CASE STUDY:This month's case study looks at how the Irish distributor for a European manufacturer of contract cleaning equipment is struggling because of poor technical back-up on repairs and maintenance and tightening credit terms
EVEN THE journey back to Düsseldorf airport on a stuffy, crowded commuter train did not dampen Tom Murphy's good humour. Neither did the long queue for the security check. Murphy was on a high as he headed home to Dublin.
After months of negotiations, he had finally secured the Irish distribution rights for a range of German-made cleaning equipment. There was also the possibility of getting the UK distribution rights if the venture went well in Ireland.
A veteran of the contract cleaning industry, Murphy had worked as a manager with two of the biggest players in the business for 12 years. He knew well the cost of problems caused by fault-prone equipment in a sector that has very tight margins. He had chosen the German brand for its sturdiness and solid engineering. However, such equipment still needed regular maintenance so sales had to be supported by an efficient service department.
Murphy had spent almost a year researching cleaning equipment manufacturers in Europe. He attended trade fairs to get a comprehensive overview of the market before short-listing two companies to approach: one in Bruges and the other in Düsseldorf.
The Belgian company was not interested in the Irish market - they said it was too small - but the founder of HSS Technik in Germany, Hans Schneider, invited Murphy to visit. Tough negotiations over six months followed before they agreed terms.
Murphy left his job and used his savings, bank funding and an interest-free loan from his father-in-law to raise the €300,000 he needed to set up the business. The major initial costs were the purchase of a combined workshop/warehouse, for which he got a commercial mortgage, a stock of parts, the cost of five demonstration machines that washed, buffed and sealed surfaces, and wages for a junior engineering technician.
Murphy's wife, Fidelma, was working as a boutique manager in Blanchardstown to support the couple (keeping up with mortgage repayments on their Castleknock home was their biggest concern). He swapped his Ford Mondeo for a Transit van and began approaching potential buyers and setting up demonstrations of the equipment at their clients' premises. Usually these had to been done at night so Murphy was often not getting home from work until midnight.
Murphy found Schneider, who ran HSS Technik with his two sons, exacting but fair to deal with. It had a small number of distributors in Europe, while the eldest son managed a subsidiary company in South Africa. The younger son worked with his father in Germany but had no clear role of his own.
After finalising the deal for the Republic, Schneider had then discussed the opportunities in the UK. Murphy got the impression that these rights were also up for grabs if he did a good job.
He agreed a five-year contract, giving him exclusive distribution rights for the Republic, with a review of terms for both sides at the end of year two.
Murphy's extensive contacts in the cleaning business proved invaluable when he went out on his own. People were prepared to give him a hearing and the machines were impressive. It took six months for the first orders to trickle through, during which time Schneider was patient and helpful. The company sent a technician to assist Murphy with initial training on the machines and by the end of the first year Murphy had the bones of a sound - if fledgling - operation.
As year two progressed, the order book began to fill up and Murphy took on a second engineer. HSS provided good technical back up with a 24-hour turnaround on spare parts. Money was still very tight, with significant sums tied up in working capital, but the business was managing to service its debt. A big advantage was that Murphy had no foreign exchange issues as he was buying in euro.
The first sign of a problem came last March when Murphy started experiencing delays in getting spare parts. It was taking up to 10 days for parts to reach Ireland and, in some cases, even longer.
More than once Murphy found himself plugging the gap with his demo machines. It was also taking longer for questions to be answered by HSS's technical department. Some of Murphy's clients were becoming annoyed at the delays in service.
Such inefficiencies were out of character for Schneider. Murphy telephoned his office many times towards the end of April; although messages were taken, the calls were never returned. His e-mails also went unanswered.
He finally discovered that Schneider was seriously ill and that the oldest son (whom Murphy had never met) had come home from South Africa to run the business. The younger son with whom he had dealt in the past seemed to have disappeared.
Schneider senior died of a brain tumour in June and Murphy received a letter soon afterwards telling him that the business was being restructured and that delivery and credit terms were being tightened. It also said that substantial changes would be made to his distribution agreement at review time and that company policy in several areas, including warranty, was being overhauled.
The news made Murphy feel sick to the pit of his stomach. It was hard enough to stay afloat when dealing with a benign manufacturer but the new team seemed aggressive and confrontational.
Murphy's worst fears were confirmed when the next consignment of machines arrived in August well ahead of schedule, leaving him with a hefty, unexpected VAT bill. This was within the strict legal terms of the contract but had never been enforced, by tacit agreement with Hans Schneider.
This threw Murphy's careful financial juggling into disarray. His business model involved taking deposits from customers, but with HSS now insisting on much tighter credit terms he had no option but to start using expensive overdraft facilities.
It appeared to Murphy that HSS knew it had him over a barrel. He had invested too much in the business, both financially and personally, to walk away. Furthermore, he knew the real returns would only start to flow when sales to the Irish market had increased substantially, and distribution rights to the UK market would be the icing on the cake. Murphy needed a greater volume of business to demand better terms from HSS.
On the one hand he was tempted to sit tight in the hope that the dust would settle when the new boss had made his presence felt. He also told himself that HSS would find it easier to keep him than start over with a new distributor. On the other hand, the tighter terms were significantly increasing his level of debt and making him feel constantly under stress. He had not slept through the night for months; rarely could he take a whole day off work and, although he did not admit it, he knew he was to blame for the frequent rows he and Fidelma were having.
Lying awake at night, he wondered whether he should take on a line of complementary cleaning products he had seen at a Birmingham trade show. They would be a lot less hassle to handle. Was HSS worth the risk of a heart attack? After all, he had always dreamed of the freedom of running his own business, not this nightmare of the business running his life.
What should Tom Murphy do next?
What options are open to Murphy? Read the experts' advice
