The Company I Kept
Inc. 500 CEOs share what they learned from earlier passages through the entrepreneurial ringer.
The Parent Trap
Who: Robert Wolters, president, CookTek (#270), a food-service-equipment maker in Chicago.
What he learned: Don't make family members officers.
Where he learned it: Global Contract Manufacturing, a kitchen-gadget manufacturer in Chicago.
Wolters started GCM in 1993 with his mother (president) and father (treasurer). Wolters himself was chairman and majority shareholder, with 66% of the company. At first everyone was on the same page. But as GCM grew, so did the choices about how to run the business. Questions arose about salaries, reinvestment of profits, customers, bank debt, and on and on. Consensus vanished. The page began to shred.
Because they felt they were more experienced, Wolters's parents thought they had the last word. Because he was chairman, Wolters knew that -- legally -- he did. "I had to either walk away from the business or force them out," he says. "I chose to force them out." His parents learned of his intentions and hired a lawyer. Wolters followed suit. Finally, convinced that the law was on their son's side, the elder Wolterses left to start another company, with a similar business plan. The camps didn't speak for two years. Now they talk occasionally and spend holidays together, but largely for the sake of the grandchildren.
How he applied it: When Robert founded CookTek, in 1995, he let his parents take a 34% equity stake but kept them out of the boardroom. Following the GCM split, his parents stopped investing in CookTek. Eventually, their stake was diluted to just 4%.
Rules Rule
Who: Paul Stannard, CEO, SmartDraw.com (#483), an Internet-based software developer in San Diego.
What he learned: Establish a formal management system.
Where he learned it: SoftEngine and Megahaus, software companies in San Diego.
At his first two companies, Stannard expected his employees to learn to execute his vision just by watching him. He held no regular meetings, set no objectives, and never talked about the big picture. "People often drifted, and then I would get mad," he says. As for the hiring process, Stannard relied on gut instinct rather than on objectively assessing how candidates would fit into his fast-growing company.
How he applied it: Stannard created for SmartDraw a formal management team whose members meet as a group every two weeks and individually with Stannard for debriefings every other Monday. To take the subjectivity out of hiring, he engaged a psychologist. Now managers narrow the field to two candidates and send their picks to the psychologist, who conducts a battery of tests. Ten people have been hired using the process, and only two haven't worked out.
Exits, Staged Right
Who: Jim Scott, CEO, In Zone (#31), an Atlanta manufacturer of beverageware and coolers.
What he learned: Position your business for sale from the get-go.
Where he learned it: Alpha Products Inc. (#76 on the 1988 Inc. 500), a promotional plastic- container manufacturer in Atlanta.
In 1982, when Scott started Alpha Products, he had no business plan and no exit strategy. "I thought I was going to grow the company into infinity," he says. By 1993, Alpha Products had no debt and revenues of $30 million. Multiple buyers came knocking, but Scott was too fixated on growth to answer. Instead he took out a $13-million bank loan and built a 250,000-square-foot manufacturing facility to consolidate his three plants into one.
41 % of the Inc. 500 CEOs surveyed had started another company before starting this one.
But the fancy technology that was meant to run his new operations didn't work. No product shipped for a month. Scott defaulted on his loan, and the bank prepared to reduce his line of credit by $1 million a month. "What happened blew our toes off," Scott says. He hired an investment banker and auctioned off the company for $23 million. By taking out the loan, says Scott, "we'd devalued the company by $13 million in 12 months."
The experience taught Scott a lot about the impact of market conditions on value. "You'll always sell for more to a strategic buyer than to a financial buyer," he says. "Those conditions existed for Alpha Products the year before I sold. Had I had an exit strategy, I would have had a plan at that juncture."
How he applied it: Upon founding In Zone, Scott appointed an advisory board of industry experts to constantly monitor market condi-tions.
Thea Singer is an associate editor at Inc.
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