Dare to be bold and thrive
Smart investments and ability to effectively manage debt are key to success at these firms. By Christina Zweig
What are fast-growth firms doing differently than their competitors in the A/E/P and environmental consulting industry?
We asked some firm leaders if the recession made firms in the design industry more risk-averse, and if a reluctance to take on debt might be hindering many firms in the A/E/P and environmental industry from making the investments they need to really grow and thrive in today’s economy.
Jim Tull, chief financial officer, Crafton Tull (Rogers, AR), a 275-person architecture and engineering firm, says, “I think everyone is more risk averse post-recession. However, most of us in business recognize that if we don’t take on risk, we will go out of business.”
H. Kit Miyamoto, president and CEO, Miyamoto International, Inc., a 200-person California-based global earthquake structural engineering company, said his firm took a strong approach during the recession and they actually became more aggressive.
“We figured offense is the best defense. We doubled in size during great recession years. We continuously invested and grew globally,” he says. “However, our debt structure is always conservative. Debt ratio decreases each year and our balance sheet is getting stronger. You never know what is ahead. You always prepare for something you don’t know. Cash is a king, not debt. But currently, in the U.S., money is cheap. You want to use it wisely.”
Like Miyamoto and Tull, Ken Ogilvie, chairman and CEO at EHS Support LLC (Pittsburgh, PA), a 57-person firm located in 19 states, knows that smart investments can help a firm grow and increase profitability.
“For us at EHS Support, I really don’t think the recession impacted our decision-making process,” Ogilvie says. “We try to make decisions on what is best for long-term growth of the firm using a responsible growth model we developed back in 2005 that still holds true today. For example, back when the recession was in full swing in 2008/2009 we made some of our largest investments that helped build the foundation for our success today.”
The ability to effectively manage debt is certainly key to success. For Ogilvie, choosing to remain debt free is something that has given the company more freedom.
“Over the past eight years EHS Support purposefully remained a debt free company, which allowed us to make investments during the recession that we likely couldn’t have made otherwise. It also gives us a measure of financial freedom to look at investments we may not have otherwise made,” Ogilvie says. “We do realize there is good debt out there and are not against making a wise investment move if it fits our responsible growth model. Going forward we will need to consider this if we want to really grow and thrive in both today’s economy and the future.”
What’s the appropriate level of debt for a firm? ZweigWhite’s 2013-2014 Fast-Growth Firm Survey found that fast-growth firms, defined as firms that have had an average annual revenue and staff growth of 20 percent or more for the past three years, actually have a lower median debt to equity ratio (using total liabilities) than the overall sample (0.4 compared to 1, respectively). The debt to equity ratio (also known as debt to worth) measures the long term ability of the firm to meet its financial obligations. It is a leverage ratio – the lower it is, the better the firm’s ability to borrow.
“Debt is a financial instrument that should be treated with respect and used in the manner in which it was intended,” Tull says. “Long term assets (i.e. trucks, GPS, shareholder buy-outs) should be paid for using long-term debt (banks, leasing companies, shareholders). Short term debt (lines of credit) should be drawn on when clients take a little longer to pay than normal and promptly paid back down when they do pay. I think a net debt to EBITDA ratio of under 3 is healthy. If a company is throwing off enough cash to pay off its debt in three years or less, it is healthy.”
The slow and steady approach can be effective. Frank Dudek, president, Dudek (Encinitas, CA) a 300-person environmental consulting firm, says, “From our perspective we have always been financially conservative and somewhat risk-adverse, although in 2013 we opened two new offices in California and grew our net revenues by 25 percent.”
Dudek says the firm never considered using debt because “we strive to be and have succeeded throughout the recession to be a high-profit firm and have had ample internal funding for any venture we choose. Some might consider us risk-adverse because we have not sought nor made any large acquisitions, choosing mostly organic growth as a more suitable method of hand-picking our growing practice leaders and professional staff. We’re more comfortable with steady 10-15 prospective growth in net revenue each year, high profits and with zero debt, and don’t believe avoiding debt has slowed our model for growth in any way over the past 30 years.”
Ogilvie says the appropriate level of debt is something that is different for every firm and depends on both short- and long-term goals. “For us the appropriate level of debt will be one we can manage that does not limit our ability to grow and expand based on our specific company goals and objectives. For EHS Support it will be that level of debt that fits our long-term responsible growth model and effectively balances profitability, cash flow, and future investment opportunities.”
Tull raises another point, “For some firms, it’s not so much about reluctance to borrow as it is being able to borrow. Since the recession began, the federal government has increased the regulatory requirements on banks lending money, making access to capital more difficult for many companies.”
This article first appeared in The Zweig Letter (ISSN 1068-1310), issue #1043, originally published 2/17/2014. Copyright© 2014, ZweigWhite. All rights reserved.
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