CHICAGO - Within a week of telling his broker that he and his partners wanted to sell their company, Marvin Ricklefs had hired Merrill Lynch & Co. to structure an employee stock ownership plan.

"They did all the roadwork for us and came back with a proposal from three banks and Merrill Lynch," said Mr. Ricklefs. "Part of the reason we went ahead with the deal was because of Merrill Lynch."

The speed with which Merrill Lynch entered the picture is a direct result of the coordination of services that begins and ends with its brokers. With more than 12,000 brokers in 500 offices, Merrill Lynch combines a local presence with a nationwide reputation.

It is that combination that has made Merrill Lynch increasingly able to win plum assignments from small businesses willing to look beyond their Main Street bank. Indeed, the system of referrals to and from brokers could provide valuable lessons for bankers anxious to improve their cross-selling to small firms.

"It's all coordinated by the financial consultant, who can pull in financial managers to do a loan or call on me to help them do an ESOP," said Ken Serwinski, a senior vice president with Merrill Lynch and head of the ESOP group for the firm's business advisory services division. "From the business owner's perspective, the financial consultant is no longer a stockbroker but a trusted financial adviser."

It is a process that begins with a customer's application, which becomes a valuable source of intelligence. Based on this source, Merrill said it has over 400,000 small business owners as clients, with over $110 billion of their assets entrusted to the firm. (That would be enough to rank as the nation's seventh-largest bank.)

The lure for many business owners is a specialized cash management account, called the working capital management account, or WCMA. The account bundles a number of products ranging from automatic funds transfer service, check writing, Visa card, and a variety of investment options, to two different kinds of loan products.

The goal of this product is to create a relationship that covers the entire life cycle of the company and its owners. Products such as loans, cash management, and retirement programs are designed specifically for growing businesses, while financial advisory services, long-term financing and retirement programs are geared more for expanding businesses.

As the owners approach retirement, the firm provides counseling about the value of their business, how to sell their interests, and how to manage the funds received upon sale.

"The real reason we're in this business is ... to help the company's retail brokerage network gather assets," said Mr. Serwinski. "By providing services of financing and advising on succession and executing a company owner's exit strategy, it puts us in the place of being there when our customers need these services."

For example, if a customer needs a special service or product, the financial consultant will contact one of the firm's 50 financial managers. These managers will put the customer in contact with one of Merrill's experts in that field.

That is what happened when Mr. Ricklefs was looking for options for Thybar, his Addison, Ill.-based manufacturer of supports and accessories for rooftop heating and air-conditioning units. For structuring the ESOP, Mr. Serwinski's group was paid a fee. In turn, It paid referral fees to both the financial manager and local consultants.

The incentives are ample. Mr. Serwinski estimated that about half of the firm's business development officers make more than $100,000, and none makes less than $65,000. "Our guys are paid a lower base salary and are paid for what they produce," he said.

The system appears to work.

In Thybar's case, Mr. Ricklefs said he casually mentioned to his longtime broker that he was considering a sale of the company as he approached retirement. The broker quickly put him in touch with Mr. Serwinski, whose group performs valuations on closely held companies, advises on the structure of ESOPs, assists in the sale of businesses, and can privately place debt or equity for the company.

Mr. Serwinski helped Thybar set up an employee stock ownership plan so the owners could immediately sell 30% of the company and over a number of years, turn the entire company over to its workers. They also brought in Merrill's small business lending group to bid on the loan.

Despite the advisory work, Thybar went with First Chicago Corp. subsidiary, American National Bank of Chicago, to fund the ESOP loan. "We did not go with Merrill Lynch on the loan because they did not have the best price, by far," said Mr. Ricklefs.

Gary Karch, a vice president in the corporate finance division of American National, said that even though the two companies are competitors for the business on both the investment banking and the lending side of many ESOP deals, they often work together.

"We can do the same thing Ken's group can do, but we can also work closely with them," said Mr. Karch. "I think they're a very good group of people to work with."

On the Thybar deal, American National and Merrill Lynch structured an ESOP loan of less than $5 million that included an interest rate swap. The deal was tailored this way to let the company lock in a fixed payment while allowing for restructuring of the loan in a few years when financing would be needed for the next stage of the ESOP sale.

Most products offered by Merrill to small businesses are not this complex, though. For this market, the company provides basic equipment financing for transactions ranging from $10,000 to $5 million.

On the lending side, the firm offers two types of credit lines through a system of 50 business development officers. The first is a commercial line of credit designed to meet working capital needs ranging from $300,000 to $5 million. This product requires the borrower to be in business more than 10 years, have annual revenues of more than $3 million, be profitable for the last three consecutive years, and have more net worth than the amount requested for a loan.

The other loan product, called Investor CreditLine Service, allows investors to borrow against the value of investments already in the WCMA. Because the loan is in essence a margin loan for working capital, the borrower can get funding quickly with no additional fees.

This product is safer for Merrill because it provides constant monitoring of the collateral used for the loan. Not only does the firm have physical possession of the securities used to back the loan, but it knows the value of the investments at any given time.

It is also a variation on a type of loan Merrill is comfortable with.

"No one knows better how to lend against stocks and bonds than Merrill Lynch," said Mr. Serwinski. "We do a lot of different deals that are collateralized with liquid assets."

These credit products have other advantages for the borrower, as well. If the company has a working capital cash management account, it will use the WCMA as the main depository. As cash comes into the account, the loan is automatically paid down. In the long-term, this feature cuts the effective interest expense on the loan for the customer.

Through these products, the Business Financial Services arm reportedly made more than $1 billion in new loan commitments to their small and midsize customers during 1993 alone.

Despite the firm's efforts in the small business arena, some lenders have yet to notice Merrill's presence. Still others say privately that Merrill is making only questionable loans they would not touch.

Though Merrill Lynch won't disclose its level of problem loans, Mr. Serwinski insists there are few problems. He says the company imposes strict screening of borrowers. Once approved, the companies must still provide quarterly financial statements to help the credit department stay on top of potential problems.

Bankers in those areas where Merrill is expanding say the attitude of their comrades is complacency - creating opportunity for the marketing savvy of Merrill. While many larger banks are just now experimenting with targeted marketing to grow business, the brokerage has a clear advantage with technology that allows it to comb customer files for opportunity.

"They are refining their marketing techniques in the rural communities and are drilling down with a good deal of expertise," said one banker in the South. "They're good at what they do. I wish we were half as good as they are."

But as on the retail side of the business, Merrill Lynch's success on the small business front continues to be tied to financial planning consultation. By staying in touch with the customer, the company is able to constantly assess cross-selling opportunities.

"Our biggest advantage can also become our biggest enemy," said Mr. Serwinski. "We have to take care of the customers referred to us by the financial consultants. We would shoot ourselves in the foot if we didn't treat our customers that way."

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