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| LEVERAGED CAPITAL NEWSLETTER Leveraged Capital, is a free monthly newsletter that presents growth and strategy issues effecting entrepreneurs and owners of small to medium size enterprises (SME's). Leveraged Capital is published and delivered electronically to subscribers. Your privacy is strictly respected and we do not share or sell subscriber email addresses to anyone outside of Graham Financial Corporation. If you enjoy what we present, please forward a copy of Leveraged Capital to clients and associates. They can subscribe to Leveraged Capital, by clicking on this link: http://www.GrahamFinancial.com/newsLetter.htm and filling out the quick form.
Keeping with the trend of executive Mea Culpa, I'll throw mine into the ring for this edition being late. We'll be back on track in March for our normal publication dates of mid month. Part of the reason for tardy publication is that deal flow has simply exploded for us to start this new year - with upward M&A activity trends leading into the second quarter. But, I do acknowledge that some of my limited spare time has been frittered away on some rather slothful television viewing, resulting in an observation and a question. Observation: Donald Trumps' company is weighted down with nearly $1.8 billion in debt, and has not produced a dollar of profit since the IPO in 1995. Begging the Question: How would Trump's performance fare with Donald in the Apprentice board room? Much (long-term) success to you,
In This Months Issue: (Click on the Article Title To Go To The Full Story.)
Quote Of The Month: Rupert Murdoch, on his 50th anniversary at the helm of News Corp. His son Lachlan at his side. Investment Hindsight:
Now is a great time to be a
small to medium size enterprise (SME) looking for financing.
Unlike the last recession, in which local banks were slow to get back
into the game, lenders this time around are well capitalized.
As a consequence, the credit markets have greater liquidity and banks
have begun to compete very aggressively for companies in the lower end of the
middle-market that are seeing to borrow 5 to 20 million dollars. Not only that, new lenders and
investors are entering the fray. Several well-known private equity
groups recently set up teams dedicated to serving SMEs. For them,
this segment offers several advantages, including greater growth potential and
better premiums than typically are found at the upper end of the spectrum. Regardless of the reasons,
increased sources and availability of capital for SMEs is good news. These
companies play a significant role in fueling economic growth. Through
their ingenuity, product improvements, and service developments, SMEs lay the
foundation for myriad future business opportunities. The SME Profile. Borrowers
at the lower end of the middle-market, by and large, are privately held
businesses in which the majority shareholder is the president, chief executive
officer and chief financial officer. Many times they make a business
decision first and worry about the financing later. Board approval
for finance decisions seldom is required. SMEs are usually sales-driven
and growth-oriented, and their entrepreneurial nature often results in earnings
and enterprise value volatility that can preclude traditional financing options. Since
most business owners are loath to relinquish equity, and junior secured lenders
such as tranche B and mezzanine rarely serve this segment, senior debt is the
primary form of financing. SMEs tend to be more cyclical
than larger companies because their businesses may be reliant on one product
line or customer base. They seek financing for a variety of reasons
including equipment purchase, product or market expansion, acquisition,
succession planning or change of ownership. Their first foray into
financing is often an asset-based structure. Since they often don't have
fully developed finance functions in-house, the owners of such businesses rely
heavily on external accountants or attorneys when they need to tap the bank
market. These outside advisors typically play a pivotal role in
identifying and contacting potential lenders, structuring the transaction and
guiding the business owner through the financing process. While
financing at the lower end of the middle-market is similar in some respects to
deals at the higher end, in other ways it's very different. How Deals Differ. Although twenty years ago all loans in this segment were indexed to the prime rate, pricing today typically includes a LIBOR-based option. In the current environment, pricing on these deals usually exceeds larger, syndicated transactions by 100 basis points or more. Straightforward Due Diligence: Financial statements for these companies often are not audited. However, trying to understand a company with 30 million dollars in revenue is much less complicated than one with a billion dollars. In addition, at the lower end, it's hard to separate the individual running the business from the company itself. So much of what the lender is underwriting are the individual's capabilities and commitment to the business. Typically the lender expects the SME owner to have something at risk, although a personal guarantee on the credit facility may not be required. More Credit Components: Most middle-market, asset-based loans center on a revolving line of credit, usually for a term of three years. At the lower end of the market, borrowers expect the lender to satisfy all of their financing needs: working capital as well as property, plant and equipment. Consequently, the credit solution generally includes not only a three-year revolver, but a term loan piece in which real estate is amortized for 15 years and equipment is amortized for five to seven. Fast Turnaround: SMEs, by their nature, are agile and they expect the same modus operandi from their third-party suppliers. Since responsiveness is critical, lenders to this segment focus on moving as quickly as possible on a specific opportunity. Regional Relationships Rule. In addition to capital, SMEs
usually need a variety of other banking services such as cash management, and
property and casualty insurance. They also like the convenience of a
branch network. Given the limited internal financial resources of
SMEs, the lender becomes almost an extension of the enterprise. Their
reliance on the lender, whose counsel and capital has helped their business grow
over time, makes them an extremely loyal customer base. Relationships
of 20 years or more are not uncommon.
The Critical Deltas. The same is true for rapid
growth. SMEs generally are focused more on growing the business than
on improving profitability and creating internal procedures and systems. Growth
consumes a lot of capital and companies experiencing rapid growth use cash at a
quick rate. This can be a cause of concern for a traditional lender,
which monitors the company by balance sheet leverage. But, here's
where the collateral-focused asset-based lender offers a real advantage. After projecting a company's
ability to grow over the next one to two years, the asset-based lender evaluates
the systems and controls required to handle the new business effectively. Credit
procedures, inventory systems and the like may need to be implemented or
modified as the mix of business and/or geographic service areas changes. By
establishing the processes and controls required to manage the burgeoning
financial aspects of the company, the asset-based lender frees the business
owner to focus on growth. Completing The Lifecycle. In the event there is no
family-related heir, the asset-based lender can help with the sale of the
company to a strategic or financial buyer. Those lenders that support
the business from its earliest stages through the final liquidity event are, in
the truest sense, lifecycle lenders (Exhibit #3—Company Lifecycle—Lender
Options). Given the nature of the SME, with its dependence on a
single-source solution and its desire to grow without focusing on cash flow, the
asset-based lender is a natural choice. From the owner's point of
view, the incremental dollars charged by the asset-based lender is a relatively
inexpensive way to insure financing throughout the full life of the business. By Sam Philbrick and Dan Stella.Fleet Capital Corporation With history dating back to the 1920's, Fleet Capital is the most resourceful lender in the middle-market. With more than $12.1 billion in committed lines of credit, Fleet has a track record as the most resourceful provider of senior secured financing to the middle-market.
In 2000, Atlanta Braves star
pitcher John Smoltz suffered a blow that could have ended his illustrious
career. After battling various injuries for several seasons, he underwent
ligament replacement surgery on the elbow of his throwing arm and missed the
entire season. Smoltz, who won the Cy Young
award in 1996, returned the following year, but only started a few games before
his arm began to bother him again. At that point, his coaches made a key
decision. Seeing that his arm felt fine until the fifth or sixth inning, they
decided to convert him to relief work, where he would only have to pitch one or
two innings per game. Although Smoltz resisted the change initially, the
coaches’ plan worked. In his role as a closer in 2002, Smoltz set a National
League record with 55 saves. In an interview with Baseball
Digest, Braves pitching coach Leo Mazzone attributed Smoltz’s successful
transformation to his pitching skills and his ability to “maintain his
starter’s mentality as a closer.” But it goes deeper than that. Had the
Braves coaching staff not recognized that Smoltz had the potential to become a
great relief pitcher in the first place, he may have continued struggle in a
starting role until his arm was too damaged to pitch at all. Instead, they
encouraged him to try a new role, and their whole organization reaped the
rewards. That’s what great coaches--and
great leaders--do. They add value to the lives of their players and employees,
individually and collectively. They’re not just concerned about winning.
They’re also interested in helping their people become all that they can
be--whether they make their living pitching baseballs, fixing computers, selling
insurance or waiting tables. How are they able to do this? Let’s explore three key
factors. 1. Great leaders possess the ability to see ability
in others. They can look at employees who have not yet shown tremendous
potential in a particular area and envision what they could become with a little
guidance. As a result, they are willing to invest time and resources to help
these employees develop. On the other hand, average leaders lack the ability to
see ability in others. They see their people only as they are--they can’t see
what they could become. So they miss out on many great opportunities to enhance
their employees’ lives and careers. 2. Great leaders have the
ability to help others discover their ability. It’s not enough to spot
ability in others. You also have to convince them--either overtly or
covertly--that they possess whatever talent you think you see. Such persuasion
is an art, not a science. It’s not always easy to get people to broaden their
horizons and think beyond their obvious skills and competencies. For example,
when you look at your employees' untapped ability, you see great possibilities
for growth and development. But their fear of failure might interfere with their
willingness to try something new. Your job as a leader, then, is to give him
safe opportunities to discover those gifts and talents they might not realize
they have. You don't have to tell them this is what you’re doing; just give
them assignments involving the ability you wish to highlight. Then, when they do
well, point out the specific attribute that helped them succeed and encourage
them to nurture it. 3. Great leaders have the
ability to help others develop their ability. Years ago, I had a mentor
named Les Stovey who was instrumental in my development as a writer. He could
see I had a passion for writing, but he also recognized I had much room for
improvement. He explained to me that, although I was a natural speaker, I
wasn’t very good at communicating in writing. If I wanted to excel as a
writer, he said, I had to keep the following question in mind at all times:
“Will the reader turn the page? “People
won’t walk out on you when you’re speaking because they would be
embarrassed,” he said. “But if your book’s not any good, they’ll read 10
pages and put it aside. And not only will they not pick up your book again, they
won’t buy your next one.” For the next few years, Les
Stovey coached me in my writing. He’d read what I’d written and then tell me
why it didn’t work. But he didn’t stop there. He also helped me see what I
could to improve--he showed me how to make my writing more compelling and
effective. He added value to my life and my career because he had the ability to
help me develop my ability. That, in a nutshell, is the essence of coaching. Look around and see if there’s someone in your sphere of influence who has an untapped ability that needs to be nurtured. You might be just the person to help him or her convert from being a winning starter in his or her profession to an even more successful relief pitcher. This
article is used by permission from Dr. John C. Maxwell's free monthly
e-newsletter 'Leadership Wired' available at www.MaximumImpact.com.
Dr.
John Maxwell, founder of Georgia based Injoy Group and
has cultivated an extensive following amount the most highly respected
business leaders around the globe. He
reaches more than 350,000 people a year through speaking engagements, and over a
million more through his resources such as Maximum Impact.
John is committed to developing leaders of excellence and integrity
through his philosophy that
“everything rises and falls on leadership”.
Author of more than 30 books, Maxwell’s titles include these best
sellers: The 21 Irrefutable Laws of
Leadership, Failing Forward, and The 17 Indisputable Laws of Teamwork.
Small firms have managed to close the technological gap
with their larger counterparts when it comes to adopting basic technologies.
However, new gaps have appeared, as large firms have implemented complex,
advanced technologies more rapidly, according to a new study. This growing gap between large
and small firms in implementing more complex technologies is important because
it may result in competitive disadvantages that small firms find difficult to
overcome. Initially, integrating information and communication technologies (ICTs) into the workplace was a challenge for many small firms, largely because of the high infrastructure costs and the inability to adjust business plans accordingly. Basic technologies - computers,
e-mail and Internet use - have now become more accessible and affordable for
small firms. However, the same technologies have reached saturation for large
firms. Large firms have now expanded into more complex technologies such as websites, intranets and extranets. They are also involved in e-commerce, because they have the resources and infrastructure necessary to sell their goods and services online. For the purposes of this study, size is based on the number of full-time employees. Small firms are those with 19 or less employees. Large firms have over 100 employees, except for those in the manufacturing sector, where large firms are defined as those with over 500 employees. Small firms catch up with
basic technology. In today's highly advanced world, personal
computers, e-mail and the Internet have become fundamental and basic
technologies for the majority of companies. In 1999, 82% of all
private sector enterprises were using PCs, workstations or terminals. By 2002,
this proportion had only risen to 86%.
During the same period, the proportion of small firms using PCs rose from 79%
to 84%, while medium and large firms did not experience any growth at all
in PC use. The same trend is observed for e-mail use. Similarly, Internet use among
small firms jumped from 59% to 73% between 2000 and 2002,
but remained stagnant for large firms. Virtually all large firms are using the
Internet, so there is little or no room for further growth. Large firms far ahead in
advanced technologies. The largest firms are far ahead of their small
counterparts when it comes to adopting the newest technologies, such as
high-speed Internet. In addition, developments such as intranets, extranets and
electronic data interchange (EDI) systems are the exclusive domain of large
firms. In 2002, 84% of large
firms used high-speed Internet, compared with only 56% of small firms. Two
years earlier, 68% of large firms used high-speed Internet, compared with 33%
of small firms. Meanwhile, between 2000 and 2002,
the proportion of small firms with websites increased from 21% to 27%.
While only 64% of large firms had a website in 2000, by 2002,
more than 77% had one. An extranet is a private network
which can be used to grant certain people access to the supply catalogue of a
business, or its information or operations. They are most commonly used by firms
to enable communication with suppliers, vendors or customers. While only 5%
of all firms used an extranet in 2002, 30% of large firms did so. Small firms purchase online,
but few manage to sell. Small firms have made important gains in
online purchasing. In 2002, about 57% of large firms engaged in online
purchasing, nearly twice the proportion of 29% among small firms. Only two
years earlier, the gap was more pronounced: 51% of large firms purchased
online, compared with 16% of small firms. Between 1999 and 2002,
sales over the Internet, with or without online payment, have more than tripled,
rising from $4.2 billion to $13.3 billion. The proportion of
large enterprises selling online has fallen since 2000, while the
proportion of smaller firms has increased slightly. Small firms are catching up in
this regard, but only by the smallest of margins. In 2002, 16% of
large firms sold online, while only 7% of small firms did so. Despite this
growth, online sales in Canada still accounted for less than 1% of the
value of overall sales. To read the analytical article, click on Information and Communication Technology Use: Are Small Firms Catching Up? (11-621-MIE2004009). For more information, or to enquire about the concepts, methods or data quality of this release, contact Mark Uhrbach (613-951-2856) or Bryan van Tol (613-951-6663), Science, Innovation and Electronic Information Division.
On February 18, the 2004 KPMG Competitive
Alternatives international business cost study was released, the fifth
consecutive report of its kind to rank Canada as the most cost-competitive
country in which to do business. The KPMG Competitive
Alternatives study presents an analysis of business costs in 11
industrialized countries, including all the G7 countries plus Australia,
Iceland, the Netherlands and Luxembourg. This year's report provides the most thorough comparison of G7 business operations ever undertaken, featuring 121 international cities and 17 industry sectors. The 10-month international study of leading industrial countries compares after-tax costs of starting up and operating a business for a period of 10 years. The analysis takes into account labour, transportation, energy and facility costs, as well as both income-based and non-income-based taxes. KPMG's on-line cost model and full study can be viewed at www.competitivealternatives.com.
Feel free to forward a copy of Leveraged Capital to clients and associates. It is free to subscribe by clicking on this link: Click Here For Your Free Subscription To Leveraged Capital. To Unsubscribe from Leveraged Capital: If you wish to removed from our mailing list, send an email to us at: ezine@GrahamFinancial.com with the word "Unsubscribe" in the subject field. © 1997 - 2004 Graham Financial Corporation, All Rights Reserved.
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