Morphing the Model: From Broker to Funding Source

by Rita Garwood Mar/Apr 2020

Like many independent equipment finance companies, Baystone Government Finance’s lifecycle took a turn when the Great Recession hit. In an interview with Monitor, Evan Howe shares the story of transforming from a broker to a bank affiliate and shares advice for other independents with M&A aspirations.

Evan Howe Director, Baystone Government Finance
Evan Howe        Director            Baystone Government Finance

Like many independent equipment finance companies, Baystone Government Finance’s lifecycle took a turn when the Great Recession hit. In an interview with Monitor, Evan Howe shares the story of transforming from a broker to a bank affiliate and shares advice for other independents with M&A aspirations. 

Independents have a distinct lifecycle. Born as start-ups, they grow strong on incremental increases of new business volume until sooner or later they are usually sold. While the M&A process looks different for each independent, a few aspects will apply across the board.

For Baystone Government Finance, a broker that originated tax exempt municipal equipment finance transactions across the U.S., the decision to merge happened almost overnight. When the 2008 financial crisis hit, one of the banks that had been purchasing Baystone’s biggest deals decided to shutter the indirect channel of its business.

“One day our largest funding source just called us up and said, ‘We’re no longer buying,’” says Evan Howe, who has been director of Baystone since 1990. “They literally just got out of the business.”

When this news hit, it was like the world stopped turning for Baystone. “We were selling probably about 60%+ of our volume deals to them, and we made most of our fee income off that particular bank,” Howe says. “We had others, but suddenly, credit decisions that usually took about a day or two were taking two weeks.”

Soon after receiving the call from SunTrust, another one of Baystone’s customers — another funder — sold its portfolio. “It became very difficult to sell deals,” Howe says.

Instead of lamenting what was, Baystone saw an opportunity and seized it. “With funding sources leaving the market, we saw a gap,” Howe explains.

Merging to Meet the Market

Baystone already had a common affiliation with Kansas State Bank (now known as KS StateBank), so capitalizing on that symbiotic relationship by merging with the bank was a clear path to filling the market void.

Howe announced the news internally by meeting with key employees one on one and having a general meeting with the whole the staff. “Everyone knew something was up since our business model was completely turned upside down,” he says. “Our top originators were given the option to become independent contractors. They could keep their customers, sell to us and stay on commission, or they could join a bank in a bank officer position and be paid a salary.”

One salesman took the independent contractor option and did very well with it. Another left and two originators became bank officers.

Then it was time to break the news to customers. “Everybody we competed against was going through the same problems,” Howe says.

Baystone’s originators told its vendor customers that they would continue to handle their business as part of the bank. But its relationship with broker customers wasn’t affected as much. “The broker customers did not see much of a difference,” Howe says. “If they were bringing us deals, they thought we were the funding source anyway — I wanted to make it as seamless as possible.”

Becoming a Bank

The biggest change for everyone involved was the business model. After the merger, Baystone morphed from a broker to a funding source for small- to medium-ticket municipal equipment finance transactions.

“Our toughest competitors became our customers,” Howe says. “It took them a while to trust us, but we were part of a bank, and they were looking for funding sources for their smaller-ticket transactions. Since everybody else had bailed out of the industry, we became that funding source.”

Baystone’s previous business model had relied on sending its sales team to trade shows around the country to establish relationships with vendor customers and funding sources. But after merging with the bank, everything changed. Since its former competitors were now customers, there was no need to send a team to shows. Since brokers were now an extension of Baystone’s business, they attended trade shows and formed relationships with vendors and municipalities.

“We told our brokers, ‘We’re here to assist you in growing your business, you just send us the deals for purchase,’” Howe explains. “After the merger, we were able to apply all of our knowledge in the industry to help other origination sources get new business or grow. But we relied on the brokers to be our boots on the ground out there. We finance far more fire trucks today than we did when I had salespeople go to all the fire shows, so it was great leverage for us.”

Blending Culture

But along with the benefits of becoming a funding source came the realities of the banking industry. Despite having a close relationship with the bank for 20 years, Baystone experienced a big cultural shift after the merger.

“We had a lot of deals in California, which has a two-hour differential from us, so we would have people stay late to call and get an insurance certificate, so we could fund it the next morning,” Howe says. “When we joined the bank, we had to follow the time clock rules that say people leave at 5:00 p.m. — you’re not supposed to stick around after that.”

This cultural difference is not surprising when two companies — an unregulated independent and a highly regulated community bank that operate in different landscapes — merge together.

Howe says it took time to learn how to blend the two cultures. “In the end, I believe both Baystone and KS StateBank benefitted from this blend of cultures,” he says. “Baystone became more organized and structured, which allowed us to improve our customer experience. And I believe that KS StateBank was positively influenced by the entrepreneurial innovation and creativity the Baystone employees exhibited. Overall, I believe our cultural blend was successful because we shared similar values and were passionate about helping communities grow.”

Adapting to Regulations

One of the first things that comes to mind when you think about the difference between independents and banks is regulation, but Howe says the merger did not cause much of an issue for Baystone’s daily operations. “The way we do business is pretty simple and straightforward. We did not encounter any new regulations that caused us to change our basic operations. We were already complying with many of these regulations anyway, such as truth in lending, before the merger,” he says.

The biggest regulatory change for Baystone came with simpler tasks, like creating marketing materials. “We’re all about marketing, and we would come up with an idea in a morning and by that afternoon we might be sending something out to our customers about a great new program,” Howe says. “But with the bank, we can’t send out a flyer without having compliance look at it since we’re FDIC insured. That delays the process.”

Preparing for a Sale

Howe has specific advice for other independents that may be in the market for a parent company:

  1. Don’t cut any corners.

  2. Keep operations simple.

  3. Have a defined model.

  4. Keep your staff lean.

  5. Maintain good records.

  6. Focus on one thing and become an
    expert in it.

“An acquiring bank will look at many things when they are considering an acquisition, but everything they look at comes down to one thing — what value does your company bring to the bank? If you spent time becoming an expert in a particular area, the value your company, and you, provide to the bank will go far beyond the size of your portfolio or your current customer relationships,” Howe says.

For most broker shops, you are only as good as your last deal. “You need to show a funding source that you have the unique systems that are able to generate assets,” Howe says. “Show how you can put your asset-generating machine in a bank culture. If you do this, you create value for the bank.”

Howe says it has taken a long time to truly merge Baystone, a former start-up entity, with an established bank. “There has to be compromise on both sides and a willingness to see the best way forward,” he says. “It is much easier said than done.”

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