From sails to profits
A yacht broker confronts his growing pains with help from FSB.
By Brian O'Reilly, FORTUNE Small Business contributor

ATLANTA (FORTUNE Small Business Magazine) - James Weller is addicted to boats. He owned a 16-foot runabout growing up and crewed on charter sailboats during college. He keeps a 40-foot powerboat on a lake near Atlanta. So when he quit his job as a software consultant three years ago, he decided to sell power and sailing boats until he figured out what he wanted to do with the rest of his life.

What Weller saw appalled him. Buying and selling a used yacht--even one costing half-a-million dollars or more--was a tedious and unpleasant process for all concerned. Too many dealers, he says, "are good old boys who think you sell someone's boat by putting a FOR SALE sign on it in a used-boat lot." They don't make much effort to see that the boat is priced appropriately, don't advertise it beyond the local market, and fail to follow up effectively on sales inquiries.

James Weller loves boats. And he knows lots of folks do. So, he created Z-Yachts to link buyers and sellers across the country.
James Weller loves boats. And he knows lots of folks do. So, he created Z-Yachts to link buyers and sellers across the country.
THE EXPERTS

Weller thinks he has a better way. He set up a nationwide boat-selling service: Z-Yachts.

"I want to be the Century 21 of the used-boat business," he says. "The key to selling a boat quickly," he continues, "is educating the seller about proper pricing." And not just giving the price for a similar boat at the local marina.

There's a national used-boat market emerging--more and more used boats costing between $70,000 and $300,000 are shipped long distances by truck to the new owners--and Weller wants to be at the forefront of that shift. To boost Z-Yachts' ability to hasten a sale, the Georgia company offers buyers financing, engine and equipment warranties, and even cleaning services.

Z-Yachts has engaged 44 brokers (split between staffers and independents) in 17 states, from Michigan to Florida and Texas. The company routinely collects national price data for all the 500 or so used boats in its listings. The boats are advertised on the Z-Yachts website, on nautical websites such as yachtworld.com, and in magazines such as Yacht Trader and Boating.

"If you do it right, you can sell a boat in 90 days," Weller says. "Do it wrong, and it will sit there for a year, until the owner gets fed up and slashes the price just to get rid of it." For its trouble, Z-Yachts gets an 8% commission on boats it lists exclusively and 10% for a listing shared with other boat brokers. Z-Yachts splits about half of every commission with its salespeople.

By some of Weller's yardsticks, Z-Yachts is going gangbusters. Boat sales climbed from 12 in 2003 to 85 last year. He says that the Z-Yachts website gets a million hits a month. Add in other sites that Z-Yachts uses, and the total is about three million hits, he estimates. Well-established boat dealers are asking to join his system. He hopes to raise $5 million from an OTC stock offering this spring.

Yet Weller admits he's having problems. Last year Z-Yachts lost $850,000, on revenues of $373,237. (About half of that loss was the cost of lawyers and accountants, plus other tribulations associated with going public.) Hiring and managing brokers is a nightmare, says Weller, 36, a short, compact man with thinning reddish hair. He finds himself tacking on more and more ancillary businesses, such as boat financing, marina operations, boat cleaning, and new-boat sales. "Every new idea I hear about sounds like a good one," he says. "My compass is spinning."

To chart the proper course for Weller, this magazine pulled together a top boat industry executive and two management consultants. He got an earful. Irwin Jacobs, chairman and CEO of Genmar Holdings, the second-biggest boat builder in the country, met with Weller in a turbulent two-hour session at Jacobs's opulent offices in Minneapolis. Later Weller met with Rolf Reinalda, head of a sales-force management firm in Red Bank, N.J., and with Michael Simonetto, a pricing and profitability expert at Deloitte Consulting in Atlanta.

Two decades ago Jacobs was one of the most feared men on Wall Street, nicknamed "Irv the Liquidator" and famous as a corporate raider who grew rich in the 1980s by attempting takeovers of Kaiser Steel, Walt Disney (Research), Pabst Brewing, and others. Though he sold off many of his investments from that era, he held on to the boat-building companies he acquired. Today Genmar Holdings builds 35,000 pleasure boats a year.

Weller threads his way through the hallways at Genmar's headquarters high above downtown Minneapolis. Jacobs, 64, is waiting in a huge wood-paneled office, hair combed back, wearing purple suspenders, a purple tie, and tiny boat propellers for cufflinks. Jacobs is friendly at first. "You have a passion for boats?" he asks sympathetically. "It's a problem we all have."

Soon, though, he's jabbing holes in Weller's business plan. "What's your value added?" barks Jacobs. "It's the network," replies Weller bravely. "It's 45 people helping you find a boat." Jacobs is skeptical that the existing system for selling used boats is as flawed as Weller asserts. "We've got 1,500 dealers selling our boats," he says brusquely. "If a dealer takes in a customer's old boat as part of the deal, he doesn't make anything unless he sells it. So it's in the brokers interest to sell the boat."

News that Z-Yachts sold $6 million worth of boats last year does not impress him. "So you got a small fraction of that as commission. That's not a lot of money." When Jacobs learns that Z-Yachts sometimes hires former real estate brokers to sell boats, he is skeptical that Weller is getting top talent. "Anybody who can make it in real estate shouldn't be in the boat business," snarls Jacobs. "Real estate is more profitable."

Weller's boast that websites carrying his boat listings get a million hits a month leaves Jacobs cold. "Have you studied the hits to see who is driving your traffic?" he asks. Weller says he hasn't done that yet, but concedes later that many are probably from daydreamers. Jacobs continues, "You're getting a million hits a month and selling a boat a week? Does that cover your costs?"

Jacobs bluntly advises Weller to drop the idea of a national network of used-boat dealers. Buyers and sellers are already finding each other on eBay and other websites. He'd be better off becoming the top boat broker in a single location. Once Weller has come up with a system that allows him to dominate one market, he can begin to replicate his success elsewhere. Weller, clearly taken aback by Jacobs's brusque manner, says he has no intention of changing his plans. When Jacobs announces he has run out of time, they shake hands politely and Weller leaves.

Two days later, at Z-Yachts' headquarters in Alpharetta, workforce consultant Rolf Reinalda listens carefully as Weller vents his management frustrations. Some Z-Yachts salesmen fail to get sellers to pay for certified preowned warranties, he complains. Others aren't pushing Z-Yachts' financing programs, and some can't even persuade sellers to list their boats with Z-Yachts. "We have a hard time getting brokers to follow our policies and procedures," he says. "Some of them are off the reservation."

Reinalda figures the sales force is overwhelmed by all the new ideas flowing out of headquarters. "I think you've got to keep your ideas to yourself longer," he says. "You've got so many that the salespeople sense that everything is changing. They don't know which ideas to take seriously."

Once Weller knows what he wants the sales force to do, the company needs to quantify what it expects from each salesperson, says Reinalda. "But don't come marching in from headquarters and order people to reach a certain level of sales." Better, he says, to spotlight the broker who has sold the most boats, gotten the most new listings, or sold the most warranties. "Use the best people as reference marks. Use their accomplishments as the new standards. That way nobody else can complain that the standards are too high, because it's obvious that some people have already met them."

And don't turn your star performers into management pets, resented by everyone else in the organization, he warns. "Turn them into teachers. Learn the techniques that make them successful, and share them with the rest of the team. Send these guys around to talk with other salespeople." With a far-flung sales network scattered across 17 states, he says, educational visits from colleagues will reduce their sense of isolation.

A few hours later, Weller is scurrying through frigid downtown Atlanta, trying to figure out which of several streets named "Peachtree" will lead him to Deloitte Consulting's offices. His wife, Gina, a partner in Z-Yachts who handles its finances, has joined him. They finally settle into a smallish office with Deloitte partner Michael Simonetto and breathlessly apologize for being late. Simonetto, friendly and funny, dismisses their concerns with a wave of his hand. Weller begins with his now-familiar description of Z-Yachts, and declares, in closing, "Our problem is managing growth: a lot of new people, high turnover." After a brief pause, Gina adds, "And profits."

Simonetto brings the conversation around to how the sales force is compensated. Weller, it turns out, wooed a lot of brokers into joining the company by letting them keep as much as 70% of the sales commission for themselves--that's about twice the industry average. "We needed to get people," Weller explains. Z-Yachts recently renegotiated the commission structure in its favor, but brokers still take 50% to 60% of most commissions. (Z-Yachts has a special arrangement with marinas and other big selling partners: The broker takes 100% of each commission and pays Z-Yachts a monthly fee.)

"Have you stepped back and asked what the commission rate should be for Z-Yachts to be profitable?" asks Simonetto. James and Gina agree that 60% is the breakeven point.

Don't have a uniform commission for all the brokers, Simonetto tells the Wellers. Create, say, three classes of brokers, tied to the volume of boats they sell. A class-one broker, with high volume, gets to keep a bigger percentage of the sales commission than a less successful one. But to boost the profitability of the parent company, demand that the top-tier brokers pick up more of the marketing and training costs.

Simonetto also urges the Wellers to analyze costs in more detail. "Look at every transaction that's part of a deal," he urges. Do some brokers call headquarters repeatedly, tying up executives' time for hours? Track that. Which brokers seek to shave the overall commission rate in order to land a sale? Which overspend on local advertising? The high-cost brokers, he says, should be let go.

In his parting words, Simonetto urges Weller to focus on getting his core business, selling used boats, to profitability. "You seem like an idea guy who is easily distracted," he says. "Don't look on new ideas as plugging a leaky dike. Just because it's boating doesn't mean it will fit."

Late that day Weller drives to Lake Sidney Lanier in the northeast of Atlanta. He boards his yacht, the Soulmate II, turns on the heat, and pops open a beer. He is convinced his business plan still holds water, despite Irwin Jacobs's advice to go local. "Pulling apart the true costs of a sale is a good idea," he says thoughtfully. He is also eager to fire unsuccessful brokers and to bring some established, successful boat brokerage companies into his system. "I think we'll get there," he concludes.

In a phone conversation a few weeks later, Weller reports that a thorough analysis of their costs has prompted some changes. "We concluded that we need to be dealing with more expensive boats, which will deliver a bigger commission for similar effort," he says.

Weller was surprised to find that selling relatively inexpensive boats--those priced at less than $40,000--was more costly than he and Gina had realized. Here he plans to cut out the brokers altogether. "We're going to develop a new, lower-cost division to handle the cheaper boats--a sort of Z-Yachts Lite," he says. "We think it can be quite profitable." Z-Yachts is also involved in developing a marina and resort in North Carolina. FSB will track Weller's voyage and report back on whether his compass is pointing in the right direction.

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Can't afford to buy a yacht or other luxury goods? No problem. They can be rented. Learn how.

You don't have to be a sailor to be impressed by old whaling towns. Read about themTop of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.