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BUYING A SMALL BUSINESS

The Furniture Company Wanted to Sell Him Its Buildings and Close Down.
 

Should he buy the company, too?
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Rick Detkowski was in the real estate business, and when Kim Beattie walked into his Clarkston Mini Storage facility in April of 2006, real estate is what Beattie wanted to talk about. Beattie was the majority owner of Moon Valley Rustic Furniture. He'd come with an offer to sell Detkowski the buildings that housed the company's operations. Then he was going to sell off Moon Valley's inventory and go out of business.

Detkowski, who owned eight buildings in the same industrial park as Moon Valley, in Clarkston, Michigan, knew the properties well. He quickly figured that he could get the buildings for roughly $500,000 to $1 million below market value. He also knew Moon Valley as a company. His son, Rick Jr., had spent a summer building furniture there. Detkowski himself owned several pieces of Moon Valley furniture; he liked the simplicity and clean lines of the cedar and ponderosa pine pieces. He respected its products and reputation. He thought about the offer, then said, somewhat impulsively, "Tell you what. If you sell me the company operations, too, then I'll buy the properties." Beattie agreed to unload it all for $1.8 million. The various vehicles, machinery, and furniture and raw wood in warehouses were valued at $500,000, roughly their liquidation value.

It was only in the following days, before any papers were signed, that Detkowski began to contemplate what he was getting himself into. "I might have been a little rash," he says. He had never run a furniture business and would be charged with reviving a sagging operation that he says was "about breaking even."

The general outlook for the domestic furniture industry was bleak. Many U.S. factories had shut down, with production shifting to China and Mexico. The U.S. housing boom was showing signs of slowing down, a bad omen for furniture manufacturers--particularly those, like Moon Valley, with heavy exposure to the second-home market. Detkowski's son, who had experience running production lines, urged him to move forward. But his wife and a trusted adviser were uneasy. Detkowski himself debated whether the deal would be worth the onerous financing terms banks were requesting. Should he go with his gut, strap on a fat loan, and attempt to turn Moon Valley around? Or should he take the easy money, flip the real estate, and let Moon Valley die?

Founded in 1928, Moon Valley had a long history in Clarkston, a community just beyond the battered automotive industry bastions of Dearborn, Troy, and Pontiac. The company had built a solid reputation for furniture that lasts for decades. Moon Valley lawn swings are a fixture in backyards around the region. The company was also considered a team player in the tough Michigan economy, purchasing much of its wood raw materials from Michigan foresters.

After making his impulsive offer to Beattie, Detkowski scrambled to perform some due diligence. He spoke to numerous customers and dealers; they all agreed that Moon Valley's product was quite good. He also spoke to Don Brown, Beattie's co-owner at Moon Valley (and also Beattie's brother-in-law). Brown was a high school friend of Detkowski's, and it turned out he hadn't been so eager to close down Moon Valley. Brown was a 40 percent owner and had his hand forced by Beattie. Brown told Detkowski that Moon Valley was well positioned to sell more products in the log cabin homes market, a sector it had not been able to go after for lack of marketing resources. Sales of log houses had been growing steadily, to about $2 billion a year, according to the Log Home Living Institute. The growth was part of a back-to-nature trend as baby boomers built second homes. Detkowski figured that people buying log homes would want furniture to match--furniture like Moon Valley's. Brown said Moon Valley could increase production and distribution of its railings and spindles for log homes to create more year-round stability than the existing product line, which mainly sold during summer months.

Detkowski also saw ample opportunities to improve the company. The factory seemed dirty and disorganized and the equipment outdated. "You walked into a building that was just chaos," he says. "You might have had to move three rows of swing parts to get the chair parts." Moon Valley had rented out part of its parcel to a land-clearing company that subsequently went bankrupt, leaving a massive pile of mulch that needed to be removed.

In Detkowski's ongoing talks with dealers, he found they were delighted with the product, but puzzled as to why Moon Valley didn't expand its lines or come up with more innovative offerings. For example, Moon Valley furniture required a varnish coat yearly, something that customers didn't have time to do. The company hadn't offered a better solution.

Detkowski saw that costs could be cut. Brown and Beattie had salaries of more than $100,000 a year each. Cutting those salaries alone would push Moon Valley, which had 2005 revenue of $1.3 million, into the black. (Detkowski didn't plan on drawing a salary immediately.) Detkowski believed he could bring in more dealers and expand sales beyond Moon Valley's existing network in Michigan, Ohio, Wisconsin, and Illinois. Ultimately, he thought he could increase the company's size tenfold. And he believed he could dramatically improve company operating margins, from the low 30 percent range to nearly 40 percent, once he scaled the business up. Brown concurred with that analysis.

Thinking the deal would be too big to comfortably execute solo, Detkowski asked a friend in the construction business to join in the acquisition. The friend demurred, saying Detkowski had no manufacturing experience and that the furniture business might prove harder than it looked. "He told me, 'Michigan is depressed, and that's where most of your customers still are. Do you want to tie yourself to those payments?" Detkowski recalls.

Detkowski pushed on and tried to see if he could get a bank loan to finance the turnaround. He'd need money to hire employees, buy raw materials and vehicles, and build inventory in anticipation of the high-volume summer months when Moon Valley realized the majority of its revenue. All told, Detkowski estimated he'd need $3 million in working capital. And the revival would take two to three years, at least. Several banks he had worked with before refused to finance the loan under usual terms that would have allowed Detkowski to post his other properties as collateral; they were asking for a significant cash down payment. The banks cited his lack of experience. His wife, Lisa, asked him, "Are you sure you want to do this? It sounds like a lot to bite off."

Detkowski was able to take advantage of one connection he thought could help. His son, Rick Jr., after working at Moon Valley, had gone on to run production and logistics teams at electronic manufacturing services provider Jabil Circuit and Philips Electronics' automotive unit. Rick Jr. said he would come onboard to help clean up the manufacturing plant and rethink the production process. But even Rick Jr. admitted it would be quite an undertaking. "My first impression is there is a lot more to it than what I realized," he says. "I knew I would need to learn a lot, and fast."

The Decision

Throughout the summer, Detkowski worked hard to nail down financing. He secured a paired loan for the full amount for $2.3 million from two local banks at an annual rate of about 7 percent. That eased the decision. Additional discussions with dealers gave him more confidence. We can sell more, they told him. Initial conversations with log cabin homebuilders and some larger retailers garnered positive responses, too. Detkowski also spoke to a competitor who said he might have bought the company. In August, Detkowski and his bankers signed the papers on the loan. With loan in hand, he finalized the acquisition with Beattie and Brown.

On September 1, 2006, Detkowski and his son took over as the proprietors of Moon Valley Rustic Furniture. They set to work cleaning house, installing new computers, and renovating offices. Detkowski kept the entire work force and even convinced Brown, his high school friend, to stay on as head of sales and customer service--at a reduced salary--capitalizing on his dealer relationships. Detkowski brought in Marc Spindler, a former defensive lineman with the Detroit Lions, to acquire new accounts. Detkowski put $60,000 into a marketing budget and revamped Moon Valley's website. "This was the first time the company had spent anything on marketing ever, from what I could tell. It really upped our visibility," he says. A more aggressive presence at industry shows helped land a contract with Barna Log Homes, a national homebuilder, and DirectBuy, a homebuilding supplies company.

On Brown's advice, Detkowski has expanded the product line. He introduced prefinished cedar porch railings to offset the seasonal nature of Moon Valley's sales. He expects railings to make up 15 percent of the company's gross sales in 2007, which are on track to hit $2 million. He also added a high-end line of red cedar furniture that caught the eye of President George Bush and his wife, Laura, on a visit to Michigan. The First Couple got free chairs, and sales rose.

In a stumble, Detkowski underestimated the demand his marketing would create. He had insufficient parts made for the spring assembly season, when Moon Valley puts together furniture for summer, the key sales season. Some dealers this summer didn't get as much furniture as they wanted. Detkowski has vowed that for 2008, the parts will be ready to go by spring.

Detkowski, now a furniture man, expects the company to go into the black in 2008 after his next inventory turn. Rick Detkowski Jr. now runs the manufacturing side, and his changes have boosted operating margins by several percentage points. Says the elder Detkowski, "He's a lot smarter than his dad. I'm old school. But I guess I don't scare easy, and this was a risk that seemed worth taking."

The Experts Weigh In

Keep the price premium

Moon Valley has the beginnings of two things it needs to survive as a domestic furniture manufacturer: a quality story to tell and the operational agility to get consumers what they want. Detkowski's challenge will be growing while retaining both. He should choose his dealers carefully and provide them with the quality story that supports the price points he needs to survive. Consumers will pay more for furniture that gives them a reason to do so, and Moon Valley can carve out a profitable, sustainable niche doing just that.

Carl Prindle
CEO and President
Furniture.com
Waltham, Massachusetts

Now for the hard part

While the higher volume will help the company grow, I would be making certain that my local operations infrastructure was as efficient and effective as it could be--which it clearly is not at the moment. I'd also keep pushing to identify market trends. Moon Valley's true competitive advantage is its broad local knowledge, from a style, climate, geography, and trend point of view. Under the new ownership Moon Valley has the chance to really step up business by enhancing quality and adding product variety.

Jane McKellar
Former CEO
Stila Cosmetics
Glendale, California

Add imports to the mix

Detkowski should not underestimate the ability of importers to produce products of similar quality at much lower prices. Perhaps he should consider supplementing the company's line of domestically produced rustic furniture with an imported line of products. Assuming that a reliable offshore vendor can be located, Moon Valley should explore the feasibility of leveraging its reputable brand name and dealer network with an offering of lower-priced imported products. That could provide insurance over changes in the market.

John A. Frank
CPA and Consultant
Dixon-Hughes
High Point, North Carolina

Last updated: Nov 1, 2007




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