Are additional companies worth the investment for distributors?
Utilizing Engineering Resources at Zinter Handling
Saratoga Crane & Monorail manufactures overhead cranes and other material hand-ling equipment from the Zinter Handling facility using employees that it leases for a fee from Zinter Handling. In total, 30 employees feed both companies. “We set it up that way for practicality, to take advantage of the infrastructure already in place at Zinter Handling. If we don’t take advantage of the duplication within the two organizations, our expenses will rise,” Zinter says. About 20 percent of the employees’ time is centered on Saratoga Crane & Monorail and about 80 percent on Zinter Handling. Lawrence Zinter serves as Saratoga Crane & Monorail president.
Cost control is of special importance at Saratoga Crane & Monorail, which does not deal directly with end-users. Its products are very cost-sensitive because the distributors need to be able to add their costs on top and still compete. “We strive to keep Saratoga Crane & Monorail’s overhead extremely low, making it better able to compete and give our distributors a good solid price that they can take to the marketplace,” Scott Zinter says.
“It is a lot of work having a second company, so make sure there is a true purpose for the spin-off that can not be handled by your original company.”
It didn’t take long for the differences to emerge between the two different styles of companies. “With Zinter Handling, a lot of the emphasis goes on the service side of the business, whereas Saratoga Crane & Monorail utilizes the engineering infrastructure that we have in place without all the difficulties that are associated with 24/7 service,” Zinter explains. The difference was particularly driven home during the development of marketing tools such as sales brochures, letterheads, envelopes and other promotional items. “We more or less created everything from scratch, and it was different than what we were used to because it was directed for distributors rather than end-users.”
The Atlas Companies Set Up Separately
Five corporations comprise The Atlas Companies (Schiller Park, IL): Atlas Toyota Material Handling, a distributor of forklifts and attachments; Atlas Mid-America Energy, a propane distribution firm; Atlas Bobcat, a distributor of construction equipment; Atlas Material Handling, a supplier of racking and wire products; and Atlas First Access, a distributor of sweepers and cleaning products.
Each corporation has its own name under the banner of The Atlas Companies and is run by CEO Howard Bernstein, who says, “We wanted to be diverse. We chose to make them separate corporations so that the management teams could have independence and eventually have the capability to split off if we so chose. That hasn’t happened, but that was the reason.” Each corporation has been around virtually from the outset of the company in the 1950s.
The five companies each have their own separate locations, including branch locations, but the company’s main facility in Schiller Park serves as headquarters for all. “You might say it’s like a holding company,” Bernstein says. “We have one accounting department and one advertising department for all the corporations, so we get the advantage of consolidated management and sharing of facilities.”
The diversity is important for generating new clientele. “Our construction equipment has a different base of customers than our material handling equipment, so our mailing list and advertising are directed toward different people. Our propane company has another base,” Bernstein says. “Yet our advertising head is one and the same for all the corporations. Each corporation has its own name under the banner of The Atlas Companies.”
Bernstein could have set everything up as one corporation and admits it may even have been easier to do so. But this way offers more flexibility. “We wouldn’t have five separate sets of books. We have to file separate income tax returns, so there is some duplication of effort in that regard,” he says. “But long range, we prefer it, particularly as the company will inevitably change hands. We have the flexibility that one corporation could remain intact just the way it is, be sold intact or be spun off very easily.”
Liftech Develops Software Company
ScottTech, an integration and software development company for warehouse projects, was developed eight years ago by Joe Verzino, president of Liftech Equipment Companies (East Syracuse, NY). “We were starting to get involved with a higher level of warehouse projects,” Verzino says. “The average lift truck salesperson didn’t have time to deal with those drawn-out, more complicated projects.”
Consequently, Verzino partnered with material handling consultant Herb Minor to handle warehouse projects. The volume of projects kept growing, and the partners eventually determined that enough business was available to create a second company. “Any time we at Liftech would get a request for a sophisticated warehouse project, we gave it to ScottTech and they’d run with the ball,” Verzino says.
Soon after establishing ScottTech, it became evident that there was a need to develop some software to track information in spinning carousels and product pickers within the warehouse projects. An employee who had written some code for the company was brought on as a third partner to help grow that end of the business. “We were very fortunate,” Verzino says. “We had a need and started to scratch the niche market that we looked to penetrate. We started on a small scale and allowed the company to grow. I think that was healthy.”
|“Be reasonable in your projections. You don’t want to put the core business, the reason for starting this business, at risk.”—Joe Verzino|
Throughout its eight-year existence, Scott-Tech has shared space at Liftech corporate headquarters. Within the last few months, ScottTech moved into new office space in the Liftech building. As an owner of the company, Liftech performs operational functions for human resources, accounting and general administration. ScottTech programmers and managers have offices, but there is less need for people to physically work in the building. Among the company’s 15 employees are people residing in New Jersey, Ohio and other parts of New York.
Positive returns on the spin-off company took a bit longer than expected, but Verzino rates the start-up about an eight out of ten. “Challenges did arise because it is a standalone business. For example, a competitor to Liftech had a need that ScottTech could help with, but he was reluctant because he thought he was feeding business to Liftech,” Verzino explains. “But ScottTech works directly with end-users, and that has seemed to work out very well.”
Barloworld Spins Off Acquisitions
Barloworld Handling (Charlotte, NC) is experienced in running spin-off companies. In 1998, Barloworld acquired a Ditch Witch business in the Southeast; it purchased a Freightliner truck dealership a year later. Barloworld sold off both companies earlier this spring. “We initially decided that we wanted to diversify away from our main product line while sticking to our core business, which is providing equipment and aftermarket service,” President Stan Sewell says. “We were looking for industrial brands that did not compete with Hyster that allowed us to leverage our ability to sell equipment, manage technicians, and provide maintenance and service contracts.”
The acquisitions were part of Barloworld’s growth strategy. “We wanted to grow, but we couldn’t do it with Hyster because we already represent such a large part of their territory,” Sewell says.
Barloworld formed a separate company for each, but provided centralized back office functions out of the headquarters in Charlotte. “We still provided information technology, human resources, risk management, accounting and payroll,” Sewell explains. “That’s where you get your synergy from multiple companies.” The two companies shared about 18 back office employees, mostly in information technology and human resources. The Ditch Witch business employed 35 people at one branch, while Freightliner had nine branches with about 500 employees.
Barloworld recently decided to sell the two companies, though it wasn’t due to poor results. Sewell says, “Ditch Witch was generating good cash flow, but we couldn’t grow it beyond the state of Georgia. What was our return on management effort for a business that is only going to have organic growth?” As for Freightliner, the truck business proved too volatile for Barloworld shareholders.
Handle with Care
Obviously, no one formula works for everyone. The above companies each have taken different approaches to their forays in establishing additional companies. Spin-off companies can be a major boon for distributors, but they must be handled properly. As Scott Zinter warns, “A lot of people set up a second company more as a way to distribute or shield assets. But it is a lot of work having a second company, so make sure there is a true purpose for it that could not be handled by your original company.”
Liftech’s Joe Verzino concurs and adds, “Too many people try to make a profit in the first 12 months, but that is unrealistic in many cases. Be reasonable in your projections. If you can’t withstand what you think is a conservative projection, then you probably shouldn’t be doing it. You don’t want to put the core business, the reason for starting this business, at risk.”
The same advice comes from Stan Sewell at Barloworld. “Look long term at your strategic plan for those businesses and know exactly what you want those businesses to achieve five and ten years down the road, and make sure you have a game plan for getting there,” he says. “More important, if you don’t get there, what is your exit strategy? You can’t be bashful about unloading spin-off material handling companies if they don’t end up meeting your strategic plan.