And they're off

And they're off

Three winners share common goal: fast growth

by Beth Ewen, Elizabeth Martin and Neil Orman   An ambitious growth plan is the common denominator for the three winning companies of this year’s Upsize Growth Challenge. Otherwise, they’re markedly different.

DeJarlais Enterprises, Crystal, is a 33-year-old family business that repairs industrial machinery in the five-state area. Mike DeJarlais, president, bought the firm from his father seven years ago, and Becky Lawrence, his sister, keeps the books.

They want to market the company’s services to a diverse range of customers, especially emphasizing the many services offered. Then, they want to identify and attract outstanding service technicians who can speak as easily with the company president as to mechanics in the shop.

Innovatech Labs, Chanhassen, is a contract analytical lab that in recent years has hit on a winning focus: cleanliness testing for computer and med-tech firms. Gary Smith, Ph.D., who describes himself as a “naïve physicist,”  became the president by default when the former owner wanted to sell. Jennifer Mathias, lab manager and a self-described med school drop-out, led the shift to the current customer base.

They’ve paid off more than $1 million in debt over the past six years, and kept operating while other labs closed their doors. But they’re sick of simply surviving. “A doctor of physics and a med-school dropout got the lab this far, but we could really use help in taking it to the next level,” Mathias wrote in her contest entry.

The Retrofit Cos., Owatonna, topped $10 million in sales in 2003 with a 12 percent profit margin. It offers a full spectrum of lighting-related services, including recycling, and has two offices in Minnesota plus one in Indianapolis. After a co-founder left, the remaining managers started investigating different ways to take the company national.

Steve Kath, CEO, and Eric Kyllo, CFO, have decided to sell franchises, and have done the legal and trademark work to make that happen. Now they’re trying to choose the best ways to begin the rollout.

The winners stood out from a deep pool of entrants because of the complexity and ambition of their growth goals, and the quality of work already completed to meet the goals. They dug into their challenges with the help of six experts, at the first Upsize Growth Challenge workshop, in March, at the offices of Fredrikson & Byron, presenting sponsor.

Dean Cadry is vice president of lending at Crown Bank in Edina, and a finance expert. Kirk Hoaglund is CEO of Clientek, a technology consulting firm in Minneapolis, and a technology expert. Sean Kearney heads the privately held company group at Fredrikson & Byron law firm in Minneapolis, and is a legal expert.

Mary Korthour is a telecom expert with Eschelon Telecom Inc. in Minneapolis. Elin Raymond is president of The Sage Group, a strategic marketing and communications firm in Minneapolis. Bryan Ross is a finance and operations expert, with EideBailly accounting firm in Bloomington.

Their tips, and the strategies and tactics employed by this year’s winning business owners, provide a map for any company wanting to grow.

Dejarlais Enterprises

Training, referral
incentives are ideas
for DeJarlais to try

by Elizabeth Martin

It’s no small task to be employed at El-Hy-Mec Inc. in Crystal, which services all types of industrial machinery.

Company President Michael DeJarlais expects his employees to be part service technician and part sales person, and know industrial machinery like the backs of their hands.

He’s having trouble finding people who are up for the challenge. “They have to be polite, clean, articulate,” says DeJarlais. “They have to be able to schmooze with the company president.

“We run into every kind of machine that is built. No two are the same,” he says. “It’s hard to find people who want to take on this challenge.”

DeJarlais brought two challenges to the experts: How to find employees and how to better market the company.

Seven years ago, DeJarlais purchased El-Hy-Mec from his father, who had founded the company in 1966. DeJarlais Enterprises is the corporate name, doing business as El-Hy-Mec, which represents the company’s three areas of expertise: electrical, hydraulics and mechanical.

Becky Lawrence, DeJarlais’ sister, began working for the company doing financials and “whatever needs to be done” in 1994. Today the company has five full-time employees, revenue of $1.2 million, and recently moved into a new facility.

DeJarlais told panelists that some of the company’s former employees have started competing firms and gone after El-Hy-Mec’s customers.

Sean Kearney, attorney with Fredrikson & Byron, recommends non-compete agreements. Although the scope of non-competes can vary, Kearney says that the narrower the focus, the more enforceable it is. Many companies limit their restrictions to their client list.

If El-Hy-Mec learns that a former employee is violating the non-compete, the company sends a letter to both the individual and the customer saying so. Just sending that letter will usually make a customer wary enough to call off a relationship with the competitor, says Kearney.

Panelists asked what kind of training El-Hy-Mec offered its employees since they are expected to know about many different technologies.

The company doesn’t have a formal training program, according to Lawrence. Each new employee is given a copy of the OSHA handbook and DeJarlais talks through policies and procedures.

The problem is, “we’d have to have three separate training programs,” says Lawrence.

But Bryan Ross with EideBailly points out that training can become a marketing tool for the company.  “You can say, ‘yeah, they can do it cheaper, but here’s how we hire, here’s how we train them.’ ”

Although DeJarlais already tells his employees to be observant of other machines that might need work when they visit clients, Dean Cadry of Crown Bank asks if there is a formal sales incentive program. Such a program would reward employees based on the additional dollars they were able to bring in from a client.

DeJarlais was cautious about how that approach might be perceived by customers. El-Hy-Mec’s reputation is the company’s main marketing tool, he says.

“You don’t want to be stepping on toes and make it look like you’re trying to make a sale on something that doesn’t really need to be done,” he says.

Beyond word of mouth
Word of mouth is how most of El-Hy-Mec’s customers discover the company, though the company has tried other avenues, according to DeJarlais and Lawrence.

“We feel we’ve tapped out the Web site, Yellow Pages, marketing materials that we’ve put together,” says Lawrence.

She adds that machine maintenance is one of the first budget items to get cut when customers are in a pinch. “When things get tough, they don’t want to fix things, they just let the machines run until they drop.”

Elin Raymond of The Sage Group suggests the company create a marketing plan and identify their ideal customer. Ask questions to define your customers: Who are the decision-makers? How many are male versus female? Such questions will help the company better focus its resources, she says.

Raymond also suggests the development of a referral incentive program.

“There might be a nice way — a gift, a service or a reduction in their next service — to say, ‘We value you and we thank you so much for referring so and so,’ ” she says.

Mike DeJarlais, El-Hy-Mec Inc.: 763.533.0606; md********@*******ec.com; www.el-hy-mec.com. Becky Lawrence, El-Hy-Mec Inc.: 763.533.0606; www.el-hy-mec.com

Innovatech Labs

Focus on profitable
customers will help
Innovatech Labs grow

by Neil Orman

Innovatech Labs’ bosses entered the Upsize Growth Challenge workshop ready to move from survival mode to growth mode, and looking for tips to help it make the transition.

The Chanhassen firm is a contract lab for materials analysis. It performs two main types of services — materials characterization and cleanliness testing — for a range of hard-drive parts-makers, biomedical firms and other clients. Envision a lab with scientists working with the same type of equipment seen on the CBS hit CSI. Instead of working for law enforcement, Innovatech works for businesses that need to identify a foreign substance, or ensure their products are free of contaminants.

Founded in 1991, the company has experienced big challenges over its history, including major debt, bickering owners, three changes of ownership and three name changes. But in its latest incarnation, Innovatech has made steady progress and owner Gary Smith has erased nearly $1 million in debt on the firm’s books and owed to the former owner.

Smith, a physicist and the firm’s original employee, purchased the firm in 1998 and changed the name to Innovatech two years later. He came to the workshop thinking Innovatech was in good financial shape to focus on things like marketing and growth.

He was joined at the workshop by his lab manager Jennifer Mathias, the firm’s second-longest tenured employee.

In its last five years, Innovatech has experienced steady cash flow and decent profitability. Revenue has been flat at about $700,000 per year for the last five years. Smith says net profit margin has varied between zero and 20 percent over that time, and is now toward the upper end of that range. He also says Innovatech has about $225,000 in debt remaining.

Innovatech’s leaders have three main questions: How to beef up the firm’s marketing; how to get a better handle on cost accounting and pricing; and how to decide upon the best methods for growth, such as internal growth, mergers or acquisitions.

After the discussion, Smith lists the main takeaways: The firm needs to identify its most profitable customers and use software tools known as “log analyzers” to gather marketing information on Web site visitors. Also, he plans to take advice on how to better pinpoint costs, which will, in turn, help the firm identify its most profitable customers and set prices.

Who’s most profitable?
Defining the most profitable customers was a suggestion stressed repeatedly by the experts, and after the workshop, Smith says he now considers that his top priority. Marketing expert Elin Raymond, for one, says that is the foundation for any marketing plan.

“Every company, large or small, needs to focus its resources,” says Raymond, president of The Sage Group. “You cannot market to everyone.”

Raymond recommends ascertaining how much education customers require about Innovatech’s business.

“The more you have to educate the customer to bring them in, the harder the sell, and the more costly the marketing,” she says. “You want to avoid those situations.”

A related issue is how to better measure costs, partly so Innovatech can gauge which customers are most profitable. Accountant Bryan Ross suggested Innovatech use its repeat customers as a starting point.

“With repeat customers, it’s easier to say our technicians take this amount of time, they’re using this amount of machinery time, this amount of chemicals, because those are more consistent jobs,” says Ross, with EideBailly. “It’s not an exact science, but it gives you a benchmark.”

Smith, a self-avowed numbers-lover who said he “could spend all day with a spreadsheet,” handles the firm’s books himself using Peachtree accounting software. Yet his accounting expertise is limited and the financial experts suggested he hire an accounting firm.

“An outside firm has unique abilities and talents to help you with pricing and costs, which someone within the firm might not have, unless they’re a trained CPA from the industry,” says Dean Cadry, vice president of lending at Crown Bank’s Edina branch.

Both Ross and Cadry say they are impressed with the firm’s balance sheet and history of profitability and debt repayment. Yet Innovatech has a few financial challenges remaining. In addition to payments on its remaining debt, another drain on cash flow is rent. The firm occupies a much larger and more expensive space than it needs, a 10,000-square-foot building with a rent of $11 per square foot.

Innovatech has a subtenant now that occupies a quarter of that space, but that tenant will be leaving next year. Ideally, Innovatech would like to move out of its impractical current space, but it’s locked into its current lease until 2008.

Ross notes the high rent payment as something the firm should try to address. He recommends Innovatech find a replacement for the current subtenant, so its high rent payments continue to be partially offset.

On the growth front, Smith asks about the possibility of mergers or acquisitions. Cadry says the firm could likely get many deals done, due to its steady cash flow and good track record. However, he urges Smith to think hard about issues like culture-fit before buying or merging with any company.

In a technology discussion, Smith was interested in finding ways to glean more information about visitors to the firm’s Web site, an increasingly important sales tool for the company.

Tech consultant Kirk Hoaglund says most Web hosting firms offer “log analyzers” as either a software tool or a service. Most Web activity is logged, and these tools can do things such as trace a Web site visitor’s IP address.

“If the visitor is a commercial enterprise, they can trace back the source IP address all the way to the registration record, and get a company name and contact,” says Hoaglund, of Clientek.

Gary Smith, Innovatech Labs: 952.361.5570; gs****@************bs.com; www.innovatechlabs.com. Jennifer Mathias, Innovatech Labs: 952.361.5570; ma**@************bs.com

The Retrofit Cos.

The Retrofit Cos. readies
franchise rollout for
full-spectrum lighting firm

by Beth Ewen

Owners of The Retrofit Cos. Inc. have spent the last year in intense preparations for their growth challenge: the sale of franchises around the country.

They chose this route for national expansion after experience with running projects in places as farflung as Alaska and the East Coast, says Eric Kyllo, chief financial officer and minority shareholder of the Owatonna-based firm. “Our crews got worn out,” Kyllo says.

He and CEO Steve Kath have their UFOC in place, or the document that all franchisors must prepare before selling outlets. They also have done trademark work, and have designed a logo that emphasizes all four aspects of the business: electrical contracting, sales of lighting products, sales of replacement lighting, and recycling programs for lighting and related wastes.

The whole package is the key to the business, Kyllo believes. Each portion feeds the others, and sets The Retrofit Cos. apart from Mr. Electric, for example, a nationwide franchised operation that does electrical contracting alone.

Kyllo wants to sell up to 50 outlets throughout the United States, 15 of those in the first three years. He’d like to sell three to four the first year, to “get our bugs worked out,” Kyllo says.

He says he figures franchise operators can reach $2 million in annual sales within the first three years, and reach return on their investment in 2.2 years. That type of precision is vintage Kyllo: He has a firm grasp on the details, probably because it’s his job to run them.

When the rollout begins, the company will get back on a growth track that stalled in 2003. The company reached $10.5 million in sales in 2002, with about 80 employees and a 12.1 percent profit margin. Then came the exit of one of the two founders, Mike Noble, leaving Kath to take over as president. The restructuring began.

Sean Kearney, attorney with Fredrikson & Byron and the Upsize Growth Challenge legal expert, praises Kyllo for Retrofit’s preparation to franchise. Many times companies don’t understand the work it takes to become a franchisor, especially the requirement to file in each state where one wants to operate.

“A lot of people don’t realize it takes 50 to 100 grand to set it up,” Kearney says, referring to the legal work. Likewise, Retrofit’s trademark work is impressive, another area that is sometimes overlooked but key to any company looking to expand nationwide.

Now the mission for Retrofit is message definition. “Tighten your definition of your key messages and your key differentiators,” advises Elin Raymond, president of The Sage Group.

Bryan Ross, a certified public accountant and a partner at EideBailly, describes the financial analysis that he would do for a client who was considering buying a franchise. He’d explore in detail two main questions:

• Can I cover my fixed costs, including the 7 percent annual royalty to the franchisor, and the 2 percent technology fee? Kyllo says one attribute is that it’s “a cash flow business,” primarily because recycling programs are mandated and those customers pay in 15 days. Such details will be important to a potential buyer.

• What do I get in return for those fees? “The relationships of the Retrofit Companies with customers is what they’re buying,” Ross says. Kyllo should emphasize any national accounts already set up when selling franchises.

Dean Cadry, a financial expert with Crown Bank, says Retrofit is different from the retail operation that is typically franchised, like the coffeeshop or restaurant. Kyllo should keep that in mind as he decides which groups to target as potential franchisees. “It will be harder to find, but when you find them they’re going to go gangbusters,” Cadry says.

Delegation a must
The technology experts for the Upsize Growth Challenge, Kirk Hoaglund of Clientek and Mary Korthour of Eschelon Telecom, point out a common problem for companies poised on the verge of growth: Kyllo is doing too much himself.

“Delegate out IT right now,” Hoaglund insists. He says Retrofit’s biggest challenge in the expansion will be communicating with franchisees, and making sure they can run successful operations.

Likewise, Korthour recommends identifying one person, whether a company employee or an outsourced consultant, to manage all the aspects of information technology and telecom.

Delegation may be the biggest challenge of all for Kyllo, because he’s used to controlling every aspect of the business, especially return on investment. If he and Kath can make the transition, the experts agree, they have a good-looking future.

Eric Kyllo, The Retrofit Cos.: 507.455.2181, ext. 113; ek****@***************es.com; www.retrofitcompanies.com