What would happen, my colleague John Case wondered aloud, if you took the INC. 100 list and stripped off all the obvious hyper-growth companies? Say you cleaned out all the running-shoe, computer, high-tech, biotech, health-care, fast-food, and communications businesses. Say you eliminated companies that trade on their locations in economic hot spots -- Austin, Atlanta, or San Diego, for instance. How many companies, he wondered, would there be left?
ROBERT SAULS: MOBILE HOMES
Robert Sauls told me he read somewhere that raising the brain temperature one degree doubles one's thinking efficiency. So he gets the shower water as hot as he can stand it and runs it on his face and then on the back of his head. "I got to thinking about things so dang hard the other morning," he says in his brand-new Tampa office, "that I stayed in there for 36 minutes." Then he gets out and records any ideas he's had on a tiny dictating machine. "The good ideas you get," he says, "are so simple, it's hard to think of them again."
Sauls's down-home business -- selling low-end mobile homes to rural southerners -- has grown as fast as the kudzu vine to be the first or second largest of its kind in the country, depending on who's doing the counting. But it hasn't gotten any fancier, a lesson he picked up at the first trailer lot he opened. People kept driving through. "Finally I hollered at one. 'Hey,' I said, 'how come you don't stop?' The fella said he didn't think he could afford anything. That taught me a lesson: don't make it too fancy; just keep it neat."
Unsophisticated? Oh, yeah. Like when he bought a small manufacturer of mobile homes to back up his regular suppliers. He paid $856,000 for the plant, which produced pretax income of $800,000 the next year. "If I ain't mistaken," he offers, "it returned near 100% on our investment." Not bad for an orphan boy who never got through high school.
The company, Manufactured Homes Inc. (#89), is Sauls's second. The first, also a mobile-home retailer, he started in 1967, sold in '70, and stayed on to manage for the next three years. Then, idled by a noncompete clause, he spent two years planning his comeback. The difference, he says, is that he took the second company public. "A private company in this business can't get enough cash money to sustain it. Otherwise," he says, "there ain't nothin' changed." Same product, same market, same selling proposition.
Who's his market? "People who were born and raised in a farmhouse, hell, they think one of those mobile homes is a damn mansion." Sauls sells fully furnished and applianced mobile homes, strictly in the Southeast, and mostly to people who can't afford anything else. "I have found that it don't never change. In good times, these products sell along with others. In bad times, they're the only ones that sell."
Which means he's not plagued by repossessions. "Dealers forget," says Sauls, "that you got to live with those [financing deals] for 15 years, and in 15 years chances are you're going to get an economic downturn. Then people start looking around to see where they can move to save money. When they're in my [mobile homes], they find they are already there. They can't live cheaper anywhere else."
Why just the Southeast? Because five states there account for 37% of the entire national mobile-home market. Other retailers that have "gone runnin' off out yonder just because it's a hot market" -- to Texas, for instance, when oil was booming -- end up with a lot of used merchandise on their lots and no buyers when the hot market suddenly turns cool.
You can make a lot of money selling cheap trailers if you sell a lot of them, as Sauls does. "So," he says, "I can take a company that was just making a tad of profit and [by bringing it under the Manufactured Homes umbrella] make it a real profit center." Discounts for volume purchases help Sauls reduce the acquiree's cost of goods sold. His volume and reputation enable his dealers to command a larger cut of the bank's financing profit.
Sauls also insists that his dealers finance most of what they sell with recourse loans, which means that if the buyer defaults, the dealer gets the trailer back. It means he gets a lot more loans approved by the bank than if he were looking for non-recourse protection. And if a unit does come back, it's going to be pretty easy to resell. "There's two things we don't do," Sauls says. "We don't sign recourse on double-wides or on any mobile home with payments more than $300 a month." Why? Because the disassembly and reassembly makes repossessing a double-wide expensive, and because he doesn't want the high-priced homes coming back. The average factory worker in the Southeast, he says, makes about $310 a week. "Those are our people. If a big mobile home comes back, I'm out of my marketplace. The majority of my people couldn't afford it."
The growth? It's mostly through acquisition. A mobile-home lot, like an auto lot, can serve only a limited local market. "After about six years," he claims, "it's doing all the business it's going to do." To start a new site from scratch, raise it to profitability, and then recoup the start-up losses takes, Sauls says, about a year. Better to buy a going operation -- but not until the seller is good and ready to sell. He started talking to the owner of a chain of Florida sales sites a year and a half before the deal closed. "We don't pester people. We decide what we want to pay and either we do it or not. . . . The first time, the man told me what he'd take for it. . . . This last time, he asked me what I'd give him," Sauls recalls. "That put a different light on it."
Sauls buys management, not just the lot. "So far as employees are concerned," he says, "that man still runs the company. That's the only way it'll work." There's a five-year earnout period, the details of which he doesn't want to discuss.
And there's the five-to-one management structure, which he also doesn't want to talk about. "The secrets to success are so damn simple that people just don't see 'em. So I don't want to tell the competition the simple things."
Elaborate management mechanisms confound him. "You can control lots of things without controlling 'em," he says. Meaning? Meaning, for instance, he doesn't have any fancy rules for how many times managers should turn over their inventory. He promises them a 10% bonus for every annual turn of over three and a half.
Suited up, Sauls, 58, could be a banker, lawyer, or doctor in any small southern town. He's got the thinning gray hair, the soft white hands. The new office in a Tampa high rise is Sauls's attempt, undertaken with some reluctance, to distance himself from the new management he's installed in the Winston-Salem, N.C., corporate headquarters. "I've been there so damn long, people have a problem accepting other people's authority while I'm still there. The only way for me to solve that is to get out."
Freed of routine responsibilities, Sauls can play the chairman's role -- like considering new opportunities. He's thinking about mobile-home developments, for example. But he's got a one-button speed dialer on his telephone so no one back in Winston-Salem gets to feeling too important. "An individual who thinks he's a real wheel just disgusts the hell out of me. A wheel is something for a dog to cock his leg up at." Or tries to get too fancy. "I tell 'em you can make money off some of the people all of the time. . . . I understand these people because I been one of them all my life. . . . I was brought up real hard, worked all my life, and never had nothin'. . . . There's more people in that category than in any other in the country."
LARRY DOSKOCIL: PIZZA TOPPINGS
Twenty-six years ago, Larry Doskocil wanted only to be the best sausage maker in Kansas. Now, he wants to build a billion-dollar business. You might wonder whether the man who can do one can also do the other.
Doskocil's story is classic. Fired by his vision, young Larry leases an old chicken hatchery in Hutchinson, Kans., about 45 minutes from Wichita, and starts his business. From five a.m. till noon he makes sausage; from noon till five he delivers it to retailers; evenings, he kills hogs for the next day's production; nights, he sleeps on a cot in the plant. As business picks up, he hires a man to drive the truck and then hires another.
The next year, 1962, hungry Larry stops to eat at a Pizza Hut Inc. franchise, a small start-up chain out of Wichita. The local owner buys some Doskocil sausage to crumble on top of his pizza, and before you can say double cheese with pepperoni, Larry Doskocil finds his market in the about-to-boom pizza industry. As Pizza Hut and later Godfather's Pizza Inc. grow, so grows Doskocil. By 1981, Larry Doskocil -- modest, reserved, and seriously religious -- isn't just the sausage king of Kansas; he's on his way to becoming the pizza-topping king of the country.
Good question. It comes up frequently in Hutchinson these days, where there's a general notion that as growth in pizza flattens out, the company ought to be building on its strengths -- whatever those are.
What was it that fired Doskocil's growth?
Luck -- stumbling into the pizza market just as it started to climb -- helped. Of course, Larry Doskocil had the good sense to recognize a growth opportunity and the gumption to pursue it. What else? Not marketing. The company sold to just a few huge chains and didn't worry about cultivating the proliferating smaller buyers and independents. It had no marketing department. Not much new-product development. Sausages and pepperoni -- that's what the company made. Not fancy financing. Larry Doskocil just used earnings and Small Business Administration guaranteed loans to pay for the growth.
Look around the plant, though. That's where you see it: production efficiency. Most everything in there, including the walls and the floors, came out of Larry Doskocil's head. He's always been willing to spend money up front if the expenditure would save over the long run. Precast concrete walls, he determined, would reduce his long-term maintenance and cleaning costs. When he couldn't get precast locally, he manufactured his own. He made his own superefficient insulation -- better than what he thought was available commercially -- to save energy costs. For reliability of supply, Doskocil Cos. (#39) owns its own gas wells. It made or modified all its own production equipment and automated any processing step in which automation made sense. As soon as he put a machine to work, Larry Doskocil began tinkering to improve its efficiency while he worked at designing the next generation. Doskocil wasn't just the largest supplier of pizza toppings and still growing, Larry Doskocil made sure it was the low-cost quality producer.
Rather, it used to be. Now, he's not so sure.
In 1970, when Doskocil was still privately held, Larry Doskocil gave 40% of the stock to some of his key managers. In a few years, the predictable liquidity issue flared: what good is the stock, some of his new partners wanted to know, if we can't convert it to cash? A few of them got persistent. Larry entertained but rejected offers from other companies to buy the business. How much was it really worth? He didn't know, and anyway, did he really want to quit? He's only 56 today. He hired an experienced chief financial officer to help him sort things out, and Larry Doskocil, who used to make just sausage, now started making deals.
Doskocil and his partners hired an investment banker, who eventually advised them to sell, but they wound up instead in 1983 doing a reverse merger with a corporate shell partly owned by the Bass brothers' organization, in Fort Worth. After a public offering to retire the bank debt that funded the merger, Doskocil emerged with a public market for its stock, a healthy balance sheet, some nice tax-loss carryforwards, and a working relationship with some Texas wheeler-dealers who took a shareholder's interest in the company's fortunes and who helped it hit the acquisition trail. They bought Stoppenbauch Inc., a pepperoni, smoked meat, and cheese maker in Wisconsin. They bought a crabmeat processor in South Carolina. They considered but rejected a poultry deal.
So by '85, Doskocil had all the strengths it didn't have before: fancy financing capabilities, thanks to (another) new CFO and the Bass connection; a marketing organization, thanks to new chief executive officer Harold Dick and his McKinsey & Co., Frito-Lay, and Norton Simon background; product diversity -- and a spot on the INC. 100 -- thanks to the acquisitions; and a more ambitious long-range goal, thanks to chairman of the board Larry Doskocil. The deal with the Basses "blossomed us out," he says. "It showed us what we can do, which is more than just make sausage. . . . We grew up with the pizza industry, but now we got to get off that shirttail because it's growing too slow. . . . We need to find that next magic product." That, he says, is his job now.
Great. Except that in the meantime, the company lost its productivity edge.
Gross margins and net income began to slide in '85 and continued into '86. Doskocil ran into price resistance. Competitors had caught up to its processing technology and productivity. The company had lost its cost advantage. "We're no longer five years ahead," says Larry Doskocil, "not even three years."
Who can fix it? "It's Larry," says CEO Dick. "Last summer I asked him, 'Larry, would you please go back on the production floor?" He did.
So the real question is whether one man can be the best sausage maker in Kansas and build a billion-dollar business, both at the same time?
HARLAND STONECIPHER: LEGAL INSURANCE
Harland Stonecipher, founder and chairman of Pre-Paid Legal Services Inc. (#92), complained in a newsletter interview not long ago that the biggest barrier to his company's success was skepticism. "People always want proof that something new will work," he said.
Well, shouldn't they?
"A second barrier," he added, "has been a disbelief in anything originating in rural America. Rural Americans are intelligent, though, even if they are not given proper credit."
Who's picking on rural Americans? Bob Sauls and Larry Doskocil couldn't be any more country, and nobody sells more trailers or pizza toppings than they do. That kind of native business sense we could use more of. But, Mr. Stonecipher, look at this business you're in.
You're touting a supposedly professional product that nobody ever heard of. You push it with the same kind of multilevel marketing scheme that Amway and Herbalife International use to sell soap and funny diet plans. Your company devours cash. The biggest balance sheet asset is expenses you've already mostly incurred. The annual report reads like a revival meeting handbill, and the financial footnotes mention enough related party transactions to give Ivan Boesky gas. Furthermore, you're doing this in a place that calls itself Ada, America, and when this outfit shows up on the INC. 100, you don't think a little skepticism is in order? Hey, lighten up. Where is this Ada, America, anyway?
To paraphrase Harland Stonecipher, a man with a sense of humor, I hope . . . Ada, as even a city fool with a map could see for himself, is in horse country about two hours' drive southeast of Oklahoma City. Down here we serve up chicken-fried steak, iced tea, and lots of smiles.
Now, if you want to know, there're two reasons why we're on that list. We've got a product that meets a need, and we've got a sales force that delivers it. I know that doesn't sound very complicated, but that's what it is.
Back in '72 I had this idea to sell legal insurance. We've got lawyers everywhere, but only rich people and poor people get to use 'em. So I thought I'd sell this insurance to folks in the middle. That's about 80% of the population. It's not new. They've been doing it in Europe since the early part of the century. You pay us a monthly or annual premium (about $160 a year), and, just like medical insurance works with doctors, we pick up your lawyer's bills -- whichever lawyer you want to use. We pay only for covered services, however, and only up to specified limits. But the policy does cover most of the common legal problems people run into -- such as car-related issues and tax audits.
Well, I was going along slow but sure selling group policies, when in '83 my friend John Hail said, "Harland, did you ever consider multilevel marketing?" I told him that I was no Glenn Turner and I didn't want any part of it, but if he wanted to try on his own, he could go ahead. "Just don't mess up the business I have going." So he started his own little marketing company, and inside a year he had 13,000 people selling my policies to themselves and their friends. I saw pretty fast that that was the way to go. So we brought John's organization inside ours, and we just took off from there.
Multilevel marketing upsets some people, but in truth it's no different from any other sales force. Think about it. They're all multilevel. You've got salespeople and district managers and regional managers and sales managers and vice-presidents of sales. The only thing different about our organization is that nobody decides when you get promoted. The computer decides. It doesn't matter how you dress or whether the boss's wife likes you. The only thing that matters is how much you sell. You don't get money or promotions for bringing anybody into the organization, but you do get an override on anything they sell. The point is, nobody makes any money until a sale is made.
Now, we've got 155,000 associates selling policies for us and close to 500,000 members. We'd have more if we weren't doing business in just 22 states. Lots of times state insurance regulators don't know how to treat this product. It's the first time they've seen it, so expansion takes time.
About the annual report -- you got something against enthusiasm? People need to be motivated, you know.
And the balance sheet -- check it out. That's the way insurance companies always handle policy acquisition costs. You don't expense them; you amortize them to match the revenue flow. And we're conservative here. If we never sold another policy, we'd still recover our costs and a profit on the policies we've already sold.
Related party transactions? Sure, we reinsured some policies through company officers. They paid us cash for the future premium flow. It's just a financing device to help us raise cash, and nobody made any money on it.
However, you're right about devouring cash. First-year commissions on a policy come to 71% of the premium, which makes growth very expensive for us. I've spent 90% of my time looking for cash to keep this company growing. We could grow without it -- just use our profits -- but we've got to grow faster than that. Eventually the Prudentials of the world are going to figure out that we're onto something good, and when they do, we want to be there already. Montgomery Ward has already started selling a legal insurance product.
So you can be just as skeptical as you like about us, but not everybody is. Last night, for instance, I think we solved all our cash problems and some other problems, too. See this letter of intent? I.C.H. Corp., in Louisville, an insurance-holding company with about $8 billion in assets, is going to invest a bunch of money in us -- about $10 million to start -- in exchange for an option on some of our stock. I.C.H. chairman Bob Shaw spent three days here in Ada last week. "Harland," he said to me, "if you stayed at this 15 years, you must think it'll work."
So, what's that say about your skepticism?
IT TELLS ME THAT SKEPTICISM IS A healthy attitude when you don't know whether someone's on the level or not. I.C.H. checked Pre-Paid out with a lot of people before deciding to invest.
But later it occurred to me that Bob Shaw, whom I've never met, saw in three days what people who write about business -- who look for the dramatic, the unique, and the sexy -- sometimes don't see at all: that glitz and glamour and technical virtuosity aren't everything; that plain old perseverance, conviction, and tenacity still count for something in building a company. Those, I think, are the characteristics that connect these oddball businesses, and they're the answer, I guess, to our question: what in the world are these companies doing on the INC. 100? They earned their spots the hard way.