Rob Severson - Specializing in finding the perfect financing solution for you and your business

StoneL was a young startup company that needed to raise some equity capital in order to move forward. They had developed a valve monitoring device and were ready to take it to market, but where would they go for equity and how would they get it?

One problem was that few people knew what a valve monitoring device was, and worse, few people cared! Wally Stommes, CEO of StoneL explained it to me very simply. In a processing plant there are pipes that carry fluids, on the pipes are valves that let the fluids out that are turned on and off via an actuator, not the kind of twist valve that I have on my outside hose that I think of. By putting a chip in it and letting it communicate to a central PC, a plant superintendent can monitor the processes to be assured that everything is functioning as required. Or in simple language, is the beer getting the right ingredients?

But even knowing that, or believing you understand it, would you invest in such a venture? Well, several people did, and each had their own reasons.

• One of Wally’s former professors understood the product, and believed in Wally and his partner Gerry Nelson
• A local guy that liked to invest in companies, knew Wally and Gerry and was willing to bet on the people and product as well as his interest in the community
• A Twin Cities entrepreneur that had very little understanding of the product, but was immensely impressed with the people and the fact that the founders were buying stock at the same price as they were offering it to him. They were taking no “free” founder stock

So, that is how they got started with angel money. They eventually attracted other investors from around the area and the Twin Cities, (including me, one of my best investments ever!) borrowed money from economic development organizations, and financial institutions. And through very frugal management they bootstrapped their way to survival. Profitable years were few, but they were becoming a well known player in their industry.

But, as most know, investors want an exit plan so for several years Wally spent a lot of time studying and talking with his competitors and possible acquirers. With this knowledge and the relationships he created, they sold StoneL in 2000 to a strategic buyer that understood valve monitors very well and needed the device to complete their product line. All the investors received a substantial return and all the lenders were repaid. With a NYSE company behind StoneL now, they are doing well, growing and building a new plant.

I worked with these people for almost 10 years, my final involvement being helping with the sale of the business. My first project with them was to arrange some financing when they were in a bind and had no idea where to get debt financing. I treasured the people relationship and the profit on my investment as did every other investor/lender that was involved. Just goes to show how profitable it can be to invest in and work with people that are unselfish, have integrity and passion for what they do.

How passion replaces being “lonely at the top”A common problem for many owners and managers is that they believe they have no one to talk with about their business.  Small business owners often have this problem more that others in that they have few people that are as educated, trained and broad thinking as they are.  So, what is the solution?I think my brother Tom is a good example of how to solve this problem.  He just successfully sold five of his six convenience stores that he had built up mostly on his own with the help of many employees that executed his vision.  He didn’t get extremely wealthy by some standards, but did very well.  How did he make it happen?Mainly, he has a passion for the oil business and convenience stores.  Our father had a small oil business and several gas stations and that is where he started his love affair with the industry.  He worked for Conoco for several years learning what others do and learning the business from a macro level.  When he bought a small distributorship 25 years ago he had a passion and vision for where he wanted to take it.  And he did it, by buying or opening four more stores, all on borrowed capital.Secondly he built outside contacts to have support people.  He probably went to 5-10 conferences a year to learn and network, such as:NACS  National Association of Convenience Stores, an organization of stores that has conferences, training and a lot of networking.  Tom was on the national board representing the small store owners, an experience that allowed him to meet the big players and get to know how they did things.Oil industry groups.  There are many of these that provide networking for all brands and have people from all sizes of businesses attending.  Tom got to know many of these people and now sells fuel to their operations plus has access to their counsel.Conoco  He has kept in touch with many contacts from his corporate days that provide more expertise for him as well as keeping up with what is going on in the business.CNT  Christian Network Team  A group of business owners, CEO’s or others that met monthly for breakfast for Bible study and to learn from each other how to solve various business problems that they had encountered.He was a member of a national group of similar businesses that created composite financial data, compared theirs to the others, and met frequently to discuss them.So with his passion for the business and his desire to learn from others he created a great network of people to talk with and support him.  Many of the successful people I have dealt with also have a passion for what they do which I believe vastly contributes to their success.  The ones I see that just want to make money on their business have a hard time. 

RETIREMENT 

It was about 10 years ago that I met Don Harley through another client.  Don produced acrylic awards, marketing them to various promotional item reps.  A few years later he asked me to advise him in the sale of his business, which I did (although I didn’t do much) and he eventually he sold his business.  The interesting part though is that he was 80 years old at the time, and wanted to sell because he had some other business ideas he wanted to explore.  Today he is doing just that by marketing various hand drawings of products that he accumulated over the years as pieces of art.  At first I thought he had “lost it”, but I was wrong again, he now has a display at the Minneapolis Institute of Arts in

The interesting thing about a credit crunch is that when it happens, everyone raises their standards.  Many bankers rely on asset based lenders to replace their loans when they are “tired”.  But, asset based lenders may be seeing better loans all the time if there is a crunch.  I’d suggest that bankers look at their loans to see if they can be taken out by others.  I can help with this.

Are loans “graded” on a curve?  Most lenders would say that they have rigorous standards for evaluting commercial credit requests.  In most cases that is true.  But some of the aggressive lending shops may grade on a curve.  IE if they have 10 credit requests in the house they may pick the top 3 to work on.  On another day the bottom 7 may end up in the top 3 for them.  I have placed loans with lenders by finding out when they are having a slow time thus getting my deal at the top of their list!

This is also true for examiners, although they also follow standards.  Will your loan fail the curve?  If banks start exiting poor performing credits will you become one of the bottom credits?  You may want to find out where you stand with your financing.

Law of untended outcomes strikes again!

I think we are all aware that the Taxpayers League of Minnesota is one of the most despised organizations in this State, especially by progressive tax advocates. I find this interesting in that I know the story of how it came in to existence.

About 20 years ago I approved some financing for a leveraged buyout of a local business for a man named Mike Wigley. He came up with about $130,000 through credit cards and stretching every nickel he had to make it work. We provided a loan for $7,000,000 to complete the purchase, which he personally guaranteed. If he would have failed, he would have been in personal and corporate bankruptcy immediately. But, he didn’t, and was very successful with it and made a lot of money when he sold the business.

Upon closing his deal he made the trip to his accountant to do his taxes. He was astounded by the amount he owed the governments for income tax! He had taken the risk, employed many people, and been successful through hard work and implementing his plan to own and turn around the business he had purchased. Now the governments wanted what seemed more like a “success fee” than tax.

Later in the day he had coffee with a gentleman that was considering starting a tax payer’s advocacy group. Mike was immediately interested and offered to do the first funding for it. He never had to fund it all because when others heard about it there was money coming in from everywhere to support what became the Taxpayers League of Minnesota!

Today this organization is one of the most powerful in the State, although despised by the “higher tax” people. The candidates that have signed the “no new taxes pledge” have all been criticized by their opponents. Some think this organization has far more power than it should, and maybe it has. This is an appropriate question no matter what your political persuasion is.

Is it a good idea to have an organization like this to keep government accountable? Or, has the government really been “sold” to high wealth people via their higher taxes thereby prompting them to get more involved and try to run it? Do wealthy people just like to “pull the strings” regardless of their political views? Is there a better system that would give us all the feeling of equal ownership of our government? Do the tax laws discourage small businesses in this State? I’d be curious to hear from people that I know about this with your comments on this blog.

Oh, and as an irony, Mike is a very generous person giving to schools, colleges (some very liberal ones at that), arts organizations and many other things in our community. He is a proponent of fiscal responsibility, but puts his wealth to work where he sees it is needed!

Here are a few communication mistakes I have heard from financing seekers over the years. Do any of these sound familiar?

What you say to your lender and what he/she hears!:

When a lender hears: “My bank doesn’t understand my business”, he hears “My business is in deep trouble, I am in denial, and my bank is angry with my business’ performance”;

When a lender hears: “I want to explain a few things before giving you my financial statements”, he hears “My financials are lousy and there are many valid reasons that you probably won’t want to make me a loan, so don’t waste much time with me”;

When a lender hears: “It’s hard to do projections in my business”, he hears “I have no idea what my business model is and am operating on hope”’

When a lender hears: “I don’t want to guarantee my loan”, he hears “I don’t think my collateral is very good”.

Anyone have any others to add to this list? Add your comments, they may help someone some time!

Bankers
How well do you really know your business customer?
Do you know any of their management besides the CEO and CFO?
Do you know who the #2 person in the business is?

I know when I was in the lending business that I often thought the CFO was the #2 person in their organization; probably because that was the person I talked with the most.When I got in to the “real world” I learned that may not be true. There are a couple others that you should know about too. The sales manager and the production manager. Depending upon who the owner counsels with most often, it will make a big difference in how they run the business.

I’d suggest you find out who has most of the owner’s attention.

It may affect your loan some day.

Lenders and Business Owners, this site is for you!

I hope you find something of value and hope that you add your comments where you see fit.  They may help someone some day!