One investment banking firm makes its mark with a strong commitment to helping entrepreneurs preserve their ownership and control of the businesses they are founding.
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.
