The Money Hunt

Priority Express Courier Inc., based in Boothwyn, Pa.; founded in 1994

Industry niche
Same-day courier service operating in the Philadelphia area

Financial snapshot
$5.5 million in revenues in 2000; profitable since its first year of operation

Financing history
The founding partners raised $10,000 for the launch from savings and personal credit. Since 1997 they've had a bank credit line, which has grown gradually from a $25,000 limit to $300,000; they took on more bank debt last year to finance a small acquisition

Fund-raising goal
To explore longer-term sources of equity and debt capital to support possible future acquisitions

How's this for the best of all possible business situations? Co-owner Rob Johnstone expects to nearly double Priority's revenues within a single year, projecting 2001 results at about $10 million, thanks to a strong business model and the recent acquisition of a local competitor. "We don't need any new or increased sources of financing," he says. "We've had pretty steady growth, strong cash flow, consistent profitability, and expect all that to continue. For now we're just concentrating on making certain that we integrate this new company into our existing operations as well as possible."

But that doesn't mean that Johnstone has always been free of financing headaches. When he and his partner decided last year to make that acquisition, they naturally approached their banker about lending them enough to pay for half the purchase price. (The seller financed the rest.) "Our bank wanted us to go the SBA route, which we didn't want to do because of the higher fees, extra paperwork, and additional valuation requirements," he recalls. "When we turned that down, they offered us an even worse deal -- they'd forget about the SBA but only if we would escrow with them the entire amount we were planning to borrow from them. I was a little offended by that!"

Johnstone and his partner encountered a similar response from a number of other local lenders before they finally approached a small-business bank that gave them the terms they wanted. "We might well want to make future acquisitions," he explains, "but I don't want to go through that runaround again. I'd like to know, in advance, what our best sources of capital would be."

The experts

Ralph Sillari
Executive vice-president and manager of regional banking for the Small-Business Services division of FleetBoston Financial Corp., in Waltham, Mass.

"This company would be far better off with a larger bank, the kind that is used to financing acquisitions. With $5.5 million in sales, it's well positioned in the middle of the target market for small-business divisions like ours that want to support small growth-oriented companies. In fact, our division spends a lot of time and money trying to identify loan candidates like this one.

"If this company were working with an appropriate kind of bank, it could explore a variety of different ways to finance upcoming deals -- before any acquisition had been negotiated. There could be a couple of different debt tiers, maybe using some kind of subordinated debt. The banker could help figure out the best way to structure any seller financing involved. The right banking relationship might help this company reach its next stage of growth without selling any equity.

"But I do want to make one point. SBA loans are not, in themselves, a bad thing. They can really provide a good source of capital for a company like this one. The key is, deal with a lending institution that does a lot of SBA transactions. It can't save you any money on the fees, but it will be able to take much of the burden of paperwork off an owner's hands. And it's certainly true that compared with the cost of selling part of your company to an angel or a venture capitalist, the terms on an SBA loan are significantly less."

Fred Marcusa
Senior partner at Kaye, Scholer, Fierman, Hays & Handler, a New York City-based international law firm specializing in finance and mergers and acquisitions

"From a bank's perspective, this courier service doesn't have assets that can easily collateralize a loan, such as trucks, real property, and inventory. It doesn't need them, since it relies on independent contractors who own their own vehicles and since its receivables are probably fairly short-term. But that doesn't mean that this company shouldn't continue to pursue bank debt -- even if it is forced to rely on SBA-guaranteed financing. Among other things, any private investor who would consider supporting this company would want to see a capital structure that combined debt with equity.

"How strong a candidate would this company be, when it comes to private equity? If it stuck to a strategy of occasional small acquisitions, not very. It's a service company without any type of proprietary technology or significant barriers to entry in the industry. Still, someone could look at this company's past record of success and view it as capable of executing a roll-up strategy with the potential to achieve real economies of scale and aggressive growth. That could open some doors when it comes to equity financing. It could even attract money from a strategic partner within a related industry."

Ed Goodman
Cofounder and general partner at New York City-based Milestone Venture Partners, a venture-capital firm that focuses on early-stage investments

"Could this company attract venture capital? I don't think so. There are plenty of businesses like this one that are very healthy, but they don't have a growth rate whereby you can capitalize them through an initial public offering or a sale to a major corporation. I don't see this company growing to $50 million in sales.

"Although they might not want to hear it, the SBA loan program is very sensible for them."

--Ed Goodman

"It's possible that they could secure growth capital from a corporate strategic partner, but they're too small and locally based to attract most companies' attention. The truth is, I think they fall into the category where they already are -- bank financing or self-financing. And although they might not want to hear it, the SBA loan program is very sensible for them. They can access quite a bit of capital from it to support future acquisitions. And if they use an SBA loan to start building a relationship with a large bank, they might eventually be able to move away from the program to a regular financing arrangement."

Jill Andresky Fraser is Inc. 's finance editor.

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