Dynamic duo Featured

7:00pm EDT November 24, 2006

Brothers Mark and Scott McMillin had little time to think about the majority interest of their father’s company, The Corky McMillin Cos., they had just acquired back in 1989, because they spent the next several years trying to save it from bankruptcy.

The privately held real estate company had fallen victim to one of the industry’s vicious down cycles, and it took everything the family could muster to save it.

Its financing was arranged through a handful of local banks and savings and loans. As the financial institutions began to fail and were taken over by the government, loans were called and the company found itself in crisis mode. “We were cutting overhead and managing cash flow daily on a set of 3-by-5 cards on a huge conference table,” says Mark McMillin, who shares chairman and CEO duties with his brother, Scott. “Our loans were being called, and we couldn’t draw on our lines of credit.”

It was through a legal contact in San Francisco that they finally found financing in Taiwan and avoided bankruptcy. “From that experience, we learned to diversify our sources of equity,” says Mark McMillin. “We now borrow from more then 15 different sources.”

Spread your risk
From that experience, the brothers learned that the future of the company would lie in greater diversity of the business model, and they began fashioning directional changes, including the decision not to develop all of the land that the firm acquires. “Over the last five or six years during the housing boom, our core business is now more focused in land development and investment,” says Scott McMillin. “We don’t build on all of the land that we invest in. We understand that in good times, there are two profits to be made — one from the property and one from the building improvements. In bad times, there is only one profit to be made.”

The company, which was founded by their father, Corky McMillin, doesn’t disclose revenue, but Hoover’s estimates revenue at $464 million, while Reed Business Information puts its housing revenue at $593 million, with other revenue adding an additional $287 million.

The brothers have also learned to take a more pragmatic approach to deal-making. “When the economy is good, it appears that there are too many good deals out there,” says Mark McMillin. “Interest on our money is our biggest line item. Every deal that comes through now, I put some realism and conservatism into it.”

Learning to reduce the financial risk associated with the building industry by buying and holding land was one change that the brothers implemented as a result of the lessons of the 1990s; the other was that expanding beyond the San Diego real estate market when staying local posed growth limitations for the first time. “In order to grow, we needed to look outside of California, and we also wanted to look at markets that are counter-cyclical to San Diego,” says Mark McMillin.

That decision has resulted in acquisitions in Bakersfield, Visalia, Imperial Valley and now San Antonio, Texas. For a family-owned business, bringing outside companies into the fold can be a challenge, and to do it successfully, the brothers didn’t stray too far from the core beliefs and values that are part of the company’s foundation. “First and foremost, when we look at a company for a potential acquisition, we want the firm to be operating under the same parameters as our own, so they have been built by other entrepreneurs,” says Mark McMillin. “We have to have a comfort level with their people.”

One of the main points of emphasis is on the people who come with the company. “Real estate is a local business, so we really are making that acquisition for the express purpose of buying their intellectual capital and knowledge of the local marketplace,” says Scott McMillin.

Before making acquisition decisions, the brothers complete their financial due diligence and then spend time with the top two or three managers from the prospective acquisition, as well as with the departing owner to assess the staff’s market knowledge level and cultural compatibility. Once the acquisition is made, the McMillins have learned from experience that effective assimilation is vital. “In order to teach our method of quality, we send people in from San Diego,” says Mark McMillin. “We’ve learned that you can’t just throw the manual at them.”

Executives from the acquired company are brought to the headquarters, shown the new processes with hands-on training and are assigned a coach.

The methodology for effective acquisition assimilation was perfected following the Bakersfield purchase and is one that Scott McMillin says is transferable to other industries. “Initially, we consolidate financially and get a pulse on the cash flows and projections,” he says. “Then we involve them in our best practices operationally, and jointly we develop a business plan after some due diligence and by using their local knowledge. We continue to support them the first six months and begin the co-training process.”

Cumulatively, organic and acquisition growth have resulted in about 1,000 employees. It has been important for the brothers to lead by example with their consensus-building abilities, because the company is structured on the philosophy of teamwork, with much of the decision-making conducted by committee and the real estate development work conducted by project teams.

Success through teamwork and culture
The Corky McMillin Cos. uses an executive committee to determine strategic direction and resolve differences.

The executive committee structure was put in place by Corky McMillin, and the group participates in strategic planning and corporate decisions, including land acquisition and development, homebuilding construction, sales and marketing, and customer service. “We make group decisions here, and we move slowly,” says Scott McMillin. “Even if we are going to terminate someone, that decision is reviewed by a group of people. It works for us because our business units work together to bring products to market.”

Projects are also managed by teams. For example, in developing communities and neighborhoods, the project teams include managers from sales, marketing and planning. All of the team members understand both the overall project objectives and the individual components of the project, eliminating decision-making in silos. “You take the typical real estate executive, and they allow the project manager to make all of the decisions,” says Scott McMillin. “Our company project managers don’t have that type of authority. Everyone’s open to listen to ideas, and we’ve never stopped anyone from providing input or being involved.”

The committee structure also serves to spread accountability for the end result, something Scott has carried on from his father. The compensation plan also supports the team-work philosophy and group accountability, with all employees potentially able to receive a bonus each year based upon total company performance.

In addition, the firm sponsors an off-road racing team, and employees have the opportunity to work with the crews as a real-life example of the correlation between teamwork and success. The racing team is also used as a marketing vehicle, as a way to maintain the family culture of the organization and to provide some fun along with the growth.

The concept of earning opportunity was part of their succession planning curriculum and was instilled in the brothers as they progressed through the ranks. Mark McMillin started with the firm in 1979 and Scott McMillin came on board in 1981. Both started at the bottom of the organization and worked their way up, earning the respect of managers and co-workers by living the culture that favors hard work and hands-on involvement.

“I went through all the chairs,” says Scott McMillin. “Being an owner, I came to understand why decisions are made and to support the managers and become personally responsible.” Today, the same practice remains in place. A manager brought in from outside the company is required to take a rotation through the chairs and will not be promoted until the new person impresses the managers with his or her abilities and earns their respect and confidence. In addition to continuing the culture established by their father, the brothers have kept a close watch on staff morale through the transition when Corky McMillin passed away in September 2005.

“We have formal feedback sessions with the managers three times per year,” says Scott McMillin. “We bring together about 80 people for half-day sessions just to receive feedback. I also measure the morale by being out on the front lines and talking to people. I spent time in sales and marketing, so I think I can pick up on the vibes.”

HOW TO REACH: The Corky McMillin Cos., www.mcmillin.com