Larry Dorfman, APCO’s chairman and CEO, learned a cold fact of life the hard way: If your business is heavily dependent on another market sector and that sector takes a hit, you’re going to take a hit too.
And, boy, did that other sector take a hit. New car sales in the U.S. fell by almost exactly half in a little more than a year, says Dorfman, whose company sells extended warranties at 1,800 franchise auto dealers around the U.S. and commonly goes by the name of its extended-warranty brand, EasyCare.
“New vehicle sales dropped from 16.9 million to 8.7 million, basically in a 15-month period,” he says. “Used car sales suffered significantly too, but the hardest hit were clearly the franchise dealers.”
Dorfman didn’t have to go looking for danger signs. They came rolling at him like a tidal wave.
“You could literally see the volumes starting to slide, and we were attached directly to the number of cars that get sold at any given store [dealership],” he says. “If a store sells 100 cars, then you know they’re going to sell a certain number of extended service contracts. And if that 100-car store suddenly starts selling 50, then both of us have a problem. That’s just the way it is.”
It didn’t take long for Dorfman and his leadership team to figure out what they needed to change. APCO’s business was too dependent on car sales. The company had to find a way to broaden its base.
“Our benefits at the time totally focused on how many cars got delivered to a customer at a franchise dealership,” Dorfman says. “We started to recognize that we were on what we call a two-legged stool. Whichever way the car business went, that’s the way we would go too. Now, our company was founded in 1984, so we had been through a couple of recessions. We’d been up and down on a couple of these rides. Of course, nobody knew what this one was going to be like. But you sure could feel it coming.”
Set the table
APCO’s leaders quickly concluded that the stool on which their company’s fortunes were perched needed a sturdier base. Dorfman and his team knew that building that third stool leg would be absolutely critical to APCO’s long-term health, so they attacked the project meticulously and deliberately and from several angles at once.
In fact, APCO’s leadership team had set the table for these base-broadening measures before the downturn really started to seriously kick in — just as they began to sense it coming. Ford Motor Co. had bought APCO back in 1999 and had been operating as a subsidiary for about seven years.
For the first few years, that arrangement had gone swimmingly. But as Dorfman saw vehicle sales leveling off and creeping downward in late 2006 and early 2007 and with Ford increasingly sinking into debilitating debt and cash-flow problems in mid-2007 after more than a year of deliberation, APCO’s employees and equity partners purchased the company back from Ford.
“We bought it back, and then, from that point, the market continued to dribble down a little bit,” Dorfman says. “And, fortunately, we were able to start making some decisions — some investments — that we could not have made under Ford. This was one of the critical reasons that we wanted to buy the company back. We could see that they weren’t going to invest in our company.”
Then the stock market crash hit in 2008, and business went into free fall virtually across the board in the U.S., including automobile sales and, consequently, APCO’s business.
“One of our key financial measures is trailing 12-month EBITDA,” Dorfman says. “We watch that very carefully. And we went from $28.7 million at our peak — that would’ve been about ’06 — to $12.5 million after the crash, in ’09. So what do you do?
“Well, you know, the first thing you do is you take the gun out of your mouth. No, I’m kidding. Obviously, this didn’t all happen in one week. But it did happen pretty darn quick.”
As they saw the nose-dive gathering steam, APCO team members started looking for ways to get their company off of its two-legged stool and build a firm third leg for balance.
“The first thing we did is we looked at how we approach the business,” Dorfman says. “What we saw was that our business was totally affected by whether the dealer sold a car today or not. We knew that had to change. So we asked ourselves, ‘How else can we do what we do and stay who we are but, at the same time, move away from being so dependent on car sales?’”
APCO decided to focus on what it saw as an underappreciated and neglected area of its dealerships: the service department. It developed a software program called EasyCare SOS — Special Owner Services — to help its dealers better manage their customer relationships.
“It’s literally a CRM [customer relationship management] program,” Dorfman says. “It helps dealers manage their customer relationships throughout the ownership life cycle of the vehicle. We built this software to make sure consumers are approached the right way — that they’re notified properly but not overnotified when their vehicle is due for service, what specials are available, etc.”
The program has worked so well that APCO guarantees dealers a 500 percent return on their investment.
“We started that piece, EasyCare SOS, from scratch in late ’07 with two people,” Dorfman says. “Today, it has 36 people in it, and it contributed 8 percent of our profit this year.”
Invest in technology
In addition to forming EasyCare SOS, APCO made other investments. The company formed a retail division, it created a certified used car program in partnership with Motor Trend magazine, and it bought a company called CoVideo that had developed a sophisticated video email technology.
“The CoVideo technology allows you to create and send a video email as quick and easily as you could type and send a text email,” Dorfman says. “It’s very personal and immediate. You’re looking right at the person’s face: ‘We want to let you know it’s time for your vehicle to come in for service. Click here for an appointment.’ Or: ‘Hello. Thanks for the time on the phone. I enjoyed it. I look forward to seeing you when I come in next week. We appreciate your business.’”
APCO invested $900,000 in the CoVideo technology to build the infrastructure and create apps to deliver large quantities of video email efficiently to an array of mobile devices: iPhones, iPads, Androids and BlackBerrys. The company plugged the technology into its EasyCare SOS program so its dealers can use it to send video updates to their customers instead of regular emails.
“We did all of this during a down market,” Dorfman says. “In so doing, we turned digital customer interaction into a much more personal process.”
All of the investments have begun to pay off for APCO. The company’s key metric, trailing 12-month EBITDA, is growing again, and the company has paid off a substantial portion of the debt from its buyback from Ford Motor Co.
“Trailing 12-month EBITDA is back up to about $16.7 million from a low of $12.5 million in ’09,” Dorfman says. “So we’re back up 25, 30 percent. And that’s while making these major investments to grow the business.
“Also, we’ve paid our debt down to about $20 million during very tough times. We’ve built a broader base, which has expanded us further into our own business and actually outside the car business with CoVideo. This puts us in a strong position to continue to make more investments to grow the company.”
Choose partners wisely
Asked what advice he would offer business executives whose businesses are facing similar challenges, Dorfman ticks off several suggestions: Choose your business partners carefully, focus on delivering more than is expected of you, keep a finger on the pulse of your business, and stay ahead of the game with regard to expense management.
“You’ve got to have great partners, great clients and great employees,” he says. “You can’t ask more of somebody than the time and effort that you’ve taken to build a relationship with them. You can’t go to the bank and make a $300 deposit and then go back five days later and take $10 grand out. The bank doesn’t do that. And neither do customers, partners, investors.
“Your chances of being able to make a withdrawal are a lot better when you’ve made a substantial deposit. And what we did for a few years before and during this downturn is we continued to make deposits with the people we work with so we had a base to work from. Building that base really helped us.”
Dorfman says the most important thing he has learned while leading APCO through the financial crisis is that executives should never let market conditions dictate the pace of their business.
“If you buy in to everything people say about the market, you’ll be out of business in no time,” he says. ?
How to reach: Automobile Protection Corp., (678) 225-1000 or www.easycare.com
The Dorfman File
Chairman and CEO
Automobile Protection Corp.
Born: Brooklyn, N.Y.
Education: University of Georgia
What was your first job, and what business leadership lessons did you learn from it?
I grew up working in our family’s office equipment business. I was in sales. I was given a car at age 16, and I had to pay for the gas and insurance with the money I made selling. My dad was my mentor — actually somewhere between my mentor and tormentor — and in both cases, he did a good job. He exposed me to a lot of opportunities, like learning how to go out and make cold-call presentations to businesspeople. And, you know, at 16 or 17, that’s a pretty interesting game plan. You learn quickly. And my dad was always there to go back to and talk about what worked and what didn’t.
Do you have a main business philosophy that you use to guide you?
One of the key things we learned as we went through the recession is we changed our philosophy from the hard sell to building a relationship with customers. I grew up in a hard-sell environment. But I think people have changed. They don’t like to be hard-sold anymore. Salespeople have to understand that you can’t ask more from a customer than what you’re willing to give them — your time, your effort, your knowledge.
What trait do you think is most important for an executive to have in order to be a successful leader?
Don’t be afraid to make a decision.
What’s the best advice anyone ever gave you?
You can’t take more out of a relationship than you put into it. I learned that from an instructor at a communications course I took in 1985 that was geared toward getting people to understand and learn to communicate better. It was a personal and business growth course.