It's harder to raise capital now for smaller companies, with investors insisting on a bigger stake in your business and willing to pay you less for it. Many growth-minded entrepreneurs would rather hunker down, wait out the tepid economy, and then raise money when the terms aren't so onerous.

If you can wait, that's probably a good idea.

If you can't wait, you've got something in common with Openfirst Inc., a Milwaukee direct-mail firm that went through a bruising -- though it appears, ultimately successful -- recapitalization this past November.

Sometimes, as the Openfirst story shows, if you want the business to survive and grow, you have got to accept a smaller portion of the ownership, and less money than you expected for your stake. It can be a bitter pill, especially for entrepreneurs who saw the value of their companies soar during the recent economic boom, only to plummet more recently.

Openfirst, with backing from investment funds, acquired three direct-mail firms during the mid-to-late 1990s. It was a small-scale roll-up, hoping to add two-plus-two-plus-two and get nine, based on lower combined expenses and aggressive management for growth. It's harder than most entrepreneurs realize, with many roll-ups failing. After Openfirst's last acquisition, in 1999, debt was high and profits were falling. The post-Sept. 11, 2001, anthrax scare that temporarily brought the direct-mail business to a standstill also hurt.

A new management team led by Robert W. Kraft, who had sold his company to Openfirst and is its president and chief executive, began a turnaround of the operations in early 2000. That effort was largely successful by early last year. Earnings before interest, taxes, depreciation and amortization, or Ebitda, which had plunged to about $1 million in 2000 from about $3.5 million in 1998, were rising sharply again. Revenue was up, too, headed above $30 million, according to a presentation prepared by Grace Matthews Inc., a Milwaukee investment banking firm that advised Openfirst on the recapitalization.

But the balance sheet was a mess. The company's main bank wanted its money back. " There were promises made to the bank that more capital would come in. It never came to fruition," says Ben Scharff, a vice president at Grace Matthews. Banks had been happy to lend more and see less equity in firms in the late-1990s, but quickly tightened those standards when the economy slumped.

Meanwhile, interest on notes due to entrepreneurs who had sold their firms to Openfirst was piling up at a rate of $1 million a year, adding to the debt. The company needed money to invest in systems to support important new clients it had signed up.

Openfirst needed a recapitalization, which is essentially a sale of the company, though often with some owners remaining.

To make all the lenders and investors whole would have cost a combined 9.8 times the company's Ebitda for the 12 months ended Oct. 31, 2002, according to Grace Matthews. The market value was probably closer to five or six times Ebitda, says Doug Mitman, a managing director at Grace Matthews. Not enough.

The bank loans were senior, so they had to be paid. That left investment firms and entrepreneurs who had sold their companies to Openfirst to absorb its losses. Any volunteers? Along the way, with the sudden deterioration of the firm's finances, some bad blood had developed. Harsh words were traded. Positions hardened.

" It had become quite contentious," says Mr. Kraft, the CEO. " It was tough to put personal issues aside." Though the operations were healthy, the debt was crushing. Some people weren't speaking to each other.

So, Grace Matthews was hired to approach each investor and entrepreneur with a stake in the company. Knowing the company's tough situation, at what price would they sell? Grace Matthews was able to get commitments from all investors and entrepreneurs to sell for a little more than half of what they had either paid for the stock or were owed by the company.

The deal closed in November, allowing Openfirst to bring in a new bank for its loans, which was crucial, and to fund its expansion. The overall price for the company was " less than $20 million," says Darren Snyder, a partner at Prairie Capital, Chicago, which replaced an investment firm that wanted out, and thus became majority owner.

The price was high, Mr. Snyder says, based on the most recent results, or about seven times Ebitda. But Openfirst's profits are rising fast enough that, " if you look out over the next 12 months, it's going to be 4.5" times Ebitda.

Mr. Kraft took his lumps on the notes he held and invested the proceeds, plus some of his earlier payout, in stock in the recapitalized company. At age 51, he is a lot less rich than he had expected to be when he sold his own firm to Openfirst in 1999. But he has a second chance. So does Openfirst.

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