Accounting software developer Blackline Systems had reached the point where its organic growth could not finance future expansion plans. In August, the Woodland Hills company found a solution by having its founder and Chief Executive Therese Tucker sell off a majority stake to Silver Lake Sumeru, a private equity firm in Menlo Park investing in middle market technology companies. While Tucker would not disclose the amount added to Blackline’s balance sheet from the sale, the company is in a better position to add staff to its London office and its Los Angeles technology team. It also plans to bring on new consulting, technology and outsourcing partners. “We have a lot of ways to spend this money,” Tucker said. The Blackline deal shows why California remains one of the top states for private equity deals even if the volume remains below what it had been pre-recession. Blackline’s track record of multiple years of strong growth likely made it stand out as a good investment. Between 2010 and 2012, revenue has grown 142 percent to $25 million, placing Blackline at No. 9 on the Business Journal’s list of fastest growing private companies. Blackline stands out because in general, private equity groups are having a hard time finding growth companies for investment, said Justin Blaine, a managing director with Mentor Group, a Westlake Village investment banking, financial advisory and appraisal firm. Tucker “The appetite is there but I think they are overly picky of what they are looking for or there are not enough companies that are attractive right now,” Blaine said. Meanwhile, on the bank side of small business finance, the lending environment is lukewarm, though finance industry professional point to signs of improvement. While major banks remain skittish post-recession about making business loans, they are loosening up with the dollars they give out due to a pent-up demand, according to some in the industry. “The lenders are working hard to balance the regulatory environment and getting new clients because they really do want to place the money,” said Drew Grey, a partner with Encino accounting and business consulting firm SRG LLP. Blackline is among more than 2,200 companies headquartered in California backed by equity finance. The state ranked second in the nation in attracting private investment in 2012 with $35 billion in 255 investment deals, according to the Private Equity Growth Capital Council, in Washington, D.C. In the Los Angeles area, the deal volume has not picked up even with an improving economy, said Blaine of Mentor Group. Pre-recession deals were plentiful and a company with a unique product would get interest all across the funding spectrum – from banks to private investors, Blaine said. Now business owners who have waited out the recession are ready to sell, a trend that will likely pick up merger and acquisition activity. “That will be the impetus for more deal flow,” Blaine said. Equity decisions In the case of Blackline, the company had a $5 million line of credit through Silicon Valley Bank that it never ended up using because of its frugal management and not wanting to spend more than was coming in, Tucker said. As for finding fresh capital, the options were between a strategic buyer who would take 100 percent of the company and a financial buyer taking just a large piece. Tucker said she chose Silver Lake Sumeru because it was the firm that was the best fit for Blackline and the one she was most comfortable with. “They saw the potential of our market,” Tucker added. At the same time Blackline found organic growth could not keep the company moving forward, more competitors were entering the accounting software market, so it needed cash to compete. Another factor was Tucker planning ahead for when she was no longer actively involved in Blackline; an equity partner would help with planning. “If you want a company to be sustainable, you have to have a good succession plan in place and that takes three to five years to happen,” Tucker said. However, some business owners are not ready to give up as much of their business as Tucker did in her deal. For raising capital, a mezzanine loan is often a favored route because that way they do not give up too much equity too soon, said David Bonrouhi, managing director at Calabasas Capital, a financial advisory firm. “Some business owners would rather take on high-cost debt if they are confident about the growth,” he said. Another option available to those seeking capital include the Valley Economic Development Center in Sherman Oaks, an alternative lender working with entrepreneurs and small businesses throughout Los Angeles. The VEDC offers micro-loans in amounts up to $50,000; small business loans up to $750,000; and community advantage loans up to $250,000. The center is supplying $1.5 million a month in new credit compared with $1 million at this same time a year ago, said Lynn Fernandez, vice president of lending. “We are still receiving referrals from banks because (businesses) do not meet lending criteria,” Fernandez said. And then there are the traditional banks. Demand is picking up for loans throughout the San Fernando Valley and the Los Angeles basin, industry professionals said. City National Bank, for example, had a bank-wide 23 percent increase in commercial loans in the third quarter year-over-year. The Beverly Hills-based institution makes loans throughout the U.S. but does a majority of its business in California. Jim Haney, regional manager of commercial banking services for City National, said that in his talks with business owners he perceives an uptick in their optimism. Industry bright spots include general manufacturing, logistics, aerospace and food distributors. There are even signs of life in the construction industry, Haney noted. “Drive around the Valley and you will see a lot of construction cranes you did not see two years ago,” he said. Scott Schlange, commercial lending area manager in the Valley for Wells Fargo Bank, believes a stabilizing economy is bringing business owners back for loans. Wells Fargo is the nation’s largest lender of SBA loans, which growing businesses can use for acquisitions, property purchases, and working capital. The challenge of working with fast-growing companies is they can be highly leveraged and have poor balance sheets that create a higher risk profile, Schlange said. Also, the profits may appear low because of costs associated with growth, leaving the owners baffled about their financial strength. At that point, Wells Fargo will take on a consultative role and work out financing with restrictions. “Often that involves a lot of meetings and kicking the tires and looking at the inventory in order to provide the best financing that we can give,” Schlange said. Crowdsourcing of startups and small businesses is a new form of financing still making its way through regulatory approval process. The U.S. Securities and Exchange Commission has proposed rules for crowdsourcing of small businesses which are now in a three-month public comment period. When approved, this would allow investors not registered with the SEC to put money into small companies. The rules would also cap at $1 million the amount raised in a 12-month period; require a registered broker-dealer to be involved with the crowdfunding; and filing of annual reports of companies completing a crowdfunding round.
Economy Boosts Financing Options
