How Small-Scale Entrepreneurs Can Compete in (Heavy Industries) Markets Dominated by International Giants

0:00I am here because I'm just an average guy, but 30 years ago I got together with some gentlemen and some partners and we did start a company from scratch, from dirt, by mortgaging our homes and 30 years later the company is doing about $150 million in sales and manufacturing, so something we did over those years we certainly must have done correctly. What I'd like to do initially is just talk about some of my personal experiences because I am a pretty average guy and some of the things I learned so if I use I some in the beginning please forgive me. I remember the first job I ever had when I was about 13 or 14 I was raised up in the coal regions in Pennsylvania in the anthracite coal region area and it wasn't long after that that anthracite became obsolete and of course the movement was to purchase bituminous coal so you can imagine it was not a very wealthy type neighborhood.

0:54But the first job I ever had, I worked in a hobby shop, and in those days, the houses were heated with coal, so my responsibility was to stock the shelves, and then on Friday night, this owner of the hobby shop would go to a flea market and sell his goods, and I had one important responsibility, and that was to keep the stove full and the furnace full of coal and had a hopper on it. And Friday night, I had to be sure I put coal in that hopper. Well, one Friday, 13-year-old guy forgot to do that, and boy, it got really cold and had a house on it. When that man came home that night and I learned one reliable one thing then early on that you had to be reliable in your job responsibility that you could easily get fired and that still stuck with me today you remember your first job day you remember learning anything from the second job I had I learned something else going to college and sometime obviously I had to

1:54I work for a building contractor and obviously working for a building contractor the chores they gave me were the chores that they didn't want to do themselves and you can get pretty bored and tired in digging holes and trenches and I remember one summer we had a job digging septic tanks we were paid three dollars a foot so you dig this hole and my partner and I we started digging and you know the first day or two you did pretty well until you got down about 10 or 15 feet and then you only did about a foot every six or seven hours So I realized then that building homes could be challenging if you're the owner of the company, but being the labor, it really, really wasn't very, very interesting. So the third thing I learned though was when I went to work in Alabama for a company called Lockheed Space and Missile Company.

2:41This was after I got out of the service and I went to work and it was back when Sputnik first occurred and, you know, people were hiring engineers. If you had an engineering degree, you could easily, easily get a job. And the first job I had was they put me in a cubicle in this large building. And honestly, I'd go in in the morning and it was dark in the wintertime. I'd come home at night and it was dark. I never saw the daylight. Now just in this cubicle, working on differential equations, and I realized that there had to be a better way. There had to be some better way of making a living with some variety in it. It was totally ennui that just captured me.

3:26I just was so bored. I said, I have to find something new. It made me realize that in my subconscious, I was starting to learn things. I was learning from mistakes. I was learning things I didn't want to do and led me on the path of being what Mark calls an entrepreneur. I remember when my daughter graduated from Auburn University four years ago. She was an English major, and she came home, and it was May, and she sat up in her bedroom. She was almost crying. She said, Dad, you know, I really don't know what I want to do. I said, what's going to happen to me? So we sat down, and we started talking on the bed. I can remember it to this day. I said, well, let's list the things that you don't want to do. And I said, could you be satisfied working in an office or a building where you went to the same desk every day and had no variety?

4:14No Variety. And she says, no, I wouldn't want to do this. But there are many people that get enjoyment out of that. In my company, we had a structural engineer. And every day, he goes into his office at his computer and he works on structural formulas and structural ideas. And he's happy with it. And he's a major contributor to the company. But for Mary, my daughter, that's not what she wanted. So we listed all the things she didn't want to do. So we were left with one or two things that she did want to do. So that embarked her on her eventual career that If you've had a chance to look at these notes, what I've done is I've listed seven or eight suggestions that you might consider if you're going to be successful in business, and more importantly, if you're ever dreaming about having your own business.

5:04And suggestion number one is to be involved with as many people and as many organizations as you can. Obviously, I'm directing that towards someone like Dick, who's relatively young compared to the speaker. But I think there are so many ways you can learn what opportunities are out in front of you. You have to have wide vision. You can't be my optic. And I mentioned here that I learned a lot initially, you know, in a health club. A health club, you can go to a health club and you can talk about someone and learn about the experiences that they have. Another good place is church. I'm not suggesting you go to church for anything other than sacred reasons, but there are really some wonderful people at church where you can learn about the experiences of so many different people. I collect antique cars, and you never stop learning.

5:52I just met somebody a couple of weeks ago who, in Birmingham, started off, he and his wife, with a gasoline station, just a simple little gasoline station, and today he has the franchise rights for BP Oil and Chevron, I bet he's a multimillionaire starting out with just a little gas station, the nice thing about the gas station business is it's cash, and that's a nice feature if you have responsibility paying taxes, I've always Dream of having a bar where people pay in cash, I think that would be a nice opportunity. In this suggestion number one, I do make one profound suggestion, that is, if you are thinking about getting into something for the first, into something for sure, you really need to have worked in that field prior to it.

6:48It would be a tragic mistake to go into some type of a business having never experienced what it's like to work in that business. I think one exception might be is if you're looking at getting into a franchise business then you are paying a franchise fee for the experiences that they can pass on to you. The second suggestion is to really recognize your weaknesses and to do something about it. When I was about 22 or 23 years old, having graduated from engineering school, you can imagine that engineers have a pretty limited vocabulary. Technically, I had a good vocabulary, but boy, I could not write. I couldn't write a paper or a report worth a darn.

7:35And I recognized that I had to do something about it. And I found the most enjoyable way to correct that weakness was to start reading novels, because in college, I never read many novels. I read technical books. I enjoyed books about Einstein and theory of relativity, but never many novels. So I started reading by an author called Taylor Caldwell. Have any of you ever heard of Taylor Caldwell? You had that? Boy, I'll tell you, she wrote probably 12 or 13 or 14 incredible, incredible books. And the first one she wrote, of course, as I mentioned, the paper is Captains and Kings. And I sat down, I read that book and I read about five or six pages and there were three or four words I never, I didn't understand.

8:21So what I did was I would write the words down and I'd write them on a little notebook and I'd keep the notebook with me. And every day I'd review the notebook and after about three or four months I realized my vocabulary was increasing and that I was correcting a weakness. So I think it's absolutely imperative if you're thinking about going into business or even if you're going to be a businessman for some other large company to recognize your weaknesses early on. The third suggestion is, as I mentioned, is don't venture into something that you haven't been in before. I feel like I've always wanted to own an Italian restaurant.

9:06I love Italian food, but it would be impossible to have a successful Italian restaurant if you'd ever worked in it yourself. You have to have, if you want to get into a business like that, obviously, Jeff, I'd have to go in and have a partner who knew how to cook because I can't cook. So he would be a key employee. And if you're going to try and structure a company like that, you would want that key employee to be locked in with you for the life of the business. And that's where you'd want to improvise and possibly make the chef a part owner in the company or give him some type of a pay package where you know he's never going to leave you and compete with you.

9:55Suggestion number four is to realize that in starting a business, it does entail combining different skills and diversities of different people. And to start a business, you have to start it with a business plan. And I guess, speaking to economic students and economic professors, you've obviously done a business plan before, but in case you haven't, can I just go over a real simple one with you? Somewhere, you should have that business plan. Yeah.

10:35I remember my dad, when he retired from Pennsylvania, came down to Alabama to be with the grandchildren. He had a dream of having a hot dog stand. So I said, Dad, let's just do a little simple business plan. And he went through his business plan, and he forgot to include his salary. So the guy actually, my dad actually would have gone into this business, Business, and it would have failed because of the fact that he didn't do the business plan. Again, being an engineer, what I've done here is imagine a company similar to the one I had, and it was involving steel fabrication. I'll talk a little bit more about it later on. But when we put our business plan together 30 years ago, it didn't take a lot of cash to start a business back in those days.

11:21I remember to this day, I still have a copy of the $5,000 check I wrote to the bank to get the business started, but it does require some collateral, some going to the bank and borrowing money. In order to do that, you have to know how much money to borrow, and that's where the business plan comes in. And again, I apologize if it's too fundamental to you, but it's a simple business plan involving something like our business, which would be steel fabrication. and I did it for one year and you notice under January I have projected sales. If you're envisioning putting a company together, chances are you're not going to book business and ship products the first month you're in business. It may take two or three or four months. Then the second thing I have is the cost of sales.

12:06In our business we had a steel manufacturing plant, so we had to buy steel, we had to buy welding rods, we had to pay welders. So you have to have some costs associated with sales in the first month even though you're not manufacturing anything because you have to have a plant superintendent, you have to have foremen, you have to hire people, you have to set up equipment, you have to set up your building and so forth. So the first month in this example, you actually do have some cost to sales. Your G&A is your general administrative cost, the cost that's fixed. That's the cost of the president, the cost of the salesman, the cost of advertising, the cost of the office, the telephone, the secretarial cost. It's always there. So in this particular example, the first year we've lost $30,000.

12:51Pretty much the second month went on the same way as I would envision our company. You're just simply not going to sell a product and ship it until some period of time elapses. So it's not uncommon for a business like ours to go two months before you actually The first month you start shipping a product, but you do have continuing costs, so now by the end of the second month you already lost $60,000. Now the third month, we finally start having booked business, recorded business, manufactured and shipped it out the door. So the first month we have shipment of $40,000, cost of sales $30,000. In this particular example, the gross margin is around a 25% gross margin. Are you familiar, Dick, with what I say by gross margin?

13:40The gross margin, in my interpretation, is the percentage of cost to manufacture the product. So if you have a, you're manufacturing a $40,000 machine, if it costs $30,000 in the plant to manufacture it, Your laborers, your material you have to buy, your welding rods and so forth, that's your actual shop cost. So what is left over is the gross margin, which in this case is 10%. This month, the third month, I envision the fact that the company now is going to start growing. So by then you probably would have hired some additional people, some salespeople, you may have done some advertising. So your G&A jumps up and for once now, instead of losing $30,000, we've only lost $20,000 that second month.

14:32And this continues on with the same type of pattern and you can see by the end of the first year, this company would have lost about $65,000. Now, in addition to this, you have to have other cash to start the company. You have to have start-up costs. You have to be able to go out and rent a building or buy a building. You've got to buy manufacturing equipment. You have to hire people and so forth. So this has to be the absolute beginning point if you're envisioning and starting any type of a business. Why does everything fall off in December here? Typically, in December is a period when not many orders are received. There's not a lot of activity. You have people taking vacations, you have Christmas holidays and so forth, so that pattern is pretty typical.

15:26I guess I subconsciously did it because in my business that actually did happen. Thanks, Mark. You sure wasn't Ford Motor Company. I wouldn't want to be involved with Ford or General Motors retirement programs right now. Once you put the business plan together, now you need certain people to have a company. Again, in my subconscious, I'm envisioning my company. And the starting point is to have to have something to sell. You have to have a product. You have to have an idea. And you certainly have to have a marketing plan. And in order to put this business plan together, Jeff, you need the marketing guy, because the marketing guy should be aware of the competition and should be able to predict the gross margin of the product you're going to sell because not knowing the gross margin, without knowing that you can't put the business plan together.

16:20You'd have to know your cost of manufacturing, what you can sell it for above that number. So the marketing guy is awfully important and you can be enthusiastic. I think every entrepreneur is enthusiastic and has a passion for it. But you must get into something like this realizing that there is going to be competition. And you're probably going to be competing against the well-established large companies, which is extremely, extremely difficult. Even if you have a unique product that you feel is unique, it may or may not be protected with a patent. But even if it's unique, believe me when I tell you, when people start observing your success, they'll be competing with you. So you have to envision this as a situation where you're always going to have some competition.

17:09The bad thing about competition is that it keeps your gross margins down. The fellow putting the ideas together then needs to absolutely be conscious and be well knowledgeable of the competition and the strengths and weaknesses of the competition. The second guy is really, really important. And I was blessed with a partner who was an accountant. And he's obviously very different from my traits. I'm enthusiastic, and boy, I go into him and say, we have to do this, we have to do that, we have to add another product, and say, let's do a business plan. Accountants, are there any accountants in the room? No accountants.

17:54I've really been blessed by having a good friend as an accountant. This guy is as tall as Mark, but he's very reserved and very quiet and very, very pessimistic about everything, I mean really pessimistic. I'm pessimistic. When we did put a plan together, as I mentioned in here, if you have a chance to look at it, I think it's a good idea to put two marketing plans together. And the sales guy, the marketing guy, the guy with the ideas on the products needs to work in unison with the accountant. And it's probably wise for the salesman, the guy with a lot of enthusiasm, to be a little bit weaker in personality than the accountant, and that was fortunately our situation, not because he was physically bigger, but he was knowledgeable from a business standpoint that I respected.

18:41So, the business plan has to be put together by the accountant, because you have to, and the accountant is critical also so that you continue to have good cost data, good sales data, good profitability data. Every month he would hand us a financial statement that not only told us what our profit was or what our losses were, but every month we had a statement that told us the gross margin of each product. So as the company grew, yes, it started off with one product, general steel fabrication, but today at $150 million a year in sales, there are endless number of products. We developed products over the years, but this accountant, every month we knew exactly where we stood from a cost standpoint, a manufacturing cost standpoint.

19:34I was asked to get involved with a company over in Georgia that's having some financial problems. They make rubber products. And the first thing I went and asked the accountant for is, let me see your manufacturing cost data. They had no idea how much it cost to manufacture their product and it was a 60 or 70 million dollar a year company. They just didn't have the accounting information to know where they stand. So in any company, whether it's a big company or small company, the accountant is absolutely vital, absolutely vital. The other thing you have to have when you're starting a business and some relationships with outside people. And by the time you get to this point, you probably have developed a relationship with some banker, an individual plus a banking company.

20:26Because in order to fund the start of this company, you probably are not gonna be able to do it on your own. You're gonna need some financial assistance. And the best thing to do is to go to a banker and develop a close relationship with him to see if he'll let you borrow the money. Now, back in the 1960s, 70s when we started this company, it wasn't this. The banking rules weren't as strict as they are today. Back then, you didn't have to collateralize everything. But I believe if you went to start a company today and you went to Compass Bank or you went to AMSAL, they would require you to provide collateral for every penny that you're going to borrow. One alternative to that is, if you don't have the collateral, is to go to a venture capitalist and venture capitalists are generally very, very wealthy individuals who have excess money that they'd like to invest in growing companies because their objective is to gain about 20% return on their investment.

21:25They're looking for a high return on their investment. So that's one possibility. I would discourage that if at all possible because as the company grows and as it becomes successful, The value of the stock is going to continually rise and it's going to be ever more difficult for you to buy your stock back, but it is one recourse to go to venture capitalists and you can go to the banker and the banker generally knows people who you can go to. I was really surprised at starting the company that we got very, very, very little, zero assistance actually from local governments, state governments. Realizing you're starting a manufacturing company, you obviously are going to be creating jobs. So you would think that the local municipality would give you some type, even a tax breaks.

22:13And I don't know whether we did it incorrectly, but we absolutely got zero help from government agencies. We had to do it all on our own. You might think, well, why don't you go public with the company, sell stock? The cost to sell stock and to develop that type of a concept is very, very expensive. Generally, companies that go to a stock option or sell it go public are companies that are already established and they need funding to supply growth. Those are the companies that generally go public. I know HealthSouth did that, for example. In our company, again, we needed, we had someone who could envision the product, who knew something about the product, And we had a darn good accountant who could put the business plan together and control cost.

23:03And again, I've got to emphasize the importance of keeping your startup costs low. I saw Mark's office today and it's a beautiful office. I can tell you in our company, we had very, very inexpensive offices. My kids, as they were going through high school and college, they'd come down and they'd laugh at it. But we kept our initial cost as low as possible. And I think that's a good rule to follow. But in a company of this type, you have to have someone who can design the product, who can engineer the product, and who can manufacture the product. So when we started our company, we realized we had to have someone that could run the manufacturing facility, who could put it together, who knew where to go out and buy the used equipment to put the manufacturing facility together.

23:50and then we needed someone who could design the product. Now that doesn't necessarily have to be an engineer, but it has to be someone who can take the idea and put it on paper in the form of a drawing that it could go into the shop and be manufactured. Alabama is a heavy industry state. There's a lot of steel manufacturing in Alabama and the supply of these skilled people is really diminishing. It's getting very, very, very difficult to hire draftsmen anymore. So these are the type of people so that you've got to have the foresight to realize you can't have them leave once you get them on board they've got to be there forever. So those are the type people that you might give minority stock ownership to. Legal. Legal help is absolutely imperative.

24:36To put the company together, you have to have a lawyer draw up all the various contracts, the stocks and so forth, and he would draw up all of your legal documents, and he's going to be required ongoing as the company grows. I'll give you an example. We had a construction superintendent who hired a worker and he was from Poland and he had a safety hat on and he had Polak on the top of his helmet, safety hat, and one day I guess he got mad at the superintendent and he filed his lawsuit against us. Discrimination, the superintendents call me a Polak. You won't believe this, but our insurance company ended up paying $40,000.

25:23It's unbelievable the number of lawsuits that you're going to constantly encounter. Some of them are trivial, but some of them aren't. We had a situation where a large crane, from an insurance standpoint, we always rent a crane with the operator. We had a situation where the operator of the crane extended a boom too far and the crane collapsed and that was about a $400,000 or $500,000 lawsuit that we got involved with so that the attorneys are always there. In the steel fabricating business, the construction business, it's dangerous. It's one of the most dangerous businesses in the world. We've had employees killed. So, having a good relationship with a reliable lawyer, knowing him on a personal basis is an ongoing situation that you have to consider.

26:13Did you have a lawyer in your company or just someone on the outside? Just the outside. I think you really, Mark, have to get into billion dollar companies or 500 million dollar companies before you start affording a legal counsel. We never had an airplane either. I always went on an airplane. The accountant said no to the airplane. Again, suggestion six is persistence. Obviously, it is important. One of the prices I paid, though, was being in the sales end of it, I had required to travel quite a bit, and that can be tiring, that can be tiring, especially when you're raising and Small Children. In those days, the children were, you know, 3, 4, 5, 10 years old. And I always had a policy that when I did travel, boy, I worked as hard and as long as I could when I was gone so that I could get back and maximize the amount of time I could be back in Birmingham, Alabama. And that meant leaving 5 o'clock airline flights, coming in the last flight at night. That's one thing I absolutely

27:26I did as a necessity. It's something that, it's a price you have to pay. And it's difficult because I remember I'd come home, and Sue would say, boy, Sean, son, he's got a problem in school, you got to go help with his math, or they did something wrong. It's so stressful. You want to come home and you want to hug him. And all of a sudden, your spouse is saying you got to discipline him. And it really, it really is can be office stressful. I think also in persistence is that you must reduce your debt as quickly as possible. What you want to do is have a company that eventually is free of your banking responsibility. Well, you're not borrowing money to operate on.

28:11And again, that's where the partner of having a really strong accountant really is an asset. I like to spend money. I do. My partner likes to accumulate money. and that is really, really an important factor in why we succeeded. He wouldn't let us spend money. For the first 10 or 15, you know, $150 million a year company. Obviously, we had to be making money. And I know up until my daughter, my one daughter went to Auburn and the other daughter went to Samford. And when the older daughter was at Samford, she'd come home and we had an average house. I didn't drive Cadillacs. I drove Buicks or Chevys. And people said, why are you working so hard? Well, what was happening during that period of time was the fact that we were reducing debt.

29:00We were getting buildings paid for. For example, we kept our manufacturing plants as a limited partnership where the owners had them, so we collected rent from those buildings. Well, it took 15 years to get the buildings paid off. And it wasn't until later in life that I started realizing, you know, I'm making money. Rather than just looking at it on paper, I was starting to get my rewards simply because the accountant was really a strong guy, and he said, we're going to reduce that. We got to the point that we weren't borrowing any money. And that made it possible to do what was right. That was, as we grew the company, we hired young people out of college. And they stayed with us for 15 and 20 years and helped us grow there.

29:45They were part of the company. They learned, we all learned together. And by retiring debt then, we had an option that was ethically correct. Rather than selling the company to a large conglomerate who'd pay two or three times book value, we had the luxury of being able to pass the company on to these young people and let them pay us over time at an affordable price, which would not have been possible if the accountant hadn't been such a strong individual. As you reduce debt and as you grow, and as a company succeeds, Jeff, what happens is people start coming to you and saying, can I buy into your company? Can I have some stock in your company? And at that point, you don't want to sell your stock, but you have another good option.

30:33And that is the option to start satellite companies. We're a steel fabricating company, so obviously we had to buy millions of dollars of steel. So we found an individual who wanted to buy stock in our company, which already told me he wanted to be an entrepreneur, he wanted to have ownership. We said, well, but what started another company? By reducing debt now, we could go to the bank and borrow money to start a separate company. So we were buying steel, so we started a separate steel warehouse company. And we were building machinery that required high strength steel, a very particular type of steel. So, we centered this warehouse business around this particular high-strength steel. Today, that steel warehouse is one of the largest warehouse companies in the United States on that particular steel.

31:21Our company went to paper mills and power plants. We worked on boilers, so we had another individual come to us and say, you guys are manufacturing auxiliary equipment and repairing auxiliary equipment for large boilers. Boilers are pieces of equipment that Alvin Power has that they put coal in, they generate steam, the steam goes through turbines and generates electricity. In a paper mill where we are in the center of the paper industry, when you're making paper, the first thing you do is you go to the forest and you cut down trees and then you remove the bark. And the bark then is not used for making the pulp or making the paper, you have to dispose of it. So what the paper industry does is they'll take all this bark and they'll put it in a pile and they'll burn it in a boiler and they will generate high pressure steam to take the high pressure steam, expand it through a turbine and generate their own electricity.

32:15Then they will use the low pressure steam to go into what's called the digesters to cook the pulp. It's like a pot. So they cook the pulp and make what's called pulp that eventually goes onto the paper machine. So all around the South, or really all around the world, you have an abundance of boilers. Our company manufactured and repaired the equipment that was not what you'd call high pressure, not thousand pound pressure, the auxiliary equipment that worked at low pressures. So we had an individual come to us and say, can I join your company? And, well, we don't want to sell any stock. He wanted to have ownership. That's the key. So he said, well, we'll start another company. So, having the accountant who made us reduce debt, allowed us again to go to the bank and borrow money to start another satellite company, which was a boiler repair company.

33:07Today they're doing around 30, 40 million dollars. We also were buying a lot of welding rods and oxygen and acetylene. A gentleman came to us and said, look, I'm working for this welding supply company. I'd like to have my own business. Can I buy into your company? I'm sorry, but there's no stock for sale. Well, the accountant reduced debt, went to the bank, borrowed money, and started a welding supply company. Eventually, we had about five or six companies that really started that way by an individual wanting to have ownership in the company, but didn't have to know how to do it, nor did he have the finances, she had the finances to do it. Thank goodness for the accountant. Suggestion seven, without question, the most difficult aspect of managing a big company or a small company or your company or someone else's company is salary management.

34:00Extremely, extremely difficult. We had superintendents, probably the most important people on a company was seven or eight superintendents who would go out on the site and wreck the equipment and so forth, and there's a big demand for these superintendents. So, we would have a situation where the accountant and the sales people would say, well, we're about to lose a superintendent. We can't lose him. Let's raise his salary. He's going to get more money at the competitor. You just can't do that because if you raise a salary for one superintendent, you have to do it for the other six superintendents. And that doesn't work. I don't know what the solution is other than to be associated with someone in management who has some, again, some accounting background. I think the accountant by his nature is just so pessimistic that he's going to maintain keeping your cost at a very, very minimum.

34:54I talk about taxes. You read the paper so often about companies that get into financial trouble because they're in trouble with the IRS because they don't pay their taxes. Your accountant is going to have an outside accounting company that's going to audit your books and do all of your taxes, but you've got to be sure that every quarter you pay your taxes. I'm ashamed to say such a fundamental thing to such a bright group of people, but there are companies that don't do that. There are absolute companies that don't pay their taxes. There's an article in the Birmingham paper about one of the CFOs at Health South Corporation. He forgot to pay his taxes for two years. I mean, I don't know how that happens, but every quarter we paid our taxes, and we had money to pay our taxes.

35:48Near the end, I'm talking about a type of business, defining the type of business, and I talk about what's called an OEM. OEM. Do you know what I mean by that? An OEM is an original equipment manufacturer. Let's say that Dick Clark wanted to start a company. Like you're reading in a financial paper today about this company, a subsidiary of Ford that got in financial trouble. They made parts for Ford Motor Company. I can't think of the name of it. But I can understand why they're in trouble because they manufactured products for an OEM, which was Ford Motor Company. In my 30 years, I could never figure out how to make money selling a product to an OEM. I really couldn't. Because if you go to the OEM, the OEM has polished purchasing agents who do nothing but buy equipment, and they'll just knock you down and knock you down to the lowest dollar possible.

36:43We had a competitor of ours who really caused us terrible problems early in the creation Company, because he somehow was selling at a price lower than what we could, and we finally figured out he went bankrupt, but he had a position in marketing that he was spending most of his time calling on OEMs. Now, in our industry, that was the boiler manufacturers, companies like Babcock, Wilcof, combustion engineering. But in Dick's business, if he's going to start a small machine shop and he is going to manufacture for a product for an automobile. It might be, let's say, a steering wheel. I mean, that's a simple case, or a gasoline pedal or something like that. He has two choices. He can go to Ford Motor Company or General Motors Company and hope he can get a contract to supply these components for that automobile.

37:36But believe me, Dick, you're not going to make a very high gross margin if you do that. Your alternative would be to go and sell that product as a replacement product to the end users. One of my partners, who I love very dearly, came to us about 8 years ago and said, I want to build a church. I want to sell my stock. So we bought him out. And he started an incredibly, fabulous, huge Baptist church up in Birmingham. And after he built the church, he fulfilled his dream. He wanted to do something. So in his church, he got to know some of the medical professors down there. UAB. And they had come up with a formula for a vitamin or a nutritious pill, a vitamin essentially. So he came up with this pill and he went to a company in Georgia. He manufactured it. And by this time, my partner didn't have much money left. He gave it all to the church, to be honest with you. So he did, was not financially strong. So he had this vitamin and he's figuring out how to sell it. Now, one thing, the easiest way to sell it would be to go to CBS or Rexall or Walmart. So look,

38:47How about you selling this for us? But you know that they're not going to give you anything for it. You're going to be working on a pencil-thin gross margin. So he's trying to sell it through manufacturer's reps. You know what I mean by a manufacturer's rep? You do this? You, Jeff? Well, there are individual people in different geographical locations that represent a number of companies. and they work strictly on a commission and the idea is if you're going to go with them it's really a smart idea initially because you don't have the cost of hiring and training your own sales force all you've got to do then is train assist these people so that's the concept that AT is going to try and do is get these people to go out and sell but I keep saying to myself AT your big obstacle is how do you know how do you evaluate the benefit of this you know that to me is the The challenge, if they could do a blood test or something, you take your vitamins and after

39:50so many months you find that your immunity system is improved, I guess. But I mean, he really, really has a problem in trying to market this product from this new company. I also had one other creed that I followed, that was to be in a position, if I was working somewhere whether it was for me or for someone else, to be in a position where I was constantly learning, constantly learning. Lockheed, that first job I had sitting in the cubicle doing theoretical calculations, Mark, I wasn't learning anything. I was miserable. And I said, I've got to get out of this. I've got to do something else. So for 35 years, I made a point of being in a position where I learned something, where you can learn constantly. I think if you're not learning at a particular position, Jeff, you've got to change. And I always taught my children, don't quit something.

40:43In closing, I made some highlights. If you're thinking about becoming an entrepreneur, I don't like to use that word, but if you're thinking about becoming self-employed, you better have an accountant as a good friend, and you ought to put together a good business plan. Retire debt as quickly as possible, minimize start-up cost, and have a good business plan. Handle the most difficult aspect of the company and that's manage salaries properly and wisely. Pay taxes promptly. I'm sorry, but we have to add that. And you've got to grow the company strategically. You have to realize that every day if you're not growing, your manufacturing costs are increasing.

41:29People are going to want cost of living raises. Price of steel is going up. So you've either got to increase your gross margin each year or you've got to increase your sales. And increasing gross margin is extremely challenging. So in your company, you've got to look at constant growth to take account of constant cost. You've got to train key employees to take over the company because you don't live forever. You never compromise your ethical beliefs, never. In a private company, of course, you think, well, you may not be tempted, but we did have a situation after about two or three years, if you recall, most everyone in this room is too young to recall, I guess, but there was a period of time about 20 years ago, interest rates were about 18 or 19 percent. Does anybody remember that?

42:19It was really difficult. The banks came to us and said, I don't know how you guys are going to do it. So we had a time where we would be required in those days to give the bank our monthly financial statements. And it would have been very easy, I guess, to be tempted to forge some numbers on those financial statements. but the five of us would never ever consider anything like that. We had to come up with our own money at one time rather than cheat on the accounting statement. So I think ethics, what can you say? It has to be with you. It has to be ingrained with you. You have to be consistent with it. And then finally, you've just got to enjoy it. It's supposed to be an hour, but I've run out. There's no participation. That's OK. We'll have some questions for you. Thank you very much, Bob.

43:04OK. Before we actually see if you've got any questions, I've got to say that I appreciated the part of your story where you talked about how your father didn't include his own salary in his business plan, his opportunity cost of going into business because that's one of the things we teach in principles of economics classes is if you're going to go from a salary to self-employment, you have to consider the cost of your time. And I always thought I was wasting the students' time with all of that analysis, thinking that everybody must realize that, so the fact that your father didn't. Mark, in economics class, do they teach students how to put a business plan together?

43:52Is that part of the economics class? No, not in economics. The business plan would come in management courses, certainly by the time you get to Strategic Management, for example. I would suppose the accounting classes would more than likely do that. I would imagine. Being an engineer, I can remember all I ever had was one English course, one economics course, and everything else was all technical. So I had to really rely on the accountant, as he was so important. But he had to rely on me, because he didn't have any vision of what the products would be. so we were totally dependent on each other

45:03Finally, a question coming from a man who married a banker, and the best man at his wedding was an accountant. You're sitting at the von Mises Institute, and your clothes was just perfect. Never, never give up. Never, never give up on your ethics or your moral standard. It seems to me like somewhere in there you want to address, and I'll be interested to hear what your comment is, it'd probably be nice to have a friendly politician. It seems like anybody today that wants to start up any business, whether it's a hot dog stand or building an automobile, the roadblocks that are put into place by the government are just insurmountable almost today as opposed to what they were 20 or 50 years ago and you know the stuff that I suffered at Ford Motor Company when I first went to work for Ford Motor Company the operating manual was about this big and you had a couple of warranty and policy manuals with cap regulations, emissions regulations, passenger strength

46:16regulations, I have no idea how young people get into the job that I did at Ford Motor Company and survive it's just so overwhelming. You didn't even Of course, well that and that had always been there, and of course they got worse as well. Well, I think you're right. In starting the business, we really got zero help from the government. I think we seeked the initiative. Well, there was no help. That kind of helped the Austrian people. But safety is such an important issue, and you have so many government regulations pertaining to safety, so many forms to fill out. And what's your advice to young people in dealing with those obstacles today?

47:18When I graduated from college, I went into service. I was a lieutenant, I had a platoon. Boy, that was so much fun to have responsibility for someone. So I think we all started a business because of dissatisfaction in working for someone else. Having someone else control how much money you're going to make. So I think when you start off, you're probably not worrying about these other obstacles that you're alluding to, but they manifest themselves pretty quickly. They really do. Having the outside accounting firm, having a good relationship with an outside accounting firm really, really, really, really was a big factor. My partner being an accountant, yes, I gave him a lot of credit for the business plan, but he also ran the manufacturing plant.

48:09So he had the problems, is it going to be union or non-union? That comes up. And our thought was, well, if they want to be union, in the Union. So, but the government obstacles are there, yeah, like I talked about the lawsuit over the guy because he said Pollock, I mean it's a true story, I bet, Ozzie, I bet you think I'm making it up, but I'm not. I have so many questions, so I'm just going to throw them all out, but two. One, I'm curious how the inflation of the late 70s affected you and your accounting standards, and how you dealt with that, and also to ask you about the The boom of the late 90s and your assessment of the impact of that on all the accounting scandals that followed.

49:16I don't know how you did it. You shouldn't have done it. But the way we did it was our salaries were very, very low. Our travel expenses were very, very low. I remember traveling in a car and going to a hotel. I didn't stay at Holiday Inn. I stayed at really, really cheap hotels where 4.30 in the morning the truckers would start their engines and they'd wake you up. So we kept our costs at an absolute minimum. And we eventually got to the point that we started getting some additional products developed that would carry higher and higher gross margins. So we are subconsciously moving in a direction where our gross margin was increasing. So we somehow weathered that storm, but we just weren't taking any money out of the company. And it was, you know, conservative management, I guess, is the answer.

50:05Now back in the 90s when they had the boom with the computer industry, Again, in Birmingham, being in the steeling, it really didn't affect us that much. It really, it really didn't affect us. What happened to us as time progressed, we got to the point where our sales costs started to come down. Well, we didn't have to go out and beg for business, not beg for business, but really work hard to attain business because people don't want to work with a fledgling, young, incipient company. They want to go to a well-established company. If you're a plant engineer in a paper mill, You make a bad decision over buying a product, you're going to pay for it. So obviously, they're going to want to go with a big established company where their risk is minimum. So where we started to experience some relief, Jeff, was as time progressed and our customer base enlarged, our sales costs essentially started decreasing.

50:59I think that's accurate. I think all of a sudden, people would start to come to us with inquiries rather than us going to them saying, would you be interested in buying this product? All of a sudden they started coming to us, where the real progress occurred was when the competitor, I mean we had about four or five competitors, we had one really key competitor who was driving our prices down and about six, seven years ago he ran into financial difficulty and when we acquired him then our margins went up and we almost had a monopoly on it to some extent, but that success in the 90s, it really didn't have much effect on our particular group of companies.

51:45We were getting our business from the paper mills, and the power plants, and the steel mills. Yes? yes well the closest I can come to is thinking that can a salesman could be a good sales manager and the answer to your question is no we didn't we didn't and Experience. All of the people in our company, we grew up as a family. We had young engineers and when we hired engineers, I didn't go to Auburn or Mississippi State to look for the brightest engineers. I didn't want an engineer with all A's. I wanted an engineer who was diversified, a guy with B's and C's who was active in different things and who could communicate, who didn't have to do what I did and read Captains and Kings twice. And those people stayed with us and we grew.

52:48I guess we did not experience what you're talking about. I guess I'm talking about Peter Pressmore. Yeah, I think that does exist. When I worked for a big company, well, when we went to work at Lockheed, I mentioned in that paper that, gosh, in 1964, if you had an engineering degree, you had a job, and the supervisor had a job. I realized I was working for a guy that knew, how do I say this, technically knew less than I did. But the Peter Principle does exist. I don't think we experienced it in our company. I think we controlled it. We had some people, for example, who wanted to be promoted to different positions and who they couldn't do it. Primarily, the specific one I'm thinking of is we had a particular salesman who was very, very good at selling.

53:37But when we put him into a regional sales position in charge of the Northeast, after about a month, all the salesmen and sales rep came to me and said, Well, I'm not going to work for this guy. I mean, he was a hell of a good salesman, but he didn't know how to manage people. He didn't know how to encourage people. He discouraged them. So that's probably the best example I could think of. But the Peter Principle is there, yes. Yeah, Jeff? Related to that, what makes a good employee? Well, I think he has to begin, he has to be ethical to start off with. He has to be an honest person. But then he is created. He's motivated. You develop him, I think. I think if he's a draftsman, and he's going in and he's doing drafting all the time, you've got You've got to go down and encourage him and talk to him and tell him he's doing a good job and tell him what he can do to be progressed, to be managing that department.

54:39If you can make that employee realize that he's not going to be in that position forever, that there's an opportunity for advancement, then you've got a good employee. One mistake I made was we had a gentleman who came to work for us, and he used the Lord's name in vain, you know, all the time, you know. That's not the kind of guy you want in your company. That's a bad employee. And what are you going to do about a guy like that? Encourage him to leave. But I think a good employee to answer the question is someone that's ethically honest, a good person. How did the steel tariffs, the pushed steel tariffs affect you?

55:47We were paying more or less for steel, then the competitors also were in the same position, and so our cost, the importance of our cost was how relative it is to the competition. So it didn't hurt us manufacturing-wise, but it did destroy a lot of the business, potential business we could get from the large steel companies. For example, Bethlehem Steel, they're no longer in business. I don't know if tariffs had anything to do with that. I think that was absolutely a case history of very, very poor management. I'll give you an example. Up at Bethlehem Steel in Pennsylvania, they built a new coke plant. What you do with coke is you take coal and you put it in this process and you drive out all the impurities. So you end up with almost pure carbon and you put that in the furnace and you make steel.

56:36We went up there and I was trying to sell them three simple fans and large fans. and what's your name? Lou. We went in there and they had four engineers from United Constructors. They were paying probably $150 an hour. They had a staff of about six people. And I went up there I guess four times to sell them. They must have spent as much evaluating the fan proposal as they did for the fans. And I said to myself, these guys aren't going Bob, is your company, would it be considered a small company within your industry?

57:37When you first started out talking about this subject, I was thinking, you know, this seems to me like an industry where the bigger you are, the more competitive you'd be and that you'd be able to drive out the smaller players in the market, and I was going to ask you about that, but it seems to me that a lot of what you had to say today was about the advantages What exists in a small company that don't exist in a large company, like the ability to, you know, pull in your costs at certain times and that sort of thing? Well, we were competing against very, very large companies, and we didn't always necessarily have the lowest price, but we probably had a better understanding of our costs.

58:30had a better understanding how to manipulate it and so forth but as we did have small companies develop that competed with us and and for a period of time those small companies do have a price advantage in some cases I guess and I'm trying to think I don't you know our company 150 million dollar a year probably you know it's broken up now but it it at one time was probably one of the largest privately held companies in Alabama I bet it was one of the ten largest but no one ever heard of us because we wanted it that way we never had our name in the papers and magazines because we didn't want competition to know what we were doing so the only way I could get to speak here was to invite myself no one ever heard of me

59:25Thank you very much.