With the Great Recession, bank financing for businesses has become scarce. Many companies have struggled as previously reliable customers have cut back their orders or disappeared. Their cash reserves have shrunk as sales have diminished.
Some companies have sought protection through state receivership or federal bankruptcy restructuring. Some have desperately sought new banking relationships, in hopes of securing a new line of credit.
Others have dug into their own pockets or added more debt to their credit cards, injecting more personal capital to keep their companies afloat.
Some have simply turned off the lights, locked the doors and called it quits.
In an effort to save companies that were otherwise healthy before the recession but have struggled in the past year, three of Milwaukee’s veteran entrepreneurs have created a new business model they believe will save companies and jobs while creating an investment opportunity with high return potential.
In September, Wayne Staats, Hensley Foster and Richard Kranitz launched Ubela Inc., a holding company that acquires, transforms and grows healthy businesses that have run into difficulty during the economic slowdown.
“The concept is that as we try to make them more successful. We find if (the companies) can share common things,” Kranitz said. “We sort of cram them together – they share facilities, share employees and try to sell to similar customers.”
The entrepreneurs created the Ubela model earlier this year after they consulted with several businesses in turnaround situations. While examining the different issues each company was facing, the Ubela model began to take shape, bringing other companies under the same corporate umbrella.
“All of a sudden, Wayne and I thought about maybe putting the three together,” Foster said. “Within several days, we all said, ‘Let’s go for it.'”
The Ubela business model is built around efficiencies. The company’s three current portfolio companies now share a 50,000-square-foot facility on Milwaukee’s north side. They also share employees, marketing, some office administration functions, manufacturing processes and assembly and information technology.
The three companies are:
- Green Tree Designs Inc. – A designer and builder of trade show exhibits, digital signage and related products. Previous customers included Wacker Corp., Aurora Healthcare, Koss Corp., Jacob Leinenkugel Brewing Co. and other prominent companies.
- Green Tree Shelters – A builder of backyard shelters that require no tools for assembly. Green Tree Shelters was formerly a division of Green Tree Designs.
- Green Tree Environments – A designer and builder of playgrounds and educational environments for children and interactive environments for the elderly.
The benefits of shared services between portfolio companies were revealed during the business planning process, Foster said.
“We were looking (at first) at how these companies are going to survive, but we started to find that this is something you can take even in good times, that it makes sense to share (operations, facilities and employees),” Foster said. “Sustainability is the key word. This gives our companies sustainability that makes them viable five to ten years down the road.”
To date, Ubela’s purchases have been funded by Staats, Foster and Kranitz. However, the trio plans to look at other funding options to acquire additional companies in the future.
“We’re bootstrapping kind of guys, but we realize that in the long run we’ll probably need to bring in outside financing of one sort or another,” Staats said.
Financial transformation
Ubela is not a charity. The company tries to help potential portfolio firms restructure themselves.
“Whatever the company is, it has to be clean before it comes to Ubela,” Foster said. “The companies that have lost 50 percent of their volume, they can’t do anything about their fixed costs. We are attacking their fixed costs and bringing them down to that 50 percent level. We have to ask (these companies) what it will take to make them profitable at the level they think they can sell at within the next 12 months.”
Kranitz, an attorney specializing in securities and financial law with the Grafton law office of Kranitz & Philipp, said Ubela’s portfolio companies needed to reduce their debt loads with banks before they could be acquired.
“The banks will take a haircut, but they will get more than they would in a bankruptcy,” Kranitz said. “And they end up with better customers (in the long run). We’re taking an active hand in that, negotiating with the (companies’) creditors and banks personally and behind the scenes.”
By reducing the debt held by their portfolio companies, Ubela is creating a scenario in which they can survive, attract investors and see growth prospects when economic conditions begin to improve.
Profitable incentives
After a company has gone through a financial restructuring, it is also required to create a new business plan before it becomes an Ubela portfolio company. Part of that process is inserting a line item dedicated to profit in the company’s new profit-and-loss sheet, Staats said.
Initially, each company will save 1.5 percent of its revenues in a dedicated fund to be used in reinvesting in the company.
“That was derived from the businesses’ need to make a profit, something that is often thought about but forgotten,” Staats said. “It’s something I’ve thought about for many years – profit ends up being an afterthought rather than a necessity. It’s a concept more businesses need to consider doing.”
By forcing portfolio companies to think about profit, Ubela will ultimately become a more attractive investment.
“This is necessary for our survival,” Kranitz said. “If we’re going to attract capital – our investors are entitled to a return – we’ve got to be prepared to pay a return.”
The profits earned by portfolio companies also are a key incentive to the top managers of Ubela portfolio companies.
When a company is sold to Ubela, its former owner becomes an Ubela employee. Their shares in their former company are converted into shares in Ubela. And depending on the performance of the portfolio companies, the number of shares each former owner holds in Ubela fluctuates.
“Every year, 18 months or two years, we will reassess every company. Based on a formula that we all agree on, we will determine what the value of the company is,” Foster said. “That ability means that (the leaders of the companies) can have a better chance of increasing their share. The person that is running that business ultimately is going to do it or not. And if it goes down the tubes, their value in Ubela goes down to zero.”
Staats, Foster and Kranitz hold meetings with the leaders of their portfolio companies every Wednesday, where they discuss sales prospects, best practices and long-term ideas.
“It’s sort of like a TEC group or a CEO roundtable,” Foster said. “We talk about concepts or best practices – it’s all tied to making Ubela more valuable.”
Entrepreneur advantage
For the former owners of Green Tree Environments and Green Tree Designs, joining Ubela was the best option.
In mid-2008, Creative Works, which would later be known as Green Tree Designs, was projecting 2009 to be its busiest year. The company, which designs and builds displays used in trade shows, had more commitments in its pipeline than ever before.
“Within two months, it all dried up,” said Les Braze, one of the former owners of Creative Works. “Between September and November, we scrambled. We laid people off. We looked for other work. We put management on a four-day work week. Then we took furloughs. Eventually, we had to let everyone go.”
Gerry Slater, former owner of Playworks Inc. and Playworks 4 Kids, which are now known as Green Tree Environments, was in a similar situation. The companies had as many as 19 workers previously, but shut the doors in late 2008.
“Getting small businesses together to collaborate on our strengths – that makes so much sense to me,” Slater said. “This model is consistent with natural, healthy systems. This is a very positive, collaborative vision, and it’s exciting.”
Mark Mittelstadt, the other co-owner of Creative Works, said the Ubela model reminds him of the Minnesota farming community where he grew up, when families shared equipment and helped each other during the harvest season.
“Overhead is a fixed expense, and if you can share machines with partners in similar businesses, that can help offset your exposure,” Mittelstadt said. “And the ability to share financial resources like accounting and payroll, by collaborating you can get higher quality service in any number of areas (than you normally could).”
Today, Slater is the only employee of Green Tree Environments. He handles sales and marketing and design work, while Green Tree Designs is able to handle his manufacturing.
“They have a fantastic shop with great people in it,” Slater said.
At its peak several years ago, Creative Works had as many as 30 employees. Today, the company has five full-time employees, but it hopes to hire other former Creative Works employees as business picks up.
The Ubela companies have agreed to provide services to each other at pre-determined rates, which cover the costs of the services provided while allowing the eventual seller of the product to make a profit.
The focus on lean operations allows companies to focus on their core strengths, Slater said, while providing an avenue to expand their sales channels.
“By redefining what each of us does, we have begun to find the essence of what each of us does,” Slater said. “That has allowed us to do cross (marketing and sales), which gets you out of depending on one market segment. We’ve found other ways of using our skill sets to sell and serve customers.”
While serving a previous customer, Slater recently cross-sold some of Green Tree Design’s services, the first time the companies were able to effectively cross-sell, Braze said.
“There really is synergy between us,” Mittelstadt said.
Building plans
Green Tree Environments, Green Tree Design and Green Tree Shelters are all located in a leased 50,000-square-foot facility at 6770 N. 43rd St. in Milwaukee. There is some expansion room in the facility.
Ubela is talking to about six other companies that it may acquire. By the end of the year, the holding company could add another two firms to its roster, Staats said.
“The bankers are referring them to us. The accounting companies are referring them to us,” Staats said. “Branding agencies are referring a few.”
“When this starts to turn around, all boats will be floated,” Foster said. “If (a company) is around and kicking, they will be kicking butt.”
