Q&A with Brett Blake

CEO Brett Blake

Bringing more investment into Direct Selling

According to direct selling veteran Brett Blake, direct selling companies need more capital, but even more, they need the help of smart investors and savvy executives from outside the industry to close the gap between current practices and those that will help it scale into the mainstream of public acceptance.

Blake’s new book Private Equity Investing in Direct Selling: Identifying Risks and Rewards was written to help investors make smart investments and to be more valuable partners to their portfolio companies. He leveraged his relationships to perform front-line research for this book. He interviewed dozens of direct selling CEOs and investors and captured their experiences and best thinking in this book. He also documented more than 125 deals, summarized due diligence questions every investor should ask, and created a comprehensive list of the KPIs that the most successful direct sellers use to measure the health of their business.

Although the book is aimed at the investment community, it’s a must-read for every direct selling executive. I see it being a go-to resource within our own industry, the media, as well as anyone looking to understand the channel’s unique nuances.

How did the idea for the book come to be?

Everyone who reads the title of the book tells me—that is not a best seller. I agree, it wasn’t written as a best seller. I have had this unique vantage point to be able to watch many financial deals get done in our industry. Some of the deals have been great, and several have been really disastrous both from the field’s perspective and in many cases for the founder’s perspective, and often for the private equity firms. As a former CEO of a few direct selling companies, I’ve realized that capital is so hard to get in our industry, partly because of some of these bad deals. Based upon the experiences I’ve personally been a part of, I felt like I was in a unique position to write a book that would help investors make better decisions. Hopefully, better decisions mean there is a better return on capital deployed in direct selling and over time more capital available for direct selling companies.

What are some of the most common misconceptions that the investment community has about direct selling?

A lot of the misconceptions aren’t much different from what our customers and new distributors have about our industry. Once they get past these stereotypes and prejudices, many investors are surprised with the dynamics of our independent sales force. Many people come into this industry assuming our independent sales force are just like employees, and you could tell them exactly what to do. They fail to understand the complexity of being able to really think through how does one motivate a sales force, and what is required to get them engaged both mentally and emotionally in the business. As you know our industry is different from many others, in that you can’t always tie a direct return on investment to more capital invested like you can with a brick and mortar retail establishment.

Let’s say I’m a Starbucks, and I have a good idea of how much it costs to build out the store. I know what my lease payment and fixed overhead will be. To some degree, I know every store that I build, I’m going to get “x” return from that store. It’s not like that in direct selling. You can’t just say I’m going to deploy another $20 million or $100 million, and I’m going to get $120 million return on that invested capital. It’s a different experience investing in direct selling companies, but it’s one that can be really rewarding for investor portfolios.

In your book, you say that direct selling has a favorable economic engine. Explain a little bit what this means.

I went into this project with a concern that there were not really great exit strategies for investors in our space. I was surprised by one of the first interviews I had with a very large private equity partner who said to me—What we love about direct selling is that there are more places for us to get a return than is typical, because of how favorable the economics of the business, and particularly what a cash-rich business most direct selling businesses can be. That was a big eye opener to me. If you set the economics aside, I think right now we’re at this place where we talk a lot about the gig economy, or as I like to refer to it as independent contractor enterprises.

“Hopefully, better decisions mean there is a better return on capital deployed in direct selling…”

I think businesses are starting to realize that more and more of what they do can, and ought to be, outsourced to partners. Some of our best direct selling companies are doing this. You don’t need a lot of people to make an enterprise unique. You can outsource your call center and customer service, product development, manufacturing and distribution and even marketing and IT services. And what remains are the unique ideas, culture and systems that really make the company competitive.

This is why investing in direct selling companies is a compelling choice for private equity executives. We have a lot of experience in knowing how to motivate an independent sales force by creating incentive systems that work.

Investors can learn a lot about the human element of an enterprise that requires independent contractors. It requires you to find a way to tap into and motivate individuals who are essentially volunteers who work the business on their own terms.

You talk about the common characteristics that make up a direct selling company, that you call the 5 S’s. Which one do you think is the most important?

I think the most important—and the least understood right now—is a simple selling system that is so straightforward that the newest person can look at what other people are doing and say, Yeah, I can do that.

Far too few of the companies that I’ve worked with at the corporate level understand how important it is to have a simple selling system. I talked to a lot of executives about their systems, and they say, We’re a party plan company, and we sell through parties. That’s our system. The transactions may happen at a party, but selling system contemplates the conversations that take place before a party and how guests are invited to the party. If you don’t know how a salesperson starts a conversation about your company’s products and how that conversation leads to a transaction, chances are you don’t know or don’t have a selling system.

CONNECT WITH BRETT For more information about Brett and to order his new book, visit InvestIngInDirectSelling.com.

Companies may not understand that there are a lot of simple and well thought out systems that are required for success:

  • How do I begin a conversation and acquire a customer?
  • How do I upgrade that customer eventually to a distributor?
  • What’s my system for onboarding new distributors?
  • What’s my system for taking a new distributor and helping them earn that first level that will allow them to be profitable in their business?
  • As somebody begins to build a team, what’s the system for helping them become a leader and provide leadership to their team?

What I’ve seen that happens too often is these systems get implemented or created at the field level, and the corporate team rarely understands or knows that they even exist. Therefore, bad decisions are made at the corporate level that can mess these simple systems up.

You talked with a lot of direct selling CEOs in the course of writing your book. What were some of the insights that you learned that maybe you didn’t expect?

Three insights stand out from my interviews with CEOs: First, there are more deals being done than I realized. I went into this project thinking that there were very few deals that got done in direct selling. Then when I started documenting, I was shocked at just how many deals have been done in our industry and continue to be done. That was a big surprise.

Second, I learned helpful ways of looking at common problems. For example, I was able to understand more about the fall off of some of the companies that I studied. If you look at trends, so many companies have a three to five-year run, and then they see a decline in sales. Both Darren Jensen, CEO and President of LifeVantage and Orville Thompson, Co-CEO of Scentsy shared with me the philosophy that your sales tend to outpace your ability to develop leaders, and then there’s a leadership gap. To hear how companies are trying to fill that leadership gap has been really interesting.

Finally, I was reminded how open CEOs are to helping others in the channel. Over the years, I’ve been so grateful for the relationships I’ve had. The fact that 30 executives would open up their calendars to find time to help me with a project like this was really telling and helpful.

At the end of the book, I had a chance to go back and ask many of the individuals that I have interviewed, why are they in this space and what motivates them. It was inspiring to hear many of the CEOs share why they still love being a part of direct selling and how much satisfaction they get from the work they do day in and day out.

The Five S’S: Common Characteristics of Great Direct Selling Companies By Brett Blake

In my twenty-plus years of experience, I have learned that great companies consistently deliver on what I call the “Five S’s of Direct Selling:”

  1. Social Benefits—they have more than just an economic reason for being.
  2. Stakeholder Value—they deliver value not only to shareholders, but to all stakeholders including customers, distributors, employees and owners.
  3. Sellers Who Add Value—they have thought through the role of their sellers and positioned them as guides who add value to the customer’s experience.
  4. Simple Sales System—they have a straightforward system that causes the newest seller to say, “I can do that!”
  5. Stickiness—they have built attractive hooks into their business so that customers and sellers want to stick around.