January 2004 • 29

The Resurgenceof the

EntrepreneurialIndependent

By Susan Carol

THE RECESSION YEARS HIT THE EQUIPMENT LEASING AND

finance industry hard with a record number of mergers, acquisi-

tions, and layoffs. In just one year—between 2000 and 2001—ELA

lost 39 independent members. But 2001 may have marked the low

point in the descent of the independent leasing company. Since

then, new independents have emerged and several industry analysts have predicted

a resurgence of the entrepreneurial independent company. Their optimism is based,

in part, on the following signs of strength within the leasing industry:

n some independents have been able to achieve measurable growth during diffi-

cult times by carving new market niches for their companies;

n entrepreneurial industry veterans, some of whom were the victims of lay-offs at

other leasing companies, have been forming new independents.

n today’s market outlook is considerably brighter than in recent years.

Continuing SuccessesSome existing independents prospered even as the overall industry contracted andbattled widespread pessimism. For one, IFC Credit Corporation, Morton Grove,Illinois, realized an annual compounded growth rate of 37 percent per year from1999 to 2002. Compared to industry ROE averages during the same years, IFCCredit’s growth is remarkable at 22.6 percent vs. 9.7 percent industry average.

IFC Credit President and CEORudolph Trebels, who has witnessed anumber of economic cycles during his25 years in the equipment leasingindustry, viewed the recent downturnas just another challenge. Since hefounded IFC in 1988, the company hasprovided financing for more than $400million in equipment, not includingthe financing volumes from twoacquired companies.

“We’ve just been keeping our eye onthe ball,” says Trebels. “Sure, we areentering new areas of business wherewe see opportunities, but our focus ison the customer, on increasing efficien-cies, and on maintaining our goodreputation with funding institutionsand investors.”

Trebels acknowledges that it hasbeen harder in the past few years toacquire capital, especially for compa-nies that did not already have a proventrack record with lenders. “We have astrong reputation with funding sources,good references from lenders and frominvestors as well,” he says.

In fact, IFC Credit is currently in theprocess of raising capital and has boldacquisition plans to expand its vendorfinance operation and enter new mar-kets. Its acquisition of FirstCorp,Portland, Oregon, in February helpedthe company win new vendor clientsand gain considerable efficienciesthanks to FirstCorp’s frontend origina-tion system. The acquisition addedsome 8,000 leases totaling $100 millionin receivables to IFC’s portfolios.FirstCorp’s chairman, Len Ludwig,joined IFC’s board of directors, and IFCassimilated FirstCorp’s business plat-

form for vendor leasing transactions.“Now we are providing a custom web-

site to our select vendors,” says Trebels.“They can review reports and informa-tion 24/7 and provide lease applicationsand payment quotations to their endusers. We are frequently turning leaseapplications around in less than anhour,” he reports.

With its vendor finance business plat-form now in place, Trebels is optimisticabout his company’s continued growth.He also points to IFC’s flexible vendorleasing programs such as private label,progress payments, co-operating mar-keting, and special paymentpromotions, including graduated orvariable rate plans. A number of ven-dors have opted to join IFC’s BusinessPartner Alliance program, which offersreduced lease rates, other financialincentives, and support.

There are more acquisitions in IFC’sfuture as well, especially of small ticketvendor portfolios. The company alreadyhas purchased 16 of these portfoliosover the years, ranging in size from$500,000 to more than $10 million. IFCis most attracted to portfolios orcompa-nies that have a piece of informationtechnology that IFC may not yet have,or those that operate in specific nichesattractive to IFC.

One new area of business that IFC’spresident finds attractive is the munici-pal leasing market. Governmentfinancing is currently experiencing adwindling tax base and revenue stream,and the combined budget shortfall for

all 50 states is estimated to be $50-$70billion dollars in 2004. According toIFC’s new government and educationleasing division leader WilliamStuckert, the former head ofComdisco’s federal leasing division,many tax-funded organizations cur-rently experiencing a deficit will favorlease financing.

Surviving Start-Ups Allegiant Partners of San Rafael,California, is another independent tak-ing advantage of current opportunities.It’s a true success story, especially com-pared to the many start-ups that werefolding just as Chris Enbom launchedthe company in 1998.

Allegiant Partners was born aboutthe time that the flow of venture capi-tal choked off and the dot.com bustsank into America’s consciousness.Allegiant, which operated without bankfinancing until the year 2000, todayreports annual revenues of nearly $3million that are projected to grow to$4.5 million within a year.

Enbom, the company president,spoke on the subject of “starting a leas-ing company from scratch” at the ELAconvention in October. He told his audi-ence of 50 executives that Allegiant hasbeen profitable every year, but he alsowarned about income “delusion” whenvolume increases quickly, leading to aramp up in staff. Enbom also coveredbusiness planning, funding, and operat-ing systems with a sizable audience on

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Some existing independentsprospered even as the overallindustry contracted and battledwidespread pessimism.

the last day, in the last session, of theannual convention.

He describes his own businessmodel as an “earnings over time”model. The company books and holdsmost of its transactions—a strategythat today makes a lot of sense, butfive years ago was considered unusual.“Everyone was looking for huge growthand then selling,” Enbom says.Instead, Allegiant developed a 15-yearplan that would be exercised overtime, in the same way that this avidmarathon runner paces his energy andresources out over time. Allegiant con-tinues to follow the 30-page businessplan created five years ago.

“We’ve built an old fashioned leasingcompany that is more like a bank. Wedo sell a few transactions a year, but 98percent of our leases are booked andheld,” says Enbom. “We knew it wouldtake a couple of years to get the trackrecord to attract bank capital.”

How does Enbom’s company differenti-ate from larger independents and banksin his market? “We spend more timeunderstanding a credit. We look at every-thing carefully. We did spend a lot ofmoney on technology for rating agencydata, but we also put a lot of humanlabor into the process and we are able toaccept credit situations the banks will

deny automatically,” he explains.Asked if this is a good time for inde-

pendents to be forming, Enbom repliesthat a company’s business model ismore important than the timing. “If youare starting when there is less competi-tion, you will simply have it later, but ifyou have the right model you can over-come that.”

He and other executives of independ-ent companies were encouraged thisyear by the news that Capital Source,Chevy Chase, Maryland, managed a suc-cessful initial public offering in Augustafter only four years in business, andthat New Jersey’s Marlin LeasingCorporation filed with the SEC inSeptember to reorganize as MarlinBusiness Services with up to $60 mil-lion worth of common stock. Thecompany reported in the filing that itsees “significant opportunities for con-tinuing its organic growth.”

In contrast to these strategies, GreatAmerica Leasing Corporation has noplans to go public or sell the $530 mil-lion small-ticket leasing company. ButCEO and Chairman Tony Golobicexpects to double in 2003 the 12 per-cent growth rate Great Americaenjoyed in 2002.

How? “We think of our customers, whoare providers of office, telecommunica-

tions, health care and retail distributorfocused equipment, as our partners. Weserve as their partner by deliveringhigh-integrity, convenience-basedfinancing solutions and selected com-plementary services that help themachieve greater success and keep theircustomers for life. We think there is asubstantial portion of the markets weserve that will buy our value addedproducts and will be willing to pay theprice for it,” says Golobic, who describeshis company’s competitors as very largecorporations such as GE, CIT, and majorbanks. “We think of ourselves as the RitzCarlton or Nordstrom of the small-ticketleasing, where our customers are willingto pay a little more for consistent qual-ity and great value,” he adds.

One small example of GreatAmerica’s customized approach toservice is its phone system. Callersdon’t hear a robotic, automated voice,but rather a live human voice, eager tohelp them, on the line. There is a maxi-mum of two rings before someoneanswers the phone. There is no voicemail at this company Cedar Rapids,Iowa, company.

Golobic says he is approached all thetime by Fortune 500 businesses wantingto buy Great America, but the com-pany’s vision was never to grow andsell. In fact, he says the reason so manycompanies go out of business prema-turely is that they start with themindset of selling, but they sometimesjust can’t sell in time. Companies thatbuild for the long run develop a morepermanent footing and soundprocesses, Golobic says.

Great America is definitely in it for

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Asked if this is a good time forindependents to be forming,Enbom replies that a com-pany’s business model is moreimportant than the timing.

the long haul. It has 230 employeesand will add some 50 more this year.The company is heavily investing intraining and continuous education ofits employees.

“The future looks pretty good to usfrom where we’re standing; in the mid-dle of the corn fields of Iowa,” Golobicsays. “We live every day by our logo tagline: ‘Hard Work, Integrity, Excellence.’”

New LifebloodWhile ELA saw a slight decline in mem-bers overall from 2002 to 2003, theassociation also experienced an increasein new independent companies.

One of the newer independents isPantheon Capital, Mahwah, New Jersey,created in mid-2003 by Bob Thoma,George Tsahalis, and Mike Crofton,each of whom wanted to return toentrepreneurship after several years ata large, bank-owned leasing company.All three began their careers in small,independent leasing companies activein healthcare finance.

Pantheon officials believe this is agood time for small independentsbecause there are fewer of them tocompete with overall due to industryconsolidation. Crofton says they arebringing value to the market placewith their detailed expertise in health-care finance and their ability toprovide speedy, personal service withintegrity. For example, PantheonCapital is able to approve even largemiddle-market transactions of severalmillion dollars within just a few hoursof proposal acceptance.

“We provide every client with full-

service administration and we are inti-mately familiar with how hospitals liketo manage their capital acquisitionprocesses,” adds Crofton. “In effect, weenable our hospital clients to use us astheir outsourcing partner for a signifi-cant piece of their administrativeburden, at zero cost to themselves.”

With a team of only seven profession-als, Pantheon keeps its focus onhealthcare providers—hospitals andphysicians—in the Northeast and Mid-Atlantic regions. The company financesa variety of medical equipment, as wellas information technology systems,energy management systems, furniture,and fixtures. Although not limited bydeal size, Pantheon’s current focus ison middle-market transactions in the$500,000 to $5 million range.

Volume after its first three months ofbusiness was nearly $20 million.Pantheon expects volume to reach $100million by the end of 2004. The com-pany plans to add new members to theteam as needed, but will also rely ontechnology and automation forincreased productivity.

Crofton’s advice to anyone forming anew company is to develop a thoroughbusiness plan that demonstrates tolenders the principals’ experience,expertise, and personal financial com-mitment to the company’s success. Hebelieves that obtaining funding is notan issue when an independent isfocused on quality.

“There is plenty of capital available.Lenders are aggressively seeking to putquality assets on their books. However,it is critical to show lenders that theyare investing in a high quality organiza-tion,” Crofton says.

Although larger organizations haveaccess to lower cost capital, this can beneutralized when a business offers cre-ativity, service, and speed. “We believethis is a distinct advantage for thesmall independent,” Crofton adds.“When your entire team is focused on,and succeeds in, exceeding clientexpectations and underwriting sound,quality leases, your business will thriveand prosper.”

Of course, working for a small com-pany is in a sense its own reward. “No

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Many companies go out of busi-ness prematurely because theystart with the mindset of sell-ing, but they sometimes justcan’t sell in time. Companiesthat build for the long rundevelop a more permanentfooting and sound processes.

amount of big-company benefits canoutweigh the fun and personal satisfac-tion that comes with building a well-runsmall business,” Crofton believes.

Growing in StrengthThe stories of IFC Credit, AllegiantPartners, Great America, PantheonCapital, and other successful independ-ents support the equipment leasingindustry’s futurist views. When mem-bers of the ELA’s Industry FutureCouncil met in 2003, they predictedthat independent firms will grow strongagain. The key to making that happenwould be “getting it all right,” accord-ing to the report.

“Getting it right means having anexperienced management team andstaff that can efficiently take care ofthe customer’s and vendor’s needs, theplatform to execute the program, andthe capital and funding to grow thebusiness,” says Trebels of IFC Credit.

John Deane, founding principal ofThe Alta Group, an international con-sultancy exclusively serving thismarket, also predicted more than ayear ago that there would be a rebirthof independents who would createsomething with which the industrygiants often couldn’t compete—person-alized, value-added service.

In anticipation, The Alta Groupbegan offering Funding ManagementServices to provide a bridge betweenlessors and funding sources, such as

arranging for lessee funding; financingfor lessor portfolio expansion; position-ing to gain revolving lines of credit; anddeveloping approaches for specializedor critical funding needs.

Two years ago, The Alta Group alsoformed a business alliance withFairView Advisors, which has offices inFlorida, New Jersey and California.FairView provides investment bankingadvisory services to financial servicesand information technology clientswho are seeking to raise capital in theprivate equity community or buy or sella business.

Steve Sherman, a managing princi-pal, says only a small percent ofinvestors focus on financial services:more than 80 percent of privateequity investment is in healthcareand technology. “If you are looking foran investor in financial services, youare looking for a discreet minorityand within that, each has their ownobjectives and goals and idea of whatrepresents a successful investment,size and geographic criteria.”explains Sherman.

In a presentation at the ELA conven-tion, FairView advisors gave these tipsfor increasing a leasing company’svalue to potential investors:

n create a “scarcity” value, or thestrongest position in the niche

n maintain strong vendor relationships

n have conservative accounting andunderwriting practices

n maintain assets that can be securitized

n generate consistent and strongprofitability.

Market UpswingFairView also encouraged their stand-ing-room-only audience with news thatcash on hand has risen to record levelsand that debt to equity ratios havereturned to pre-boom levels. “Free cashflow is indeed headed toward a newrecord,” Sherman said.

Indeed, independents and their con-sultants have been buoyed by positivesigns of an improving economy thatshould benefit the entire industry. InOctober, CapitalSource released resultsof a capital spending survey that indi-cated 72 percent of middle marketcompanies planned to increase spend-ing in the coming year. The poll,conducted with Gallup, surveyed 500top financial executives of companieswith revenues between $25 million and$500 million.

Across the industry, lessors are start-ing to see business coming back. Manyof the opportunities may be gobbled upby the big fish, but it seems there willalways be a place for small, flexible andsmart players—the entrpreneurialindependents.

Susan Carol is founder of Susan Carol

Associates, specialists in equipment leasing com-

munications for 15 years.

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“Getting it right means having experiencedmanagement and staff that can efficiently takecare of the customer’s and vendor’s needs, theplatform to execute the program, and the capitaland funding to grow the business,” says Trebels.