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It all started with a missing saw blade.
Portions of this article are excerpts from "Forbes" Magazine April 14, 1980.

John Folkerth was a "closet woodworker" back in 1971. By day he was a stockbroker at a Merrill Lynch office in his native Dayton. But come nightfall, a 38-year old Folkerth was down in the basement doing clever things to pieces of wood. One day, as chance would have it, he brought home a radial arm saw he'd gotten a real bargain on. All it needed was a new saw blade. Then he learned why he'd gotten a real bargain: The saw and the saw blade had been out of production for six years.

Now this might have made some men kick the machine and feel stupid. Not the young Folkerth. He'd been reading his home mechanics magazines faithfully and he knew that his saw as a "Sawsmith," made by the same people who gave the world the "Shopsmith," a top-of-the-line multipurpose tool well known in the closet woodworking set since the end of World War II. So there must be a juicy little spare parts business to be had. That was sort of a knee-jerk reaction for anyone from Dayton with its innumerable machine shops and extensive metalworking know-how. It wouldn't cost much to get into the parts business, Folkerth figured-maybe $5,000 to $10,000, which he could easily borrow. He could even do it in his spare time.After all, he was familiar with the business his dad ran - a fair-size machine shop in town.

So Folkerth charged off and contacted the company that had abandoned the Shopsmith product line back in 1965. They said they'd be happy to sell him the rights to the Shopsmith line and the tooling for it for, say, $250,000. Now that was quite a bit more than Folkerth had bargained for. After all, Folkerth was a broke broker.

Hopeless. But John Folkerth found it an irresistible challenge. "I said to myself, 'Here's your chance, baby!'" he recalls. "Now - did I have the guts to look myself in the eye for the next 25 years, going into Merrill Lynch and wondering why some little old lady's dividend didn't get to her, always thinking, 'you got your big break and you didn't have the guts to try it'? I read all those articles in Forbes about turnarounds and men who'd built great businesses and I always thought if I had the opportunity I could do that. Well, here was my opportunity. I didn't have the guts not to do it."

Crazy. But not quite as crazy as you might think. For one thing the demand still seemed to be there. Folkerth found a thick stack of mail from woodworkers and hardware store owners, all wanting to know when the Shopsmith tool was coming back on the market. For do-it-yourselfers it has always been a dream machine, ever since clever Hans Goldschmidt invented it in 1946 - a combination table saw, lathe, horizontal boring machine, disc sander and vertical drill press all in one. It was at once a significantly cheaper package than the equivalent machines would cost individually, and one that required far less space. By 1971 there still wasn't anything like it on the market. Reviving the old hardware store distribution system seemed quite possible. Folkerth had carefully canvassed 50 of the old hardware-store distributors from various areas of the county, seeking their advice. On the basis of that, he drew up an elaborate business plan, full of the kind of cash flow projections he knew sophisticated investors would demand. As for the machinery to make the Shopsmith, there were enough tools and dies to crank out 25,000 MARK V units a year plus a fair amount of the newer Mark VII's and Sawsmith's.

So Folkerth, his wife, three children and a mortgage notwithstanding, rolled the dice. He borrowed $5,000 and offered to buy a one-year option on the business to give himself time to raise some more money. "I didn't tell them that I didn't have any money!" He says with a loud laugh. It took the lawyers four months to hammer out that option, which Folkerth felt had to be ironclad if he was ever going to use it to persuade people to go in with him on the deal. Once he got the option, Folkerth quit Merrill Lynch and set out to raise capital.

At first it looked like it might be smooth sailing. Almost immediately a local Ohio manufacturer named John Scarbrough offered to joint-venture the deal, leaving Folkerth with a 10% equity stake. Folkerth thought he could do better than that and politely turned Scarbrough down. Then things took a turn for the worse. It took Folkerth five months to find a bank that agreed to sponsor him (on Scarbrough's recommendation) for a $350,000 Small Business Administration guaranteed loan if he could raise $150,000 in equity. Now, for a broker of ten years' experience you might think that would be a simple task. But it wasn't. The next pitfall Folkerth encountered was filled with red tape. In order to peddle a new issue to 25 or fewer "sophisticated investors" Folkerth had to become a licensed broker-dealer, and that took him four more months. "That was almost a killer," he says. "If it had gone on another two months I don't think I could have held out. I have five Master Charge cards and two Bank Americard cards with nice $2,500 limits and I pushed them right to the hilt. I had a second mortgage on my house. I guess you either go into this all the way or you don't go in."

When the dust finally settled and the new Shopsmith was born in March of 1972, President John Folkerth wound up with a 56% equity stake in the company in exchange for $18,000 worth of personal loans now charged to the company. One year later the first Shopsmith unit came off the production line. Two years later John Folkerth was in clover, or thought he was anyway. "We were on top of the world," he says. "Our quality was good. We were shipping to about 200 dealers. And we were making $10,000 a month."

Wrong. "When we got our physical inventory at year-end we found out we were $220,000 short, says Folkerth. "We had been under-costing. Every time we produced a unit we were marking our inventory down by $200. We should have been marking it down by $400. So instead of the $120,000 profit we thought we had, we wound up with a $109,000 loss."

It was catastrophe. "It almost put us under," Folkerth concedes. "We were really up against the wall. We were more than technically bankrupt. We were way under. I spent the next four months holding hands and signing personal notes." How could Folkerth possibly have made so basic a mistake when he'd worked for years as a supervisor in this father's machine shop? Simple. The one thing most machine shops have very little of is inventory. Unaware of how crucial tight inventory control is in most businesses, Folkerth didn't bother with the usual timekeeper and inventory clerk. He just assumed that if a normal shop operates at 85% efficiency, then one that was just starting probably ran at 70% efficiency. But it was the year of economy-wide materials shortages and Shopsmith's true efficiency was down around 45%.

With agility born of desperation, Folkerth managed to juggle his debts just long enough for Shopsmith to produce its way from under during the remainder of 1974. But as 1974 unfolded still more trouble surfaced. "Many of our dealers were using the FISH method of accounting-First In Still Here," he quips. "It was obvious that without some sort of factory demonstration they just weren't going to sell our units." But how could marginal Shopsmith get the needed crowds without ruinously expensive advertising? How about demonstrating the MARK V in shopping malls?

You guessed it. The idea worked like a charm. Oh, the local hardware stores that were carrying the Shopsmith machine didn't like it one bit. After all, those mall demonstrations were in direct competition with them. But so what? They weren't selling many machines anyway.

Today, Shopsmith not only demonstrates the MARK V in mall shows, but also at home shows, as well as state and county fairs.

Shopsmith publishes a catalog offering a variety of woodworking tools and accessories, as well as producing four direct mail promotions a year offering Shopsmith owners discounts on products carried. "We strive to keep our customers happy and have a Customer Service/Technical Support staff ready to help you five days a week", says chairman John Folkerth.

"It has been a very challenging twenty-plus years for Shopsmith. But it is very gratifying to know that the Shopsmith family has grown to over one-half million since 1946- the year the first five-in-one multi-purpose tool was invented- to today!"

 

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