Recap: 2016 Manufacturing Growth & Investor Conference
July 27, 2-5 p.m., Tivoli Ballroom, Auraria Campus, Denver, Colorado
With a sound plan and a long view, now’s the time to finance growth, says debt and equity financiers.
Panels covered capital strategies from the perspectives of private equity, banking, and the manufacturers themselves. The big picture: It’s as good a time for a manufacturer to pursue financing as any in recent memory.
But the devil’s in the details. Here are 10 pearls of wisdom from the panelists.
The time is now.
“If you’re looking for credit, now is the best time to go out and get it,” says Jon Robinson, CEO and chief lending officer of UMB Bank Colorado. “The banking world is very, very competitive right now. Deposits are very high, loan-to-deposit ratios are historically low, and there’s a lot of competition.”
Nonetheless, traditional banking is inherently risk-averse: “We have to be right when we’re loaning out money 99 percent of the time.”
And interest rates are due to go up, well, any year now. “We’ve been begging for interest rates to go up for years,” says Robinson. “It hasn’t happened. We’re going to keep forecasting it to go up.”
But spend wisely: There are a few clouds on the horizon.
“We see the velocity of capital starting to increase relative to manufacturing,” says Chris Bouck, principal with SDR Ventures in Greenwood Village.
“When we lend money, we’re very quick to say, ‘Please don’t deploy this money unless you’re going to earn more than we’re charging.’ You can burn through a lot of capital pretty quick.”
“There are some headwinds everybody needs to be aware of,” warns Steve Ward, president of Centennial Bank and Trust, citing post-brexit uncertainty in Europe, the manufacturing workforce (or lack thereof), and increasing chatter about the Fed hiking interest rates in 2017.
But Ward remains optimistic. “I think the Colorado economy will keep chugging along,” he says.
Aligned objectives are critical.
John Pfannenstein, president and founder of Denver-based Rockmont Capital Partners, Ltd., is in it for the long haul: His firm has served one client for more than 50 years. He says that aligned objectives are a key with “patient capital.”
“The key is to pick the right partner,” he says. “You’ve got to have somebody who syncs up with your objectives. The key is alignment with the team.”
And the more specialized the company, the better. “We’re generalists,” adds Pfannenstein. “We’re an inch wide and a mile deep. We try to find people who are the inverse of that — an inch wide and a mile deep.”
“We’re really expecting them to know the business,” he adds. “If we’re in there running the business, we made a mistake up front.” He notes, “You’d rather have an A team with a B business than an A team with a B business.”
Natural foods need a “pathway in the marketplace” to build a brand.
Ross Shell, founder and CEO of Red Idea Partners in Boulder, says he looks for a brand with potential to extend into multiple categories. “If it’s a food or beverage product, we have to believe it’s not a niche of a niche of a niche,” he says.
Shell says he needs clients who are aware that building a brand in natural foods could mean a full-time commitment for a decade or more. He looks for “evidence of tenacity” in founders and CEOs. “Expect seven to 15 years,” he says. “If they aren’t tenacious, they’ll quit.”
He says one client, Bhakti, is in year eight, but he sees the commitment in founder and CEO Brook Eddy. “We saw a brand that could get to $20 million to $50 million someday
A good plan stands out in the crowded craft brewing market.
Traditional banks want to invest in craft breweries, says Joe Van Haselen, president of First National Denver. The sector continues to grow and most capital investments inherently involve collateral, he says, but there are more breweries than ever — distinguishing yourself is key.
“The best way to differentiate yourself, especially at the startup level, is your business plan,” says Joe Van Haselen of First National Denver.
More broadly, he adds, “Examiners are pushing banks to diversify portfolios and get into commercial and industrial. A huge component of that is manufacturing.”
Alternative lending suits startup manufacturers.
Ceyl Prinster, president and CEO of the Colorado Enterprise Fund, a 501(c)3 nonprofit dedicated to fostering entrepreneurship and community development.
“We have quite a few manufacturing companies in our portfolio,” she adds. “There’s a lot of demand for what we do because a lot of these manufacturers don’t want a large amount and can’t get bank loans.”
Colorado Enterprise Fund is a good fit for small manufacturing startups. “We work with businesses who hope to graduate to banks,” she says.
“We’re taking a lot more risk,” Prinster says. “We look at different factors [a traditional bankers], and we look at some of the same ones, but we look at them through a different lens.”
She says the local market is catalyzed by the attitude of the state’s entrepreneurs. “I think the X-factor in Colorado is the astounding amount of innovation and energy here,” she says.
Manufacturing has broad political support.
“Politically, manufacturing says middle-class jobs,” says Tom Bugnitz, president and CEO of Manufacturer’s Edge. “That’s how it’s viewed, so there’s a lot of political and administrative support.”
Bugnitz says policymakers in D.C. are looking to catalyze innovation and efficiency to advance reshoring, and supply chain is another big policy push for broad-based economic development. “What Washington thinks of supply chain is big companies buying from small companies,” he says.
Private equity can more flexible than a bank loan.
Andrew Cousin, CEO of Longmont’s Circle Graphics, the country’s leading billboard printer, says he prefers equity deals because of flexibility.
“The equity’s along for the ride and more likely to work with you,” says Cousin. Traditional banking “may be cheap, but if things don’t go as planned, it’s riskier capital.”
“I wish I had the knowledge 10 years ago I have now about different funding options,” adds Sue Welsh, president of Greeley-based Rubadue Wire, noting that an equity deal might have catalyzed growth. “We’ve always been conservative with debt. That has stunted our growth over the years.”
Welsh says sales dropped off of a 80 percent cliff in a single month during the 2001 telecom crash. “Letting people go is a hard lesson to learn,” she says.
Never sign a personal guarantee — and never say never.
“My one golden rule is don’t ever put a personal guarantee against a business loan,” says Circle Graphics’ Cousin.
But sometimes it’s a necessity. “When we first started out in 2000, the only way we could get a loan was to personally guarantee it, so a guaranteed my house,” says Edmond Johnson, president and majority owner of Premier Manufacturing in Frederick.
Times have changed for Johnson and his PCB assembly manufacturer. “I’ve got bankers now knocking on my door,” he says. “Twelve years ago, I had to knock on theirs.”
But it’s key to find the right bank and the right financial point person, Johnson adds. “You have to have a banking partnership, not a relationship, and you’ve got to have a CFO, somebody focused on the money.”
Buy your factory.
Marcia Coulson, president of Denver tubing manufacturer Eldon James, says it’s easy to leverage equity in real estate because it’s something traditional banks understand.
“In Colorado, it’s very lucrative to own real estate. There’s been many times I’ve borrowed against our factory and times I’ve borrowed against my own personal residence.”
Coulson says her three kids have all launched businesses recently. Her advice to them: “You need to really think about those answers [to potential investors’ questions],” she says. “You need to recite in your sleep, ‘How can you pay us back?'”
