My wife, Michele Baratta, and I have a jewelry business, which we converted six years ago into a direct-selling company. Previously, she had sold her jewelry wholesale to customers such as Nordstrom, Sundance Catalog, and Macy's, as well as to thousands of retailers. Although it was a big change,it has worked out great. Now I'm thinking we need a five-year plan with an exit strategy. Do you have any advice about when and where to get started?
CEO, Michele Baratta at Home
I believe that, from Day One, you should build a business as if it's going to be sold—even if you never intend to sell it. When you look at it the way a potential buyer would, you notice things you might otherwise ignore, including improvements you can make and best practices you can adopt. So in response to Andrew's question about when to start preparing for an exit, my answer was, "Immediately."
As for where to start, the opportunities were all over the place, but Andrew had missed them—perhaps because he wasn't looking at the business through an investor's eyes. For example, he told me that the company sold Michele's jewelry through "consultants" who buy it and then hold house parties at which they resell it. When I asked how many consultants he had, he said "under 400"—out of 1,500 the company has recruited over the past five years.
So how does that turnover rate compare with the industry average? Can Andrew figure out ways to reduce it? What do other direct-selling companies do? Among the consultants, there are wide variations in productivity. What are the stars doing that the others can learn from? Are the company's prices right? What are the gross margins on its different types of jewelry? Maybe some lines aren't making enough money to justify their continuance.
The point is that building to sell will lead you to ask a lot of questions you should be asking anyway but don't because you're focused on the day-to-day, month-to-month challenges of running a company. Andrew and Michele have built a good business with great prospects, but there's more work to be done.
Please send all questions to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.