News Column

Money to Grow

October 2004, HISPANIC BUSINESS Magazine

Joel Russell


Commercial bank loans, at today's favorable interest rates, are a popular choice for companies on the Hispanic Business 500 seeking to expand, according to a survey of entrepreneurs on the exclusive directory.

Data from the Hispanic Business 500 indicate the two types of finance used most often by large Hispanic-owned firms are commercial bank loans and personal savings, with 63.8 percent of companies saying they utilized these financing tools. Among companies in the $5 million to $20 million revenue range, 61.7 percent use commercial loans, with that percentage increasing steadily with the companies' size: 71.9 percent of companies with annual revenues of $100 million to $300 million employ commercial loans.

Once companies cross the $300 million revenue threshold, their likelihood of using alternate forms of finance jumps dramatically. The percentage of companies in this revenue range that are accessing commercial bank loans drops nearly 20 points to 53.3 percent. And while, overall, only 3.0 percent of companies on the Hispanic Business 500 have used venture capital and only 2.6 percent have tried private equity, among these large companies 13.3 percent have used venture capital and private placement.

"Accessing capital is obviously easier when you are successful with a proven track record," says Jorge Perez, CEO of The Related Group of Florida, a company that has accessed venture capital. "We have numerous groups who have, or would, provide us with capital needed for any given transaction."

Mr. Perez estimates that last year, his company a real estate developer that ranks No. 3 on the Hispanic Business 500 with revenues of $1.08 billion accessed more than $1 billion in debt and equity for real estate projects. Twenty-year relationships with Lehman Bros., Prudential, and City National Bank facilitate the process.

A closer look at Hispanic Business 500 companies using equity investments reveals many are auto dealers. Lou Sobh, CEO of Lou Sobh Automotive, No. 10 on the list with revenues of $497 million, says that programs offered by General Motors and Ford help minority entrepreneurs buy dealerships. Typically, auto manufacturers will loan 85 percent to 90 percent of a dealership's purchase price to an entrepreneur. But that still means the entrepreneur must provide 10 percent to 15 percent of the price, which runs into the millions of dollars. "There might be venture capital because of the need for an equity portion of the deal," says John Thomas, an analyst at the National Association of Auto Dealers.

After the purchase, many auto franchise agreements limit the role of equity in financing. "I could not sell stock in my corporation without approval of the manufacturers that's part of the franchise agreement," says Mr. Sobh, who has not used venture capital. "But the agreement doesn't restrict where you get your money from."

The car industry runs on debt provided by either banks or the finance arms of the manufacturers. Mr. Thomas explains that dealers use loans to buy their inventory the cars on the lot, often called the dealer's "floor plan" from car manufacturers. Also, most customers who buy cars require loans. And if the dealer wants to expand facilities, develop nearby land, or buy a new dealership, banks provide the money. "Banks are involved in every angle of the business," says Mr. Thomas. "The banks all want your business," Mr. Sobh confirms. "Everyone wants your floor plan that's pretty much a gravy business."

Lou Sobh

"The banks all want your business. Everyone wants your floor plan that's pretty much a gravy business," says Lou Sobh, CEO, Lou Sobh Automotive. Even companies that use private-equity financing depend heavily on banks. Mr. Perez says The Related Group usually puts up 15 percent to 20 percent of the money for every construction deal, with lenders putting up the rest. "Our equity is either funded by our own capital, others' capital, or a mezzanine loan," he says. "We are very fortunate to have a number of financial institutions who are behind us to meet our growth needs." The low interest rates of recent years help make a strong case for debt financing. "I have not used any venture capital in my business. I believe there are adequate amounts of capital available through conventional financing, which is more favorable to entrepreneurs," says Mike Shaw, CEO of Colorado-based Mike Shaw Automotive, No. 18 on the Hispanic Business 500 with revenues of $219 million.

Mr. Perez calls debt financing "attractive in today's market." Much of The Related Group's projects are condos in South Florida, and with the market booming, the future value looms large. With loans, "you are not required to give up a percentage of the deal as is required when you access venture capital," Mr. Perez explains.

Still, private equity is more attractive to some CEOs, including John Zamora, who last year went hunting for investors to help grow his company, Graphic Press, which he started in 2000. "We were capital intensive, growing at a fast rate," he recalls. "We needed additional working capital to continue to support the company's rapid growth and improve vendor payments."

Mr. Zamora's search led to Luis Nogales, president of Nogales Investors, a private-equity firm that specializes in the Hispanic middle market. After negotiations, Nogales Investors put money into Graphic Press, "but he didn't take an equity stake," says Mr. Zamora. "On a return-on-investment basis, he made a five-year deal. It just shows there are many ways to structure a deal."

Non-financial factors played a significant role in the final decision. While the money helped pay down expensive debt and stabilize cash flow, most of the heavy financing had occurred three years earlier at start-up. In commercial printing, the presses represent a company's main hard assets, with price tags of between $3 million and $11 million. To fund the start-up, Mr. Zamora and a partner put up the initial working capital and incurred $35 million in debt to purchase equipment.

But the CEO doesn't measure his relationship with Mr. Nogales only in dollars. "His belief in our company goes back into the market," Mr. Zamora says. "He introduced us to a lot of people, so we use his network of relationships with bankers, suppliers, and customers."

Graphic Press had revenues of $51 million last year to rank No. 101 on the Hispanic Business 500. Despite the success, "until [Mr.] Nogales came in, I felt all alone," Mr. Zamora says. "Now I have someone supporting me, other than myself."

capital sources chart

In addition to debt and private equity, entrepreneurs have another method to raise money going public. Currently, eight companies on the Hispanic Business 500 trade on public exchanges. And that number will increase next year: Brightstar Corp., the No. 1 company with revenues of $1.3 billion, has announced plans for an initial public offering.

But for many companies, an IPO presents as many obstacles as rewards. "Yes, we have been approached about going public," admits Mr. Perez at The Related Group. "It is our belief that if we did go public, it would limit our ability to make quick decisions. In order to be successful in our business, you must be able to make quick decisions."



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