Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Three winning CEOs get final boost toward meeting goals
by Beth Ewen, Neil Orman and Elizabeth Martin Help across the finish line was the focus in the second of two workshops offered to the three winners of this year’s Upsize Growth Challenge, presented by Fredrikson & Byron.
David Miller of Floorworx Distribution Services learned the finer points of negotiation from the contest’s legal expert, during the May workshop.
Lynn Richardson of GateKeeper Systems heard huzzahs from our financial gurus for his aggressive debt reduction plan, and for his disciplined efforts to diversify.
Jim Borofka of P.M. Bedroom Gallery told the pleasant tale that profit margins are up at his company, a point he didn’t know before he took our technology consultants’ advice to dig into financial and customer data.
Upsize thanks the three winners for throwing themselves into the first Upsize Growth Challenge. Business owners can enter next year’s contest starting in December; look for info in that issue of Upsize magazine.
We thank the sponsors and their experts at the second workshop for their dedication to helping these and other growing companies: Pat Kelly, legal expert from Fredrikson & Byron law firm in Minneapolis and presenting sponsor; Kirk Hoaglund, technology expert from Clientek in Minneapolis; Dean Cadry, finance expert from business banker Crown Bank in Edina; Joseph Majeski, accounting and operations expert from EideBailly in Bloomington; and Mary Korthour, telecommunications expert from Eschelon Telecom Inc. in Minneapolis.
FLOORWORX DISTRIBUTION SERVICES
Floorworx owner
learns art of negotiation
as key to growth plans
By Beth Ewen
One goal has consumed David Miller, owner of Floorworx Distribution Services in Rosemount, since he attended the first Upsize Growth Challenge workshop in March: completing his agreement to be the exclusive distributor of a quick-drying, floor-coating technology made by a local company.
That technology, which he’s dubbing WoodSimple, is key to his company’s future. His is a commercial floor refinishing firm, specializing in hardwood floors for customers with smaller, awkwardly shaped spaces. With a licensing agreement in hand, he would spend heavily on marketing and on signing independent contractors throughout the country to use the system.
Miller is finding out that such agreements don’t come easily. “They do not wish to relent on a few issues,” he says about the local manufacturer. “They’ve been stung in previous arrangements. We’re back and forth just on the letter of intent. It’s frustrating.”
So it always goes when making agreements, consoles Pat Kelly, an attorney with Fredrikson & Byron law firm in Minneapolis. Kelly has worked on dozens of such deals as head of the emerging business group there.
As he walks through the agreement with Miller, asking questions and offering talking points, he essentially outlines a primer on the art of negotiations.
“What are his biggest hangups?” is the first question to ask about the other party, Kelly says.
Miller answers: “Exclusivity. They’ve never given anyone proprietary rights.”
Kelly nods his head: “The distributor always wants exclusivity in the world. I always say to the manufacturer, don’t give exclusivity unless you get something in return.”
Kelly reviews the latest draft of Miller’s agreement, and says it appears that Miller has conceded many points to come to the middle, but not too many.
“His concern is that escape valve,” Kelly says. The manufacturer doesn’t want to grant exclusive rights to Miller, only to have Miller sit on the technology and fail to sell it. “A couple of things present themselves in terms of escape valves,” he adds.
In return for exclusivity, Miller can offer sales targets. For the first year, there should be no sales target, because the start-up year is the toughest and Miller is taking maximum risk. For the second and third years, Miller should offer a target that’s well below what he really thinks he can sell.
“If you think you can sell 50 in the second year, say 25. If you think you can sell 100 in the third year, say 50,” Kelly says.
Plan sales targets
It’s crucial to carefully plan those sales targets, with the most important number being the revenue that Miller needs in order to make this a viable business. “Your analysis is, if I’m not making sales of at least X, why am I in this business?” Kelly says.
Then, include remedies for the other party if those goals aren’t met. “At the end of year two, if you’re not at your number, he’s going to have remedies: Either terminate exclusivity, or terminate the whole thing.” Kelly recommends that Miller offer the former, and not suggest the latter.
Miller should make sure to include a “cure” period of three months or so, as a cushion to meet the number if the original deadline isn’t met.
Kelly also advises that companies check whether what they do can be patented. It’s not only a product that can be patented. Protection is available for business “know-how,” processes, and so on.
Keep tabs on competitors even while focusing on the negotiations with the original party. If other manufacturers have a similar product in development, Miller would benefit by knowing about them. That way he has options if the first deal never happens, and he’d also have leverage in the current negotiations.
Miller says big companies such as Maplewood-based 3M Co. are making moves in this arena, but ignoring customers with smaller, oddly shaped hardwood floors. That’s where Floorworx shines.
“The other way for him to look at this, say to him, ‘If you don’t lock me up for three years, I’m in the best position ever to go to 3M,’ ” Kelly says, using a hypothetical example rather than suggesting a specific course of action. “He needs to realize if he doesn’t get going, he’s losing his opportunity for being first.”
In the end, a crucial conversation needs to happen. “We both are taking risks, but we’re not stupid,” is how Kelly suggests this should go. “Now each of you is on the extremes and you need to get in the middle. It’s sitting down with their people to say, ‘What is reasonable?’ ”
Pat Kelly, Fredrikson & Byron: 612.492.7040; pk****@*****aw.com; www.fredlaw.com. David Miller, Floorworx Distribution Services: 651.322.7480; da*********@*******rx.com; www.floorworx.com
GATEKEEPER SYSTEMS INC.
GateKeeper Systems cuts
significant debt, explores
new lines of business
By Neil Orman
Two months after getting advice on eliminating red ink and diversifying its business, GateKeeper Systems Inc. has taken steps to slash its debt by two-thirds and explored major new product lines.
The company, which moved in the spring to new offices in Eagan, develops systems for vehicle access control at airports, and it is one of the top three vendors of these products. But the firm faces two challenges: cleaning up its balance sheet and diversifying its business.
Based on radio frequency identification technology, GateKeeper’s systems include credit card-sized devices that are placed on vehicles, giving security-conscious airports the ability to control and monitor the movements of taxis, limousines and courtesy vehicles.
Airports using GateKeeper’s systems can ask taxis to stay away from their limited curb spaces in waiting areas, calling them in only when needed.
GateKeeper sells airports software for a one-time license fee, which has ranged for about $100,000 for a small airport to $1.8 million for a large one. That fee includes design, installation, testing and training.
The firm’s biggest challenge is developing new business to provide a steadier revenue stream. “I’m interested in finding ways to generate revenue based on a kind of continuous flow of information, as opposed to selling a system with a one-time price, in order to even out cash flow between large projects,” says GateKeeper’s CEO Lynn Richardson.
The new opportunities GateKeeper’s exploring include developing baggage-tracking products and adding a data-mining service where customers can tap into the reams of information the firm’s systems collect.
New products
Another effort GateKeeper has accelerated since the first panel is studying new potential airport-related products.
Baggage tracking is a big one. Some airports, such as the Las Vegas airport (a customer of GateKeeper’s vehicle access control product), are installing systems involving placing transponders, or tiny antennas, on baggage tags and air tickets.
“They will be able to do a positive bag match so if your bags get on the plane and you don’t, they know it at the gate — or vice versa,” says Richardson.
Specifically, Richardson and his colleagues are studying the different components of these systems available now, from supply chain-type software to baggage tags, to see if there are needed components GateKeeper might provide.
There are other new product possibilities, too, which Richardson wants to keep confidential. He emphasizes that these new product and service possibilities are just options the firm is studying right now.
GateKeeper’s second challenge is reducing its debt. Richardson aims to raise new financing to fund those efforts, but before he can do that, he’s been advised to clear some of the red ink off GateKeeper’s balance sheet.
The firm has several hundred thousand dollars in debt, and that issue was a major focus during the first panel. Since then, Richardson has set up a repayment schedule with its creditors requiring monthly payments that will reduce GateKeeper’s debt by about two-thirds by the end of the year.
“That’s a significant hurdle for us,” says Richardson. “Cash flow is difficult but this is something we’ve committed to do.”
This year, Richardson predicts GateKeeper will generate $1.6 million in revenue and turn a profit, and the company is now on a track to one day be a $4 million to $5 million company. However, Richardson hopes to considerably increase the firm’s potential by diversifying.
Several of the panelists say they are pleased with GateKeeper’s progress to date. Joseph Majeski, an accountant with EideBailly of Bloomington, says that by having less debt on its balance sheet, GateKeeper will have an easier time getting bank financing in the future.
Dean Cadry, vice president of lending for Crown Bank in Edina, also applauds a healthier balance sheet. He points out that companies with assets such as accounts receivable or equipment can secure debt financing using those items as collateral.
Dean Cadry, Crown Bank: 952.285.5800; ****@********nk.com“>dc****@********nk.com; www.crown-bank.com. Lynn Richardson, GateKeeper Systems: 651.365.0700; *@***ys.com“>ld*@***ys.com; www.gksys.com. Joseph Majeski, EideBailly: 952.918.3569, ******@********ly.com“>jm******@********ly.com, www.eidebailly.com
P.M. BEDROOM GALLERY
By Elizabeth Martin
Jim Borofka, president and co-owner of P.M. Bedroom Gallery, took the advice of the panelists at the first Upsize Growth Challenge session to heart.
At the first workshop, panelists suggested that Borofka find ways to survey customers and to improve the company’s efficiency by examining its processes and systems, including decreasing the amount of duplicated work and centralizing information and communication.
At the second session, Borofka told panelists that he had found a promising system that can perform tasks such as adjusting the price of a piece of furniture based on its features, something P.M. Bedroom Gallery’s current system can’t do. While he hasn’t yet invested in the system, Borofka is excited by the possibilities. P.M. Bedroom Gallery sells higher-end bedroom furniture in several Twin Cities locations.
While they encouraged Borofka to continue exploring ways to improve the stores’ data collection processes, panelists also cautioned Borofka to consider stores’ needs and not try to mold his business to the capabilities of the software.
“There’s a tendency for software developers to put good ideas in software. Good ideas to them,” says Kirk Hoaglund, founder and CEO of Minneapolis-based Clientek.
Hoaglund says that software manufacturers have become infamous for insisting that business owners mold their business practices to the software, rather than giving their software the flexibility to adapt to various business practices.
“Just don’t let them tell you how to run your business,” he says. “It’s the other way around.”
Because P.M. Bedroom Gallery has stores in Blaine and Maplewood, and a third store opening in Woodbury over the summer, the technology panelists asked if the new software would solve the challenge of centralizing the stores’ information.
Borofka believes it will, which led panelists to emphasize the importance of centralizing inventory and accounting information for the three stores.
Hoaglund reiterates that when all of the company’s information is on paper, it’s not possible to arrange data in ways that will reveal information about how the business is doing.
“You can’t track vital signs about your business,” says Hoaglund.
Panelists also encouraged Borofka to involve employees in choosing a new software system. P.M. Bedroom Gallery employees will be the ones who decide whether the system works or fails based on the way they use — or don’t use — the software.
The panelists were also interested in finding out what P.M. Bedroom Gallery had done to improve communication between stores. At the first Growth Challenge session Borofka said that each store has its own phone system. Although the company does not yet have a centralized phone system, it is something that Borofka is actively considering for the sake of efficiency.
“These phone systems can help you with vital statistics too,” says Hoaglund. Panelists agreed that the company could track call volume and caller location with a good phone system that wouldn’t necessarily break the bank.
“You don’t need to invest in a $500,000 phone system,” says Mary Korthour, of Eschelon Telecom in Minneapolis. “The phone system will grow as your business grows.”
Jim Borofka, P.M. Bedroom Gallery: 763.785.1111; www.pmbedroomgallery.com. Kirk Hoaglund, Clientek: 612.379.1440 ext. 101; ***********@******ek.com“>ki***********@******ek.com; www.clientek.com. Mary Korthour, Eschelon Telecom Inc.: 612.436.6093; ********@******on.com“>mj********@******on.com; www.eschelon.com.
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