Yesterday morning I noticed that people were doing searches on "Marcus Lemonis skullduggery" but had no idea that the latter was actually a business appearing in The Profit. So I jumped to the conclusion that a few paranoid types were associating skullduggery with Marcus's deal-making style. Oftentimes people who don't understand the rules of business will suspect the worst when they don't get what they want. Instead of accepting that they are bad negotiators they will attempt to paint the other party as being somehow unscrupulous. It's rarely the case and certainly doesn't apply to Marcus.
Then by late afternoon I discovered that these searches were for the latest episode of The Profit.
After the farce of Worldwide Trailer Sales, I was ready for an episode about a serious business with real potential that Marcus could fix up and make money with. I really do try to start each week with an open mind, folks. Alas, it was not to be. We got Skullduggery instead. Over the years I have met a few toy company owners and/or CEOs and all of them were playful creative types. They have to be in order to understand what their customers will like.
In contrast, the Skullduggery office and owners had more of a Speedy Muffler outlet look and vibe than that of a creative business. Indeed many of the toys were really quite lame as Marcus pointed out early on. And what's worse, the president really couldn't relate to kids as demonstrated by his ugly reaction to the young girl at the focus group.
To recap, Skullduggery has been a small family-owned business since 1987 which designs and sells games and toys. It's currently run by the founder's two middle-aged sons. Despite being in business almost 30 years it only has $1.6 million in sales and a $50k loss in the most recent fiscal year. On top of all that it is $1.3 million in debt. At the rate it's going this debt will never be paid off.
Something is clearly very wrong here and it will be interesting to discover why.
Marcus's Growth Strategy
The reason Marcus wanted to look at the company is because he has the connections with NASCAR. He believed that he could cut a deal in which Skullduggery's toy cars could be rebranded as a NASCAR line.
Now let's do a quick overview using Marcus's 3Ps approach.
The company has too many products, or SKUs if you prefer, many of which collect dust in the warehouse instead of selling. Who's to blame for this? Clearly it's the brothers. Whether you are considering buying a company, investing in it, or making a loan to it one of the very first things you look at is the inventory. Inventory is the low hanging fruit in fixing businesses. If a company has inventory that's not moving you make it move with a fire sale. Just get rid of the damned stuff anyway that you can. Marcus had a local Dollar Store take the dead stuff away for cents on the dollar. It was the right move.
One more thing. Skullduggery? It's hard to come up with a worse name for a toy company or any business for that matter.
There were problems-a-plenty here too. The company's designer is over 3000 miles away on the east coast. The production process is highly inefficient because the production dies and molds are set up to make only four parts at a time instead of eight or sixteen. This pushes unit costs up and reduces margins. On top of all that, the boys admit that they couldn't give a fig about what kids want and simply create products that two middle-aged men think are fun. Hoo-boy!
I'll stop there.
The company is now run by Steve the president and his brother Peter the v-p. Their dad remains a shareholder but prefers to stay in the background. Steve suffers from a very bad case of foot-in-mouth disease as we saw numerous times. The first time is early on when he mimics Marcus. It took me back to high school. Another time is when he responds sarcastically to a 10 year old girl who dared to point out that one of the toys is confusing. Get a grip, man. However, the very worst case was when Steve tried to be clever at the meeting with NASCAR's V-P of Marketing by trying to flip the agenda around to "what can NASCAR do for our tiny failed business?" It didn't fly and just made him look bad.
One of the amusing things came at the end during the final blow out with Marcus. Steve and Peter are feeling Marcus's wrath and finally tell him "Well, you'll have to talk to our dad." These guys are the president and vice president of the company. They are in their forties and on top of that outnumber Marcus 2 to 1. Yet they pass the buck off onto dad? Sadly, dad wasn't open to being reasonable either. The apples don't fall far from the tree.
The Big Lessons
Here are the four big lessons from this episode:
- If your inventory is not moving, liquidate it. Too many owners hold onto bad inventory (which is cash) because they can't bring themselves to admit that they made a bad decision about what to carry. Bite the bullet and sell it for cash.
- Don't create products without any market feedback. Do your research on what's selling and use tools like focus groups, when appropriate, to understand what your market does and doesn't want.
- Finally, understand the risks of being a minority shareholder in a private company. In most cases, you will have few rights. If as Marcus explained, the majority shareholders want to spend lavishly on themselves with items such as $600K cars that eat away all the profits, that would otherwise be shared via dividends, there's nothing to stop them. Nothing.
Marcus was being perfectly reasonable in asking for a veto on all financial decisions in return for accepting a 30% stake for his $1 million investment.
- Don't be a smartass.
Could you be the next Marcus? Find out.