[MUSIC]

I want to talk a bit about the Analog Outfitters Interview that you

are about to watch.

This is a very small business, and as the owner himself says,

the financial management aspect of the business is under developed,

they are learning by [INAUDIBLE].

And what you’ll see also is that many of the key questions that we ask in this

course and also in Corporate Finance I, are going to appear in our

conversation because of the questions I asked him, and the topics that they want,

actually there is more than one interview, the topics that they chose to talk about.

So here's the big question I have for you,

you're taking an MBA level finance course and that might

allow you to actually think about, how would you have done it differently?

Which financial management decisions would you have changed?

What would you have changed about the financial management of this business?

Let me highlight a few topics that you can pay attention to.

First of all, the financing strategy which is one of the big

topics we're going to talk about in corporate finance too.

What are some of the methods that Analog Outfitters has used to finance

its business?

Traditionally, the owner definitely talks about that and

he also talks about the problems with these traditional methods,

if I wanted to identify those and think about it.

And in addition, it's going to be clear, I think,

in our conversation that the company is trying to change the way it does things.

And the question I have for you is,

is the company moving in the right direction, right?

In terms of risk management, which is one topic we're going to talk about in

Module Three of Corporate Finance 2,

is I wanted to think about why is it that this company faces currency risk?

It's a very small company so you might think that they don't have currency risk,

but in fact they have.

And more specifically, think about how changes in the value of the dollar

relative to the other currencies can affect the profits of this company.

This is one of the topics we're going to talk about in Module 3, and

you can start thinking about it as you watch this interview.

The owner also talks about R&D.

This is the technology company right?

So, they do invest in R&D, right?

And I wanted to watch that and

think about whether this is a significant investment for the company or not?

I think there are some numbers in the video that allow you to compare

the investment in R and D with some of the other investments that this company makes.

All right, so going back to Corporate Finance 1, I want you to think about this

question and also consider whether the company is using the type of R&D

financial model that we discussed in Module 3 of Corporate Finance 1.

Payout, we talked about payout as well.

One point that is coming up in the interview is that the role of

payout has changed over time for this company.

I want you to think about why this is the case?

Why has payout become more important?

And what is the company doing to design a payout policy going forward?

Payout is going to be a topic that we're going to discuss in

Module 2 of Corporate Finance 2.

[MUSIC]

Thanks for talking to us, can you tell us a little bit about the company,

the products, a little bit of history maybe?

>> The history, well probably a lot like a lot of small businesses,

started in a basement.

And Benji Day was the original owner,

and basically we went from doing everything from repairing pro

sound equipment, and

a little bit of everything, all the way to wanting to build our own amplifiers.

So we went from kind of a live sound rental company,

repair company to manufacturing.

And, which is a great direction, I'm a musician and I'm a builder.

>> [LAUGH] >> And, so

now we fully just manufacture our own amplifiers out of

recycled materials and some of the old vintage materials that we find.

>> How long have you been manufacturing?

>> We've been manufacturing around five, six years.

>> Five, six, yeah.

>> I think, probably not.

>> [LAUGH] >> But

we've been in business for longer than that.

>> Yeah, they look great [LAUGH].

>> Yeah, and so it's a pleasure to kind

of give some of these materials a rebirth and

make an original tone, an original sound.

>> Yeah. >> And

that gets back down to the basics of just old finish tube amps.

>> Yeah, the sound was beautiful here as well.

I was playing- >> Yes,

you were the first person to play an amplifier in here.

>> Yeah, I heard that.

It was incredible, yeah.

[LAUGH] >> So you christened this place.

>> I have to get one for me.

They sounded great.

>> It was absolutely beautiful.

>> So Dan?

>> Yes. >> Thanks for talking to us.

>> My pleasure.

>> Yeah. Can you tell us about what were the big

investments your company has made in the last few years?

>> Yeah, as our business has grown, for the last seven or

eight years, we've been in a building in downtown Champaign.

And, we own the building, but we started off with one little

2,000 square foot section and rented out the rest of the building.

And it was [LAUGH] sort of comical our section didn't have a bathroom

>> [LAUGH]

>> And we couldn't afford to pay the rent,

so I had to find other renters.

And so we would had to walk down the street and

use the- >> To go to the-

>> Sneak in the back of a restaurant

to use their bathroom for about a year and a half.

Anyways we finally had enough money where we took over more of the building and

more the building until the last few years we had the whole building except for

the apartment.

But we realized very quickly during our growth that we were in the absolute

wrong place for a manufacturing business.

We've really transitioned from a service business doing repairs

primarily to a manufacturing company and went from a company that was

open to the public to accompany that essentially a factory.

So we don't need to be open to the public yet

here we were in downtown Champaig with no parking and

we couldn't have semi trucks to delivery, it was just very difficult.

>> Yeah. >> And so,

we had to rent properties around town.

So, getting back to your question, what was the investment?

Well, this place was certainly one of them.

We have four acres here of land, a 9,000 square foot building,

and then two 1,500 square foot out buildings.

And plenty of room to build a new building if it ever comes to that.

>> Yeah. >> So this was

one that we've been working on for about a year.

Another big investment we did was at our last building.

We made a professional production woodshop.

For all of our cabinet work.

When we first started making speaker cabinets,

we were literally doing in the parking lot with portable hand tools,

like literally, in the gravel parking lot, setup saw horses and stuff.

>> Even in the winter?

>> Yeah.

>> [LAUGH] >> Yeah, we didn't have a choice,

because we couldn't get saw dust in the rest of the facility because of all

the electronics.

We really paid our dues.

So, that wood shop cost us probably about

with the tools probably about let say $50,000.

We had a contractor build it out properly and so that was a big investment.

>> What happened to that when you move here?

>> That part, we're still renting that part of the building for

another like month as we finish this building.

And we have a lot of our stuff is stored in another storage place in town.

So that really made possible for us to get our quality and

our efficiency much higher to where we could do you really precise work.

Recently, I'd say one of our bigger investments was to hire

a full time marketing person which,

you know is difficult when the cart of

the horse is like when you have to have the sales to afford the marketing person.

But if you don't have the marketing person, how you going to get the sales?

We've been very fortunate that word of mouth has done.

We've never done any advertising ever of our manufactured products

since we started in 2011 with this part of the business.

And luckily our dealers and our word of mouth took us to a certain level,

but we realized there's only so

much you can do with goodwill and you know referrals from other people.

So we made the leap to hire a person to do that and it's worked out excellent.

>> Yeah. >> And

it was worth all of the hard work it took to make that happen.

>> So let's talk about the initial investments.

We talked about the manufacturing that you have to build.

How did you finance that?

>> Well, that's a great question.

There was a couple of ways we did it.

>> One of the mistakes we made in our business over the years was that

we took on an investor named Visa.

Ever hear of him, Visa?

No, American Express?

>> Visa, the credit, I see.

[LAUGH] So you borrowed on your credit card.

>> Yeah, and that was a mistake.

And the problem with that is that if you don't really

plan out financially a project or a plan.

You think, yes, I can get it done right now.

We've never been very good financial modelers.

I should going to get an MBA and I need to sign up for your course.

>> You will be welcome.

[LAUGH] >> So,

we did a lot of short term fixes without enough long term planning.

Now, we have paid off all of our credit card debt, but you know,

we wasted a lot of money at 10% interest.

>> Interest rate is very high, right?

>> Yes, this is ridiculous.

So, we did borrow about $25,000 from my father.

I come from a family business background.

We have a 100 year old family business that my great grandfather started in 1916,

called Ideal Industries.

We make electrician's tools and wire connectors and stuff.

So I grew up around business and

I grew up understanding a lot about how you build and grow a business,

I have not been a successful as my great grandfather was, but I do my best anyways.

Anyways getting to the investment part, my dad worked as an executive there for

many years.

So he had some free, some extra money and so he has

lent me money at various times when we could

go get a bank loan, but his terms are better.

[LAUGH] >> So when you move to this space here,

did you take a bank loan to buy the space or is this a [CROSSTALK]

>> This is a very interesting situation,

where we are here, this is a beautiful building but

it is one that has been neglected And

the story here is we're on an old airforce base that was close in 1994.

And as you might imagine a small town, it would be like UofI leaving Champagne.

>> Yeah. >> They lost half of their population

over like 16 months.

And this Airforce base, it was given to the village.

And they've been trying to, ever since get businesses out here.

And sadly, some of the buildings fell into some disrepair, as can happen.

And so basically, we approached the village of Rantoul and

said, this is a perfect place for us.

And we worked out a pretty good deal with them.

We are closing on it, they let us move in before closing.

>> Mm-hm. >> Because I had to sell my other building

in downtown Champagne.

So we should be closing in another month, and I will take out a loan,

but I can tell you that moving to an old Airforce base 15 miles from Champagne,

financially, is the best thing I've done,

because we're getting a great facility for 10% of the cost.

It would be 15 miles that way.

And we're not open to the public we can be in the middle of the corn field.

So this is perfect for us, and there's all these industrial buildings around here

that we're renting a few of them.

And there's just wonderful opportunities here.

There's a 200,000 square foot airplane hangar over there for sale,

if you need some space.

>> [LAUGH] >> So

you said you're going to take a loan to help finance this.

A mortgage?

>> Yeah, I'll take a mortgage.

I'm going to put probably about $20,000 down and take a mortgage for the rest.

And so our mortgage payment will

be probably half of the rent that I was paying to myself for our other building.

We had a real estate company and

then Analogue Outfitters, two separate business entities, and

the real estate company just owned that one building, and so I paid rent to that.

>> But you own the other space, right?

>> I did, I bought it in 2005 when Downtown Champagne really

was starting to come up a little bit, but still kind of on the downturn,

still recovering from the 70s and 80s.

And now it's really an entertainment district it's really doing great.

>> Probably made a good profit on that.

>> We did very well that's part of what helped us get rid of all of our debt,

it was doing well on that building.

>> So that's what I was going to ask you actually, so you have this windfall,

right, from selling the building.

How did you use that in the company, or did you use that some other way?

>> Well, we used a little bit of it.

It's funny, it was actually in my wife's name.

>> Yeah.

>> And so we teased that it was her company.

>> [LAUGH] >> And it was her building.

Even though she never went over there.

Every two months she'd pop in and say hi.

>> [LAUGH] >> But basically what we decided,

we were going to split the profits.

She gets half to do what she wants and I get half to do what I want.

And course, she used her half to like, fix up our house and do some stuff.

And then I used part of my half, to pay off some debt and

then basically, you know, buy this and

then just saving some for For the future.

>> Saving for the company, right?

>> You know, I don't know.

It's in our real estate company, I left it there, so

I don't know what I'm going to do with it for sure.

I mean it's not a ton of money, but I want to, you know,

leave some, maybe do something fun, buy some new fishing poles.

>> [LAUGH] >> I'm really into fishing.

So are you the owner of the company?

Is it a partnership with Ben and- >> I am currently the sole owner.

>> You're the sole owner?

>> Yeah, and I started it in 2002, as Benny said in the basement and

then I upgraded to a garage after that.

So a big upgrade.

>> [LAUGH] >> But

I am going to be taking on a partner, Brian,

who you might be interviewing today.

>> That's what I was going to ask you, actually,

if you ever considered bringing capital by having more partners.

>> Yes. >> So apparently, the answer is-

>> Yes, and the reason, really,

for him, it's really not I chose him not so much for

a capital infusion but- >> I see.

>> A management and- >> It's more on the management side?

>> Yeah, because he has a long history, as an entrepreneur,

he had his own heating and cooling company and build it up to have.

>> Over 30 employees you know built it up from scratch and has a lot of history,

you know, he decided to make a change and

wanted to get into something he was more passionate about.

So he saw that and, but,

he's worked for me for about four years as a fabricator.

>> And because of his skills.

And bending sheet metal.

You know, making duct work, he's the one that has figured out how to make these.

You know, take the old road signs and bend them up.

because he has that skill.

And as a fabricator, he does all the woodwork too.

And over the years he would give me little advice and say hey,

we should really consider this.

Why don't we do that?

And then one day I'm like wait a minute you've got all of this business knowledge.

You've got all this fabrication knowledge and your hobby is to work more.

>> [LAUGH] >> He's one of those guys.

>> Yeah. >> I mean you need to be

part of the ownership structures.

It's ridiculous.

And so, we started that about a year ago.

And we're just getting all the details worked out about how he's going to buy in.

And part of the way he's buying in is with, basically, sweat equity.

>> He's taking a diminished salary

in exchange for- >> Having some ownership

rather than contributing capital.

>> Right,and which is great, it works out great.

He's brought some new energy to the company even though he's been here for

four years, now that he is on ownership track.

You know, his efforts are even greater.

I mean he's here at seven in the morning and

a lot of times I get a call from him at eight o'clock and he's still here.

He's just an extremely hard, passionate worker.

So, he's the perfect guy for a partner.

You know, and I've, there are other times I considered having a partner,

but I never really had quite the.

>> The right fit.

My dad always told me, he said,

a good business partner is one of the best things you could ever have.

>> Yeah. >> And a bad partner is like you might as

well not even be in business because it's going to take every bit of joy and

probably success out.

So I was always very careful in how I thought about that.

And I think I've found the right person.

>> Yeah, that's great.

Let's talk a little bit about risks that you see going forward.

What are the major risks that you see for your company and your future?

>> Tthat's such a great question.

When I read that, I had so many different ideas.

One is that the music business.

As all businesses change, it's just that's a guarantee.

Musical tastes change, and that's one thing we've seen is that

a lot of young people are instead of listening to bands like Led Zeppelin and

Pink Floyd, really guitar centric bands.

They're gravitating more towards this electronic dance music

which is, you know, sometimes it will have a drum set and

some other instruments, but a lot of it is electronic.

>> Yeah.

>> And so the sales of electric guitars over the last couple of years have

>> Have been going down.

Acoustic guitars are still growing and so as electric guitars go down,

well of course amp sales go down.

It's probably a temporary blip, that's what I think.

I mean I can't imagine the electric guitar's really going to go anywhere but

there's trends, just like disco in the 70's,

that It's just there's some volatility in that.

So that's one of them.

And I think that one of the other risks I see is that we have a tremendous

international presence that's where we sell over half of our product.

All this stuff is going to Paris.

>> Really?

>> Yeah. >> Wow [LAUGH]

>> And we have dealers in Costa Rica,

Hong Kong, Sweden, Germany, Spain, Netherlands.

I mean, you know, Japan.

And I'm a little concerned about our new President.

You know he's he's scaring off a lot of,

with all of his sort of potential trade wars.

You know, and that can really have an impact on us,

I think, If suddenly it's much harder to import or there's new tariffs imposed.

So that concerns me.

>> Do you spend any money on research or?

Yes.

Do you do any R and D kind of things?

>> Yeah, I don't even want to know how much.

You know hundreds of thousands of dollars over the years to develop new products and

that is.

We had one product which we don't have here right now.

One of our better sellers.

It took a year to develop it.

And that's expensive, I did it

myself and I used some interns from the University of Illinois.

And another friend of mine, we did it, it was expensive.

>> Yeah. >> So, but

to make something great, you have to put in the time.

So it's just part of it and then try to figure out how to price the product

to recover that investment, how many do I have to sell to get this money back?

So and we've been successful at that in most products but not all of them.

So. >> Do you think about that ahead of time?

When you start doing research,

do you think about the >> Not enough.

>> Not enough, right?

>> Not enough.

That's something that would be a weakness of mine as I'm not a great

financial modeller or long distance planner for things like that.

What is our structure going to be?

How much is it going to really take to develop this product?

And part of that comes from just being sort of artistic guy and

when I get something in my head I just want to make it.

>> [LAUGH] >> And worry about the rest later.

>> [LAUGH] >> And that's really been a mistake.

And so, part of having the team I'm trying to create here

is to have a little more discipline with things like that and do better.

Financial modeling to really decide, is this a good thing?

Artistically it might be great, but this is a business.

And we gotta pay our bills and pay our employees, so

we can't just be a bunch of artists.

>> [LAUGH] >> We need some right-brained

people around here too.

>> Yeah.

>> So >> Great.

>> Yeah. Let me ask you a final question.

>> Sure.

>> Especially now that you have another partner,

have you given some thought about how are you going to pay cash to the owners or

how are you going to distribute, right, the profits?

>> Right. >> This is like the dividend,

how do you get the money in your pocket?

>> Right >> In part, versus keep eating [INAUDIBLE]

in business. >> We're working on that right now with

I've paid myself in the past as an employee and

occasionally taking some dividends, but

you know as an owner of a small company you're always the last one to get paid.

>> [LAUGH] >> If you want to stay in business you

have to do to it that way through the rough times you know.

>> And so that's just how it is.

So, but yeah, we're working on our operating agreement with our Lawyer

to figure all that out and to, you know,

he's going to be purchasing a chunk of the company too, so.

>> The Lawyer?

>> No, not really.

>> Yeah,I thought you said the lawyer.

>> He can pay cash.

>> My partner Brian >> Your partner Brian

>> Yeah, he will be buying a large chunk

of the company and so we have that payment to work out,so there is a lot of

details to work out with the lawyer but, >> And

certainly the how we're going to deal with that cash is part of it.

And we want to have a good solid operating agreement, everything laid out in advance,

so everybody knows, you know.

If he wants to sell out to me in the future or I want to sell out to him, and

you know, all that's spelled out, the formulation, evaluation, everything,

so fight about it.

There's nothing to fight about you know.

Because it's all laid out.

So, the dividend policy will be part of that discussion.

>> Interesting.

Thank you, thanks for talking to us.

That was very interesting.

Hi Brian, thanks for talking to us.

>> Thank you. >> So,

we were talking a little bit beforehand.

You have a business background?

>> I sure do.

I used to own a heating and cooling business in St.

Louis that I grew basically started out with me and

one other technician and grew up to 35 techs and at 35 trucks on the road.

And did that for five or six years and

sold my half of the business and about it really, did really well.

It's exciting.

>> Why did you get out of that deal?

>> I don't like heating and cooling.

>> [LAUGH] >> I'm a musician, and

more of an artist kind of a person.

I'm a craftsman, basically.

That wasn't much fun.

It was really hard work.

So, you know, and awful hard work.

[LAUGH] >> Did you start that company?

>> No, I kind of did the same thing I'm doing here.

I went to work for a guy, and

basically just kind of turned the business around with hard work basically.

I just got busy, had some pretty good ideas as far as how to market the business

just did things differently, and kind of got it rolling, so, and it worked.

And then I burned myself out, it was too much.

So it was time to get out.

>> [LAUGH] You have some famous musicians playing your amps.

>> We do.

We do have some,

you know, Pearl Jam has one of our amps >> John Scofield,

we got a, we have a piece of gear that's going to Dave Gilmore I think

today >> Wow

>> Maybe?

Which is pretty cool,

you know, we've got all kinds of people and it's great, it's fun.

>> That's fantastic.

You just joined as a partner, right?

>> Yes. I've been with the company for

I think 5 years now, 4 or 5 years And I just did art at night.

I'd work from 10 o'clock in the night till 6 o'clock in the morning and

didn't see anybody.

>> [LAUGH] >> And

then basically, I saw potential in the business side of things.

And said, we should really go for this.

And it was the time for Ben.

He's been doing it for 13 or 14 years and he's like, I need the next push.

>> Yeah. >> And so

that's just one of my strength as a partner.

I know how to drive the team, get things done, get it going.

Put the work in.

I'm not afraid to sweat it out.

I do want to sweat, I couldn't stay [LAUGH].

>> Yeah, that's what we've from.

>> Yes, I just work, work, work.

>> [LAUGH] >> Get the job done and

then it pays off at the end in which >> So far we've done pretty well with it,

we have new changes.

>> But that's part of the partnership,

you're also going to buy into the company, right.

>> Yes, yes. >> Not just red equity.

>> Yes, yes.

I'm buying into the company with all my-.

>> Any concerns.

Financial concerns or what worries you about.

>> Well, it's an investment for sure.

>> I don't really have any worries.

I don't know, I tend to keep things positive no matter what.

I don't do very good at losing so if I'm going to join the battle,

I'm not going to quit.

I will win one way or the other and just takes hard work, basically.

And being innovative and think of new ideas and

just approaching things differently from everyone else.

I think, at least in the world of musical instruments, is, see what everybody else

is doing, and do the complete opposite because you want to stand out.

And that's how we approach things.

>> So do you, Business students from all over the world watching.

Do you have any advise that you'll give to the people starting?

>> Well you know I do have a little advise and, I hate this

I'm not doubting the younger folks in the world, but I think younger

people these days are afraid to get dirty and get down to business and get to work.

And I think if you really want to make something succeed and

you really lead it and sweat it and love it, the work is not really work,

it's a labor of love, and you need to If you're going to become a business owner,

you need to love what you are doing or it is not a true passion I guess.

You have to have passion for what you are doing or

it is never going to work, you know.

You either are going to make a lot of money and be miserable or

you can make a lot of money and do what you love,

you know, >> Yeah.

>> So I choose the latter.

>> [LAUGH]

Analog Outfitters

Corporate Finance II: Financing Investments and Managing Risk

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