Selling Your Business How to Get Ready and What to Expect

At some point, every business owner considers selling their company. Most that don’t go out of business are sold at some time in their history. But between considering it and selling are a host of issues, surprises, conundrums, and general confusions for the business owner who has never been through the process before. I have spoken with or heard of sellers who are minimizing the chances of making a good deal by

·         Requiring that the buyer make an offer before seeing the seller’s financial statements
·         Stating prices that are so unrealistic as to make any further discussion futile
·         Hoping to close a sale without using appropriate professional advisors.
If you’re going to sell your business, let’s make sure you do it right and for the right reasons. You can maximize your chances of success, and minimize wasted time, by focusing on what I call the five “Gets.” Get real, get a goal, get ready, get agreement, get help. 
Get Real
It’s as predictable as the sun coming up in the morning. The owner believes in his business. He believes in it so much that his perception of what it is worth to a buyer is, in my experience, almost always out of line. 
A sophisticated buyer won’t ignore your projections, but he will discount them very heavily. He will recognize the growth potential of your business, but balance that with a realistic assessment of the competition. He will want to know very specifically why you have been or will be successful. He will base his offer to you on the potential return he objectively thinks he can earn compared with other investment opportunities he has. In determining his maximum purchase price, he will value your business in ways that are standard for valuing companies in this or similar industries.
He will recognize that your growth depends on increasing working capital investment in the business and that he, not you, is the one who is going to have to take that risk. He will admit that there are some synergies in combining the two companies, but will believe (probably correctly) that his organization will be more responsible for achieving them than yours. Accordingly, he will be reluctant to pay you for them. He will understand that the business is dependent on you and perhaps a few key managers, and will be concerned with your motivation once the deal is closed. So if you expect to receive the value you perceive in your business you should expect to do it in an earn out.
He will look closely at your historical financial statements. They will frequently be the single most important (though not the only) factor in determining the price he is willing to offer and no amount of explaining, rationalizing, projecting or shucking and jiving will change that.
So, to begin, make a realistic estimate of the value of your company. There are many ways to value a company. None of them give a right or wrong answer. But when you are done, and you may need help to do it, you will have a reasonable range of value for your company. You may also want to value it under different scenarios. For example, your company may be worth more as part of a larger organization because your sales will no longer have to support, on a stand alone basis, all the overhead expense you currently have.   Value it, in other words, as the potential buyer would to get insight into his thought process.
This knowledge is a powerful negotiating tool. Make sure you have it.
Get A Goal
What do you want to accomplish by selling (besides get money)? What do you want to sell; assets or equity? How do you want to get paid? Will you take stock? Cash at closing only? Is an earn out acceptable? What will be your role be in the business after the deal closes? For how long? How hard do you want to work following the sale? What is the minimum price you will accept? 
There is no way to know if an offer is a good one or a bad one unless you know what you are trying to accomplish by selling the business. You always want the other side to put the first offer on the table, but you never want them to be able to control the negotiating process because you haven’t thought long and hard about what a good offer looks like. You can be successful in your negotiations if you know specifically what you want to accomplish and why.
The converse is that you must also know when to walk away. If you are desperate for a deal, you’ll get a bad one.
Get Ready
From the time the first contact with a serious purchaser begin, it you can generally expect it to take six months or longer to close a deal. But preparations may begin literally years earlier, when the owner concludes, based on the kind of valuation and goal setting described above, that her best long term strategy is a sale of the business.
Try and increase awareness of your company among potential buyers. You can do this, for example, by being active in the appropriate professional associations. Get articles about your company published in trade journals. You may be better positioned to negotiate if the buyer comes to you. 
Have systems that prepare consistent, accurate financial statements and information that can be easily verified or audited. It’s a critical element in determining a purchase price and an important indication that you are a competent business person the buyer can rely on to operate the acquired business.
Clean up your balance sheet. Get rid of old inventory and write off uncollectable receivables. It’s never a good idea to fool yourself about the value of assets, and you won’t fool a potential buyer. But by not making these adjustments you may find your own competence and credibility questioned during the acquisition process. “What other surprises are hidden here?” wonders the potential buyer.
Have a current business plan that validates your strategy. Make sure the warehouse is brightly lit and painted. If there’s any tax issues, litigation or disputes with employees out there, settle them.
You can’t put your best foot forward if it’s stuck in the mud.
Get Agreement
This may seem a little obvious, but it’s a good idea if all the shareholders agree with the decision to sell the business and have a common understanding of what constitutes an acceptable deal before the negotiations begin. Legally, it’s possible to sell a business with the approval of less than 100% of the ownership. But in a private company, with only a few shareholders, it can be difficult. A buyer may be concerned about litigation by a minority shareholder. If a dissenting shareholder is expected to continue to work for the acquired company, an uncomfortable operating situation can result.
While you can’t please all of the people all of the time, it’s usually a good idea to try and get acceptance (enthusiasm would be nice) from other key stakeholders. These may include customers, suppliers and key employees. At the very least, make sure they have good information about what is going on as negotiations reach their final stages.   They will all be asking “How is this going to affect my relationship with this company?” and you need to have an honest and accurate answer.
Get Help
Sale of a company demands an accelerating time commitment from the owner. My experience is that as the deal gains momentum, you can either manage your business or work on the deal. There’s often not enough hours in the day to do both well.
Let’s look at a typical scenario. You’re selling the business you built. It’s your baby. You’re proud of it, and are far from objective. To make it more interesting, you’re entering into a process with which you have little or no experience. And this deal is potentially the most important and lucrative transaction you have ever entered into.
Let’s say that on the other side of the table is the representative of a larger company. He’s been through this before and knows what to expect. At the end of the day, whether or not there’s a deal, he gets paid the same and goes on to work on the next deal. He’s completely dispassionate and may not have any stake in the outcome.
Somewhere in the course of the negotiations he looks at you and says, “I assume you’re willing to warrant that there are no outstanding disputes with any federal, state or local tax authorities except as disclosed in appendix A of the agreement?”
Now, a good response, assuming it’s true, is something like “I’m willing to warrant it to the best of my knowledge,” but if you’ve never done this before, you might not know that. Happily, you’ve got an attorney sitting by your side to handle those kind of issues.
But if he’s the attorney who drafted your will, helps you collect from delinquent creditors, or kept you out of jail after the IRS audit, he may be waiting for you to speak up. Your attorney must be experienced in representing sellers of business.
The same is true of the other professionals who may work with you; your financial advisor, tax accountant, business valuation advisor and possibly others. Get help. Do it right. You may only get one chance.



SIA 1996; It’s Just Business

Business. It was all business.

Well, maybe not quite all. The ladies and gentlemen at Mervin Manufacturing were dressed in all white outfits (they claimed not to be angels) and Mike Olsen was shooting money out of a cannon at irregular intervals.   But the snowboard side of this year’s SIA show in Las Vegas showed that the industry is maturing. There were the usual crowds and noise and excitement. But there was also, especially among the larger companies coming to dominate the industry, a more subdued sense of purpose and focus.
They weren’t there to have fun; they were in Vegas to do business. 
You felt it as soon as you saw the booths. Many were the size of my house, except my house doesn’t have a second story . Now I know why Morrow did a public offering. To pay for their booth.
Larger, sleeker, cleaner, sophisticated, with more controlled access and private rooms for meetings and order writing. Less beer being consumed during show hours. No companies thrown out for use of controlled substances. To put it succinctly, snowboard industry leaders had booths that looked, well, like ski company booths; except they were busy.
This was the year where it seemed that the ten or so companies that control 70 plus percent of the US snowboard business heaved a collective sigh of relief. They knew snowboarding was here to stay. They knew they were going to have a prominent part in it. They realized that the small, undercapitalized companies not being run like businesses would disappear or, at worst, be like fleas on a dog; occasional and momentary distractions.
Their focus was on taking market share before the competitive situation solidified and establishing their positions against the other large players.
Their tools were complete product lines, payment terms, discounts, pricing, reliable delivery and customer service coupled with marketing and promotional programs only they could afford. Retailers, nervous after late deliveries, poor and/or late snow in much of the US, and left over inventory didn’t have to have their arms twisted-much. Their interests, and those of the Burton/Sims/Ride/Morrow/Mervin snowboard juggernaut generally coincided.
Now under these circumstances, you might expect that the size of the show would have stabilized or (be still my heart) even declined a little. Nope. Booths spilled out into the lobby and took over the meeting rooms on the second floor. I don’t know how much of the growth was the result of companies taking more square meters, but I’d estimate there were a couple of dozen new snowboard companies. Or at least people with boards in booths hoping to become companies. The directory lists about 300 snowboard brands in total.
My conversations with them tended to be the same as with other new companies last year. They had limited capital and product lines, no competitive strategy, and couldn’t explain how they were going to differentiate themselves. If I hear “We’re closer to the market than our competition” one more time, I’ll shoot myself (I shouldn’t say that. I’ll be dead at the next trade show.). I didn’t have the perception that these companies were writing any significant orders, though of course you can’t expect anybody at the show to say “We’re doomed” when you ask them how it’s going.
There didn’t seem to be much change in board design or construction. What I did notice was the size of the line of some of the players. Between the Ride, Mercury, Liquid and 5150 brands, Ride, if I counted right, had 84 boards. Let’s see a sales rep put all those in his van. Graphics were simpler and colors varied but muted. Yellow seemed popular. As companies go mainstream, the goal of graphics seems to be not offending anybody.
Traditional bindings offered incremental improvements. The hot product had to be the step in bindings. In addition to K2’s Clicker, Switch and Device, Wave Rave, Blax and Marker/DNR had models to sell. Burton didn’t have one, but was taking orders anyway. That’s market power.
Over 300 companies were listed in the show directory as offering snowboarding apparel. The statistics I’ve seen indicate that Burton and Columbia by themselves account for 50 percent of sales in the US, making it pretty clear that many of these companies have their work cut out for them if they are going to succeed.
One thing I didn’t see at the show was the usual number of representatives from Japanese companies frantically looking for new snowboard product lines. This seems consistent with current conventional wisdom about oversupply and general competitive conditions in Japan. As discussed below, it has critical implications for the viability of a large number of US snowboard hard and soft good companies.
Essentially, what happened was that companies were pushed down the feeding chain. Larger companies tried to require bigger commitments from retailers, pushing out second tier brands. These brands sold to stores they had not previously done business with to try and maintain their volume. The smaller companies were pushed out of these stores, sometimes leaving them with no place to go.   
What was seen at the show has been confirmed in the six weeks or so since it ended. I’ve had calls from perhaps half a dozen smaller apparel companies who did not write the anticipated orders at the shows, and who’s Japanese orders have been significantly reduced or are not yet received. At least one larger apparel company has picked up an additional distributor in Japan because of the reduction in orders from its existing distributor. Where orders have been placed, there’s increasing reluctance to provide the historically favorable financing terms of 50% down and 50% sight letter of credit.
In the US hard goods reps for other than the major companies are having a hard time getting orders, and personal relationships appear to be the key factor in determining their success. 
Retailers are cautious in their ordering. Often they are already committed to the major suppliers. In addition, some have more stock than anticipated left from last year.
A new factor seems to be retailers perception of product availability. Historically, companies produced only what they could sell in the preseason, and retailers were confronted with an inability to get reorders. Late season availability was not a problem last year. Late deliveries and poor snow conditions in much of the country meant retailers were getting called by snowboard companies with product to sell at attractive prices. Combined with the increased availability of quality domestic manufacturing, retailers seem comfortable in holding back some of their open to buy for later in the year.
An industry consolidation does not start with a bang at a particular moment in time. However, the SIA show this year made is absolutely clear that the long awaited consolidation isn’t just starting. It’s in full swing.



Hard Choice Time; Strategies for Success in the Snowboard Industry

It all kind of came together for me at the industry conference at Banff, though I couldn’t say if it was on the lift, in the spa or at the bar. Probably at the bar. The time is over when a small or medium sized independent player in this industry can just focus on getting from one year to the next. If all you think about are tactics and operations, chances are that one year soon, you won’t make it even as the industry as a whole continues to prosper.

 Your choices are pretty clear cut. There are four. They are discussed below. The goal of this article is to motivate you to dispassionately evaluate your business and the market, and then actively pursue one of the four. To do that, we’ll consider the impact of some recent industry transactions and identify the problems that most smaller companies say they have in common.   To begin, we’ll get past some of the hype and excitement of snowboarding and look at it as another industry starting to enter its maturing phase.
In 1980, a Harvard professor named Mike Porter wrote a book called Competitive Strategy. The whole volume is worth your consideration, but Chapter 11, “The Transition to Industry Maturity” is especially relevant at this time in the industry’s evolution. I think we can safely assume that Dr. Porter was not a snowboard pioneer, but his discussion of what happens in a consolidating industry (any consolidating industry) will look ominously familiar to anybody who thinks about what snowboarding is going through.
Step One in our analysis, then, is to agree that as much as we may love it, and as exciting as it may be, the evolution of this industry won’t ultimately be different from that of any other industry. At this point in time, the only difference I perceive is that it is happening faster than it does in most industries. I believe that’s because there are really no significant barriers to entry, but the fact that you have to commit to the next season before the last one ends makes it hard to get out.
No entrepreneur succeeds without an almost heroic belief in themselves and their business; if they didn’t have it, they would never take the risk.   It can be difficult to have an objective perspective on industry trends and the potential of their company. The euphoria engendered by rapid growth, the hype of any fashion related business, and the fact that companies try to make themselves look bigger than they really are (except Burton and Gnu/Libtech, who seem to want to look smaller) can make it tough to be dispassionate.
Get dispassionate. Talk to business people outside of snowboarding. Set some measurable goals. Figure out what success means (hopefully more than bare survival). Formally decide if the risks are worth the potential returns, financial and other.
Step Two is to look at some recent industry transactions to figure out why, in general terms, they happened and what their impact on the industry may be.
Let’s see, Morrow went public, Salomon bought Bonfire, Ride bought Thermal, Hooger is buying American Snowboard Manufacturing, Madison Sport bought Purged/Mantle and Variflex bought Plunkett Snowboards, Inc. What’s going on?
Companies are building their balance sheets, vertically integrating their businesses, associating themselves with stronger partners, developing year round cash flow, and generally positioning themselves to survive and compete with lower margins on higher volume. 
Are we shocked by all this activity? No, because under Step One we agreed that the same trends that occur in any other maturing industry will also occur in snowboarding.
Let’s look specifically at the Variflex deal. Variflex produces protective equipment and in-line skates that it sells directly to large retailers.  In May 1995, it acquired Plunkett Snowboards, Inc. to produce its Static brand of snowboards. Variflex’s goal at the time was to produce a board that retailed in the $300 price range but was comparable in features and quality to the most expensive brands.
Because Variflex sells directly to retailers, from a financial perspective this goal won’t be difficult to achieve. Based on my discussions with a number of board manufacturers, I’d estimate that the cost to produce a high quality board in volume is probably under $90.00. Let’s say it is $100 and the board is sold to a retailer for $140 to give Variflex a 40 percent margin over cost. The retailer wants to make their traditional 40 margin too, so the consumer pays $233.
Hey, what happened to the $300 retail price? Remember this is a bit of a moving target, and K2 already has the Dart out for a suggested retail of $270. K2 and Variflex are both selling direct, as is Elan with the Nale brand. Eliminating the profit for that extra middleman frees up a lot of margin.
Happily, there’s more than financial calculations at work here. Even in skiing, brand names and marketing keep retail prices higher than they need to be from a financial perspective. Nobody is going to scurry to give up margin before they have to. But I do see the day where a high quality wood core board will retail not too far north of $200. With boots and bindings, there appears to be more of an opportunity to keep margins up through technological innovation, assuming you can afford the cost of developing those innovations. 
Step Three is to identify problems most companies have in common. One’s obviously price pressure. It’s more or less important depending on your market segment and size, but it exists for everybody.
A second is inability to differentiate a brand. Most smaller companies are unable to spend enough to make an impression in the market. Even when they do spend it, it gets lost among the hundred of brands trying to do the same things, driving operating margins down even further.
A third issue is the working capital requirements of a highly seasonal, fast growing business. Success probably requires you grow at least as fast as the market. Seasonality, and the increasing tendency of retail accounts to require longer terms, means you have to tie more and more capital up in the business for longer and longer periods. Many company’s’ track records and profit potential don’t justify either a loan from a bank or an investment. Lacking a rich uncle or a trust fund, it’s going to be tough to come up with the money. 
Fourth is dependence on the Japanese market. A few months ago, several sources estimated that there would be 800,00 boards brought into Japan this year. Interestingly, I’ve also heard 400,000 and 1.2 million. Maybe 800,000 is a reasonable number.
I don’t know what reality is in the Japanese market. But I am certain that the days of 50 percent cash deposits and 50 percent site letters of credit are going to vanish. Companies creating brands that are sold only in the that market should not expect those brands to survive. How will they replace that cash flow?
In summary, then, margins are declining while required marketing costs increase. The financing
necessary to grow quickly enough so that volume offsets reduced margins is, at best, difficult to find. Cash constraints will be accentuated by changes in the Japanese market.
Step Four is to look at possible strategies given the conditions and market evolution described above. There are four of them.
The first is to find enough capital to reach a volume world wide, as a manufacturer or a wholesaler, that makes you a “player.” That is, that puts you in a position to compete at least partly on price and to be profitable under the circumstances described above. As a stand alone snowboard industry company, if you aren’t close to being there now, you probably won’t be able to get there. The reason is that you won’t be able to show the return on investment required to attract the funding.
The second, in theory, is to find a market niche where you can differentiate yourself so that brand loyalty offsets sensitivity to price and, to some extent, insulates you from the emerging competitive conditions. I say “in theory” because the only company I believe has really accomplished that is Mervin Manufacturing, and they’ve done it by having a consistent focus over a period of years. Nitro, with what I’ll call their high tech, retro-ski approach to advertising this year, may be trying to establish a niche for themselves and I think they’ve got a good chance to do it. Not a jumping rider in sight on some of their ads. For a long time, they tried to disguise the fact that they were a European owned company. Now it looks like they are using that “liability” as a strength.
AK Bommer Boards in Valdez, Alaska is another good example of a niche strategy. They make individual custom snowboards. “Big Boards for Burly Riders with Big Feet” it says on the business card. As a guy with a size 13 attached to my leg, I called for information. Probably won’t ever be a big company, but at $500 a board, their margins should be okay and their break-even point low.
They have the additional advantage of knowing exactly who their market is; “Big Boards for Burly Riders with Big Feet.” Think of the power of that phrase. With those eight words they know exactly who their competitors and customers are and what their position in the market is. Consider the efficiencies it gives them if only because they don’t waste advertising and promotion dollars.          
The problem is that there are too many companies and not enough niches, and no niche completely insulates you from price pressure. Sales dollars required to break even are rising, and I expect they will continue to do so.
The third strategy is to become a product line of a larger company with year round cash flow. You share overhead, facilities, possibly distribution channels and reduce your break-even point. Year around cash flow eliminates or at least reduces the annual crisis of working capital common to one season businesses.
A corollary to this strategy is to find someone better capitalized than you are to distribute your brand. You continue to control product development, and maybe advertising and promotion, and earn a royalty on sales. It’s probably a lower return strategy, but it’s lower risk as well.
The fourth strategy, which is inevitably the least popular, is to pack up and go home. If you go through the kind of analysis suggested above and can’t find a way to implement one of the three strategies I’ve identified, maybe the chances of success don’t justify the risk and effort anymore.
There’s actually one more strategy, if you want to call it that. It’s what I characterize as the “more of the same” approach. This will prove to be the most popular approach and some companies taking it will succeed. A lot won’t. There’s not much to this; just keep doing whatever you’ve been doing before and hope it works. Every company has a strategy- even if it’s a bad one and they didn’t actively chose it.
I know how hard it is to find time to deal concretely and dispassionately with issues of strategy when you’re trying to run a company. But the surest path to failure is to be caught in between strategies, unable to compete on price and not having established a defensible market niche. If you are caught there you aren’t going to enjoy it, and you aren’t going to survive.
Trends In Any Maturing Industry
Shamelessly plagiarized in a good cause from Competitive Strategy by Michael E. Porter
·         Firms sell to experienced, repeat buyers who shift their focus from the decision to buy to choosing among brands.
·         Industry profits fall. Smaller firms are most affected. Cash flow declines when it is most needed, and capital becomes increasingly difficult to raise.
·         Danger of over capacity accentuates the tendency towards price competition.
·         Company attitudes must be disassociated from the euphoria of the past.
·         New products and applications become harder to develop.
·         Dealer margins fall, but their power increases as more brands compete for shelf space.
·         Slowing growth means more competition for market share. Frequently that competition can border on irrational.

Competition may emphasize cost and service


Big Air; Initial Public Offerings in the US

Open on the table next to me I have the preliminary and actual prospectus for, respectively, Morrow and Ride Snowboards initial public offerings. As of December 13th, 1995, my broker assures me, Morrow is not public yet.  Ride’s prospectus is dated May 6, 1994 and those of you who bought their stock at the time of the offering are patting yourselves on the back. Those of you who didn’t, aren’t.

Ride’s prospectus estimates expenses of the offering at $361,500. Morrow’s estimate is $900,000. They pay these expenses for the privilege of filing quarterly and annual statements with the Security and Exchange Commission (SEC), dealing with shareholders, revealing information they’d rather keep confidential, paying for audited financial statements and legal fees and holding annual meetings.
I can tell you from experience that to prepare their company to do all this, they went through a process which, besides being expensive, distracted senior management from running the business, was stressful and involved a high level of uncertainty. Why would they do it?
For the money, dude. But it’s not quite that simple. Basically, there are five financial benefits to going public.
First, the company receives cash from the sale of shares. In the case of Ride, the net proceeds were $4,138,500. Morrow hopes to raise something like $19,000,000. The company has great flexibility in how it uses the money. The Use of Proceeds section of the Ride prospectus says they expect to use $175,000 for office and warehouse equipment and the remainder for “working capital and general corporate purposes.” As non specific as that is, they then go on to reserve the right to use it differently “…if market conditions or unexpected changes in operating conditions or results occur.”
Basically, they can use it for any reasonable business purpose.
Second, it’s typical that the value of a public company is higher than a private company. As recently as April of 1995, Morrow sold convertible debentures with a conversion price of $3.67 per share. Remember they are hoping to go public at “between $11.00 and $13.00 per share.” If the offering price was $12.00, the company’s apparent valuation would have increased over 225% since April. Going public creates wealth.
Third, the company gains liquidity, and this in part explains the higher valuation. Shares in the company can now be bought or sold easily and efficiently.  The price is determined daily by the actions of (hopefully) objective third parties.
Fourth, the owners reduce their risk and can diversify their portfolios. Also, they make a lot of money. Morrow expects to sell 1,600,000 shares to the public but current shareholders will sell an additional 530,000 shares personally. The net proceeds from sale of those shares (around $6 million) will go directly to those individuals.
Finally, the company creates an asset that doesn’t show up on its balance sheet; the ability to sell stock. There are restrictions to how much you can sell, when, and at what price.  Some restrictions are legal one, and some the result of how the financial markets view the sale of new shares. But in general the public company has easier access to capital.
In August of this year, Ride did a secondary stock offering. The company sold an additional 1,165,400 shares and existing shareholders (directors and officers of the company) sold 834,600 shares they held at a price of $17.00 a share, succinctly demonstrating the value to the owners of a public offering and a successful company’s ability to raise cash after it is public.
The process of doing a public offering starts when a company goes into registration, submitting a registration statement and a draft of the prospectus (known as a “red herring”) to the SEC. Depending on how recently the company has done an offering, and how well known the company may be, the SEC may decide to have no review, limited review, or full review. A review will typically take about a month. It results in the company receiving comments from the SEC that require changes and/or additions to the registration statement and prospectus.
If there is no review, or when it is complete, the road show can begin. The road show is a series of meetings and presentations with interested investors and institutions in different cities. These meetings allow the company and its investment bankers to create interest in the offering and to evaluate how it should be priced.
Following the road show, the stock is priced in one or more meetings between the company and its investment bankers. The price depends on a variety of factors including market conditions and the reception during the road show. Once the deal is priced, the prospectus can be printed with complete information and become effective. The prospectus and stock are distributed to interested institutions for sale to investors and the stock begins to trade.
The draft I have of Morrow’s prospectus runs to 66 pages. Ride’s was 48. Both have sections entitled “Additional Information” which makes the reader aware that the prospectus does not contain all the information in the Registration Statement filed with the SEC. It notes that “Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete…” and informs the reader that they can get copies of these documents (which, including exhibits, can run to hundreds of additional pages) from the SEC.
The form and content of a prospectus is clearly defined by the SEC. It is a carefully choreographed document that results from a certain level of creative tension between the company executives, the lawyers and the investment bankers. They all share the goal of getting the company public. The executives and investment bankers want the prospectus to be as positive a document as possible to improve the prospects of selling the shares at the best price. The lawyers are more cautious. Their job is to make sure that all the relevant information is disclosed completely and accurately, whether it is negative or positive. Lawsuits by investors claiming inadequate or inaccurate disclosure in the prospectus are not unusual.
My favorite example of how language gets crafted is in the Morrow prospectus when they talk about manufacturing risks. When discussing the company’s ability to get the materials it requires for manufacturing, they say “In addition, the Company has experienced limited delays in the delivery of certain raw materials due to delay in payment for such materials.” Those of us who are less eloquent than attorneys might have said “Their suppliers wouldn’t ship any more until they paid for what they’d already received.”
Obviously Morrow is far from the only snowboard company to have a tight cash flow, and one purpose of the offering is to prevent that from happening again, but you can see how it can pay to read some of the fine print carefully.
The Table of Contents to Ride’s prospectus dated May 6, 1994 is reproduced in the box below. Morrow’s is the same except for a few words and the order of presentation. We’ll talk briefly about some of the sections.
Table of Contents                                  Page
Prospectus Summary                            3
Risk Factors                                         6
Use of Proceeds                                   12
Dividend Policy                                     12
Dilution                                                 13
Capitalization                                        14
Selected Financial Data                         15
Management’s Discussion and Analysis
  of Financial Condition and Results of
  Operations                                          16
Business                                               18
Management                                         22
Executive Compensation                       24
Principal Shareholders                           27
Certain Transactions                              28
Description of Securities                       31
Underwriting                                          33
Shares Eligible for Future Sale               36
Legal Matters                                        36
Experts                                                 36
Additional Information                           37
Index to Financial Statements                F-1
The prospectus begin with a summary and moves on to “Risk Factors.” Morrow and Ride take six pages to talk about what could go wrong; foreign exchange, seasonality, ability to sustain growth, weather, dependence on key individuals, product liability. The list goes on. It gives the potential investor insight into the business risks, but is also important in protecting the company from lawsuits for inadequate disclosure.
“Selected Financial Data” is summarized historical income statement and balance sheet data. I always ignore this and proceed directly to the detailed, audited financial statements. The “Management Discussion” puts into words the financial relationships you’ll note yourself in reviewing the financial statements and explains the conditions that led to those results. The “Business” section talks about the industry, the company’s strategy, and its basis for competing.
Now it starts to get really interesting. “Management” describes the age, position and background of the company’s executives and directors. “Executive Compensation” tells you who is paid how much in salary, bonus and “other.” “Principal Shareholders” lets you know who owns how many shares, and what percent they own before and after the offering.
Now comes my favorite section: “Certain Transactions.”   This is where you can hope to  learn how the company really got financed before its public offering. You learn about stock issued for services, loans from family members of officers, private placements to officers and directors and their families and other interesting transactions. I always smile when I read about them, but it’s partly in admiration for people who figured out how to get the job done.
“Shares Eligible For Future Sale” gives you some idea what the “float” (number of shares actively available to trade) will be. Morrow’s prospectus indicates that after completion of the offering, but assuming no exercise of outstanding options or warrants, there will be 5,061,045 shares of common stock outstanding, but that only 2,130,000 will be eligible for sale to the public without restriction. The others are restricted either for legal reasons or be agreement with the investment bankers doing the public offering. They will become eligible to be sold as described in this section of the prospectus. As and if they appear on the market, the supply of Morrow common stock will increase. All other things being equal, increased supply reduces demand and, therefore, price.
Now you know a little about what it means to go public in the US and what’s to be found in a prospectus. Only the substantial financial rewards to the company and the shareholders can justify the expenses, distractions and continuing obligations the process inflicts.



SIA Member Services; Run Your Business Better: No Charge

I think the first time I heard about SIA it was when somebody asked me to write a check for membership. “What are we going to get out of this membership?” I asked. “We have to be a member to go to the show,” was the less than enthusiastic endorsement. So I signed the check.

Turns out there’s more to it than that. SIA offers its members no charge services that, if utilized correctly, will add to your bottom line. The mystery is why so few members utilize them. Maybe a little publicity will help.
The Credit Services Program gives companies a picture of the payment status and credit quality of retailers they are doing business with. Produced seven times a year (January through May, August and October), this report shows the amount and status of all reported debt more than 60 days past due. It includes not only information supplied by SIA members, but by the credit associations of other action sports trade groups.
The report I received in August was about an inch and half thick. The only cost to participate is the time it takes to complete a form which shows the name and address of the account and the amount 60 days or more past due. There’s room for a short comment on the account status.
The information is reported by a member number. The name of the reporting company is not disclosed except to Riemer Reporting Service, which assembles the data.
Let’s say you’re doing about $2,000,000 in business annually (an estimate of the mean revenue of SIA members). Your business continues to be highly seasonal, and your customers are demanding better payment terms. SIA reports that overdue accounts represented 4.8% of sales at wholesale, or $96,000 for your typical SIA member.
Not all of that will ultimately be uncollectable. But after taxes, a lot of businesses are lucky to drop 4.8% to the bottom line. Better management of your bad debt expense can easily be the difference between a profit and a loss.
The in season cash flow affects are harder to illustrate, but may be more important. As I’ve said in this space before, companies pay their bills with cash, not with profit. A lot of snowboard industry companies live hand to mouth during the period between the arrival of product and collection of receivables.
What happens if, on average, your collection period goes from 60 to 90 days? How much more money will you have to invest in the business? Where will you get it? What will it cost?
Just for fun, let’s say you can borrow money at 10% annually.  To carry $2,000,000 in receivables an extra 30 days costs you about $16,700. The calculation is oversimplified, but you get the picture.
SIA’s Credit Services Program is part of an effective program to reduce your bad debt exposure. Checking credit references is important, as is your history with the account. But nobody ever handed out bad credit references, and conditions change from year to year. If by participating you can sell more product to accounts that pay, and pay on time, isn’t it worth the few minutes it takes to fill out and send in the form? You bet.
Often, public relations doesn’t make it on our radar screens, though when somebody says “advertising and promotion” we perk up and get out our check books. To paraphrase Clauswitz, public relations is advertising and promotion carried on by other means. Working with SIA, you can do some good public relations work that’s inexpensive to free.
Sort of my accident I got my hands on SIA’s New Products, Best Values publication. This annual publication, distributed to hundreds of media people and anybody else who wants it, gives each company a chance to briefly describe its latest products. Having a listing is free, but only 30 board companies participated this year. Since the show, SIA has distributed about 1,200 hundred copies.
We spend six or seven thousand dollars on a Transworld ad that we wonder if anybody is going to notice, but we won’t take the time to get some information in the hands of people who are specifically requesting it.
Call SIA and get their free booklet on press relations. Tell them you want to participate in New Products, Best Values. Then call them again and ask what you should be doing about public relations and how you can do it. The information and advice you can get for free would cost you thousands of bucks from a public relations firm.
Finally, there’s the Cost of Doing Business and Compensation and Benefits Survey. It’s just as expensive as all these other SIA services; you got to participate.
Inaugurated only in 1994, this survey is focused on developing accurate financial information on the snow sports industry. Only participants receive the report. The submitting company is known only to an outside accounting firm that receives the information. The tabulated data is released only in composite form. It shows expenses as a percentage of sales, not in hard dollar terms. In other words, participants are well protected from disclosure of proprietary information.
The data is broken down by small and large companies (with $5 million being the cut off) and by hard and soft goods. Right now, limited participation is making the information less valuable than it will ultimately be. Only 82 companies (out of an SIA membership of 850) are participating, but less than 20 are snowboard or snowboard related. SIA is prepared to run the data for snowboard companies separately as soon as there’s enough participation to make the numbers meaningful. 
There are two basic reasons to participate. First, it will let you know how you’re doing compared to other companies, highlighting what you’re doing right and where you can look to improve. Second, it can be very valuable in dealing with your bank or other financing sources.
For most industries, banks have “common sized” financial data that allows them to compare your company to others in its industry. Not so with snowboarding; until now. This kind of data is something of a security blanket for bankers unfamiliar with an industry. It will allow you to explain how your company is doing compared to similar businesses. The fact that you even have this data and have considered its implications will improve your credibility, giving you and your banker a common point of reference.
Using SIA’s services and information correctly will improve the way you manage and finance your business. Do yourself and the industry a favor; participate. Fill out the forms and send them back.



Where Have All the Snowboards Gone? The Apparent Imbalance Between Production and Sales

I seem to remember from my first economics class that if supply goes way up and demand doesn’t keep pace, prices can be, well, negatively impacted. When I look back at the 1994-95 season, I am disturbed because it appears that there were more boards produced than were sold to retailers; maybe a lot more.

Below, I try and estimate just how many more. With so little hard information out there, that’s a tough thing to do with any confidence. But because the answers will affect how we run our businesses and how successful we are, it’s worth the effort.
My information is based on what I’ve read, some third hand conversations, rumors, insights gained working with snowboard companies, and some educated guessing. My numbers are not precise, and I’d like nothing better than for somebody to prove me wrong. 
If I were to guess how many boards were sold to retailers during the 1994-1995 season in the United States, I might estimate 225,000. Conventional wisdom says that the U.S. is one third of the total market. If that’s accurate, there were approximately 675,000 boards sold to retailers world wide.
My instinct is that the number is over 800,000. Using that number for discussion purposes, let’s talk about how many boards were produced.
I’m pretty confident that Pale and Elan together produced over 400,000 boards. Let’s say that Burton, Morrow, K2, Lamar, Gnu/Libtech and Rossignol together made 450,000 in factories they own or control for their own brands or others.
That’s a total of 850,000, which would be consistent with my estimated sales number if I wasn’t ignoring Atomic, Spaulding, Blizzard, Carnival, Thermal, Surf Politix, ASM, Niedecker, Volkl, Dynastar and a host of others that make their own and/or other brands.
At a minimum, I think production for the 1994-95 season was 1,100,000 snowboards. One knowledgeable source said the number was closer to 1,500,000. That means there would be between 300,000 and 700,000 unsold boards out there, not counting what retailers still have.
That raises some interesting questions. Like, for example, where are all these boards?
Maybe a distributor has them all in a warehouse somewhere, waiting for a good time to unload them.
Japan. They got to be in Japan. That’s actually the opinion of some people, and if you accept the conventional wisdom that there’s enough pairs of skis in Japanese warehouses to satisfy the market in 1995-96 if not a single additional pair was imported, it at least seems plausible. Certainly the Japanese have the balance sheets to support holding that much inventory.
Maybe it doesn’t matter where they are if they exist. At some point in time, they will appear on the market. Are your brands so well positioned that customers will still pay full price rather than buy a new, one year old board with essentially the same construction for a huge discount?
Think on it. What do you need to do differently as the market changes?



Foreign Exchange Management; What’s All This Brouhaha?

Actually, there’s nothing to it. The differential in rates of inflation between the economies of two countries equals the percentage change in the exchange rate over the same period. This is known as the Purchasing Power Parity theorem.

There. That should be clear. Of course, government intervention in the markets can also affect exchange rates and everybody knows that in the short term currencies with higher interest rates tend to be stronger, but of course the dollar has plummeted recently following a series of short term interest rate increases by the Federal Reserve, and various tariffs and trade barriers affect rates, so I guess that’s not always right.
What we really ought to do is read the 78 pages of fine type in Financial Accounting Standards Board pronouncement 52 that deals with accounting for foreign exchange transactions. Then this wouldn’t be so confusing.
On the other hand, we could say screw it. Unless we’re buying or selling in a foreign currency or, as a retailer, have a lot of time, effort and money invested in establishing and promoting a brand you’d like to see survive and offer better prices. Or unless you’re making boards (or other products) in the U.S. and exchange rates affect how your competitors price their products. Or unless you’re exporting boards and getting paid in a currency besides dollars.
The hypothetical U.S. based company BFD Snowboards is buying boards from that European snowboard manufacturing behemoth EPS. BFD is only buying 5,000 boards and EPS’s capacity is sold out, so they can insist that BFD pay for the boards in their currency. Let’s let our imaginations run wild and assume it’s the German Mark.
In spring, BFD opens a letter of credit (LC) through their bank in favor of EPS. Let’s say all 5,000 boards are the same and each costs 200 Deutsche Marks (DM 200). This board is hot. All 5,000 are committed to dealers (must be a signature board). BFD’s letter of credit is for DM 1,000,000 (5,000 times 200).
That’s as complicated as we’ll let this example get. In practice, partial shipments up to the total of the LC may be permitted, EPS may be allowed be over or under the DM 1,000,000 by maybe 10%, and some of the boards shipped may be second quality boards that carry a lower price. In addition, assuming BFD is buying ex factory (that is, they are responsible for all the costs after the boards leave the factory door) they will spend six to seven percent of the purchase price in freight (more if it’s air freight) and customs duty to get the boards to the U.S.
What these variables mean is that the actual DM amount you have to pay may be higher or lower than 1,100,000 and there may be more than one payment date.
The LC is opened in April. An LC, for those of you who have had the good fortune not to have to deal with them, is a promise made by a bank to pay a certain amount of money upon receipt of specific documents indicating shipment of the correct merchandise the right way, by the time required. Note that the bank pays based on the documents. There’s no protection against fraud. If the boxes get to BFD and are full of P-tex scraps, the bank has no liability if the documents they paid against were as required.
In April, then, BFD has a potential liability for DM 1,000,000. It doesn’t become an actual liability until EPS ships the product. If the exchange rate at the shipment date is, say, 1.60 DM to the Dollar, BFD will have to come up with $625,000 (DM 1,000,000 divided by 1.60) to pay for the merchandise. That payment date depends on the terms of their agreement with EPS.
Assuming it costs them about DM 12 for freight and duty, BFD’s landed cost for each snowboard is DM 212, or $132.50 at the exchange rate in effect when the LC was opened. Now BFD wants to earn a little money itself to pay for lift tickets, so it marks the product up and sell it to retailers for $172.25, giving BFD a gross profit of $39.75, or 30 percent.
Ah, but we forgot about that moving exchange rate. BFD had to price their boards before the letter of credit was ever opened so retailers could show up at the shows and know what they were going to pay for it. If, at the time BFD set their prices, the exchange rate was 1.70 DM to the Dollar, BFD is bummed. As the Mark has strengthened from 1.70 to 1.60 (strengthened because you get fewer Marks for each Dollar) BFD’s dollar cost per board has risen from $124.71 (DM 212 divided by 1.70) to $132.50 (DM 212 divided by 1.60). If, on the other and, the Mark was at 1.50 when BFD set its prices, it is mighty happy, because its dollar price per board has declined from $141.33 (DM 212 divided by 1.50) to $132.50 (DM 212 divided by 1.60).
The difference between a cost of $141.33 and $132.50 is 6.25%. To put that in perspective, it’s enough to be the difference between a profit and a loss for the year. For BFD, it’s a swing in gross profit of $44,150 on the sale of the 5,000 boards.
Exchange rates move every day. A lot, a little, up, down; there’s no way to tell. If BFD just waits until they have to pay EPS marks, it will have to pay whatever number of dollars the market dictates at that moment. That’s one possible strategy. There a couple of others.
At any time you can buy the marks you need and put them in a bank account in Germany earning interest. The marks will be available to pay EPS as required, and you will know your exchange rate and, therefore, your cost.
Choice two is to buy a forward contract. A forward contract is an agreement entered into with a third party, usually using a financial institution as an intermediary, to buy or sell a given amount of foreign currency at an agreed upon exchange rate on a specified date. Forward markets for major currencies are broad and deep. You can generally buy or sell whatever amount you need for delivery at the date required. The forward rate (that is, the exchange rate at which you buy or sell a currency for future delivery) is determined by market expectations.
BFD is buying DM 1,000,000 of boards from EPS. Let’s say EPS ships the boards May 15. The documents from the shipment go to EPS’s bank and then to BFD’s bank to be “negotiated.” The letter of credit calls for terms of “sight 60.” That is, BFD’s bank, and therefore BFD is required to pay DM 1,000,000 60 days after documents receipt. If the documents are received May 23, payment date would be July 23rd.
BFD decides the dollar is as strong as it’s going to get before payment is due and that, in any event, it doesn’t like it’s profitability to depend on the whims of an unpredictable market. It instructs its bank to purchase forward DM 1,000,000 for delivery on July 23rd. The bank enters into the contract and BFD now knows exactly what those boards will cost it. It no longer cares how the Mark moves against the Dollar between now and July 23rd. It’s cost in dollars will be the same.
On July 23rd, BFD receives the marks, paying dollars for them at the contracted exchange rate, and orders its bank to transfer the marks to EPS’s bank account to satisfy its liability to EPS. Depending on how the dollar and mark have moved against each other in the period between the date the forward contract was purchased and the date it matured, BFD’s financial manager may feel like a hero or an idiot. But a major source of financial risk will have been removed.
The third option involves what’s called asset liability management. Let’s assume BFD doesn’t really know anything about the U.S. market, but has convinced some Japanese distributor that it is a cool brand and that Japan really needs another snowboard (obviously, this is a hypothetical situation.). The Japanese distributor agrees to buy 4,000 of the boards, to pay for them in German Marks at a price of DM 250 per board, and that payment is due July 23, the same date BFD must pay EPS.
Suddenly, BFD has a perfect balance sheet hedge. They have an asset of DM 1,000,000 they will receive from the Japanese distributor and a liability, due the same day, to EPS. They no longer care how the dollar moves against the mark because they will not have to convert one currency into the other.
If you’re exporting and getting paid in a foreign currency, the problem is the mirror image of paying for imports in foreign currency. Most companies I know of solve this problem by insisting on payment in dollars.
Now you know a little about how foreign exchange risk arises and how it can be managed. You may also have realized that even if you don’t deal in foreign currencies, your suppliers and/or competitors probably are. That affects the prices you pay and the profit you can make and is worth a few minutes of thought.



Show Trends and the Business of Snowboarding; “It’s Deja Vu All Over Again!”

In 1903, 57 companies were started to make cars. 32 left the business. I recently heard it on National Public Radio, so it must be true. Snowboarding, of course, is going to be different.

In your dreams.
They say that when you die, your finger nails and hair keep growing for about three weeks. In Las Vegas I saw some companies who’s personal grooming was clearly not part of a fashion statement they were making (except for Gnu/Libtech of course). They sat in their booths waiting for wide eyed buyers desperate for any kind of snowboard or snowboard product to place orders regardless of price, quality, or line completeness.
Four, maybe three years ago, it might have worked. It did work. This year jaded buyers overwhelmed by the number of snowboard brands and companies scurried back to the familiar brands they knew they could count on for delivery, quality, terms, warranty, service and, by the way, sell through.
It’s 1903 all over again.
I asked the same set of questions to perhaps 25 hard and soft good companies. I focused on relative newcomers. The conversations typically went something like this.
“If you’re successful, what will your company look like in three years?”
Long pause and a smile followed by some variation on “We’ll be a lot bigger and making money.”
“So you’re not making any money yet? Are you paying yourselves salaries?
Longer pause and less of a smile followed by some variation on “Well, you know how it is.”
“How much working capital do you need to achieve your sales goals this year?”
“We’re not exactly sure yet.”
“Where are you going to get it?”
“We’re talking to a lot of people.”
“Who are your competitors and how are you differentiating yourself from them?
Inevitable answer: “We’re closer to the market and really know what’s up.”
“Are you really prepared to risk loosing everything you have?”
At this point they were often looking around hoping somebody else would come into the booth for them to talk to. If there was ever a messenger who needed shooting, it was me. I could see it was time to finish up, so I’d summarize by saying, “Let me see if I understand this. You aren’t really sure what your goals are, have no source of capital, no clear competitive strategy, could make more money working at McDonalds, and are risking everything you have. Why are you doing this?”
Finally a question they could answer. Their face lights up. “We love snowboarding!”
Obviously, most companies didn’t fit this extreme profile, but some came close. Almost everybody had at least one of the issues I referred to above and, to everybody’s surprise I’m sure, the most common was lack of financing.
There are quite a few companies with well known brand names that are much smaller than everybody thinks. They are well managed and established in their market niches. They know what they need to do, but don’t have the bucks to do it. The sad thing is that in this competitive environment, where just surviving requires an aggressive marketing posture, investors will not be able to find the returns they require and capital may not be available.
It’s hard to make good business decisions when you are driven by a capital shortage. More than one company had an opportunity to sell a lot of product to a chain. They need the sales volume and cash flow, but can’t risk devaluing the brand and alienating their specialty customers. If the capital requirement is critical enough, they may be forced to make a bad marketing decision for short term survival.
The kind of irrational competition described above is one indication of the consolidating snowboard market. Other indications I saw at the shows include:
1)         People trying to create market niches as a way of differentiating their product by a) having separate lines for specialty and chain stores, b) doing graphics specific to a particular region of the country and c) trying to make minor design or construction changes seem significant.
2)         The product is becoming more important than the booth and its presentation. As what it takes to succeed in this business hits home, price, quality, service and delivery are competing with glitz and hype in the selling equation.
3)         The first rumbling of price declines were seen, but not as much as I had expected. I attribute that to a shortage of quality, volume manufacturing and fiberglass in the U.S., a week dollar, the presence of a lot of smaller brands that can’t afford to sell at lower prices, and the fact that a lot of the big players aren’t really selling direct yet. If you want a peek at the future, look at the pricing on Nale’s boards (Is that Elan spelled backwards!? Gee, I wish I’d thought of that.) One new brand having its boards made at Elan bemoaned the fact that Nale was selling boards to stores for less than he was buying from Elan. How could he compete?
Answer: he can’t, unless he’s very well capitalized and has a well thought out marketing strategy.
I guess it’s just this simple. The snowboarding business is changing in predictable ways. Whether you are a retailer, distributor or manufacturer the way you do business is going to change as well. Success means being out ahead of the curve and using these changes to develop a competitive advantage. Living in the past means being buried there. “More of the same” won’t work anymore.



Who Are Your Customers? And Why Are They Buying From You?

As a snowboard retailer, you have a position in your market. You own it, and it’s yours to loose. The best way to loose it is to forget who your customers are and what they want.

The other day I was in one of these warehouse stores. There was a snowboard with bindings for, I think, $299.00. The board had a full metal edge, the inserts and finish looked fine and the bindings, while nothing to write home about, seemed perfectly functional. The description said it had a full wood core, and most of the other statements about it could have been out of an ad for a leading brand. The brand? At about the point where the number of brands passed 150 the part of my brain that could remember them all atrophied.
It’s enough to strike terror into the heart of a shop owner. If you end up competing on price…. Well, you can’t. 
But there’s hope. Recently, a competing publication (I don’t think they’ll let me say Transworld Snowboard Business here) did a survey of 100 snowboard shops. It indicated that brand name and the sales person were the two most important factors determining a purchase. On a local level, how can you get that kind of information; the kind you can act on?
Rush to your local library or town hall, or log onto the Internet. Dig up the census data for your county or SMSA (standard metropolitan statistical area). What are the incomes levels? Average age? Population density? Where are most of the people you believe are your likely customers?
Are they your customers? Ask questions of every customer that comes in your store whether they buy or not. Get their address, school they attend if appropriate, where they work, what mountains they ride, whatever will help you figure out what they want. This doesn’t mean locking them in a room until they fill in a three page questionnaire. It can be part of an informal conversation between the sales person and customer. The trick is getting it consistently written down immediately after the conversation.
One side benefit is that showing that kind of personal interest in a potential customer may actually increase your chance to make a sale. Listen to your customer. Easier said than done.
Get a map of the area and tape it to the wall. Put a pin in to show the home and/or job and/or school of each person. Is there a pattern to where your customers are coming from? Is it what you thought it was? Does this tell you anything about how to reach them and where you should be advertising?
Pay for gas, food and list tickets for a couple of shop employees on the condition that they come back with information on 50 snowboarders. What kind of riding do they do, how often, where did they buy their gear, and why? Offer to share your data with the mountain if they’ll do the same with you.
It isn’t enough to collect this information on slips of paper or three by five cards, read through it, think to yourself, “Isn’t that interesting” and then forget it. Organize it to see the patterns. On a computer, or on some big pieces of paper taped to a wall. The more data you collect and the more ways you look at it, the more you learn. The magic of being this rigorous is that some of your cherished and unquestioned assumptions about who your customers are and why they buy will turn out to be a bunch of fatuous blather (i.e., wrong).
Assuming that you go through the procedure I’ve described (or a similar one you believe is more appropriate to your market) what’s in it for you? Now you have some harder data on what kind of people are buying from you, what they are buying and why. Tape some more big pieces of paper on the wall with information about your inventory at different times of the year. Given the kind of people buying from you and their reason for buying at your store, should your product mix be different? Are you carrying too much of some items and not enough of another?
How many dollars is it worth to you to have the right inventory at the right time and have as little as possible left over at the end of the year?
If you are a little better able to anticipate your customers’ needs, what kind of return and add on sales does that generate? The process is cumulative and never ending. The better you do, the better you do.
Scurry to the book store and buy a paperback called Customers For Life, by Carl Sewell. Mr. Sewell is the most successful luxury car dealer in the country. The book is about how he gets and keeps his customers. Before you laugh about using the ideas of a car dealer in a shop that sells snowboards, you might take a look at the consolidation going on in that industry. Price competition is intense, the number of dealers has declined rapidly, the survivors are tending to be much larger, and the customers aren’t as willing to be convinced that there’s a significant difference between brands . Recognize any trends you’re worried about?
Your shop is unique. My questions and sources of information may not be the right ones for you, but the concept is right; whether you’re selling cars or snowboards. There’s no more important information than who are your customers and why are they buying from you. In the snowboard industry’s competitive environment, you have to take the time to find out. 



The Joys of Consolidation; Managing the Transition from Growth to Maturity

It happened to skate boards and surf boards. Now, it’s the snowboarding industry’s turn.

The transition from a fast growing, hot trend to a mature industry is about more than consolidation to fewer players. It means lower margins, slower growth for many companies and aggressive competition increasingly based on price and service, not to mention savvier consumers who may care less about image and more about price. This transition will happen quicker than in most industries due to a lack of entry barriers (low capital costs, no patented technology) and be accentuated by the financial burden imposed by extreme seasonality.
But change produces opportunities whether you’re a retailer or distributor if you have perspective to recognize them and willingness to do things differently. Some companies will refuse to recognize the new circumstances and insist on business as usual. Acting irrationally, they will fight for sales as a temporary survival mechanism — even at the expense of future fiscal viability.
Realize you may not be able to count on the fast growth and high gross profit margins the industry has historically enjoyed. Your break-even point will be higher, a larger investment will be required, and payback will be further down the road. Check out Ride’s public offering prospectus and read the six pages of single spaced, small type “risk factors.” And that’s for a company that just completed a year with nearly $6 million in sales and over $400,000 in net income.
No matter what end of the business you are in, take a hard, realistic look at your numbers. As your margin goes down, your break-even goes up. Don’t kid yourself into thinking you’re immune from these trends. Where are you going to get the additional working capital? Can you compete? I don’t know who they are, but there are some companies who should be getting out of the business. Actually, they will be getting out. The issue is whether they walk or are carried feet first.
Think you can outlive the competition? Here’s a partial survivor’s checklist.
If you’re a distributor:
·         Sharpen your pencil and look closely at the gross margin of each product. There’s been a tendency to look at the overall margin and let the higher margin products carry the lower ones. Obviously, there are some good marketing reasons to do that, but the competitive environment that is emerging may not allow it. Do you really need all those T-shirt colors and designs?
·         If you do find yourself with too much product, write it down and move it fast. There’s never a good time in a seasonal business to get stuck with close-out merchandise but tying up working capital in bad inventory is an even worse idea than usual when an industry is maturing. The longer you kid yourself about what it’s worth, the less you’ll get for it.
·         When you do your financial planning, allow three percent of cost of goods sold for uncontrollable things to go wrong. Last season, I cleverly chose to ship a container of boards by train across the country rather than by ocean carrier through the Panama Canal. The goal was to save a week to ten days in shipping time. Great analysis, good plan. Then the freight company called to announce that the container was “lost” in the midwest due to the floods. Three weeks later, it showed up.
·         If your product is priced in currencies other than the dollar, hedge. You’re trying to make money in snowboarding, not currency speculation.
As a retailer:
·         Buy from companies you can count on. Competition is going to be based more on price and service. Deal with companies who provide them. That will often mean larger, better established companies who own the manufacturing plant or have a long term relationship with the manufacturer. A small company with presses in a garage can supply a small number of boards either because their costs are low or because they don’t really know their costs. With growth, it will run into the same cost curve as every other manufacturer, but be on the wrong end of it. Either they will raise their prices or go out of business, leaving you with an interesting warranty problem.
·         Give some thought to the relationship your supplier has with the manufacturer. If a manufacturer is making 1,000 boards for one customer and 10,000 for another, which one do you think is going to get the best prices, service and attention? Who is he going to keep happy when something goes wrong?
·         Retailers can expect margin pressure as more product is available, the consumer gets smarter, and chains push prices down. The good news is that leverage with suppliers should increase. Use your leverage to build cooperative, rather than confrontational, relationships. If you’re getting your budgeted margin from a supplier, don’t push for an extra point just because some other company offers it. You’ll get it back in service and responsiveness.
·         Retailers shouldn’t have a hard time getting product this year, though not always from the company you want. But even with free freight, great terms and a big discount, don’t buy it if you aren’t sure you can sell it.
Going into a business because you are excited about it is a good idea. Going into it without adequate capital and with unrealistic expectation of risk and return can get you unexcited real quickly. Fast growth and high margins cover up a variety of business sins. Nobody likes to change, and doing “more of the same” is the usual response. If you expect to be one of the survivors, focus on costs, build your balance sheet, make a profit even at the expense of growth, and actively select a strategy that fits your market position and financial capabilities. Lots of companies, new and established, are going to make it in this industry. But counting on selling more at higher margins may no longer be a viable strategy.