Last Updated Jul 29, 2010 1:44 PM EDT
Our company had just experienced its worst quarter ever when the CEO decided he wanted to retire and asked the junior partners to buy him out -- in cash. My three partners and I wanted to become the majority shareholders in the company, which is called Compliance EnviroSystems (CES) and is an environmental assessment and technical sewer evaluation business based in Baton Rouge, Louisiana. To do that, however, we needed to raise $8 million in what happened to be the worst lending climate of my 15-year career.
We got hit hard
When the economy tanked in mid- to late 2008, the government began issuing stimulus packages to municipalities. You'd think this would be a boost for a company like ours, but it was the opposite. A lot of the contracts we were counting on for late 2009 and 2010 were pulled by cities hoping that they would instead get federal dollars to fund their projects. Our backlog shrank, leading to the that terrible quarter.
Even so, when news got out that our CEO was leaving, several outside investors -- including competitors and venture capitalists -- approached us. They saw our potential. Taking venture money would have been the easy way out, but we weren't willing to dilute our interest in the business. I knew what the outside investors knew: That CES had great infrastructure and lots of room for growth. Plus, I like working for myself, and at this stage in my career I didn't want to have to start reporting to a board.
We took on the risk
When the market crashed, banks took authority away from the local business bankers and moved it to the board level at corporate. The result was that we became nothing more than a financial statement and a social security number. The first bank we went to -- a bank we had been working with for 15 years -- turned us down. The only thing it saw was our company's most recent quarterly report. The banker totally ignored our outstanding 15-year track record and solid business model. We went to other lending institutions but were turned down for the same reason.
When we couldn't get a loan based on an appraisal of our business, we ended up structuring multiple loans where we took on the risk. We got a five-year loan, with 80% loan-to-value ratio, on all of our heavy equipment, with regular monthly payments. We also got a three-year, non-revolving line of credit for 75% of accounts receivable. This loan requires a regular quarterly reduction in principal of $50,000, and a monthly report on our accounts receivable. If we have a bad month and our accounts receivable go below a certain threshold, my partners and I have to put our own money into the company to bring it back above that watermark. Fortunately, that has never happened.
Furthermore, both of these loans required personal guarantees from all of us. And we were still $3 million short. So my partner -- the current president -- each loaned the company $1.5 million. We did it for one key reason: We had absolute faith in our company.
Once we finished structuring these loans -- December 31st, 2009 -- my partners and I focused on streamlining the business. We stopped investing in developing new locations and new technology. We cut expenses such as country club and golf club memberships, which we were using to network with potential clients, and instead focused on developing stronger relationships with our existing clients.
Most importantly, we focused on completing our existing jobs, rather than chasing after new contracts. The partners also went on the road with our marketing team to meet clients and oversee our marketing campaign.
We were able to stack the deck in the right way for our first and second quarters of last year, and wound up with $13.5 million in revenues. Our gross revenue in 2008 was $17 million, and we are on track to get back to the $17 million gross mark for this year. Best of all: We expect to be able to pay all of our loans off early.
--As told to Harper Willis
Brad Dutruch also serves as the president of NASSCO, the National Association of Sewer Service Companies, a nonprofit industry trade organization with members all over North America. CES services municipalities in 17 states across the Southeast.
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