Merger-Minded Firm First Must Redesign Itself

By CYNDIA ZWAHLEN

Dec. 22, 1999 12 AM PT

SPECIAL TO THE TIMES

After 23 years flying solo, Shari Canepa is convinced that her small interior design firm needs the instant bulk a merger or joint venture can provide to thrive in the next quarter century.

The industry veteran has watched the competitive landscape grow rockier for generalists such as Interior Spaces Inc. of Santa Monica. The number of niche players who charge higher prices for their specialties has grown. Consumers are increasingly design-savvy. And access to well-designed furniture no longer depends on designers, thanks to the Internet and moderately priced retailers such as IKEA and Pottery Barn.

“We’re an awkward size and it’s a real awkward time in our lives, especially mine,” said Canepa, who expects sales at the five-person firm to reach $650,000 this year. While she’s not ready to sell the company she started in 1976, Canepa would like to share some of her day-to-day duties and not worry the company will come “to a screaming halt.”

In the last six months she has approached a handful of fellow entrepreneurs who run design firms, all of whom have expressed some interest in joining forces, she said. But Canepa doesn’t know how to structure a merger or joint venture among several small but well-established firms, although she’s sure that is the path to future success.

“I believe that situations where entrepreneurs come together in consortiums or joint ventures rather than the traditional employee-employer model is the wave of the future,” said Canepa, whose firm has won several design awards, participated in charity showcases and seen its work featured in various publications.

Ideally, she would like to find merger or joint-venture candidates with strong commercial and international portfolios and solid marketing skills. That mix would complement her own client base, which is 65% residential despite her efforts to focus on commercial jobs.

Consultant Christopher Coleman backs Canepa’s merger strategy but has a somewhat different view on what strengths she should be looking for in merger or joint-venture candidates.

He thinks the company should focus on finding partners with strong office management and business management skills.

“She’s got a lot of creative designers. She really needs a management component for the firm,” Coleman said.

While the company needs to create a formal plan to attract merger or joint-venture partners, it also should consider cutting overhead costs and boosting marketing to commercial clients, he said.

The company can get a start by redefining the jobs of its employees. Currently, everyone can handle design work although several fulfill other roles such as office management. Coleman recommended that Canepa fire a full-time employee to cut costs and dedicate one person to office management and another to marketing. Those two jobs could be handled by independent contractors, he said. He also suggested pooling resources, such as by sharing an office manager, with a smaller design firm in the building to further cut overhead.

Streamlining operations could give Canepa the time she needs to work out a merger or joint-venture deal and to go after larger commercial clients, he said.

“She has to get the office straight so she can leave it,” Coleman said.

Although Canepa envisioned herself partly turning over the reins to younger merger partners, Coleman would like to see her remain in control. Either way, Canepa, like any business owner contemplating joining forces with one or more companies, has to come to the table with an attractive package, he said.

To do that, Canepa should expand her initial evaluation of her company’s strengths and weaknesses. She’ll need to create a formal plan outlining how a merged entity might work and be prepared to sell herself and the benefits of the plan to potential partners.

It helps to ask for input early on from respected colleagues and to get preliminary legal advice on the options for structuring the entity. But when it comes time to approach target partners, “try to come to them with a finished vision,” Coleman said.

“If you come up with the idea, they look to you as leader,” the consultant said. “And you always want to keep some degree of that type of stature.”

He suggested that Canepa offer a plan that includes a new entity to house overhead and administration for the merger or joint-venture partners. The partners could pay a percentage of sales for its upkeep, he said. The entity should have its own name and will provide a vehicle the partners can use to go after the bigger contracts on which Canepa says smaller firms often lose out.

Pooling resources could include creating a travel budget larger than any individual member could afford on its own. It will also create efficiencies of scale when it comes to billing, payroll and other administrative tasks.

Interior Spaces and its partners would be free to pursue clients on their own but might be required to share two or three contracts a year with the umbrella entity, Coleman said.

Marketing is another area in which the new entity could add firepower and provide consistency for its members.

That would be important to Canepa, who worries that marketing efforts at her company are too tied to her personal energy level. That results in inconsistent and ineffective marketing, she said.

“I go like a bulldog till I get tired and go into a ‘Whatever happens, happens’ mode,’ ” Canepa said. She knows that personal energy is too unpredictable to rely on, but as an entrepreneur running a small company by herself, she said that’s often the extent of her resources.

“Personally, I feel like I have zero control over everything: my marketing, my revenues,” Canepa said. She pointed to a phone call that came in one day in 1997 that resulted in a job that quadrupled annual revenue to $942,000.

“It hasn’t happened since and it hadn’t happened before,” she said. The business owner has no idea what, if any, marketing effort or referral may have brought her such a large job.

That situation could change with the greater resources a merged entity could dedicate to consistent marketing of itself and its individual members, Coleman said. In the meantime, he suggested Canepa restart marketing efforts at her company. He’d like to see her thorough but subdued marketing materials traded in for a “little bit slicker” brochure that includes color prints of the company’s commercial work.

He also suggested that she establish a formal system to track how every new client heard of the firm and to call every source of a referral to ask for additional recommendations.

He said Canepa should restart her networking efforts, this time emphasizing large commercial clients. He suggested attending the meetings of real estate associations, including commercial real estate developers.

“She needs to get out more into the commercial scene with her ideas, with her new, flashy, 2000-based marketing package,” Coleman said.

He knows Canepa has been discouraged because past efforts to crack the commercial and international markets have sometimes failed. It helps any business owner to remember that sales is to some degree a numbers game, according to the consultant.

“If you are working on more deals, something will come through,” Coleman said.

To free Canepa for additional marketing, networking and other sales work, he also suggested she limit her design time to just what’s necessary to keep her skills sharp.

“She is a salesperson but she doesn’t like to sell,” Coleman said. “She’s going to have to change that one right there because if she wants to go after the Disneys she’s got to go out” and get the business.

That’s where Canepa sees her idea of matching strengths and weaknesses in a merger with other veteran design entrepreneurs bearing fruit.

“We are like these little gerbils in these cages and I think we can all be harnessed with the right mix and the right system to become like a racehorse,” Canepa said. “Instead of going around in a cage, we are going in a straight line.”

Cyndia Zwahlen can be reached via e-mail at cyndia.zwahlen@latimes.com.

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This Week’s Business Make-Over

* Company name: Interior Spaces Inc.

* Headquarters: Santa Monica

* Type of business: Residential and commercial interior design

* Status: S corporation

* Owner: Shari Canepa

* Founded: 1976

* Start-up financing: Minimal for the originally home-based business

* 1999 sales: $650,000, estimated

* Employees: 3 full-time, 1 part-time, 2 independent contractors

* Customers: Residential and commercial, including Western Bank, Magic Mountain (restaurants) and Channel 52 (offices).