3 Reasons Bollé Sunglasses Acquired SPY Optics

March 20, 2020 |  

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The action sports business is fuelled by big brands which is why, when SPY Optics built a style popular with irreverent teens, eyewear bemouth Bollé decided they had to own them.

To read a transcript of this episode, click here.

The action sports business is fuelled by big brands which is why, when SPY Optics built a style popular with irreverent teens, eyewear bemouth Bollé decided they had to own them.

This episode of Built to Sell Radio features SPY’s president and major shareholder Stephen Roseman who described what he did to beef up SPY’s value prior to Bollé’s acquisition. This interview includes a number of important insights for value builders such as:

  • Invest Cash In What Drives Your Value: one of Roseman’s first moves as a SPY shareholder and its president was to jettison the factories SPY owned in Italy. He reasoned SPY could contract with a manufacturing plant to make their lenses elsewhere while selling the factories would free up the cash to invest in building their brand.
  • Find Multiple Sources of Supply: Roseman knew becoming too dependent on one supplier for his lens would undermine any value he created by getting out of the manufacturing business, so he was sure to set up relationships with multiple manufacturers capable of making SPY products.
  • Do Something Different: SPY came up with their “Happy Lens” technology which lets a spectrum of light through which apparently improves the mood of whoever wears them. The Happy Lens technology and brand served to further differentiate SPY and make its brand durable in the face of fickle consumers.

There many more pearls of wisdom in this conversation with Stephen Roseman.

Roseman cautions owners to avoid making superficial improvements to their business leading up to a sale as most professional acquirers will discover your short-term fixes during diligence. Instead, Roseman recommends you “build the house you want to live in” by which he means to make long term decisions that render your business better for the long haul, not just more attractive to an acquirer in the short term.  Want to know how your business measures on the eight factors that long-term investors care about? Get your Value Builder Score and we’ll make recommendations for improving your durability and appeal to an acquirer.

Our guest

Stephen Roseman joined the board of SPY in July 2009 and served as CEO from October of 2018 through the successful sale and transition of the Company in January 2020. He also served on multiple committees as public company board member, including audit, governance, compensation and executive committee of the board. He is an alumni of the Harvard Business School, Class 52, OPM program, has received a M.B.A. from Fordham University Gabelli School of Business, a B.A. in French Literature from Arizona State University and is a CFA® charterholder.

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Transcript

John Warrillow:

So the next interview almost never happened. It’s with a guy named Stephen Roseman. And when we first got on the call and we were doing kind of a preamble before we got talking, he said, “I can’t really talk a lot about SPY and how Bolle acquired them because it’s shrouded in all sorts of secrecy and privacy and there’s all sorts of confidentiality agreements that I can’t really reveal.” And I thought, “Do I cancel the interview?” But it was already set up and I thought, “Let’s go forward with it.”

John Warrillow:

And I’m so glad I did because Stephen is a real wealth of knowledge when it comes to building the value of a company. What he is, is an activist investor in a positive way. He goes in, builds a position in a company and built it up with a view of selling it for more than he paid for it. And he shared some really interesting value-building lessons. A couple of it sort of I took away are the power of a brand in particular and how he distinguished between normal brands and what he calls heritage brands. I love this quote. He said, “Build a house you want to live in.” And of course that’s a reference to a builder’s sort of analogy, but he’s thinking about it in the context of a business. In other words, build a business with a view that you would want to run it forever, and you’re going to have the maximum choices to sell it when and if you want to.

John Warrillow:

He also introduces a concept called antifragile. Have a listen for how he defines that. I got him to describe two things he did at SPY to antifragile his company before they sold it to Bolle. I think you’re really going to enjoy this interview. Here to tell you the rest is Stephen Roseman.

John Warrillow:

Stephen Roseman. Welcome to Built to Sell Radio.

Stephen Roseman:

Good morning.

John Warrillow:

It’s great to have you here. Tell me how you came to be running SPY Optic? First of all, I’m a big fan. I’m a snowboarder and skier. And so I’ve known the SPY brand for a long time. I have a pair downstairs that I could bring out. I’m a big fan. So how did you come to be running this company?

Stephen Roseman:

So I am a long time private and public market investor. And SPY was a company that I became acquainted with post-IPO. So they went public in 2004, and hit my radar as a newly public company back then. I got to know the business, and as I got to know the business, I identified some opportunities for improvement within the business. It was a nascent public company, and at the time the folks running it had done an amazing job of building a brand from scratch. They were tremendous brand visionaries. And as I got to know the business well, I saw the opportunities within the company that would, I believed, allow the company to get to that next level. And I became an investor. Again, it was public market, publicly traded equity at that point. It was in the public market. So I was able to build a position. I in fact became the largest shareholder at the time. And started working with the board and the management team to help them understand what I believed to be true as to the opportunities for the company. And that goes back to 2005, 2006.

John Warrillow:

How do you go from having some shares … I have some shares in Google. I have shares in Apple. But that doesn’t mean I’m running the company. How do you go from buying some shares in a public company to, it sounds like you built up a significant position being a big shareholder. Did that entitle you to sort of some face time with the management team and the other board members, the other shareholders? How did you go from being a passive investor to being the CEO?

Stephen Roseman:

Yeah. So there’s a long history, certainly in the US, although globally this is true, but certainly more so US and Western Europe, Canada, of shareholders who become more active or, to whit, activists, within a company. So I have a long history as a turnaround investor. And have historically become more involved. So if I could rewind the tape a little pre-SPY, I come from an operational background. Prior to my investing career, I had grown up in my family’s businesses. And had really had a front row seat to business, business operations, largely focused at the time on consumer businesses. And that is how I grew up. So when I made the transition into finance, and ultimately ended up on the buy side or as an investor, my focus really started to hone in on that area. On business improvement, and what one can do to identify opportunities within a company to improve balance sheets, to improve margins, profitability, cash flow, cash conversion, et cetera.

Stephen Roseman:

And so with that as a background, when you asked the question how did I come to be so intimately involved with SPY, it started with, back in ’05, ’06, effectively a business plan to help solve for some of the problems I identified in the business, and some of the things that I saw were an opportunity to, and I’ll use the quote, fix the business. And to make the business better. And being a shareholder itself isn’t sufficient. There’s the notion of being influential, right? So you’ll see activism, if you take it away from what I was doing with SPY, certainly in the US markets you’ll see shareholders with much, much larger companies. In fact, large and megacap companies where they might only own one or two percent of the equity, but as investors they’re fairly influential investors given the expertise they bring to the table. And you will see other shareholders coalesce around them. And we’ve seen that with the likes of Carl Icahn, Bill Ackman, David Einhorn, et cetera. So the notion is one more of influence than it is of size. In this case, I happened to be a pretty substantial investor in SPY during that period. But it’s also what you bring to the table in terms of a dialogue for fixing the business.

John Warrillow:

Are you investing your own money? Or have you got other people like, “Hey, Stephen’s great. Here. I’m going to give you some money, can you invest it on my behalf?” Or is it all your own cash?

Stephen Roseman:

No. It’s both. So it’s my capital as well as outside investors’ capital. Folks who, they have entrusted me over the years with their capital. We have run funds that have focused specifically on this strategy, where we have intended to be activists and fix the businesses and improve the businesses. Which, by the way, ultimately is a benefit to all shareholders. And what I was about to say is, if you go back in time, everybody, many of your listeners will recall a period during the ’80s where the notion of quote-unquote activism was not a positive one.

John Warrillow:

No.

Stephen Roseman:

It was, there was the notion of, the colloquialism of corporate raiders. Where at the time, there were industry participants or market participants who were getting involved with companies really to strip out valuable assets at the companies and leave a less valuable shell. Activism, fast forward 30 years, activism has a very different patina today. Activism is truly about a collaborative effort, collaborative with the activist investor, other shareholders within the company, and even management to really improve the company for everybody’s benefit. For all stakeholders. They’re not just shareholders, but also employees of the business and the company’s business partners, enterprise partners.

John Warrillow:

And forgive my ignorance on this, but I’m curious to know. When you build a position, how do you show up and say, “Listen to me, guys. I know what I’m talking about.” Is it just your pedigree and your reputation that they come to know, and therefore they’re like, “Oh, this guy knows what he’s talking about, I’d like to listen to him,” or do you force them to listen to you based on the position you’re building up in the company? Do you see what I’m saying? Is it one of forcing, legally forcing them to listen? Or influencing them?

Stephen Roseman:

Yeah. So said differently, if I can recap that question is, am I knocking on the door and getting the door opened for me with a warm introduction as I come into the house, or am I knocking the door down?

John Warrillow:

Yeah, exactly. Exactly. Because my sense is, a guy like Carl Icahn knocks the door down.

Stephen Roseman:

That is typically the case. Well documented, right? No inside baseball for me, it’s well documented. That is often the case. So in my case it has been both. So there has been a well trodden path of course for both in this country. And what I have found is that ultimately having a constructive and active dialogue with the management team, with the board, is a more constructive starting point. I would be lying to you if I said to you that I didn’t have boards and management teams tell me to go pound sand in the past. And that is when you exercise your rights as a shareholder a little more aggressively. But typically it is a well articulated, well presented, well documented position as to why you’re making the suggestions you’re making, right? These are not capricious decisions or capricious suggestions that I’m showing up with, that are banal and unimportant. They are well researched, well thought through, and people can reasonably disagree with them. That’s okay. But they aren’t without basis and they aren’t without a lot of supporting facts and data and documentation.

John Warrillow:

Got it. Got it. So you saw something in SPY which you both liked but also that you thought you could make an impact. What did you like about the company?

Stephen Roseman:

So, SPY has an incredible heritage and an incredible brand. So the folks who had started the company really did an amazing job in establishing a brand in the cradle of action sports in North America. So, and arguably globally. So Southern California has a long heritage and a long pedigree as being the birthplace for well-known action brands. Whether it’s Quicksilver on the board short and apparel side, whether it’s Oakley, also a sunglass company, SPY of course are [inaudible 00:08:33] du jour today. You go down the list of companies across action sports, and what we call core sports, which include skateboarding, snowboarding, surfing, and then of course all of the extensions of that. So, land based sports like motocross, BMX, et cetera. So it came from a really, really advantageous birthplace. And you had folks who had a vision for a brand to really establish a brand that would speak to its constituency. So when they gave birth to the brand, the idea was, is this is a brand that’s a little more irreverent than the establishment.Yeah, when I went on the website, Stephen, there’s a guy giving a finger to the camera. It was great. I was like, “Wow, that’s not exactly what you expect from a big corporate brand.” But it’s great.

Stephen Roseman:

I know.

John Warrillow:

Is it spy.com, or spylens that was the website?

Stephen Roseman:

Spyoptics.com.

John Warrillow:

SPY Optics. Yeah. It’s awesome.

Stephen Roseman:

Yeah.

John Warrillow:

Yeah.

Stephen Roseman:

And I would say, the image you’re referring to with the stiff middle finger is probably one of the more PG efforts …

John Warrillow:

Oh, is that right?

Stephen Roseman:

Yeah. So we definitely had a little more edgy than that, even. So yeah. And that irreverence was important, right? So, and this is an industry specific, or even arguably a sector specific consumer goods comment, which is two things. One, I will point out that people generally don’t want to wear their father or mother’s brand. Right?

John Warrillow:

Yeah.

Stephen Roseman:

That is a truism as old as the ages. That has nothing to do with SPY. That has to do with [inaudible 00:10:14] denim and footwear, and you go down all the categories of consumer goods. It’s true for restaurant concepts. And so what you have is you have a little bit of a generational change, and that next generation’s looking for something different so they can make their mark on the world and show everybody, demonstrate to everybody how they’re so much different than the last generation. So that’s one point. Separately, the definition of fashion, and this was an expression that I heard growing up in the business and I heard from my father at one point, the definition of fashion is whatever you don’t have hanging in your closet. Right? So in the case of sunglasses, or let’s take it away from sunglasses. Let’s say you have a closet of white oxford button-down shirts. And all of a sudden, courtesy of the late and amazing Steve Jobs, black turtlenecks become de rigueur, and you don’t own any black turtlenecks. Well, by definition, you have to go out at that point if you’re going to be in vogue and in keeping with what is the fashion of the day, you could go out and buy black turtlenecks, right? We’re talking about, again, this proverbial definition of fashion right? It’s whatever you don’t have in your closet. So brands across categories, including eyewear, become important to have a voice and identity that’s distinct and separate from what came before them. Both for that fashion component and also because of that notion that we don’t want to wear what our parents wore. We want to id-

John Warrillow:

But brands are also fickle things, right? As you well point out, right, at times they’re in favor and desirable. I’m trying to think of what’s hot right now. I’m totally out of the loop with all this fashion stuff, so I can’t think of anything off the top of my head. But they do kind of come in and out of fashion. As an investor, how do you ensure that that brand isn’t going to become irrelevant?

Stephen Roseman:

No, and that is a fair point. And what I’ll do is I’ll, with all due respect to some of these amazing brands I’ll reference, if you think about brands over the last number of decades, you can think about brands that have blown up. And I mean that in a very positive way. Brands that have become really mainstream, front and center, and important as brands. Abercrombie and Fitch. Timberland. Ralph Lauren. And they’re all phenomenal brands that have had at times, or still have, great management teams, great operators, great visionaries. But at some point you become a little bit of a victim of your own success. It’s your point about the fickleness of the market. The market definitely moves on at some point.

Stephen Roseman:

Now, there are exceptions. I’ll provide the asterisk, or caveat to that. The asterisk is, there are heritage brands. And if a firm establishes itself firmly as a heritage brand, while it’s still susceptible to the vagueries of the market and fashion, it enjoys a muted cycle. So let me give you examples of that. Levis jeans. There was an area about 10 years ago, so everybody knows, Levis, of course, Levis has been around since the 1800s, started in Northern California as gold miner’s dungarees. Really started as a tool brand, right? Became really very much a heritage brand as fashion decades and decades later. Well, there was a period about 10, 12 years ago where that expensive fashion denim became vogue. Including denim with a lot of flourishes and bedazzled jeans. Levis fell out of favor during that period, because that was not Levis. That’s not who they were, and it’s not who they were going to be.

Stephen Roseman:

However, when the fashion of the high flourish jeans cycled, Levis was still there as your heritage brand. Right? In eyewear, you see that. You see that, frankly, even in footwear, right? So if you think about Nike’s positioning, which of course Nike is a seemingly impenetrable fortress across many categories of sporting goods. There have been other brands that have made very significant inroads into both the footwear and the active wear market against Nike. Lululemon comes to mind, even though Nike was there with compression attire before Lululemon. There have been specialty brands. Hoka One in footwear, for example. Even though Nike, of course, was there in shoes as its original business under Phil Knight in terms of Nike’s birth. So there is a fashion component, and your fickleness that you’re pointing out is very real. And it’s important to know who you are as a brand and how to manage that cycle. What your expectations are.

John Warrillow:

Okay. Okay. So you look at SPY, and they’ve got this middle finger irreverence. How do you … because again, I’m looking at it from the standpoint of, a lot of our listeners would be getting ready to sell their company. And they would have built a brand and part of the conversation, part of the value they’re trying to sell is that that brand has shelf life. It has longevity. It’s going to continue and grow and build and so forth. On the other side of the table, being the buyer, investor in that company, how did you evaluate the longevity, the strength, the staying power of SPY’s brand?

Stephen Roseman:

So one, when you look at a brand, the beauty of consumer goods is that consumer goods companies stand on the street corner, the proverbial street corner, and raise their hand and wave their flag and make themselves known.

John Warrillow:

Sure.

Stephen Roseman:

And that’s true when you go to the channels of distribution. So if you go back, certainly SPY is, it’ll be 26 years old next month. We celebrated our 25th anniversary last year. If you go back 25, 26 years ago, the internet was not a factor with respect to distribution where it is today. But if you went to retailers and if you went to the natural organic places, you would find a brand like SPY. It was very much a brand at the forefront, visibly at the forefront. IE, you could see the frames on people’s faces. You could see the sunglasses on people’s faces. You could see the goggle straps on the mountain, on snowboarders and skiers. So right off the bat there’s an awareness, right? There’s a level of awareness that comes to the fore as you’re doing research, and as you’re getting to know a brand and to your point specifically as you’re evaluating the veracity of the brand, you’re able to observe how that brand interacts in the wild, as it were.

Stephen Roseman:

Now, fast forward to today and it’s a little more complicated. It’s a little more nuanced. So, and I’ll stand by my complicated comment but I’ll go back to that. It’s more nuanced today. Because there are a lot of companies out there today in the consumer world that are able to make big splashes with respect to their brand. And then the question is, as a business owner, business operator, and/or potential acquirer, am I translating that awareness to revenue and ultimately cash flow and profitability? Right? And those are two different things. So we have plenty of examples in recent history over the last decade of brands that enjoyed very high awareness, but didn’t necessarily have the staying power as companies. So what I would say to your listener is, the good news about not being Nike, if we’re going to use Nike as our placeholder for somebody who’s enjoyed global domination and done an amazing job, you have the promising upside in the story of growth in the future. And that is what typically is valuable to an acquirer. And typically if you’re already at a point where you’re talking to an acquirer, you have likely demonstrated some awareness and some expertise in really demonstrating that to the market. Demonstrating that you’re a brand that’s relevant. Presumably that is how you got to a point where you’re enjoying a conversation with an acquirer.

Stephen Roseman:

So for the benefit of your listeners, your readers, somebody reading this transcript, what I would say is that I would want to be able to demonstrate that the brand matters. And use the, and I’ll use the management expression of KPI. Use the KPIs or metrics that are going to be relevant to your industry or your product category that you can point to, right? So for consumable goods, for example, it’s going to be, repeat purchase is going to be far more important. Repeat purchase is always important. You want repeat customers. But for consumable goods, being able to point to frequency of purchase is really important, right? You don’t buy denim every month. You don’t buy jeans or sneakers or sunglasses every month. But for example, cosmetics, you might be a monthly or even weekly consumer of that category. So the folks listening to this will know what’s important to their segment. And I would really focus and emphasize on being able to demonstrate that strength in that market segment.

John Warrillow:

So, to go back to SPY again, this is curious for me. Because you saw this brand but admittedly, it was obviously something that you liked, and were struck by. But sunglasses, to your point, and goggles, are not something that you’re buying every day. What was the repeat purchase opportunity that you saw with SPY?

Stephen Roseman:

So with SPY, and remember, SPY started as, we weren’t the incumbent, right? So even predating my involvement, we were the quote-unquote disruptor, right? Not necessarily a term that would have been used back then, but we were effectively the disruptor taking share from the folks that were already in the market. And what you had is you had an expanding universe and awareness of action sports. You had the rise of digital entertainment, digital distribution of the sports. Not the products. The product distribution came later, from a digital standpoint. But you started to have specialty segments on TV, and ultimately online, when you started getting video streaming online, of some of these action sports. So BMX, motocross, skiing, snowboarding, and it came to the fore. It was kind of that era of Red Bull, Monster Energy, right? We’re all part of that same cohort of action sports brands. Of course, those two are beverage brands, but very much played in that same exact sandbox of brands that were riding this wave of awareness and participation in action sports.

Stephen Roseman:

So you had a couple of factors. So, one, you benefit from a generational advantage. So if you think about what was happening then, you had Gen X was a relatively small generation behind the baby boomers. We were certainly not at that time a baby boomer brand per se. We were certainly at the fringes, but we were going after a Gen X customer. And then you have the benefit of Gen Y coming up right behind Gen X, participating in all these sports that were becoming more accessible to people, right? So all of a sudden through the magic of digital distribution of media, a teenager sitting at home in Ohio could fantasize about surfing big waves, see it live in real time, not just a monthly magazine, which is two dimensional, but actually see it live real time online or on cable or on satellite TV and watch surf competitions from California or Hawaii. Watch skate competitions from California. And there was this whole rise of action sports brands. So Quicksilver was part of that cohort, for example, obviously participating from a surf standpoint. Or at least their heritage was on the surf side. You have Billabong coming from Australia at the time.

Stephen Roseman:

And what I saw was a ground swell of interest and it was a movement away from what I’ll call the, what had been the traditional sports and pastimes from several decades earlier, which of course was golf and tennis and the quote-unquote country club sports. And you had an increasingly younger aging demographic. And what I mean by that is, because it sounds like it’s oxymoronic or contradictory, a 50 year old today participates in sports in a way, and in life and is active, in a way that’s very different than 50 year olds 30 or 40 years ago. And that trend started, and had started prior to my involvement with SPY, but it was becoming very clear that we were becoming younger and healthier as an aging population, allowing an elongated participation in sports. And to whit, when you go to a surf spot today, you go to California or on the east coast, you’re up in Massachusetts or Maine, New York, off Long Island, and you look at the cohort of people who are surfing, the age demographic spans from teenagers to folks in their 60s. And that wouldn’t necessarily have been the case back then. So that was something that was important to me, was I saw a growing demographic, growing participation, and growing interest in the category into which SPY was selling.

John Warrillow:

Got it. How did you add value to SPY? How did you build its value over time? What were the big things that you did to improve its value?

Stephen Roseman:

So a lot of what I’ll reference is from its time as a public company, well documented as a public company we of course had, we reported [inaudible 00:23:08] like every other public company. And we had made some business decisions 15, 20 years ago that had come back to haunt us in the sense that they weren’t as productive of a company as they could have been. They were made from a place of tremendous optimism. As many, and I should say, as many mistakes often do, right? So typically, we make, everybody, whether you’re an investor, you’re an operator, you’re an operator who’s also an investor, we make mistakes in our business. We make mistakes in life. We make decisions that don’t pan out as we intend. That is part of life. It’s part of the human condition. It’s part of learning to be better.

Stephen Roseman:

And the company in its younger days had made some, to my mind at the time, some mistakes in terms of how it was positioning itself, where it was expending resources globally, how it was thinking about distribution globally.

John Warrillow:

Can you give me an example?

Stephen Roseman:

Yeah. So we had, early on we had a focus on dominating the rest of the … what we all ROW. Rest of the world, meaning outside of the United States. And we hadn’t even fully penetrated in the US yet. We had tremendous opportunities to penetrate in the US. And that’s a concrete example of somewhere where you go back, again, 15 years ago and we were, as a public company, well documented, we were spending money growing in Asia and Australia, yet we still had plenty of opportunities to grow in the United States. Right? So these are the types of, when I say companies make mistakes or operators, management teams, make mistakes, they make mistakes, it comes from a place of good intent in almost every instance. But it might just be a blind spot for the management team or that operator. So that was an area where I at the time wanted the company to refocus. So when I became involved back in ’05, ’06, post-IPO, that was one of my big areas of focus. Let’s take our limited resources, be clear. Every company, irrespective of size, has a limited, a finite amount of resources, whether it’s human or financial.

John Warrillow:

Sure.

Stephen Roseman:

And my point to the company at the time was, let’s take our finite resources and focus on dominating where we have this massive groundswell of interest and tailwind. Within North America, within the United States, within a market we already understand really well. Let’s own that market. We have plenty of competition to take on. We can take shelf space from that competition. Let’s refocus there. So that’s a concrete example, to your question about where and how I add value, when I come into a company, just seeing it through a different lens. And having the advantage of being able to take my business perspective across many different industries, many different companies, and many different marketplaces and just applying it. And really turning the solution or turning the problem over in the hands, if you will, almost like a Rubik’s cube and looking at different solutions to the problem, in a way that somebody who just comes from footwear or just comes from the restaurant business or just comes from eyewear might not be able to do.

John Warrillow:

What else did you do in that tenure to really change and turn the business around? Because in your own sort of admission, you are known as a turnaround specialist. One of the things was focus on North America, don’t go chasing a place when you’ve got enough market share here in your back yard. What else did you focus on that enabled you to turn the business around such that Bollé was keen to buy it?

Stephen Roseman:

Yeah, so, and again, some of my comments are going to go back to the pre, not the most recent efforts, just pre-acquisition.

John Warrillow:

Sure.

Stephen Roseman:

But I’ll go back a little further. It’s a little easier to discuss some of what we’re doing as a public company, because it’s well documented, published in the public filings at the time. So for example, capital efficiency. So one of the decisions the company had made, and again, came from a place of concern and care, and I understand the gestalt of why they were making the decision, it just proved to be the wrong decision. We had bought our factories in Italy. So as you are undoubtedly aware, most companies want to be in the business of managing brand IP. So let’s go back to Nike, the example we keep using. So Nike contracts with factories to make, to create the designs. To bring to life the designs that it thinks of in its skunkworks, within its labs in Oregon. Right? Nike is not in the business of owning heavy assets to pour rubber, to make rubber soles. They contract with companies that do that. And they really focus on the IP of R&D, developing great products that consumers are going to want, lots of consumer research, right? And this goes into the R&D process. And then bringing those products that they believe have legs to life by having them manufactured by manufacturing partners elsewhere. That is the norm. That is the center of the fairway for most branded companies, whether it’s luxury goods, eyewear, footwear, denim, or whatever.

John Warrillow:

Sure.

Stephen Roseman:

The decision we had made and why I reference capital efficiency is, we actually made the decision way, way, way back when, again, to acquire our factory in Italy. And so we took, again, this predates my involvement with the company, just to be clear. But we institutionally took the tack that we were going to own the factories of production to better control our sourcing. And that’s just, from a capital efficiency standpoint, that’s not particularly capital efficient. You want to drive capital efficiency by looking for a way to minimize capital intensity while maximizing the return from the products you’re bringing to market. Right? And this is true for any industry, by the way. This translates across, it’s not just true of consumer goods, it’s true of services businesses, et cetera.

Stephen Roseman:

And so that’s another example of where we were able to really pivot, and where I added value is getting us to focus in a place of capital … focus the business on capital efficiency to take us away from a place where we’re tying up capital and trying to manage a business a continent away, right? From the West Coast of the United States to Italy, trying to manage that business remotely. And that proved to be a tremendously successful decision.

John Warrillow:

So on the upside, you get the capital out of the factory and you could put it into building the brand. I guess the other side of the coin, though, is that you … and I guess the other argument, is that you’re now kind of dependent on another supplier to supply the lenses and the product. How did you kind of make sure that you weren’t becoming too dependent on a single supplier? Something we talk a lot about to our audience.

Stephen Roseman:

Yeah, you bring up a tremendously important point. And the point is one of multi-sourcing. So don’t rely on a single source for factories and production. And that is an important point, of course, for diversification for safety and robustness of your business. And one of the things that I think a lot about with respect to businesses, the notion of making a business anti-fragile. And that is not the opposite of robust. Anti-fragile means, let’s take away anything in the business, anything within the business process, that potentially can be a liability to the business. So, single sourcing is great example of that. If you single source any product, or any raw input for your products as part of your factory production, you run the risk of having a supplier that at some point disappoints you or fails you. So to your point, it is a critically important facet of building a business that has more value, which is focused on places where the business might be fragile, and focused on making the business anti-fragile. And there’s a lot that’s been written on this. This is not something, it’s not a notion, a management notion that I invented. This is something that I believe in, though. I’m a huge follower and believer in it.

John Warrillow:

Yeah. So what other examples would there be of places where companies become too fragile and they need to make sure they’re anti-fragile?

Stephen Roseman:

Yeah. So depending on the size of the business, it might also be your labor pool. So subjecting your whole business to a labor pool that’s geographically concentrated. So, an easy example would be if you run a call center business and you have 100% of your employees, for example, in Southern California, where we know California of course is, Southern California, anyway, suffers from being on the San Andreas fault, and suffers from a potential of earthquakes. And it’s one of these things where you have to really think about the difference between frequency and severity. That’s an insurance concept. The frequency might be low, ie, we don’t get earthquakes all that often, but the severity can be quite high. And if you have a severe enough earthquake that it damages your building or damages the telecom infrastructure, in this fictional example of a call center business, you’re in a lot of trouble. Because 100% of your employees are in one geographically concentrated area. So it really rhymes with that idea of not single sourcing. If you have a big enough employee base, let’s diversify where your employees are. Because one, you diversify the hiring dynamics and the search dynamics for where you’re finding people. Every major metro market, or every employment base, every employment area, has a dynamic, micro economic factors, that are determinant for how that economy’s doing, right?

Stephen Roseman:

So think about the difference between, for example, Seattle, which has been enjoying this tremendous tech boom over the last bunch of years and it’s very hard to hire people in Seattle because the demand is voracious. Right? It’s got these large, well-funded tech companies are sucking up all the available bodies that come to work. Where, contradictory to that might be, for example, a market where, and you would look right now in perhaps the oil patch. So somewhere in Texas, where suffering from a weak commodity, and there’s well documented layoffs. So again, in this fictional example, you would diversify your business between, say, Southern California and Texas. Or Seattle and Dallas or Houston or whatnot. And that’s that notion of, again, anti-fragile. So you look across the business by functional area, and look at where your potential problems are. Where your weaknesses might lie. And really address those.

Stephen Roseman:

And you know the old expression, an ounce of prevention’s worth a pound of cure. So let’s see if we can address … And now sometimes, you won’t be able to address them because if you have a company with a smaller number of employees and you really have one headquarters, the company size doesn’t really allow for you to have multiple headquarters. Then what you do is you try within that framework to minimize the potential of business interruption and business risk, right? So back to the call center example, perhaps you pay for a backup call center or backup real estate 50 miles away that, in the event of a disruption … so we did that. I’m based in New York, and certainly every company in New York has, because of the nature of New York being obviously a globally important city and historically been a target for terror activities and whatnot, every company in New York has, or every company of any size, has backup facilities, often in New Jersey or up in Connecticut. Somewhere that’s geographically reachable, where they can move some portion of their workforce that’s remote and take them offsite in the event that there’s a disruption to getting into New York City.

John Warrillow:

I guess, there are some people listening to this saying, “Okay. He runs way bigger companies than I have. Because I’ve got my business that’s,” whatever. 10 employees, 20 employees, 40 employees. And I hear what you’re saying about, and by the way, I totally believe, I agree with you in this idea of avoiding single source supply and so forth. But there’s always this trade-off for entrepreneurs around, on one hand, doing everything to make your business anti-fragile, which involves investment. And on the other side of the coin, all these things that we invest in like multiple locations and backup facilities cost money. And so they bring down the [inaudible 00:35:21] of the business. And so how, as an operator, as a turnaround guide, do you reconcile those two … do you see how those two things compete with one another? And if so, how do you reconcile them as someone who’s focused on building value into companies?

Stephen Roseman:

Absolutely. And within the vein of the nature of your show, in terms of built to sell, is really asking yourself as an operator, “What’s important to my would-be buyer? What’s important to this industry? What can this business bring to the table that would be of tremendous value to a buyer, that they might not have or they don’t have enough of?” Maybe it’s a new brand, right? So maybe it’s having a differentiated brand that has a different core market, maybe skews younger, skews older, skews healthier, whatever the case may be. Perhaps it’s in fact a different supply base. So it allows an established manufacturing company on acquisition to instantly diversify its sourcing, because you as a target, you as the operator in your business as a potential target for an acquirer, has a vastly different supply base. And you know that in your industry, within your business, within your industry, that’s going to prove to be attractive.

Stephen Roseman:

So I hear you, and there’s no doubt you’re titrating between spending more money and building robustness or anti-fragility. And it’s really knowing where you are within your business individually. Are you preparing your business for a sale? Because of course, the decisions you make will be influenced or informed by your timing, no doubt. But it’s also the dynamics of your specific business or industry, and what might prove to be valuable. And one of the things that you and I discussed a little bit before the show was the importance of not just putting on … not making the business look better just for the purpose of the sale. Build, this is an expression I use with my management teams all the time. Build the house you want to live in. Build the business the way you think the business should be built, so that the business reflects the best practices, best thinking that you can bring to the table with respect to your specific industry, your specific company. That will always prove to be attractive to a potential acquirer.

Stephen Roseman:

And one of the mistakes I see potential sellers of a company make is they will gussy up the business. They’ll fix up the business just for the sale, and they’ll make the business look pretty just to attract more suitors or potentially a higher bid. And in my experience, in almost every instance, that proves to be the wrong decision because, one, the potential acquirer tends to see through that thin veneer. Because looking at historical financials, you can get a pretty good sense as to when those changes were made. And it becomes pretty abundantly clear that those changes were made very recently. And then you’ve got to substantiate, and it doesn’t put you on great footing with a potential acquirer. Make the decisions that are substantive that are, and can be substantiated to a buyer. But because they’re good decisions and the right decisions for your company. And in my experience as a seller of a business, and I have sold a lot of businesses, you will get paid for that over and over and over again. And there are no regrets. Back to this notion of, build the house you want to live in.

John Warrillow:

I love that expression. I’ve never heard it before, but it’s tremendous. As you look at the acquisition … I know we have to be a bit delicate around the Bollé acquisition of SPY, but as you think about that acquisition, are you able to talk at least at a high level about what you think Bollé saw in you? What it was that was strategic for them?

Stephen Roseman:

Yeah. So again, just to be clear, not deputized to speak for Bollé or other things about the acquisition.

John Warrillow:

Right.

Stephen Roseman:

What I can speak to is where SPY is, and where it’s been in the marketplace. The beauty of being, back to my earlier point, a consumer goods company is we’re very observable. And what you see in SPY today is a brand with heritage, back to my point I made a little bit ago. Which, we’ve been around 25 years. So we have authenticity and a standing, if you will, in the action sports market globally where we’re recognized as a brand. Where we’re recognized as a company. And we’re well understood within our core constituency, our core customer base, for what we are. And I think any acquirer looking at SPY would have seen that. To whit, I can share with you that I’ve seen photographs, this has been shared many, many times, photographs of folks who are wearing, who are off skiing or snowboarding wearing helmets from one manufacturer, goggles from another manufacturer, and plastered on the side of their helmet is a SPY sticker.

John Warrillow:

A SPY sticker. Nice.

Stephen Roseman:

Right? And the funny thing is, they’re not wearing anything, in those examples, they weren’t anything SPY other than the sticker, right? Because the brand stands for something to them. And you see that. And there are those brands that have those power within the marketplace. And by the way, we’re seeing it now, just to give you an analog, because some of your listeners might be familiar with the brand, called Allbirds. Allbirds was a brand, and I’m only referencing them because we were talking about Nike, that came out of nowhere, more or less. Started in Northern California to tackle, to bring ESG friendly, green friendly footwear to market. And what they use is a sustainable model. They bring, they develop footwear using wool from sheep. You don’t think of wool as a natural material, or a typical material for shoes.

Stephen Roseman:

And they have absolutely killed it. They are the footwear of choice in the whole tech community, the whole startup community. I have yet to meet with somebody that works in or around tech that isn’t wearing Allbirds. If I do a meeting and there’s a half a dozen people in the meeting, I will tell you half of them are wearing Allbirds as footwear. Even with suits, even with slacks, and they are sneakers that have just become very much de rigueur in that community. So again, this idea that when you build a tribe and a brand, so when you ask about SPY, I point to that same idea. SPY has had a tremendous tribe around its brand.

John Warrillow:

I can sense another investment coming. Fantastic. Fantastic. You’ve been very generous with your time, Stephen, and I really, I can tell that you have a tremendous wealth of experience in this area. Both in the buy side and sell side. So it’s just enormously valuable for our listeners. I appreciate you spending the time with us. Where can people reach out, if they wanted to connect with you? Do you have a Twitter following, or LinkedIn, or what’s the best way for people to reach out?

Stephen Roseman:

Indeed, LinkedIn would be the best place. I am certainly findable on LinkedIn. And I can provide you with the links that you can then share with the folks on the podcast.

John Warrillow:

Yeah, that would be great. And it’s Stephen. Let me make sure I’m getting the spelling. S-T-E-F-A-N-E. Is that correct?

Stephen Roseman:

No. So it’s S-T-E-P-H-E-N.

John Warrillow:

My apologies. I had it wrong. I think I spelt it phonetically in front of me as opposed to actually looking at the document, so. That’s awesome. Stephen Roseman.

Stephen Roseman:

No, no worries. And it’s Roseman, R-O-S-E-M-A-N.

John Warrillow:

Awesome. We’ll put that in the show notes as well. Stephen, thank you so much for joining us.

Stephen Roseman:

All right, indeed John. It was a pleasure, and nice to meet you.

John Warrillow:

Nice to meet you.

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