John Ettorre

Monday, 22 July 2002 10:00

Bellone on Web retailing

In several conversations about his company CompSource, and about online retailing in general, Dean Bellone has several observations about this emerging sector. Here's a sampling.

  • On Amazon.com founder Jeff Bezos: "It's amazing what he's done; he's created a brand recognition like Coca Cola's in a couple of years."

  • On what he regards as his chief competitor, CompUSA: "I tell people to shop there and buy here."

  • On why CompSource avoids auctions, which are increasingly popular on the Web: "There's always that possibility that you'll sell it below cost. We're already close enough as it is."

  • On the pressure for corporate purchasing people to become Web-literate: "I don't want to say they're being forced to, but I think they're realizing there are some benefits. One is price."

  • On CompSource's ultimately successful three-month lobbying campaign to get Amex to lower its rates from 3 to 2 percent of each transaction: "That was a grueling battle to get that down. We'll try again (to get it lower still)."

Monday, 22 July 2002 09:57

Looking for a company to buy?

As 1998 wound to a close amid an apparent flood of private-company sales in this region, one could sense a kind of end-of-an-era feeling in the air. At Chagrin Valley Country Club, a group of two dozen or more regulars are said to play golf for $150 a game. Their affinity? All the participants have sold their companies. Meanwhile, when executive recruiter Mike Gerbasi of Garfield Hts.-based Sager Co. was informed of the sale of yet another Cleveland-area company late last year, he was moved to wonder aloud, “Am I going to be the only guy working next year?”

What was it about 1998? Did the raging bull market and its paper riches, along with plentiful credit from banks and burgeoning private equity groups, combine to make ’98 the peak of the company selling season? Or are we witnessing the ushering in of a different era, one in which the brisk trade in the sale of private companies is a standard, continuing feature of business in Northeastern Ohio?

Long-time M&A specialist Russell Warren expects it’s the latter.

“In this area, there are just so many companies, it’s like an evergreen crop,” says Warren, former chairman of the mergers & acquisition committee for Ernst & Whinney (now Ernst & Young LLP), and subsequently founder of The Transaction Group, Cleveland-based consultants in M&A transactions. “I think of it much more in the forestry model. Every week, we learn about people who want to do things” such as sell their company.

Warren expects no let-up in the pace of deal activity in the region. “Almost weekly, we are called by players in New York and other distant places, because they know this is a good, fertile crescent for good companies,” he says.

While the flood of private equity capital sloshing around the economy (see box) unquestionably fuels much of that activity, the heightened pace of mergers also seems to be tied to a different generational psychology than an earlier breed of company founders who worked till they dropped. In their place have sprung a different kind of owner, one more likely to sell his or her company off well before retirement age before going on to other pursuits. “Owners are turning companies over faster,” says Frank Novak, a partner in The Transaction Group.

Behind much of the faster cycling, Warren suspects, is the relentlessness of technology. “We call it the technology poker game — you’d better ante up, or the game’s over” for stand-alone companies, he says. “The only thing that’s constant [with the technology curve] is acceleration. And the only thing that money buys you is a shorter lead time before you have to do it all over again.”


The man who keeps track

If you’re engaged in the business of buying or selling companies in Northeastern Ohio, sooner or later you’ll probably have occasion to call Ed Crawford, chairman and CEO of Park-Ohio Co. And when you do, he’s keeping track.

“I sat there one day and said, ‘Every time I turn around, I’ve got somebody else competing with me’” in the buyout business. As representatives of various groups contacted him about this or that proposed deal, he kept a list. “I started adding them up,” he says. He stopped counting when he got to 36 private equity groups. “Ten years ago, there were about six,” he says.

Despite the crowded field, Crawford’s not complaining. “I get a lot of deal flow from that.”

Monday, 22 July 2002 09:56

The China Syndrome

From launching a company without a clue of how to produce, market or sell your products to sourcing items from China in a little over a decade is a pretty healthy leap in sophistication. Carol Herzing says she bridged that gap by learning early in her entrepreneurial career that it pays to get top-drawer professional advice. Here’s how she quickly put together the deal for her new Beanie Babies-like product, Coolbeans, produced by a factory in Shanghai.

The first step was ensuring that the trademark was secure. The toy industry is extremely competitive, says Herzing’s attorney Deb Wilcox, and at the time Custom Edge was eyeing the new product line, a boatload of copycats were trying to climb aboard the Beanie bandwagon.

Chicago-based Ty Inc., developer of the wildly successful toy, was determined to stop them. The company and its famously reclusive CEO were becoming increasingly litigious to protect its niche just as Herzing was about to launch her product. “They were starting to sue a lot of people at the time,” says Herzing.

To guard against a trademark infringement suit, says Wilcox, “basically, what you do is make sure your designs are original.” Hiring a toy designer to draw up a fresh design was a good start, “and adding the licensed NFL, NHL and MLB clothing certainly adds to the distinctiveness.”

Once the intellectual property beachhead was secured, the next major hurdle was finding a manufacturer. “What you want to find is a factory you can trust, so they’re not selling [your designs] out the back door, putting somebody else’s name on them,” says Wilcox. “It’s not an uncommon problem in China right now.”

To find a factory, Herzing made two trips to China in six weeks, the first time with an interpreter, the second with an import agent. That, despite her extreme discomfort with flying.

“You know how they say you’re cruising at 30,000 feet? I want them to say we’re at three feet, so if I want to get out, I can.” With the help of a Chinese government agency that serves as a liaison between foreign nationals and Chinese factories, she found a plant with which she was comfortable.

While Key Bank and its international division, under the direction of 30-year veteran Horst Redetzki, helped finance the transaction with $220,000 worth of letters of credit, that didn’t remove Herzing’s anxieties.

“The biggest fear in all these letters of credit is quality control,” he says. Why? Redetzki notes that “the most misunderstood situation in letters of credit by newcomers is that they think having them in place guarantees quality [of products], or even the right material. It doesn’t.”

With letters of credit, adds Herzing, who came to understand the lack of guarantees only too well, “once they start clearing, they could ship you grapefruits if you’re not there inspecting it.”

In the end, Herzing did receive her seven shipments of plush dolls outfitted in various team logos — not grapefruits. But there was an unplanned three-week delay in clearing customs. And there was that $1.3 million in orders that had to be scrapped for failure to produce the items fast enough (over which she has considered litigation).

In the end, the drawbacks were no doubt worth the effort. In the new world of low-margin American merchandising, an ability to source from low-cost areas of the world such as East Asia is quickly becoming not just a competitive edge, but an admission pass to play the game.

Monday, 22 July 2002 09:56

License to grow

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It was the kind of challenge for which Carol Herzing never had any preparation as an Easter Seals telethon coordinator.

With $2 million in sales and just four full-time employees, she was cobbling together a plan that would instantly inject another 50 percent to her top line. After years of having her licensed novelty merchandise for Major League Baseball, the National Hockey League and the National Football League produced domestically, her Brooklyn Heights-based Custom Edge Inc., was now about to layer in a whole new tier of complexity by sourcing the new merchandise overseas, from a plant in China.

The idea was ambitious even for her, but it wouldn’t surprise anyone who has known Carol Herzing for long. After all, she had the moxie to land a coveted NFL merchandising license when her “company” consisted of herself, her basement and a scheme to market a Cleveland Browns Christmas card, capitalized by a $5,000 loan from her mother.

So in late ’97, Herzing convened a three-day meeting of her board of advisers to discuss a new line of plush toys, Coolbeans, which would capitalize on the Beanie Baby craze by adding clothing associated with her sports-league partners.

“We’re only about a two-million company, and we’re trying to put together a project that’s about a million dollars’ worth right from the beginning,” she says. “I had my accountants and everybody trying to figure out how to come up with over $800,000 to give to China to pay for the first shipment.”

She pulled it off, though not without complications. While she sold about $1 million worth of the toys in ’98, she had to tear up another $1.3 million in contracts simply because the factory couldn’t produce the items quickly enough to hit the demand window. “That was kinda tough to take,” she says, wincing.

She also encountered problems in expeditiously clearing U.S. Customs. In business, she’s found, “as soon as you think that you’ve gone through the learning curve, you venture into something new, and then you find a new learning curve.”

But in the end, it seemed well worth the headaches. “Her ability to source internationally as well as domestically gives her an edge,” says NFL Properties’ Leo Kane, director of licensing for non-apparel products and the gateway to one of Herzing’s best customers.


Custom Edge arose from exceedingly humble circumstances. Herzing had been an Easter Seals fund-raiser for 13 years, when she got the idea about 11 years ago to produce a Christmas card, designed by a friend, around a Cleveland Browns theme.

Somebody suggested she call the Browns for approval. The team referred her to NFL Properties, the league’s licensing and marketing arm established in 1963 by Commissioner Pete Rozelle. It accounts for about $3 billion in business, according to industry estimates.

She was sent a questionnaire, which she filled out honestly. “Someone from NFL Properties called and said, ‘Are you some little person out there?’ And I said, ‘yeah,’ and she said, ‘I can’t believe it — we really like this idea.”

The caller asked Herzing what her point-of-purchase display looked like. “I said, ‘Well, you tell me what a point of purchase display is, and I’ll tell you.’”

Nevertheless, she won approval to produce ceramic mugs as well as greeting cards. “So now I’m licensed to do ceramic mugs. I have no idea how to make it, what to do with it, how to get it on the market or anything,” Herzing says.” She began taking wild stabs, cold-calling companies and getting nowhere. “They thought I was nuts.”

She attended trade shows, where she connected with a breakthrough opportunity. Her first account was a coupon distributor.

“They ordered $5,000 of coffee mugs, and two weeks later they ordered $49,000 of mugs. And two weeks after that, they ordered, like $70,000. It was hard to figure out where I was going to get the money to make them and ship them.”

Herzing’s background in the resource-challenged nonprofit arena helped. “It was great training for starting a company with zero money,” she says.

Undaunted, she convinced a bank to lend her operating capital and set up shop in a condemned building on Pearl Road. (She’s since moved to an equally scenic industrial park in Brooklyn Heights).

From mugs and greeting cards, she added beer steins embossed with team logos. “So that smoothed out the curve,” Herzing said of the highly seasonal business, “but it’s still [heavily weighted to] fourth quarter, because we sell to retail, and that’s when they sell.”

Herzing added licenses with the NHL and Major League Baseball. Today, Custom Edge produces 17 distinct items—shot glasses, candles, etched frosted mugs and the like — carrying logos of each of the teams in the three leagues. More recently, she’s begun branching out to do business with NASCAR. Her products are sold in more than 4,000 locations across the United States, including Wal-Mart and J.C. Penney stores, and major league team shops.

But it hasn’t all been wine and roses. Custom Edge was rocked by the Browns’ sudden departure to Baltimore. Customers stopped buying products with the team logo and returned some they had bought.

Similarly, the business almost didn’t survive the Major League baseball strike of ’95. Herzing had landed the licensing agreement with the league only months before, in October ’94, and looked forward to capitalizing on it. Instead, she says, demand for baseball merchandise collapsed. “It almost put me under.”

To scrape by, she sold a one-third interest in her company to a distributor of her mugs. About a year ago, she bought it back. Many of her counterparts weren’t so lucky. Before the strike, there were approximately 400 MLB licensees. By the time it was over, only about half remained in business.


When she started, Herzing wasn't alone among licensees in running a modestly-sized operation selling largely through specialty stores. In the interim, though, the market for licensed sports novelty products has come to be dominated by large companies that distribute through nationwide retail chains.

""Now, it's Mattel and Hallmark and Nike and Reebok,"" she says. ""So you have to get your sales up real fast"" in order to reach the minimum sales figures now required of major league licensees.

“A lot of people would love to say they’re an NFL licensee, but it’s not that simple,” says Herzing’s lawyer, Baker & Hostetler’s Deb Wilcox. “You have to have a really high quality product, you have to be very consistent, you have to have good distribution.”

But it’s Herzing’s high octane charm and energy that really seem to drive Custom Edge. Those who have done business with the company inevitably remark on her 1,000-watt enthusiasm.

“She just oozes it, doesn’t she?” says NFL Properties’ Leo Kane. “She’s always enthusiastic, always challenging us to do new products. And she shows a real knack for growing her business. She’s got her finger on the pulse of what’s hot out there.”

No doubt because of that reputation, the league refers a lot of would-be licensees to her for advice. “It’s pretty hard to get an NFL license,” Herzing says. “These people have tried and they can’t get one, so the league tells them to contact one of us. And for some reason, they’ll give out my name a lot.”

But the referrals aren’t limited to modestly-sized entities. To her amusement, she’s also been contacted by giant public companies, looking for advice on how to get started in the sports novelties market.

“Somebody from Owens-Corning called, and said, ‘We want to talk to you.’ Come on! What can I tell Owens-Cornin g? They said it’s their first time in the sports market, but come on!”

While the league doesn’t like to make an issue of Herzing’s gender — nor, for that matter, does she—it clearly doesn’t hurt in doing business with the NFL. An NFL Properties official points out that 44 percent of the league’s television audience is female, as is an even larger proportion — more than 70 percent — of those who purchase licensed merchandise. That demographic profile perhaps explains why the league installed a woman, former MTV president Sara Levinson, as president of NFL Properties.

On the other hand, Herzing is eager to make an issue out of the fact that having children has helped the business. Starting when they were infants, she systematically capitalizes on their radar for promising new items.

“I think the thing that helps me the most is having kids,” she says of her 10-year-old daughter and 12-year-old son. “That’s probably our best marketing tool. Before we even do most of our products, especially kid-related, I’ll take them to my kids’ schools. The teachers probably think I’m nuts. I’ll go in and say, ‘Can I see your first-grade class?’ I walk in, and if the kids go nuts, then I know it’s a good idea.”


The sports novelty business is appropriately named. Rest on your laurels with products that were hot one year, and you’re sunk the next. Steve McKeever, a national buyer for J.C. Penney’s, says the retailer last year sold about 110,000 of Herzing’s Coolbeans toys in about 600 of its stores nationwide.

This year, he predicts, “it’s going to be a lot less, because the bloom is off the rose. So I’m looking forward to meeting with Carol real soon to talk about some new products.”

These days, she’s most excited about a 16-inch talking NFL frog, which would retail for about $25. But there are also a few old dependables — items that function like annuities for her. “I mean, there’s been an NFL bear out there for 13 years, and it keeps selling,” says Herzing.

And the client base for these toys isn’t as limited by age as one might think. “We have tons and tons of 68-year-old guys calling and saying, ‘I have the raccoon and rhino for the [Denver] Broncos, but I can’t find the hippopotamus,” she reports.

And always, there is the not-unimportant factor of her kids’ input, which routinely launches her down new product paths. Her son Chad never tires of lobbying for her to get involved in his favorite pop-culture items.

“I think she should do monster trucks next,” he says. “The American Hot Rod Association does that.”

Chad’s enthusiasm for television “wrestling” has led to the latest product line for his mom’s company. When she was in New York for a toy-industry trade show, Herzing stopped by the offices of World Wrestling Federation, to discuss a deal to produce WWF-licensed skateboards. She’s lined up a factory in China, under Korean management, to produce them.

What’s it like doing business with the rough and tumble colleagues of Jesse “The Body” Ventura? she’s asked. She rolls her eyes, dissolving into laughter. “Now, there’s a different group of people.”

"
Monday, 22 July 2002 09:52

Value-added mattresses

Let’s say that you’re perched in a sector of the retail industry that’s increasingly being dominated by drastic price wars driven by circus barker, bait-and-switch advertising. And let’s further stipulate that you’re shrewd enough to see that it doesn’t pay in the long run, nor perhaps even in the short, to compete on that purely commodity basis, even if you wanted to, which you don’t. What to do?

If you’re Tony Amato, owner of the 12-location World of Sleep mattress chain, you might try short circuiting that untenable situation by introducing a low pressure, consumer education component to your sales pitch. Which he has.

It’s not a bad idea. After all, he’s someone with an obvious reverence for information and learning, something of a lifelong student who almost unconsciously looks for the small but crucial edge in the marketplace not by sales hype, which he evidently abhors, but through appealing to customers as intelligent beings.

Given half a chance, he’ll reflexively bend your ear about studies on sleep and associated medical issues that render mattresses something rather less than automatic cure-alls to disruptions in a good night’s snooze.

So two years ago, he decided to employ a staff nurse to regularly train his sales people on the medical issues connected with sleep, including sleep disorders, a malady from which an estimated 8 percent of the general population suffers.

Last year, he ratcheted that approach a notch higher, though almost accidentally. The head of the Cleveland Sleep Centers, something of a sleep clinician, happened to buy a mattress from Amato. He became intrigued by World of Sleep’s more cerebral sales approach, which drew on elements of his specialty, diagnosing and helping solve sleep disorders by hooking people up to instruments and monitoring their overnight sleep, or lack of same.

That led to the center being retained for sleep assessments and an even higher order of snooze-consulting than the staff nurse can provide.

“Our sales people have a general knowledge of sleep disorders,” says Amato, and they try to employ it both to give guidance to customers in the selection of their mattresses and perhaps moderate their expectations of the role a mattress — any mattress — can play in providing a good night’s rest for anyone with an underlying medical complication.

He likens the layering in of additional in-house or external expertise to the various services offered by accounting and law firms, which offer clients an array of services at different price points.

“The reason for it is to be proactive with customer service,” Amato says. “If you go out to buy the top-of-the-line, most expensive mattress” and expect it to single-handedly solve your problem despite your underlying medical disorder, you’ll be disappointed with the product. “There might be some underlying sleep disorder” — and not the mattress he just sold you — “that’s preventing you from getting a good night’s sleep. And we want to be able to separate that out.”

Amato is enthusiastic about the approach. Despite the investments, it might nevertheless save him even more expense and headaches from unhappy customers who try to return a previously purchased mattress out of a mistaken expectation that it could solve their more deeply rooted sleep disorder.

The educational thrust also has the not unimportant additional benefit of separating him from the pack of competitors, many of whom are competing solely through barking about who offers the cheapest mattress and box springs.

“There’s nobody doing anything like this,” says Amato of his approach, which involves integrating the medical message in TV ads and store displays with training of the sales force. In fact, he suspects that one of his national manufacturing suppliers decided to adopt a similar program after learning about World of Sleep’s program through a vendor presentation Amato staged a couple of years ago.

The latest twist? Recognizing that a lot of customers will recoil from sharing such private matters as sleep disruptions with mattress sales people, Amato is considering how he might let potential customers contact the sleep centers directly for a personal sleeping assessment.

“We just want to be a resource for our customers to find information in a nonthreatening environment.”

How to reach: World of Sleep (440) 891-9071

Monday, 22 July 2002 09:50

Plugging holes

It may be true that there’s no escaping death or taxes, but an entire cottage industry of tax attorneys and estate planners nevertheless is organized around the time-tested belief that in many instances, one can, with the right kind of advice, legally extricate oneself from plenty of the latter.

A favorite new tool for legal tax avoidance is to exploit an anomaly between federal and Ohio tax law. For the last few years, while the beneficiaries of so-called “electing small business trusts” have been taxed at the federal level, they haven’t been similarly subject to taxation in Ohio.

But one Cleveland-area state legislator is trying to close what he considers an unwarranted loophole that arose simply as a result of lack of coordination between federal and state tax regimes. Ed Jerse, who represents the Hillcrest area of the suburban East Side, is pushing House Bill 139, which would change the Ohio Revised Code and subject these trusts to Ohio corporate tax.

The situation arose as a result of the Small Business Job Protection Act of 1996, which for the first time permitted these ESBTs to hold shares in S Corporations, which have become an increasingly popular vehicles of business incorporation because they aren’t subject to double taxation (only their beneficiaries, not the corporations themselves, pay income tax).

So while beneficiaries of these trusts are taxed at the federal level, they have thus far escaped taxation in Ohio, which does not tax trusts.

In testimony earlier this year before the Ohio legislature’s Income Tax Subcommittee, Case Western Reserve University law professor Erik Jensen, who holds a chair named for Akron industrialist David Brennan, said the federal tax law changes, absent corresponding changes in Ohio tax law, “can create a legal, but unwarranted, shelter for Ohio income tax purposes because the trust’s share of corporate income falls through the cracks: It is not taxed to anyone.”

A member of the faculty since 1983, and before that a practicing tax attorney in New York City, Jensen said that “this problem was not created by villains; it was an accidental byproduct of a well-motivated federal tax change that unfortunately does not mesh with Ohio law.”

Accidental or not, it’s a provision to which estate planners and tax attorneys seem to have enthusiastically steered clients to reduce their tax bills. Jerse says he’s heard estimates of lost revenue that run as high as $100 million annually.

“If you sell a $60 million S Corp., you would have a 7 percent tax,” Jerse says. “So that’s $4 million on one deal that you’re missing. I would imagine you could go through the law firms of Cleveland alone, and find 10 or 20 of these deals in process.”

Still, Jerse has been stymied in trying to put a more precise number on the problem. For reasons he can’t understand, he’s thus far had no luck getting the state’s tax department to come up with appropriate numbers.

“The tax department has basically given me absolutely nothing in helping me estimate this [the magnitude of lost tax revenue]. They keep telling me they can’t figure this out, because it’s like trying to calculate the shadows on the wall.”

The professionals whose clients are benefiting from the tax provision, meanwhile, are stuck in their own balancing act: They can’t actively lobby in favor of continuing the loophole, which would only call further attention to it, but neither do they seem to want it closed.

“They’ve called several times, but they’ve never shown up at hearings,” says Jerse of these estate tax professionals. An industry official was reticent about the issue when contacted for this story.

“Arthur Andersen has no comment,” said one member of Andersen’s Family Wealth Planning Group, Patrick Saccogna.

Nevertheless, Jerse, whose legislative career won’t be affected by term limits until the year 2004, plans to push hard to get this loophole closed this year, despite the fact that the legislature won’t regroup until October, and then for only a few more days in 1999. He’s spoken to the speaker of the house, and to the chairmen of the tax subcommittee and the Ways & Means committee, “and nobody’s expressed any opposition.”

While some legislative observers think it will difficult to impossible to get action on the bill in the six or seven days of the legislative session that remain, Jerse remains optimistic. With revenues of this magnitude leaking out of state coffers, he says, “I don’t think they’re [legislative leaders] going to want to leave that out there. If the legislature has the will to do it ... I’m going to be pushing to get it done this year.”

It may be difficult to predict the outcome of the bill, but one thing seems certain: When campaign contributions from estate planners and tax attorneys are totaled at year’s end, don’t look for Ed Jerse’s name to be high on the list of beneficiaries of their largesse.

John Ettorre (jettorre@sbnnet.com) is a contributing editor at SBN.

Monday, 22 July 2002 09:49

Early adapter

When Akron-area Federal District Court Judge James Gwin ordered the small law firm of Willis & Linnen to file a case electronically this spring, the firm was forced to quickly come up to speed on the Internet. After all, it didn’t so much as have a Web page.

Initially, the firm’s principals shopped for some high-speed alternatives to connect to the Web. “They were very fast,” recalls partner Mark Willis, but with no speed requirement, he ultimately decided, “There’s no need to drive a Ferrari in a parking deck.”

Instead, with the help of Akron information-technology consultant Jeff Satterfield, the firm opted to employ the “open-source” software, Linux, to facilitate its connection to the Web. The firm’s new Linux server now sits quietly in its offices, out of sight.

“It’s in this little putty-colored box, sitting down in their basement. No one ever sees it or touches it. It’s not even in their computer room,” says Satterfield.

A subject of fascination among the computer geek subculture since hundreds of programmers around the world collaboratively cobbled it together under the loose direction of Finnish-born Linus Torvalds, Linux has more recently had a splashy introduction to the general public. This summer, a North Carolina company named Red Hat, which packages the otherwise free software on a CD-ROM and adds an instruction manual, went public, creating a number of paper millionaires.

Besides being free (downloadable at no cost from www.debian.org), Linux’s popularity has risen along with its reputation as a nearly crash-free alternative to the Windows, Macintosh and Unix operating systems. While the first fully usable version was released just five years ago, reputable industry estimates call for installations of the software to grow at a rate of about 25 percent a year over the next five years. That would mean that by 2003, its market penetration would be within striking distance of the vaunted Windows NT networking platform.

For his part, the 38-year-old Satterfield, a lifelong Akronite — who’s pained to admit that he was in the same Boy Scout troop as infamous mass murderer Jeffrey Dahmer when the two were growing up in Bath — likes to think he has a three-year head start on the coming Linux boom. It was precisely three years ago this month that the former IT staffer for the economy hotel chain Knights Inn and the accounting firm SS&G first bumped into the then-novel software.

He’d recently left SS&G to strike out on his own as an independent consultant, when a client was in need of a networking solution that seemed to fit Linux’s strengths. Satterfield recalls “a lot of late nights” spent toying with the collaboratively created software, teaching himself the technology in the process of assembling a workable configuration for his client.

Of course, cutting-edge technology solutions, even the most reasonably priced, aren’t for everyone. Even with all the attention it’s been receiving, Linux is likely to retain its outlaw image among many business users for some time. A case in point: Satterfield laughs at a page from the Web site of the Cleveland Linux Users Group (www.cleveland.lug.net), where a slovenly self-proclaimed Linux master lounges in bed, his pet bird Hercules perched atop him. Not exactly the best advertisement for dependability in a business environment, he admits.

“I mean, do you want that couch potato in your business,” playing with your company’s IT family jewels? he asks rhetorically.

With that hesitation in mind, and perhaps also because competing software platforms are better for certain tasks, even confirmed Linux enthusiasts such as Satterfield continue to offer more familiar IT fixes to clients.

“We do [Windows] NT as a back-office solution. That’s because it’s a solution that’s understandable,” he says. If you tell people you’ve installed a Microsoft product in your business, “people won’t wrinkle their nose at a cocktail party,” he says.

In fact, the mixing and matching of various networking platforms probably matches the comfort level of many businesses these days. That’s been the case for 79-year-old Amer Insurance. The downtown Akron insurance agency, which specializes in property and casualty coverage, called on Satterfield to install a Linux system for front-end connectivity to the Web. But it continues to rely on more traditional platforms for other, even more vital, pieces of its network architecture, says executive vice president B.G. Labbe.

“We have a Novell server” for applications such as running credit checks, “and a Unix system for the agency’s internal management system. We’re insurance agents, not computer experts. But we’re pretty advanced in our technology,” says Labbe, who claims to know just enough about IT to be dangerous, but also knows when to summon an expert.

It wasn’t too long ago that Labbe’s young nephew was constructing Amer’s Web site. Now, through the Linux server, Amer has taken a considerable leap in sophistication, beginning to perform some basic customer service transactions, such as soliciting client policy changes and application forms, through its Web site. Satterfield heartily approves.

“If a business owner is not looking at Web-enabled applications as we go to the 21st century, they’re going to be screwed. They’re going to lose sales as a result.”

And Satterfield thinks that, against the backdrop of that new competitive pressure, Linux will win more than its share of that emerging Web-solution market. The popular attention from the Red Hat IPO has helped, but perhaps even more important in demystifying it has been the recent decisions of large industry players such as IBM and Hewlett-Packard to climb aboard with their own Linux applications and pledges to support the software.

For all its funky reputation in the corporate market, Satterfield thinks Linux’s cost advantage, coupled with its growing reputation for reliability, will slowly but steadily win business converts.

“You can just set it up and leave it,” he says. “I have clients who haven’t touched their Linux box in months. It seems like you’re [fixing] an NT box every 30 days.”

How to reach: Jeff Satterfield (330) 666-7897, www.sattco.com

John Ettorre (jettorre@sbnnet.com) is a contributing editor at SBN.

Monday, 22 July 2002 09:49

Trust me, I’m with the Feds

The name Clarence Thomas will go down in the history books for a number of reasons: as the second black Supreme Court justice and first person to widely introduce the infamous Long Dong Silver to the nation’s cocktail party conversation.

But among his lesser-noted legacies, the Georgia native also presided over a huge backlog of cases while he served as chairman of the Equal Employment Opportunity Commission during the Bush Administration.

And now the EEOC, for years resource starved but more recently given a $37 million budget increase by Congress, is trying to whittle that pile of old cases down to a more manageable size. Once up to 112,000 cases, the backlog is expected to dip to 44,000 active cases, although 80,000 new charges a year continue to be filed with the agency.

EEOC chairwoman Ida Castro was in Cleveland recently to promote the use of mediation by businesses, which thus far have only warily embraced a local pilot project.

Under mediation, the agency cannot force a settlement of employment discrimination charges. Both the charging party and the company charged must agree to submit to the process and both must sign confidentiality agreements. Unlike cases in which the EEOC is investigating, the agency isn’t a party to mediations, but merely a facilitator. If no settlement is reached, the case reverts to the agency’s normal investigative track.

EEOC mediation has won high marks from parties that have tried it, Castro boasted. But the bottom line, and no doubt the real reason for her visit, is that “employers decline our offer to mediate 65 percent of the time,” even though 60 percent of the charges are settled in one day or less (the average session is one to five hours). Smaller employers, she added, reject mediation at an even higher rate, “even though they can benefit more” from removing such a major management distraction.

She was forced to acknowledged the obvious: The EEOC, which for 30 years has rightfully been seen by business as a tough, even ruthless beat cop watching over employment practices, hasn’t had much occasion to engender maximum trust among employers. But she said the agency has erected an “impenetrable firewall” between its mediations and its investigative unit.

All notes from mediations are destroyed, and cannot ever be used against a party if mediation fails and the case is sent back to agency investigators. She pitched mediation as a tool for management to be proactive.

“Find out what it means to take control of your own employment disputes,” she said. Perhaps most improbably, though, she repeatedly referred to the agency’s “customer service” capacity, language which must have an especially bizarre ring for any company on the receiving end of an EEOC investigation.

Underscoring the notion that business remains just as wary of EEOC mediation as it is of the agency, panelist Richard Chesnik, corporate director for human resources for Cleveland-based Brush-Wellman, immediately lit into the initiative when his turn at the microphone came. “I hope that this program is a systematic change in how the EEOC does business, as opposed to the backlog-buster du jour.”

Chesnik ticked off a number of methods the agency has used to cull its caseload in the past, including what he called agency “SWAT teams,” which were known to call companies out of the blue on six-year-old cases when periodically directed to winnow its backlogs.

Moments later, the first question from the floor was similarly hostile. “Why would an employer agree to mediate when they’re sure they didn’t do anything wrong?” one human resources staff member pointedly asked.

Castro, quickly shifting from her earlier conciliatory posture, went on the offensive. She cited egregious examples in which employees “were treated like dogs,” including one in which an employee was raped by a supervisor, then fired by upper management when she complained. “We’ve found too many bad actors that lie, and they hurt all of you. Those that fight us tooth and nail hurt all of you,” she said.

Furthermore, she noted, while business might feel the EEOC is hostile to its interests, she claimed to constantly run into the opposite attitude among charging parties: “That we’re in bed with companies, that we’re [thereby] useless.”

In the end, though, even corporate defense attorney Tom Barnard of Ulmer & Berne said there’s some utility to mediation, at least when both parties want to go that route. In his experience, he said, if both sides agree to mediation, they’ll typically settle the case.

But many clients will always be deadset on litigation, he says, either because opposing counsel hasn’t yet found damaging facts during the discovery phase or because the client is intent on setting a prophylactic precedent for future scofflaws.

“I’ve had clients go to trial for the stealing of a candy bar” to set a precedent in the grocery business, he said. Under those circumstances, “if they’re not interested in mediation, they won’t agree to it. And the EEOC’s wasting its time” in trying to talk them into it.

Mediation at a glance

Additional facts about EEOC mediation program in the Cleveland district, which covers all of Ohio:

  • Under a three-year-old pilot program, the EEOC’s Cleveland district has been offering to mediate cases brought before the agency. In the last 11 months, about 250 mediations have taken place.

  • The Cleveland district has four internal and 38 external mediators, triple the number available last year. Due to the recent increase in the agency’s budget, outside mediators, who had been serving on a pro bono basis, are now being paid.

  • The EEOC’s Cleveland district, along with counterparts in Chicago and New York, will soon enter a joint pilot program with the American Bar Association, under which lawyers will be provided pro bono to interested parties.

  • The Cleveland office, like other EEOC offices, has a liaison for small businesses interested in mediation.

For more information on EEOC mediation, contact the agency’s local mediation supervisor, Loretta Feller, at (216) 522-2001 or consult the agency’s Web site at www.eeoc.gov.

Bob Cohen tends to see people at their most stressful moments.

The Akron-based turnaround consultant once presented a business pitch to a troubled retailing company. A year and a half passed, and no word. Then, he gets a panicked call from the owner, telling him that payroll is due on Friday, and they’re going to miss it by 90 percent. Can you come right away to help?

A lack of communication and deep denial of their troubled situations are the classic hallmarks of companies in trouble. But it can get even worse, says Cohen, founder of Centrus Consulting, which recently merged with a New York/Philadelphia practice to form Nachman-Hays-Centrus Inc.

“I always watch for when a client moves from denial to the next stage: blame. When you find a client is into blame, they’re probably beyond turnaround.”

What’s the difference between turnaround artists and general business consultants?

“As a general rule, a consultant goes in and asks, ‘How do we make this business better?’ A turnaround guy asks, ‘Is there a core business here?’ That’s a key difference.”

Beyond that, the immediate priorities are assessing the adequacy of the management already in place and figuring out if there’s some form of bridge financing to buy time to fix the problems.

Sometimes, of course, they’re not worth fixing. In more than half his engagements, Cohen winds up overseeing the sale of the company. Some are simply liquidated, with the turnaround consultant focused on trying to squeezing as much debt out of the business as possible.

In this business, there are few routine assignments. A bank once hired him to try to get its money back from a troubled fireworks company in this area.

“We did some homework and found out the owner liked to punch people’s lights out. So we showed up with five armed guards, [with guns] fully loaded, and went after the cash register. He was going to punch our lights out, too, until he looked out the window.”

Of course, the cash register didn’t contain the full $4 million the bank was seeking, so it had to file suit in Stark County court, as well.

As you might expect, it helps to have a loose and easy demeanor in this line of work. And Cohen, who once borrowed heavily to buy a six-figure seat on the Chicago Board of Trade at the age of 22, indeed has something of a cowboy reputation. He recalls once literally roaring into an engagement, overseeing a troubled coal mine in central Ohio’s Amish region, aboard his Harley Davidson.

Every troubled company is different and every owner of a distressed property has his or her quirks, but they all have one thing in common, he says.

“The owners are concerned that the employees will find out, but the employees already know. And them thinking that they don’t want anyone to know is a kind of joke, ’cause everyone knows.”

John Ettorre (jettorre@sbnnet.com) is a contributing editor at SBN.

Monday, 22 July 2002 09:47

On the block

Where have been lots of other golden periods in this century to sell a company, but perhaps there’s never been a better time to do it than the last few years.

No less an authority than Mark Fillippel, head of mergers & acquisitions for McDonald & Co., recently called the current period “the best M&A market of the century,” and a “great sellers’ market.”

With so much capital chasing after so few remaining prime properties, a lot of business owners who once might never have considered selling at lower earnings multiples are now at least keeping an open mind about the possibility of cashing out. But how should they prepare their companies for the auction block?

Investment banker/business broker Nick Merkle, of Woodmere-based Falls River Group, which this year has brokered the sale of three companies with combined revenues of about $60 million, offers what he calls 10 timeless tips on preparing your company for a sale. Why timeless?

“I look back at what I said 13 years ago [when he got started in the field], and nothing’s really changed,” he says.

His pointers include:

Continue to operate the company as though you were not going to sell it.

It’s an age-old mistake: A business owner puts his company on the auction block, then gets so caught up in that process that he neglects to run the company as tightly as he once did.

The problem arises if the process takes longer than expected, as it often does. A first wave of buyers can easily fail to materialize, and since you’ve let the business slip, it might well be worth considerably less to a later group of bidders.

Besides, says Merkle, “you don’t want to unduly distract your employees by bringing people around for constant tours.” So just stick to your knitting during the sale process and pretend that nothing has changed. Or it will, for the worse.

Be able to give specific, logical reasons for selling.

It’s well-known in the investment-banking field that a lot of owners merely pretend to be interested in selling. Instead, they’re really just fishing for a free valuation or testing the waters for a possible sale years down the road, or appeasing their egos by seeing if their company might fetch as much as their buddy’s did.

“A lot of people claim they’re for sale, and they’re not. Selling a company is a lifestyle decision, not an economic one, because after taxes, they may not have much left,” says Merkle. Buyers, coached by their brokers, are generally skeptical of “sellers.” You can help allay those suspicions by preparing some solid reasons for selling.

Be prepared to note the pros and cons of owning a business.

Similarly, a balanced appraisal from a reputable source will boost your credibility with a potential buyer.

Clean up the premises.

This one’s pretty self-explanatory. As Merkle puts it: “Nobody likes to buy a dump.”

Clean up the books.

Before you hang the “for sale” sign, it would behoove you to go after past-due receivables, settle outstanding loans to officers, sell off old inventory, trim payroll, etc. While investment bankers report seeing fewer obvious no-nos than they once did, like ghost employees, most privately held companies still have their share of financial skeletons in the closet that would raise eyebrows for outsiders.

“You want to have a fairly simple transaction, so getting rid of all these things up front makes it easier” to do a deal, he says.

Purchase minority interests.

Not unlike the previous item, this suggestion goes to the heart of the deal’s simplicity. Buyers want to bargain with one seller, and they typically recoil at the notion of dissenting shareholders.

That makes the deal higher risk and less likely to close. You can shortcut all those headaches by settling up with old partners before you shop the company.

Eliminate related-party transactions.

One of the prime variables in setting the purchase price of a company is the degree to which the cash flow is directly transferable to a new owner. If the previous owner has been playing Let’s Make a Deal with all of his friends and family members for years, it’s bound to depress the price his enterprise would command from an outside buyer.

“If you’re giving special deals to your buddies or getting deals from your buddies, the new buyer may not get them. So they want to be assured that they’re doing business at arm’s length,” says Merkle.

Make a detailed list of all tangible assets to be sold and a list of those to be retained.

The process of selling a business is not unlike selling a home, insofar as buyers and sellers can differ greatly on who gets the curtain rods.

“Very often, the seller’s perception of what he’s selling and what the buyer’s buying are two very different things,” says Merkle. “Often, a seller has different lines [of business], and they might plan on retaining some of those.” So put it all on paper for everyone to see in black and white.

Given the time, report true earnings for at least one full fiscal year, not the profit you may have engineered to minimize taxes.

Only naïve fools and Boy Scouts would be surprised by some of the creative accounting that privately held companies engage in. But when it comes time to sell, it’s in your interest to have kept your sleight-of-hand to a minimum, at least over the prior 12 months.

“To the extent you can have your accountant show clean figures, that’s a big plus” to a potential buyer, says Merkle.

While most private companies, for instance, simply expense capital purchases rather than amortizing them over many years (as the tax code allows and larger companies typically would do), as long as you’ve been fairly consistent in your accounting, there shouldn’t be too much of a problem.

In the end, he says, when it comes time to talk price, “it’s to a seller’s benefit to show the largest profit over the last year, rather than saving a few bucks on taxes.”

Hire a professional merger and acquisition intermediary to help you. You will recapture the expense many times over.

Okay, so this one’s a little self-serving on Merkle’s part, but we decided to let him have it, partly on the theory that 10 tips sounds a lot catchier than nine.

John Ettorre (jettorre@sbnnet.com) is a contributing editor at SBN.