A Rare Case Of Bourgeois Values
One cold, wet Saturday morning in March 1982, three aspiring entrepreneurs from Arizona arrived at an early-nineteenth-century wooden house in Exeter, N.H., for an 8 o'clock meeting with a man they had never met. Neither Mike Koether nor his two partners -- his brother Bob and Joe Zavislak -- knew what to expect from their weekend journey. Koether hoped they could return to Phoenix on Monday with an innovative blueprint for financing their new equipment-distribution business.
But the lengthy conversations that day and the next seemed to resolve very little. There was hardly any discussion of money matters. Instead, as heavy rains pelted the house, Koether and his partners were urged to reflect on their personal and busness strengths and weaknesses, their values, and the financial and nonfinancial motivations for wanting to start a business. Even when the talk shifted more directly to the equipment-leasing venture itself, they were asked to describe the basic concepts and factors they felt would make the business work rather than to focus on more explicit facts and figures. "We were there for two days and it was awfully hard to tell what was going on or if anything would come of it," recalls Koether. "We knew we were being tested."
The scrutiny Koether and his associates received wouldn't have been the least bit surprising if they had been soliciting money from a venture capitalist in exchange for equity in their business. But, although they were in desperate need of money, they had no interest whatsoever in giving up ownership or control of the business they were founding.
Mike Koether, who had spent 15 years selling copiers for Xerox Corp., and a team of four other ex-Xerox marketing specialists were planning to sink a total of $150,000 of their own money into a new office-copier dealership that would sell Japanese-made Ricoh machines in a market dominated by Xerox, IBM, and Eastman Kodak. It would be difficult to succeed, because of the established and well-financed competition. To have any hope of competing for the most lucrative leasing and rental customers, Koether, who is now 39, and his partners knew they would need more money than they had and a lot more than banks seemed likely to provide. In the early years, the financing requirements for the leases and rentals would expand with the growth of the business. Yet the business would also need to invest substantial amounts of both money and management time in building a quality sales and service organization so it could begin carving out its place in the market.
Although he had been a successful marketing man at Xerox, Koether's early encounters with bankers on behalf of his new business raised substantial doubts in his mind that adequate financing could be found. "I was pretty bad at articulating how the business would work and what our financial needs would be," he admits. "But even if I had explained things better, it seemed pretty clear that we weren't the kind of new customer the banks were looking for. We didn't have enough equity to justify the money we would need."
Koether's problem wasn't atypical for a new equipment distributor short of equity. One unappealing option Koether knew of was to sell his leases to a third-party leasing company and minimize bank borrowings by staying out of the rental business. But before he even began to pursue such a solution, he learned of an intriguing start-up strategy that seemed to require very few compromises. It was an aggressive financial battle plan that had already enabled an East Coast Ricoh dealer to launch his business with ample capital and to compete broadly against its big-gun competitors.
Relying on an unusual approach, the eastern dealer had been able to achieve a presence in the leasing and rental business during its first year that might otherwise have taken several years. In effect, the dealer's leases and rentals were treated as two distinct businesses, with different methods of financing then selected for each. The plan had been designed by a New Hampshire investment banking firm that Koether hadn't heard of before named Bourgeois Fils & Co.
While the whole dealership functioned as a single entity under a holding company Bourgeois Fils (pronounced Boorjwa Feece) had created, the investment banking firm had also set up a wholly owned leasing subsidiary so that the dealer could receive cash advances from its bank whenever it booked three-to-five-year leases. And for the capital to buy the fleet of copiers required for the short-term rentals -- the activity Arizona banks seemed most unwilling to support -- G Albert "Bert" Bourgeois, the mastermind behind the strategy, had chosen a different technique. He structured and sold a $300,000 limited partnership to own the rental equipment and receive income from it, but without any equity interest in the business. The overall solution, Bourgeois says, had been the result of the type of analysis his young and innovative firm has attempted to bring to every client it works with. "We looked at the business, exploded it into its pieces, and then put it back together."
As exciting as this offbeat approach was to Koether, what appealed to him most was the fact that Bourgeois Fils was facilitating more than just capital. For fees over and above those associated with structuring the business, tapping investors, and inanaging the partnership, the New Hampshire firm also served, in effect, as the company's treasurer and controller, permitting the dealership's owners to focus on building the rest of the organization during the start-up period. Bourgeois and the handful of others who worked for him would even handle the dealer's relationship with his local bank. "It was almost a turnkey package," Koether says. "It would enable us to do what we knew how to do. We could hit the street and sell."
If Koether had been calling the shots, he would have hired Bourgeois to put together an identical start-up package almost immediately. But before Bourgeois would make any sort of commitment, he wanted to assure himself that Koether and his partners had both the talent and the personal dedication to make the business work. Initially, Bourgeois says, "I was disturbed by Mike Koether's offhand style." Indeed, it was only after their two-day encounter in Exeter that Bourgeois felt confident enough about Koether's abilities to bet on the success of Koether's new venture, Infincom Inc. As with any client, Bourgeois Fils was putting its own credibility and the prospect of future fee income on the line. And early signs seem to show that the firm chose wisely. In its first year, Infincom had revenues of about $1.5 million and was gearing up for a second limited partnership of as much as $1 million to get under way in the summer of 1983 to support its booming rental business. Based on its rapid progress, Bourgeois now expects sales to double, at least, during the second year. "And we'll make money while Koether gets there," he says.
The man Mike Koether and his partners had traveled nearly a continent to see, Bert Bourgeois, is a 34-year-old financial strategist who has built his own risk-oriented business out of designing non-venture-capital options for entrepreneurs. Rather than seeking an ownership stake for himself or other investors, Bourgeois, who cut his financial teeth on Wall Street and at two large companies during the 1970s, specializes in helping businesses raise enough money to support rapid growth without diluting the equity positions of the entrepreneurs.
Bourgeois formed his investment bank four years ago as the vehicle for his financial services to private businesses. While part of what Bougeois Fils does involves structuring and placing deals as small as $500,000, what makes the business go is its orientation toward ongoing relationships with clients (currently numbering 15 to 18) who, as long as things work out, will need to do several financings over the space of a few years in order to keep pace with business expansion "We don't get involved unless we think it will lead to bigger and better things," says Bourgeois. By design, the firm's clientele consists of companies in growth markets, many of which are start-ups, where the profit outlook is attractive and where the appetite for capital equipment is substantial. The current financial needs of such enterprises may not be sufficient to invite the attention of Merrill Lynch, or even smaller investment banking firms, looking for large transaction fees to cover their high overhead. But it hasn't lessened the appeal for Bourgeois. "We're in a market Wall Street doesn't want," he says. "This means we can have the pick of the lot.
In addition to tailoring transactions to fit the specific needs of a business, such as financing purchases of costly equipment through limited partnerships, Bourgeois Fils has shown a knack for placing the deals it structures with private investors and persuading commercial bankers to back the businesses with the necessary credit. In many instances, moreover, the firm has gone so far as to assist client companies in their day-to-day operations by furnishing a wide-ranging set of fee-generating management services, such as preparation of financial statements, cash management, planning, and even acting as the liaison with the client's local accountant and bank.
Since at least some of the fees Bourgeois Fils earns from such client services are tied to the ongoing success of the business, the firm, like a venture capitalist, actively bets on its clients' success in order to get paid "If things go badly, then we do badly," Bourgeois explains. "But the more value we bring to a business, the greater the potential there is for us." For this reason, a major component of Bourgeois Fils's evaluation of prospective clients involves the capability of management. "For us to bring in money of any kind," Bourgeois says, "we have to be satisfied [the client] knows his business inside and out. That's orders of magnitude above everything else." But beyond the firm's financial interests, each deal also requires that Bourgeois Fils risk a bit of its own credibility in the market. In order to line up the pieces of a puzzle to make a complex financing plan work, notes a Boston banker, "people really have to believe in Bert." A miscalculation, Bourgeois concedes, would mean that "future deals would be harder to do."
The idea of setting up a new investment banking firm so exposed to risk wasn't even on Bourgeois's mind when, after graduating from Harvard College, he got his MBA from Stanford Graduate School of Business in 1974. At that point, motivated to prove himself in an established environment, he joined First Boston Corp.'s corporate-finance department. For the next three years, in New York and Tokyo, he worked on structuring project financings of $40 million and more for Fortune 500 clients. But soon after beginning his next job, at Itel Corp. in San Francisco, placing hundreds of millions of dollars of computer leases with financial institutions, Bourgeois began to think about using his deal-making skills on small, private transactions in which he felt there were significant opportunities for creativity. The idea simmered even after he moved back to his native New Hampshire in 1978 to become the financial vice-president of Wheelabrator-Frye Inc.'s energy division.
Having worked mostly on large debt transactions, Bourgeois admits, "I didn't know what the actual products would be for small companies, or even who the most likely clients were. But I was pretty confident there would be opportunities for integrating what I knew about credit and markets with the tax, legal, and accounting skills necessary to create financial options for private businesses." On this gut feeling, Bourgeois, at age 30, quit his $80,000-a-year job in 1979 and started assembling a network of bankers and accountants who could lead him to his first clients.
Almost immediately, Bourgeois began to do deals. And while the deals relied on fairly standard techniques, they often showed a creative flair. As a way of financing a $1.3 million Portsmouth, N.H., nursng home, for example, Bourgeois arranged a conventional long-term mortgage with an insurance company, a guarantee from the Farmers Home Administration, and a partnership to enable the investors to own and depreciate the real property while their company operated the nursing home. A local bank, which kept a small piece of the deal, had introduced Bourgeois to the investors. But on its own, he says, "the bank couldn't have done anything that large." In another deal, Bourgeois used his computer-leasing background from Itel to arrange a $2.7 million leveraged lease for a private Massachusetts-based company in need of tax shelter. The company he found to lease the computer, as it turned out, was based in California. "All our client really knew was that he wanted tax benefits," Bourgeois explains. "It would never have occurred to the company to get them by owning a computer."
Even as Bourgeois Fils has grown from 1 person in 1979 to 12 people today, an enduring theme in its financings has been the preservation of ownership for entrepreneurs. "I have an intense conviction that the people who put their sweat on the line ought to be able to reap the rewards," Bourgeois says. In late 1980, for example, he succeeded in persuading a local bank and a small business investment company to provide $1 million of working capital and subordinated notes to enable two managers to do a leveraged buyout of the New Hampshire footwear-manufacturing company they worked for. Originally, the bank had turned down the managers' request for a loan. But later, with Bourgeois's intervention, they succeeded in getting 60% of the business with only $10,000 of their own money.
Since 1981, however, the firm has tended to specialize in creating financial strategies for financing new ventures that Bourgeois deems both promising and apt to require multiple infusions of money during the early years. Even before establishing its first relationship with an office-copier dealer, for instance, Bourgeois Fils became involved with Atavar Corp., which was gearing up to enter the nascent semiconductor-testing industry in Scarboro, Maine. To enable the capital-short owners to obtain about $1 million of testing equipment to launch their new business, Bourgeois Fils put together and sold a limited partnership of $500,000 in early 1981 and then a second one for the same amount five months later. But even though Atavar was a risky start-up of the type conventional venture capitalists might back, the investors received no equity in the company. Instead, Atavar leased the equipment from the partnerships, who, in exchange for their investment, got tax benefits and income designed to provide an aftertax yield of more than 20% on their money.
"In order to bring investors into a deal like this, you needed to offer a significant return," explains Bill Nyhan, the No. 2 person at Bourgeois Fils. But, as usual, the firm also had to risk some of its own credibility. Before taking Atavar as a client, Bourgeois Fils had done an extensive analysis of the business the entrepreneurs were entering and its management team, which was headed by a former executive from Fairchild Camera & Instrument Corp. "No bank wanted anything to do with it until we found additional equity," Nyhan says. However, the type of equity Bourgeois Fils found from 30 private investors didn't require Atavar's founders to give up any ownership; the partners' interest was only in the equipment.
Bourgeois Fils's ability to add value by structuring and placing creative deals has been enhanced by its growing credibility in the marketplace. "Lots of other people advising small businesses seem to bring us every deal that occurs to them," notes a bank executive who has lent money to a series of Bourgeois Fils clients. "Bert Bourgeois understands what a bank needs, and he doesn't waste our time."
While Bourgeois Fils has walked away from a number of chances to provide its services to other office-copier distributorships in which management didn't measure up to Bourgeois's standards, the firm now has formed relationships with Ricoh dealers in 10 cities, including Phoenix, Los Angeles, Denver, Chicago, and Boston.
To cater to the needs of these and other clients, Bourgeois Fils has been assembling a staff that now consists of nine financial professionals, among them his wife, Marsha Francis, the firm's treasurer, who oversees internal operations and planning. Three other staff members handle data processing and communications at the Exeter office.
For the professionals, the firm has relied mostly on recently minted Harvard and Stanford MBAs, who have been willing to start at base salaries in the low-30s, substantially less than they could earn at better-known investment banking firms. "It's exciting to work on transactions from beginning to end, and there's a real challenge in managing a client relationship," says Carlyle Singer, a recent Stanford MBA. Her job, like others at Bourgeois Fils, combines investment banking and selling of partnership interests with the hands-on duties of a chief financial officer. To ensure quality control while promoting the risk-taking spirit on which the firm is based, employees are encouraged to put their own money in deals they work on. "This isn't Morgan Stanley and it's not Hambrecht & Quist," says Bourgeois. "But it's a place where you can get your hands dirty and learn some things."
Yet even as the firm becomes more established, Bourgeois doesn't expect it to stray very far from where it began. As its clients mature, Bourgeois says, the firm may start doing somewhat larger transactions on occasion and may even act as underwriter for their initial public offerings. What is more, the firm may soon open its first branch office -- not in New York City, but in Newport Beach, Calif. The new location, like Exeter, would help keep overhead costs down, permitting Bourgeois Fils to operate much as it has from the start. "Our business isn't really numbers and analysis," says Bourgeois. "What we sell isn't dependent on 5 or 10 basis points but whether a guy will be able to keep his whole company or have to sell a piece of it. It's a very personal, emotional business, and you can t really institutionalize it. We try to do things a little bit differently, and we really believe in the deals we do."
Says Alex Bernhard, a senior partner at Hale and Dorr, the prestigious Boston law firm that advises Bourgeois Fils, Bert Bourgeois "knows what's economically viable, and he's constantly testing the parameters of what's possible." Happily for Mike Koether, his equipment-leasing venture in Arizona fell within those parameters. "If we hadn't been able to strike our deal with Bourgeois," asserts Koether, "I don't think we would have gotten started in this business."