We carefully located a building that would hold our second store. I took the lease for the second store to our lawyer to review. He looked over the lease but did not find anything wrong with it. He recommended we set up a second corporation for the second store. I did not follow his recommendation to set up second corporation. I later learned this was a fatal mistake.
Our first store, Woodland, was on the corner adjacent to the largest shopping center in Oklahoma. We had a drive-up retail trade in a suburban location there. It was purely a retail operation with a large parking area and all our sales people were accustomed to customers coming to the store to buy. None of them were motivated in any way to go out and look for potential customers.
Our second [downtown] store, Bartlett, was in a high rise building where Tulsa’s Time Square New Years Eve Party is held each year. Our plan was to use this store as a base of operations for an outside sales force which we did not have at the time. We were the first MicroAge store to buy a second franchise and attempt to run a second store.
Opening the downtown store was a big mistake, primarily because the market there was entirely different and we were not prepared to make that adjustment. There was almost no retail traffic. One had to walk half a block from a parking garage to get to the store.
Around this time, our Controller, James, recommended we hire his friend, Daryl, who had experience with direct sales, to help with our downtown store. He mentioned that Daryl might invest $100,000 in our company. That sounded like a good idea at the time as we were stapped for cash as we had an inventory of IBM PCs stacked to the ceiling. I had not seen the value of floor plan financing that could have been part of the cure for our inventory cost concerns.
The space we were leasing was on the ground floor of the Sinclair Building. [The “Teapot Dome Scandal” was hatched in this historic building.] We did not realize the significance of the need for the outside sales force and I ordered IBM PC inventory for the second store. Very few sales were made in this store. After four or five months, we had PCs stacked to the ceiling and I stopped ordering more.
Managing the two stores became a real challenge. We leased a warehouse space between the two stores. We called this building “Central.” This brought our total leased space to around 10,000 square feet. That move added new problems in communications and logistics of having computers and equipment in different locations. The state-of-the-art in communications then did not support wide area networks, so all our communications were by telephone. We had about 10 phone lines between the three locations. Two or three of these phones were typically tied up between our three locations.
Around this time, IBM made a price reduction and the value of our PC inventory took an $80,000 hit. IBM had a price protection system in place but it only applied to the last three months of order volume. I had stopped ordering PCs for around three months, so we had no orders covered by the price protection. That price reduction became an $80,000 direct hit on our balance sheet.
Our lease included a large room in the basement which we made into a beautiful and functional training facility. At the beginning of our lease, there was no public stairway to get to get to the classroom area. The Landlord finally completed the stairway and we finished our classroom after having Bartlett open for around eight months.
We had a lead salesman named Peter. He told us he might consider buying our downtown store with money from his family. We continued to operate the downtown store for about three months at a loss while we were thinking he might buy it. I did not realize it at first but he was an alcoholic and there was no way his family would trust him with enough money to buy the franchise. Lesson learned: Always negotiate with the decision maker. In this case, the decision maker was Peter’s father who we never met.
In order to try to save the downtown store, I moved my office there. I was no longer in touch with the operation of our best store. I made the mistake of giving our Controller, James, check signing privileges with the bank.
We were doing $3.5 mm in sales and were dominant in the Tulsa market. Our advertisements were everywhere. There were three TV stations/networks available at the time ABC, CBS and NBC. Our TV ads appeared simultaneously during the morning news on all three networks. We were now two stores of eight stores authorized to sell IBM PCs resulting in IBM PCs becoming a commodity.
As our operational and financial stress mounted, I went to our bank with Daryl along with me. We mentioned that Daryl might invest another $100,000 in the stores. I thought that meeting went reasonably well but then we were called back to the bank two weeks later. When we went back to the bank, a Process Server came in and presented me with a lawsuit with the Bank calling our note. The Bank then hired guards to be placed all day at each of our stores. A courier would come to the stores at the end of each day to gather proceeds from the sales we were making and receivables we were paid. The bank allowed us to make payroll but would not permit us to pay any of our vendors.
It was obvious to the public that our stores were in trouble. I found a law firm and a lawyer named Kathy that would represent The Computer Professionals, Inc. in our conflict with the bank. I lost control of almost everything. Daryl did not put any money into The Computer Professionals, Inc. He and our Controller, James, immediately began to discuss buying me out of the corporation. They offered to let my partner, George, stay on with the company after they “bought me out.” At this point, I did not have a friend in the whole world. All the employees knew that I was on my way out and they all knew Daryl and James would be running everything.
Looking back, I should have fired Daryl even before the bank came down on us. He did not do the job he was hired to do. That is, he was hired as Sales Manager in order to get our direct sales happening and to reduce the inventory of IBM PCs which were over 80% of our inventory and where our cash was tied up. I also should have fired James. I am reasonably sure James failed to make our monthly payments to the Bank thus giving the bank reason enough to call our note. James had recommended the bank that gave us the $400,000 loan. I learned later that the entire loan base for this bank was only $1.3 million. The health of the bank was in jeopardy if our loan were to go bad. Lesson learned here: Watch for other people’s agendas!
We wanted out of our downtown store. We gradually moved our computer inventory out of the downtown store. We rented a truck and with volunteers we went in early one Saturday morning and removed our assets that were not built in. As we were closing the doors on the truck, the building manager arrived to see what we were doing. Earlier, I had made an appointment to meet with the Landlord for Monday morning following our move out. He was totally surprised that I showed up for that appointment. A few days later he agreed to let us cancel the $400,000 lease by giving him a $5,000 check. Lesson learned: There is a lot of value in communicating well, keeping one’s word and keeping appointments.
Kathy, the lawyer representing our corporation in the conflict with the bank, offered to represent me personally during the buy-out. I did not take her up on that offer and I believe not doing so was my biggest mistake of this period. The next three months would be the hardest of my entire life. I owned two-thirds of the company stock. I tried to hold on to some of my stock in the company. Daryl told me no and I did not push hard enough on that point. I could have filed for bankruptcy in order to push my position but I did not go that far. Were Kathy and other business advisors on my side, I now know I could have done better during the leveraged buy-out, possibly by retaining 10% to 15% of the stock. It may also have been an opportunity to bring in an investor other than Daryl and James.
I thought I was totally out of options at this point. I realize now, 34 years later, that I had MANY more options. My lack of business experience now came out in a really big way. I was no match for Daryl as he had the cunning and business acumen that I lacked. At the time, I did not know how much goodwill we had in the market. We had a great staff of 27 people, four of which were CPAs. We had a technically dominant market position that our competition could not match. Our major financial obligation was to the bank. We were in good standing with our vendors. Because of the stress I was under after the bank called our note, I did not recognize the full value of our corporation. I ended up signing over my stock as did my Partner, George. in return for almost no cash. The capital we had invested, including my Profit Sharing was lost.
As I was preparing to leave Tulsa, I had lunch with Kelsey Kennedy. He was the man in charge at Computerland, our primary competitor in Tulsa. He was on his way to take a position at Computerland Franchise headquarters. At that time, he told me Computerland in Tulsa would not make a counter proposal or another bid if they were in a technical situation on which we were proposing.
Major Lessons learned:
- Make sure ALL employees share your value system
- Hold ALL employees accountable and focused on company goals
- Set up new entities as necessary to protect new ventures
- Call for outside help when needs fall outside your area of expertise
- Watch like a hawk for employees with extra agendas
- Do not fail to threaten to or file for bankruptcy if necessary to improve a negotiating position
- Pay yourself first, that is, take cash out of the business when prosperous (I recently heard this
verified by advice from Anthony Robbins) - Never pioneer by working with a new bank
- Do not “put all your eggs in one basket” by working with a single lender. See Floor Plan Financing post.The same advice also holds for depending on a single product or a single customer.