How to Make the Banks Do Your Bidding

Bankrolling your growth doesn’t have to be a hassle. As these PROFIT 500 winners prove, if you learn what lenders are looking for and put in a bit of extra effort, you can secure the cash you need—no grovelling required 

Catherine McIntyre || September 15, 2016

Illustration: Sam Island

More success stories and strategies from Canada’s Fastest-Growing Companies »

When husband and wife duo David and Stephanie Ciccarelli were rebranding their young voice talent firm in 2004—then called Interactive Voices—from a physical studio to an online marketplace, they found the perfect domain name: voices.com. The URL carried with it six years of credibility and search power, with an organic influx of traffic that would allow the Ciccarellis to stop paying for online advertising. The cost: $30,000, which the Ciccarellis did not have. 

David, the company’s CEO, prepared a spreadsheet detailing projected equipment expenses, printed out his 50-page business plan and made appointments with nine different banks. All nine rejected his request. One particularly blunt lender called the business “unbankable.”

It was a harsh lesson in the difficulties entrepreneurs often face when pursuing bank financing. It also galvanized the couple. “After that, we wanted to button up and run a real company,” David recalls. They incorporated the business, updated their forecasts, edited the mammoth business plan into something more digestible and finally got the $30,000 loan. Voices.com has since convinced its bank to to loan it $50,000—followed by $100,000, $150,000 and $500,000—and, just this year, $2 million to help fund its expansion. It’s proven a safe bet: The company, which ranks No. 94 on the 2016 PROFIT 500 ranking of Canada’s Fastest-Growing Companies, has seen sales spike 798% in the past five years. 

The experiences of the Ciccarellis and many of their PROFIT 500 peers show that money can come freely when you learn to work with—not against—your bank. 

Give yourself choice
Family-run food manufacturer Stemmler’s Meats & Cheese (PROFIT 500: No. 485) began a major expansion last year at its Heidelberg, Ont., headquarters, which its startup-focused bank refused to back. Seeking not just a new lender but also the best deal possible, its owners decided to go in prepared, hiring an accountant and a consultant to conduct a feasibility study, detail the capital costs for expansion and calculate its projected profitability. “Banks want to know you’re not some pie-in-the-sky company,” says Terry Stemmler, who co-owns the business with his brothers, Kevin and Shawn. It took months, but that extra effort convinced all four banks the Stemmlers approached to offer loans, putting the company in the enviable position of being able to dictate its terms. In their case, that meant scratching two lenders that wanted personal guarantees and choosing one that put forward 20% more than the original request. 

Ask ambitiously
About that 20% cushion: The Stemmlers have become big believers in getting more money than they need—even if they don’t plan to spend it. “It’s better to ask for more and then not use it,” says Terry Stemmler, adding that he and his brothers have created strict rules about when and how they can expend the extra cash. “It makes banks edgy if you keep going back for more money; it makes them wonder if you have the project under control.” Asking for more at the outset—experts recommend between 20% and 30%—is unlikely to be a deal breaker for an interested lender and will minimize emergency cap-in-hand requests. 

Ask Often
Four years ago, Brendan Howe, CEO of Toronto managed IT services provider Techify (PROFIT 500: No. 340) had what he calls an “oh, shit!” moment. Howe had just bought out his business partner, spurring the company’s bank to cut its credit line in half—just as Techify hit a growth spurt and was desperate for cash to cover operating costs. “Not having the money when we needed it added significant stress,” he says.

Frustrated, Howe pulled the company’s account and moved to a new bank, with a new approach: Every year since, he has met with his banker to discuss Techify’s growth plan and to secure a loan—whether the company needs it or not. This has proven effective in easing the anxieties of both Howe and his banker. “Luckily, since that first incident, we haven’t really needed a big loan,” says Howe. “But I’ve learned that the best time to ask is when you don’t need it.” 

Become buddies
Rounds of golf or lunchtime drinks might seem hopelessly dated, but face time remains a great way to convince your lender you’re a safe bet. Matthew Harding, president and CEO of Ottawa-based IT services provider the KTL Group (PROFIT 500: No. 219), either phones or visits his banking manager almost every day, sharing good news with proof and not-so-good news with a proactive explanation. “I want them to see me,” he explains. “I want them to know when I’m thriving.” 

According to Alma Johns, president of Toronto’s Bench Capital Advisory, which helps small- and mid-sized businesses get financing, banks consider such candid behaviour a mark of good character (read: worthy of investment). “The moment you start hiding, they become suspicious.”

CEO Confidence Boosts Executive Recruiting: EcoPulse

By Anna-Louise Jackson & Anthony Feld 

 

Business at executive-recruitment companies is improving, buoyed by increasing confidence among corporate leaders and a stabilization in hiring for senior positions in the financial-services industry. 

Heidrick & Struggles International Inc. (HSII) and Russell Reynolds Associates say they see some increase in demand, a trend that was echoed in a recent survey of consultants by William Blair & Co., an independent investment firm. Meanwhile, sentiment among chief executive officers strengthened in April to the highest level in almost two years, as the Chief Executive magazine confidence index rose to 6.07 from 5.55 the prior month, based on an e-mail survey conducted by the magazine. 

  

 Photograph by Jasper James

Rising CEO confidence is a ``key indicator'' that's helping to boost demand in the executive-recruitment industry, said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York, which manages more than $1.5 billion.

Rising CEO confidence is a “key indicator” that’s helping to boost demand in the executive-recruitment industry, said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York, which manages more than $1.5 billion. “In the mid-to-later stages of an economic expansion, competition for business leadership intensifies, prompting more companies to employ search firms to attract talent.”

Gross domestic product expanded at a 2.5 percent annualized rate in the three months ended March 31, following a 0.4 percent gain in the fourth quarter, according to the Commerce Department. Growth was slower than the 3 percent median estimate of economists surveyed by Bloomberg. 

Revenue Growth 
The first quarter brought “signs of improvement” for Heidrick & Struggles, a Chicago-based executive-search company. This included 25 percent year-over-year revenue growth at its New York office, which is “a good indication that the financial-services sector may be stabilizing,” Chief Executive Officer Kevin Kelly said on a May 9 conference call.

Financial services is still a “substantial end-market” for the two largest publicly traded recruiters -- Heidrick & Struggles and Korn/Ferry International (KFY), said Tobey Sommer, an analyst in Atlanta at SunTrust Robinson Humphrey. Its share of each companies’ revenue has fallen in the past three years to about 22 percent for Heidrick & Struggles and 16 percent for Los Angeles-based Korn/Ferry, down from 32 percent and 19 percent in early 2010, he said.

While banks have been cutting staff, they’re also pursuing new areas of business and hiring senior-level executives to lead these divisions, Ghriskey said. The six largest U.S. banks announced plans in the first quarter to eliminate about 21,000 jobs, with the most vulnerable positions in units such as mortgage foreclosures, according to data compiled by Bloomberg. 

‘Noticeably Stalled’ 
The 2012 presidential election and this year’s budget debates made many corporate boards hesitant to change senior management, Sommer said. While recruitment “noticeably stalled” for more than a year, it now is rebounding as some of the uncertainty has dissipated. 

Another “meaningful signpost” for the industry is turnover among CEOs, which rose 20 percent in April from a year earlier, Sommer said, citing data from Liberum Research in New York. Last month’s increase was the first positive change since December, according to Liberum. 

Fifty-six percent of executive-search consultants in an April survey by William Blair described “a sequential improvement in demand” during the previous three months, with consultants specializing in financial services reporting a slow recovery, according to Timothy McHugh, an analyst in Chicago at the company. 

Big Increase

Reynolds Associates, a closely held global executive search and assessment company based in New York, is seeing “a big increase” in its work-in-progress pipeline, according to Symon Elliott, who leads the company’s U.S. operations in New York. That has translated into “fairly significant” growth in the number of client inquiries and new searches after these were “bumping along a bottom.”

“The U.S. environment’s not rosy by any means, but it’s getting better,” Elliott said.

For investors with a sanguine outlook for the U.S. economy, now may be a good time to invest in recruitment companies, because their stocks tend “to do well in the mid-to-later stages of an economic expansion,” Ghriskey said.

Their shares are starting to stabilize as a sell-off during the past two years appears to have stopped, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and also a chartered market technician. 

Missed Estimates
Heidrick & Struggles stock has outpaced the Russell 2000 Index by almost 18 percentage points since May 2, though it has lagged behind by 19 percentage points since Feb. 25, the day before the company reported fourth-quarter earnings and sales that missed consensus analyst estimates.

“Investors haven’t forgiven the company for its earnings miss in February,” though investment flows are taking “a step in the right direction” more recently, Stellakis said.

Recruiters have changed during the past five years to be less reliant on “big-ticket” executive placement by moving into nonsearch businesses, including training and career-development services, according to Matthew Beesley, head of equities at Henderson Global Investors in London, which oversees about $100 billion.

While this helped the companies weather the 18-month recession, their earnings growth could be more muted now than in the past because their diversification provides “less earnings oomph,” he said. 

Foreign Revenue
In addition, revenue from outside the U.S. now accounts for more than 20 percent of total sales, while financial services makes up less than before, so “investors could find that these stocks don’t behave the way they think they should during this economic cycle,” Beesley said.

Still, shares of these companies have “significantly underperformed” the Russell index during the past two years, so it won’t take much growth in the operating environment to attract investment, Sommer said. As a result, they could rally a lot “since they’re very under-owned,” Ghriskey said.

Another encouraging sign for these stocks comes from the relative performance of the financial-services index. The Financial Select Sector SPDR Fund (XLF) has led the SPDR Standard & Poor’s 500 Exchange-Traded Fund (SPY) by 9.4 percentage points since Nov. 30, reflecting more optimism among investors about the banking industry that’s starting to accrue to executive-search companies, Ghriskey said. 

Pent-Up Demand 
Along with their increased confidence, clients of Russell Reynolds Associates are unleashing some “pent-up demand from the last three to five years,” Elliott said. There’s strength in its financial-services division from asset-management firms seeking to hire senior managers, while business in global banking also is starting to pick up, he said.

The negative sentiment that’s dragged down the industry appears to be “bottoming out,” even though analysts including McHugh aren’t “expecting a V-shaped bounce back” in the near-term, he said. McHugh maintains “market perform” recommendations on CTPartners Executive Search Inc. (CTP) and Heidrick & Struggles and is “outperform” on Korn/Ferry.

For investors seeking positive sequential change, executive recruitment could be an interesting option, Ghriskey said. “This industry is starting to show some signs of a favorable risk-reward trade right now.”