How to stay on the right track without getting hit by a train Featured

9:43am EDT July 22, 2002
When the owners of ProLine Services got a call last year from a company interested in acquiring the McKees Rocks rail car services firm, the timing couldn’t have been better.

The company had put most of its big problems behind it, and the sale would free up the young entrepreneurs, Chris Farls and Eric Close, to plow into their next venture. ProLine Services was on an upswing, doubling its revenue from 1997 to a profitable $3 million in 1999. They increased employment at the company from 14 to 36 and were creating a buzz in the industry.

The company looking to acquire ProLine Services was Trinity Industries Inc., a Dallas-based public company with nearly $30 billion in annual sales. Not coincidentally, it was the prime candidate that Farls and Close had identified in the business plan they put together a couple of years before. The sale went through, and, according to plan, the partners now are poised to leave the rail car services business behind and take on a venture in the robotics industry.

“It was right out of a movie,” says Close, describing the encounter with Trinity.

The ProLine Services story hasn’t always followed such a charmed script. When Farls and Close took over in 1998, they knew it would be a battle to get the business back into the black. It was teetering close to bankruptcy.

Customers and suppliers had lost confidence in its ability to deliver on its promises. There was a revolving door in the human resources department, and those employees who had stuck out the rough times were left demoralized and cynical by broken promises. And the trials and troubles continued.

Over the next 21 months, Farls and Close faced problems with leases, a union organizing effort, the departure of a key employee and the loss of a key customer. And if that weren’t bad enough, an alphabet soup of state and federal regulatory agencies showed up unannounced to poke around.

Despite the obstacles, the young entrepreneurs turned around ProLine Services and sold it for enough money to return $500,000 to their investors and reap seed capital for their next venture. Some might say they succeeded because of their sheer drive and determination, mixed with a bit of young luck.

But take a closer look, and you’ll find two entrepreneurs who were willing to do what most entrepreneurs only talk about before becoming sidetracked by grandiose schemes. They stayed on track and followed the detailed business plan which they had laid out from the beginning, while showing a willingness to apply what they learned as graduate students.

An odd choice

While their classmates at Carnegie Mellon University were hooking up with fast-paced start-ups or prestigious large companies, Farls and Close were looking for a bit more entrepreneurial independence. Except for a few thousand dollars provided by their parents after they graduated from CMU’s MBA program, however, the would-be entrepreneurs had little with which to acquire a business, save their ambitious enthusiasm and some real-world experience.

Yet they were determined to follow that path.

The would-be partners decided early on to take an approach that wouldn’t involve venture capitalists or new technology launches. Farls and Close didn’t go on the hunt for any particular type of business; instead, their specifications had more to do with ease of acquisition and how the company would respond to their application of business school techniques.

The litmus test was whether they could acquire a business at a bargain price and then, by applying solid business principles dictated by a carefully crafted plan, resuscitate it and turn it into a strong performer.

As they began the search, many of the prospects they researched had negatives — firms with technology but unclear proprietary rights to it or owners who were simply shopping the market to see what kind of price they could fetch for their holdings. After thumbing through about 30 companies, they settled on Specialty Linings, a McKees Rocks-based company that refurbishes the interiors and exteriors of tanker rail cars.

The company’s main problem: It was swimming in debt.

Taking over a failing rail car services company hardly seems like the kind of venture that would spark the imagination of a couple of energetic, clean-cut CMU graduates. Both had graduate degrees in business, and they were young but hardly wet behind the ears. Farls, a military veteran, had held management positions, and Close had on his resume a stint in consulting for a major accounting firm.

But Specialty Linings fit some critical criteria. It was floundering but held a good geographic location in the Northeast, where there is high demand for such services and a limited number of service facilities. The founder, although he had no ownership in the company, had strong contacts in the industry and proprietary knowledge of the business. And the company had a reputation for doing quality work, even though its customer service record was less than stellar.

“What it lacked was the management expertise and a lot of the modern tools that are commonly used in business today,” says Close.

Confident that they could improve the company’s performance, the entrepreneurs struck a deal to take over as consultants, secured an option to buy the company and put together a business plan. A few months later, they acquired the company for less than $1 million.

B-school improvements

Close and Farls found that implementing simple changes to the way ProLine did business had a significant impact on its bottom line. They implemented an inventory system for repair parts — something that hadn’t existed at Specialty Linings. They developed better systems for costing jobs and scheduling work.

The tougher problem was in trying to rebuild relationships with customers and suppliers, which Specialty Linings had strained. Vendors had shut off shipments because of delinquent payments, and,customers awaiting delivery were caught in the lurch.

So the partners negotiated with suppliers to loosen their supply lines and met with customers and shared their business plan to assure them that things were going to be different. Farls went on calls with vendors’ sales representatives to explain to customers what the company was up to and how it had improved its operations and to share the partners’ business plan.

Says Tom Reese, a manufacturer’s representative for Placite Inc., a linings producer, of Farls: “In spite of having no background in rail, he picked it up quickly and gave you a very professional feel.”

Kevin DeAngelis, a rail fleet specialist formerly with Nova Chemical and currently with Aristech, has done business with ProLine Services while with both companies. While at Aristech, ProLine cooperated on a plan to put a mobile repair service into operation.

“I was pretty well pleased with what those guys were doing down there,” says DeAngelis.

DeAngelis adds that the capability to turn out quality work in a timely way is of key importance in the industry, something that ProLine has been able to accomplish.

“Any time you use a rail car repair facility, turnaround time is key,” DeAngelis says.

Close and Farls realized that, to maintain the high quality of work that the company turned out, they would have to retain skilled employees in a tight labor market. They built into their plan provisions to raise wages and add benefits. Over time, they implemented a health care package, offered a 401(k) plan, increased production worker salaries by 20 percent and doubled the number of paid days off.

But the ProLine plan called for even more sophisticated changes in the way the company was to do business. The partners deduced that it would not be able to survive and grow unless it became a full-service operation. The company had been operated essentially as a job shop, where one or a few cars rolled into the shop and crews completed the work on them.

Farls and Close figured they could increase volume by going after larger orders, such as painting fleets of new cars. The strategy would allow them to gain efficiencies of scale, increase throughput and fatten their profit margins. They convinced their investors that they had to invest in new equipment to add services and ease the bottleneck in the blasting shop that was slowing production.

While their customers were often Fortune 500 companies, such as Bayer Inc. and General Electric, businesses in their industry, they found, were often lagging technologically. Through research and in talking to customers, they knew that problems often arose because customers are generally geographically distant from the shop, making communication about service issues at times difficult.

We wanted to bring the customers into the process,” says Close.

Their solution was to develop a customized job tracking system that makes car status reports available online. Customers can know at any given time a car’s stage of completion or see firsthand damage or parts that needed repair or replacement, with explanations of work required, supplemented by digital photographs of the job.

They established a quick turnaround service for customers who needed cars back into service without delay.

Founder falters

The company’s founder had planned to stay on, and Farls and Close say they believed that his operations knowledge — he handled most of the company’s operations and had the industry contacts — would complement their strategic business strengths.

But they purport that the founder ultimately was resistant to the changes they wanted to implement. So after several months, all parties decided that it was best to part ways.

“That was painful,” says Close.

Now, while they were making systems improvements, they would have to spend even more time learning the business.

At the end of 1998, eight months into their acquisition of ProLine Services, Close and Farls were blind-sided by an organizing campaign by the International Brotherhood of Electrical Workers. The partners say they were taken by surprise because they believed that they had made it clear to their employees that improvements in working conditions and compensation were in their plans.

Ultimately, the workers voted not to unionize by a 4-to-1 margin, but the episode left some scars.

“Chris and I were offended,” says Close, but he recognizes now that the history dating back to the Specialty Linings days of broken promises to employees overshadowed their good intentions. In retrospect, he muses, implementing more of those changes earlier may have staved off the union problems.

The organizing effort failed and they were able to overcome the loss of the key manager, despite their

inexperience. In the process, they learned some valuable lessons about people and turnaround efforts.

“We had a lot of good ideas from the get-go,” says Farls, “but the time it takes to implement them because of the people factor — it takes more time than we anticipated.”

There were other problems. During the early going, a major customer that represented about 40 percent of the company’s business got involved in a merger and diverted its business for six months. Then the company’s landlord went into bankruptcy, and the partners discovered that the property was in danger of being purchased out from under them — a development that could have put them out of business.

Ultimately, they banded together the leaseholders, bought the property and secured their location.

The strength of the plan

Farls and Close weathered an onslaught of business-threatening ills, several within the first months of their ownership, largely on the strength of their business plan. Because they were focused on their ultimate goal and had backtracked through the planning process to determine what it would take to get them there, they succeeded.

“We found that the process of developing the business plan and writing it makes you think through all of the strategic issues,” says Farls.

The entrepreneurs recognized that their business was cyclical, which meant they had to carefully structure their financial plan. They looked at the company’s business patterns, predicted when they might need infusions of cash and built those assumptions into the plan.

Jack Thorne, director of the Donald H. Jones Center for Entrepreneurship at CMU and one of Farls and Close’s professors, was among many, they say, who offered valuable advice throughout the process of acquiring ProLine and turning it around. He says a solid business plan is much more than just a tool to attract investors, describing it as an “operating document” to guide the business and to communicate the vision for it to other professionals, lawyers, accountants and bankers. And it has to be focused, yet flexible.

A plan as detailed as ProLine’s, says Thorne, is not the norm.

“The trick is writing a good plan with enough slop in it so that you can deal with those unexpected things that come out of the woodwork,” he says.

Close and Farls say they came away from the sale of ProLine to Trinity Corp. with a small profit, enough to provide them with seed capital for their next venture — one they anticipate will be in the field of robotics. Making a killing on ProLine Services, they say, wasn’t their goal.

“That wasn’t the point,” says Farls. “The track record is what we were shooting for.”

And that, of course, was all part of the plan.

How to Reach: ProLine Services, www.proline.com; Carnegie Mellon University, www.gsia.cmu.edu

Ray Marano (rmarano@sbnnet.com) is associate editor of SBN.