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REVIEW SUMMARY
Company. Structure Medical
Industry. Manufacturing
Key. Private investors will likely be the future funding sources for American manufacturing companies.
LeNoir “Len” Zaiser used to manufacture the wings, warheads and guidance systems for the Sidewinder air-to-air missiles on U.S. fighter jets.
Good thing he's not making them anymore because he might launch one at his bankers.
A successful manufacturer, Zaiser, 73, says his bankers essentially forced him to sell his company, Naples-based Structure Medical, to two undisclosed private investors.
Zaiser says he needed capital to handle fast-growing demand from large medical manufacturers to make implants for orthopedic surgeons, but he says his bankers forced him into a “technical default” last year for boosting Structure's equity.
As a result of this action, other banks refused to finance Structure's growth. “We got turned down 17 times,” Zaiser says. What's more, Zaiser says finance companies that used to fund capital-equipment purchases disappeared from the market after the financial crisis erupted in the fall of 2008.
Zaiser says Structure Medical grew revenues by 110% in 2009 and expects another 60% increase this year. Although he declines to cite specific revenue figures, he says the company is “approaching $25 million” annually.
To manage growth, Zaiser knew he had to invest in expensive machines that cost as much as $500,000 each. He figured he needed about $3 million to boost supply to nine major customers such as Stryker, Johnson & Johnson's DePuy and Smith & Nephew. “The banking industry wasn't there,” he says.
With banks and finance companies out of the picture, private equity seemed to be the only solution to grow the company. “The whole banking crisis strained us,” Zaiser says. “The banking community is not supporting small business in the U.S.”
Missiles to implants
Zaiser is well known in Collier and Lee counties for his business acumen, so his sharp criticism of commercial bankers commands attention. On Oct. 27, Zaiser will be inducted in Junior Achievement's Collier County Business Hall of Fame at a gala dinner.
Like many Midwest entrepreneurs, Zaiser moved his family to Naples in 1975 from Indianapolis in search of nicer weather. He parlayed an initial $750,000 loan and a handshake from Mamie Tooke at Barnett Bank in Naples into a 550-employee company called Engineering Research Inc.
ERI, as it was called, made Sidewinder missile parts such as wings, warheads and portions of the guidance systems in a building by the Naples Municipal Airport that now houses Haynes Corp., a manufacturer of fuel-injection parts for locomotives.
At the time, there were hardly any manufacturers in Collier County. So Zaiser published a classified ad in the Dayton, Ohio, newspaper to recruit machinists. The ad, which featured a palm tree and promised a good job in warm weather, was aimed at the thousands of machinists laid off by National Cash Register Co. By the mid-1980s, ERI had about 500 employees spread between Naples and another plant in Anniston, Al.
Zaiser sold ERI to Bendix Corp. in 1982 and promptly started a new defense company called Defense Research Inc. two days after the sale. Again Zaiser grew that business to about 500 employees manufacturing weapons components in Naples, selling that company in 1989 to German defense company Messerschmitt, which was later renamed Daimler Benz Aerospace.
Shortly thereafter, in a move that he says “set my karma straight,” Zaiser started a new company called Inovo that made oxygen regulators for the home-health market. The company also made scuba-diving regulators. But the market for these products was limited and Zaiser sold the company to a private-equity firm in 2004.
Then one of Zaiser's college fraternity brother, James Strickland, who was president of the American Academy of Orthopaedic Surgeons, suggested manufacturing medical implants and Structure Medical formed in 2004. “He made the introductions,” Zaiser says. “That opened the doors to opportunities.”
Despite Strickland's connections with the leading firm, manufacturers were reluctant to subcontract work with Structure Medical because the industry was “a good old boy network,” Zaiser says.
So Zaiser took a gamble. “We'll make the toughest parts for free,” he told prospective customers. It worked and customers started ordering.
But by 2005, the housing boom was in full swing in Collier County. Talented employees cashed out of their homes and left the area while new employees couldn't afford to relocate to Naples, where the median price of an existing home topped $500,000.
“The housing market drove out all our employees,” Zaiser recalls.
So in September 2006, Structure Medical opened a plant in Mooresville, N.C. The area is close to Michelin and Bridgestone tire plants that employ skilled machinists. Today, Structure Medical employs 37 people in North Carolina and 60 in Naples.
Now, with the housing recession and high unemployment, Structure Medical has no problems hiring in Naples. At least 10 people a day walk into the company's offices near Collier Boulevard and Interstate 75 seeking employment.
Equipment and talent
Zaiser says he always bought the highest quality, most expensive machines to beat the competition. That's because the latest equipment is usually the most efficient, helping him outsell the competition by producing more and bringing down costs. Zaiser never keeps equipment longer than five years, reselling it on the used market after that.
What's more, the latest equipment motivates employees. “If he has the best equipment, he feels obligated to do the best job,” Zaiser reasons. “They start by knowing it's going to work.”
Zaiser prefers to hire young, creative machinists and computer programmers in their 30s who aren't set in their ways. “We have no engineers,” he notes.
Most employees at Structure Medical don't have a college degree, though Zaiser says many of them would fit right in at the Massachusetts Institute of Technology. “They think like he does,” says son Len Zaiser IV, Structure Medical's vice president. He rewards key employees with shares in his company.
Armed with the best equipment and raw talent, Zaiser says he knew he had an opportunity to make money when he discovered subcontractors to the medical manufacturing sector were using outdated equipment and inefficient methods.
But manufacturing is a capital-intensive business because sophisticated new equipment is expensive. “Until the last five years, I always financed capital equipment,” Zaiser says. Companies such as GE Capital and ITT were among more than 40 companies and commercial banks Zaiser could turn to for financing. “Debt is the cheapest form of equity,” he quips.
Without access to financing, Zaiser and other manufacturers like him have faced a difficult choice. “We got to a fork in the road,” he says.
Zaiser says he needed another $3 million to grow the now-profitable company so he could accommodate his customers' increasing demands for production. Already, he had spent $6 million in 2009 for new equipment and had moved the Naples plant to a larger, 30,000-square-foot facility.
After commercial bankers turned him down in 2009, Zaiser faced three choices. He could accept slower growth but risk driving customers to his competition, give up equity in his company and lose control or he could sell the company. He chose the latter, holding an auction that resulted in the sale to private investors.
Zaiser and his son will continue to run the company. “This is the first time I've had a boss,” Zaiser chuckles. If he has plans to start a new company, he isn't telling. But if he does, he won't be calling on bankers.
After more than five decades building and selling companies, LeNoir “Len” Zaiser offered these lessons at a presentation he made recently to a group of CEOs in Naples:
• Take advantage of inefficient markets by using the best technology, instituting unique manufacturing protocols and hiring the brightest employees.
• Share ownership in a successful company with your key employees.
• Never put all your financing with one lender. Stay under the radar if you can. Remember that debt is the cheapest form of equity.
• Don't actively seek to sell your company because the opportunity for an exit will always come at the most opportune time.
• When times are tough and you think that you are over your head, remember Macbeth's famous line: “I am in blood stepped in so far that, should I wade no more, returning were as tedious as go o'er...”
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