Willis Johnson, the CEO of Copart, a Vallejo, Calif., salvage-auto auctioneer, was already aware of the growth potential in his highly fragmented industry when Barry Rosenstein, a partner in the San Francisco investment firm Genesis Merchant Group, came calling two years ago.

Johnson, whose company was earning about $1.5 million annually (before interest payments and taxes), was eager to build a large, public company. "But when Barry and I talked, he convinced me we'd be better off bringing in private money first, so that I'd be able to show the public I knew how to grow the company before we tried an IPO." Rosenstein, for his part, was extremely impressed. Johnson, Rosenstein maintains, is "one of the smartest businesspeople I've ever come across. He could see the big picture, and he realized what Copart could do with enough capital.

"We raised $10 million for Copart, structured as a four-year note," says Rosenstein. "We didn't even call it a bridge loan, because we had no intention of thinking about an IPO until the company was ready." Still, Rosenstein was convinced that if Copart used the mezzanine, or interim, financing to make the right acquisitions, "we could bring the company public at somewhere near 12 times cash flow." Had Johnson attempted an IPO without the mezzanine capitalization, the offering would have brought Copart no more than 3 times cash flow.

The strategy worked. Johnson's acquisitions helped him expand Copart's annual volume of salvaged cars from 28,000 to 328,000. And in anticipation of a public offering, he hired a top-quality accounting firm to audit Copart's financial reports.

The payoff: last year Copart raised $25 million in its successful IPO and an additional $37 million in a more recent secondary offering.

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