When Opportunity Knocks
In this business climate, shops that analyze and plan thoroughly can secure additional equipment, work space, employees and even clients at great prices. Shops that make such moves without doing their homework, however, are living dangerously. Here’s how to determine the right acquisition plans for your firm.
By Robert Carey
What a difference a year makes. In mid-2009, if anyone in the decorating business was chugging along nicely, they must have been hiding from everyone else. But 12 months later, many shops are reporting serious growth in business. Says Alan Friesen, a director at Direct Focus Marketing Communications in Winnipeg, Canada: "The wearables industry is definitely advancing again; the business climate is improving and clients are loosening their purse strings. It's not where it was a few years ago, but clearly it's climbing back."
Meanwhile, Anna Johnson, owner of Super Embroidery & Screenprinting (asi/339634) in Phoenix, reports higher revenue month over month throughout 2010. Jim Hunt, president of Long Island Screen Printing in Shirley, NY, says that his business "had the best second quarter in the 16 years we've been in business." Jeff Henderson, principal partner of Pony Xpress Printing (asi/297068) in Dallas, notes that his firm has had 30% revenue growth since the second quarter of 2009. Lastly, Mitchell Lombard, owner of Atlas Embroidery & Screen Printing (asi/700400), a large contract firm in Dania, FL, uses one word to describe recent business: "Roaring."
Given this consensus, it might be tempting for a decorator to look around at all the equipment, commercial space and skilled workers on the market – jettisoned by firms that didn't survive the last two years – and make bold moves to grow. In fact, it's a classic business strategy to invest ahead of an economic recovery to take advantage of low costs and to position the firm to gain market share, according to Edward Hess, a professor at the University of Virginia's Darden School of Business and author of Smart Growth: Building an Enduring Business by Managing the Risks of Growth.
Hess warns, however, that "This recovery is probably going to be long-drawn-out; the reality is that we haven't gone through the process of wringing out all the financial excesses in the system." So, while businesses should look to be opportunistic with acquisitions, they need to be cautious, too. This means "planning realistically for the increased costs vs. the potential revenue growth, and always preserving enough capital to stay protected" from a possible double-dip recession, he says.
Opportunity #1:
Obtaining Equipment
It's no secret that there are many used machines on the market. As a result, "Embroiderers have a good opportunity to upgrade their quality or expand their capabilities in the direction their business is already going," Lombard says. He recommends contacting equipment-leasing companies to see which machines can be picked up on the original lease terms. "The machine might be half paid for already, and you aren't stuck with it forever if it doesn't pan out for you," he says.
As for purchasing machinery, leasing companies might be amenable to selling rather than leasing repossessed units, and www.craigslist.org is awash in units. But as Johnson notes, "You don't want to buy a used machine just because the price is good if you can't get documentation that it was well maintained." For instance, one of her colleagues purchased a mid-level direct-to-garment printer for about $2,000, "but she never got it working right – it clogged all the time," she says. "It was wasted money, and it wasted her time, too." What's more, "This business has changed so much because of overseas production that some machines are not worth it no matter how little you pay," she says. "We used to need 12- and 15-head machines, but that's barely the case anymore.
So what good is it if you can get a 12-header for $10,000, if you'll never use that capacity?"
On the other hand, Johnson does feel that the people who'll stay in business are those who diversify their offerings, and there are many different types of machines currently in oversupply. In fact, her shop added a garment printer two years ago, a vinyl cutter last year and another garment printer this year. But, "We have several hundred customers, so we knew we had people to sell these new services to. If I wasn't so big, I wouldn't have made these purchases, because I don't have salespeople to expand our client base enough to keep this additional machinery humming." To get new customers, she actively encourages word-of-mouth marketing from existing clients who use the new services she offers.
Interestingly, Susan Ritchie, vice president of Kent, OH-based National Network of Embroidery Professionals, sees many of her members buying new machinery because the glut of used machines is depressing prices. "With embroidery units, people seem somewhat more comfortable picking up a secondhand machine. But, what I see is that people are getting other types of equipment through suppliers, rather than through the used-equipment channels," she says. "I just spoke to someone about which heat press they should buy, and a few days before that there was someone else looking at a variety of cutters. The people who are serious about this business are saying, ‘What worked yesterday is not necessarily going to work tomorrow, so I need to alter or add to my offerings.' "
While Henderson finds that there were better deals on equipment last year than there seem to be this year, Hess counters that "You aren't missing out on the opportunity of a lifetime if you don't buy a machine in the next month or two. With this economy, there is time to plan and to find what you're looking for at the price that's right for you." In fact, Henderson advises that it's easier to work with a bank before you're in need of the money, so try to line up an adequate line of credit that can be used to finance your growth in the near future. Contrary to the conventional wisdom of the moment, many banks (in partnership with the Small Business Administration) are lending money – it's specifically for equipment purchases among businesses that have sound financials.
No matter if equipment is used or new, or if it's for embroidery or for a new service you'll offer, "You have to examine your universe of customers and prospects to find the trends that justify buying it," Lombard says. "If you pick up low-priced machines that are tangential to your core business, they could be an albatross around your neck a year from now." Hess stresses that each shop should also make this calculation: "Factor in the new costs you'd be taking on, and then run the numbers to see if you could make it for a year with no new revenue from that machine," he says. "If you can't, the risk is probably too great."
Opportunity #2:
Obtaining Commercial Space
Given that the unemployment rate seems to have stabilized at just below 10%, "The rapid increases in the commercial vacancy rate in the past two years have moderated substantially," says Sam Chandan, chief economist at Real Capital Analytics. "Still, we shouldn't expect a sustained and consistent improvement in occupancy until office-using employment, as opposed to at-home employment, reverses its deep losses. Even in that case, lease rollovers will remain dilutive for some time, meaning that new leases are being signed at lower rates than the leases that are expiring."
This macroeconomic trend is holding true throughout the decorating industry. Henderson's firm moved into a new 30,000-square-foot plant in April. "We had a ton of commercial spaces available, and the landlords were extremely aggressive," he says. "But, it took some time to negotiate the right space to our liking. If companies can limit the up-front financial expense to the landlord for build-out or improvements, or pay for some of it themselves, like we did, then there are great deals to be had."
Johnson advises that owners check with reputable real estate agents for premature lease vacancies, and perhaps even foreclosure sales and short sales. But short sales can get messy ("The banks use your bid to try to get a higher one, and they keep you hanging for months," she says), so factor that in. "If you go with an experienced broker, they know how to deal with the banks and who to approach to find you a space you can get into quickly," she adds.
"Every day I feel tempted to move to a larger unit in the industrial park we're in," Hunt says. "The landlord has even offered me great incentives to do that." But after making calculations and acknowledging his gut feeling, he decided to stay in his existing space. "The rent is already cheap, and my equipment is paid off," he says. "That combination keeps the pressure off of us for awhile."
Lombard notes that simply having more space, even if it is at the same price as your existing space, still creates more costs in the form of utilities and insurance. "If you haven't analyzed how you use your current space, you shouldn't yet jump to anywhere else," he adds. "Step back and evaluate how you are set up in your present space, and also make sure you have the right manning tables with the right headcount at the right costs. You might realize that a few adjustments will let you use your existing space much better than before, and that you don't need anything more."
To Hess, here are the key considerations: "Should I pay a bit more to get a lot more space, or should I renegotiate my current space at a lower rate, with an option to add space at that same rate if a nearby unit comes available?" he says. "And, if I can get savings on my current space, how much of that will I invest in advertising, marketing and customer acquisition?"
Opportunity #3:
Obtaining Skilled Employees
While employees are the greatest expense for most businesses, there are so many skilled decorators who are unemployed or underemployed that a shop would be remiss if it didn't frequently scan the landscape with the thought of adding talent to its staff. "There are people out there with good skills and good business relationships, but who couldn't keep their company going through the long downturn," Friesen says. "So now would be a good time to find those people and say, ‘Come do what you do best and you won't have to worry about running the business end.' " And the talent pool won't become shallow anytime soon, as he predicts that "There will be a correction in the next 18 months where another 10% of decorators and ad specialty distributors go out of business."
Goldner Associates Inc. (asi/209800), a large Nashville, TN-based distributor that offers decorating services, has shied away from trying to buy other businesses or taking over more commercial space, opting instead to seek out good salespeople who've worked at other firms and set them up in home offices. "We give them some funds to offset the set-up costs, and it's been an efficient way for us to grow," says Mitch Emoff, executive vice president of Goldner. "A lot of the people we bring on were owners of small shops, and they didn't want all the headaches anymore." Another advantage of doing this is that there are government-paid training grants presently available for custom-tailored programs in management training and worker productivity. Goldner has secured grants for both programs through the Nashville city government, although they're federally funded.
Even with lots of skilled people looking for work, poaching among competitors still takes place. "It's happened to us with a few key employees, unfortunately," Henderson says. "We learned that the key to preventing this is to have better communication with employees through quarterly reviews, team meetings and company lunches. We're seeing competitors trying to lure employees with high-commission plans, but most of them are only offering what they call "above industry average" for 12 to 24 months. My guess is that a lot of those employees will be on the market again when those plans expire. To replace people, we've focused on growing organically, with hungry salespeople that are new to the industry but not new to sales."
"I hired four people in the past several months because of the uptick in my business, and they're excellent," Johnson says. "Two years ago, when the economy was hot, I couldn't get anyone in who was reliable. Right now, though, you don't even have to steal people." On the other hand, when decorators hear through the grapevine that a competitor is buying fewer raw materials, cutting back on overtime or just lost a big account, "You might want to make a certain employee over there aware that you know about them," she adds. The reason: "You want to be in the front of their mind if they ever leave, or if the owner sells quickly rather than going out of business. Otherwise, by the time you find out that person left, another shop will have grabbed them," she says.
Hunt has brought in additional experienced employees to run a second shift; this not only helps him create more product but also lets him benchmark the performances of those on the first shift. Hess observes that it can be tempting to bring in more-talented employees and then let others go – except that the potential fallout among the rest of the staff can be significant. "If you have a tight culture and you let some of the family go, you have to manage it so you don't lose engagement from the others," Hess says. "There's a psychological art to upgrading personnel: You need to help the survivors go through mourning their former colleague while getting them to understand why it happened, that it was fair, and that it is better for them and for the business. How you do this is probably more important to the future of your business than the new person you've brought in. If everyone else no longer trusts you and their job security, you'll lose them over time."
Opportunity #4:
Obtaining Client Contracts and Lists
When another shop is floundering to the point that its owner is looking to unload the firm's assets, consider if the firm's client list is worth something to you. "The list would have to be specific to what your shop does," Ritchie says. "If a shop with a heavy retail presence called me, I wouldn't want that list because I'm strictly wholesale. If it was another contract embroiderer that had some solid accounts, I would be interested. But, I would only buy it from the owner, not from a third party who obtained it."
Ritchie does warn, though, that "The success of most shops is reliant on the owner's relationships." When ownership changes, the level of goodwill that remains is marginalized. So you might have to pitch everyone on that client list to keep them. Then again, the deal could include an explicit testimonial from the former owner in support of the buyer.
Lombard recently bid on a large competitor's business because "I wanted their sales and revenue," he says. "I would have hired some of their people to manage that business. The company had leased their equipment, so it went back – I didn't want it. But, I wanted those clients, and I would have paid commission to the seller on whatever I got from those accounts." In the end, his was not the winning bid.
Nonetheless, Hess likes the way Lombard was thinking. "Buying a customer list isn't the same as buying customers," Hess says. "Unless you're buying customer contracts that are binding and thus buying a revenue stream, you should not overpay for a client list. Besides, if there are many people on your competitor's list that you don't know, you're doing something wrong."
When considering any of these opportunities to expand, it's critical that "you don't have a fairy tale in your head: ‘If I only had this machine or that space or a few more good people, we would really take off,' " Lombard says. "You have to make realistic, even conservative, projections before you spend. If you build your business properly, all of that stuff will come over time anyway. But right now, you really need to be clear about how you're going to grow before you spend much on anything."
And, if you make the proper calculations and realize that taking on additional costs right now is too risky, then "Be opportunistic by putting time and energy into getting new customers," Hess concludes. "With fewer firms out there, there are more customers for the taking. When you land some of them, you can make new calculations as to whether you could use more equipment, space or people."
ROBERT CAREY is a contributing writer for Stitches.