Funding Growth With INVESTMENT CAPITAL
Document imaging integrator records $11.5 million in gross sales in 1997, but outgrows resources of original start-up investor.
Business Solutions, March 1998
TRION has undergone many changes since the company was last featured in Business Systems Magazine (June 1996). The Cleveland, OH-based company reported $3.7 million in gross sales in 1995 and closed the books on 1997 with $11.5 million in gross sales. The imaging integrator and software developer also moved to new offices from its prior headquarters which encompassed two small buildings. The new building, designed by TRION management, is spacious with room to expand. The internal structure of the company has been reorganized to focus more effectively on three vertical markets (medical/pharmaceutical, legal and commercial, government). While there have been significant changes at TRION in the past 18 months, choosing a new investment partner has been the most fundamental change.
Finding Start-Up Money
This would not be the first time that Tallerico had to find an investor for his company. His first search for capital was to start the company. During an informal conversation with a friend in 1990, Tallerico mentioned his idea for a new business. His business plan called for one company, which would install imaging systems and perform service bureau work. According to Tallerico, service bureau production work generates more regular income than system integration. His plan was to support the company with revenue from the service bureau while trying to sell imaging systems, which have a longer sales cycle. Tallerico's friend was intrigued by the idea. He was working for a privately-held company called Information Conservation, Inc., which was interested in investment opportunities.
Tallerico polished his original business plan and presented it to officials at the company. He estimated that he would need $200,000 to start TRION Technologies and projected the company would lose between $200,000 and $300,000 in its first year of operation. Considering the rapid growth rate of the imaging industry, Tallerico estimated that TRION would record about $4 million dollars in gross sales within five years. His long-range plan called for TRION to level-off at about $5 million in gross sales.
Information Conservation, Inc. decided to invest in TRION Technologies and became majority owner of the start-up. Tallerico and another business partner retained a minority interest in the company. When TRION lost only $50,000 after one year of operation - far less than had been projected - Tallerico felt the company was on the right track to be a winner.
Growth Surpasses Investor Resources
After five years in operation, TRION revenue far exceeded Tallerico's original estimate of $5 million. When the company neared $12 million in gross sales, TRION was expanding at a faster rate than its original investment partner could support. "We reached a point where TRION was no longer a start-up company. Information Conservation, Inc. wanted to expand its core business, but its resources were mostly being put into TRION," states Tallerico. "When we first started the business, I believed TRION would be a niche company. I never dreamed we would experience this kind of growth. We needed more capital than was available to us."
Evaluating A Managerial Buyout
The most preferable option to Tallerico was to affect a managerial buyout and take complete control of the company he founded. Tallerico and several top managers at TRION discussed the possibility of a buyout and briefly pursued the option. The TRION management team contacted a bank in the region which had experience in this area. After two meetings between officials from TRION and the bank, Tallerico knew a buyout was not likely.
Becoming sole owners of TRION was beyond the financial means of the senior management. TRION officials also realized that following a managerial buyout the company would be heavily leveraged. Profits from the company would then have to be used to pay back loans from the buyout. The TRION team knew the company needed additional money to funs its growth and a managerial buyout would not provide this.
Another concern to the TRION management team was the fees that the bank would charge to handle the transaction. "A managerial buyout was not the best option for us. It involved a lot of personal financial risk and the level of fees charged by the bank was also surprising," comments Tallerico. "It became clear that seeking a new majority investment partner was necessary."
The Search For A New Investor
Various contacts were made both directly and through a business broker to find a potential new investor. A list of possible investment partners was compiled by TRION, the majority owner, and the business broker. The TRION management team whittled the list down to four names.
TRION met several times with officials from the four companies. In fact, Tallerico says that about 10% of every day for three months was dedicated to reviewing the four potential investors. After completing the research, TRION decided to pursue the possible investment of Orion Partners (Boston, MA).
While Tallerico says the final decision was a "gut feeling," he was able to point out several factors that led to his choice.
- Investor was familiar with industry - Orion Partners had invested in technological companies before. "Other companies invested in all types of businesses. Orion knew the industry and supported what were trying to do," states Tallerico.
- Company will not be sold - According to the investor, TRION will not be sold in the near future. Other companies may be acquired under the TRION name, but there are no immediate plans to sell TRION to a larger company. Tallerico says, TRION will be the "keystone" to the investment.
- Investor understood the real value - According to Tallerico, TRION's real value as a company is its employees and software ideas. "We don't warehouse a lot of equipment and we lease our building. We wanted an investor that realized the value of our employees and the work they do," remarks Tallerico.
After Orion Partners was chosen as the new investor, the transaction moved along fairly quickly. Before the two parties signed a formal contract, Orion Partners needed to sign a letter of intent (LOI). "Orion Partners required us to provide extensive information on our company and its operation before signing a letter of intent," states Tallerico. "After they signed the LOI, both companies signed a formal contract about two months later."
TRION had to provide detailed financial statements for each year since the company was founded in 1992. A list of major TRION customers was produced with the work TRION did for each. TRION was also required to send surveys to its customers for an audit. "Orion Partners wanted to know what our customers thought of us and the work we did," comments Tallerico. "We dedicated a lot of time and manpower to comply with its information requests."
Finalizing The Contract
TRION and Orion signed a formal investment contract almost one year after the search for a new investor began. "By the time we signed the contract, we were very comfortable and confident with one another. During the previous year we had developed a good rapport with Orion Partners and they had had an opportunity to meet nearly every employee at TRION," states Tallerico.
The final contract gave Orion Partners majority ownership of TRION. The original start-up investor retained a minority interest in the company. Tallerico maintained the partial ownership of TRION which he acquired when the company was founded. As part of the restructing of TRION after the contract was finalized, several key senior management personnel were extended an ownership opportunity. Orion and TRION also wanted to reserve a small percentage of the company for future use. Tallerico explains, "We want to reserve the option to offer important employees an opportunity to invest in the company at some point in the future."
The Control Of An Investor
Orion Partners has majority ownership of TRION, but the investment firm is not involved with the day-to-day operations of the company. According to Tallerico, Orion Partners has representatives who sit on TRION's board of directors. The board meets quarterly to discuss the company's current results and strategic planning. "We are still permitted to run the day-to-day operations of TRION," states Tallerico. "Orion gets involved when there are big decisions to be made that will change the course of the company. This could be company strategies, acquisitions, or things of that nature. Orion is very valuable and involved as an owner in these instances."
TRION has three distinct aspects to its business: software development, document imaging integration, and service bureau operation. Tallerico says TRION is evaluating the acquisition of other companies which might complement one or more aspects of its current business. For example, TRION produces CLINflo, document management and workflow software for pharmaceutical companies. To improve CLINflo, TRION may acquire a company that develops software which can be integrated into TRION's product. "Orion Partners is very involved with the decision to acquire a company under the TRION name. This is because of the financial commitment the acquisition involves and the future ramifications to TRION," comments Tallerico.
No Longer A Start-Up Company
As TRION grows, it is starting to relinquish its label as a start-up company. The operation of the company has become more formalized. Tallerico welcomes the change. "I don't look back to those early days and I don't miss being in those cramped offices," states Tallerico. He admits, however, that regardless of revenues, he still watches expenses. "Even though we are a bigger company, I still keep a close eye on the cash flow."
Reflecting on the search for capital, Tallerico realized his company needed money to continue to expand. Tallerico recognized this fact and had no problem pursuing an investor. Tallerico and the management team knew they had about one year to locate an investor. "We were not desperate to find an investor and I think this gave us a little leverage," states Tallerico. "I knew we had a good company that was capable of growth. Our company needed money, but we had time to research carefully and make sure we were comfortable with the chosen investor."
While seeking the services of another outside investor was not Tallerico's first choice, he believes it was his best choice.