Andrew: Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy where interview entrepreneurs about how they built their businesses. Joining me is . . . I don’t know if I’d call you an entrepreneur because you technically didn’t create the company, but you’ve got an interesting entrepreneurial story. So the person who I’m referring to is Anthony Vidergauz. Not even that hard. Anthony Vidergauz. Did I pronounce it right?
Anthony: Not quite. It’s Vidergauz.
Andrew: Vidergauz.
Anthony: That’s right.
Andrew: I phonetically wrote it out and I still got it wrong. Anthony Vidergauz. He was working for a company called California Closets which I remember reading about. It was just, like, unbelievable entrepreneurial story. This kid created it at 17 years old, he ended up on Oprah talking about how successful he was. I think at the time there was another entrepreneur on there saying, “I’m more successful than you.” And that guy ended up in jail a year later. So the fact that the 17-year-old kid who grew up to create this closet company did well and then wasn’t trying to be the richest man in the world or the showiest, but was just showing, “Here’s what I did,” was amazing. And then he ended up selling the company to Williams-Sonoma.
And then I read a bunch of articles about how it didn’t do so well for Williams-Sonoma. And today’s guest, Anthony, ended up buying it from them and turning the company around and then selling it and today he is running a company called Paradise Group, which offers a range of advisory services and support to franchise businesses. And it makes sense because California Closets was a franchise operation, right? You had a bunch of franchises around the country all providing custom closets and home storage systems.
All right. I should say as we get into the story, this interview is sponsored by two phenomenal sponsors. The first if you’re hiring developers, go check out Toptal. And the second if you’re building a website, or frankly, if you’re not thinking about it, you should, go to HostGator and I’ll tell you about them later. Anthony, good to have you here.
Anthony: Nice to be here, Andrew. Thanks very much.
Andrew: So the story that I keep hearing is how you started out with a few thousand dollars and turned it into a few million dollars. The few thousand dollars is from what? What does that represent?
Anthony: Well, as you’ll probably you’ll learn from my accent I was born and raised in South Africa. I came here when I was about 30 years old. And at the time, I didn’t have a lot of money. I came with, actually, with about $5,000, at least $5,000 that I could invest in a business at the time. So that’s pretty much what that represents.
Andrew: The $5,000 is a $5,000 that you came into the country with not necessarily what you used to buy the business. The business was bought partially with help from a mentor. Am I right?
Anthony: Yeah. And I’ll just to give you a quick background. I worked for the company. I was hired by the 17-year-old, and I very well remember that Oprah show and the other guy who was on the show with him and landed up in jail. I remember that very well. But I worked for the company as a legal counsel, which was quite surprising. It was a startup company. I was a lawyer in South Africa, and I came to this country actually on a two-week vacation. I had no intention of actually even staying in this country.
Literally, two days before we were due to go back to South Africa, my mother-in-law who was living in LA had her closets done by this company. As I said, it was a little more than a startup, California Closets. And she loved the idea. Lots of people were leaving South Africa because of the political issues. I was very happy in South Africa at the time. My wife was quite keen to leave, I should say. And my mother-in-law set up an appointment with California Closets.
The designer who came around and the 17-year-old who you mentioned in your opening were best friends. He hired a number of his good friends at the time and my mother-in-law said, “Is there a way my son-in-law could meet the president of the company or somebody in the company?” And the designer said, “Sure, I’ll call my good friend.” And she set up an appointment with the founder and CEO. And there was probably five or six people in the company. That was a very small company at the time. And it was just a friend calling a friend and setting up the appointment.
I went over. I came back. I think my wife and I were in Disneyland or somewhere. I had no idea my mother-in-law was doing this. And I remember saying to him, “Well, if you set up an appointment like this, I’m not a handyman. I don’t know if I’ve been through this with you, but I’m actually a lawyer.” But let’s go to the meeting. We went to the meeting and this guy was first offering me a franchise and then he said, “What is your background?” I said, “Well, I’m in law.” And he said, “Well, you can be legal counsel.” And aside from the fact that I didn’t have a green card, I had no legal qualifications in this country, I became the legal counsel for the company.
Andrew: Why? What attracted you to this company?
Anthony: So that’s a great question. And this I give total credit to my wife. I came back and I said to my wife . . . He had made me this offer and he said, “I’ll sponsor you for your green card.” Remember, this was a little more than a startup company. And I think he saw in me somebody that we got on well right off the bat. And in fact, we’re still good friends. And he said . . . So I thought, you know, I made a good connection with the guy. I was still young. I didn’t really want to be a lawyer. I’d been complaining about that for years to my wife. And I came back and my wife said to me, “Look, life is an adventure.” We didn’t have kids at the time. “Why don’t we give it a go? You work for this company for a year, they’ll sponsor you for your green card. If it works out, it will be great. And if it doesn’t, you can always go back to South Africa and be an unhappy lawyer,” which is . . . So on that basis, I said, “Okay.” When you’re young, you do things perhaps a little differently.
Andrew: Why did your mother-in-law want you to see this company? What did she see in California Closets?
Anthony: Well, she saw two things. One, she liked what they did, even though in those days it was pretty basic stuff. Two, I think she was quite keen on getting her daughter and son-in-law out of the country. A lot of people were immigrating. She focused to be a great opportunity. She was living in America pretty much on her own. And she thought why not? Let him go and talk to this company. Maybe there is something there. It was just a flyer, but it was one of those things that came to pass.
Andrew: And so the beginning of many of the headlines I saw about you was “Immigrant Turns $5,000” that’s what you started with “into $300 million a Year Business.” That’s what the sales were at California Closets at the end when you sold it.
Anthony: Yes. Yeah.
Andrew: Okay.
Anthony: So you remember it’s a franchise business so that was the sales, total revenue of the system.
Andrew: And each franchisee owns their own business, they just kicked back some money to you. And before we get into that, I wonder if part of the reason why your mother-in-law thought you’d be interested in it is that your dad owned a small retail furniture business in South Africa. Am I right?
Anthony: That’s very true. And my dad was an immigrant from Latvia, came to South Africa, couldn’t speak the language, but owned a small retail furniture business. And I did . . . So, it was kind of in the category, but I can’t say that when I used to go to my dad’s business, I thought one day this is what I would want to do. But yeah, I suppose it was a little bit of that when I was offered the opportunity.
Andrew: I told you I couldn’t find much information about your time in California Closets because we’re talking about the ’90s, the ’80s, the early 2000s. It’s hard to go back in time and find a lot of articles online. But I did find this one article about your dad. In the early ’80s, apparently, you guys were at home, you and Lisa, you were dating her at the time, you were at home, the alarm goes off, your dad asks him to drive you to his store. Do you remember what I’m talking about?
Anthony: Totally.
Andrew: You got to tell that story. This just says so much about your dad and where you’re coming from.
Anthony: Yeah, it does. And frankly, it was an inspiration for me and a lot . . . I think I took a lot of lessons as I became an owner of a business in later life. Well, what happened as you pointed out, Andrew, is it was a Sunday morning in South Africa. We were visiting my parents and his alarm went off and my dad said, “I’ve got a faulty alarm.” It was a Sunday and in South Africa in those days, everything was closed on a Sunday, so his business wasn’t even open. And he said, “I’ve got to go down and turn off the alarm and get the alarm people at some point to come fix this.”
So he said, “Do you want to come down with me?” And I said, “Yes, I’ve got to put some gas in the car.” And Lisa, my wife and I went with him to his store, we dropped him at the store and said, “We’ve got to go off and put some gas in and we’ll come back and get you. Go and turn the alarm off.” And we went off and about 20 minutes later, maybe a little longer than that, we came back. And we stopped the car and my dad was standing outside his store with a young man who couldn’t be older than 21 or 22. And they were shaking hands with each other and patting each other on the back and wishing each other well. And he got into the car a minute later and we looked at him and he was a little . . . I don’t want to say he was white, but he was a little shaken.
Andrew: Yep.
Anthony: And so we asked him, “Who was that guy?” So he said . . . He proceeded to tell us the story. We dropped him, he walked into this store, and he suddenly confronted by this young man with a stocking over his head and a gun pointing at him.
Andrew: Wow.
Anthony: And he said to the guy . . . He started talking, which was very much my father, he started talking to the guy and he said to him, “Look, put your gun down. Let’s talk about this. What is it that you want?” And the guy interestingly enough said he wanted food out of a refrigerator. My dad was selling furniture and appliances including refrigerators. And my dad thought that was odd because he did have one refrigerator which he used for excess meat and other food for our house. And this guy obviously knew that this was there.
And my dad’s store was in a poor part of a town called Krugersdorp about 20 miles outside of Johannesburg. And a lot of his customers used to buy from him what we called on HP, on credit. They used to pay off for the furniture, whatever. So my dad said, “You want some food. I’ll give you some food. But why don’t we go and sit down and talk about this for a minute. Come into my office, let’s talk about it. You look like you’re a young man,” even though he couldn’t see him properly. But he said, “Come and sit down and I’ll make you a cup of tea and let’s talk about it.” So they went in, the guy sits down, he’s very nervous, and my dad makes him a cup of tea and he comes back, sits down. The guy is still sitting there with a gun in his hand. My dad gets him to put the gun down. He says, “Take the stocking off your head otherwise you won’t be able to drink your tea.”
Andrew: Drink your tea, yeah.
Anthony: So the guy took the stocking off his head slowly and as he did that my dad recognized the guy. He was a son of a customer and a poor people. And this guy knew because the customers used to come in on a fairly regular basis mostly to make their monthly payments. And this kid came in with him on regular occasions and he knew there was food at the back. I don’t know, you know, one of the occasions I suppose my dad was there and showed it to them. I don’t know.
So he had come to get the food. But the long story short is my dad spoke to him like a father to a son said, “You must never do this again. I’m not going to turn you over to the police, but I am going to call your parents.” And when we pick them up, they were on the way out, best friends. And the lesson I learned from that . . . He did call the parents, by the way, because he said, “You’re going to spend the rest of your life in jail if you do this again.”
And the lesson I learned from that I think was way of talking to people and that difficult situations can be resolved by doing things in a humane way and understanding way. He knew these people were poor. He knew that it was more . . . He wasn’t even trying to steal furniture. He was trying to steal food. And I think it gave me a sense, I know it gave me a sense of how to treat people. And it was a lesson that I learnt right through my business career. It was a lesson about relationships and personal relationships that I’ve never forgot.
Andrew: Okay. I love that story, by the way, and I’ve got to remember that when something’s frustrating me when I get angry, the anger actually would just bring out anger in the other person.
Anthony: Yeah.
Andrew: Maybe it’s better to just be as chill as your dad was in that situation. Let’s come back to California Closets. So the 17-year-old, Neil Balter. Am I right?
Anthony: Yeah.
Andrew: He starts selling franchises, the company starts to grow while you’re there, it becomes a company that’s doing $9 million in revenue, $850,000 in profit. By 1989, grows from 4 people in a house or so to 125 people. Salesforce of 350 people, I’m guessing that’s because of the franchisees. Am I right?
Anthony: Yeah.
Andrew: So it just keeps growing and growing and growing. And then the founder tries to sell the company once from what I understand, doesn’t happen. He said in one article that I read, he worked up the courage to call up Williams-Sonoma, Williams-Sonoma said, “Yes, we’ll buy it,” in a stock swap valued at $11.5 million. He has a five-year contract with them, and I think a couple of years into it, he basically gets kicked out because sales aren’t where they want to be and he’s done. Williams-Sonoma now has this in their books. They apparently can’t do anything with it. 1994, am I right about the year? Yeah, 1994 they’re just really eager to sell this company. And I should say as the backdrop to all this, the home organization trend was really kicking up. People wanted this. It was like a $1. something billion a year industry and growing.
Anthony: That’s correct.
Andrew: Okay. And so 1994 Williams-Sonoma wants to sell. How did you find out that they want to sell? Were you working there?
Anthony: Yeah. Well, from ’87 to ’90 the company was based in Southern California in LA and actually the company had started there a few years before I joined was LA company, Williams-Sonoma buys it in 1990 and moved Neil, the founder, myself and our CFO up to San Francisco. And as you mentioned, for one reason or another, the two of them left the company in a short space of time. For some reason, they hung on to me maybe because I was the . . . They wanted one person who still knew the franchise system, whatever the reason was. And I stayed on. We were sort of a branch of Williams-Sonoma separately run, but under the Williams-Sonoma umbrella, and I stayed on as legal counsel from ’90 to ’94.
How I heard about it is through the grapevine. The company was . . . Williams-Sonoma, by the way, brought in their own CEO after Neil left the company. It didn’t work out well. And by 1994, we were losing hand over fist. It was like the . . . Williams-Sonoma, brilliant company, outstanding company in every respect, but it was . . . The economy wasn’t doing very well, and California Closets was floundering along for a variety of reasons. One, we were the pioneer of this industry. You could always get your closets done, but you’d have to get a contractor. We were the first closet company in the mid-80s when Neil started the company.
So we were the pioneer, but my 1994 we had a lot of copycats. There were a lot of people doing exactly what we were doing and typically, cheaper. So the company started losing business, we were certainly losing money and almost the entire time Williams-Sonoma owned us the company was losing money. So 1994 I had heard through the grapevine that they wanted to sell the company even though whether it was true or not, but, you know, the talk was out there.
Andrew: It was company rumors. You heard internally, “This is not sustainable. They want to sell it.” You didn’t have the money to buy it at the time.
Anthony: Yeah.
Andrew: Or did you?
Anthony: I did not. No.
Andrew: You didn’t.
Anthony: So I had a little more in my pocket because I got some stock in the company when I back in LA before Williams-Sonoma bought the company, but only a small piece. So now I had a little bit of money. I had met my financial advisor, not advisor, my financial arm when it came to buying the company was a gentleman by the name of Bill LeVine. Bill was the former founder and CEO of a company in the printing business called PIP Printing, PIP Printing. They had over 1,000 franchises. And Bill used to be on our board when we were still in LA.
I was this young immigrant that Bill took under his wing and became my mentor in this country. And he and I used to go out and play golf. He was a very keen golfer. I’m a keen golfer. We used to go out and play golf at his club in LA and Palm Springs. When Williams-Sonoma bought us, Bill fell off the ball because we were now under Williams-Sonoma’s board in 1990. But Bill and I continued our friendship. He was 30 years older than me, but he remained my mentor. And even while I was up in San Francisco, I used to get back to LA frequently to visit family, and the rest of my family all in LA. And we would go out and play golf at his club and I’d tell him what’s going on, how badly things were.
But one day in 1994, a critical day certainly in my life, we were on the golf course, on the 11th hole of his golf course at Brentwood Country Club. And we’re about to tee off and he said, “So how are things going with Williams-Sonoma?” And I had now heard that they wanted to sell the company. And I said, “Bill, not to well. As you know, we’re losing money and things are not improving. We have a very disgruntled franchise system. And I have heard through the grapevine that Williams-Sonoma want to sell the company.”
And being this wise man that he is, he didn’t say anything for a minute or two and we teed off and we drove to the green. And I was about to get out of the golf cart and he said, “Wait a second.” He said, “So you think Williams-Sonoma want to sell the company.” And I said, “Well, that’s what I’ve heard.” He said, “I’ll tell you what.” He said . . . And he’s got his arm around me because I’m ready to go and putt. And he says, “I’ll make you a deal.” He said, “If Williams-Sonoma is willing to sell the company, I will back you financially. So you call Williams-Sonoma and tell them that you have a backer.” And he said, “Provided you’re willing to run the company, I will back you.”
And I remember turning to him and saying, “Bill, I’d heard that you’re a wise man and I’d always thought you’re a wise man. I’ve never run a company before. Are you sure you want to do this?” And he said, “Absolutely.” And I honestly think a big part of it was, you know, we liked each other, he was my mentor, and he wanted to give me a break. He had no idea whether I’d do well or wouldn’t do well. He was a wealthy man. He had sold his company. He was retired.
Andrew: It was two years before he sold this company. Am I right? I think he sold it to Sir Speedy in ’96.
Anthony: Yeah, I think you’re right, actually. I think you’re right. So he maybe hadn’t cashed in fully yet, but he was a very wealthy man.
Andrew: But what did he see in California Closets? I understand what he sees in you. He’s watching you over the years, you’re friends, he wants to support you. What did he see as the opportunity that Williams-Sonoma couldn’t capitalize on? And they were better off financially than he was, better than you would be.
Anthony: It’s a very good question, Andrew. I think that he was guided twofold, he was a), in the late ’80s when the company was actually making money I would say to some degree despite itself. We were selling franchises. We were making things up as we went along because we weren’t a well-funded company in those days. And he was on the board. I met him because he was on our board. And there was a lot of positives going on in the company, people excited to buy not only the company but the product. And I think it was a combination of them thinking not that Williams-Sonoma did a bad job. As I said it was poor economic times. Williams-Sonoma, excellent company. So I don’t think it was a . . . We had a CEO who didn’t work out. They hired a CEO in the early ’90s. But I do think that he was largely influenced by his desire to help me.
Andrew: That was it, just believing in you.
Anthony: Honestly, I think he, believing in me may be too strong a word, but he definitely wanted to help me. He realized that there may be no place for me if the company is sold or whatever Williams-Sonoma is going to do with it. And he . . . But I think he liked the company. He couldn’t quite get why the company wasn’t doing better.
Andrew: It didn’t fully make sense as part of Williams-Sonoma, I think as an outsider, because Williams-Sonoma is this place that sells kitchenware, home furnishings, high-end stuff. But I don’t understand going in there to find the right pot for cooking at home and then saying, “I’m going to get my closet redone.”
Anthony: I’ll tell you, there’s a . . . Williams-Sonoma owned store at the time called Hold Everything. Hold everything was a high-end accessory products that you could buy from these stores. So high-end storage accessories. That’s what Hold Everything was. If you can imagine a store like The Container Store or something like that. It was a much . . .
Andrew: That’s what I’m imagining.
Anthony: It’s much smaller basis, you know, probably 2,500 square foot store or maybe even a little less with high-end storage products but storage products that you’d come in, you would take, you buy at retail and walk out with. And they thought that California Closets would be a good add-on to that, custom [integration 00:24:00] . . .
Andrew: Got it. Okay. That makes sense.
Anthony: . . . with that. So that’s what happened. That’s why they bought us. It was never the shining star of Williams-Sonoma family because as I’m sure you know, they own Pottery Barn as well. Those . . .
Andrew: West Elm. It looks like in 2006 they sold Hold Everything. All right. So he believed in you. He said, “I’m going to back you if you want to go and buy it.” And it turned out that it went well. Let me take a moment talk about my first sponsor, speaking of knowing good talented backing it.
One of the things that I love about Toptal is that they do have the best of the best talent. One of the things, Anthony, that I don’t know if you’ve ever done it, but I used to think management consultants were the type of thing that you get if you’re a huge company and you get access to brilliant people who will help you see the world in a way that you don’t see it yourself. And then I went to Toptal and I said, “Look, I have a problem. I’m the only one looking at my financial statements month to month, I look at it on a regular basis, but I’d like somebody outside our company with a different perspective to come in and give things a second look.”
And so they said, “You know what you’re looking for, we’ve got it.” In addition to hiring developers Toptal can help companies like me hire designers and also finance people. “So we’ve got some people for you.” They introduced me to three or four different people. I loved this guy, Jack, and I hired him right away. He had management consultant experience.
Immediately he comes in and he starts creating these spreadsheets for me, show me, “Andrew, here’s how you’re spending right now. Here’s how if you adjusted your spending a little bit, you could be making money.” He understood that our big expense that I wasn’t paying attention to is credit card processing because it was kind of invisible in our income statement. He says, “I think I could go through their crazy paperwork and figure out where you’re spending money.”
It turns out, and you probably know this, Anthony, each credit card company is charging a diff . . . It gets a different cut of what we pay. I said, “That makes no sense. Let’s look at where that’s going, how we can adjust it, and let’s negotiate.” And he sent me in to negotiate with the credit card processing companies. He negotiated himself. He understood what we could be doing to cut costs. And so through that and a bunch of other really . . . To me it feels crazy to dive into 100-page paperwork from the credit card processing company to figure out where the cost savings was, he more than made up for what I’m paying for him, saved us tons of money and helped us grow our company.
That’s the beauty of going to Toptal. They have the best of the best developers. Yes. And I’ve talked about that a lot. They have the best of the best designers. Yes. But they also have finance people that are, really, we’re talking to McKinsey level, Bane level. And I’m saying that specifically, Anthony, because these people have worked for those companies in the past and we could hire them to help us with our company. And many people hire them like I do for guidance on how to run our company. Others say, “Help me put together a paperwork I need to go raise a series A or series B or to help make the case that I want to make a decision that I need some help making.”
All right. If anyone out there wants to go higher from Toptal the way that I did, you should be going to toptal.com/mixergy. When you do, you’ll get 80 hours of Toptal developer credit when you pay for your first 80 hours in addition to a no-risk-trial period. If I wasn’t happy with Jack, I wouldn’t have had to pay. That’s top as in top of your head, tal as in talent, toptal.com/mixergy. All right. How much did you guys pay to acquire this company from Williams-Sonoma?
Anthony: So we paid very little. I’ll tell you, Andrew, Williams-Sonoma had a company that they just wanted off their books. So, essentially, it was a loser. And you pointed out earlier. They are all company-owned high-end businesses. This was a franchise business that’s very difficult to control the brand. And so we paid less than single franchise. Most single franchises have sold in subsequent years. We paid nothing for the business.
Andrew: We’re talking under $100,000, just take it off our books.
Anthony: No, no. We paid more than $100,000.
Andrew: Okay.
Anthony: I can tell you we paid less $2 million for it.
Andrew: Got it. Okay. And so you acquired it. I was trying to figure out what you did that was different. One thing you told our producer you did was you said, “We need marketing. I’m going to go and talk to every single franchisee and say, “We’re going to be charging with 3% fee so that we could take it into a pool of marketing.” Am I right?
Anthony: Yeah, that’s correct. As I mentioned earlier, by 1994, we had a lot of copycats doing exactly what we were doing, marketing the same way we were doing. And just the only difference was they’re doing it cheaper, selling the same product too that we were doing. So I was landed with the company in 1994. My partners still continue to live in LA. And I had to put together a new team. For me, I took this as, if we’re going to change a game here, which we had to do, desperately and I needed to do it quickly, there were a couple of things I needed to put in place. I needed to hire great people. I’ve always been a big proponent of not just good people, great people to the extent I can hire them.
We needed a strategy and a strategy that we could take an idea that we knew there was a good market for this idea, but we needed to differentiate ourselves in a way that was really meaningful and relevant to the customer base. So we took the two sides of the strategy and said, “How do we go about it?” So, for me, it was people, it was taking a plan that we could put in place that was going to differentiate ourselves and then we had to execute on the plan.
So the funding or the cash I had, because that would probably be the fourth thing I looked at under strategy. We didn’t have a lot of cash, but my partner put up enough cash for us to run the business and not sustain losses or continue to sustain losses for too long. So I realized something had to be done. So, from the people standpoint, I think I got lucky. I managed to hire two or three really good people.
I’m a relationship person. A couple of those people I just happened to meet through social circles and lucky in the sense that they were ready for an opportunity like this and they came and worked for the company. And there was a recognition that we were going to have to turn this company from what was a home improvement brand very much like your typical home improvement business. I’m generalizing, but largely not doing what you say you’re going to do, overcharging, not being reliable. So that was, like . . . That sounded to me that pretty simple. We can do that and we can do that part really well.
Andrew: You mean the reliability from the franchisee, you could improve that.
Anthony: Absolutely.
Andrew: Okay.
Anthony: Yeah. But we were going to move this company from a home improvement company and move it to a lifestyle brand and a lifestyle brand that meant something to our consumer, which typically was a woman at the time and I think it probably still is largely today. So how were we going to do this? We had to shake up our branding and our marketing and I needed to hire the right team to do that. My belief was that if we raised the level of our marketing and our branding and our promise to the consumer, we would have to raise our game in other aspects of our business as well. We’d have to execute. We’d have to deliver on what we are promising we have.
Andrew: What I read was, I think the very first article that I could find out that included your name at all said that after you came in, what you did was it was no longer in the commercials, in the promotional material photos of the closets. In fact, the closets could hardly be seen. It was a model, somebody who looked really good who was front and center talking about how her life is improved, I think, by having this design by having this organization. And somewhere in the background even at the commercial was the closet. It wasn’t front and center. It was about this person whose life was changed because of this brand. Am I right?
Anthony: You’re absolutely correct. That’s how . . .
Andrew: And so you started acquire . . . You started bringing together a team that could communicate this? That’s what you’re talking about? And what did that mean? Who are we talking about? What type of people?
Anthony: So I brought in a brand guy who had some great experience not in the franchise business, in clothing industry, worked for a few big companies, but an outstanding branding person. He put together a team. Where we looked at the closet and the lifestyle of our customer being as important or more important than the actual product so we could connect to our customer at a level that they understood and the level what they could identify with.
For example, we came up with a magazine which we called Hush Magazine. That was my branding guy’s name for it. It was quiet space. It was . . . And in Hush Magazine, we wrote articles typically not about storage. We wrote articles on cooking and gardening and exercise and things that we knew were important to our customers.
Now, it came to our customer, we would send this magazine out through the mail at the time or just give it out when we went out on calls. But our whole idea was to appeal to this person’s life and understand their life and lifestyle in a way that wasn’t typical. It wasn’t just about selling poles and shelves. It was a way of understanding who this individual was. And our branding, as you pointed out, was very much of looking at the lifestyle and our photography and our creativity was with the closets often in the background. It was more about the person and the life they wanted to live. Our core purpose was simplify home and life only in that small piece, but that’s what it was about.
Andrew: I’m looking at this. Apparently, you got . . . I’m looking at an old Washington Post article. It’s so weird. Whenever I go back in time to look for old articles, I see what the internet used to look like. So I’m looking at an old Washington Post article. Apparently, you guys even sold Hush Magazine at Barnes and Noble.
Anthony: Yeah.
Andrew: So people can go and buy it. “We like customers to think the place that they put their stuff is as important as the stuff itself,” you’re saying. Actually, this was one of the executives who was working for you, Edward Lehman. So that was part of it. You remember at Edward Leaman.
Anthony: Edward is still a very good friend of mine. We still work together, actually.
Andrew: And so to fund all this, you had to go to the franchisees and say, “We’re charging you 3% of sales to put into this marketing budget.” How did that go over? How were you able to persuade them to trust you with this?
Anthony: Right. That’s a great question. And with all, I think, the things that perhaps I did wrong in the company, one of the key pieces I think of changing the company’s direction was getting this 3% from franchisees. 1994, as I said, we’re losing money, the company was directionless, and if we didn’t change the game and start making some money, we wouldn’t have been around for too long. And the piece that I felt at the time that was vitally important was the branding of the company and that we needed to change how we looked and how we presented ourselves to the consumer.
And I knew that we didn’t have the money to do this on a national basis. By this time, you know, we were selling franchise systems consistently. And I went to the franchisees probably in 1995. And by that stage, I had hired Edward, my branding guy. And we went around . . . I probably visited every franchise. I was a relationship person. The company’s success, of course, was largely due to the franchisee success, but I had to get them to move. It was easier for me to get them to move and to take 3% of their sales. Remember, they were paying us a royalty and they were required to spend 10% of their sales on local marketing.
And because times were tough, it gave me an opportunity to say, “Your competition is starting to eat your lunch and they’re cheaper. ” And I used to get a lot of feedback. “You guys need to help us. The competitions are cheaper than us and we have to pay you a royalty. There’s this. There’s that. We have to . . . We have to change things for the franchisees.
So, with the team I had with a couple of outside people too we went around to the franchise system and said, “Look, we’re going to need out of the 10% that you’re spending on marketing locally, give us 3, you can spend 7 in your local market. So you’re still spending the same.”
Andrew: Okay.
Anthony: Let’s start with the three and we think we can change the game out there. We can get ourselves into national magazines when none of these . . . Everybody else was a mom and pop. We could get ourselves on TV in those days. It wasn’t so much about the internet, of course. And that’s . . . And the franchisees, it was a long haul. It wasn’t easy because I went to them and I said, “We need 90% of you to agree to this.” We can’t have 60 and 40% freeloading off this fund. That won’t be fair. We need a minimum of 90 . . .
Andrew: And they all had to sign on to this or else you couldn’t do it? And you got them to sign on. It doesn’t seem like it was that tough a persuasion technique, right? You’re saying to them, “Trust us with 3% of the marketing. You use the other 7%.” That’s it. It doesn’t seem like it was that hard, was it? What was it that you needed to do to persuade them?
Anthony: Well, I’ll tell you what’s hard, Andrew. I’ll tell you where it is very hard and harder than I think may appear. In a franchise system there’s always this idea, “Well, we can do it better than you. If we give it to you, it’s like a tax, we don’t know what you’re going to do with it. We don’t know. There’s no guarantee that my leads are going to grow. There’s no guarantee that my business is going to improve. And now I’m giving you 3 and I’ll probably have to end up,” this was the argument, “spending 10 in my local market as it is because you guys have . . . ” Remember, we didn’t have a good reputation in 1994. The company was losing money, the corporate team before I hired a new one, to be perfectly honest, was not well regarded by the franchise system at all. Now I’m asking them to give me 3% and I’m telling them, “We’ll spend that 3% better than you will.”
Andrew: So how did you . . . What did you do to get them to say yes? Teach me a little bit based on your experience.
Anthony: Well, I did a couple of things. I introduced them to the marketing team. We had a marketing plan put in place. We said, “This is how we’re going to spend the money. This is the vision of where we could be if we can change the game. We have to . . . ” They realize that if we don’t change things up, we are going to have a serious . . . They were having a serious problem. A lot of franchises were losing money at the time. The corporate office was losing money. They realized it was time for desperate measures.
But I’ll tell you what they did say to me. I had . . . As I said to you, for me it was very much about trust and the relationship. I think it’s fair to say that it was mutual when it came to my relationship with them. They said . . . When they agreed to come on board, they said we’ll do this for three years. And we signed the agreement. We had to have an addendum to their franchise agreement. They agreed to come on. But in three years, they could vote it out. They said, “We’re giving you three years to do this. We’ll do this on the basis of trust. If it’s not working, we’ll . . .
Andrew: So what I’m hearing you saying is, look, you were able to persuade partially, because what was happening right now at the time was not going very well, and so that is an opportunity to capitalize on. The other part was you weren’t taking away their spending, you were just asking them to shift it somewhere else. Then you also showed them what they were getting. You weren’t describing a future that you’re planning to build, but you were showing them what they could have, the branding, showed them some of the material. Am I right about that?
Anthony: Yeah, that’s absolutely correct.
Andrew: And then finally, there was a deadline for you to produce and so by . . . And you talked to every single one of them and by doing that you got enough of them on board for you to continue. I did actually go back and investigate. I said, “Did this really work?” I’m sure enough I did find a couple of articles where the franchisees said that the reason that they stand out was that the marketing internationally or nationally, it was done in a way that no one else could compete with. And I saw pride in that.
You know, the other thing that I saw when I was looking at franchisees in the earlier articles was they were making mistakes. They were pricing things, sometimes they said it was well-intentioned that they would price things out for a client and then it would end up costing more. And this one guy, I think, even said that his wife used to think that he was good at math, but it turns out he’s not good at math. And the way that he discovered it is because he ended up having to charge customers more than he expected. What did you do about that? How did you get the service from the franchisee who owns this product to improve? You can’t tell them what to do.
Anthony: Yeah, that’s a good point. Franchising is often seen as a business where you have to herd cats. They’re independently owned and operated. But we did a couple of things even in regard to that. Obviously, what you’re raising is an operational question. And a lot of franchisees come into the business because they want support in marketing, branding, of course, operations. They want to make money out of this business.
But when you’re herding cats, so to speak, I say that in a very kind way, but everybody’s independently owned and operated, they come from different walks of life, they have their own life and business experiences, and suddenly, they’re all working under the umbrella of a company called California Closets. I mentioned earlier that we were very strong on improving our brand and trying to generate as many leads for the franchisees as we could.
I also mentioned that one of the key pieces for me was once you generate leads, make the phone ring as we used to talk about it in those days. We had to execute at a level that compared favorably and even better than the marketing that we were putting out, which was all this high-end, lifestyle, beautiful models, etc. in our advertising. And we had to ensure that the franchisees at the end of the day made acceptable profitability because if the franchisees don’t make money, they don’t invest in their business, they don’t hire good people, they don’t do the things you would want them to do and they’re not happy. So all those pieces.
First piece on the execution side was we decided that we had to put values . . . We didn’t have core values. We didn’t have a core purpose. And common and aligned core values was something that was unheard of at least in our company. And I remember getting up at conventions that we used to have and talking to an audience and looking at one person sitting over here on the one side and another at another side. And I knew that if you had to go through an experience with each one of them, it would be very, very different from the products even that they were offering or the extent of the products that they offered to the people who came into their homes and to the sales, to the after-sale service installation and so on. And that we needed alignment in values. Sorry. I think you were going to ask a question.
Andrew: What I was trying to get at is, so you’re saying that by getting them on board with values, you were able to get them to deliver what you promised because they believed in what you stood for?
Anthony: I’m saying it was one element. So I hired a very solid operations individual. And through that, we had three or four what we called regional managers who used to go out there and being in contact with the franchisees on an ongoing basis looking at the numbers. So the numbers side we had control over. We were entitled to get their financial statements on a regular basis. And we got to a point where we advise rather than telling them what to do. So when it comes to pricing and when it came to other things like that, we couldn’t mandate what they did, but the franchisees wanted to make acceptable margins. We told them what acceptable margins should look like. We would go through what every cost item should be.
Andrew: To make sure that they weren’t overcharging people.
Anthony: Well, that was self-regulating as far as I was concerned. There are a lot of competitors in the marketplace and if you overcharge, you typically didn’t get the job. I think what was more of a concern is that they made the margins that were acceptable, that they had margins that kept them happy and profitable.
Andrew: Meaning charge them . . . So getting them to increase the margins was part of it.
Anthony: Sometimes to increase the margins or to understand better where their costs should be to control costs to understand even how to pay designers in a way that made sense. And it’s something that was done largely at a local level, but we gave guidance on this or we could review their numbers and say, “You’re spending too much here or there.”
Andrew: What else did you do? So you managed the operations the way that you just described. You created a marketing strategy that was nationwide. And what else did you do to turn things around?
Anthony: So the product development side of the company as well changed tremendously. From a company that only sold closets and very basic closets for a long time, we started selling some beautiful closets. We got designers who understood more about design, very professional people. We sourced product from Italy, for example. We had a high-end product from Italy, which was beautiful. And other people weren’t selling that.
Andrew: To get into the tens of thousands of dollars. So it wasn’t just a $3,000 closet, now if somebody has money to spend, you can give them a $30,000 closet.
Anthony: Yes, you could. Absolutely.
Andrew: And was it also that you started at that point to expand beyond people’s bedrooms into garages?
Anthony: Yeah.
Andrew: That was it. So suddenly garages needed to be organized. You were on it.
Anthony: Well, what happened is we’re often in a customer’s home and they said, “By the way, could you do some shelves from, like, pantry or my garage?” or whatever it was. And so we moved from just selling the closets to home offices, garage systems, laundry, pantry. We were in the home. If a customer liked us in any event, it was a real opportunity to add to our product selection.
Andrew: One thing I wonder about California Closets is even if you do a great job, you’re not getting repeat business from me. I’m not coming back and saying, “Let’s do the closet next year, right?
Anthony: No.
Andrew: So that’s it. All you could get it you could get a referral to my friends, but at some point, you exhaust my friend list.
Anthony: You do and you don’t, Andrew, because typically when we went into most homes, we did . . . Well, I shouldn’t say typically but in a lot of homes, we did one closet. Say we came in and we did the master closet, but it’s a four-bedroom home or a five-bedroom home and they said, when you come in the first time, “Well, my kids, that doesn’t matter.” But then we get a call back and say, “You may as well do all the closets.” And then you’re doing a home office and you do garage and we haven’t had these. And so we had a lot of repeat business. Up to 50% of our business for a long time was repeat business.
Andrew: And the agreement that you had for ownership was you are going to get a percentage that expanded over time based on performance. Am I right?
Anthony: Yeah. It’s actually an interesting story and it talks to the goodness in people, and that was my partner, Bill LeVine. As I told you, I had very little to add to the park when we bought the business from Williams-Sonoma. He and I sat down one day and he said to me . . . And I remember this is a man 30 years older than me, wise, older gentleman and he sat down and he said, “You and I will be the board, but I want you to have a stake in this company. I understand you don’t have a lot of money right now, but the company we can value at pretty much nothing. And I will give you 10%. You give me whatever you’ve got. I’ll give you 10% of the company. You and I will be the board and every year you and I will set a target. And if you hit the target, I’ll give you another 10%. If you hit the ball out the park, I’ll give you 20% provided that if you get up to 60, we stop there because that’ll mean the company’s doing really well and I want to keep 40.”
Andrew: Right.
Anthony: And I said, “If you’re going to negotiate like that, I’m out.” No, I didn’t say that.
Andrew: You said, “Thank you very much.” Okay. That made sense. You then ended up with 60% of the business and you hit your targets. And why did you decide to sell?
Anthony: That’s an interesting question. And I sold in two tranches, call it. In about 2000, I was approached by a public company that wanted to buy the business. Now, I was in a situation where, to be honest, I did the wife test. I said, “What will make my wife more unhappy with me?” If I . . . we were offered at least my partner and I, we were offered a sum that could keep me, you know, quite healthy financially for a long time. And they wanted me to stay on with a piece of the business as well. And I said to my wife, I said, “Look, this is the deal.”
But my test to myself was, “What will make my wife more unhappy? If I don’t sell the business . . . And I say this is going to get bigger and better and all the . . . And the business fails like it did in 1990. I lived through that. I saw what happened. If Williams-Sonoma weren’t around, the company would have folded. Or I keep a minority stake, big issue because I had the majority of the business at the time. Or I keep a minority stake. The company . . . I continue to run the company, they had offered me an opportunity to sell my stock back to them and they were a public company on 30 days’ notice, but they could buy me out on 30 days’ notice that I suppose was just a little catch in that one, but I had a public company that I knew that if I continued growing this business on 30 days’ notice I could sell it to them. I had a buyer for a minority stake in a business like this and I could clear a lot of chips off the table.
I started with nothing, I’d seen this business failed before and I didn’t want to be greedy. And I decided my wife would be more unhappy with me if I kept the business and it failed again and we left all of that out to dry. So that’s why I decided the first time to stay involved. And then by the way, I was involved for nearly 10 more years with the business.
Andrew: Because you sold initial piece, then you sold the rest, and then you . . . And you still held on to a percentage of the business. Am I right? You still had interest in it.
Anthony: Well, what I did is I sold that first piece and then effective 2007 I sold the second piece which was actually as it turns out, you know, the timing was wonderful because 2008 and onwards people decided that they’d rather buy food for their kids than custom closets. It was a very tough time from ’08. I was in the company in the middle of 2009 so I lived through some of it even though I didn’t have stock anymore. I’d sold my business . . . I sold everything I had as of 2007.
Andrew: And did you end up doing anything like I . . . So I told you, as I was hunting down any information, the bare . . . I found a few articles, and then I found like home property deeds or something. But it seems like you’re basically living in the same place. It’s not like you said, “All right. I sold my company. I’m moving up.” You lived there for a long time. Did you do anything fun? Did you . . . I don’t know.
Anthony: My whole life . . . I think I’ve done a lot . . . For 23 years when I was with the company I was involved day and night with the company and you go . . . It was an incredible experience. But you go through the ups and downs of being in a company and being the CEO of a company. And when I sold my company it gave me financial security, you know, the first time and the second time. And so I spent the . . . I’ve got this company, the Paradise Group, and I work and I travel and I play golf and I spend a lot of time with family and [earned 00:54:12] enough.
Andrew: That’s it.
Anthony: Yeah.
Andrew: You didn’t end up with like some giant . . . I don’t know what. Like a set of houses, you didn’t end up with a fleet of cars.
Anthony: No. I mean, I’ve made investments in some companies and some companies that I’m involved with now I’m an investor in as well. But no, I don’t have a fleet of cars or planes or boats. I don’t.
Andrew: So then what made it all worth it? Having worked this hard for so many years, finally turning around this company, what made it worth it?
Anthony: I think what’s made it worth it for me is the financial security I have, the opportunity to travel that I hadn’t really taken advantage of when I was . . .
Andrew: And you finally could.
Anthony: When you finally could to have less pressure. I have to be honest with you, I still enjoy getting into the game. And with some of the companies that I’m involved with even now I get a tremendous kick out of it. And I don’t see myself as a guy who’s going to sit around and do nothing all the time. I’m always involved in something or another, but not on a day-to-day operational basis. That’s a piece that I am quite happy to have relieved myself off, employees coming to you to you every day. And the day-to-day worries. I’m much more than an advisory role than I used to be. And I’m very happy. But I’m always looking for opportunities. And as I said, I’ve invested in a couple of things and I keep myself very happy.
Andrew: How much did you sell for?
Anthony: Am I allowed to tell you this? So the company was sold for 60 million.
Andrew: Sixty?
Anthony: Sixty, yeah.
Andrew: Sixty. So huge turnaround. Huge turnaround for this company that was at a loss. You then, as you mentioned, you created the Paradise Group. I’m going to suggest to you that one thing you could do is for the Paradise Group, go to my sponsor, HostGator, go to hostgator.com/mixergy so I get credit but also so you get the lowest price from them and set up a website for it. I find that it adds a lot of credibility when a business has a website. Do you guys have a website?
Anthony: No.
Andrew: You don’t.
Anthony: No.
Andrew: No. You know what? Here’s the funny thing. My team put together notes on you and always I say, “Go into their LinkedIn profile for every single guest and put together a timeline.” When they put this Google Doc together for me, you weren’t even really on LinkedIn. All you had was California Closets. Today I went in, there’s a LinkedIn profile. Someone on your team is doing that. Right?
Anthony: Yeah.
Andrew: Yeah. You’re taking control a little bit of your online reputation.
Anthony: Yeah.
Andrew: But the Paradise Group does not have a website. Why not?
Anthony: There’s no good reason. My business has come to me pretty much just through word of mouth. I haven’t actively gone out. I probably should.
Andrew: And what you do there is you help businesses that have franchisees do what?
Anthony: So, in one instance, a New Zealand company, New Zealand and Australian base wanted to come into this country, I was speaking at a franchise conference a few years ago. They approached me afterwards, and they wanted to franchise in the U.S. So I’ve helped them at many levels from finding people to understanding the market, understanding the franchise regulations and requirements, franchise agreement. And they’ve started in the U.S. I’m an investor in the business and I’ve sold six franchises. So I’m helping them in all aspects of franchising. I’m an advisor too, also to a large bathroom franchise, a company called Re-Bath where we’ve got over 100 franchises been around 40 years. So I help them as well. There’s . . .
Andrew: The thing that I’ve been wondering is, yesterday I took my kids to Chipotle. I’m so susceptible. I happened to hear on a Recode podcast that one of the guys said, “I love Chipotle. I love Chipotle.” I said, “Let me take my kids to Chipotle.” I took them there, and I was thinking, years ago, Chipotle would have been a franchise, you know, the way McDonald’s was, Burger King, all these other fast food places. And I realized that a lot of businesses don’t go the franchise route because they don’t need the financing because there’s so much money right now from investors to open up more locations, and they probably don’t need the operational help because with franchising or with this type of operation, there’s a clear cookie-cutter process for doing it. In fact, it’s kind of frustrating that you have to get the franchisee to follow the process. I wonder, is franchising now not as big as it was before? Is it going down as a financing and operation technique?
Anthony: You know, I don’t think so. I don’t have the exact statistics for it, but I don’t think so. I think the opportunity for people to be their own boss to put it very simply is still out there. The idea of working for people and being susceptible to a boss who doesn’t like you or whatever is there for the millennials just as it was for people, you know, in my day. So I don’t think it is.
And you’re right, there’s much more private equity involvement, frankly, in franchising now. But it still I think remains a tremendous way to scale a business with all the challenges that franchisees have and regulations that have been put in place and it’s not always as easy as . . . I don’t want to say as it used to be. It was never easy. But I think there’s a lot . . . I think a lot of scope and for franchising to continue to prosper just as it always has.
Andrew: All right. If anyone wants to contact the Paradise Group, what’s a good way for them to connect with you?
Anthony: Probably the best way would be on my email, which I can . . . As you said, I don’t have a website yet, but they can contact me personally.
Andrew: Okay. You want them to contact me and then we’ll follow it up and send it to you?
Anthony: That would be great. Thank you.
Andrew: Good. And our contact information is on my website, guys, or just contact . . . What is it? Contact@mixergy.com if you need it. By the way, who’s this guy, Marty Allen? I thought that Williams-Sonoma really suffered with California Closets but I’m seeing a bio where Marty Allen is apparently listed as the guy who turned it around for Williams-Sonoma. And according to this bio, the only reason that Williams-Sonoma sold it was because Marty wanted to move on and rather than risk a future with new management team, they decided to sell it. Does that sound right?
Anthony: I think I should make no comments on that.
Andrew: That is contrary to every other article that I read.
Anthony: All I can tell you is that from 1990 to 1994 was a period, I spoke to you about earlier, was a very bad time for the company.
Andrew: Yeah, that’s what I saw.
Anthony: Yeah.
Andrew: All right.
Anthony: That’s why . . . Williams-Sonoma wouldn’t have sold the company, believe me, if it was doing so . . .
Andrew: If it was doing well.
Anthony: Yeah.
Andrew: All right. Here’s one last piece of . . . I’m telling you, I get lost in researching. One last thing that came up was Hush Magazine might be over. Apparently, you guys were ahead of your time, but it did last for five solid years.
Anthony: Yeah.
Andrew: But there is a new magazine for California Closets. What is it called now? Ideas of Order. It’s apparently an 86-page meditation on space and organization. And according to this blog that loves this type of stuff, a blog called Business of Home, it is a beautiful magazine and they highly recommend it. Go figure. You’re ahead of your time. All right. Congratulations, Anthony. Thanks so much for being on here.
Anthony: Thank you, Andrew. I enjoyed it.
Andrew: You bet. And thank you all for listening. I want to thank my sponsor who made this interview happen, the two of them. The first, if you’re hiring developers, designers, as I did a finance management operations person, you should really go check out toptal.com/mixergy. If you’ve been listening to me for years and haven’t given them a shot, you should. And the second, if you need a website for your business or, frankly, if you want to pitch yourself to Anthony and say, “Look, I’ll go to hostgator.com/mixergy and set you up with the website as a way of getting together with him and maybe creating the type of mentorship that he ended up having, you should go to hostgator.com/mixergy. I thank them for sponsoring and Anthony, thank you.
Anthony: Thanks, Andrew.
Andrew: Bye. Bye, everyone.
This interview is over, but I’ve been talking with Anthony since we finished recording this interview because he is concerned about something that he said in this interview. At one point in the interview, I asked him how much he sold his shares for, and he incorrectly thought that what I was asking was, what’s the valuation of the company? So he gave me a high number, not because that high number is what he sold his shares for, but because that was the valuation at the time that he sold some of his shares, and anyway, he was really worried that he left you with an incorrect impression of what he sold the shares for.
I’ve always said to him and other guests, the details of the exact number are not that important, how they get there is important. And I do think that we got that in this interview. So I appreciate him wanting to get an accurate representation out there. He understood and understands that I don’t do any editing. And so when he sent me this follow up message, I thought I could reassure him by reading this to you and letting you know the number that he said that he sold his stock for was just the valuation at the time that he sold some of his shares. All right. Thanks for listening.
