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Last Update: Friday December 15, 2017

Key Idea: Find Suppliers Who Help

Founder Tom Gegax tell us that TiresPlus financed its growth by plowing the earnings of the business back into expansion and by borrowing from suppliers.

Key Question:

A: 

Tom and Don went to their suppliers for financing when it became clear that the two didn't have enough cash to grow.  At first, this was by necessity, as the banks would not lend to TiresPlus because of Tom's lack of experience. Later, it was a conscious decision.

Q:  Why would a bank, which is in the business of lending money, not loan money to Tom and Don, and yet a tire company, which is in the business of manufacturing tires, would?

A: This is a classic risk-reward analysis for both the bank and the tire manufacturer. We all know banks are conservative lenders. They take no equity position in their customers' businesses so their money is cheaper for you than venture capital or going public. Cheaper for you means a lower return for them, and a lower return means they are not willing to enter into high-risk deals. Any banker with a crystal ball would have leapt at the opportunity to finance the growth of TiresPlus, but unfortunately, success is difficult to predict. For the most part, bankers don't finance start-up operations. When they do, it's because they see a strong secondary source of repayment, such as the personal guarantee of a high net worth individual with a clear capacity to repay the loan if the business fails.

Let's look at the risk-reward relationship from the tire manufacturer's point of view. Supplier financing is more common than you might expect. The reward to the vendor is substantial, a growing, successful customer (you!) buys more than a smaller one. The risk to the supplier is actually less than we might first think. Remember, the supplier is getting the margin on the inventory you purchase. Every dollar of profit the supplier earns on your account further mitigates any potential loss on the loan made to your business. Suppliers generally evaluate customer financing opportunities in terms of the "payback period", i.e., how long it will take to eliminate the possibility of any loss on the loan. This period is generally substantially shorter than the period over which the loan is repaid.

Let's look at a specific example: A retail customer wants to borrow $100,000 from a manufacturing supplier to open a 2nd store. The customer currently purchases $10,000 per month from the manufacturer; this amount will double with the second location. The customer is willing to repay the principal of the loan ratably over a five year period. The manufacturer's gross profit is 20%.

At the end of the first year, the customer will have repaid $20,000 on the loan and purchased an additional $120,000 of inventory, providing the manufacturer with an additional $24,000 of gross profit or a total payback of $44,000. The entire payback period is just a little over 2 years, rather than the five year period of the note.

Rarely are suppliers motivated by the actual return on the investment, i.e., the interest on the loan. They are much more interested in the customer relationship and its growth potential. There is also some concern that if they don't make this financing available to you, one of their own competitors will. If you go elsewhere, the current profit associated with their relationship with you is at risk. 

Think about it

What unconventional sources of capital are available to you to finance the growth of your business? (Hint: Who makes money if you make money?)
 

Clip from: Tires Plus with Tom Gegax and Don Gullet

Minneapolis: In 1978, Tom Gegax and his partner Don Gullet, bought a few gas stations and opened for business. By 1998, they had 150 tire stores with 2,000 employees generating $200 million in annual sales.

That's a good story unto itself, however, in this episode of the show, we learn from a master entrepreneur about the meaning and value of life. Tom Gegax is pulling and pushing us up the ladder. When they sold this business, he became an author. His third book, The Big Book About Small Business  builds on his first two,  By the Seat of Your Pants: The No-Nonsense Business Survival Guide, and Winning in the Game of Life.

The first editorial title for Tom's book was The Enlightened Executive. And with all these self-help books and continuous improvement cycles within our lives, enlightenment is actually breaking out all over.

Tom Gegax was a founder, the Head Coach, as well as Chairman and CEO.  In 1999 they were being courted for acquisition.  In 2000 Bridgestone/Firestone sealed the deal to buy 100% of the company.

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Gegax Management & Tires Plus

Tom Gegax, founder

Gegax Management Systems
PO Box 16323
Minneapolis, MN 55416
612-920-5114

Visit our web site: http://www.gegax.com

Office: 612-920-5114

Business Classification:
Education

Year Founded:

Find Suppliers Who Help

In Minnesota:

TEAM PLAYER: I'd like you to give a warm round of applause to our leader and head coach Tom Gegax.

HATTIE: (Voiceover) The Tires Plus recruits attend spring training session to hear from their head coach Tom Gegax.

TOM: (addressing his teammates) We try to create an environment where you can get the best of both worlds. You can make as much money as you would ever make in a business of your own. Yet, being members of a brain trust, a team and that's why you would want to stay here.

HATTIE: (Voiceover) While Tom was the internal and external communicator, Don Gullet, his partner worked on internal operations, store relations and expansion. The two started Tires Plus in 1976. Both left Shell Oil and each put up their own cash to buy three gas stations which they converted to tire stores. When they sold the business in 2000, there were 150 stores with 2,000 employees generating 200 million in annual sales.

TOM: Interesting story. Ten banks I had to go to before I was able to get a loan.

HATTIE: Why?

TOM: They kept saying no, no. And the main reason, you don't have experience.

HATTIE: Have you done an initial public offering?

TOM: No, all our growth has been our retained earnings. In some earlier years where our growth exceeded our profit-making abilities, manufacturers assisted some in our growth there.

HATTIE: So you did get some partnership ...
 

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