Dec
13
Minneapolis
debriefing

Uncommon sense

Beth Ewen,
Upsize:

bewen@upsizemag.com
www.upsizemag.com

‘Keep it simple’
is goal one for
Highland Electric’s boss

by Beth Ewen

Most troubled companies think the problem is sales, says Rick Lowenberg, meaning that they need more of them. But usually the problem is too many sales at a too-low margin. He developed these and other basic tenets of business success as a turnaround expert at more than a hundred companies, most notably Minnesota Elevator Inc. where he still serves as president. Now he is focusing his acumen on Highland Electric, an electrical service contractor in which he bought a 50 percent stake and became an owner for the first time in 2008. Any owner can apply his ideas-including a dictum to write just a handful of simple goals for only one year at a time-to shoring up their own enterprises.

Upsize: Describe your company as it stands today.

Rick Lowenberg: We got a call in the summer of 2008 from Alliance Bank in St. Paul that they had a troubled electrical contractor. At the time we were putting in a paint line at Minnesota Elevator and we were going to lose about 5,000 square feet. The building that Highland Electric was in had the space, so we relocated Minnesota Elevator to St. Paul.

In talking to the bank, we learned that Highland Electric had three distinct areas they were working in: residential, which started in 1965. And then they had their commercial division, where they were losing money, because they had underbid a lot of school work. They also were doing some commercial buildings that they had trouble with. When we bought it we were looking for the location serving the Highland area and greater St. Paul; we were looking for the electrical opportunity to serve Minnesota Elevator for its electrical needs on site; and we were looking for an office for Minnesota Elevator.

Upsize: And it’s the first company that you’ve purchased a stake in. What attracted you to Highland Electric, when you’ve looked at a hundred companies as a turnaround expert.

Lowenberg: First was geography; the other companies I’ve worked with were scattered all over. From an industry standpoint, I’ve got a a manufacturing background but we’re in a service economy, so Highland Electric offered that service piece; and then we wanted an electrical contractor that could service the Minnesota Elevator contracts efficiently.

Upsize: You said Minnesota Elevator is a $50 million company, and Highland Electric is much smaller, under $1 million. How big do you want Highland Electric to get, if you state goals that way?

Lowenberg: I don’t. We look at growing in the niche that we’re good at. We’re good in the residential area in St. Paul; we’re good on the commercial side servicing retail for trouble calls; we’re good in the elevator service side. I don’t have a set number for how fast I’m going to grow.

We were able to grow quickly over the last three years, 78 percent last year, 30 percent this year, and we can continue that 30 percent rate. We are looking at products to add, too. We sell surge protection for homeowners and small-business owners; we have a solar pole product that we’ve been trying to sell, but it’s been tough; and we have thermal imaging where we can go into a home or business and look for trouble spots with our camera.

Upsize: So when you say you don’t have a specific revenue goal that you aim for, what are you focusing on? Profitability?

Lowenberg: Certainly profitability. That’s No. 1: If you don’t have the cash flow, the profitability, you’re not going to be able to sustain the business. No. 2 is supporting the customers we have and following them in the work, otherwise you’re going to get into trouble. We’ve been able to follow property managers, for example, as they change companies.

Upsize: When you set out goals and vision for your employees and management team and your co-owners, what do you talk about?

Lowenberg: We have a process. Actually it starts in November. We meet to look at how we’re going to finish the year from a financial standpoint. And then we look at the tactics we set out the year before, for example on the marketing side. How many flyers did we send out? How many church bulletins were we in? How did we do on our lunch and learns, where we have a plan where Derek meets with our customers so many times per year.

Once we’ve put together the results we start to work in December, January as to what we’re going to do for the next year, and we bring our three electricians, our bookkeeper, our managers together and go through what we’re going to do, starting with me. It’s not complicated. It’s 10 pages, starting with me: What am I going to do? What is each person going to do?

Upsize: You mentioned Derek. I know he’s key to your operations.

Lowenberg: Derek Nissen. You mentioned lessons I’ve learned. One lesson I learned, when I bought the company I agreed to keep one of the projects, but it turned out to be a complete disaster from a materials planning standpoint, from a billing standpoint, and that’s when I made the decision to let that whole team go, and start with new. So in January 2009 I hired Derek Nissen as my full-time operations manager. Because of that baseline with Derek and then Steve Romnes, focusing on the elevator side, we started getting busy, and we added to that. Each focuses on the market they’re responsible for, and it’s been a great team.

Upsize: You mentioned the process you go through every year. It sounds quite detailed, and it sounds as though it gives everyone in the company specific tasks.

Lowenberg: Yes, even our bookkeeper has specific tasks, for example,  how can we focus on the apartment customers, how can we meet their needs? We also look at realtors, they’re a nice referral for us, because they’re trying to sell homes and when you sell a home you have to bring it up to code. Dentists, banks-they all have different needs. We try to craft a message to each of them.

Upsize: Why do you involve everybody in the company and give each person specific tasks?

Lowenberg: Well you wouldn’t want me doing it, that’s for sure! No. 2, everybody has to be on board. The electricians are the face to the customers out there, so they’re critical to knowing what our business plan is. It adds so much value because all come from different backgrounds. They can bring in their expertise. They’ve tried something with past contractors that did work or didn’t work. The bottom line is they’re a lot smarter than pushing stuff from the top down.

When a company starts to get in trouble, all the decisions tend to bubble up to the one person, the Dad who started it, let’s say, or the son who has taken over. The best ideas come from the floor, as I say, because I work with so many manufacturers. They see the issues; they live it; they breathe it. They’re going to have the best ideas all the time.

Upsize: You said that often when a company gets in trouble, the owner has started to make all the decisions. Is that a cause or an effect of trouble?

Lowenberg: There’s a lot of different reasons that companies get in trouble, but there are two or three top ones. One is they took on too much debt, and their business didn’t increase. For example I see it all the time when the Dad started his business in the garage in 1968, and moved it to a shed and did fine through the next decades. Now when the second generation comes on 30 years later they want to add to the company and the business isn’t there.

So they start to bring in low-margin work, which is another red flag. A lot of time the revenue has doubled but it’s low margin work so the profits are down.

And then you probably have a management team that’s not diverse enough for that business.

Upsize: What do you mean, not diverse enough?

In my opinion there’s three pieces of a business. You have the business development side, and then you have the operations piece and the finance piece. A lot of times the owner is really good in one of those areas, but maybe the spouse is doing the books, and the spouse is a good bookkeeper but isn’t a good CFO type. Or maybe the son is good at sales like his Dad, but isn’t skilled at operations.

The problem with turnarounds is you don’t have those three strengths in the business. You have to have those three legs that are strong, and if you don’t you’ll have problems.

Upsize: When you evaluate a company, what are you looking for in those three areas?

Lowenberg: Every industry is a little different. And so sometimes it’s important to have that industry knowledge; sometimes it isn’t. In the finance area it’s probably less important, but it’s important to know cash flow. The problem with turnarounds is they probably know their p&l well; they may or may not be managing their balance sheet well: they have too much old equipment with some value still on the books, for example. So the balance sheet is a problem and the balance sheet drives cash flow.

That’s what we do at Highland Electric: We focus on cash flow first, not on sales.

Upsize: How do you focus on cash flow, on a daily basis?

Lowenberg: No. 1 we don’t believe in a loss leader, meaning giving away work or finding a chunk of business that’s low margin thinking that you can make it higher margin in the end. So with every job we do we look to make money on it, but fair to the customer with the service we’re providing, and if you do that every day the rest will come in.

I’ve seen some companies if they have four people on their manufacturing floor they want to keep them busy all the time. People sometimes take work just to keep them busy, but the work might not be profitable and it’s difficult for the company to survive.

Upsize: Tell me more about how you focus on cash flow?

Lowenberg: We’re looking at cash weekly, and sharing it with all the employees. Some of the employees might not have interest, they’re not finance majors, but we want to make sure they understand how we’re doing on a weekly basis. Because they know if a job’s going bad.

I hear some companies saying we don’t tell our direct labor how many hours we quoted on a job, but I believe in open books.

Upsize: Why?

Lowenberg: The guys that make you the money are the guys that are out in the field. No different than in manufacturing-it’s the guys or the gals on the floor. Not the front office, never the front office. And giving them the transparency helps the company be more successful.

Upsize: Is there a third area you focus on?

Lowenberg: Certainly employee reviews are important. We just got done with a 90-day review with our bookkeeper. Then we have annual reviews. We tend to do six-month reviews where the first six months is just a review of goals and actions of the company and how they can impact the goals. Then at a year we talk money. I try to separate the discussion of goals and the discussion of money, because I was there, working for companies, and I didn’t care how I was doing; I just cared about how much money I was going to get. And then having the discussion: did you do what you said you were going to do?

Upsize: A lot of business owners hate employee reviews. Not you. Why?

Lowenberg: I love them. I think you take that money thing out, No. 1. No. 2 I try to do them all in the same month. And I think some businesses try to do it on their anniversary date, and then you have to do them every week if you have 50 employees. So I try to do it all in one week, let’s say April, and then discuss money in September. Then it makes the business planning process easier, because you’re getting all that information. Another trick to the trade is I have the employee do 95 percent of the review: here’s our evaluation form, please fill it out before they come in.

Upsize: Do you feel you get thoughtful, useful comments with that approach?

Lowenberg: Oh, the best! If you ask the employee to do it, one, they’re motivated to do it because they know it’s tied to their compensation at some point down the line. 2, most employees want to improve their job. And 3, the employee knows their job better than anyone, better than you.

Upsize: Let me ask about your former life as a turnaround expert. What’s the most dramatic turnaround you’ve engineered?

Lowenberg: Certainly Minnesota Elevator was the most dramatic. It had losses for 2002, 03, 04 and 05 and I came in 06. The bank was at its wit’s end. The owner had tried a lot of different things, John Romnes. And so by getting in there, putting together a plan, with input from their managers. We had to lay off 30 people, but the decisions were made by the supervisors.

Like I tell everyone, 80 percent, maybe 85 percent of the things I come up with the company has already tried. I take those things and implement those maybe in a little different way, with actionable results. It was funny because they had losses for three, four years but when I came in within six months they were profitable and have stayed profitable ever since.

Upsize: You said you implement things maybe in a bit of a different way than the company has tried. What’s an example?

Lowenberg: Every turnaround I’ve sat down with, they think sales is their problem. They need more sales. Where in reality they didn’t need more sales, they needed less good sales. So at Minnesota Elevator, they were quoting jobs at low margin. All that causes is if you have one little blip you’ll lose money on the job, and then you’ll cut corners.

We changed our philosophy and charged fair margins on the work, and we kept the business we were good at. I think that’s important: What are companies good at? That’s what turnaround companies have to figure out-what are they really good at?-and then go after that market. And that’s what we’ve done at Highland Electric.

Upsize: How can companies figure out what they’re good at? Does that always take an outsider to see, because maybe the owners are so enmeshed that they can’t figure it out?

Lowenberg: Well you’re tired, because cash is so tight. So you’re making decisions based on how tight cash is. You might hire someone at $40,000 instead of $60,000 because of cash, even though the $60,000 person might be twice as productive. And then you asked the question, how can you find out what you’re good at? It’s the customer that will pay a reasonable price for your service or product, is what you’re good at.

It’s a simple formula. You have your s,g&a cost let’s say is 25 percent, and if you sell it for less than that you’re losing money. Some companies try to sell some at 30 and some at 20 and figure it will come out at 25, but the problem is customers gravitate toward the lower end.

Upsize: So much of what you say doesn’t seem lofty or inspirational; it seems basic and common sense. But I get the impression that maybe that common sense, basic stuff is missing in troubled companies.

Lowenberg: Normally there isn’t a business plan that articulates simple goals, maybe five simple goals. I see too many companies that work on five-year plans and I scratch my head. We don’t know what’s going to happen two years from now, so why waste your time?

Small companies just have to worry about the next year. Put together a plan, figure out those five simple goals, and then make sure you assess, plan and execute on them. Most people kind of dabble with the plan, but they don’t execute on it.

Upsize: Why should goals be simple?

Lowenberg: Because you’ve got to explain it to your employees. We’re here today, we want to get here tomorrow, and what are the steps? If it’s complicated it’s going to be too hard to achieve it.

For example, we want to do 30 percent margin work. That’s our goal at Highland Electric. At Minnesota Elevator we have maybe 25 goals: like we ask every employee to come up with three team improvements, five individual improvements, to volunteer 8 hours of their time  outside the company and in return we give them 8 hours of vacation. Those are simple goals that the employee can do.

Upsize: You’ve mentioned the importance of measurable goals. Why is measurement important?

Lowenberg: Because people can achieve that goal and can reach for it. I see businesses who have a revenue goal of $2 million or $5 million or $50 million. Well, how can you get there? I break it down by industry, by products. What’s the revenue goal for each, and most importantly you assign someone who’s responsible for it. And it’s not just the sales manager or the CFO. It’s not one person responsible for those 10 goals; it’s probably 10 people responsible.

Upsize: As a turnaround manager, do you believe that every business can be saved?

Lowenberg: Here’s the question I usually get: what’s your success rate? It’s a good question, but it depends on how you look at it. The bank might see it as a success if you’ve sold the equipment and you’re done. My first turnaround in 1999 was a lady and her son; the dad died. I looked at their business and recommended they sell it, close it and move on. So I consider that a success. Some businesses you liquidate some, you sell a piece, you fix what you can fix because there’s a good core business there.

Can every business be saved? No. I get a call too late all the time.

Upsize: What’s different now that you’re an owner for the first time; you own 50 percent. Does that ownership stake change your definition of success? How will you know if you’re successful with Highland Electric?

Lowenberg: I don’t know. I sit on eight different boards; I’ve worked on over a hundred turnaround companies. I look at it as just another progression in my work history.

Upsize: So you approach it the exact same way?

Lowenberg: Yes, whether I own it or not. My wife asks me all the time, are you going to retire? I don’t think so. I don’t think I’ll ever retire.

Upsize: This is just what you do?

Lowenberg: Yep. Yep. On the flip side, how I know if I failed is if I get up in the morning and I don’t want to go to work, whether I own it or I don’t own it.

Upsize: What’s one lesson you’ve learned, that you’d like to pass on to other business owners?

Lowenberg: I think it’s important to do your breakfasts, your cups of coffee, your lunches, with as many people as you can.  There’s so much to be learned from other people. I sit on the University of North Dakota College of Administration board, and I tell graduates, reach out once a week.

You’re going to broaden your network. And by broadening your network you learn so much that you can apply to your job daily. Plus you can pick up the phone if you see an opportunity or if you need to pick someone’s brain. You always have to be marketing yourself, and by meeting with different people all the time it helps broaden yourself.

Beth Ewen

Editor
UPSIZE MN

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