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Oreck Founder: Private Equity Bankrupted My Company

Oreck used to be one of the biggest names in the vacuum cleaner business. Ten years after he sold his company, David Oreck reflects on what happened.
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The Oreck vacuum is familiar to generations of consumers who remember television commercials and QVC spots featuring company founder David Oreck touting the quality, value, and light weight. Now, a decade after Oreck, then an 80-year-old entrepreneur, and his family sold the business to a private equity company, Oreck the company has filed for Chapter 11 bankruptcy.

"We sold a company that was doing extremely well: profitable, growing, debt-free," Oreck says. Now 90 years old, he has looked back on decades of experience in business and written a book called From Dust to Diamonds, in which he discusses what made his business a long-term hit and what fundamentals entrepreneurs today should hone.

Oreck thinks he knows what went wrong with the company he founded since the sale: Management strayed from important business principles.

Keep Control of Distribution

One problem was an over-reliance on third-party retailers. "If you don't control your distribution, you'll be controlled by your distribution," Oreck says. Back in the day, the company had about 600 franchised stores.

"At Oreck, we built a good product," he says. "We built it to last. We had a 21-year warranty. Our people would keep it going. If service was required, it was done immediately and if it couldn't be done immediately, we gave them a loaner."

However, third-party retailers like big-box stores cannot provide that level of attention and service. "I submit that value is essential," Oreck says. "You don't get that as a rule from the big-box guy."

Not that big retailers are unimportant. "[They have] a role to play and certainly an important one," he says. Being able to display merchandise and explain the relative values and benefits is critical to many purchase decisions. Unfortunately, many consumers will use the retailer as a showroom and then go online to purchase for a lower price, which hurts the future of the retailers, as well as the businesses that depend on them.

Know Your Target Customer

Oreck's two big selling points were its light weight and a reputation for being dependable, built by selling the units to hotels for commercial cleaning. The vacuums were not cheap.

Oreck says that the successful target market was middle-aged women. The light weight made the vacuums easier to handle, and middle-aged people were often better able to afford the price tag.

"By definition your customer is someone who could buy today, not a year from today," he says. "A year from today you could be broke." However, the new owners of the company began to target a younger demographic, moving away from the natural customer base.

Market Smart

Marketing should go with knowing your customer as a glove fits on a hand. "With advertising costs today, you can't afford to advertise to everyone," Oreck says. "Many manufacturers don't really know who their customer is. That's essential. A productive ad costs no more than an unproductive ad."

Oreck says that he was willing to continue being the spokesman for the company, much as Dave Thomas was the face of Wendy's after he stepped down from daily management. But "someone convinced the company they didn't want to have some old fart tell them to buy their vacuum cleaner," Oreck says, "so they had some eye candy gal push the vacuum cleaner."

Put Money in the Business

The final straw was a classic private equity approach to making money: Buy a business, rack up the debt and pull cash out, and then drive down costs to service the debt. "It weakens the company and I think it threatens the jobs of those who invested heavily of their own time," Oreck says. It may not be illegal, but as far as I'm concerned, it's immoral."

Although David Oreck has no financial interest in the company, some members of his family are exploring a repurchase of the company when it exits bankruptcy. Presumably to use his father's principles to reestablish the business.

Last updated: May 14, 2013

ERIK SHERMAN | Columnist

Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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