80 billion of allocated but uninvested capital. It’s been directed toward private equity funds, but those funds haven’t invested it. The private investors have been sitting on the sidelines since 2000, 2001. That’s a lot of capital accumulated.
Now the level of investing is starting to pick up, and that is a fact.
But there’s another dynamic, and this is based on my observations and conversations with others. Banks, who were also sitting on the sidelines, are becoming more active. Specifically, I’ve been seeing banks starting to dip down in to the middle market and most recently into the smaller middle market. In doing so, they have to be more flexible, change their parameters, because many of these companies are barely cash-flow-positive.
Upsize: What exactly are the banks doing?
Frecon: I’m seeing money center banks interested in extending credit to companies that I don’t think they would have two years ago. They’ve bid on two of our companies to provide lines of credit, and one was not cash flow positive but on the road. It’s significant to note that these lenders wanted that credit.
Upsize: How are banks changing their parameters?
Frecon: They are being more flexible in terms of looking at the company as a whole and evaluating the risk as a whole, rather than taking a cookie-cutter approach. They’re looking at it more the way an equity investor would.
You pay for it, or the borrower does, in interest rates. This type of financing is expensive. But it’s an option and having options is good. A lot of small, growing companies, they just assume they don’t qualify.
Upsize: What about going public?
Frecon: In the public markets you see increasing stability vs. a couple of years ago. You see some reversal of declines in valuation. Probably most significant, you see a modest increase in IPOs, initial public offerings, and you see an increase in mergers and acquisitions activity. Corporate buyers are starting to make acquisitions. Those are all positive signs for investors, so that investors can see an exit.
Upsize: I don’t think I’ve heard such upbeat comments from a financier for a while!
Frecon: I don’t want to say I’m jubilant because there are a lot of issues in the economy and the world. I’m cautiously optimistic. But you have signs that banks and investors are getting more active. Small-business owners who may have been on the sidelines, they should come out now because the timing is good.
Upsize: What do private equity investors look for?
Frecon: Let’s start with professionally managed firms like ours, as opposed to individual investors.
A lot of VC and private equity firms were burned in the go-go years by investing in startups, in management teams with no track record. It’s been amazing to me to see VC firms that were characterized as pure venture move into our arena, which is, we don’t invest in startups, we do look at positive cash flow.
What I’m seeing is more funds migrating to more conservative businesses. That’s good news for a lot of your readers because that often means companies that weren’t considered glamorous. It’s back in vogue to have cash flow.
Upsize: Business owners often view investors as all the same, when in fact each is distinct. How should an owner go about researching financiers?
Frecon: It’s my observation, having worked with a number of small-business owners, they lump financing their business into one big category and do not take an informed and strategic approach. Like everything else, to be good at raising money you have to understand it and have a plan to go after it.
This starts with — and this sounds incredibly obvious, but many people don’t do it — having a plan. I heard one business owner recently who said, “I haven’t figured out how I want to grow.” And that’s telling, because in order to get financing you have to have a plan.
What the plan must do is show how to get you from here to there. You have to deal with this before you go for financing. The business plan will be different, the capital structure will be different, depending on the goal.
For example, if you’re a $6 million company and you want to get to $10 million in 10 years, you can get by on small lines of credit. Don’t go get equity.
Or, you might be $10 million, and you know you have to sell, and no one will buy you unless you’re $50 million, and you don’t want to wait forever. You need equity.
No one will lend you money or invest their money if you don’t know what you want.
Upsize: Tell me about some of your company’s investments.
Frecon: It’s like talking about your kids. You can’t talk about just one or you’ll make all the others mad. But two businesses that are recognizable are Gedney [the pickle company] and Simondelivers [grocery delivery]. It’s perfect with my background at General Mills.
They’re interesting because one business is four years old and the other is 120 years old. One is starting the long and arduous task of building a consumer brand, and the other has the largest market share.
You might ask, how did they both fit our criteria? Both were businesses where I could bring contacts, and I’m on the boards of both. Our companies look to us as much for expertise as for capital.
Upsize: How can business owners learn which equity firms want what they have?
Frecon: There are two things to do: you can research the stuff on the Internet. You want to match your capital needs to the size of the firm. A common mistake is they go after all private equity firms. You can waste a lot of time that way.
Secondly, talk to business owners, people who have borrowed money, and people with equity investors. There are pros and cons to everything. You can listen to these perspectives, but I always go back to, you do a business plan and go after the capital structure to reach that plan.
Third, find a competent expert to help. Although it costs money it’s money well spent. You can actually do damage by going out in the market without your ducks in a row. First impressions matter. How you’re introduced matters.
[contact] Leslie Frecon, LFE Capital: 612.752.1801; le****@********al.com; www.lfecapital.com
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