Case Study: Designing the Opportunity in an Embroidery Business

The Situation

A husband, tired of being at the beck and call of management while working as a supervisor in a warehouse, and a wife, whose children were now in senior high, decided to start a business and run it from their home.  They chose to start an embroidery business because it is a low-barriers-to-entry business with high margins that they could run pretty much by themselves.  They bought good, solid used equipment, set it up in their basement, and learned to operate it.  Meanwhile, each night on his way home from work, the husband would cold call three businesses to generate work.  They set a goal of selling the business and retiring when they had $1 million in savings.

Within one year, they had enough business to allow the husband to resign his warehouse job.  Their beautiful house (which they had built themselves) was located in a wonder woodland setting; the couple was warm and inviting; clients and clients’ staff loved coming to their home to pick up orders.  It was a big part of the experience of being their customer – as was the on-time delivery and high quality of production.

The Problems

As wonderful as the client setting was, just as powerful of a drawback it was to potential buyers.  Would clients stay with the business when the setting and warmth of the owners were gone?  In truth, embroidery businesses are a dime a dozen; without the draw of the location and owners (who had no employees and would leave AS SOON AS POSSIBLE when the business sold), there didn’t seem to be much point in paying for the business when a new one could be opened much more cost-effectively.

While the profit margins were very attractive, bordering on 50%, what would those margins dwindle to when the business was moved out of the house?

And the most interested parties were looking for a business for an offspring – who really weren’t interested in working the hours it took to make the on-time, high quality deliveries.

What kind of case could be built to sell this business, and cement the achievement of the owners’ dream retirement?

The Solution

In The Exit Eagle’s sale process, the first two stages are preparing the valuation and interviewing the owners for a history and delineation of the business model and components.  While interviewing the owners, they had one set of customers that really brought joy to their faces when talking about them.  This was the bouquet of Catholic schools that they had gathered as customers.  It started with the school that their kids were attending.  They would go to the school on Parent’s Day, prior to the start of the new school year, and basically transport their uniform and related inventory to the school for the school kids to try on and their parents to order.  The parents loved not having to order the uniforms and return them when they didn’t fit, and the school appreciated having this special offering.  Other Catholic schools signed up for this free service.

That caught our attention, but until we looked at culled the financial data to generate a customer profile, it didn’t really strike us as a strategic niche for the business offering.  Here’s what we discovered.

 

Category

% Customer Base  

Category

 

% Revenues

Businesses 38% Sports / Outdoor Teams 36%
Sports / Outdoor Teams 24% Businesses 30%
Individuals 19% Private Schools 20%
Nonprofits 10% Nonprofits 9%
Private Schools 3% Government 3%
Government 3% Individuals 1%
Public Schools 2% Public Schools 1%
  • Their largest category of customers, Businesses (38% of customer base) generated 30% of revenues.
  • However, 66% of Business revenue was a one-time order from a service company that had just changed its logo, so they had to buy new uniforms, coats, etc., for their staff. While such an event happened most years, it wasn’t reliable recurring revenues.
  • Sports/ Outdoor Teams had the highest percent of revenues and second highest volume of customers. But loyalty was unreliable; when the parents in charge of ordering uniforms cycled out of the parent group, the newly assigned parents usually brought in their own provider.
  • Individuals rarely had any repeat business.

BUT…

  • While Private schools were only 10% of their customer base, they were 20% of their revenue stream;

AND…

  • Because of the unique offering of coming to the school, once a private school signed on, they didn’t leave.
  • And their primary competitor in the school uniform business was a large, nationwide, highly impersonal service.

BUT…

Were there enough private schools locally that would make this a niche-worthy sector?  Further research demonstrated that there are a lot more private schools within a reasonable driving radius than any of us expected!

County # of Private Schools Subset: Catholic Schools
Westmoreland 47 11
Allegheny 130 46
Butler 24 6
Fayette 14 4
Washington 16 3
Totals 231 70

The Result

Now we could create a plan for a compelling business acquisition offering:

  • Hire a full-time machine operator.
  • Move into a new location; owners operate it for at least one year in the new location.
  • Acquire 3-5 new private school contracts to solidify the niche – just enough to secure the niche, while giving the new owner opportunity to grow the niche even further.
  • Work with the company, when sold, long enough to foster a relationship between the new owner and key customers.

The owners followed the plan and are traveling and spending time with their grandchildren today