In Episode 51 of the “Law & Business” Podcast, we take a look at a company that makes a plush product that is also a curtain tie-back. It is a very useful product, but one that also features the ability to be very fanciful. So the group takes a look at how the Nessa Group improved its sales and revenues from many different aspects, and also looks at what to continue to improve.
Enjoy the stimulating conversation.
Anthony Verna: (00:00)
Everyone, welcome back for our fifth episode of the special mini-series with the NESSA Group. I’m Anthony Verna. Chances are you already knew that by listening to this., With us, Jim Huerta, principal of the NESSA Group. How you doing?
Hi, I’m doing well. Thank you.
And Barry Kolevzon second principle of the NESSA Group.
I’m listening to all of this.
I’m glad. I’m glad that you are. Also Wil Jacques. How are you, Wil?
How are you doing Anthony?
I’m well, thank you. And the well-dressed Scott Mautner there. How you doing, Scott?
I’m doing well, thank you.
All right. And for attorney ethics since you and I are a part of firms, what firm are you with as well?
I’m with Harrington, Ocko and Monk.
All right. And, of course, I’m the managing partner of Verna Law. But again, chances are you knew that. All right. So today we’re going to talk a little case study here. And NESSA Group had a client, one that I’m familiar with as well. We won’t mention it by name, but we will just say that their product is a curtain tie back. Jim, how’d I do with describing the product?
The current tie back has a plush cover and on top of that plush cover, I would say, is a plush figure as well. How am I doing?
You’re doing well. It’s amazing how well you are doing . I’m just listening.
Thank you, Jim. And basically, the plush part of this, what makes it attractive is that it’s in different animal shapes. Again, how am I doing with describing the product?
You’re doing very well.
Okay. Jim, Barry, let’s start with you two. This company, when you met them, was having problems. Can you describe, let’s start here a couple of the problems that this company was having?
Barry Kolevzon: (01:55)
Oh, there, there are a bunch of issues that are involved. I don’t believe that they were staffed to carry on what they had. They’re in business 15 years, 20 years, 30 years. I’m not sure. And basically they were evidently happy with where they were. Then they woke up and said, “Hey, you know, we got a problem.”
Anthony Verna: (02:19)
Well, I think a lot of a lot of business owners are like that. You’re in business for a while and it seems okay.
Barry Kolevzon: (02:25)
Well that’s a problem. That’s a big problem there. You know, they go to their buddies and talked to them and hey know everything, and the problem is evidently they don’t.
Anthony Verna: (02:39)
All right, so what would be another problem?
Barry Kolevzon: (02:42)
Well, could be the problem of whether they make the product or the sample or whatever it is in house or out house. It depends on getting…
That sounds like a supply chain issue.
A supply chain issue, yes.
Anthony Verna: (02:57)
All right. So let’s start here. When you say that the company was in existence for 10 to 15 years, but not exactly where the business owners wanted you’re talking revenue?
Yeah, they were short on revenue. That was a problem.
Okay. So let’s start here. Was there a sharp decline in the revenue or was it just the revenue wasn’t good enough?
Barry Kolevzon: (03:22)
I think they felt that it was comfortable with their been in business and the revenue amount where they’re at. And I think that they ran into a problem, and I don’t know what it might be…
Anthony Verna: (03:37)
And they didn’t deal with it.
Sure. Jim, if you’d like to jump in and go ahead. What are some of the items that you look at when a company like this has revenue problems?
Jim Huerta: (03:49)
Well, from our standpoint, when we looked at it, it was the revenue problems were amassing, actually Barry was the lead on that. But the value problem, they were starting to create burn rates that they couldn’t match against those revenues. They were making decisions that were costing them money that shouldn’t cost them. And then they were backpedaling. It was like they were playing it not to lose and they were trying to kind of burn out the clock, which was not going to help them any.
Anthony Verna: (04:18)
When you say that this company was creating a burn rate, I mean, you’re in business for 15 years, how do you suddenly create a burn rate that appears, I don’t want to say out of nowhere, but almost out of nowhere?
Barry Kolevzon: (04:30)
Well that depends whether or not a product is an in house product completely or they give it to somebody else to make it and ship it to them and somebody has a problem. The trailer load doesn’t get in and they needed it because they were running right at the edge.
Jim Huerta: (04:47)
Yeah. And it could be just to add to that, because there’s something that comes up quite frequently. I think a lot of companies when they’re making their projections and where they’re looking what their financials are looking like, everybody has propensity not to kind of consider those hours that they’re putting in. It’s almost like that’s funny hours and that it’s not important. And all of a sudden as the growth starts, they have to fill those hours with other people. Now there’s a cost involved. It wasn’t there before. Well that’s because you weren’t creating some kind of an estimate what it would cost to replace you. So that’s how I say, creating a burn rate that all of a sudden you’re doing things that you have to pay for what you were doing for free, thinking that’s the way it was going to go. And it’s not going to go that way. It’s going to eventually catch up to you. And it caught up to these guys.
Anthony Verna: (05:36)
Barry, when you were talking about the staffing problem, is that what you’re talking about? That they were short staffed, but then they had to hire?
Barry Kolevzon: (05:45)
Well, I think that they weren’t selling that much and didn’t have the money. Possibly, maybe they did. Maybe they needed to have problems with getting the product made outside even inside. And I think that it’s what Jim is saying is right. It just creeps up on you.
Anthony Verna: (06:05)
Okay. So, let’s talk a little bit about the supply chain. What frustrations existed in that supply?
Barry Kolevzon: (06:12)
Oh, well where do they get the supplies that they have to send it out to a factory to do?
Anthony Verna: (06:19)
Well, my first thought would be everything’s made in China. So that would be my first thought that it’s made in China. Is it not made in China?
Barry Kolevzon: (06:26)
I didn’t finish the sentence…
Everybody knows that in what goes on. But you get to the point sometimes in these companies where they just say, you know, we got money that can carry us another week, what do we do? And that’s a really big problem for a company.
Anthony Verna: (06:47)
Because you have to be thinking about the next sale or the next set of sales.
Barry Kolevzon: (06:51)
Well, whether or not you can pay your bills and you’re thrown out by the supplier and that’s not fun. And I think that they have to maybe periodically look at what’s going on in the marketplace of their products to see whether or not that’s making progress and their marketing is very important. And some of them say, we can get some money if we can borrow more money.
Anthony Verna: (07:18)
I have some very specific thoughts about the marketing of this product, which we’ll get to later on. Jim, did you see any particular, let’s say core corporate governance issues? Maybe the personalities?
Jim Huerta: (07:29)
Oh no. That was also, it’s a problem going in. I mean most companies that are owned by family members and that combination usually creates that problem. But one of the other things that we talk about supply chain and I think is a problem with these guys and I think this is a genuine problem for everyone. I can tell you from experience that a lot of times you go out and you create your supply chain and you go find your manufacturing spot and all of a sudden you find yourself falling in love with your manufacturer because you have a good rapport and you’re on the phone, everything else and you stop looking to find out, am I getting the best price for what I’m doing? Are my margins wide enough? Am I getting below the line, the P and L and I can absorb it, which was what’s happening to these guys.
So they weren’t really going out there and seeing if there was someone else that can produce the same thing and give them a wider gross margin. They weren’t looking at that. They were married to this guy who was taking them under, and you know, the manufacturers going concern and they’re doing okay because they have many clients. But yet our client was the one that was getting hurt the most vibe because it was sitting on very narrow margins and they couldn’t support it.
So you had to take them to another factory.
That’s what we would’ve recommended.
Anthony Verna: (08:40)
Wil, let’s talk about the niche for you and me, which is the intellectual property. I understand that you were able to file at least one patent on the product. Am I correct on that?
Wil Jacques: (08:56)
No, actually the company came to us with issued patents.
Anthony Verna: (09:00)
Okay. So everything was already set up for this company to protect the product.
Wil Jacques: (09:08)
Yeah. Yeah. But that wasn’t the issue with the company. Working with Barry, what we noticed was they weren’t exploiting the very claims that were in the patent itself.
Anthony Verna: (09:19)
Okay. So let’s go through that. They have a protected product, but they’re not selling everything that’s claimed in the in the patent.
Wil Jacques: (09:28)
Not only are they not selling everything that or selling the features of what’s claimed in the patent, there were potential infringers that were in the marketplace that we’re selling product that was very similar to theirs and they didn’t use their IP asset, I. E the patent to at least go shut them down.
Anthony Verna: (09:47)
So, let’s take that to the next step. When you see a company that’s not protecting their patents, not protecting all of the, the claims that are in them, what’s your recommendation to moving into that next step?
Wil Jacques: (10:01)
It depends on, you know, again, with my colleagues, it depends on the business, and we try not to have people focus so much on the patents as the leading point of the business. But the business is the leading point of the business.
I think we said that in the first episode of this series.
Well, you know, that mantra doesn’t change because it’s true. So, when we took a look at it, the idea was, well, where is the infringement coming from and is it worth it to potentially go after it? These what we believe to be infringers. Well, there’s a cost to that. You know, there’s no patent police. There is no one that goes and knocks on the door of an infringer and says, “Hey, you got to stop doing that.” That’s a cost that’s born by the company. And if they were already in trouble in terms of just meeting their business goals, the emphasis at the time was to continue to put cash toward that and then we could go after, you know, potential infringes of the patent.
I think that’s an important point to hammer home because I think a lot of people see, uh, some kind of IP infringement lawsuit as instant cash and as a way to change their business. And I think that you and I, and really everybody at this table has enough experience to know that it’s really the opposite, that you have to put money and resources into protecting your IP before it’s realized.
Wil Jacques: (11:27)
Let’s put it this way, a patent has zero value unless there’s a product that’s making money that it supports. So, let’s do a very simple math without going into the books of the client that we’re referring to. If it takes essentially $600,000 to one point two million just to bring the case you’re making, nothing near that amount of money and then the person that you’re going after is making even less.
So where the economics of pursuing that just didn’t make sense at that particular point in time. The economics and the business suggests, let’s figure out how to turn ourselves around and make money with our own product first.
So what suggestions did you have in terms of helping the revenue and selling the product better?
Well, actually, the patent claims came in. We’re very pertinent to that. Barry had already determined that the company had essentially a cash flow problem, and so they needed to raise money. So looking out into the market in terms of a projection, not only at their own business operations, but just looking at the space in the marketplace that was provided by that claim… a repose product, right? But one of the claims in the patent was that the repose product, you know, what a plush toys sitting on top wasn’t really the claim, the claim was the fact that there was a skeleton that was allowed in that claim that was put into that plush toy, which, to that point had never been seen. And that’s what they were not exploiting.
Understood, understood. Completely. Justin, Scott, let me bring you guys in for a hypothetical thought on a situation, on this particular situation. One of my critiques of this particular company is that the plush side of this are generic animals. And I think that they look nice and I think that yes there are parents who would certainly buy this. But to me, I looked at that and I said, “Where’s Batman? Where’s Spiderman? Where’s the Yankees? Where are the Nationals? Where are the Chiefs now that the Chiefs just won the Super Bowl?” Justin, would you take my side of this and say that, “Hey, you guys need to be a licensee and I know that that has skews, but you guys need to add a licensee to add value to this.”
Justin Tripodi: (13:56)
It’s hard for me to comment on that, exactly. Because it’s really rooted in what is their business model, what are they looking to accomplish and who is their target audience? If their targeted audience, depending on the size of it, is willing to accept animal shapes, they could produce revenue and make a successful business. To what degree, I don’t know. The thing I like about intellectual property and we’ve talked about this before, is it does give you opportunities in how you monetize. You can create a product as they did, or you can license it out. We joke about licensing as being mailbox money. It’s a little bit easier because building a product, building a brand is hard, it’s expensive and it takes a lot of time. Licensing though there’s some roadblocks potentially and it is hard to value sometimes is a much smoother path, especially if you can go forward. We still some larger companies that could insulate you. So otherwise it is hard to comment because it’s really related in their business model.
Anthony Verna: (14:48)
Sure. No, I under, I understand that that completely these guys were able to get this company a little bit of cash. What are the things that you’re looking for from a company like this to help them get the kinds of funding that they really, truly need?
Scott Mautner: (15:04)
For a company that’s been around for 15 years, it’s tough to get venture capital at any stage, right? Because at that point you’ve sort of exploited the market. We would look at it from a raising equity point of view as the company having to do a pivot. So what Justin was just kind of talking about is do you go into licensing to create better revenue streams? Do you look at where you can create new revenue models or something else? Because a company that’s been around 15 years is just a mature company and it’s, there’s not really going to be a big jump in the future and building out the business and it sounds like there may have been a scalability problem with this company. Short of that, you would do the typical things with any startup, you’d go to your venture financing or here you’d probably look more towards like a family office where someone might see the value in investing in the business and actually growing it and sort of playing long ball with the business versus you know, typical startup model of let’s get out of this in three to seven years.
Anthony Verna: (16:19)
Justin Tripodi: (16:20)
Anthony, can I just follow up on that?
Of course you can.
Maybe not relative to this specific client, but other more established businesses, especially with those two: products and inventory, do have other financial instruments available to them outside of family offices of venture capitalists or offering equity. It could be asset backed financing, it could be inventory, financing, purchase order financing. It all depends on the nature of their business. But going back to what Wil was saying is, and Jim was saying is you have to do the due diligence. Know it’s out there, contact the right advisors, have a consultative call with them. Know all of your options before you make a near minded decision that’s going to cost you money, time and potentially collapse your business. Don’t ever pretend like you know everything because we’ve been doing this all collective for a long time and I think we’ll all admit we don’t know everything. I learned something from you guys and the other people I talk to every day.
Anthony Verna: (17:10)
Go ahead. Go ahead, Wil.
And, well, I provide even some credit to my esteemed colleagues here. So, unless my patent hat drags the floor right now and my ego gets busted right along with it. Let me say this, that when we talk to clients like that and they come to us and they go, “Well, I can make money licensing.” Well, yeah, maybe you can, but, essentially what you’re telling the person that would be your licensee is there is value here and you’re negotiating from, let’s say behind the wagon. If you haven’t shown any traction in the market for the very IP that you’re trying to license to that company. And so they look at you and go, I can negotiate a deal that’s actually much less. It’s capital, it’s money, it’s venture that’s much less than what the asset may be worth. They don’t want to put the time into actually showing that there is a market for the device. And then the patent restricts competitors from entering the market, thereby making it larger. Right. And understand that’s where your licensing dollars come from. Not the other way around.
No, I understand that completely. I’m just thinking in a situation like this particular product, I look at that and to me that just seems like an obvious way to be a licensee. I know you had gained skews by being a licensee, but it’s the kind of product that seems to fit the way that I’m thinking. Like put a comic book character on there, put a sports figure on there and it, you might actually even increase the range of ages for this particular product as well. Yeah.
Just make sure, add some clarity to that.
Go ahead and go ahead and do that.
No, no. I want you to, because I just want to make sure people understand from which directions we’re talking. From the patenting case and we’re talking about licensing, we’re seeing that the owner, this company has a patent, can they license that patent to others? What you’re saying is the real value in even exploiting their own claims. Is that in license be a license?
Yes. Be it be a licensee , as us lawyers use the complex language. I know and understand. So, Barry, what were some of the solutions that NESSA implemented for this particular client?
Barry Kolevzon: (19:30)
Well, we took on this company when they approached us and we decided that we would work to turn them around and to do that, Wil got involved a little bit on helping them on the marketing side, finding out who’s doing stuff and comparisons. The other thing is to ask them questions like, so why aren’t you selling more? Very simple question, very complex answer.
Make sure that they have a self-examination of their own business.
That’s correct. And you know, what kind of relationships do they have in their industry? Are they good? Are they bad? Did I do good things? And at night, sit down and sure they would say, well, we’re here, but how are we going to get outta here?
You know, you say you talk about similar industries and their competitors and the relationships that they have with their competitors were, or the reputation that they have with their competitors. My former law partner and I met this company at toy fair, but yet I don’t know that I would consider this product a toy. What do you think, Jim?
I don’t, I never saw it as a toy.. I wasn’t going to take it off the cart and play with it. Okay. It was something that was decorative.
It probably belonged more to home furnishings.
That’s why I’m in agreement with you about the idea of sports figures and going to the NFL, the NBA and selling that kind ability to have these things that you can hang in your room to hold your curtains back. I think that was a way to go.
I mean, I’ve met a lot of business owners who, when I talked to them about that kind of setup, they’ve really get afraid about minimum minimums, you know, minimum purchases, minimum sales. They get really afraid of having many skews and how are we going to keep track of 28, you know, new products, boom, that have to get introduced like that. And the first answer is it’s usually not 28. A lot of sports leagues work with small businesses and say, look, we’ll do like a little regional test so it’s four or five teams. Pick a region, take four or five teams, and then this way we can ramp up as time goes on.
Jim Huerta: (21:40)
Yeah. I think one of the things, if I might just add to your question about what we do or what we did or what they did for the client, I think the concept that we always get because of the fact that the obvious thing is that we bring such a level of expertise in so many different disciplines, that we provide the material for our clients that think through what they haven’t thought through in the past. For example, most clients that I deal with, they’re so focused on one thing and one thing only that while the buildings are falling down around them, they’re still focusing. What I’m saying, I think you’d better run because that door is coming down next and is heading our way. Our job is to really say, give us the picture of your company, sit down and talk to us, and then we’re going to see what we can find for you and we’re going to give you some direction that you might or might not take as a positive recommendation, but they don’t do that without people like us.
Anthony Verna: (22:33)
No, I understand that completely. And I agree with you completely. I think we all agree with the statement like, like that.
No, let’s kick that football just a little bit. Because you guys mentioned something in, in what you said was I went and I saw these guys at toy fair and I didn’t consider this thing to be a toy. Well, as we sat around and we spoke about this particular item that they were selling, yeah, it was home decor and Barry and I looked at three different sectors in which this toy could be placed in, how it would be channeled to the market based on the amount of money that they had and where they needed to be in order to get the product position. With that said, what we notice was that it was no different than Jennifer Telfer’s toy Pillow Pets. Yeah. It has a dual purpose. Yeah. It was a drapery. It was for reposing, you know, curtains in the home of a child, in the room of a child. However, that child, when they went off to school, you know when the curtains are closed, could pull the toy off of the curtain and actually still play with it as a plush toy. So it had dual markets and what the company was not doing, exploiting the places where those dual type of products would be sold.
I think that’s a very important thought because to tie this into the rest of our mini-series, the first episode that we talked about was what does it take for a business to work with a business consultancy and what are the kinds of expectations that a business has when working with a business consultancy? And I think that’s very important right there. Gentlemen, we are out of time for episode number five and our special mini-series. Thank you so much. Jim, as always, you’re going to tell everybody how to find the NESSA Group online.
Sure. That’s easy enough. If you have a computer, our URL is www.thenessagroup.net. And they’ll be many opportunities there for you to get ahold of us and tell us what you’re looking for and we’ll certainly, we’ll get back to you right away.
Anthony Verna: (24:48)
All right. Thanks, Jim. Thanks, everyone. We’ll be right back with episode six.