Soup and sandwich with a side of mentorship
Sean Rayner’s company is leveraged. Highly leveraged. Jeff Polovick has plenty of experience with debt. Over lunch at Edmonton’s Royal Mayfair Golf Club, they discuss the intricacies of borrowing and how best to do it
YOUNG EXECUTIVE: Sean Rayner, president, Vet’s Sheet Metal
COMPANY HISTORY: Rayner is the fourth generation of his family to run Edmonton-based Vet’s Sheet Metal, which installs custom ductwork, specializing in institutional, heavy commercial and industrial ventilation.
ANNUAL REVENUE: $10 million
LUNCH: Steak sandwich (medium rare) with onion rings and a side of curried carrot soup
SENIOR EXECUTIVE: Jeff Polovick, founder, president and CEO, The Driving Force
COMPANY HISTORY: Polovick founded Driving Force Vehicle Rentals 34 years ago. The company rents, leases and sells vehicles, with commercial accounts making up 90 per cent of its business. A lot of its work is in Fort McMurray, but Driving Force has branches in Whitehorse, Vancouver, Fort St. John, Calgary, Edmonton, Saskatoon and Iqaluit.
ANNUAL REVENU:E $200 million
VEHICLES IN FLEET: 8,000
LUNCH: Beef barley soup and seafood salad
The sun pours through the floor-to-ceiling windows, and the dining room at the Royal Mayfair Golf Club is filling up with the luncheon crowd. As we settle in and place our orders, Sean Rayner gives a brief history of Vet’s Sheet Metal. The company was founded by his great-grandfather, Fred Rayner, in 1921. He named it for the war veterans he fought with in the First World War and employed in the years after. Until recently, the Rayners were completely averse to taking on debt. “Dad never owed a penny (or so I’ve been told),” Sean Rayner says. “When I speak with him about it, he says, ‘Oh my god, you’re paying eight per cent interest here! You might as well cut your left leg off and see if you can still run.’”
But Rayner, who’s young and ambitious, wanted to use debt to help the company grow and has done that. But in the construction industry, when you get big jobs, you also get large “holdbacks” – payments that are withheld to ensure work is satisfactory and all subcontractors are paid. “Our ability to finance more work decreases because our money is tied up in holdback,” he says. Making matters worse is the fact that the biggest project the company has ever worked on got extended for a year, meaning his money is being held up longer.
Vet’s has gone from paying everything in 28 days to pushing payment out as far as 85 days with vendors, some of which Vet’s has had 80-year relationships with. It hasn’t breached any of its covenants with the bank, but it has been close. “It’s been a challenge and quite stressful,” Rayner says. “There’s a light at the end of the tunnel, but it was pretty dark for the last few months.”
Jeff Polovick knows a thing or two about debt. “We’re extremely highly leveraged,” he says. “Always have been.” At one point, he says, he had a debt-to-equity ratio of 36 to one. “I quit worrying about my debt load in the early ’80s because if you owe more money than you can possibly pay, the creditor has the problem, not you.”
Polovick is all for the responsible use of debt. “You always want to leverage up your business as much as you can, as long as your business can afford to pay for it,” he says.
He recalls a professor at Harvard’s Owner/President Management Program, which he attended a few years back, who said equity is the most expensive form of debt you can possibly have. The professor told the story of the debt limb: “The closer you are to the trunk of the tree, the stronger the limbs are [and the safer your debt load]. The further out you get, the limbs become shakier and more unstable. But the thing is that all the best and biggest fruit are at the outer extremities of the tree. So it’s always a balancing act: how far out on the debt limb can I go to get that fruit before it breaks and I fall?”
Polovick grills Rayner on a few details of the big job Vet’s has been working on. Rayner assures him the contractor’s credit is not an issue, that the quality of work is fine and that no other trades are likely to go after this contractor and lien the project.
“How much rope will your bank give you?”
“I’m pretty much at the end of it.”
“Have they asked you for any additional security?”
“No, they have it all.”
“So you’re all in.”
Lunch is served. Polovick greets a couple of colleagues, customers and friends, then suggests both short-term and long-term plans for Rayner. “For the short term, you have to communicate regularly with the bank and your suppliers,” he says. “Go to your suppliers and say, ‘Look, work with me. I’ve never defaulted on anything and I’m not going to default on anything. I’ll tell you anything you want to know. I’ll share with you whatever data you want.’ They’re going to want to know.”
Long term, Polovick says Rayner needs to renegotiate with his lending institution. “When times are good, and they are now, you can renegotiate lending agreements with banks. Do they need to have all the assets they do? Where do you have leverage with them? You don’t want to be in this position again.” There is also the option of subordinated debt, which Polovick used when his debt-to-equity ratio was at its peak.
Rayner admits he has been exploring the idea. Subordinated debt ranks behind other debts should a company go bankrupt, so lenders are going to charge credit card interest rates. But Polovick says that’s no reason not to use it. “When you look at your overall cost of capital, you have to average it. There’s nothing I hated more than paying 18 per cent on money, but when you average it out, as long as you’re still competitive with your overall cost, it may be more important to have that peace of mind and flexibility to go after some jobs that might pay better than others. So you’ve had this discussion about subordinated debt with your lending institution?”
“Did you bring it up or did they?”
Polovick ruminates for a minute. “So they’re open to the idea and that tells me they have a tonne of confidence in your business and in your ability to run your business. You might want to expand that conversation. Having said that, from my experience, the banks will do whatever they can to tie you up for as long as they possibly can. So negotiate with them. And it wouldn’t hurt to do some research on your own with some other lenders.”
With meals finished and plates cleared, the waitress asks if anyone would like coffee. Rayner says no. Polovick orders an herbal tea: “Anything but peppermint.” He settles on chamomile, and asks Rayner one more question. “Do you have audited statements?”
Polovick encourages Rayner to have a second look at his accounting firm. “Just as someone will assess your business, you should assess theirs. Are they a young group? An old group? A growing group? Check and see if there are others out there who might have some ideas about how you might structure your debt. Ask what
it would cost to have audited statements. Some lending institutions will only provide subordinated debt to people who have audited statements.”
Plus, shopping around keeps all your professional advisors on their toes. “You can get billing creep, which is one of the most insidious forms of how you pay for things,” Polovick says.
As lunch winds down, he tells Rayner to call him at any time if he wants to continue the conversation, perhaps to raise issues and say things he doesn’t want printed in a magazine. The Mayfair’s dining room is emptying out. A few women play cards at one table and a few more chat at another, but the suits have headed back to the city. Rayner is genuinely grateful to Polovick for the advice and the two men shake hands. Rayner looks a little relieved, glad to know that others have gone out on a limb before him and survived to tell the tale.
On handling growth in a boom and bust economy
“Aside from 2009, we’ve had steady growth,” Polovick says. “Years ago I recognized that we had to be more geographically diverse than we were. If you’re planning on growing, you can’t be focused in one area. Right now, we’re too focussed on Western Canada. We bought a GM dealership in Whitehorse. We’ve looked at an opportunity in Eastern Canada but it wouldn’t work with our culture. We have an opportunity in the Greater Toronto Area we’re looking at right now. We really should be there if we want to be a national company. Like it or not a lot of decisions are made there.”
“The more high profile you get, you get to a certain size and then one of the nationals will come in and cut your legs out because they’re dealing directly with the guys in Toronto.”
Rayner: “We’re Northern Alberta focussed at the moment: Fort McMurray and the facilities that serve it, like the mod yards in Nisku. The challenge is to understand those markets before we get into them. The construction industry works differently in Saskatchewan and B.C. than it does here.”
“But it’s still all about relationships ,” Polovick says. “We’ve green-fielded in Calgary, Saskatoon, Langley and elsewhere. Business isn’t done the same way, but the key is to form some new relationships.”
On creating a business culture
“The culture we have is something that has evolved over 34 years,” Polovick says. “Back in the 1980s when vision and mission and purpose were the big buzzwords, we as a management team got together and said, ‘Why don’t we just have a philosophy of how we want to do business?’ More and more I’ve found this philosophy has created the culture. It’s very simple: With integrity and respect we work together to satisfy our customers by consistently exceeding their expectations. This ensures our growth, profitability and the well-being of our employees.
“The two parts of that go hand in hand. We have an annual retreat with the management team and look at that philosophy every year, but haven’t changed it much in a long time.”
“We’ve just recently articulated a lot of that,” Rayner says. “There are people who have been at Vet’s longer than I’ve been alive. It has taken a number of years for me to gain the confidence to articulate the culture that I felt the company embodied and the values that the people need to have (and have had, for the most part).
“In the last four or five months the management team has articulated and tweaked our philosophy, and it comes down to the acronym HONOUR: human compass, ownership mentality, nurturing environment, open communication, united team and remarkable craftsmanship. A lot of those were unspoken before, but were engrained in the people who have come up through the organization.