This document provides background information on John Esler and his company Patio Rooms of America (PRA). It discusses John's background and career path that led him to start PRA. PRA is the exclusive dealer of BetterLiving Patio Rooms, manufactured by Craft-Bilt, in most of Massachusetts. The document outlines challenges John faces with production and his desire to expand into new territories that Craft-Bilt is reluctant to grant him. It also provides context on the patio room industry.
2. satisfying than others. The first day of April, for example, was
a bad day. He had a territory
disagreement with Craft-Bilt that required immediate resolution,
he had perplexing HR troubles,
and production was half of what he had forecast, so his cash
was flowing red.
John’s company, Patio Rooms of America, Inc. (PRA), was the
exclusive Craft-Bilt
dealer of BetterLiving Patio Rooms for most of the state of
Massachusetts. Craft-Bilt
manufactured components for building BetterLiving Patio
Rooms (see Figure 1). The key
benefit of this product was that homeowners could spend time
outside without being bothered by
bugs or the weather – big problems for people in New England.
John founded PRA as a
BetterLiving Patio Rooms marketing and installation company
in November, 1997.
Sales were vigorous, so a back-log of orders (and impatient
customers) was growing. In
the first four months of business, PRA sold 41 rooms worth
$509,006 and had a six-week
installation back-log – and this for a “summer” business. John’s
comment was, “We had
phenomenal sales in January and February. We proved that this
business is not strictly seasonal.”
John wanted to grow PRA – had to grow the company to support
the infrastructure he
was creating – but Craft-Bilt resisted selling him the adjacent
Connecticut and New Hampshire
territories, while up-state New York, Rhode Island, and Maine
already had BetterLiving Patio
Rooms dealers. Unfortunately, John was not rich enough or
3. successful enough yet in
Massachusetts, to convince Craft-Bilt that he could manage
another BetterLiving Patio Rooms
territory.
Since Craft-Bilt was reluctant to commit immediately, John was
trying to persuade Craft-
Bilt to leave Connecticut and New Hampshire open until PRA
was ready to expand, but Ross
Lederer did not want to concede even that. Ross Lederer, the
Craft-Bilt Director of Development,
was not as receptive to PRA’s growth plans as John would have
liked. Ross was concerned that
PRA could not properly service the additional territory soon
enough, so he wanted to be
unhindered when approached by qualified buyers. In fact, Ross
began negotiating with a couple
BetterLiving Patio Rooms BAB072
of Wharton Business School graduates for the Connecticut
territory shortly after John asked for a
right of first refusal.
On the human resource front, John also had serious challenges.
PRA already had over a
dozen employees, most building patio rooms. These employees
were better paid than those in his
previous businesses, but the operation was not building rooms
fast enough. Craft-Bilt had told
him that a two-man crew would build two rooms a week, but
PRA crews were only producing
one room each week.
4. How would he persuade Craft-Bilt to give him a right of first
refusal on the Connecticut
and New Hampshire territories when PRA was not performing
as projected? Were his goals
unreasonable? Perhaps it was just that the company learning
curve was steeper than he had hoped
and he needed to be patient a little while longer. But maybe the
problem was deeper: John had no
background in construction, yet he was running a construction
company… PRA had a sales
back-log, now it had to construct rooms well enough to survive.
Figure 1
A BetterLiving Patio Room
John Esler
Born and raised in Albany, NY, John first caught an
entrepreneurial fever as a teenager.
He had worked at the Sarasota racetrack selling tee shirts for a
couple of summers and was
promoted to supervisor after his junior year in high school.
That summer, John found himself in
charge when the owner of the business suddenly disappeared.
John managed the operation for the
next four years and paid his way through college with the
profits. Upon graduating from SUNY
Albany, John passed the business along to his brothers.
5. After college, John moved to New York City and worked for the
Macy’s department
store as an associate buyer for two years. He found the work
uninspiring so he returned home to
Albany. While looking for a job, John noticed that there was no
valet service at an upscale
restaurant that certainly would have offered it in New York
City. He thought a valet service
would make good money at this restaurant, so he approached the
owner with a business
proposition, and started Valet Parking, Inc. John turned one
contract into a business, and
2
BetterLiving Patio Rooms BAB072
3
managed the company for five years. It grew to $200,000 in
annual revenue, and employed 30
people (almost all part-time), but he grew bored and sold it to a
senior employee in 1990.
Then came Subway Sandwiches. John purchased an Albany
Subway store franchise in
1990, and over the next five years, he opened four more stores.
The businesses were successful,
with two of his stores ranked in the top five Subway stores for
the region. However, it wasn’t
what he wanted long-term.
6. I set five-year goals, and when I grossed $1.5 million between
the five stores, I
definitely met my goals. But when it came time to set new
goals, I didn’t want to
stay in that business. I didn’t like the employee equation, I
didn’t really like the
restaurant business, I didn’t particularly like the franchisor, and
on top of all that,
the margins were not very good. I decided to sell my stores and
look for
something better.
The sale left him with a wider set of options. It was around this
time that he met and
married Jeannie Lawton, a doctoral psychology student. John
became enthused with the idea of
gaining more knowledge about his chosen profession. He
wanted to develop more sophisticated
business skills, to meet other entrepreneurs, and to pursue
bigger business challenges with
confidence.
John decided to get an MBA and selected the F.W. Olin
Graduate School of Business at
Babson College. Babson College was a business school on the
outskirts of Boston with a one
year MBA degree, and a renowned entrepreneurship program.
FranNet
While in school, John’s studies included franchising,
dealerships, and distributorships,
and he wanted the advantages of business affiliation in his next
venture. John started researching
specific business opportunities, but had not found a compelling
opportunity by the time he
7. graduated in May 1997. (See resume, Exhibit 1).
I was looking for growth potential – multiple units or a large
territory. I told
people, ‘I need a business that will be at least $5 million in five
years. I already
had the million dollar thrill.’ One of the things I got from
Babson was "What is
your threshold?" How high can you set the bar? How much
will you be satisfied
with?
That summer, John took a three-week safari with his wife before
getting to work
identifying his next venture. Back from Africa, John decided to
engage the services of business
brokers. Eventually he found FranNet, a national network of
franchise brokers who shared
information about business affiliation opportunities. There were
FranNet consultants selling
franchises and dealerships nation-wide, and they operated much
like realtors representing the
sellers in a real estate transaction. The Boston branch was
owned by Jack Kelt. Jack interviewed
John then presented him with opportunities in the automotive,
education, and food industries.
John did not want to get back into the food business, and was
not excited about the education
BetterLiving Patio Rooms BAB072
4
8. industry; however, he thought the automotive industry had
potential. After some research, John
decided to meet with people at Cottman Transmission and
Amoco, both headquartered in
Pennsylvania. Jack first heard of Craft-Bilt at this time, and
suggested John visit while he was in
Pennsylvania.
Meanwhile, John had also begun interviewing to get a job.
What if finding a new venture
took longer than expected? He and Jeanie were not
independently wealthy. The negotiations for a
position as a business development agent with Cedent, the
largest franchisor in the world, went as
far as getting an offer. John agonized over the decision, then
accepted Cedent’s offer.
FranNet had told me about Cottman Transmissions and AMCO,
but I accepted a
position at Cedent because they were pressuring me to make a
decision. When I
told them yes, they turned around and said it would take a week
to get me an
offer letter. Then they said there were still two other candidates
they had to
consider.
The week Cedent flip-flopped, John went to Philadelphia, as he
recalled.
I was angry and booked a flight to Philadelphia to meet with
Cottman and
Amoco. Craft-Bilt was also in Philly, I hadn’t done any
homework on them yet,
so I only gave them three hours. I went out to dinner with the
president and vice
9. president for business development. First and foremost, I told
myself, ‘I trust
these people.’ I liked their openness and the look in their eyes.
I left Philadelphia knowing that I didn’t like Amoco or Cottman
Transmission.
With the auto shops, I didn’t like the fact that everyone walked
though the door
upset. With patio rooms, you improve customers’ lives. I liked
that.
Ironically, Cedent called three days after John met with Craft-
Bilt and made a firm offer
for the job he had accepted the prior week. John turned them
down without hesitation. After
meeting with the people at Craft-Bilt, John was excited about
building his own business. If his
due diligence checked out, he would move forward. John
returned to Boston and researched the
BetterLiving Patio Rooms opportunity.
I proceeded to visit existing dealers. I traveled to Maine,
Albany, Vermont, and
Providence. These were older dealerships doing 20 to 50 rooms
a year as a part
of home remodeling businesses, and the dealers had nothing but
praise for Craft-
Bilt. I looked into the industry – no dominant player. I decided
to negotiate an
agreement. I thought, “If they can do this focusing on patios
part-time, I should
be able to focus full-time and really blow the doors off.”
When John first discovered BetterLiving Patio Rooms, he was
impressed by the people
and the opportunity. Later the challenge came into sharper
10. focus.
It hit me one day after I was well into the deal that BetterLiving
Patio Rooms was,
first and foremost, a construction play. I had thought of it more
in terms of the
BetterLiving Patio Rooms BAB072
opportunity: a great product with a great marketing concept
supported by a great
manufacturer in a fragmented market. It had growth, margins,
almost everything
I was looking for in a business.
Of course I had also wanted to know something about the
business, but with my
background, I didn’t think this would be likely so I was not
deterred by my
inexperience in the construction trade (See Exhibit 1 for John
Esler’s Resume).
However, it has become clear to me that this is a monster
challenge.
Patio Room Industry
More Americans own their own homes in 1997 than at any time
in history, both by the
percentage of households occupied by owners (about 65%), and
in absolute terms1. The American
home remodeling industry was $118.4 billion in 1997, an
increase of 5% from 1996. Over
500,000 American households remodeled their homes each year
11. to add sun space2. Analysts
placed the size of the sun space market in the $6 billion range,
putting sunrooms3 at a little over
5% of the remodeling industry. The scale of market demand
was confirmed in a 1991 home
owner survey where 31% reported that a sunroom was the single
most desirable element in a new
home, yet only 10% of the builders surveyed included this as a
standard feature in their new
construction developments4.
Other data on remodeling market demand was collected using
the toll-free “Homeowner
Remodeling Hotline” by NARI, the National Association for the
Remodeling Industry. The
public called this number to ask questions about remodeling.
The statistics in Figure 2
demonstrate the extent of consumer interest in sunrooms. This
is supported by Figure 3, a survey
which shows sunroom projects were a more common project
than either kitchens or bathrooms.
Figure 2
Information Requests
Project Areas Inquirers
Kitchens 47%
Bathrooms 46%
Other Interior 41%
Windows 39%
Room Additions 35%
Sunrooms 32%
Source: NARI Homeowner
Remodeling Hotline, 10/97
12. 1 US Department of Census, telephone interview 8/98
2 Qualified Remodeler Magazine, 9/97
3 The term “sunrooms” is used to for both 3-season and 4-
season glass rooms. Patio rooms are 3-season
rooms
4 Professional Builder & Remodeler Magazine, 1991
5
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6
Figure 3
Project Frequency
Project Rank
Windows/Doors 1
Siding 2
Whole-house 3
Other 4
Room Additions 5
Sunrooms 6
Kitchens 7
Roofing 8
Bathrooms 9
Outdoor Spaces 10
Source: Qualified Remodeler
September, 1997
13. The sunroom industry could be thought of as being comprised of
four niches based on
framing materials and usage: aluminum or wood, and three-
season or four-season use. Patio room
enclosures were defined as three-season rooms. An industry
trade group, the National Sunroom
Association, estimated the patio room segment at about $1
billion in 1997. Consumers selected
between styles based on budget, needs, and aesthetic
considerations. Contractors using wood-
framed construction accounted for the majority of patio room
construction. Wood-frame
enclosures took longer to construct and cost more than
aluminum-frame rooms (the average
selling price for a PRA room, $13,000, was about 70% less than
an average wood frame room).
In addition, aluminum required less maintenance and lasted
longer.
The patio room lifestyle cut across several socioeconomic
classes. Purchasers of this
product tended to come from the middle class, the upper
portions of the lower socioeconomic
class, and the lower portions of the upper socioeconomic class.
In Pennsylvania, the BetterLiving
Patio Rooms customer base had also been segmented by age,
with baby boomers (ages 45-60)
buying 60% of the patio rooms, younger couples (ages 30-45)
buying 25%, and seniors the
remaining 15% of the rooms. The prime patio room customer
age was the largest part of the
population (35-54) in Massachusetts.
John’s experience was that customers purchase BetterLiving
Patio Rooms for a variety of
reasons: lifestyle improvement, increased living space, value vs.
14. the four-season and wood
alternatives, extended use of an existing deck, custom design
vs. pre-fabricated alternatives, and
protection from insects. John put it succinctly, “Our hottest
markets are bug-infested! People
need enclosures because of the mosquitoes.”
Favorite patio room activities included private phone
conversations, dinner “outside,”
bird-watching, and enjoying the evening sky. As an investment,
the return on patio room
additions was about the same as other home remodeling projects
as shown in Figure 4.
BetterLiving Patio Rooms BAB072
Rem
Project
Minor Kitch
Bathroom
Deck
Siding
Patio Room
Home Offic
Windows
Source: Tod
15. There was no nationally domina
and most manufacturers and dealers were
difficult to estimate. However, there wer
largest, Patio Enclosures, had revenue
compound annual growth rate over 10% s
Founded in 1946, Craft-Bilt was
This privately held family firm experienc
founder Bud Stone died, and his son And
recruited Ross Ledderer, making him vic
joined the team with carte blanc for growi
Ross Ledderer had experience in
a restaurant chain to 300 units, and then tr
gaining control of the organization, Ros
1,000 company, and found Andy Ston
established a retail sales goal of $200 m
divulge annual sales numbers, however
1992 wholesale revenues at $5 million. T
improvement in its dealership performanc
Historically, Craft-Bilt sold its p
contractor/dealers. Craft-Bilt paid for fi
installation personnel at corporate headq
usually sold over 100 rooms a year, but
leader, Patio Enclosures, had branches
Washington DC which consistently instal
were either owned and operated by th
franchisees). These operations focuse
complementary products (casual furniture
Figure 4
odeling ROI
16. ROI
en Remodel 102%
77%
73%
71%
70%
e 69%
68%
ay’s Homeowner, 2/98
nt manufacturer in the aluminum patio room industry,
privately held, so the industry size and growth rate were
e about a dozen aluminum frame manufacturers and the
of $58 million in 1997. Patio Enclosures had had a
ince 1991.
Craft-Bilt
located in Pennsylvania, an hour west of Philadelphia.
ed a management succession in the late 1980s, when the
y rose from vice president to chairman and CEO. Andy
e president and director of business development. Ross
ng the company.
merchant banking and franchising. He had helped grow
ied to buy it back from the franchisors. Unsuccessful in
s went looking for an opportunity to create a Fortune
e with a similar vision. Together with Ross, Andy
illion for 2002. Privately held, Craft-Bilt declined to
an online company reporting service listed Craft-Bilt’s
o achieve their goal, Craft-Bilt needed a revolutionary
e.
17. atio rooms through small, established home remodeling
ve-day training seminars for all dealership sales and
uarters. The ten best BetterLiving Patio Rooms dealers
many sold less than a dozen. Meanwhile, the market
in Chicago, Cleveland, Philadelphia, Baltimore, and
led 700 to 1,000 rooms a year. Patio Enclosures’ offices
e manufacturer (24 branches) or by franchisees (11
d exclusively on selling patio rooms and two
and window treatments).
7
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8
In mid-1997, Craft-Bilt implemented a program offering world-
class support for a new
class of dealers known as Craft-Bilt Super Dealerships (CSD).
CSDs were created to focus on
and dominate a patio room marketplace. Craft-Bilt developed
new products and services to
support the CSDs (e.g., “best in class” marketing, training, and
dealer recruitment programs), and
set a course for unprecedented growth.
Patio Rooms of America
John completed his due diligence and began negotiations. Andy
and Ross were
enthusiastic about John opening up the Boston territory, but
18. John wanted a larger sphere, and
made an offer for the Worcester and Springfield territories
immediately. Ross was skeptical
about John’s request due to his lack of experience and financial
depth. After discussions back
and forth, John entered into exclusive dealership agreements
with Craft-Bilt Manufacturing for
three territories: Boston, Worcester, and Springfield,
Massachusetts. John paid a $35,000 fee for
the exclusive rights to the Boston territory. The Worcester and
Springfield markets cost $10,000
each. John signed all three contracts in October 1997.
As someone who had financed five Subway stores, he had a
good idea what was
involved. John was not too worried about raising $125,000 in
bank debt because he had $75,000
in mutual funds for collateral, he was investing his own equity
capital in the company, and he had
a successful track record. His first stop was the bank that he
worked with in Albany, as John
recalled.
Two days after I talked to him, my banker said, ‘You are
approved. No problem.’
I was going to get $50,000 as a letter of credit for Craft-Bilt and
$75,000 in cash.
They said it would take two weeks to do the paperwork.
Two months later, I finally got a letter of commitment from the
bank – after I had
opened the business – and the deal fell through the same day I
received the letter.
Someone at the bank reviewed the deal and realized that some
of my collateral
was non-assignable! My folks could not use their retirement
19. account for
collateral. I should have looked into it, but I thought the banker
would have
known. So here I was in December, I owed Craft-Bilt $30,000
for inventory
already in my warehouse, and I had material worth another
$20,000 on the way.
I had to liquidate my mutual funds to pay the first bills.
The next day I called one of my contacts at Babson College,
Professor Joel
Shulman, and he connected me with Tim Fahey of Middlesex
Bank. They
provided $125,000, collateralized by the assets of the company,
and $35,000 of
my cash. The $125,000 only yielded $40,000 in working
capital, because Craft-
Bilt demanded a $50,000 letter of credit (LC) in order to get 30-
day terms on
inventory. Without the LC, no terms. Bankers hate LCs, that’s
why Tim kept
$35,000 against the $125,000. I wrote checks for all $40,000 the
day I got the
money.
BetterLiving Patio Rooms BAB072
John opened an office serving the Boston and Worcester
territories on November 1, 1997.
This territory included the entire state, north to New Hampshire
and south to Rhode Island,
beginning with Worcester county and moving east to the ocean.
PRA established a 6,800 sq. ft.
20. warehouse and office space in Northboro to serve as corporate
headquarters.
John expected to install at least 850 rooms annually in these
three territories within five
years (Figure 5). There were over 1.3 million owner-occupied
homes in this area, and the 35-54
age group was the largest segment of the population (see Figure
6). When John Esler opened the
Boston territory, PRA became one of the first CSDs. With
PRA’s mid-winter sales performance,
it rapidly became a model CSD operation.
We did some installations during the winter because most go on
existing decks.
The problem was doing the footings5 in winter. We did not
know what we were
doing. It took a week with everyone pitching in to put up one
room with new
footings.
Figure 5
Patio Room Sales by Territory
Territory 1998 1999 2000 2001 2002 2003
Boston 135 175 225 275 350 425
Worcester 31 50 100 150 175 200
Springfield 50 100 150 200 225
Rooms Sold 166 275 425 575 725 850
Figure 6
Territory Demographics
21. (000s) Personal Home- Homeowners
Pop Income owners Ages 35-54
Boston 4,011 $112,249,701 988 407
Springfield 666 13,664,970 164 68
Worcester 717 15,544,172 186 76
Sources: Markets in 1994 with Population by County - Regional
Economic Information
System CD (REIS); Household Size - Population Estimates
Program, Population Division,
U.S. Bureau of the Census, 8/21/97; Homeownership rates -
U.S. Dept of Commerce,
Economics and Statistics,
HTTP://www.census.gov/hhes/www/homeown/source.html
5 Footings are the concrete foundation posts in the ground for
supporting structural weight. Producing new
footings is difficult when the ground is frozen as it usually is in
New England from December through
February.
9
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22. 10
According to Craft-Bilt, this business should operate at about
37% COGS, 50% gross
margins, and 15% net margins (see Exhibit 2 for Income
Statement). Overall, John expected that
material costs would remain stable over time because prices for
aluminum products were
historically stable and Craft-Bilt had a track record of resisting
price increases. The production
labor costs should be controllable because of the modular
process for installing rooms. Finally,
the in-home sales transaction should continue to generate
undiscounted sales. Start-up
inefficiencies had kept PRA’s margins below these levels.
Team Building
John began putting his team together by networking, as he put
it, “My most important
function is selling the company to the people we need on-
board.” He found that two friends who
lived in Albany were interested in helping to launch PRA. Ed
Jackowski had known John at
Subway where Ed was involved in selling franchises. Andy
Constable was educated as an
architect, skilled at carpentry, and had been in John’s wedding
party. Andy recommended another
friend in Albany who was willing to move to Boston, also
named Andy, Andy Malone, who was
an architect by training, but a master carpenter by profession.
With a nucleus in sales and
production, John set up the warehouse in Northboro and began
recruiting.
We’re trying to build a company here. I am a good employer
23. who treats
employees like members of my family. That’s why we provide
medical and
dental insurance, earlier than we can really afford it. I want
everyone who works
here to want PRA to be the last company they ever work for. It
may sound corny,
but I look for people with a good heart who can see that vision.
The results have been great so far. Low turn-over and in each
BetterLiving Patio
Rooms training class, one of our people has finished number
one. We have
consistently attracted top quality people.
BetterLiving Patio Rooms BAB072
Turn-over was less than many firms in construction, and John
believed that having
founding principles was an important part of his success
formula (see Figure 7). John explained
how the third principle found a practical application.
These principles have to translate into little and big things. I
bought a plunger
after a toilet got clogged, and brought it to a sales meeting to
illustrate the point.
I said, ‘If the toilet gets clogged, I’ll be the first one to grab the
plunger. We
shouldn’t need to hire a janitor to clean up after us because if it
is to be, it is up to
me – and you.’
24. PRA’s F
1. Practice integ
2. Value is alwa
3. The Rule of th
“If it is to be, i
By April, PRA had three peop
in the media department (all but the
installers and the production manager.
An important part of John’s
included world-class experts in
entrepreneurship, construction, and on
monthly to review progress on the bus
Marketing
Compared to other firms sel
marketing team, and a more aggressiv
gross sales on this program (an estima
Developed in part by Craft
infomercial advertising (usually place
were not run continuously due to the
buys were made by Direct Results Ma
Results Marketing in Ohio to produc
the ads and earn a 15% commission.
sheets called Daily Marketing Report
cable station was $175 for a 30-minu
25. cost per name. PRA was the only mar
6 Note: Although expressed as percentage
requirements.
Figure 7
ounding Principles
rity in everything that we do.
ys defined by the customer
e Tens Twos (10 words with 2 letters):
t is up to me.”
le in sales (five including John and the sales manager), four
manager were part-time), and four crews for a total eight
team was his independent board of advisors. The board
several fields: manufacturer relationships, franchising,
e of John’s classmates from Babson. These people met bi-
iness.
ling patio rooms, John had a larger, more highly trained
e media program. PRA expected to spend 9% of projected
ted $185,589) in year one of operations.6
-Bilt, PRA’s marketing mix relied heavily on television
d on cable stations). The 30-minute television infomercials
large number of leads produced by these programs. Media
rketing (DRM) as directed by PRA. Craft-Bilt hired Direct
e the infomercials, and the contract allowed DRM to place
To monitor variation from goal, PRA produced tracking
s (see Figure 8). The average cost for placement on a local
te spot, which produced an average of 12 names for $14.64
ket competitor using TV.
26. of sales, marketing expenditures were driven by lead
11
BetterLiving Patio Rooms BAB072
Craft-Bilt told us that the names to appointments ratio was 37%,
appointment to
close was 27%, so we could predict very closely what our sales
would be. This
was critical because we had to keep our salespeople busy and
not keep our
prospects waiting too long.
The key for using our capacity was to fill our day spots, because
we knew that
we could fill evenings and Saturdays. We were booking 18
appointments on
Saturday, something like 60% of our business. There was a nice
predictability to
the revenue equation.
Figure 8
Marketing Conversion Ratios
Success Rate Households
Names from TV 100% 100.0
Appointments Written* 33% 32.8
Appointments Issued** 76% 24.9
27. Demonstrations 91% 22.7
Sales Closed 28% 6.4
Installed Rooms 72% 4.2
Source: PRA Daily Marketing Reports
* This refers to the customer contact where an appointment is
set
** This refers to the confirmation call where each customer is
contacted again the
evening prior to the scheduled appointment.
John planned to incorporate other marketing techniques later,
but many traditional
BetterLiving Patio Rooms dealers excluded TV from the
marketing mix, so these other mediums
were also proven to generate business.
The marketing process began when a prospective customer
called for product
information. The 800 number was fielded in Florida and faxed
the next morning. The media
department mailed literature after the faxes arrived. PRA
planned to move some of these
functions in-house at some point, as John explained.
28. I would rather have developed print and television marketing
expertise in-house,
however the Craft-Bilt turn-key system worked and that was
worth a lot. DRM
knew the home remodeling direct response market, but we were
as involved as
we could be.
12
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13
This marketing system created a sales interview virtually free
from competition. Each
lead was pre-qualified long before a salesperson arrived at the
customer’s home – the
demonstration was at least the fifth contact with BetterLiving
Patio Rooms (see Exhibit 3). The
PRA sales process involved no cold calling. As a result, PRA
representatives were closing sales
at a rate between 25% and 40%, and averaged 28% in March;
they were required to achieve a
minimum closing rate of 20% to remain employed by PRA.
However, John was proud of the fact
that this was not a high-pressure sale,
We explained the product and its benefits, and then offered the
same price sheets
to everyone. Customers actually used our price sheets to design
and price the
29. room themselves. They could change the room to lower the
price, and we
offered a standard discount for ‘buying tonight,’ but we didn’t
haggle.
PRA received a 25-33% down payment at the time of sale. Two
weeks later, before
ordering materials from Craft-Bilt, PRA would bill for another
third of the total. Then when the
customer was satisfied with the installation, payment-in-full
became due.
It was a long winter; I was down close to zero a couple of times.
I didn’t think of
changing our payment terms until February. We were living on
25% down. Most
customers accepted the new terms without blinking an eye. Our
cash situation
improved immediately.
Competition
Competition in the Massachusetts market was highly fragmented
with small contractors
accounting for the majority of patio room construction. These
carpenters typically built fewer
than ten wood-frame rooms per year. As John described it,
Our main competition was the conventional ‘stick build’
addition which takes
over three weeks to build. However, we were 60% of the price
and our rooms
went up in 2 or 3 days. It was a fantastic advantage!
There were no other marketers using TV and representing
competing manufacturers in
30. New England. Companies in the Massachusetts market with an
aluminum product similar to
BetterLiving Patio Rooms included Texas-Aluminum (30
installations in 1997), Oasis Sunrooms
(40 installations in 1997), and Four Seasons Patio Rooms (30
installations in 1997). These
dealers were mostly contractors who specialized in home
remodeling and built patio rooms as a
product-line extension. Patio Enclosures was the only
manufacturer with a comparable patio
room marketing program. They had no branches in the Boston
market.
At home shows, other aluminum patio room dealers offered
direct competition, however
home shows were a minor part of the PRA marketing plan. An
estimated 15% of PRA’s sales
began with a referral in 1998, and John expected this percentage
to increase with the growth of
the installed base. The remaining 85% began with a TV
infomercial. Almost all sales transactions
occurred during in-home sales demonstrations. The intimate
nature of the two-hour in-home
presentation significantly reduced the threat of competitive
challenge, as John explained.
BetterLiving Patio Rooms BAB072
14
People didn’t usually shop around for patio rooms, unless they
were at a home
show. We went into the home as professional contractors – not
31. salespeople. What
we did in the home was warm and fuzzy. We talked about their
dreams, about
improving their quality of life, and two-thirds of our sales
happened in the first
meeting. You have got to love getting non-contested sales.
Production & Operations
PRA’s operations were initially based on guidelines produced
by Craft-Bilt. Craft-Bilt
was in the process of creating a turn-key system for opening
new territories. Craft-Bilt passed
this system along by training owners, managers, installers, and
salespeople at corporate
headquarters. The training was supported afterwards by
telephone consulting and regular on-site
visits from key Craft-Bilt personnel.
The key position in the BetterLiving Patio Rooms system was
the production manager.
The production manager had to have construction experience,
computer skills, and management
talent. The production manager was responsible for all aspects
of production. His human
resource duties included hiring, training, and scheduling
installers. His operations duties included
coordinating the permit process, confirming sales measurements
and job feasibility, ordering
materials, managing inventory, and monitoring job costs.
Hiring someone with this unique set of
skills was a difficult challenge, as John recalled.
We blew our first production manager out of the water in two
weeks. He had a
lot of experience in construction management, and had even
32. built patio rooms, so
he seemed perfect. But after two weeks, he looked at me with
fear in his eyes.
For him, pulling 20 permits was like building 20 homes. He
said, ‘I’m not your
guy.’ I promoted a lead installer, John Leahy, and the whole
team pitched in to
make things work, but it continued to be a big problem area.
Another problem was the building permits which were required
for every job and issued
by building inspectors. Unfortunately, every town had different
requirements and inspectors,
some with unexpected biases. For example, one inspector
refused to let PRA build on a
preexisting concrete slab, in spite of the fact that he concurred
that it was perfectly sound.
Another wanted footings for the deck that were deeper than the
footings for the house.
We wanted to be able sell a room today, measure it tomorrow,
and get a permit
the next day, but we learned in March that it never happens that
fast. One reason
is the plot plan. Homeowners don’t have a plot plan, and
nobody issues permits
without one, so we have to get customers’ land surveyed.
But the plot plan is just one of the hurdles to getting building
permits. There
seems to be no rhyme or reason to what gets approved.
Building inspectors are
prosecutor, judge, and jury all in one.
33. BetterLiving Patio Rooms BAB072
15
Once a permit was obtained, materials were ordered. With the
BetterLiving Patio Rooms
product, the most expensive parts of the room were custom-
ordered by the job. In April, John
speculated that PRA would never need to have more than
$50,000 in inventory (see Exhibit 4).
After the building materials arrived, the job would be
scheduled, and installers assigned.
Installers picked up building materials at the warehouse
between 6:30 and 7:30 AM, and returned
between 4:30 and 6:30 PM. This produced more over-time than
John had projected in his initial
business plan. However, the larger problem was that jobs were
not being done right the first time,
or going up fast enough.
The real challenge is in constructing rooms. You have to put
rooms up fast and
tight, or there is no profit. If a room takes too long, the profit
gets killed by labor
costs. If a room isn’t done right, the profit gets killed by call-
backs. I hate the
sound of the phone ringing when it rains.
Problems on the job site were not always the fault of the
installation team. PRA sold
custom-built rooms. The installation guru at Craft-Bilt was on
record saying, “50% of the rooms
can not be built as sold.” It was the production manager’s job
to make sure he discovered these
34. problems and resolved them before scheduling a crew for
installation. John Leahy scheduled
crews to build unbuildable rooms in March.
I wanted to put up 20 rooms in March, but we only put up five
because of
permitting and construction problems. However, we sold 30
rooms, so we had
$350,000 in sales and something like $75,000 in cash (see
Exhibit 5). We
expect to install 20 rooms in April because we are learning to
be more efficient.
If we can do jobs in 2-3 days instead of 4-5 days, we can start
making money.
Often, making a room buildable meant extra expense and John
was displeased by how
often customers were told that the price went up after the sale.
Salesmen were not contractors,
but on-going training was essential because they needed to
know what additional costs might
arise when building a room. This was critical for all concerned
because PRA salesmen were paid
straight commission based on job profitability, so either they
sold profitable jobs, or starved.
Issues with Craft-Bilt in Early April
Although he was worried about construction and operations
issues, John’s biggest
concerns involved Craft-Bilt. John did not accept the terms
Craft-Bilt wanted to impose on the
relationship, and saw potential problems awaiting down the
road.
I wrote a business plan focused on developing Boston in the two
35. weeks after
sales training, and realized that the whole nation was up for
grabs. Either we got
a bigger piece of the pie right away, or we would wish we had
when we wanted
to expand.
BetterLiving Patio Rooms BAB072
16
Craft-Bilt had never sold multiple BetterLiving Patio Rooms
territories to a
dealer before, but I sold them the vision of me as the Babson-
educated super
entrepreneur. All Craft-Bilt upper management read my
business plan. I went
back to the table and got Worcester and Springfield.
Of course, they didn’t believe we would actually implement the
plan until they
saw us doing it. We became a prototype dealer for BetterLiving
Patio Rooms
when we sold rooms all winter.
The biggest thing I missed in the dealership agreement was the
way the letter of
credit (LC) would work. I thought the $50,000 LC got me 30-
day terms on
inventory, but all it got me was terms on inventory worth
$50,000. In effect, I
got no terms. We’re discussing this issue too. In the past, they
were dealing with
36. “hook and ladder” guys, so withholding credit made sense.
However, when
you’ve got CSDs, it makes no sense. I have an annual quota of
375 rooms
beginning in year five, and seasonality creates a steep annual
ramp-up, so why no
terms? They say it would put the company at risk, but I don’t
buy it.
What do we want in our on-going relationship with Craft-Bilt?
We have a sales
and marketing organization that can move home improvement
products. We are
developing a service delivery system. We are learning how to
get our name in
front of people and sell in the home. And we are learning how
to deliver
construction projects. Craft-Bilt offers us a quality product, but
long-term, there
will have to be more value in it for us.
We have a great relationship now, but will they allow us to
grow? We’ve talked
about it, and they don’t seem threatened, but they don’t want to
give me any
more ground either. I want to open Connecticut and New
Hampshire next year,
but Ross is dragging his feet. I also want a right of first refusal
for all other New
England territories if any current dealers lose their regions. So
far, Ross has not
budged on these issues, yet he wants me to sign a tighter non-
compete. They
have the power to limit the scope of this business to western
Massachusetts.
There is no way I am going to let that happen.
37. BetterLiving Patio Rooms BAB072
17
Exhibit 1
John Esler’s Resume
JOHN K. ESLER
100 Otis Street * Northboro, MA 01532
Telephone/Fax: 508-393-0400, Ext. 226 * E-mail:
[email protected]
Background Summary
A results driven, high performance, entrepreneurial general
manager and a sales/business
development leader with an exceptional range of
accomplishment based on key strengths in:
Leadership - The combination of analytical, interpersonal skills
and emotional resilience gained
through firing line experience to create a vision, engender
dedication and hard work, and
maximize team’s talents to achieve outstanding performance.
Rapid Contribution - The learning skills, obsession with
excellence and excitement for the task at
hand to quickly contribute in new and rapidly evolving
situations.
High Performance - Exceptional energy level, dedication,
competitive drive and commitment to
thrive on pressure and multiple challenges, and infuse the
organization with the same level of
performance.
Communications - Strong written and oral communicator with
superior ability to negotiate and
38. persuade.
General Management Perspective - Experience in a P&L
position for a large company and
ownership of a small business. Developed business planning,
business strategy and
implementation skills focused on creating profitable
relationships with customers.
Entrepreneurial Management - Demonstrated ability to
recognize opportunity, martial the
necessary resources, create entrepreneurial organizations and
achieve result.
Professional Experience
Subway Sandwiches, Albany, NY Principal/Owner 1990-1996
Originated and operated 2 year-round and 3 seasonal locations
that ranked as first and second
volume locations in a 65 store market.
RH Macy and Company, New York, NY Asst Buyer, Sportswear
Dept 1986-1989
Promoted from Management Training program to Sales Manager
to Assistant Buyer with
responsibility for purchasing, inventory management and
pricing for a $15 million product
category.
Valet Services, Inc. /Saratoga Flats, Albany, NY
Principal/Owner 1981 -1995
Founded and established two entrepreneurial businesses. Sold
both as ongoing entities.
Education
F.W. Olin Graduate School of Business, Babson College
1997
Master of Business Administration - Entrepreneurial Studies
and Marketing
Magna Cum Laude Honors, GPA: 3.7 Class Rank: 6, Class
Size: 220
University of New York at Albany 1985
Bachelor of Arts, Dual Major- Finance/ Economics
39. Outside Interests
National/American Hockey League - youngest ever to officiate
at the professional level
Enjoys golf, skiing, tennis, SCUBA diving and travel.
BetterLiving Patio Rooms BAB072
18
Exhibit 2
PRA Income Statement (continued on Exhibit 6)
Jan Feb Mar Total
Rooms Installed 5 8 7 20
Recognized Sales $ 71,571 $ 98,744 $ 81,657 $ 251,972
Average Selling Price $ 12,599
Cost of Construction
Materials 28,317 40% 34,117 35% 37,444 46% 99,878
Field Installation 7,412 10% 9,854 10% 16,383 20%
33,648
Equipment & Trucks 5,650 8% 2,996 3% 6,138 8% 14,784
Permits 730 1% 550 1% 526 1% 1,806
Total CoC 42,109 59% 47,517 48% 60,491 74% 150,116
Gross Profit 29,462 41% 51,227 52% 21,166 26% 101,856
Sales & Marketing
Sales Compensation 9,711 14% 11,656 12% 14,383 18%
35,750
Media Department 3,540 5% 3,691 4% 3,745 5% 10,976
41. BetterLiving Patio Rooms BAB072
19
Exhibit 3
PRA Sales and Installation Cycle
• Day 1: TV ads generate calls to an 800 number answered in
Orlando, Florida.
• Day 2: These leads are faxed to PRA the next morning and the
PRA media supervisor sends
out product literature to prospects.
• Day 4-5: The media department calls to answer questions and
schedule in-home sales
appointments. These calls are typically made in the morning or
early evening when
individuals can most often be reached at home.
• Day 6-10: The day before an appointment, media calls to
confirm.
• Day 7-11: Scheduled appointments are conducted by the sales
department. Initial job
measurements are made as part of the sales demonstrations.
PRA estimates that 65% of all
sales are closed on the first visit to the home. A 33% deposit is
the standard down payment.
• Day 8-12: John or the salesman begins work on obtaining
customer financing if needed.
Less than 50% of PRA customers seek financing.
42. • Day 8-12: The production manager receives work orders. He
visits customers to confirm
measurements, and fills out job order forms to purchase
materials. Orders are placed once
per week and materials are received within 10-14 days. Terms
for material are net 30-days.
Customers pay another 33% of the sales price prior to PRA
ordering building materials.
• Day 12-32: Installations are scheduled to be completed 3-5
weeks from the close of the sale.
During this time, the production manager obtains any building
permits that may be necessary
from the town. Additionally, any preparatory deck or
foundation work is completed.
• Day 33-46: Patios are installed by PRA crews. Installation
times range from 1 to 7 days,
depending upon complexity and any complicating factors. The
average installation time is
running a little over 3 days. Upon job completion, the
outstanding balance is collected.
• Day 47- 61: Door hangings are placed on neighbors’ doors and
an open house is scheduled to
be held in the newly installed patio room.
BetterLiving Patio Rooms BAB072
20
Exhibit 4
PRA Balance Sheet
43. Dec-97 Jan-98 Feb-98 Mar-98
Assets
Checking/Savings 1,913 17,604 36,900 63,480
A/R - - 250 17,107
Inventory 3,197 37,989 16,300 34,759
Fixed Assets - 2,874 4,666 7,802
Other Assets 37,125 37,125 37,125 37,125
Total Assets $ 42,235 $ 95,592 $ 95,241 $ 160,274
Liabilities and Equity
A/P 17,369 32,735 21,919 36,230
Loans From Related Parties 75,981 59,730 64,102 62,795
Notes Payable, bank - 74,000 73,700 73,025
Customer Deposits 4,649 4,849 (801) 88,496
Equity (55,764) (75,722) (63,679) (100,272)
Total Liabilities & Equity $ 42,235 $ 95,592 $ 95,241 $
160,274
Exhibit 5
PRA Cash Flow Statement
Jan-98 Feb-98 Mar-98
Sales Collected $ 75,946 $ 98,494 $ 64,800
Expenses:
Cost of Construction 26,743 58,332 46,180
Sales and Marketing 24,594 21,051 29,735
Indirect Operating Exp 2,966 4,812 4,476
General & Administrative 21,861 13,321 23,549
Total Expenses 76,163 97,516 103,939
Net Operating Cash Flow (217) 978 (39,139)
(Inc)/Dec in Inventory (14,793) 21,690 (18,459)
Inc/(Dec) in Cust deposits 200 (5,650) 89,297
44. Puchase of Fixed Assets (2,874) (1,792) (3,137)
Loans From Related Parties (16,251) 4,372 (1,307)
Loans From Bank 74,000 (300) (675)
Net cash inflows/outflows 40,065 19,297 26,579
Beginning Cash (22,462) 17,603 36,901
Ending Cash $ 17,603 $ 36,901 $ 63,480
BetterLiving Patio Rooms BAB072
Exhibit 6
Pro Forma Income Statement
4 /9 8 5 /9 8 6 /9 8 7 /9 8 8 /9 8 9 /9 8 1 0 /9 8 1 1 /9 8 1 2
/9 8 T o t a ls
R o o m s In s t a lle d 1 1 1 5 1 9 2 3 2 7 2 3 1 9 1 5 1 1 1
8 3
T o t a l S a le s $ 1 4 2 ,3 4 0 $ 1 9 4 ,1 0 0 $ 2 4 5 ,8 6 0 $ 2
9 7 ,6 2 0 $ 3 4 9 ,3 8 0 $ 2 9 7 ,6 2 0 $ 2 4 5 ,8 6 0 $ 1 9 4 ,1 0
0 $ 1 4 2 ,3 4 0 $ 2 ,3 6 1 ,1 9 2
C o s t o f C o n s tr u c tio n
M a te ria ls 5 2 ,6 6 6 7 1 ,8 1 7 9 0 ,9 6 8 1 1 0 ,1 1 9 1 2
9 ,2 7 1 1 1 0 ,1 1 9 9 0 ,9 6 8 7 1 ,8 1 7 5 2 ,6 6 6 $ 8 8 0 ,2 8
9
F ie ld In s ta lla tio n 1 9 ,9 2 8 2 7 ,1 7 4 3 4 ,4 2 0 4 1 ,6
6 7 4 8 ,9 1 3 4 1 ,6 6 7 3 4 ,4 2 0 2 7 ,1 7 4 1 9 ,9 2 8 $ 3 2 8
,9 3 9
E q u ip m e n t 4 ,2 8 8 5 ,8 4 8 7 ,4 0 7 8 ,9 6 7 1 0 ,5 2 6 8
,9 6 7 7 ,4 0 7 5 ,8 4 8 4 ,2 8 8 $ 7 8 ,3 3 0
P e r m its 6 2 1 8 4 7 1 ,0 7 3 1 ,2 9 9 1 ,5 2 5 1 ,2 9 9 1 ,0
7 3 8 4 7 6 2 1 $ 1 1 ,0 0 9
45. T o ta l C o C 7 7 ,5 0 3 1 0 5 ,6 8 6 1 3 3 ,8 6 9 1 6 2 ,0 5 1 1
9 0 ,2 3 4 1 6 2 ,0 5 1 1 3 3 ,8 6 9 1 0 5 ,6 8 6 7 7 ,5 0 3 $ 1 ,2
9 8 ,5 6 8
G r o s s P r o f it 6 4 ,8 3 7 8 8 ,4 1 4 1 1 1 ,9 9 1 1 3 5 ,5 6
9 1 5 9 ,1 4 6 1 3 5 ,5 6 9 1 1 1 ,9 9 1 8 8 ,4 1 4 6 4 ,8 3 7 $ 1
,0 6 2 ,6 2 4
S a le s & M a r k e t in g
S a le s C o m p 1 4 ,2 3 4 1 9 ,4 1 0 2 4 ,5 8 6 2 9 ,7 6 2 3
4 ,9 3 8 2 9 ,7 6 2 2 4 ,5 8 6 1 9 ,4 1 0 1 4 ,2 3 4 $ 2 4 6 ,6 7 2
M e d ia D e p t 2 ,8 4 7 3 ,8 8 2 4 ,9 1 7 5 ,9 5 2 6 ,9 8 8 5
,9 5 2 4 ,9 1 7 3 ,8 8 2 2 ,8 4 7 $ 5 3 ,1 6 0
A d v e r tis in g 6 ,4 0 5 8 ,7 3 5 1 1 ,0 6 4 1 3 ,3 9 3 1 5 ,7
2 2 1 3 ,3 9 3 1 1 ,0 6 4 8 ,7 3 5 6 ,4 0 5 $ 1 1 9 ,2 4 8
M is c . 8 0 5 1 ,0 9 7 1 ,3 9 0 1 ,6 8 2 1 ,9 7 5 1 ,6 8 2 1 ,3 9
0 1 ,0 9 7 8 0 5 $ 1 6 ,2 4 3
T o ta l M a r k e tin g 2 4 ,2 9 1 3 3 ,1 2 4 4 1 ,9 5 7 5 0 ,7 9 0
5 9 ,6 2 3 5 0 ,7 9 0 4 1 ,9 5 7 3 3 ,1 2 4 2 4 ,2 9 1 $ 4 3 5 ,3 2
4
I n d ir e c t O p e r a tio n s
P r o d u c tio n M g m t 2 ,8 9 0 3 ,9 4 1 4 ,9 9 1 6 ,0 4 2 7
,0 9 3 6 ,0 4 2 4 ,9 9 1 3 ,9 4 1 2 ,8 9 0 $ 5 3 ,5 4 3
W a r e h o u s e 3 0 0 4 0 9 5 1 8 6 2 7 7 3 6 6 2 7 5 1 8 4
0 9 3 0 0 $ 5 ,9 7 7
T o ta l IO 3 ,1 9 0 4 ,3 5 0 5 ,5 1 0 6 ,6 6 9 7 ,8 2 9 6 ,6 6 9 5
,5 1 0 4 ,3 5 0 3 ,1 9 0 $ 5 9 ,5 2 0
G & A
S a la r ie s 3 ,1 0 3 4 ,2 3 2 5 ,3 6 0 6 ,4 8 9 7 ,6 1 7 6 ,4 8 9
5 ,3 6 0 4 ,2 3 2 3 ,1 0 3 $ 6 1 ,1 0 9
R e n t 2 ,5 7 0 3 ,5 0 5 4 ,4 4 0 5 ,3 7 4 6 ,3 0 9 5 ,3 7 4 4 ,4
4 0 3 ,5 0 5 2 ,5 7 0 $ 4 5 ,8 5 4
T e le p h o n e 1 ,6 0 7 2 ,1 9 1 2 ,7 7 6 3 ,3 6 0 3 ,9 4 4 3 ,3
6 0 2 ,7 7 6 2 ,1 9 1 1 ,6 0 7 $ 3 0 ,3 0 0
In s u r a n c e 2 ,4 1 3 3 ,2 9 0 4 ,1 6 8 5 ,0 4 5 5 ,9 2 3 5 ,0
46. 4 5 4 ,1 6 8 3 ,2 9 0 2 ,4 1 3 $ 4 4 ,1 7 9
M IS 4 5 8 6 2 5 7 9 1 9 5 8 1 ,1 2 4 9 5 8 7 9 1 6 2 5 4 5 8 $
8 ,6 9 6
O f f ic e S u p p lie s 4 3 2 5 8 9 7 4 6 9 0 3 1 ,0 6 0 9 0 3 7
4 6 5 8 9 4 3 2 $ 7 ,8 4 1
P r o fe s sio n a l F e e s 2 ,6 9 4 3 ,6 7 4 4 ,6 5 3 5 ,6 3 3 6
,6 1 2 5 ,6 3 3 4 ,6 5 3 3 ,6 7 4 2 ,6 9 4 $ 4 8 ,5 1 6
U tilitie s 2 4 3 3 4 2 5 1 5 9 5 1 4 2 3 3 2 4 $ 4 ,1 9 5
D u e s / S u b s c r 1 3 1 1 7 8 2 2 6 2 7 3 3 2 1 2 7 3 2 2 6
1 7 8 1 3 1 $ 2 ,1 4 2
T r a v e l / E n t 4 8 9 6 6 6 8 4 4 1 ,0 2 2 1 ,2 0 0 1 ,0 2 2 8
4 4 6 6 6 4 8 9 $ 9 ,8 8 1
B a n k C h a r g e s 4 5 6 1 7 7 9 4 1 1 0 9 4 7 7 6 1 4 5 $ 1
,7 4 5
T o ta l G & A 1 3 ,9 6 6 1 9 ,0 4 4 2 4 ,1 2 3 2 9 ,2 0 1 3 4 ,2
8 0 2 9 ,2 0 1 2 4 ,1 2 3 1 9 ,0 4 4 1 3 ,9 6 6 $ 2 6 4 ,4 5 7
T O T A L ( n o n - C o C ) 1 1 8 ,9 4 9 1 6 2 ,2 0 3 2 0 5 ,4 5
8 2 4 8 ,7 1 2 2 9 1 ,9 6 6 2 4 8 ,7 1 2 2 0 5 ,4 5 8 1 6 2 ,2 0 3 1
1 8 ,9 4 9 $ 2 ,0 5 7 ,8 6 9
E B I T $ 2 3 ,3 9 1 $ 3 1 ,8 9 7 $ 4 0 ,4 0 2 $ 4 8 ,9 0 8 $ 5 7
,4 1 4 $ 4 8 ,9 0 8 $ 4 0 ,4 0 2 $ 3 1 ,8 9 7 $ 2 3 ,3 9 1 $ 3 0 3
,3 2 3
21
April 1st 1998John EslerFranNetPatio Room IndustryCraft-
BiltPatio Rooms of AmericaTeam
BuildingMarketingCompetitionProduction & OperationsIssues
with Craft-Bilt in Early AprilJOHN K. ESLERTotal Liabilities
& Equity
This case was prepared by Greg Ehrlich under the direction of
47. Professor William Bygrave.
Ewing Marion Kauffman Foundation.
All rights reserved.
David Pearlman
David Pearlman was just about to finish his first full week of
business. He
already had two offices, the basement of his parents’ house and
the back seat of his 1973
Chevy Grand Prix. It was unclear which was more spacious, but
the rents in both were
quite favorable. It was Friday afternoon and David was busy in
the basement office.
The summons was hand delivered to the house on Friday
afternoon. I
had never had any legal problems before, and had certainly
never been
served a summons before. My previous employer was suing me
for
$100,000, breach of fiduciary responsibility and was seeking
injunctive
48. relief.
This was not exactly the storybook beginning for a new business
venture, but one that is
becoming more commonplace. Starting a new business is tough
enough, but add in a
lawsuit and many would be tempted to throw in the towel.
There was no love lost
between David and his former employer and David was not
about to roll over and play
dead. He could not bear to give Alvin the satisfaction, and he
did not have much to lose.
He had no savings, and did not own a thing except for a 15-
year-old car for which he
needed his mother to co-sign the auto loan in order to have the
note approved.
David B. Pearlman
David Pearlman grew up in Salem, Massachusetts. His mother
taught hearing
impaired students and his father was a Certified Public
Accountant. David attended
public schools until high school, when he attended St. Johns
Prep in Danvers,
49. Massachusetts. While in high school David worked at MVP
sporting goods, Eastern
Mountain Sports and Hilton Tent City. He loved to sell and
thrived on his ability to
explain his knowledge of products to customers to help them
make the correct purchasing
decision based on their needs and price range. While working
in these retail positions,
David was keenly aware of the salesman who regularly came in
to the stores to meet with
the managers. They did not all appear to do a great job, but
every one of them appeared
041-C98A-P REV
Arthur M. Blank Center
for Entrepreneurship
Babson Park, MA Phone: 781-239-4420
02457-0310 Fax: 781-239-4178
Rev: 11/08/02 URL: http://www.babson.edu/eship
2
50. to be making plenty of money. David did not know a lot about
what these salesmen did,
but felt pretty confident that he could do that job.
Following high school graduation in 1983, David attended the
University of
Massachusetts at Amherst. He initially was interested in
becoming a veterinarian, but
after a year of cleaning out farm stables, he decided to major in
history. David was an
average student and was not very motivated by school. He
stretched out the four-year
undergraduate program into five years, hoping to find his
calling. He thought he might be
interested in the law. He worked at the District Attorney’s
Office of North Hampton,
Massachusetts during his senior year and although he found it
interesting, he knew that
law was not going to be the right career for him. David
graduated in the spring of 1988
with the same dilemma most history majors have—what type of
job can you get with a
history degree?
51. Birth of a Salesman
David’s first job as a college graduate was in 1988. After
graduation he joined a
manufacturer’s representative—as sub-representative—of winter
sporting goods (skis and
snowboards) within the six New England states. He worked
with this company for about
six months and did a lot of traveling, much more than he wanted
to do and the financial
rewards were far smaller than he felt his time contribution to be
worth. An opportunity
came along for another sales position and he took it. He was
now selling children’s
clothing for a man who represented London Fog. He did that
for about six months but
didn’t enjoy it. He did not enjoy the products and he felt that
liking the product you sold
was very important to being successful in sales.
David then contacted a headhunter to help him find a sales job.
In the process of
inquiring if the agency placed people in sales positions, he
ended up accepting a sales
52. position with that particular employment agency. The agency
did not place clients in the
sales field but in the banking and accounting fields. He found
the training he received at
this job to be invaluable. “They train you to sell as well as you
possibly can. I didn’t
make a lot of money, but I learned a lot.”
Manufacturer’s Representative in Housewares
After six months of working at the employment agency, David
was getting the
itch for change again. A friend of his mother mentioned to
David that he had a friend,
Alvin Peters, who ran a manufacturer’s representatives business
in housewares in New
England. Peters Associates represented manufacturers,
importers and distributors of
houseware appliances, gadgets, cookware and a variety of
tabletop items. As a
manufacturer’s representative they served as an intermediary
between the parties they
represented and the retail stores and chains. Manufacturer’s
representatives did not own
53. the products they sold, but made a commission of 6-9 percent on
all of the sales they
brokered between the parties. Alvin was looking for someone
to handle a certain part of
New England. David thought it sounded like an interesting
opportunity and he met with
3
Alvin. His initial meeting with Alvin piqued his interest. Alvin
took him on the road to
meet with a few of his accounts.
He lured me with something that I knew was kind of false at the
time.
He said, ‘Well I’m not getting any younger [he was about 55 at
the
time] and I have kids that don’t want to get involved in the
business,
and who knows, this could all be yours’.
David accepted the position, because it seemed more interesting
than what he was
presently doing as a headhunter, and began working for Alvin in
January of 1990.
54. Peters Associates
David was considered an “independent contractor”, not an
employee of Peters
Associates. This meant that he was basically self-employed and
was responsible for his
own expenses including telephone bills, gas, car repairs,
postage, tolls and travel
expenses. David’s title was “sub-representative”, which meant
that he wasn’t the primary
representative of the line but was acting on behalf of the
primary representative, in this
case Peters Associates. It was a general industry practice that
you could work as a sub-
representative covering the lines of a primary representative
while also representing lines
of your own, as long as the lines did not present a conflict. For
example if you were sub-
representing a line of coffee makers, you were prohibited from
representing a competing
line of coffee makers of your own. However, if the company
you were acting as the sub-
representative for did not represent a coffee maker, you were
55. free to represent one
yourself. David handled the retailers for Peters Associates in
Massachusetts and Rhode
Island while another sub-representative handled Maine, New
Hampshire and Vermont
and a third covered Connecticut. David only acted as a sub-
representative of the lines,
which were carried by Peters Associates, while the other two
sub-representatives also had
lines of their own. Alvin handled most of the larger retail
chains throughout all of the
territories and Alvin’s wife ran the office.
Alvin’s wife was mean. She was unpredictable and deceitful.
Alvin
was also dishonest and was not up front with me. Between the
two of
them they were terrible. They would yell and scream and they
were
irrational. They didn’t pay me very well either. I was on
straight
commission, but there was a draw against the commission. If
they
didn’t think I knew about a sale to one of my accounts, because
56. the
sale was written directly through the office, they wouldn’t pay
me a
commission on it. As for the commissions they did pay me,
they were
paid on a commission statement such that I couldn’t track
anything. I
didn’t feel like I had any recourse. It was basically, if you
don’t like it
you can leave.
Aside from the work environment at the office, David
thoroughly enjoyed the business
and he felt he was very good at it. He liked the traveling and
loved meeting with his retail
4
accounts. When they had questions or problems he would seek
guidance from Alvin.
Alvin usually told David to talk to the manufacturer or find the
answer himself when he
was in the office. This autonomy aided in David’s complete
understanding of the
57. business, as he would handle nearly all functional aspects of the
firm. It also helped him
develop relationships with the manufacturers, distributors and
importers that Peters
Associates represented.
Tradeshows
There are two major gift shows for the housewares industry
each year that David
attended for Peters Associates. The National Manufacturers
Housewares Association
Show in Chicago is held every January and the New York Gift
show every February. In
1990 David attended both the Chicago and the New York show.
The trade shows provide
an opportunity to meet with the manufacturers, importers and
distributors as well as the
retailers. The main purpose for these shows is to solidify
existing relationships and
develop new ones (i.e. pick up new lines to represent).
In November 1990, David was getting near the end of his rope
with Peters Associates.
58. He had worked with them for almost one year, twice as long as
any prior job he had held.
He decided that it was probably time to give law school a shot.
While continuing to work
at Peters Associates, he took the LSATs and was getting
information on various law
schools in Massachusetts.
In the meantime, he still needed to make a living and was biding
his time with Peters
Associates. In late February 1991, David attended the New
York Gift Show. On the
night of his arrival at the show he had dinner with Steve
Monroe, another sub-
representative of Peters Associates. Steve had been in the
business for more than five
years and carried some of his own lines in addition to the ones
that he acted as the sub-
representative for Peters Associates.
That evening David told Steve that he was fed up with Peter
Associates and was planning
to leave. Steve suggested to David that if he was so dissatisfied
he should try to pick up
59. some lines on his own. David had not really given this option
too much thought in the
past, as he was only 25 years old and thought of himself as
relatively inexperienced.
Steve’s comments that night did a great job building up his ego,
but David was still intent
on going to law school.
Mr. Pepper
The next morning David attended the gift show. He started off
the day helping
one of Peters Associates manufacturer’s, Mr. Pepper run their
booth. Mr. Pepper is one
of the largest manufacturers and distributors of peppermills in
the world. They carry
about 100 models at any given time. The present owner’s father
had started the business,
but it was his son who had carried it to another sales level.
They have distributors in
about 70-75 different countries.
5
60. David ran the booth with Mr. Pepper’s National Sales Manager,
Sharon Stengel, helping
her write up orders for retailers. He had developed a nice
working relationship with
Sharon over the past year, and she had recognized the growth in
the business in David’s
territory. David planned on helping out at this booth for a few
hours and then going to
help a couple of other Peters Associates manufacturers with
their booths afterwards.
While working with Sharon at the booth, she told him that Mr.
Pepper was going to be
letting Alvin go as the representative for their line. She told
him that when he heard
about this from Alvin, she wanted him to know that it had
nothing to do with him. She
told him that he had always done a nice job for Mr. Pepper.
David spent the rest of the
day working the other booths as he had planned, but in the front
of his mind he was now
giving some serious thought about going out on his own.
The next morning David went back the Mr. Pepper’s booth and
told Sharon that he was
61. going to be going out on his own. He asked her if Mr. Pepper
had already decided on
who would be representing their line in New England. She said
that a decision had not
been made but that the issue would be discussed over the next
few weeks. She asked
David if he had put together a group yet, and he informed her
that he was in the process
of building one. He asked her if she would consider him to
represent the Mr. Pepper line
and she said that she would.
David had to act quickly. He talked to several people he knew
in an effort to put together
a team that could handle the Mr. Pepper line if they offered it to
him. On March 14, 1991
Sharon called David to tell him that Mr. Pepper was going to
ask him to become the new
representative of Mr. Pepper for New England on a six month
trial basis. David could
feel his heart pounding with excitement. He assured Sharon
that she would be making
the right choice and that he would do a great job. He told her
that after six months if they
62. were not completely satisfied, they would not have to fire him
because he would resign.
Four days later, Mr. Pepper informed Alvin that they were
terminating their relationship
with Peters Associates. David continued working for Peters
Associates until he resigned
on March 23, 1991. On Monday, March 25, 1991 Mr. Pepper
officially offered David the
New England territory and he accepted.
David knew that it would not be long before Alvin heard that he
was the new
representative for Mr. Pepper. He decided that the best thing to
do would be to call Alvin
and tell him personally, rather than let him hear it from the
“street”. On Monday, exactly
one week after he had started representing Mr. Pepper, David
placed the call to Alvin.
Before David could say anything, Alvin told him that he had
heard that David was
representing Mr. Pepper and said: “You will be hearing from
me.”
Four days later, David “heard from Alvin” in the form of a hand
63. delivered summons to
his parents’ house. David was uncomfortable as he was
charting some unfamiliar
territory. He had never been served with a summons before.
Alvin’s summons included
three separate requests. It was seeking injunctive relief to
prevent David from
representing Mr. Pepper until the entire lawsuit was
adjudicated, it claimed that David
6
had committed a breach of fiduciary responsibility, and it was
asking for treble damages
totaling $90,000 which was three times the lost annual
commissions which Peter’s
Associates would forgo by losing the Mr. Pepper line.
I knew the lawsuit was coming. A few days before I had
received the
summons, Alvin had called Mr. Pepper and told them that he
was
suing me. He told them that he did not want to involve them
and that
64. if they let me go now it would not go that far.
David was afraid that Mr. Pepper would not want to get
embroiled in his fight with Alvin.
If they backed out now he would have understood. Luckily,
they became defensive when
threatened by Alvin and decided to stand behind David. David
viewed Sharon Stengel,
who was just a few years his senior, and the owner of Mr.
Pepper as gutsy people. The
owner was somewhat of a rebel and an entrepreneur himself and
was not going to be
bullied. He told Alvin “sue away and we’ll see where it goes.”
Motion for Injunction
I told one of my best friends, Morris Porter, about the summons.
Morris slapped me on the back and said ‘Boy, I wouldn’t want
to be in
your position’. So that’s how the lawsuit started. Friday night
I got it.
I didn’t sleep very well that weekend. I didn’t have any money
to lose
and I was not concerned with him taking what I had. The
65. biggest
concern I had was the injunction he was seeking to prevent me
from
representing the line. That was the biggest concern I had. I
was not
concerned about the money. I was not concerned about
anything else
except for the injunction. I knew exactly what he was doing. I
called
Mr. Pepper and I said I understand you got a copy of the
lawsuit. They
are trying to stop me from selling your line, if the injunction
goes
through, I obviously can not represent the line, so I will resign.
They
understood the situation and were supportive.
On Monday David called an attorney to represent him.
Unfortunately, Uncle Bob was in
the process of retiring, and he did not want to take the case. He
recommended David call
the firm of Kraft and Hall, and talk to David’s cousin Phillip
Kraft, Esq. Phillip was a
Harvard Law School graduate and had worked for a few large
66. Boston firms before
starting his own firm with his father.
I didn’t really know Phillip very well. I called him and
explained the
situation. I told him I really don’t have a lot of money. He said
don’t
worry, I’ll give you the cousin’s discount. He charged me only
half his
normal hourly rate and let me pay as much as I could when I
was able
to.
7
The hearing for injunctive relief would be held two weeks later.
In the meantime, David
was free to continue selling Mr. Pepper’s line. This should
have been comforting to him,
but he ran into operational problems he had not foreseen.
Within one week of receiving the summons, I had my car stolen
in
67. Connecticut. It had all my samples and everything inside of it.
I slept
in a hotel and when I came out in the morning the car was gone
and
there was glass all over the ground. I had all of my orders in
the car. It
was crazy. The case was going on, the injunctive hearing had
not yet
taken place, and I wondered how could it get any worse. I
drove back
300 miles through the state of Connecticut picking up the back-
up
copies of the orders from all of my customers and re-writing
them so
that I could place the orders with Mr. Pepper. I had Mr. Pepper
over-
night me new samples. The car was found a few days later. All
the
samples were gone. But there were pink fuzzy dice hanging
from the
rear view mirror. I thought that was very odd at the time. Two
years
later I saw Alvin Peter’s wife driving her car with pink fuzzy
dice
68. hanging from the rear view mirror. I’m not saying there is any
connection, but . . .
The hearing for injunctive relief was held in Salem District
Court. Prior to the hearing
both parties filed their motions. The plaintiff’s attorney,
Harvey Hilo, filed a five-page
motion entitled “Brief of Plaintiff in Support of Request for
Preliminary Restraining
Order”. David’s attorney filed a thirteen-page motion entitled
“Defendant’s
Memorandum in Opposition to Plaintiff’s Prayer for Injunctive
Relief”. David felt he had
a good case and was confident, but all that changed as soon as
Attorney Hilo began
speaking.
[Attorney Hilo] said ‘this young guy steals the business from
this man
who is getting ready to retire’. Every other word out of his
mouth was
‘steal’, and each time he said it he was a little louder. I put my
hand on
69. my head. I thought that I was sunk. My cousin spoke second.
He said
contrary to what my ‘brother’ has said, this is the nature of the
business. He then produced an affidavit from the national sales
manager from Mr. Pepper stating that Alvin would have been
fired
with or without David, and that helped quite a bit (see Exhibit
1).
Attorney Hilo argued that David could sell Mr. Pepper to any
accounts he wanted as long
as they were not Alvin’s accounts. Basically, this would mean
that David could not
represent Mr. Pepper as those consisted of most of the major
accounts in New England.
He then argued that David should be allowed to sell to all the
other accounts until the
lawsuit has been ruled on. David’s cousin explained how that
would effectively put
David out of business. The entire meeting lasted a couple of
hours.
70. 8
About a week and a half later both parties returned to Salem
District Court. David felt
butterflies in his stomach. His fists were clenched and he
gritted his teeth as he awaited
the ruling from the judge. The judge announced [in the case of
Alvin Peter’s Associates
v. David B. Pearlman] “motion for injunctive relief denied”. It
was music to David’s
ears.
Once the injunction was denied I was excited and I worked
hard. I was
on the road five days a week. I worked 18, 19 hours a day. I
didn’t
sleep. My office was in my parent’s basement. I sent faxes at
three in
the morning. It was the greatest and the toughest year of my
life. Here
I was starting what I called an ‘empire’ but was more like an
anthill. It
was mine and I never had so much success in my life. I had
nothing to
lose and everything to gain. Not only did I have the challenge
71. of
starting the business but I had the lawsuit [still looming] and
that made
the challenge greater and more stimulating.
A Two Pronged Attack
Alvin’s other tactic was to spread rumors about David. He was
telling people
David had an affair with the Mr. Pepper’s sales manager in
order to get the line. “He was
very nasty. I must have had five people ask me if I really slept
with her. Alvin never
gave up, he pursued it up to the end.”
Alvin quietly spread rumors about David any chance he got.
His rumors were effective in
keeping David from selling to two of the larger New England
retail chains. David first
became aware of what was happening when he was attempting
to pick up another line.
The manufacturer was doing a reference check on David. They
were getting some nice
recommendations until they called on one of their largest retail
72. accounts, Table Tops
Plus. The buyer said that he knew David had stolen a line from
Alvin. He told the
manufacturer that he did not want to deal with David and that
he would only deal directly
with the manufacturer. The manufacturer told David that they
would hire him to
represent their line in New England, but Table Tops Plus would
be a house account
because the buyer did not want to deal with him.
That was the first time it hit me what Alvin was doing. This
was a
major account that I was not able to sell to. I immediately
wrote a
letter to the buyer of Table Tops Plus which basically said: ‘I’m
25
years old. I just started the biggest undertaking of my life.
Against all
odds I started this business. I work many hours and all I ask is
that I’m
treated fairly and given an audience with every buyer who could
sell
my product. If you never buy from me I will not be insulted,
73. but if you
don’t allow me to come in, then you could put me out of
business.
And that is not right. If you truly know Alvin and he is truly a
friend
of yours, then you must know that what happened to Alvin was
not my
fault’. I sent that letter and called him a week later. He took
my call
9
right away. He was clearly embarrassed when we talked. He
said ‘it’s
not that I don’t want to deal with you’. I said ‘great, when can
we
meet’? We met three weeks later. Now he’s one of my biggest
accounts.
A similar problem occurred at Lechmere. For over a year the
buyer, who was a good
friend of Alvin, would not buy a thing from David. He would
take his calls but never
bought anything.
74. After about a year and a half I called and said ‘I hope you don’t
mind, I
call you a lot and you never buy anything.’ He said you have
more
energy than anyone I deal with, keep calling and eventually
you’ll have
something that I’ll buy. Ultimately I ended up doing a great
business
with them.
Pearlman Associates First Year
Every October business normally slows down. But I kept
writing orders. I
opened about 171 new accounts for Mr. Pepper in New England
that first
year. They already had 600 New England accounts. There
weren’t
anymore to be had. There was no stopping me. I went through
the entire
customer list. I activated inactive accounts and sold to
customers who had
never bought before. I won the award that year at the National
75. Sales
meeting held in Chicago for the rep. who opened the most new
accounts,
and they gave me a big plaque. I picked up another line which
is now one
of my best companies. They started with $48,000 in annual
sales in New
England. I did $75,000 with them my first year. I was their
number one
salesman. 1991 was the best year of my life. It was a year I
will never
forget. I made $60,000 that year. That was more money than I
had ever
made. I was happy.
10
Exhibit 1
COMMONWEALTH OF MASSACHUSETTS
ESSEX, SS. SUPERIOR COURT
76. CIVIL ACTION NO: 91-2146
ALVIN PETERS ASSOCIATES, INC., )
)
Plaintiff )
) AFFIDAVIT OF
V. ) SHARON STENGEL
)
DAVID B. PEARLMAN )
)
Defendant )
I, Sharon Stengel, state of my own personal knowledge the
following:
1. I am the National Sales Manager for Mr. Pepper Inc. (“the
Company”). My business address is 145 Flatwood Avenue, San
Francisco,
California. I hold a bachelor’s degree from Stanford University
77. and I have
been with the Company for the past four and a half years.
2. The Plaintiff Alvin Peters Associates, Inc. (“Peters” or
“Peters
Associates”) has represented the Company in New England for
the past nine
years. For the last several years, we have had discussions
within the
Company about dropping Peters and hiring another
representative. Among
other things, the Company was displeased with Peters’ lack of
cooperation
with us, especially as regards to his response time to the
Company. More
specifically, there was a period of time when he would not
return calls to our
Vice President, Ron Petrocelli. In addition, we were never
pleased with his
failure to call on our target customers, nor the fact that two key
accounts
(Zarron’s and Lechmere’s) were lost in 1990.
78. 11
3. In late January, 1991, the Company, after considerable
discussion, determined to terminate its arrangement with Peters
and to seek
other representation. The Company’s decision to hire a new
representative
had nothing to do with the Defendant David B. Pearlman. It
was based
solely on the Company’s increasing dissatisfaction with Peters
Associates.
4. I attended the New York Gift Show in New York from
February
24, 1991, through February 28, 1991. At the show I manned the
Company
booth. By the time of the gift show, the Company had already
decided to
terminate Peters but had not yet notified him of the termination.
This
termination would have taken place at the gift show, however,
Alvin Peters
was only at the show one day, and we were very busy, since it
was the
79. opening day of the show.
5. In the course of the gift show, I saw and spoke with the
Defendant David B. Pearlman who was, at the time, working as
an
independent contractor for Peters. David was the “sub-rep” on
the “Mr.
Pepper” product line manufactured by the Company. David had
always done
an excellent job for the Company. He knew the product line
well and had an
outstanding manner in dealing with customers.
6. In my discussions with David during the gift show, I
informed
him that the Company had decided to terminate its relationship
with Peters
Associates, before I knew David was starting his own group. I
told David
directly because he had worked the line the hardest, and spent
tremendous
effort to grow Mr. Pepper sales. I was disappointed that we
were losing good
sub-reps by making this change and felt obligated to tell David
80. directly since
he had worked our line the hardest. Later in the show, David
said that he
12
was thinking of going out on his own. I made no offer or
assurance to him of
any kind regarding his taking over the representation of the
Company.
7. While David expressed to me he was personally dissatisfied
with
his job, he made no critical comments about how Peters
Associates handled
the Mr. Pepper line. David neither impugned the Plaintiff’s
business nor did
he suggest or request that the Company terminate Peters and
turn the
business over to him instead.
8. I returned to the home office in California after the gift show
and had further discussions within the Company, this time as to
whom to
81. hire. We were considering hiring another group but finally
decided to ask
David to become our new rep.
9. I first notified Alvin Peters on March 18 that the Company
was
letting him go. I then notified David on March 25 that we
wished to hire him
as the new rep. David continued to write numerous orders
through the
Plaintiff’s office up until the very day he resigned from the
Plaintiff on March
23.
10. Even if the Company had never had any dealings with the
Defendant, the Company would have terminated the Plaintiff as
its New
England representative. The Defendant in no way, caused,
contributed to, or
hastened the Company’s decision.
FURTHER YOUR AFFIANT SAYETH NOT.
Signed under the penalties of perjury this 15th day of April,
1991.
