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Portfolio Entrepreneur - Ivan and ABC Inc.

By Stuart Morley

After Ivan left university, he started a loudspeaker selling business called ABC Inc. For the first two years of the business, he lived in a small town north of Toronto in a loft above a garage, where he also built the loudspeakers. 

After about a year, he met a researcher studying loudspeaker performance using scientific data, and not their look and feel.

The insights Ivan gained helped him develop high-quality speakers that he could sell through large retailers in the USA under their brand names. ABC Inc. reached revenues of about $10 million a year with 25% margin and an operating profit (EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization) of $500,000 a year.

However, when the markets crashed, he decided to continue selling his speakers online rather than through retailers. 

At that time, he was worried that people might not buy speakers without testing them, so he offered a 30-day, money-back guarantee, an active message board for customers, and a 1-800 experts hotline. It was not long before the number of customers rose to 15,000.

Within a few years ABC Inc.’s online sales reached about $5 million a year and his margins were 80% and his EBITDA was $2 million a year before taxes. With online sales, customers pay up front with credit cards, whereas selling to large retailers in the USA meant Ivan had to wait up to 120 days to get paid. 

He hired his wife, Sue, and outside experts to set up online marketing and then over time hired a full-time marketing executive, who received a small equity stake in ABC Inc. 

Many of his customers purchased speakers every year as new models were launched, and they also took advantage of the speaker trade-in program. Playing sports or making money was never a big focus for Ivan. As long as there was cash in the bank, he was happy. He did not see the value of paying accountants to prepare financial statements other than for the purpose of keeping tax authorities and bankers happy. Ivan was more interested in creating the best sound systems.

As the business grew, Ivan delegated more of the research and development to a young engineer who became head of research at ABC Inc. and earned a small equity stake in the company.

To keep the cost of electronic parts competitive, ABC Inc. set up ABC China Inc., with operations near Shanghai to produce specialty electronic components and ship them to Canada.

Ivan believed he could create the future. He cared little about competition and preparing a traditional business plan to quantify the size of the market opportunity before setting up in China. Instead, he used the Canadian Consular Services to meet Chinese business leaders and government officials. He also used contacts at Export Development Canada and one of the banks to get insights and introductions to key people in China. Ivan only focused on securing paying customers in Canada. If over time he found customers in China, it would be a plus.

Ivan preferred to try low-cost experiments over formal market research. He hired a full-time translator and chauffeur to help navigate his way around the area to find a suitable factory space and suppliers. 

But Ivan soon realized he needed someone trustworthy on site in Shanghai to check product quality, because once it left China, there was no way to return the product. Also, a lot of transactions were done in cash and he needed someone to oversee that. So one of Ivan’s managers, Chris, moved to Shanghai to manage the facility. Over time, Ivan gave Chris a small equity stake in ABC Inc.

Within a year of moving, Chris helped Ivan develop speakers for the Chinese karaoke market. Ivan sold those pieces through another company, ABC Karaoke Inc. He also set up a separate facility to make these speakers in China and hired a local manager Sami. Ivan wanted to make sure that none of his suppliers copied his technology. 

Ivan would spend about three or four months of the winter in China, and once a month he and his wife, Sue, would meet in Japan to relax.

As costs in China kept rising over the next decade, Ivan realized he would be better off if he moved more of his electronic assembly back to Canada. By this time, Sue was spending most of the winter in the Caribbean where her business partner was located, so instead of going to China, Ivan would take regular breaks to spend winter in the Caribbean.

Even though he usually didn’t pay attention to the business books, Ivan changed his mind when he noticed his bookkeeper was stealing from him. Once he got rid of the bookkeeper, he hired a dedicated accounts payable person and developed a sophisticated inventory tracking system. He also took bookkeeping courses so he could do most of the work himself. At year end, he would spend many hours with his auditor going through his financial information to make sure everything was in order.

Over time, Ivan bought a manufacturing facility. He took his accountant’s advice and established a separate company called Building Inc. He found it less stressful to own a piece of several companies than having all his wealth tied up in one company.  

Just before COVID hit, Ivan purchased Big Sound Inc. that offered home digital solutions, including alarm systems and music and home theatre systems, etc. Big Sound Inc. was based two hours away from Ivan’s Canadian factory and was a customer for ABC Inc., as well as a competitor. 

The founder of Big Sound Inc., Colin, wanted to retire. Unproductive family members as employees were dragging down his business. He didn’t have the heart to fire any of them, so he sold the business. Ivan was confident he would secure Colin’s support and technical expertise for troubleshooting as long as he remained a shareholder.

It was important that ABC Inc. continue Big Sound Inc. as a separate business but under the same names in the market place. Because they shared some of the same distributors for products sold in Europe and India.

ABC Inc. purchased 65% of Big Sound Inc. for $2 million and arranged to buy out the remaining 35% over seven years. Ivan raised $500,000 from securing a mortgage on his factory, which he held in Building Inc. and in turn Building Inc. loaned him $500,000, which he invested in ABC Inc. as part of the $2 million purchase price. 

Sue also provided a $500,000 investment to ABC Inc. and Ivan’s fishing buddies and other shareholder employees provided the rest of the funding in return for their equity stake in ABC Inc.

Ivan consolidated the manufacturing and administration of the two businesses and made a generous offer to the Big Sound Inc. staff he wanted to move to the ABC Inc. location.

He contracted Sue’s company to upgrade Big Sound Inc.’s website and upgrade its social media marketing campaigns.

With the lazy employees out of the way, a year after purchasing Big Sound Inc., Ivan was amazed how much he was able to increase the profitability of the business. A back of the envelope calculation told him that extra profits from streamlining Big Sound Inc. would make it possible to buy out Colin by paying the $3,076,923 within 2 years, rather than $439,560 a year over seven years. It also meant that he could offer some equity to key Big Sound Inc. employees sooner.

About a year before the COVID shut downs began, Ivan sold ABC Karaoke Inc. and moved his manager Sami back Canada. Sami used his equity payout from the sale of ABC Karaoke Inc. to become a shareholder in ABC Inc. When COVID hit, Sami was able to deal with component suppliers directly in China to air freight key components to Canada so that ABC Inc. and Big Sound Inc. could keep up with a surge in demand during COVID. 

Since Ivan and his wife did not have kids, he thought he continue to work until he died, dedicating his wealth to causes he and Sue believed in. When Ivan gave presentations to business owners he was famous for telling entrepreneurs to always have investments in more than one company and in more than one country. 

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