Five Simple Ways to Redesign Your Business

When you're looking to grow, sometimes less is more.

By Antonio Neves   |   November 4, 2010

When Edith Heath founded Heath Ceramics in the 1940s, the legendary artisan likely had no idea that her work would end up in places like New York's Museum of Modern Art. But when husband-and-wife team Robin Petravic and Catherine Bailey purchased the Sausalito, California-based tableware manufacturer in 2003, the luster of Heath's company was fading.

Sales were lagging. Standard operating procedures were nonexistent. And morale was low. Using their background as industrial designers, Petravic and Bailey set out to redesign every aspect of the company. All changes would be based on a key principle of good design: simplicity.

"There's been a lot of emphasis on big innovation," says Petravic. "I think a lot of people have forgotten the importance of just doing something simple and doing it well."

Seven years later, Heath's "redesign" is a resounding success. Sales that barely topped $1 million in 2003 are projected to hit $9 million in 2010. Here's an inside look at how you can redesign your company the Heath Ceramics way:

Tell your story. Every business has a story to tell. Heath Ceramics has a rich history of producing tableware and tile. Petravic and Bailey used this to their advantage. "We don't always call it marketing," says Bailey. "Our strategy is to make sure we tell the story really well."

Heath tells the tale through factory tours, tools like its website and especially press and blogs. "We would really rather have people tell the whole story than … just take out an ad and have people just recognize the brand," says Bailey.

Focus on direct sales. According to Petravic, direct sales channels generate almost 80 percent of Heath's revenue. This includes its website, three retail stores and direct sales to restaurants, contractors and homeowners.

"We really enjoy being directly connected with our customer," says Bailey. "It also makes a lot of business sense because we're making a much better margin on our products when we're selling to them directly."

Collaborate with strategic partners. Though online wedding registries have been a major success for Heath Ceramics, they also presented a challenge in the beginning. "One of the big shortfalls when we first put registries up was that all we sold were dishes," says Petravic.

This led Heath Ceramics to partner with outside designers who created complementary products. "It really makes Heath a better place for [customers] to shop," says Bailey. "We're meeting more of their needs." Today, Heath partners with multiple designers, like flatware maker David Mellor and linen maker Skinny LaMinx.

Charge your real cost. Heath Ceramics products aren't inexpensive. Some mugs retail for $28, and an iced tea set goes for $175. But Heath's retail prices reflect what they define as the "real cost." This includes the high overhead of manufacturing in the United States.

"The idea that manufacturing is all about competing on price is kind of fed by the idea that shoppers only want the cheapest stuff they can buy," says Petravic. "There's certainly a market for a company our size where we focus on the value."

Revamp your company culture. A major challenge for Petravic and Bailey was revamping Heath's staid culture. Their first step was to convince employees that their goal was to create a strong company for the long term. "Both Cathy and I don't really understand this concept of building a business to sell it," says Petravic. They implemented a production bonus plan and employee morale immediately increased.

Second, they created transparency across the company, providing employees with access to the company's financials and metrics, excluding payroll. "Transparency enables everybody to be galvanized toward the same goals," says Petravic. "It's about organizing your team of people, getting them motivated, giving them clear tasks."

Since 2003, Heath hasn't laid off any employees, reduced pay or cut any benefits -- and that's part of what makes it a "Cool Runnings" company.

Antonio Neves is the host of Business on Main’s Web series, "Cool Runnings," and a correspondent for NBC NextMedia Productions. Check him out at www.antonioneves.net.

Which Business Entity is Right for You?

Choosing a legal structure for your business is important, and if you don't choose the state will choose for you.  The default business form for a one-person enterprise is a sole proprietorship and for two or more people it is a general partnership.  The sole proprietorship is not all that bad if you don't care to distinguish the business from yourself and you don't plan to involve anyone else.  However, a partnership entity does not protect the proprietor or partners from 100% liability.

The business form should suit the business activities.  Each business is different and does not operate in a vacuum, so it is important your unique objectives match the basic structure of your business.  You and your attorney should consider tax implications, liability, projected earnings, losses, capital expansion, leveraging, additional equity stakes, exit strategy, and estate planning.  The first major question to consider is the likelihood of your business going public.  A technology or pharmaceutical company may have a short period of licensing their product before selling out or going public as a C Corporation.  A service based company is not likely to go public.

There is also the important issue of liability for closely held companies.  As mentioned above, a general partnership and sole proprietorship do not have limited liability, but an S Corporation, Limited Partnership (LP), and Limited Liability Company (LLC) do.  These three entities not only have limited liability but also pass through taxation. 

With that in mind, let's discuss your three top choices for a closely held enterprise:


1. S Corp

S Corps are corporate entities and thus fall under the state's corporate statute which means there is a limit to the type of business activity.  The limitations include a maximum of 100 shareholders, no different classes of stock, and no foreign shareholders.  S Corp is a common form for family businesses that pre-date the creation of LLCs.


2. LP

A Limited Partnership with a corporate general partner is one way to take advantage of pass through taxation and maintain limited liability.  However, there are managerial limits with an LP - limited partners cannot exercise control or they forgo their limited liability.  An LP is a good form for passive investors (ie, real estate developer) or venture funded businesses to offer investors equity without control of the business activities.  As a partnership, an LP retains some flexibility. 


3. LLC

A Limited Liability Company (not Corporation) does not sacrifice limited liability, flexibility of control, freedom to contract, or pass through taxation.  An LLC has members instead of shareholders or partners.  It is a catchall entity because it does most everything an S Corp and LP do with minimal shortcomings.  Those shortcomings include no public trading, state level taxation, lack of familiarity (it is still a new entity for accountants, courts, etc. so the differences between corporations and partnerships are still being worked out), and issues with selling the entity or ownership interests.  An LLC is still the quick answer to which form your business should take... for now.

More on Employment Agreements

When structuring an employment agreement, there are three key parts: (1) Term of employment, (2) Compensation, and (3) Restrictive Covenants.

1. Term of Employment

A term period provision with a drop dead date is unnecessary for most agreements - employment is often supposed to be perpetual.  However, termination for cause can shorten the employment term.  Cause can include breach of agreement which may be any misaction like failing to meet expectations, not using full time and energy for the business, committing a crime of moral turpitude, or surfing facebook on a work computer.

A Drop Dead Term ends on a particular date.

An Evergreen Term is an agreement provision that renews automatically for the term specified if no action is taken.

A Sneaky Evergreen Term is like the Evergreen Term but the notice period for taking action is at the beginning of the term instead of at the end.  This term is more favorable to the employee once the notice period has passed.

There may also be a temporary leading to long-term employment provision in the form of a probational period that protects both parties.

Finally, there can be a disability provision that kicks in depending on length and severity of disability.

2. Compensation

Compensation is more than salary, it includes benefits and possibly stock ownership.  The employment agreement may have a buy back clause to compel the sell of company stock upon termination of employment.  Agreements set forth all types of compensation and allow the precise definition of compensation and expectations.


3. Restrictive Covenants

There are three factors that restrictive covenants must conform to:
    1. Reasonable Duration
    2. Reasonable Territory
    3. Reasonable and Limited Scope

Restrictive covenants are equitable remedies that are enforced by judicial exercise (ie, injunction).  There is a risk that a judge might interpret reasonableness differently when exercising equitable powers.  There may be a legal remedy in the instance of buy out rights for liquidated damages.  A court cannot force payment of damages, but it can give the option to pay or not engage in activities.

Types of Restrictive Covenants:

Non-Solicitation of Employees Clause - Must be reasonable in Duration.  Held up by courts except when offer is a general solicitation.  There cannot be a solicitation of customers either.

Confidentiality Clause - Restricted by all three factors (Duration, Territory, and Scope).  This protects information and limits disclosure.

Proprietary information cannot be taken by an employee even if an employment agreement is silent on the matter.

Finally, there must be a separate separation/severance agreement upon termination.

Employment Agreement Form:

Four Myths of Employment Agreements

Should I have an employment agreement with my employees?  YES!  Do not fall victim to the myths:

Myth 1: Employee has the advantage
Truth: If the employee is valuable enough to hire, then they are valuable enough to lock in with an agreement.  Key players should definitely be under an employment agreement.  In the case of at-will employment jurisdictions, the relationship can be terminated by either party absent an agreement.  An employer would want to protect themselves from an employee leaving unilaterally.  With an agreement, the employer can limit and restrict the relationship.

Myth 2: A front-end downer
Truth: An employment agreement doesn't have to be too complicated to do the job.  You should be able to work with the employee to negotiate an agreement if you expect to work with them as an employee in the future.  If the potential employee is uncomfortable negotiating the agreement, pay for an attorney to represent them.

Myth 3: It is easier after the honeymoon
Truth: After the employee has proven their worth they will only have more power to negotiate.  Create the agreement at the beginning with the protective measures in place to ensure future quality work.

Myth 4: Long and legal
Truth: It can be short, and length and legal complexity should not scare the employer.  Work with an attorney.  If your agreement will be a standard for future employees you can go from the initial advice you received.