Open To Consultation Where to turn when your money-raising dilemma is more than you can face alone

William Tuorto, founder and chair of Global Eco-Logical ServicesInc. in Atlanta, accomplished more during the first six months ofthis year than many entrepreneurs achieve in a lifetime. While most29-year-olds are building Internet firms by cobbling together bits,bytes and strategic partnerships, he has staked his claim in thegritty business of solid-waste management.

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

In rapid fire, Tuorto went on a little acquisition binge of hisown. Starting in December 1998, he lined up seven waste managementcompanies located primarily in New Jersey, Ohio and Pennsylvaniaand bought them all in a single transaction, allowing him toprovide near complete vertical integration from hauling to landfilloperations to waste treatment. Six months later, he bought twomore, giving him a company that, from a standing start, had grownto $10 million in annualized revenues. But Tuorto isn't done."The end game," he says, "is to build a $200 millioncompany that is 100 percent vertically integrated by2001."

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

David R. Evanson's newest book about raising capital iscalled Where to Go When the Bank Says No: Alternatives forFinancing Your Business(Bloomberg Press). Call (800)233-4830 forordering information. Art Beroff, a principal of Beroff Associatesin Howard Beach, New York, helps companies raise capital and gopublic.

Do I Need Help?

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

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

Another acid test to take when considering whether you need thehelp of a financing consultant is the amount of capital you need toraise. The majority of firms, including Source Capital, seekcompanies raising $3 million and up, for reasons chiefly related tocompensation. Glazer says if you're raising $1 million or less,you're probably on your own. This doesn't mean youwon't be able to find someone to help you; it just meansit's less likely because anyone who is skillful enough to raisethat amount of funding for a private company will be spending theirtime 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 enoughanalysis of the future," says Glazer. "What we find is ifa company needs $2 million today, it will almost always need $5million more next year."

Your Pedigree, Please

If you decide to engage a financing consultant, be prepared totrust your instincts when deciding which one to hire. Most likelyyou can get a reference from an attorney, an accountant, or thelast banker or venture capitalist who turned you down, butfinancing consultants are typically a breed unto themselves with nocodified professional standards. In fact, anyone can hang a signand start flogging deals. Here are some items to consider as youinterview your would-be consultants:

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

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

In addition, ask for references from assignments where theconsultant did not succeed. "Anyone who has been in thebusiness awhile has had assignments that didn't result in aclosing," Glazer says. "You have to figure outwhy."

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

• Flexibility. "Let's face it, every company isdifferent and needs a different solution for financing," saysGlazer. If consultants propose strategies before they fullyunderstand your situation, there's a good chance therelationship will fail.

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

Finally, three quickies to keep in mind. "First," saysGlazer, "no pinky rings or diamond cuff links that could chokea horse [ha]; second, run the proposal by your accountant orattorney to see if it passes the reality test; and finally, visitthe consultant's place of business." A consultantoperating from a home office might give you better service than awhite-shoe Wall Street investment bank, but you need to understandthe consultant's working environment so you can see theirlimitations and advantages.

The Price Of Advice

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

The consultant's cut of the money raised might range from 4to 6 percent, according to Glazer. Typically, however, a consultantwill talk not of percentages, but of success fees, because in dealsthat might involve initial public offerings, percentages ofcompensation going to others take away from compensation going tothe 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 "duediligence" fee, a monthly retainer or both. Again, ifyou're seeking to do an IPO, there usually won't be anyupfront fees (or they will be very well-camouflaged) but rather aone- or two-year retainer after the deal. The percentage of thecompany, either in options or in shares of stock outright, rangesfrom 2 to 10 percent.

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

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

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