How does a company cross this borrowing bridge?
“If you’re trying to move from a factor relationship to traditional loan, bring your potential banker into the conversation early and share your plan with him or her,” says Craig Johnson, president and CEO of Franklin Bank, Southfield, Mich.
Here, Johnson shares strategies to get business owners on track to securing a line of credit.
What considerations are important when you consider extending a line of credit to a high-growth company that currently works with a factor?
Managers of high-growth companies need to recognize the need for cash in the business and retain earnings in the company. They need to temper what they take out of the company to make sure they provide adequately for the future. This could mean taking a look at salaries, and perhaps re-structuring end-of-year bonuses. They should sit down with their accountant and banker and set targets for how much money they expect to retain in the business so there aren’t any surprises at the end of the year.
Essentially, a banker will want to see that the company’s leverage and working capital position show continual improvement, and that the company is retaining monies the business. That way, the bank will know that even if the company is in high-growth mode, its managers are diligent about managing financial affairs.
How can companies who experienced financial trouble ease out of a factor relationship and into one with a bank?
For a company that is using a factor because of financial difficulties, we want to see that the company has made appropriate changes, trends have reversed, and a period of time has elapsed so any success is not a one-quarter aberration. We will want to review their detailed plan: What were their cost-cutting measures? How did they improve margins? Did they get new sales, and if so, who are their new customers? How do they price products? Did they move employees into new roles? Was there an event that caused them to have financial difficulty, and what have they done to change it?
We also look at the industry, and we will want to assure the changes a company makes are sustainable. The situation can vary.
This all seems quite subjective.
There are certainly some objective factors banks consider, such as financial results. And the company will likely need an accountant to provide the information for third-party verification. But many times, a decision to grant a line of credit to a company that is currently in relationship with a factor comes down to how much we believe the plan.
What should business owners include in this plan?
Document everything. If you are off-track, how will you get back on? If you increased sales, how did you do this? If you are short on payroll, why? The more information you record, the better. That way, a banker can determine if you are a safe risk. And any business that has a detailed plan is already making a wise financial decision.
Banks will want to see a rolling one-year and three-year plan that identifies 90-day increments. You should share this with your factor, your accountant, and any other financial advisers, so we can see the progress you are making toward reaching the goal of trying to get traditional bank financing.
Can banks compromise and offer products that ‘meet halfway’?
We provide lock-box arrangements whereby we act as a ‘pseudo factor.’ All receivables come into a lock box that the bank controls. We also utilize advance formulas, where a company may provide us with daily, weekly or monthly certification of receivables. We lend a certain percentage of those receivables. For example, we may lend 70 percent of accounts receivables less than 90 days, and we will get a certification of what that amount is.
Generally, these arrangements are set up for companies who need a cash management tool, or in situations where the bank needs to control funds.
Small businesses may consider the SBAExpress program.
When is it a good time to start talking to a banker about moving from a factoring relationship to a traditional bank loan?
You can share your plan with a banker before you would qualify for a loan. Let your banker know you are interested in developing a relationship and ask for their counsel. Most people I know in the industry are more than willing to help, especially if they see a future opportunity.
CRAIG JOHNSON is president and CEO of Franklin Bank. Reach him at (248) 386-9860 or email@example.com.
S.A. Ibrahim was no stranger to Radian Group Inc. when he stepped in as CEO last year.
He wasn’t green about the mortgage insurance business, and he didn’t need a cheat sheet to understand the company’s products. In fact, he knew Radian’s solutions on a different and more intimate level than did many long-time associates.
That’s because before he was named chief executive officer, Ibrahim was a customer.
“I was one of Radian’s major relationships on the mortgage insurance side of the business,” says Ibrahim, who was president and CEO of GreenPoint Mortgage Funding in San Francisco when former Radian CEO Frank Filipps announced his retirement and approached Ibrahim about taking over his position.
Ibrahim already had a good idea of what he would be getting into if he pursued the opportunity at the $1.3 billion company.
“I knew from a distance it was an innovative company with outstanding people,” he says. “I knew the company was financially strong a $5 billion (market cap), highly rated company from a credit-agency perspective and highly respected by its customers.”
When Ibrahim accepted the position and was named CEO of Radian in May 2005, he found what he expected: a business tethered to a strong legacy of success. The challenge for Ibrahim was fixing a company that wasn’t broken.
“It is more difficult to add value to a company that is not experiencing problems,” he says.
But the mortgage insurance industry had evolved drastically, and Ibrahim knew that tradition and reputation weren’t enough to help Radian maintain its edge. The company’s executives had discussed ways to capture more business, but Ibrahim needed to speed up the process.
“I found a company that was strong, but I also found a company that was in transition,” says Ibrahim. “The industry was changing so rapidly, and Radian needed to respond to those changes and reposition itself. We had to close the gap between what the customers want in terms of broader solutions and what Radian has historically offered.”
The solution was twofold: redirect what business the company went after and create a hybrid product that had the best attributes of both Radian’s financial guarantee and its mortgage insurance businesses. Ibrahim served as a catalyst to bring these changes into being, and after one year as CEO, he is guiding a more profitable business with a more competitive suite of alternative products.
Before Ibrahim joined Radian, the company had switched its growth focus from mortgage insurance to financial guarantees to diversify and protect itself from challenges on the mortgage side of the business.
“Our strategy at the time was to view financial guarantees as the growth engine for Radian,” Ibrahim says.
The plan was to build the business to compete with the largest companies in the market and go after big business deals, but it didn’t work out as planned.
“We competed head-to-head for large customers and ended up being a reinsurer as opposed to a direct insurer,” says Ibrahim.
Basically this means Radian insured the large companies, not clients directly.
“You can grow rapidly as a small player by doing reinsurance as opposed to direct business, and you can go for growth,” Ibrahim says. “But that means you add people, add expenses and focus on reinsurance.”
Ibrahim reconsidered the old strategy. Rather than relying on financial guarantees as a growth engine, he thought Radian should shift gears.
“We said we will place profit and proven credit above growth,” says Ibrahim. “Instead of being large, we need to be right-sized. We don’t want to play in the same space with (the big) players. We want to focus on unique market segments where we can be successful as a (smaller) player and make attractive returns.”
That required stepping away from reinsurance, emphasizing expenses and targeting segments in public finance and the structural side of financial guarantees. Radian needed to capture many smaller-scale customers rather than compete against the big guys for a few large clients.
So Radian stopped pursuing big business deals and instead went after opportunities where, for the most part, it doesn’t compete head-to-head with the larger players in the market. It went after a strategy that made it a big fish in a small pond, rather than the opposite.
“By being smaller, we can close more smaller deals while the big players focus on large deals,” he says. “There is nothing that illustrates our success more than the numbers.”
In 2005, the company wrote 71 percent more deals than it did in 2004.
A shifting marketplace
Ibrahim knew that to maximize Radian’s potential, he had to create products that filled a market demand.
Until recently, a standard mortgage required insurance for those who put less than a 20 percent down payment on the loan. Radian provides private mortgage insurance to fill this need, but Ibrahim knew there were more opportunities in the market.
“Historically, secondary markets penalized [lenders] for not having mortgage insurance, and there were few alternatives,” he says. “Radian had a captive market.”
Now lenders are selling loans without insurance and opting to mitigate risk in other ways, undercutting Radian’s potential business.
“The most significant factor that has reduced the demand for mortgage insurance has been the advent of the piggyback loan,” Ibrahim says.
A piggyback loan is a second mortgage given at the time of a home purchase or refinance that allows someone to buy a home with less than a 20 percent down payment but without private mortgage insurance. In most cases, 80 percent of the home’s value is financed through the primary mortgage, 10 percent through the second mortgage and 10 percent is provided by the buyer. It requires a double mortgage payment, but the second payment, unlike insurance, is tax deductible.
These loans and other alternative financing methods were becoming increasingly popular with buyers.
“I had firsthand experience on how customers found it more attractive in some cases to get solutions other than mortgage insurance,” Ibrahim says. “My background allowed us to more confidently proceed with developing a strategy that would position Radian as more than just a mortgage player.”
Ibrahim knew Radian must move quickly to capture secondary market opportunities. “Radian had always been more innovative than its peers and had already embarked on a strategy (to provide mortgage insurance alternatives),” he says, though acknowledging that the six-month search for a CEO prior to his joining the company had stalled such initiatives.
The initiatives required combining elements from both the mortgage insurance business and the financial guarantee business.
Many lenders were bypassing traditional mortgages in favor of alternatives. But some of these alternatives were offered by the financial guarantee side of Radian’s business.
The two sides of the business weren’t working together, and Ibrahim knew the company could win customers by blending the two sides.
“We are unique because we are involved in both businesses, so we can design solutions for mortgage risk protection that come from the insurance side or from the financial guarantee side,” he says.
Radian created hybrid mortgage solutions that combine the credit enhancement qualities of guarantees and the risk mitigation of mortgage insurance. Fusing Radian’s two businesses was the solution to creating that alternative Ibrahim sought as a customer.
“We position ourselves to offer customers a variety of solutions that are not just limited to the traditional mortgage insurance business,” he says. “We structured alternatives that are based more on the capital market approaches (practiced) in the secondary market.”
Radian still does a strong business in traditional mortgages, and Ibrahim says it will continue to do so. But this hybrid product mix is a third arm, and it allows the company to reach for opportunities it couldn’t satisfy with the same old products.
The results thus far have been encouraging. At the end of 2005, net income was $522.9 million, up from $518.7 million in 2004. Diluted net income per share increased from $5.33 in 2004 to $5.91 in 2005.
While Ibrahim points to Radian’s numbers to prove the success of his strategy, his plan would have flopped without buy-in from employees. The key to getting buy-in is to get employees excited about the change while allaying their fears about the new direction the company was taking. So he took to the hallways and constantly talked to people so they heard his message first-hand.
“You have to get people energized and you have to clearly articulate the vision of the company so everyone can respond to it,” he says. “You cannot make change happen until you have a personal connection with employees. The bigger the change, the greater that connection has to be.”
Even though he’s on the inside now as CEO, Ibrahim still puts himself in the shoes of his other customers shareholders.
“You can’t have a CEO who views this business as his personal piggy bank,” he says. “This is the shareholders’ company, and I have to do everything in their interest.”
How to reach: Radian Group Inc., www.radian.biz or (800) 523-1988
Does your financial institution deliver the customer service you expect? Does the loan officer know your name? And what about the teller you see twice a week? Better yet, does your bank provide convenience services so you don’t need to take valuable time away from your business to battle traffic and wait in line to make simple deposits?
“Service is soup-to-nuts, from how you are treated to the ancillary services the bank offers,” says Craig Johnson, president and CEO of Franklin Bank, Southfield, Mich.
Johnson likes to test banks’ accessibility with this “unofficial” service litmus test: Look up your bank and check out the phone number. Is the listing a direct line to your local bank, or an 800 number (surely linking to a customer call center and not the location down the street from you)?
“Many banks today have a centralized number you call, and it’s difficult to talk to the person you deal with on a day-to-day basis unless you happen to have his or her business card,” Johnson says.
Here, Johnson lists some other characteristics service-oriented banks share qualities that Smart Business readers can’t afford to ignore.
What are the “bare bones” basics of service that business owners should check before working with any bank?
You can break down service into two areas. First is the people part. Whether business owners manage small, medium or large companies, they want to walk into a bank and have people know them. They want loan officers and other key personnel to know their accounts and to be knowledgeable about their businesses. Second are ancillary services, such as convenient banking hours, Internet banking and even courier service.
But above all, the staple in service is how the individuals in your branch treat you. Personnel should return phone calls promptly, be knowledgeable about products, and if they don’t know the answers, they should be helpful in directing you to the appropriate person to address your needs.
Now that so many of our financial transactions are electronic, what value does personal contact provide?
Growing businesses really need to have a partner who understands their business. You want to be able to build relationships with people in an organization so that they will identify your evolving financial needs as your business grows.
Often, service in banking gets lost if the only point of contact for a business owner is the loan officer. You should have an opportunity to interact with a more senior person in the organization in addition to your loan officer and your local branch staff.
What other expectations should business owners set for the financial institutions they deal with?
I think extended branch hours are key. Personally, I would not bank at a branch with limited hours of operation the once traditional “banker’s hours” of 9 a.m. to 4: 30 p.m. don’t suit most managers’ schedules. The first question I would ask any bank is, ‘Do you offer extended banking hours?’ Even if you don’t take advantage of these hours all the time, there will be times when you do, and having the opportunity to swing by the bank at 6 p.m. or early morning before heading to the office is important.
What about ancillary services?
Check to see if your bank provides some kind of courier service. As a business owner, if you can have a courier service pick up your deposits for a nominal fee, you can save several weekly trips to the bank. Your time is better spent working in the business not en route to the bank to make basic transactions.
Do the “service rules” change for Internet banking?
From a tech support standpoint, most banks delegate a key contact person to address questions, concerns or troubleshooting issues. But keep in mind, service standards apply to all aspects of a bank. Whether you’re banking online, in person or over the phone, response time is critical.
Ultimately, you want to enter a banking relationship with a financial institution that sets high service expectations for its staff. That way, you know they will get to know you and your business, and they can make appropriate account recommendations.
As for your expectations, set those high, as well. You deserve to work with a financial institution that can tailor its products and services to meet your business needs.
CRAIG JOHNSON is president and CEO of Franklin Bank. Reach him at (248) 386-9860 or firstname.lastname@example.org.
Education: University of Arizona, fine arts
First job: McDonald’s when I was 15 years old. My first professional job was with NBC working on “Saved By the Bell” as a production manager. I was in charge of making copies of the script, which I distributed to the cast each week. If there was one typo or the smallest error, I had to recopy the whole thing. I learned a lot there.
What is the most important business lesson you’ve learned?
If I have to make a difficult decision, I sit back and think, ‘What would my father do?’ It was easier when he was here because you could put it on his plate and say, ‘You decide.’ I’ve learned to be patient. I’m a very do-it-now person, and sometimes I’ll act too quickly. If I sit back and wait 24 hours, things tend to come together.
Whom do you admire in business and why?
My father (Roger Albertie, who passed away in 2004) is at the top of my list. He was a hard worker, persistent, dedicated and a good teacher.
What has been your greatest business challenge?
Executing our succession plan. I don’t think that is easy for any family business. You can never be too prepared for succession, and I think we did a pretty good job. There were a lot of meetings, a lot of emotions a lot of everything.
Describe your leadership style.
I am pretty aggressive. I’m demanding of my staff, but I also make it a fun environment for them.
Albertie on running a family business: Kari, Kyle and I are humble. We don’t think we know everything, and we don’t come to work every day thinking that. We look for smart people who can give us good advice and feedback all the time. Any good business operates by having several good people, not just one or two.
Education: West Point; Harvard Business School; Fletcher School of Law and Diplomacy
First job: U.S. Army Ranger and lieutenant in Vietnam. My first job out of graduate school was a White House fellow in the Ford administration, which was a one-year appointment. I had done some investment banking as summer work while I was in business school, and I liked it. When I left the White House, I had to decide whether to pursue a career in investments or go into a corporation. I concluded that I’d rather be part of building something than completing transactions.
Whom do you admire in business, past or present, and why?
Walt Disney. He started with nothing but imagination and he created an institution built on making people feel good and providing a product people really want to buy.
What was your toughest business challenge?
The two businesses I’ve headed were both NYSE companies, and I’ve been a CEO for more than 26 years. They have both been small companies in the context of NYSE, but they have always been small companies with big-company complexity. This has been my biggest challenge: How do you sustain profit growth in mature markets when you have a complex business with limited resources?
What has been your greatest lesson learned?
Someone once asked me, ‘How do you deal with the pressure of quarterly earnings?’ I’ve had a quarter-century of quarterly earnings in my career as a CEO. I said, ‘Well, you know, I’ve seen the end of the world, and it’s not quarterly earnings.’ The experiences you have in combat follow you for a long time. I learned to count on those closest to the action and to listen more than you talk. And you can never not lead. You can’t wake up one morning and say, ‘Today I’ll be a leader, and this evening, I won’t.’
Education: Bachelor of science degree, Hillsdale College, Hillsdale, Mich.; MBA, Wayne State University, Detroit
First job: A summer job working in a factory that manufactured tubes. Out of college, my first job was at Kmart.
Whom do you admire most in business and why?
Every manager and executive has a lot of strengths, and each also has what psychologists will call flat spots, or warts. But you can pick people you respect in some areas and leverage upon their strengths and watch what they do well.
I admire Jack Welch and Sam Walton, who was clearly a great communicator. He understood people and had the common touch. Harry Cunningham, the founder of Kmart, was innovative.
What is the most important business lesson you’ve learned?
The need to have smart, good, capable people with a good attitude. That is what makes a company tick. It isn’t any one person it’s a group of people working hard, pulling for success.
What has been your toughest business challenge?
Going from a decentralized company to a centralized company in 1998. Those were tough times because they involved changes to the culture and getting people to think differently. Some people said, ‘This isn’t going to work. How is it going to work?’
Describe your leadership style.
Collaborative and I think it needs to be that way. You need to have the capability to skim and dive.
Strome on music: I’m not a hard rocker, and certainly I’m not a rapper. If this company depended on me to buy music, we’d be bankrupt. ... I do like the new Bette Midler, new Rod Stewart, and even Tommy Lee has some strong stuff.
Strome on finding new business and leaving old business: You can’t fall in love with business. When it doesn’t’ make money anymore, you need to know when to leave it.
“If my father, Will, made buddies with athletes at the gym, he’d send them Powerhouse clothing, and they wore it at photo shoots,” says Henry Dabish, CEO of the business that his father and uncle, William and Norman Dabish, started in 1975.
At the time, bodybuilding was reserved for competitive athletes. Today, even harried professionals squeeze in a workout between hectic travel schedules and corporate commitments. Fitness is one of the hottest categories among franchise chains and was named one of the top growing industries in Entrepreneur magazine last year. Powerhouse Gym, a $244-million organization, is riding this trend with 320 facilities in 39 states and 15 countries.
With a branding effort that started out with free T-shirts, Powerhouse Gym has become one of the most recognized brands in the health and fitness industry seven out of 10 Americans know the name, according to a report by the International Health Racquetball Sports Association.
The branding efforts have expanded to include gym equipment, an annual magazine and commercials on its own MTV-like television station broadcast in the gyms, invaluable PR for a corporation that depends on selling its reputation and its label to gym owners for a flat monthly fee.
“The more people who see the Powerhouse brand, the more who will want to be involved with the company and either choose to work out here or open up a Powerhouse Gym,” Dabish says.
Dabish, along with his brothers J.R. and Victor, must uphold the company’s customer-focused culture and maintain equipment and service standards as they focus on conscientious, steady growth. This means toning up current facilities and tuning into a world market interested in wearing the Powerhouse logo.
Birth of a brand
Powerhouse Gym grew in tandem with the fitness boom, starting in the early 1980s when the Dabishes began licensing the name.
They were in the right place at the right time.
“When it became (popular) to get involved with fitness, we rode that wave we evolved with the market,” Dabish says. “Powerhouse was born at a time when market demand for fitness centers exceeded the number of facilities open to the exercising public beyond serious athletes.”
William and Norman Dabish set up a makeshift gym in the back of their father’s Highland Park, Mich., grocery store. The success of that initial effort led to a second location in the suburbs.
“As soon as the sign went up, there was a demand for it that no one was aware of at the time,” Dabish says.
Before long, customers were asking why there were no Powerhouse locations outside of Michigan and expressing interest in opening new locations, which sparked the Licensing Division in 1984. Powerhouse began tapping into an underserved, national market at a time when William Dabish’s American Cup Champion bodybuilder title and connections with Joe and Ben Weider, among other fitness gurus, had won recognition for the Powerhouse Gym name.
The Powerhouse brand was rapidly building its muscle power, introducing more and more people to the brand and to the fitness and strength it represents. But building that brand wasn’t easy. In fact, it meant losing money as the company focused on getting the Powerhouse name out and stamping its trademark on new locations across several markets.
“The license fee (to purchase the Powerhouse Gym name) was minimal, just enough to cover travel expenses, because Will went to each location to set up the equipment, pricing structure and systems,” Dabish says. “After hotel and airfare costs, we lost money on the first few locations. But we had to get that brand out there.”
Though Powerhouse took an initial loss, the gyms became profitable soon after opening, and today, Powerhouse Gym is the world’s fastest-growing gym licensing organization.
Muscling into the mainstream
With interest from workout enthusiasts and entrepreneurs who wanted a piece of the Powerhouse name, the Dabishes realized their business was much more than a gym. Theirs was a branding machine a stamp of approval for gym owners who wanted independent facilities. But how do you distribute the brand in a way that will help the company grow?
Licensing seemed a logical way to provide the Powerhouse name and networking opportunities to gym owners at a reasonable cost. Basically, licensing is much less restrictive, less expensive and less risky legally than franchising.
Franchise organizations provide exact formulas for facilities and set royalty fees on memberships, and Dabish says that approach wouldn’t work for Powerhouse.
“A gym membership is not a tangible item, so it is difficult to control memberships sold and royalty percentages would be too high,” Dabish says. “We saw that happen with the competition they tried to turn into franchise companies and lost their franchisees.”
A licensing model suited Powerhouse’s goal to expand the brand in the United States and internationally, and fewer restrictions on licensees appealed to entrepreneurs and athletes interested in owning their own businesses.
“Licensing is better for them because it gives them more freedom to add their own personalities to each location,” Dabish says.
Licensees can choose the equipment and the color scheme and tailor amenities such as day care or physical therapy service to fit market demand. The licensing model works hand-in-hand with the branding strategy.
The more people that recognize the name, the more likely they are to ask, “Where can I find a Powerhouse near me?” The more they visit a Powerhouse, the more likely they are to support the brand by wearing its merchandise, further spreading the name when others ask about the logo.
And inquiries are coming from across the globe. International expansion is mostly responsible for Powerhouse’s 9.4-percent growth rate from 2003 to 2004. Master licensees in South America, Europe, Asia especially China and now India, are spreading the Powerhouse brand in markets where the American fitness brand is especially attractive.
“International growth has come quickly because we have other owners (in other countries) doing what we do here in the States,” Dabish says. “Locations crop up quickly because we have other partners, in essence. We can offer them prenegotiated pricing on equipment and other amenities they need, and they want to carry U.S.-branded materials.
“In their eyes, they want to be associated with ‘Powerhouse Gym U.S.A. since 1975,’ and they brand that way.”
Maintaining brand consistency
Elaborate facilities complete with day care and physical therapy services provide a much different fitness experience than the one that Powerhouse’s first hardcore customers sought. Today’s casual athletes work out with results in mind, but they also want the club feel, Dabish says.
Customer care is essential in order to compete in one of the fastest-growing franchise businesses. Older facilities with outdated equipment struggle to fight brand-new branches of the corporate chains that plant facilities in the same markets Powerhouse serves.
To maintain brand consistency, everyone has to live up to what the brand represents, even if it means sacrificing short-term growth.
“We’ve been steady,” Dabish says of the company’s 2005 growth in the U.S. division. “Growth hasn’t been as quick as it could be in the U.S. if we had maintained all current licenses.”
Instead, the Dabishes pulled the Powerhouse logo from 15 locations while opening 18 new gyms.
“If a Powerhouse isn’t reinvesting in its equipment and doesn’t have a good reputation, that facility will go under review,” Dabish says, describing one instance in which a gym lost its affiliation. “The facility was tired and run-down. Equipment was not maintained, and there was down equipment. There was negativity associated with the facility.”
The Dabishes look for clean locker rooms, upgraded equipment, helpful personnel and overall upkeep of facilities to determine whether a Powerhouse Gym is helping or hurting the brand.
“Corporate officers check up on facilities, and we have owners who travel and check up on other owners in different regions,” Dabish says. “We try to get to each gym once a year. We look at everything from signage to the quantity of group exercise classes offered. Probation periods for facilities that are not up to par can last from 60 to 90 days.”
If facilities don’t make the grade, Powerhouse strips its name from the gym. This doesn’t mean the gym owner won’t continue operations, but he or she will not reap the benefits of an international trademark. This type of monitoring is critical for upholding the long-standing brand.
“We will continue to grow in a controlled manner,” Dabish says, adding that by creating more corporate-owned facilities in the U.S., Powerhouse can more readily upgrade outdated gyms, especially those close to the corporate headquarters in Michigan.
“Many licensees travel to Michigan when they want to open a Powerhouse Gym,” he says. “Many of the facilities in this state have been here for 10 to 12 years or longer. I want to upgrade those, open more impressive facilities.”
Meanwhile, the type of person who chooses to open a Powerhouse location is also changing as the fitness industry evolves from heavyweight champions to well-versed entrepreneurs interested in a lucrative venture with a trusted brand.
“Initially, the people who opened Powerhouses liked to train, so they opened a gym,” Dabish says. “I always thought that was funny at the time. It’s like, ‘If I like to eat, I’ll open a restaurant.’ A gym is still a business to operate and maintain.
“The major change in the industry is that there is a lot of professionalism, and it is much more of a business now.”
Today’s Powerhouse Gym owners don’t necessarily need a fitness training background, Dabish says.
“More so, people are interested in investing in a successful company they have corporate interest in the Powerhouse brand.
“Even today when I go back and visit the original location, I’m amazed at how we started from that single location. While we grow the brand, we still want to maintain our roots.”
How to reach: Powerhouse Gym, www.powerhousegym.com
This isn’t all bad.
Consolidation clears room for new startups niche banks that are smaller in scope, target specific regions and cater to small and growing businesses, says Craig Johnson, president and CEO of Franklin Bank in Southfield, Mich. “There are a number of startup banks over the years that have taken a fair amount of market share away from bigger players by nibbling at their heels,” he says.
Smart Business spoke with Johnson for insight on community banking and what factors business owners should consider before opening accounts or applying for loans with any bank.
How does consolidation affect the customer the business owner?
The perfect example in our market here is Standard Federal Bank, which was a very large bank and changed its name to LaSalle. Bank One is in the process of changing its name to Chase. Along with the name changes come policy, procedural and people changes.
Some customers decide the new organization isn’t the route they want to go, and as a result, many small business owners look for a community banking environment to do business.
How do consolidations affect business owners?
The general feeling is that as banks get bigger, they become less customer-focused. Certain functions get centralized outside the area. You hear it often the ability to talk to someone becomes more difficult.
Business owners like to be able to go into their branches or call branches directly, and as banks get bigger they have centralized call centers. They almost discourage customers from calling branches directly. Thumb through the Yellow Pages and see how many banks have direct dial lines to branches. Many of them list 800 numbers instead.
What are advantages to working with a large bank, a national name?
Larger banks do bring a breadth of products and services to the market that many smaller banks economically can’t provide unless they enter a partnership agreement, typically with a larger bank. They may have a corresponding relationship with a larger financial institution that allows them to do such things as international banking.
What does community banking mean, then?
Typically, (community banks) are banks with assets up to $1 billion. You might call super-community banks those with assets up to $10 billion.
The argument many community bankers make is that they know their communities better than regional banks. Their decision-making for loans or other services is are local. The bigger regional banks have localized a lot of that, too. But some will say that in smaller, community banks, if a customer has an issue, he or she can walk into the president’s office and talk with the ultimate decision-maker. That is difficult to do in a large, regional bank, as decision-makers tend to be insulated within the field.
When are community banks best for business owners? And when should customers think big?
At a certain point, a business owner may outgrow community banks. But in a business’s infancy and as it grows, it is probably better served by starting out with a community bank because the owner can be closer to the decision-makers.
How can a business owner choose a bank?
Talk to two or three banks and get a feel for their philosophies. Talking with them in person will give you a good sense of their customer orientation. Can you talk to someone quickly who is knowledgeable about the products you are inquiring about?
Take time to research this decision, and take a look at convenience. Where is the bank located? What hours are they open? Do they offer niche services like courier? Do they have an Internet product that makes sense for you?
Then get down to fees on accounts. What are they charging on their deposit accounts, and what are their loan rates? Cheapest is not always best. You really need to pick a bank that will fit your needs today and as you grow, and that may not be the one with the least expensive fees.
Craig Johnson is president and CEO of Franklin Bank in Southfield, Mich. Reach him at (248) 386-9860.
Dennis Alter, CEO of Advanta, wants entrepreneurs to take the credit. After all, what better way to make a professional impression on a vendor than to pay with a personalized credit card?
So when vendors swipe Advanta’s small business credit cards, Alter doesn’t mind if they gloss over his company’s logo, which is discreetly positioned on the back of the card. He knows his customer base appreciates the positive PR from personalized credit cards.
“How impressive,” vendors think, noticing a name other than that of Advanta, a credit card company with $4.9 billion in managed assets and more than $394 million of combined interest and noninterest income. It is one of the nation’s largest issuers of small business credit cards.
But why pass up an opportunity for face-time why draw attention away from the Advanta name?
“We’ll take the customer’s brand,” Alter says.
Advanta might be at the top of its game in the commercial card sector, but its strategy is very different from that of its competitors. Doling out customized cards is one way it deflects customers from applying for cards with the usual suspects the big-name giants that reel in consumers with gimme promotions.
“Citibank or Chase would not do this because they have their brand to protect,” Alter says. “They want millions of people to take out their credit cards that say Citibank or Chase. That is their strategy. We put the customer first.”
Advanta is more of a boutique company its cards target entrepreneurs, homegrown businesses and small-scale organizations with fewer than 10 employees and less than $3 million in revenue. Meanwhile, its competition includes credit card heavyweights with billions of dollars in revenue, and it must compete against them in a temperamental industry where no one gets all of the business.
Advanta wins big by thinking small. Focus, relationships and industry-specific perks position Alter’s family business in the lead at least for today.
“I’ve been CEO for 33 years,” Alter says. “The environment certainly has changed in three-plus decades, and depending on how rapidly you can adapt to your environment generally determines how successful you are whether you are a victim of consequences of the environment or whether you embrace it.”
Alter’s first exposure to Advanta Corp. was as a young boy. Then called TSO Financial, the company started by Alter’s father in an extra bedroom provided individual, need-based loans to schoolteachers.
Alter’s role in the family business evolved as Advanta outgrew its homegrown headquarters, expanding exponentially by the time he left his teaching position in the Philadelphia city school system in 1969. When he was named CEO in 1971, Advanta (still TSO until 1988) had 30 employees, still served mostly teachers and was licensed only in Pennsylvania, Florida and Delaware. The business only provided fixed-payment loans; it didn’t own a bank and it wasn’t involved the mortgage or financing business.
It was simple, with a focused strategy, much like it is today.
But before it attained its streamlined structure the small-business niche Alter prefers Advanta had ballooned to $25 billion in managed assets. In the early 1990s, when revenue and assets were at an all-time high, 7 million consumers had Advanta cards.
Advanta was one of the giants, though still a minor player considering the trillions of dollars other banks held in assets. It was running with the bulls, and its survival depended on the economy, prime rates and the latest promotions.
“We had the sixth-largest consumer credit card business in the country, and there was tremendous consolidation going on in the industry,” Alter says.
The pressure prompted Alter to start thinking small. At the time, Advanta’s 50,000 small business customers were overshadowed by Advanta’s strong consumer customer base. In that, Alter saw opportunity.
“We had this little small business sector a tiny tail of our consumer business,” Alter says, describing the seed that started what Advanta is today. “In looking at the competition and consolidation, we determined that no one else was going to offer a small business credit card. None of the issuers at the time were doing that not Citibank, Chase, Bank of America.”
Advanta sold its consumer market business and its assets to focus on the small business niche. And for a while, it was the only credit card company in the small business market.
“We saw a market that was untapped, highly fragmented, not saturated with marketing and direct mail, and the big guys were overlooking it,” he says.
The bad news was that you can’t lock competition out of opportunities like that for long.
“After four or five years, the competition said, ‘Look at this market. Look at what Advanta is doing,’” Alter says. “And they all dove into it. We now compete against all those same banks, and it’s tougher now.”
Advanta’s strategy to simplify has its disadvantages. The competition has stronger brands and a larger fiscal footprint with thousands of branches and services, ranging from inventory financing to letters of credit. Advanta has none of this.
“There is brand and size, so they have a lower cost of capital than we do,” Alter says. “And we are specialists. We only offer a credit card to only small businesses around the country.”
But don’t mistake Alter’s realism for pessimism. An adapt-or-fail mindset defines his competitive strategies. The sheer scope and dollar power of his competitors could overwhelm him but instead, Alter considers ways to dart out of their shadow.
Modest-sized companies, after all, are more nimble more capable of innovation, creative marketing strategies and developing close relationships with customers. And targeting small businesses is natural for Alter.
“We embarked a number of years ago on a strategy of building a business based on attracting and deepening relationships with profitable, high-credit quality small business customers,” Alter says, noting that Advanta closed the third quarter with a 92 percent year-to-date increase in its number of new customers compared to the same period last year.
But Alter also recognizes the nature of credit card users. They are fickle, and they will always want more than one.
“People will not want to have all of their business with one financial institution because they do not want one institution to have the keys to their kingdom,” he says.
This gives Advanta an opportunity to attract customers with innovative perks.
“We can zig and zag,” he says. “And that is what we do.”
Strength by numbers
Customized credit cards are one point of differentiation, but there are other ways Advanta bobs and weaves out of the limelight of the large competition. This specialization of targeting only small businesses affords Advanta opportunities to really mine its customers for information. Where do they shop? What perks will appeal to them?
For example, Alter knows from Hanley-Wood research that there are approximately 800,000 business owners who check the box next to “construction small business” when filling out employment surveys. And Advanta owns close to 10 percent of this market.
“We identify [construction customers] through our analytics, so when we mail information to them, we have ancillary products and services that might appeal to them,” Alter says.
A partnership with Hanley-Wood publishing allows Advanta to offer construction customers discounts on trade shows and more than 40 magazine titles.
“We give them cash-back rewards at places like The Home Depot or Lowe’s Home Improvement,” Alter says.
These industry-specific perks appeal to small business customers, Alter says. After all, why not save money where you spend money? Advanta cardholders use the plastic, and they prefer working with a smaller institution like Advanta.
How does Alter know all of this?
Analytics lots of them.
“There are 30 million small businesses in the country, and that is always changing,” he says.
One changes that Advanta is taking advantage of is the explosion in the number of people who earn some of their living from eBay, the online auction powerhouse. Are these home-based brokers also considered small business owners? Are they potential customers for Advanta?
The definition of small business owner has undoubtedly evolved as technology and economic trends encourage more people to explore self-employment, Alter says.
“Will they want a credit card to buy inventory, separate their expenses or have a line of credit to help pay for building up inventory and the cost of doing business?” he says.
He thinks the answer is yes, and Advanta’s research shows that this population is an untapped market that needs credit card services.
“Targeting these people is one opportunity that a changing environment presents,” he says.
Still, how will Advanta sift through small business demographics to find these potential customers? Thirty million mailers, 30 million prospects that’s a daunting analytical process.
Advanta skims though the small business population by turning to the Consumer Credit Bureau and Dun & Bradstreet, among others, which provide psychographic and demographic data.
“We analyze data from a credit perspective, usage perspective and responsiveness,” Alter says. “Will they respond to an offer through the mail?”
Besides turning to such outside organizations for data, Advanta has built its own prediction models to weed out those business owners who look like a terrific person but who won’t use Advanta’s credit cards. The company relies on card-usage patterns to determine card users versus card collectors.
Once they are cardholders, Advanta will decide if customers need another card. Again, usage patterns reveal far more than how often a business owner says, “Charge it.” Those frequent card users are candidates for employee credit cards, checks or a credit line increase.
“This business is really very analytically grounded,” Alter says.
And, from the 50 percent of customers who respond to Advanta’s direct mail solicitations by logging on to its Web site, Alter knows that more customers today prefer to conduct business online. Advanta must constantly tune up its technological capabilities so its time-pressed clients can enjoy the convenience of Internet services with the real-time information they need to manage their businesses.
Innovation for inspiration
Small businesses are responding to Advanta’s strategy as evidenced by the company’s 18 percent transaction volume increase in the third quarter of 2005 to $2.5 billion. Advanta Business Card income grew 33 percent from 2003 to 2004 and since 2003, managed receivables have increased 10 percent annually.
“But that will not continue indefinitely,” Alter says, always considering the competition.
Every week, credit card companies switch up their offers to lure in customers.
“There were long periods of time where we didn’t have the best offer there are tremendous fluctuations in business in a given year,” he says.
Customer attrition is generally 10 percent in the industry, and Advanta has a slightly lower rate. The difference between Advanta and its competitors is that when economic challenges surface, Advanta’s narrow focus allows it to change its course quickly.
“The business is more manageable today, and this scale is something I am more comfortable with on a personal level,” he says.
When Advanta needs to better understand eBay businesspeople or learn even more about its small business customer base, Alter turns to his employees for inspiration. They and the small businesses they serve motivate him to be successful because of his own humble beginnings.
“I can still picture that little room with my dad sitting in it alone at his desk,” he says. “I can picture the small businessperson toiling away, trying to make a living doing what they do.
“I don’t admire a giant company that will prevail and do well regardless of who the CEO is. Momentum will carry them. I admire the guy who is competing with Wal-Mart.”
How to reach: www.advanta.com or (215) 657-4000
“People who build aircraft want to be a giant erector set,” says Richard Ill, president and CEO of Wayne-based Triumph Group Inc. “They want to put the plane together, they don’t want to build the assemblies and components.”
Offering mere pieces and parts won’t win an invitation to the boardrooms of the Boeings, Cessnas and Airbuses of the world. The commercial airline and military customers Triumph Group serves want a three-course menu that includes building components, parts distribution and aftermarket repair and service.
“If we aren’t prepared to supply our customers with integrated solutions, we won’t be able to grow our company the way we desire to,” Ill says, noting that the company has grown from $60 million in aerospace sales when it was founded in 1993 to $700 million to $750 million this year.
“On the other hand, I’m surprised that $750 million in scale is not enough to continue to be a major factor, which we intend to continue to be in this industry,” Ill says.
He points to the two keys that matter most in aviation: scale and systems. These demands align with Triumph Group’s mission to provide a bag of tricks that can cover an aircraft’s needs from nose to tail, and Ill’s goal to break the $1 billion revenue mark in the process.
To continue growing, Triumph must continue to meet aircraft manufacturers’ increasing demand for pre-assembled machine systems and do it in a cost-effective manner.
Triumph Group started as a melting pot of businesses that Ill and a handful of key managers purchased from what is today IKON Office Solutions. A majority of the businesses were centered in aerospace and aviation, and Ill began to nurture this focus through organic growth and acquiring related businesses.
“In the beginning of time, we were well under the radar and we were selling individual company products,” Ill says.
But early on, he realized that to compete in aerospace, Triumph needed to offer customers more than individual parts; the parts from the various companies needed to be combined into completed assemblies.
“We have moved up the food chain and we offer our customer base a wider array of assemblies,” Ill says.
An aircraft diagram on Triumph Group’s Web site encourages visitors to navigate various plane body parts to learn Triumph’s capabilities. Each section of the craft lights up with a description and a list of Triumph’s businesses, which includes everything from machine parts to cabin windows.
“If you had that plane diagram in 1993, the only parts on it would be spares,” Ill says. “Instrument repair, overhauls, leading edges for wings, machine parts for landing gear and a few constant speed drives. Very few.”
Ill figures the selection has multiplied by 20 since then.
“The industry is looking for that,” he says.
But many customers didn’t realize that Triumph could provide them the integrated solutions they were looking for. Linking individual businesses to a common logo was a critical sales tool, one missing from Triumph’s arsenal three years ago. Despite a business steeped in every facet of aviation production and services, the company’s early days were punctuated by a familiar reaction from customers during sales presentations, Ill says.
“It was evident, even in the early days, that we had to do something to raise the visibility of Triumph and of our capabilities so we wouldn’t hear our customer base say, ‘I didn’t know Triumph did that,’” Ill says.
“If we heard it once, we heard it many times,” he says, explaining the impetus behind Triumph’s aggressive branding initiative and its push to publicize the “Triumph T.” “If your customers don’t know you do it, they are not going to buy it from you.”
Triumph didn’t want a piecemeal reputation, and it needed to communicate that customers could source entire aerospace and aircraft systems and services from one provider. The diverse collection of 41 companies produced complementary products and provided services that would allow customers to use Triumph as a one-stop shop so they could assemble rather than manufacture aircraft.
Still, Ill says the organization needed to better illustrate the unified whole. It needed an all-encompassing identity a bold name tag to show customers that its decentralized structure was a powerful team that could play with the big guys.
“When we branded the T, we then had the ability to bring together [all of our services] for customers,” Ill says. “We no longer hear, ‘I would have given you an order if I had known you sold that.’ Now, we have a standardization of that Triumph T, and we present that to the world.”
When Ill talks about scale, he lumps the aerospace and aviation industry into three categories large, larger and largest and he expects competition, consolidation and pricing pressure to widen the gaps between each segment. Being one of the big players is how Triumph will offer integrated solutions to its customers and continue to grow, he says.
The Boeing and Airbus types reign in the $6-billion to $29-billion group. In the lower stratosphere are companies including Triumph and those close to the $1-billion range. A notch below is a fragmented base of suppliers.
“Whether through mergers or acquisitions, the industry will consolidate,” Ill says, noting that this could present opportunities for Triumph, which evenly splits expansion efforts between acquisition and organic growth.
Although a bundled acquisition fueled Triumph’s start-up and strategic sales and purchases helped increase aerospace sales from $60 million to today’s $750 million machine, Ill cautiously regards this method as only part of the company’s plan for growth.
When Triumph invites another business to the “T,” the prospect must present a promising offer that includes three Ps people, products and profit. This translates to the total system Triumph will eventually provide customers.
“We want products that will help us expand and offer more to our customer base, and virtually all of our acquisitions have added a product or service to our bag of tricks, if you will, to make us more attractive to our customers,” Ill says.
For example, two years ago when Triumph acquired a heat exchange business from Parker Hannifin, now called Triumph Thermal Systems, the purchase provided Triumph with new product complementary to its existing hydraulic line. Most of all, its strong management team flourished with Triumph, Ill says.
While the business was not a major piece of the pie for Parker Hannifin, it was a profitable one. Once under Triumph’s wings, capital and managerial support allowed the thermal systems operation to flourish.
In this acquisition and all others, Ill knows that while products fuel sales, talented pilots lead a business toward success. He searches for entrepreneurial hybrids, leaders who can operate solo, managers wired to drive toward their own goals but able to retrofit their operations to meld the mechanics of a large corporation.
“The ones who do it best have a great deal of common sense, are very loyal and are knowledgeable about their products and how they fit in with everyone else’s,” Ill says.
“Some people are excellent managers of companies that were $10 million in sales. But they couldn’t grow with us. It is a challenge to find the right people who can grow with you. I employ entrepreneurial managers and we protect the integrity of each company [we acquire], but we all have to learn to be part of a group and contribute to each business as we climb the integrated solutions food chain.”
This in mind, Triumph established a corporate structure with cross-functional teams and specialized sales forces for each business.
“Human resources and the sales forces that cross over all groups are most important,” Ill says, adding that, “This doesn’t mean that individual companies have nothing to do.”
Dedicated HR, IT and sales professionals in each business focus on their particular products and services.
Geographic sales teams that understand Triumph’s mission can sell an array of total solutions to customers because they connect with every business under the corporate umbrella.
“Sales teams that present to our customer base might include four to six companies to produce one product,” Ill says. “You may have a machined part from one company, an actuation system from another, sheet metal from another, and that is formed and assembled into a part that is then delivered to a customer.”
Triumph is now positioned to make the most of its portfolio of businesses during boardroom presentations.
Further, a $25-million to $30-million annual commitment to increase operating capacity will ensure the company integrates the latest technology always a challenge in this progressive industry while providing funds for equipment repairs, machinery and product development efforts. This investment has always been a critical budget line item for Triumph.
He set an early precedent for constantly evolving to meet market demands.
“Capacity and expansion will allow us to offer more to our customers and, at some point in time, become a billion-dollar company,” he says.
Having the size and the ability to offer integrated solutions is only half the battle. You also have to have a competitive price, and that means finding opportunities across the globe to squeeze costs out of the system.
“Aerospace is very obviously an international business,” Ill says, pointing to Triumph Group’s European locations and a work-in-progress facility in Bangkok, Thailand, which he says is a direct result of the company’s international growth.
Already, 23 percent of Triumph’s business is international. This will increase with continued investments in businesses in Thailand, for example.
“We will make acquisitions in Europe and other parts of the world, if possible,” Ill says. “We are not limiting our acquisition options to only the United States.”
Ill realizes that outmaneuvering the competition requires lowering costs for customers, and with repair and overhaul business augmenting the company in Asia, he says that Triumph will investigate practical opportunities.
“In all manufacturing sectors, not just aerospace and aviation, people are looking for low-cost sourcing and for integrated solutions,” Ill says. “There is constant pressure from our customer base a constant pressure that I hope is self-imposed, because we have to [lower costs] to survive in the business world.”
The low-cost, high-output companies that can manage the volume that commercial airlines and defense programs require will survive.
Ill wants to build a big machine, but it has to be lean to cost-effectively provide customers with the total solutions they want.
“We’ve made a significant commitment in both people and capital to the lean manufacturing process,” he says, pointing to a Spokane, Wash., facility that was reconfigured into Triumph Group’s Lean University. Triumph’s reasons for acquiring the operation that was once a Boeing plant were twofold.
“It gave us a brand-new product to offer our customer base, and it was a plant that was very lean,” Ill says. “They had taken a lot of costs out of the system; the plant was built properly from Day One.”
Now, the Spokane facility serves as a school for Triumph employees, who are trained there before they assume their posts at various plants.
“That is how we transfer lean practices throughout our organization,” Ill says.
So far, Ill is satisfied with Triumph graduates and their progress at each of the company’s U.S. facilities. But, just as with revenue, product offerings and volume, in general, he knows that his team can’t turn on autopilot just because the system runs smoothly.
Lean operations help keep costs in line and a large scale allows Triumph to meet a diverse range of customer needs, but if Triumph doesn’t continue growing, adding to its capabilities and giving customers integrated solutions, its competitors will certainly step in.
“You have to get better at doing things all the time,” Ill says. “Otherwise, you won’t be able to compete with those who do get the job done.”
How to reach: Triumph Group Inc., www.triumphgroup.com