In 34 years of building companies in the Midwest, I have learned the business is a game. By teaching strategy to employees, the people in my businesses have become empowered players, helping to transform the business from an 89 to 1 debt ratio into a company worth $500-600 million. Here is a peek at our playbook.
Down 89 to 1 – A Comeback Story
In 1983, we purchased the local truck engine manufacturing company that we worked for and soon learned that although we were trained to build engines, we were never trained to run a business. After being turned down by 50 financial institutions in two years, we ended up negotiating a loan with a bank that was in turmoil. On February 1, 1983, we purchased the company with $100,000 down and an $8.9 million loan at an 18 percent interest rate.
What we learned in the journey to raise capital is that our degrees in manufacturing didn’t matter, nor did our skills in building great products. There is a whole new metric system out there in terms of running a business. The game had begun, and we were already behind, with an 89 to 1 debt to equity ratio.
The first thing we did was put shareholder agreements in place, wanting all employees to feel that they had a personal stake in the company. Our $100,000 equity was cut into a million shares at 10 cents a share. Included in the agreement was that if any member wanted to leave, they would get 10 percent at the point of exit, with the remaining balance paid over a 10 year period. The Employee Stock Ownership Program was one of the smartest moves we made.
The next thing we did was to begin teaching our employees about the business – the game of business. In doing so, we were able to transform minds and even lives. People began to think not only about the product but the business in a more general sense.
Many were worried that they couldn’t understand financials, but we simplified it so we could teach everyone the metrics of business – balance sheets, income statements, cash flow statements, debt, and debt to equity. For every dollar of debt we could get down, we would avoid 18 percent interest so we could take a piece of that and put it into a bonus program. We ran the business as if we were going to sell it at any moment. Selling became an objective, so we worked as a team to build value in the company.
After the first year, we had our debt to equity ratio in line.
Diversification and the Huddle
Our strategy early on was to focus on the debt to equity ratio and emphasize job security. Everyone came together to get our ratio in line and after that, a conversation with a janitor led us to adopt a second strategy.
The janitor came to me. He, like all employees, had been looking at the financials in weekly meetings. He mentioned that 76 percent of our receivables were in the truck market. Since the truck market has a recession about every four years, he pointed out that we were not diversified enough, so it didn’t matter if the debt to equity ratio got in line. When the next recession strikes, we wouldn’t be able to handle the downturn and people would get laid off.
We began to realize that there is more money in building and selling companies than there are in truck engines, so we started thinking about creating more companies. We went to an OEM saying that we wanted to grow with them. We proposed setting up a subsidiary where we would each put in X percent. Our first joint venture happened in 1987 and triggered a wave of other diversification strategies in the years to come.
Knowing that business is a game, our weekly staff meetings were called “huddles.” We shared financial statements and showed how each employee was accountable for their part in how the company was running. Giving employees accountability on the financial statements created a sense of ownership and made everyone come together as a team. The income statement was our scorecard, and with it, we could evaluate how each person was doing and what value they were creating inside the company.
Suddenly people within the company started coming up with their own individual business plans. For example, we were throwing away oil coolers and one person came up with a plan and process to save them. He built his business plan off the knowledge of seeing our business plans every single week. He was given $60,000 to create this business, which would restore oiler coolers which could then be used by our company. Ten years later, someone offered $12 million for that business.
But the point is not to stay in the oil cooler business or any business for that matter. As soon as you are up and running, and you see cash flowing, it is time to diversify.
In 34 years we ended up spinning off 60 companies, including a bank which we eventually sold and a starter and alternator business that is now valued at $23 million. 14 of our companies were sold. Others were closed or merged. Today we have about 26 different companies.
Winning the Game
By focusing on value and cash flow with the intent to sell, we have enriched the lives of people in our business, in the very small town of Springhill, Missouri. There is the financial aspect of it. For example, the Employee Stock Ownership Program started at $0.10 per share and is now up to $400 per share. Over 40 employees have left with over a million dollars each.
But there is also the spiritual enrichment. We used the concept of a game to teach our people things like exits, valuations, appraisals and strategy. When we got people to the point of ‘getting it,’ it literally changed people’s lives forever. They began to think differently. They did not just think about creating a great engine. They began to think about different markets, and they thought about different opportunities.
The innovation, creativity, and entrepreneurship that has blossomed from our company has lured Fortune 500 companies to the area, benefiting our community. And within our walls, employees are empowered and know they have opportunities within the company.
On February 1, 2018, I have an exit strategy of my own. We are planning a big celebration, as we do every five years. My idea is to walk offstage, turning the company over to the people who we have been training all these years. They have successfully learned the game of business and are capable of leading the company into the future.