Less is more profitable Featured

9:48am EDT July 22, 2002

Out of state, out of mind. Without Kathy Eshelman on site to train and motivate her young staff, this high-energy entrepreneur couldn’t give them what they needed — her vision and style to manage, mingle and make that sale.

So in 1998, the Columbus-based owner of Grade A Notes Inc. closed her branch at the University of Arizona and sold sister businesses at the University of Nebraska-Lincoln and Michigan State University.

She did this to bring profits back to her company after a three-year expansion program put it in the red. Eshelman simply realized she’d stretched herself too thin.

Itching to grow

Grade A Notes Inc. started in 1987 as a class note taking service for students at The Ohio State University. Within a year, Eshelman started a custom publishing service for faculty who needed course reading materials from various sources packaged for students to buy.

In between, she added a copying service, not just for students and faculty, but for the general public and area businesses, too.

Her model was successful at Ohio State. The first year she did $66,000 in gross revenues and the business turned a profit after about two years, she says. Her original expectations: “I thought that I’d be a millionaire in a couple of years and that I’d never work summers again. I haven’t taken a summer off yet.”

For the basic thrill of growing a company, she says, she opened at Ohio University in Athens in 1993. OU was chosen because it was the closest campus with a sizable enrollment: about 20,000 students. Two years later, she opened a satellite location at the University of Michigan in Ann Arbor, where there was no note-taking service and not much competition in custom publishing, she says. There, she partnered with The Nebraska Bookstore Co. chain, whose location offered great visibility for her copying service.

The partnership also offered growth potential since the bookstore had about 85 locations nationwide. That same year, Eshelman opened Grade A Notes within the bookstore’s flagship operation at the University of Nebraska-Lincoln.

Finally, in 1996, she purchased note-taking businesses at Michigan State University and the University of Arizona, from one seller. At both sites, she says, there was an opportunity to develop the custom publishing aspect of the business.

“It’s not worth it to operate just a notes-only business out there,” she says.

Trouble in paradise

With six locations in four states, Eshelman soon ran into problems. She struggled to find the right managers for her Nebraska, Michigan State and Arizona locations. Then a lack of capital to sustain expansion caused a problem.

“When we were undercapitalized,” she says, “we never thought we were undercapitalized. We thought things were going to take off. We had enough capital if things took off like the first location, but they didn’t.

“The note sales were all pretty decent in Nebraska, but that’s only 15 percent of our business,” she explains, adding that custom publishing makes up another 70 percent and copying, the remaining 15. “To run a copy center, you have to sell local businesses on going to you instead of Kinko’s. We needed a real outgoing, sales-oriented manager.”

That type of manager never materialized.

“We had good people working hard; they just weren’t that kind to go out and get the sale in the door,” Eshelman says. This stifled growth on the custom publishing side, too, since managers need to meet faculty and encourage them to try Grade A’s service, she says.

“They are skeptical of us,” Eshelman says of professors who are not familiar with Grade A’s ability to pursue agreements with individual publishers to reprint and resell their reading list items. “Once we get them,” she adds, “they never leave. We have a 95 percent retention rate with our professors.”

Without someone on site to aggressively pursue business for those three satellite locations, however, sales lagged.

“It’s not my point to say I can do it better than anybody else,” Eshelman says, but her presence was an important motivating factor. “If you have a small company, you don’t have all the training tools that you need. I was the head trainer, and the best way to train is hands-on, discussing what went right and what went wrong.”

The long-distance hurt, too. “In that regard, location was a challenge,” Eshelman says. “It cost more to get there. You couldn’t just drop what you were doing to go there.”

She did try to invest in making additional trips, to oversee and guide the people, she says. Realizing she didn’t have the capital to hire the sales talent she needed in Nebraska, Arizona and East Lansing, Mich., and knowing she couldn’t spend more time there herself, Eshelman decided to divest. She chose to focus on increasing business at her remaining three sites: OSU, OU and the University of Michigan.

“In Ann Arbor or here, you get to know people on a personal level. The others didn’t feel like they were part of a team and building a company.”

With her scaled-back operations, Eshelman hopes to earn $2 million in gross revenue this year.

“I don’t think there’s ever been a year we didn’t have double digit growth in revenue,” she says, but the company didn’t make a profit during the last three expansions. Grade A Notes has been profitable since divesting, she adds.

A new strategy

So what has Eshelman learned from this expansion-retraction experience?

“Small business owners don’t take advice very well,” she says with a laugh. In hindsight, however, she realizes financing problems exacerbated many of the other difficulties her company experienced in trying to expand quickly and in far-off places.

“That was our biggest problem — not having the capital to properly grow,” she says.

“The growth we’re having now is really sales growth; we just financed it out of our own profits.”

For others looking to expand, she’d advise them to keep an eye on such issues.

“Try not to grow without the right amount of capital, it’s almost a death sentence,” she says. “As far as growing out of state, one of the things people don’t anticipate are all the tax laws and how cumbersome that is. If you don’t have the appropriate staff to deal with that ... we found ourselves in a myriad of hassles.”

As for her three remaining locations, she’s still in a growth mode, but she’s taking a conservative approach.

“We’re moving or opening brand new facilities for all three locations in the next 18 months,” she says, quickly noting, “We will stagger that so we have the capital.”

In addition, she is finding ways to broaden her business without adding more locations.

“We are doing a lot of custom publishing and reprints for out-of-print books for bookstores all over the country,” she says. “We service 30 universities with custom publishing,” but all the work is coordinated through Grade A’s existing locations. “We’ve actually done work with over 100 bookstores around the country ... That’s been a great strategy for us, servicing more bookstores.”

And it’s a strategy that’s keeping Eshelman closer to home.

Andria Segedy (aesegedy@sprintmail.com) is a freelance writer for SBN.