URL: http://www.entrepreneur.com/magazine/entrepreneur/1999/october/18382.html

William Tuorto, founder and chair of Global Eco-Logical Services Inc. in Atlanta, accomplished more during the first six months of this year than many entrepreneurs achieve in a lifetime. While most 29-year-olds are building Internet firms by cobbling together bits, bytes and strategic partnerships, he has staked his claim in the gritty business of solid-waste management.

Global Eco-Logical's genesis was actually industry consolidation among the big boys. "Because of the mergers," says Tuorto, "they got in what some could argue was a monopoly situation. They had to divest, and that opened the mid-Atlantic and the Northeast regions for us."

In rapid fire, Tuorto went on a little acquisition binge of his own. Starting in December 1998, he lined up seven waste management companies located primarily in New Jersey, Ohio and Pennsylvania and bought them all in a single transaction, allowing him to provide near complete vertical integration from hauling to landfill operations to waste treatment. Six months later, he bought two more, giving him a company that, from a standing start, had grown to $10 million in annualized revenues. But Tuorto isn't done. "The end game," he says, "is to build a $200 million company that is 100 percent vertically integrated by 2001."

Tuorto's financing plan wasn't any easier. The aggregate purchase price of the initial companies was $7 million, which was financed with cash, plus notes that were convertible into shares of Global Eco-Logical. To make those shares the kind of currency sellers would accept, he had to get cash into the company and get it public, which he did with the help of New York City financing consultant Source Capital Partners. "The transaction was complex, with lots of moving parts," says Tuorto. "To get it done, I knew I needed help."

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David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business(Bloomberg Press). Call (800)233-4830 for ordering information. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.

Unfortunately, when it comes to raising capital, particularly equity capital, many entrepreneurs aren't as sure of themselves as Tuorto was. The business of finance is so intimate, and so tied to their own wealth, many entrepreneurs try to raise money on their own when they should seek outside help.

According to Source Capital founder Steve Glazer, who has 20 years of experience in securities and investment banking, raising capital relies heavily on three ingredients. "Two of these--contacts and expertise--can be acquired by entrepreneurs fairly easily," he says. But the third is the one that bodes well for his line of work. "Manpower is the real issue. Entrepreneurs must ask themselves: `Can I do this myself? Can I do two full-time jobs at once?' And the truthful answer for most people, if they are running a growing company, is no."

Another acid test to take when considering whether you need the help of a financing consultant is the amount of capital you need to raise. The majority of firms, including Source Capital, seek companies raising $3 million and up, for reasons chiefly related to compensation. Glazer says if you're raising $1 million or less, you're probably on your own. This doesn't mean you won't be able to find someone to help you; it just means it's less likely because anyone who is skillful enough to raise that amount of funding for a private company will be spending their time working on much larger deals.

And if you're in that awkward range of $2.2 million or so? "[The owner] typically hasn't done a complete enough analysis of the future," says Glazer. "What we find is if a company needs $2 million today, it will almost always need $5 million more next year."

If you decide to engage a financing consultant, be prepared to trust your instincts when deciding which one to hire. Most likely you can get a reference from an attorney, an accountant, or the last banker or venture capitalist who turned you down, but financing consultants are typically a breed unto themselves with no codified professional standards. In fact, anyone can hang a sign and start flogging deals. Here are some items to consider as you interview your would-be consultants:

• A good match.First, ascertain whether the consultant helps finance your kind of business. "Most consultants will tell you upfront if there's not a match--but not all," says Glazer. "Avoid the one who wants to learn how to raise capital for your kind of business and is going to go to school on your deal."

• Good references.The most important criterium is the consultant's success with previous engagements, says Glazer. "If the consultant can't [give you] three clients he or she raised money for in the past year who can talk about the value the consultant brought to the table, you don't want to hire this person."

In addition, ask for references from assignments where the consultant did not succeed. "Anyone who has been in the business awhile has had assignments that didn't result in a closing," Glazer says. "You have to figure out why."

Did the consultant lead the entrepreneur to investors and a proposed investment that the entrepreneur turned down? Entrepreneurs are frequently unrealistic about the value of their businesses and the terms and conditions investors want, resulting in unrequited deals. These aren't as much of a concern as if your would-be consultant is reportedly difficult to work with, unfocused or slow to get off the dime.

• Flexibility. "Let's face it, every company is different and needs a different solution for financing," says Glazer. If consultants propose strategies before they fully understand your situation, there's a good chance the relationship will fail.

• Good chemistry.Raising money is the most sensitive of business transactions and requires a lot of patience and understanding from investors, business owners and the middlemen bringing the two together. For the effort to succeed, there needs to be chemistry between the consultant and the entrepreneur.

Finally, three quickies to keep in mind. "First," says Glazer, "no pinky rings or diamond cuff links that could choke a horse [ha]; second, run the proposal by your accountant or attorney to see if it passes the reality test; and finally, visit the consultant's place of business." A consultant operating from a home office might give you better service than a white-shoe Wall Street investment bank, but you need to understand the consultant's working environment so you can see their limitations and advantages.

These services don't come cheaply because capital is vital. In the end, there isn't much difference between a great business idea without funding and a poor business idea without funding. Consultants often charge an upfront fee, a percentage of the amount raised and a percentage of the company going forward.

The consultant's cut of the money raised might range from 4 to 6 percent, according to Glazer. Typically, however, a consultant will talk not of percentages, but of success fees, because in deals that might involve initial public offerings, percentages of compensation going to others take away from compensation going to the investment bankers. If the bankers' fees get compromised, they might walk away altogether.

The upfront fees might come in the form of a $25,000 "due diligence" fee, a monthly retainer or both. Again, if you're seeking to do an IPO, there usually won't be any upfront fees (or they will be very well-camouflaged) but rather a one- or two-year retainer after the deal. The percentage of the company, either in options or in shares of stock outright, ranges from 2 to 10 percent.

Finally, most engagements are exclusive, meaning if you hire a consultant, you can't talk to anyone else about raising money. To protect yourself, you need to limit the engagement to six months, according Glazer. "We won't take a company on unless we're certain we can get it funded," he says. "In general, if you hire someone and you aren't close to being funded in six months, you need to look for help elsewhere."

Speed was a keen issue for Tuorto. "In six months, we were a whole different company than when we started," he says. "Six months from now, we'll be a whole different company again."

Contact Sources

Global Ecological Services Inc., 1230 Peachtree St., #2545, Atlanta, GA 30309, fax: (404) 888-9369

Source Capital Partners, (212) 258-2520, sglazer@equibridge.com