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ACCOUNTING

The Search for Grubby Capital

Company specializes in recovering capital by selling off client's excess inventory.
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Need cash? Look no further. You may be sitting on a ready supply

Keith Maxey makes his living by raising capital for companies. But he's not the kind of financier you'd find on Wall Street. He travels to meetings in a leased plane, not the Concorde. He spends a lot of his time poking around grimy warehouses, and very little in wood-paneled boardrooms. Headquarters is at home in Roanoke, Va., where a power breakfast means you ate too much biscuits and sausage at the Roanoker Restaurant.

Maxey, executive director of Maxey International, is an authority on capital recovery -- or what might be called "grubby capital." He raises cash by selling off companies' unwanted assets. This is the back-of-the-warehouse stuff that nobody really likes to deal with: excess inventory; out-of-fashion goods; damaged products; the custom-made order that was canceled.

Sometimes the product is perfectly OK -- it's just tough to get rid of. For example, when Ron Pass, president of JDI Group Inc., a St. Louis furniture manufacturer, decided to discontinue his line of brass headboards, he found himself with a warehouse full of them.

Like a perennially messy coat closet, such slow-moving goods are easy to ignore. But there's a big payoff in getting rid of them. You can raise cash and make your business more profitable. Selling off lackluster inventory isn't the greatest way to scare up capital, of course. Maxey says that the top dollar for such unutilized assets is usually just half of their normal selling price. But consider this: if you can use that cash to make more of your most profitable or best-selling product, you'll improve earnings dramatically. "Most cash-flow shortages are primarily the result of underutilized assets, not an inherent problem with the business," asserts Maxey.

Clearing out the deadwood is also an important step in recession-proofing. Prune your inventory promptly, and your goods are more likely to fetch a reasonable price. Once the economy sours, however, unwanted assets flood the market and prices plummet.

Maxey's approach to recovering capital from assets is exhaustive. Most companies, however, could benefit from knowing just a few of the basic steps. Indeed, Maxey says that managers can duplicate most of what he does if they are willing to invest the time. Here's a primer:

* * *

* Calculate your real costs. This seems obvious, and some of it is. JDI's Pass assessed the cost of holding onto the brass headboards by adding up warehouse rent, insurance premiums, and interest expense on the money invested in the headboards. He also included some of his overhead, such as the cost of warehouse workers.

That produced a hard number -- the cost of carrying the inventory until it could be sold -- but it didn't begin to reflect the headboards' toll on the company. The hidden costs were harder to pinpoint but potentially more ruinous. The headboards might be damaged, in which case very little or none of their value could be recovered. Worse, in Pass's view, they could go out of style. "Because we're in a fashion business, the inventory doesn't get more valuable with age," he explains.

Maxey, who handled the headboards for JDI, argues that one of the greatest expenses of carrying unwanted assets is the "opportunity cost" -- the cost of not being able to pursue another course of action. If Pass had decided to gradually sell the headboards at a discount through normal channels, JDI would have given up the opportunity to earn a healthy profit margin on its other products, because both its money and its salespeople's time would be tied up by the headboards.

* Don't poison the well. The natural place to turn when you want to unload inventory is to your customers. They know you and your product. But when merchandise is heavily discounted, they should be your last resort. Selling off-price items to established customers whets their appetite for bargains on future orders. Pass worried about two other possible consequences: that existing customers would chew up their buying budgets on the brass headboards, leaving nothing to spend on the company's more profitable furniture lines; and that customers would cherry-pick the most popular styles and sizes of headboard. "We'd be left with garbage," says Pass.

* Find new customers. You guessed it: this is the hard part. Your advantage in tracking down new buyers is that you're offering a onetime bargain. Your disadvantage is that you're dealing with strangers. Maxey solved Pass's problem by selling the headboards to Building #19, a Hingham, Mass.-based surplus and salvage retailer, at a discount of about 60%. It was a relatively straightforward deal for Maxey, who maintains relationships with more than four dozen such discount retailers.

A Pennsylvania garden-furniture importer required a more comprehensive approach. Its owners needed to sell $1 million worth of expensive garden benches quickly in order to repay part of a bank loan. At the same time, they did not want to tarnish their product's image with their regular customers by discounting.

First, the partners gave Maxey a list of established customers who should not be approached. Then, using directories, he assembled a list of 40,000 furniture retail stores. He narrowed that list to just 39 potential buyers by eliminating those that did not sell high-quality garden furniture and those that were not large enough to place an order for at least $100,000 of the unwanted stock. Within 45 days of receiving Maxey's initial offering letter, prospective customers had committed to buy about 35% of the stock, at discounts ranging from 40% to 45%.

* Find unusual customers. Maxey usually tries to develop a list of secondary buyers. The garden-furniture importer, for example, sells its benches to a broad array of retailers, as well as to parks, museums, and municipalities. But "their product lends itself to institutional applications, such as resorts, golf courses, and restaurants," says Maxey. Using more industry reference materials and referrals from contacts on the first list, Maxey assembled a second list of about 20 potential buyers.

* Get the price right. Use your normal price as the benchmark in offering merchandise. Then offer a 40% to 50% discount -- anything less usually won't stir up much action. Keep dropping the price in subsequent offerings until everything is sold.

Everything has its price, but not necessarily a good one. A product's components, for example, are rarely worth much. So if you can't sell your excess inventory, think about giving it away. Maxey recalls trying unsuccessfully to sell a large batch of hammer handles. He finally recommended that the manufacturer donate them to a high school's shop class and take a tax benefit.

While that's not exactly money in the bank, it's a better solution than dumping the headless hammers in the nearest landfill. And that's what a successful capital-recovery program really boils down to: the question isn't how much you can get now -- it's how much less you might get if you don't do anything.

* * *

UNLOAD IT YOURSELF

How to recover capital on a modest scale

Maxey International's approach may be too elaborate if your excess inventory is limited. Here are some alternatives.

* Employee special. Tag everything you don't want at half price, put it in a separate area, and conduct a special sale for employees and their friends. "It gives employees a chance to buy something they know they'll get a good deal on," says executive director Keith Maxey.

* Open house. Hold a corporate yard sale. Place an ad announcing that your factory or office will be open on Saturday and Sunday for a clearance sale.

* Whatta deal! Marry unwanted products to fast-moving goods in a package.

* Think ahead. Negotiate a buy-back provision with your suppliers. If they won't pay you back for the leftovers, try for a credit against future orders. Develop secondary accounts during the normal course of business.




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