Against the grain Featured

7:00pm EDT January 26, 2009

Carl Gerhardt’s story is not unlike the stories of a lot of company leaders in Michigan. Facing the double-barrel assault of a shrinking economy and a stagnant industry, he still has to grow his business and produce profits. For Gerhardt, that means figuring out ways to grow Allegra Network LLC in the consolidating print and graphic communications industry, where growth opportunities are far from plentiful. “We’re not in an industry that has a lot of natural growth in it,” says Gerhardt, president and CEO of Allegra. “Second to that, we’re a fairly mature franchise. We’ve been around for about 25 years. In an area like that, your challenges are a bit different than if you’re in a high-growth industry and starting out with a new franchise concept.” For Allegra’s leaders, seeking growth opportunities has meant taking a creative approach to external expansion. Since becoming the company’s president in 2004, Gerhardt has helped spur initiatives aimed at finding new franchisees and new companies for prospective franchisees to buy.

To make it happen, Gerhardt and his leadership team have kept close contact with what is happening at the ground level, keeping franchisees and employees on the front lines abreast of the company’s direction and relying on information and feedback from the people who have direct contact with Allegra’s customers.

It’s an approach that has grown Allegra from $264 million in revenue in 2004 to $371 million last year, a rise of about 40 percent in four years — including the major acquisition of Bradenton, Fla.-based Signs Now Corp. in 2005, which allowed Allegra to add sign-making to its array of services.

Be a matchmaker

Gerhardt says Allegra is the eHarmony of the graphic arts business. While Allegra can’t find you true love, if you’re an independent printing company, there is a good chance Allegra’s matchmaker program can find you a buyer.

The program, started shortly after Gerhardt became the company’s president in 2004, is aimed at finding new franchises and franchisees to operate under the Allegra umbrella. The company’s leaders started the program because, in a nutshell, it’s easier to purchase franchises than to start them from scratch.

“Since this is a mature industry, rather than opening up franchises in new markets, we needed to look for a way to acquire independent print setters into our system,” Gerhardt says. “We tried to do that by having them join our franchise, but that was not successful because they basically didn’t want to pay us royalties.

“So what we did was come up with another concept to bring in a buyer from corporate America looking to buy a business, match them up with an independent printer to buy, convert it into Allegra, then take our systems and put them into place.”

From its testing phase in 2004 and 2005, the program has now become the company’s primary external growth engine, bringing approximately 40 independent printers into the Allegra system since the program’s inception.

To find independent printing companies looking to sell, Allegra began a marketing strategy that includes direct mailings, telemarketing and acquisition development managers — staff members who take leads from the company’s marketing department, screen them and attempt to find buyer matches in the independent printing company’s local market.

The matchmaker program has required an increased commitment to franchise development from Allegra. The company’s development department now employs eight. Four years ago, the company employed two acquisition development managers. But Gerhardt says that when the company can acquire an established printer with an instant revenue stream, the investment pays off.

The investment also pays off in the form of a heightened reputation.

“Because of this, we’ve become somewhat known in our industry for this (matchmaker program) now,” Gerhardt says. “If you’re an independent printer looking for an exit strategy, you probably now know that Allegra Network can provide you with that exit strategy.”

Allegra’s matchmaker program has become a sustained success due to the company’s ability to stay close to the markets it serves. Gerhardt says that for any growth initiative to take root, your company has to stay close to the market.

“It’s critical that you understand the dynamics of the market you are playing in,” he says. “We had to understand that this is a maturing and consolidating industry. In that case, if you try to grow by adding new franchises as we did in our earlier years, you will not be successful. So you need to gain an understanding of the industry you are in, then create a strategic plan that fits your industry.”

Understanding your industry also means understanding your own best practices that will maximize your growth potential. Allegra has created a program called “profit mastery.” The program teaches franchisees to run their franchises for maximum profitability, but as part of the program, about 60 percent of the company’s franchisees participate in performance groups twice a year. The peer groups are composed of about six owners who meet twice a year. In the meetings, the franchisees bounce ideas off of each other and inform management as to what is going on in their markets.

“They basically serve as each other’s board of directors,” Gerhardt says. “Our staff members facilitate those meetings, and it becomes a very important source of input as to what is succeeding and what is not succeeding in the marketplace. From there, we kind of bubble it up through the corporate staff. That helps us stay really close to what is working and what is not working with our franchise members.”

To paint an accurate overall picture of what is happening in the markets and the best places in which to seek growth, Gerhardt and his management team combine the information received from the performance groups with what they learn during industry conventions and regional meetings.

Look for external growth

Gerhardt says you must look both inside and outside your organization to plan a growth strategy.

“What we do is we look at those centers that are growing, then figure out what they’re doing to grow,” he says. “Then we match that to the talk we’re hearing in the industry about what is working.

“One example of that is one of our franchise owners who decided to diversify into the sign business. The technology between the sign business and the print business is merging. So this franchisee in one of our performance groups made it known to us that he was very successful at that. That led to our acquisition of Signs Now, which was a big growth step for us.”

When vetting a potential franchise acquisition candidate, connection to the market is among the criteria Allegra’s leaders use to assess the company. An acquisition should not only mesh well with your business model, it should help further your long-term vision.

“We’re looking for printers that have a similar profile to our existing franchisees,” Gerhardt says. “We know that market segment and can support it well.”

He says staying focused and knowing what you want out of a growth opportunity is essential to success. It’s easy to fall in love with an acquisition or any chance for growth. But it has to be the right opportunity. Developing that mindset takes discipline.

“It’s easy to get acquisition fever,” he says. “It’s like, ‘I want this car. I have to have this car.’ We’ve all been there, right?

“But when you make these acquisition decisions, you’re almost in a sense betting the farm. You’re usually taking on substantial debt. It was a several-million-dollar deal for us to take on Signs Now. So we had to acknowledge that we had to be very careful about this, that we don’t acquire something that is not right, so we have to do our due diligence right. You have to look inside it, and if you find something that isn’t right, don’t go there.”

To profile independent printers looking for a buyer, Allegra gets basic information in writing. Gerhardt and his staff look at three primary criteria: product sales, equipment and technology. Those three areas are key indicators in determining whether the acquisition candidate is operating in the same markets as Allegra.

“We look at that profile to make sure they have the right technology fit and are playing in the right segment of the market,” he says. “After that, we require them to provide their financial statements to see if they’re profitable. If they’re not, they aren’t going to be much of a fit for us.”

If a company’s vital statistics look favorable and Allegra’s leaders feel like it’s the right opportunity for the company, they’ll get the independent printer’s owner involved in aiding the transition to an Allegra franchisee. They do so by requiring that the selling owner remain financially vested in the company.

“We want the selling owner to stay on for 30, 60, 90 days or even up to six months to help in the transition,” Gerhardt says. “We also ask that the selling owner carry back part of the financing of the business. We want them to have some skin in the game, so to speak, so they’ll be less prone to misrepresent what they’re selling.”

On the franchisee side, new owners are educated in Allegra’s business through an orientation program. It might be months before Allegra finds a franchise to sell to the new franchisee, but Gerhardt wants new franchisees to have a thorough background in how Allegra does business before any deals are signed.

Once a franchise is found, Allegra puts the franchisee slated to make the purchase through an additional two-and-a-half-week training class that gives them a soup-to-nuts overview on how to run an Allegra franchise.

New franchisees are also assigned a support manager who helps the franchisee form a business plan and aids in every phase of the transition. Allegra has two staff members who concentrate solely on helping new franchises ramp onto the Allegra platform.

As part of the transition support, Allegra counsels new franchisees on dealing with employee matters. Acquisitions can lead to a period of uncertainty for the employees of the acquired company. Gerhardt says most employees want to know about their job security and the future of the company — in that order.

“Employees are vitally important in the transition process,” he says. “You have to keep those employees satisfied and in place. So we give our buyers information on how to do that with human resources tools. In some cases, we might require an employment agreement with some of the key employees.

“The employment agreement does two things: It gives the employee some security that we want them to stay on board. We would also include a noncompete clause in it. Then, if they leave the company, they can’t take any accounts with them. So it’s basically done to ensure that transition. We have some comfort, and they have some comfort.”

The process of acquiring 40 printer franchises in the past four-plus years has taught Gerhardt that slow and steady is the way to go in any type of growth.

“The key with anything like this is you have to start small, do a bit of testing and ramp up,” he says. “The first year we had this matchmaker program we did three of them and learned from the process. The second year, we did six or eight. Last year, we did 20. So we’re scaling up as we go, and we’ve refined our processes a great deal in that time period.

“These are very complex deals to work. It’s very different than starting a ground-zero franchise, where you do the site selection, send the equipment in, train the people and open it up. When you’re making a match and doing a deal like this, it’s a totally different animal.”

HOW TO REACH: Allegra Network LLC, (248) 596-8600 or www.allegranetwork.com