Unlikely heroes
How two former software execs try to save Modern Bin
by Neil Orman Envision the most unlikely turnaround prospect you can for two former software entrepreneurs to try and resuscitate.
How about a 58-year-old company that distributes stodgy Old Economy wares such as steel warehouse bins, racks, shelves and lockers? Throw in deep morale problems and soured vendor relationships, and the scenario gets more interesting.
Such issues likely scared other prospective buyers away from Modern Bin – The Material Handling Group, a Savage-based company that was closing its doors in the spring of 2004. The firm’s owner wanted to retire and was making plans to liquidate the firm. Most of the workers had been laid off, and salaries and benefits had been slashed for the remaining employees.
“It wasn’t a very pleasant place to work,” says Howard Stafne, the firm’s director of operations.
Sales had dwindled to about $75,000 a month, or an annual run-rate of $900,000, from the firm’s peak monthly sales in 2000 of $1.25 million or $15 million a year. And the firm was losing money.
That’s the rosy picture Mark Sutich and Tom Tagtmeyer entered, when they paid cash for the assets of the struggling firm. (They wouldn’t share what they paid due to a non-disclosure agreement.)
The two men had sold their software and services company, Quality Business Solutions of Mendota Heights, for several million the year before, and were scouting for new opportunities. Sutich, 49, and Tagtmeyer, 43, saw in Modern Bin a firm in need of entrepreneurial energy — something they have in spades. And they saw potential beneath the problems.
“There really is no one big dominator in this market, they have a great and respected brand name, and this industry is poised to grow,” Tagtmeyer says.
Applying Warren Buffet 101, they liked that the company’s unheralded market, called materials handling, seemed to have hit bottom, and in their minds could go nowhere but up.
After contracting 1.6 percent a year between 1998 and 2003, the materials handling segment was projected to grow 4.3 percent a year from 2003 through 2008, when it is expected to reach $20.4 billion, according to the Freedonia Group.
The term “materials handling” covers equipment for handling products in warehouses such as shelves and racks, and related technologies such as conveyor belts, robots and automated-guided vehicles.
The firm also had a list of more than 10,000 former customers. And although there were a lot of (mostly small) competitors, many of them were in debt, due to the industry’s challenges and the economic slowdown from 2001 to 2003. Modern Bin is debt-free.
“These guys that have been slogging it out through all this have a lot more baggage than we do,” Tagtmeyer says.
In fact, the new owners see an opportunity to acquire some of the dozens of firms competing within their five-state territory (Minnesota, Iowa, the Dakotas and Wisconsin) and emerge a major regional player.
“This industry needs a consolidation,” Sutich says. “There are probably 150 guys selling this stuff just in the Twin Cities, but only a few of those have a warehouse and trucks.”
Another strength was the firm’s diverse revenue stream, which includes both warehouse-related products such as racks, bins and conveyor equipment, and also lockers for schools and athletic customers. (By far Modern Bin’s busiest season is summer, when it scrambles to fill locker orders for schools.) It also has a service component: The firm sends its salespeople out to evaluate its customers’ warehouse spaces and advise them on the type of materials management “solutions” they need.
Since Sutich and Tagtmeyer bought the firm, there have been hiccups for the industry newbies, but sales have been encouraging. Monthly sales have leapt nearly fivefold since they bought the firm to $350,000 in both December and January, and $370,000 in February. The new owners’ goal is to get the firm back to at least $15 million in annual revenue.
“If we can’t do that, we’ll be really disappointed,” Sutich says.
Modern Bin was founded by Al Hein in 1947 as a distributor of steel warehouse bins for General Motors. Hein worked for GM, and was encouraged by the auto giant to start the firm. GM needed steel bins, which were considered “modern” at the time, to store parts in its warehouses. These bins, which haven’t changed much in 58 years, are stacks of steel shelves seven feet high, three feet wide and a foot deep (See timeline for more history).
By early 2004, the dogged little firm had weathered numerous recessions and changed hands three times. It had always survived and continued operating. But that resilience seemed finally exhausted last year due to the combination of five years of industry recession and a tired owner.
The firm stopped taking new customers or stocking new inventory, and soured relationships with some vendors, such as JNL Wire, a supplier of wire decking. In that case, says Adrian Aguilar, the company decided to cancel a big order two days before the ship date. Aguilar, head of purchasing, had to make the unpleasant call.
“They were furious because the had been produced specifically for us,” Aguilar says.
Morale was abysmal, Aguilar says, and the firm was down to a few overworked, beleaguered employees. Aguilar himself left the company in February 2004.
In some ways, one of the firm’s greatest strengths, highly experienced employees, was also a weakness in that some were sick of the industry. For example, Howard Stafne, the director of operations, has been in the materials handling industry for 40 years, and wanted out.
“I had vowed to get out of this industry and never really did,” he says. “This time I said, ‘I’m really going to do it,’ even if it was to go sell 2x4s at Home Depot.”
Ironically, these problems made the firm a good fit for Tagtmeyer and Sutich. The two entrepreneurial veterans had no materials handling experience but a fresh perspective, general business experience and a lot of capital.
They wouldn’t disclose what they made from the QBS sale, but Tagtmeyer says it was “in the multimillion-dollar range.” Together, they’ve bought seven firms in the past 10 years, and they’ve collectively owned and managed more than 15 over their careers.
When they met, Sutich’s most prominent experience had been founding a package delivery firm called Midwest Couriers in St. Paul and buying and turning around a records management company in Fridley called All-Data, which resulted in another “multimillion”-dollar sale. Tagtmeyer had co-founded a St. Paul firm called Transitional Guaranty Agency, later renamed Education Credit Management Corp., that collects payments for educational loans.
They met in 1995 when they coached their kids’ Little League teams in Mendota Heights. They hit it off and decided to co-found QBS, a company that sells software for nursing homes and also provides general IT outsourcing.
While there, they put their turnaround skills to work again when they acquired the assets of an ailing, publicly traded software company called Health Outcomes Management, and later sold the re-packaged QBS for a tidy sum.
Their skills are a good match: The extroverted Tagtymer, who holds the title vice president, focuses on sales and marketing, and the numbers-oriented Sutich, who is president, concentrates on finance and operations.
“Tom is Mr. Outside and Mark is Mr. Inside,” says Mark Helvick, president and COO of National Benefit Resources Inc., a Golden Valley-based customer of QBS.
They also share a bottom-up management philosophy and a wheeler-dealer, profit-oriented mentality.
In addition, the two men clearly like each other and maintain a joke-a-minute banter when they’re together; and Modern Bin needed some laughter.
Their wives provided an additional spur. “Have you ever been unemployed, having just sold a company, and been hanging out at your house for great lengths of time?” Sutich says. “And your wife says, ‘Get out. Do something.’ ”
“We almost went out and rented office space, just to have a place to get away,” Tagtmeyer says with a laugh.
Finally, they liked small firms with growth potential, but also wanted an opportunity allowing them to delegate most day-to-day responsibility to others.
“We wanted to work as little as possible,” Tagtmeyer says only half-jokingly.
They discovered Modern Bin through Sun Belt Business Brokers, a South Carolina-based firm that links up buyers and sellers across the country.
The asking price was likely very cheap, but Sutich and Tagtmeyer had a condition: They wanted two of the firm’s key veterans, Stafne and salesperson Tom Corbett, to stay.
When they heard about the possible sale of the firm, Corbett and Stafne were surprised, and hesitant about committing more of their lives to Modern Bin. And Corbett had conditions of his own.
“To stay I wanted to be a sales manager, and to hire the sales people,” says Corbett, who started working there in 1971. “I had seen too many good people leaving, because they didn’t like working with this owner or that owner. I didn’t want to go through it again, because I’d been through it twice in three years.”
Sutich and Tagtmeyer agreed and promoted Corbett to vice president of sales.
Stafne, who was seven years from retirement age, was also reluctant. But he was “intrigued” by their lack of industry background and the fact they planned to give employees more autonomy, which was a far cry from many other owners in the business, who tend to keep a tight, hands-on grip on their businesses.
Stafne was also promoted, and both men received raises.
Finally, Corbett and Stafne convinced the new owners to hire Aguilar back.
“We had to get Adrian back because he brought purchasing and accounting skills,” Corbett says. Aguilar had worked for Modern Bin for five years before departing two months before the firm’s sale.
He also required some convincing, and when Sutich called to invite him to dinner, Aguilar suggested the ritzy Redstone American Grill in Eden Prairie. It was a pricey evening: “Watch out for that guy with his steak dinners,” Sutich says with a laugh.
They got in to the details of their plans “after a couple of bottles of wine,” Aguilar says.
Aguilar was charmed by the amount of information the new owners shared with him. “With most companies in this business, there’s one [owner-operator] who keeps things very close to the vest,” he says. “You tend to just do your job and not get involved. They wanted to get people involved.”
Like Stafne and Corbett, Aguliar got a bump in pay and is now the firm’s controller.
Now the new owners had the experienced trio in place who could manage the majority of the firm’s day-to-day operations. “We try to learn from these three and for the most part, stay out of the way,” Tagtmeyer says. Experienced managers also gave the two owners freedom to focus on broader strategic issues, such as acquisitions.
Inside the company, the first step was beefing up inventory. “We didn’t want any more losing deals because we didn’t have the products in stock,” Tagtmeyer says.
Next came major sales and marketing initiatives. The new owners energized the firm by hiring five new salespeople and creating new incentives, including promising to take all the employees and their families to Las Vegas when the firm has its first $500,000 month. (They came close in January, but missed it when a competitor undercut them on a big order.) They’re looking to hire more sales people and also manufacturer’s representatives to help them blanket the firm’s five-state territory, and they also started a direct mail program.
These initiatives are a far cry from the firm’s formerly old-school marketing methods, which relied completely on Yellow Pages and word-of-mouth.
In addition, PR was very important for a firm many in the industry thought was out of business. They retained a Twin Cities firm, Wax Marketing, to create the firm’s first PR program, which has already resulted in a number of articles and a TV news story about the firm’s locker business during last August’s back-to-school season.
“They want to be a player in the market and make everyone know our name,” Corbett says.
Within the firm, they’ve worked to create a happier and more growth-oriented culture, and a policy of openness and honesty with employees. They have an open-door policy with employees and share weekly sales numbers and goals. They also ask for their ideas. “Since we don’t know this industry at all, we ask employees all the time, ‘What would you do if you owned this business?’ Tagtmeyer says. “And they say ‘I’d get more inventory,’ or ‘I’d do these kinds of direct mails.’ ”
Kate Southwick, the firm’s customer service manager, says such gestures are important. She left competitor Storage Equipment last fall to come to Modern Bin, after listening to a former colleague who had already made the jump rave about the firm’s culture
“They’ve surrounded themselves with people that know the business and they are making a huge effort to learn,” Southwick says. “I think that it helps us feel even more like a team because the owners come to us for suggestions on how to do something.”
Sutich and Tagtmeyer have increased the staff from three when they bought it to 22, and it grows to about 40 when they add seasonal employees for the summer-time locker rush.
The new owners also invited vendors over to establish face-to-face contact and create a similar climate of honesty. Tagtmeyer says the firm “changed payment terms with vendors in a friendly way where everyone wins.” They even smoothed things over with JNL Wire’s ticked-off executives.
Not surprisingly, things haven’t been all smooth sailing for the new owners. Their naïveté about the industry has created occasional problems. For example, Stafne recently took his bosses to a Chicago trade show so they could meet executives from Unarco Material Handling Inc. of Springfield, Tennessee, a major supplier of pallet racks and storage systems.
During the meeting, Tagtmeyer mentioned they were looking to beef up their inventory.
The Unarco executive said, “ ‘We have 34,000 beams you can have,’ and Tom said, ‘We’ll take them,’ ” Stafne said. “He had no idea we were talking about 13 truckloads of racks. His intent was to tell these guys we’re serious about the business, but the beams themselves don’t do you a lot of good if you don’t have the uprights to go with them.”
Fortunately, Stafne was able to step in to salvage the situation, and it had a happy ending. “We worked out a deal where we bought half the beams, or $165,000 worth of product,” he says. “Now we’re heroes with them.”
And Stafne was impressed by the new owners’ aggressiveness. “The fact that they were willing to step up to the plate not knowing what all the ramifications were really erased any doubt for me about how serious they are.”
Corbett, too, says he sometimes has to rein in the new owners’ ideas. “Sometimes we have to tell them, ‘You can’t do that,’ or, ‘You can’t treat our vendors this way,’ ” he says. “Their business before was lower volume, higher margin. This is the opposite, so there are some challenges.”
A final reason the former software executives bought Modern Bin was an opportunity to inject their high-tech savvy into the firm’s old-school methods. In early March, they completed what they expect will be the first of many acquisitions when they bought a line of software products to help operate warehouses from BHK Ventures of Mendota Heights.
They’re also working on initiatives related to radio frequency identification (RFID) technology, although they’re not ready to share details there. RFID refers to wireless data collection technology that uses electronic tags for tracking and identifying products. Major companies from Wal-Mart to Boeing are adopting the technology.
“By incorporating RFID and other technologies with an old-line provider of warehouse products, we hope to rejuvenate and reenergize the company and portray our fresh image,” Tagtmeyer says.
Looking ahead, a natural question is how long two wheeler-dealers like Tagtmeyer and Sutich plan to stay with Modern Bin. They say they have no plans to leave, nor for an exit strategy such as a sale of the company or an initial public offering. “We’re getting old and this may be the one we keep,” Sutich says.
Tagtmeyer distinguished Modern Bin from the other types of firms they’ve owned. “What we like about it is there are probably invoices to 50 to 60 customers going out today,” he says. “It’s dispersed, and there’s not one event that could blow us out of the water. In software, a new software product comes out and wipes you out. If we get it up to the $15 million to $20 million range, this could be a nice Steady Eddie return, and we could work less and less.”
Today, both men say they’re enjoying themselves, because Modern Bin is growing. “You always love it when you’re on the upswing like this,” Tagtmeyer says.
“Everyone’s feeling positive and good. Every business we’ve ever had, that’s the fun part. If it turns into a cash cow, that’s great, as long as it’s still fun, and as long as we’ve got good people to run it. If good people don’t want to run it, then we’d probably have to get out.”
[contact] Adrian Aguilar, Modern Bin: 952.895.9050; aaguilar@mhgi.com. Tom Corbett, Modern Bin: 952.895.9050; tcorbett@mhgi.com. Mark Helvick, National Benefit Resources: 763.797.4922; mhelvick@comcast.net. Kate Southwick, Modern Bin: 952.895.9050; ksouthwick@mhgi.com. Howard Stafne, Modern Bin: 952.895.9050; hstafne@mhgi.com. Mark Sutich, Modern Bin: 952.895.9050; msutich@mhgi.com; www.mhgi.com. Tom Tagtmeyer, Modern Bin: 952.895.9050; ttagtmeyer@mhgi.com
