Small Business Dealmakers Menu

First National Bank’s Boyd Pethel

Raising capital can be a good strategy, even if you’re not pursuing a deal

June 28, 2018

By: Mark Scott

Transparency of financial reporting may not be a sexy topic, but Boyd Pethel says it’s a critical component when your business needs capital.

“In the Midwest and Cleveland in particular, you’ve got really strong businesses — $5 million, $10 million, $20 million in sales and on a nice trajectory of growth — but they haven’t placed a priority on transparency in financial reporting,” says Pethel, regional president for First National Bank. “It’s really a critical one as you’re positioning the company for growth, if capital need is part of that growth or if there is ever the desire to sell.”

Pethel has spent close to three decades in the banking sector and has worked with a lot of companies in that midmarket space to help develop their growth strategies. He’s learned the value of those small details that can make a big difference in enabling your business to reach its full potential.

In this week’s Dealmakers Live, we talk to Pethel about the reasons why companies seek outside capital, the tools banks provide to help in this process and what Cleveland needs to do to take the next step in its own evolution. What follows is a transcript of the above video, edited for readability.

Breathing room is good

What’s the right amount of capital for a given deal? Well of course, the disclaimer out of the gate is every deal is different. But I would tell you the scenario you just painted, the one where the equity provider just wants to provide enough equity to get there and maybe not much more isn’t the best scenario from a banker’s point of view. We always want the company to have breathing room and access to additional capital for whatever reason they might need it. It might be for a good reason, for growth or to support an acquisition. It might also be to get through some choppy waters.

We’ve got great business owners in town, but you can only control what you can control. The one thing you can’t control is economic cycles, what’s going to happen from a legislative standpoint. So the ability to react to some of those things you can’t control and often reacting involves the need for additional capital, getting through those choppy waters, it’s really important to plan for. So planning for it even before it happens, while hoping that it never will happen, is in my opinion, the healthiest approach.

Be transparent in financial reporting

A common pain point when the need for capital is the topic is really transparency of financial reporting. A lot of your midmarket businesses are really kind of your heart and soul. In the Midwest and Cleveland in particular, you’ve got really strong businesses — $5 million, $10 million, $20 million in sales and on a nice trajectory of growth — but they haven’t placed a priority on transparency in financial reporting. It’s not a very sexy topic, but it’s really a critical one as you’re positioning the company for growth, if capital need is part of that growth or if there is ever the desire to sell. That often is a challenge. It’s expensive going from a compilation to a review to an audited statement. Most of the time, not all of the time, money well spent.

Banks provide more than just capital

Do business owners in town leverage their bankers as best as they could? That’s a definitive no. Often bankers are viewed as somewhat of a commodity. How much does your capital cost? That’s really the most important part of the equation. Thankfully that doesn’t happen a lot. But when it does, it’s unfortunate. You’ve got a lot of good banks, a lot of good bankers in town that have a wealth of knowledge and are able and willing to provide lots of value add.

So the banking spectrum involves a lot more than just capital. Treasury management, the international support, could be wealth management, deposit gathering — all of the above. It’s just an arsenal of products and services that our business owners should be taking advantage of. I think those business owners that treat their banker like part of the team, you have to keep us honest, don’t get me wrong. We’ve got to be from a pricing standpoint, fair. But there is lots of opportunity to leverage your banker as a consultant more so than a capital provider only.

There is still work to be done

When I look at Cleveland economically, where it’s at and what I see, specifically as it compares to other cities, I think we’ve got some work to do. I love the momentum we’ve got today, the infrastructure buildout over the last five to 10 years, in particular, has been tremendous. But the one thing we haven’t figured out yet, respectfully, is how to attract more new businesses to Cleveland.

We’ve done a great job of attracting downtown population, residency wise. But we need to find a way to get more new businesses to Cleveland to help sustain that tremendous infrastructure that we’ve built out. And I think you make a good point. There are other cities nearby that have candidly done a better job. Columbus, I would say Pittsburgh, Nashville, the Carolinas — they’ve got population growth that we envy. So we’ve got good leaders in place that need to continue leveraging the business community as well, myself included, to help make Cleveland more and more business attractive so we can continue sustaining this infrastructure.