Jun 15, 1998
I like the fact that The Zweig Letter has an editorial point of view. So many newsletters for this industry and others are just compilations of other, previously published articles. Or, they are so white bread that they would never offend anyone. We don’t publish something just because we have nothing better to fill up the space with. And while controversy doesn’t scare us, we won’t print something just to stir up the pot. We will print what we think our readers need to know, however, and if someone doesn’t like it or agree with it, that’s O.K., too. Every now and then I feel it’s necessary to communicate some points to our readers that aren’t worthy of a full-length article. I’ve been keeping a list of these “shorts” that apply to the world of finance for A/E/P and environmental consulting firms. Here are a few of them: Debt is bad. While logically, there may be all kinds of reasons to be “leveraged” (the financial euphemism for being in hock up to your eyeballs), it bothers me to have a company that is burdened down with debt. It’s damaging psychologically. It has to impact your willingness to assume risk when your firm is debt-laden. You cannot afford mistakes. You hesitate to hire. You hesitate to spend money. You hesitate to invest in new offices or services or marketing. Then the bankers come in and start telling you how to run your business. I just don’t like debt in a privately held business. Personally, I’d rather be in debt as an individual than I would have our company hamstrung. The company is literally “the goose that lays the golden egg” for all of us. And when the cash comes in, I like knowing that it’s ours to do whatever we want with. Many of our most successful clients have a similar philosophy that minimizing debt and carrying some cash in the bank helps them think clearly. Big banks are calling again. I got a call from Fleet Financial the other day. It’s a huge bank that acquired Bank of New England when they went broke in the early 90s. We were a Bank of New England customer at that time and went through all of the confusion, half a dozen lending officers, requests for information, etc. that goes along with the big, impersonal bank. Frankly, we’re too small of a client for that type of bank, anyway. They may want us now but just wait till the next recession hits. They’ll have their “formula calculators” in there telling them what type of clients they want and which ones they don’t, once again. I like dealing with the small or mid-sized local savings bank, one that keeps its lending portfolio and knows who its dealing with. I like the idea of being on a first name basis with the chairman who recognizes my face. I encourage all of our readers to have a banking relationship with a bank that really values you as a customer. When the next downturn hits, you’ll be glad you’re with them instead of the megabanks of the world. I’m sorry to be repetitive, but every day it is reconfirmed to me— A/E/P and environmental consulting firms are so undervalued, we’ll have to be discovered soon. We are a $75 to $80 billion industry!! That’s huge. The recent sale of ABB Environmental Services to Harding Lawson is a good case to look at. 24% of revenues is nothing! In any other industry, buyers would recognize that the value of a firm in our business is its access to clients, clients that could be sold other stuff if the firm had the “other stuff” to sell. That’s where the synergy comes in. And that’s why I’m sure some day, the investment community will realize A/E/P and environmental firms have lots and lots of client relationships— good ones— ones that allow them to interact with the highest-level decision makers in their client companies. And when that occurs, prices will stop being 25-75% of net service revenues, and will instead shoot up to 1.5 to 3.0 times revenues for the best companies. If this strong economy holds out a few more years (which it could), you’ll see the big money start to chase our industry. It has to go somewhere—and investors are once again taking a peek at this grossly undervalued industry of ours and seeing that it really does have some promise. Originally published 6/15/1998
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