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Ed Flaherty Rapid Oil Change Minneapolis, Minn

Jump on a trend to change oil and build a $200 million+ chain

This profile is excerpted from Bootstrap to Billions: Proven Rules from Entrepreneurs who Built Great Companies from Scratch by Dr. Dileep Rao. Copying or reproduction in any format or medium without the prior express, written consent of the author is strictly prohibited. For additional profiles or information: InterFinance Corp. Phone: 763-588-6067; www.uEntrepreneurs.com; www.infinancing. com

Summary: At the age of 11, Ed Flaherty started mowing lawns. His dad saw that Flaherty was starting to make money and told him, “Congratulations, you are now grown up and can buy your own clothes.” He was only half-joking. Flaherty continued to work at his dad’s auto body shop and his dad’s friend’s auto junk yard, learning more and more about cars. When he finished high school and college, he set out to be a school teacher. But before that came the Army. Flaherty worked at the Pentagon and got an MBA in the evening. Then he joined a consulting firm that worked with the Pentagon, where he drummed up so much business that he was offered a partnership. But he did not want to stay in the East Coast, and went back to his native Montana to teach. After a year of teaching, the entrepreneurial bug bit him and he started a company that sold software to high school coaches. The software helped coaches to analyze team tendencies. To expand and get more resources, he moved the company to Minneapolis from Montana. As he was selling his software and franchises around the country, he was introduced to a computer service bureau that was unloading its assets. He bought the assets for $1 plus assumed $15,000 of debt, and grew the company from $0 in sales to $1.25 million. In the meantime, he found that service stations expected him to leave his car there all day to get his oil changed, and he had seen a different model where they did it faster and more conveniently. So he leased a gas station close to his house and started his first Rapid Oil Change. While the name said Rapid, Flaherty knew that he was not that fast. One day, the chief mechanic of an Indy-car racing team (whose name Flaherty never found) came to his store and gave him detailed suggestions to become faster at oil changes. This is when Rapid truly became rapid. The chain grew and Flaherty soon found himself courted by the major oil companies. He sold to one of them, took the proceeds and bought the rights to grow Applebee’s restaurants and developed a chain with sales in the hundreds of millions. It helps to be at the right place at the right time with the right smarts. This is how he dit it.

Before the Startup

1. Cars, cars and more cars. Ed Flaherty’s dad was in the auto body shop business, where Flaherty used to hang out and see what cars were all about. Around the age of 13, he started to work at one of his dad’s friend’s junkyards, where he learned even more about cars. Flaherty wanted to own a car, and his dad suggested that Flaherty buy a wrecked car and fix it. So Flaherty bought a two-door 1955 Chevy hardtop thathad been inanaccident. Its left frontwas wrecked anditwas sitting in hisdad’s shop.Flaherty

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bought it for $140, spent $200 for parts and fixed it with the help of his dad and his team. Flaherty did not have a driver’s license yet so he could not drive the car. When it was fixed, his dad mentioned that there was a new guy in town who wanted to buy a car, and suggested that Flaherty sell the car. So he agreed and asked his dad to sell the car for $750. His dad came home the next day with $700 and told Flaherty, “I think the price is pretty good.” By 20, Flaherty had fixed about 18 more cars. His goal was to buy them cheap, fix them to “make them look good” and sell them. In the summer he worked at his dad’s shop for $1 an hour and fixed cars on weekends and evenings. He saved his money so he could invest in a business.

Lesson: When you see an opportunity, grab it. When you see a hurdle, overcome it. When you expect to need money to start your business, save it.

2. The college years. Flaherty was also an athlete. The summer before his senior year of high school, Flaherty decided that he wanted to be All-State, All-American and the captain of the football team. Setting these goals, and writing them down, helped him set his priorities, and according to Flaherty, it helped with his maturity. He was going to school, working forty hours a week at his father’s shop, fixing cars and lifting weights to get into shape. As he puts it, he enjoyed every minute of it and none of it seemed like “work.” He achieved all his goals. He became the captain of his high school football team. It won the state football championship and he was named All-State and All-American (1962). As Flaherty puts it, “setting goals and working toward them is a gift you can give yourself. Money is only a barometer. Achievement is not about money.” When he graduated, he went to college on a football scholarship. There, he got hurt and that ended his football career. He graduated from college with a degree in math and education. He was planning on becoming a teacher and coach.

Lesson: Set achievable goals and work hard to reach them (sounds like a cliché, but unless you are incredibly lucky, it isn’t).

3. Pentagon whiz kid. When Flaherty graduated, the Vietnam war was raging and he was drafted. After eight months of training, he was assigned to the Pentagon to help one of Secretary of Defense Robert McNamara’s whiz kids. This individual had been planning on becoming an astronaut, but he got hurt and became a whiz kid. Flaherty learned the value of thoroughness from this job. Previously, as he puts it, he tended to be a “short-cut artist” and got to “80 percent of the answer.” At the Pentagon, he had to get to “110 percent of the answer”; otherwise, he would have the honor of redoing his work. He had to examine under every stone and defend every assertion. His bosses were demanding and threw back bad work. Flaherty found that he was capable of doing good work, although he had never challenged himself in the past. Now he had to.

Lesson: Your returns depend on your investment. Talent without dedication is a waste of resources.

4. Part-time MBA. When Flaherty went to the Army, he had two choices. He could see it as a waste of time and act accordingly, or he could make full use of it and take advantage of the resources available to him. Since he was based in Washington, D.C., he decided to get something out of it. In addition to his full-time job, he went to school four nights a week and studied on the weekends. He got his MBA degree from George Washington University in two years.

Lesson: Time is precious. Don’t waste it.

5. Consulting sales. When Flaherty got out of the Army, he joined a small management-consulting company that worked with the military. There were about forty very smart people in this consulting company, with about half of them having Ph.D.s. The owner was the only rainmaker in the firm, getting all the contracts. Flaherty knew he could get sales contracts because he knew the Department of Defense, he knew the contract process, he knew the analysts, he knew their problems, and he knew they had the budgets for consultants. He started calling on the analysts and talking to them about their problems, which they would freely tell him when asked. He would then regurgitate their problems back to them in

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the form of a proposal that his firm and the high-IQ people could solve, and get the contracts. Flaherty found the pain and solved it. According to Flaherty, the high-IQ people were mostly introverts and could not find clients, but could solve problems. Soon Flaherty grew tired of the East Coast, so he decided to go back to his native Montana and become a coach and teacher. When he gave his notice of resignation to the owner of the firm, he was offered 10 percent of the firm if he stayed. Flaherty told him, “I want 90 percent. Ten percent does not work for me.” He exited, stage left.

Lesson: Hunt. Kill. Eat. In business, nothing happens until you get the sale. If you can sell, you have a valuable talent. To sell, know the pain that your potential customers have, and understand how you can solve it. When you know the terrain, you become a better hunter. So hunt in the terrain you know, or get to know the terrain you want to hunt in.

From Startup to Profits

6. The first business. After returning to Montana, Flaherty found that he did not like teaching and coaching. So he started his first business while he was a teacher, with his savings and a $15,000 loan from his family. He developed a product that offered a computerized scouting system to football coaches. He developed and wrote the software with some help and started to sell it, along with the service, to high school and college football coaches in his area. This is when he began to realize as many other young men and women before him that Montana was a “desert for opportunity.” So he moved his business to Minneapolis. He needed a place to process the data and found two men who had a computer service business. He bought their assets (hardware and software) because they wanted to upgrade, but he could not buy the customers. He did not have the cash to make a down payment but offered them a five-year note that he would pay out of cash flow. He then found other teachers like him around the country and licensed them to sell the software and service in a franchise agreement. Why did he franchise? He did not have the funding to expand himself, and he wanted to cover a wider territory. He knew that teachers did not make much money, so many of them also became entrepreneurs and had a part-time business. The key was finding them. He went to a new town, got dimes and started calling people involved in football, including coaches, athletes, directors, state football association members, etc. He was looking for people who were enterprising and liked sports. He occupied the phone booths in the lobby for hours because the phones in the room were very expensive. The athletic business started to grow, but it was very travel intensive and he was gone for two to three months at a time. He found that he could not spend enough time on the athletic business and his service bureau and do justice to both. Flaherty was newly married, and he and his wife had a new son, so he did not want to travel as much. He was also living on Diet Cokes and popcorn for a few weeks at a time when money was tight, and the diet was getting tiresome. So he sold off the athletic business. The athletic segment, however, had helped the growth of the computer service bureau, and Flaherty had added regular business processing, such as accounts payable and accounts receivable processing, and built it to annual sales of over $1 million.

Lesson: Although Flaherty attributes this early success to his flexibility (in moving to Minneapolis), hard work, and perseverance, he did not fully assess the potential before entering the business. If he had, he would have learned how complex a business it was. But if this had stopped him from starting his business, he may not have moved to his next phase, which was a gold mine in the guise of used oil.

7. Side business in real estate. Flaherty majored in architecture for the first two of years of college before he switched to math. He was always interested in real estate, so every year he would design one home in the winter, build it in the spring, and sell it in the summer or fall. They were all speculative homes, and at first Flaherty borrowed their entire cost. Later, he would take all his profits and reinvest in the next new home and continuously increased the size of the home and its cost. This worked very well, until interest rates soared to 18 percent. The last home after that rate jump ate up all the profits in his

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real estate projects. Lesson: Buy right and you can make a fortune. Buy in a bubble and it can cost you one.

8. Future of the service business. Flaherty built the service business to an annual sales level of $1.25 million, and he was always monitoring technology and trends, so he could decide his future direction. This future became limited when the first Altair was introduced. The Altair was the first personal computer. Previously, with the dominance of the mainframes, most small businesses could not afford to buy a computer, so they used a service bureau that could allocate the time of a mainframe among a variety of users. With the introduction of the PC, everyone could afford to buy a computer. Flaherty became one of the first dealers of the Altair in the Twin Cities. When he installed the first PC at a client’s office, the client laid off five people in the back office. Flaherty knew that the days of the service bureau were numbered. He sold it.

Lesson: Track trends. When trends are favorable, take advantage before others do, i.e. before the others. When unfavorable, jump off before others.

9. The oil-change business. To get his car’s oil changed, Flaherty used a gas station that was near his office. The station’s customers had to leave their cars all day for an oil change. On one of his trips, Flaherty had seen a 10-minute oil change store in Southern California and thought that the concept was ripe for Minnesota. So he decided to exit the computer-service industry and enter the oil-change industry. For his first location, Flaherty selected an empty gas station in one of the Twin Cities’ suburbs. He leased this store, which had two bays, from a private school on a three-to-five-year lease term, the renewal of which he would have to negotiate with a member of the school board. He cleaned up the store, put up signs, bought inventory, and hired a manager. He had just entered his new business, which was amazingly like his first business in the auto-repair industry. The key reason for his selection of this particular location was that it was close to his home. As he puts it, “Divine providence was looking after me.” This turned out to be his best store due to the large number of homes, businesses and heavy traffic in the area. His initial success with it helped him rapidly expand to more stores in the metro area, and his next six were among the best in his portfolio.

Lesson: Keep your eyes open. When you see an attractive business opportunity, see how you can benefit in other markets. Flaherty realized that quick oil changes were the new thing to help people save time and add convenience. He moved out of the shrinking service bureau business and entered the new, hot thing.

10. Make the operation efficient and live up to its name. Although he was advertising a 10-minute oil change, each one was actually taking him 30 minutes. One afternoon, in his store in the Minneapolis suburb of Bloomington, a customer came in and began studying his operation intently. Being the friendly sort, Flaherty started chatting with the man, who turned out to be an employee of Andy Granatelli, the owner of a famous race-car team. This man knew how to change oil and how to do it fast. It turned out that his wife was from Bloomington, he was in town to visit her parents and he was bored stiff. His first comment to Flaherty was, “You don’t know what you’re doing, do you?” When Flaherty agreed, the gentleman reorganized the store’s layout and helped Flaherty reduce the time to change oil from 30 minutes to 5 to 7. This man gave a tremendous gift to Flaherty, but he never gave his name.

Lesson: You need to be smart and hard working. But it helps to be lucky. What’s interesting is that the ones who become lucky are among the ones who are smart and hardworking.

11. Cash flow and profits. Rapid Oil Change had positive cash flow from month one. Each store had positive cash flow, and Flaherty made sure that he only went into locations where he knew he could develop cash flow immediately. To achieve this, Flaherty first analyzed his competitors’ prices without accounting for any temporary promotions and loss leaders. He realized that many customers were

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willing to pay up to twice as much as the “loss leader” prices that his competitors sometimes promoted. He segmented his customers and used loss-leader pricing only to get the marginal customer who could come in during slow periods when the store was not busy and be willing to wait for three to four hours. Flaherty calculated his fixed and variable costs, estimated his sales, and determined that he needed 50 percent gross margins (after accounting for direct labor and direct materials) to be competitive and profitable and reach 20 percent operating-income margins (operating income divided by revenues), which was his goal. Some of his stores reached operating-income margins of 40 percent. He estimated his corporate overhead at 5 percent of sales.

Lesson: Test your pricing to the find the right level. Pricing is often the most important decision, especially for revolutionary products or services. Since quick oil changes were new in his markets, Flaherty had to truly understand the amount of premium his customers were willing to pay to avoid the long waits. He found through market testing that he did not need to discount that price. However, he offered a program for his price-sensitive customers who could wait, thus allowing him to show a marked differentiation between his two price levels. In addition to knowing the competitive value of your product or service, you need to know your costs and be able to project revenues with a reasonable level of confidence to achieve the desired level of profits.

12. Promotion. Initially,Flahertydidnotknowtherightwaytopromotethequickoil-changeservices to attract the type of customer he wanted. So he tested a variety of media to see what worked and what did not. He realized that he needed two kinds of promotion. He needed to build his brand throughout the metro area so that customers would learn of his business and feel comfortable using his services. Brand building also attracted the higher-margin customer. He achieved this objective through mass media such as TV and radio. However, to attract traffic to each store, he needed to conduct neighborhood-targeted marketing, and this he did with direct mail, door-to-door coupons, and advertising in the local newspaper. He measured his investment, and the sales and margin returns from each media investment, eliminating ones that did not work and enhancing those that did.

Lesson: New businesses usually fail to project accurately in two key areas: The first is the level and timing of revenues, where entreprenerus are too optimistic. The second is the cost, and the right way, to get sales, i.e. your sales drivers. There is an old cliché in advertising that “half your advertising works and the other half does not. The problem is knowing which half works.” Actually, if you don’t know which half, you also don’t know if it is only half that is a waste. Test, test, test to know what works and what does not.

From Profits to the Moon

13. Rapid’s growth. As the business started to grow, leases became a problem. If a lease ended, the profits ended. This meant that Flaherty needed to own the real estate. However, two other trends were coming together in his favor. The savings and loan associations had been deregulated; they were flush with cash and had developed loose lending practices. In addition, due to the Arab oil embargo of the early 1970s, there were numerous gas stations that had closed, and the owners were ready to unload them at fire-sale prices. Flaherty found that this was an ideal situation for him. He could buy the stations with 20 percent down, fix them up, get them reappraised at 120 percent of his total cost, borrow to recoup his investment, and reuse the funds in a new site. The prices when he purchased were attractive because oil companies wanted to unload the stations. His repairs and reuse as a Rapid Oil Change station added value due to his attractive business model, and allowed him to borrow his entire investment. This was the virtuous circle for Flaherty, and he rode it all the way to the late1980s when all the best sites had been taken, resulting in higher prices for the stations. And the savings and loan industry’s poor lending practices had destroyed the industry and resulted in the end of a cheap source of expansion capital.

Lesson: One of the key ingredients you need when you grow is the right financing. Normally, high

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growth and high levels of debt are not compatible with each other because debt comes with debt service, which means you need cash flow to make the payments. However, because Flaherty bought stations at attractive locations at good prices, and was able to increase their value and increase cash flow, he was able to borrow against his property and reuse his equity for more growth. The key to this strategy was that each store started to show a positive cash flow immediately to repay the debt.

14. Find excellent store managers. As the chain grew, Flaherty needed to find excellent managers for the stores so he could minimize any operational problems and focus on growth. At first, he looked for people from the auto industry, but they did not last because the pace of his operations were fast and Flaherty expected ahigh level ofcustomerservice. He studied the job requirements for his store managers and realized that he needed people who liked fast-paced work. When he tried a few from the convenience store industry, he found that they only liked to collect money behind the cash register and liked a slower pace. However, o

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