Published August 1997
12th Annual Great Comebacks Issue
When his brother picked him up, Don Mechanic was weary from the long day. He had come to Cleveland on business, and the afternoon meeting had not gone well.
Settling into his brother's car, Mechanic called his Dallas office to get his messages. One was from a reporter, requesting a call back as soon as possible. Mechanic rung him up.
The reporter got right to the point: Was it true that some of his creditors had tried to force his company into bankruptcy? Mechanic was stunned. He had heard nothing of this. His stomach lurched.
"Pull over," he muttered to his brother.
To this day Mechanic can't quite understand how it all went wrong. His arts-and-crafts superstore, Zaks, had been a rising star in Dallas from 1983 to 1989. He'd started it as a rival to his former employer, Michaels, and "the financial community started following us from the time we got to three stores in the Dallas area," Mechanic says. "But I really wanted to do it myself, to hold onto the ownership."
By 1988 he had eight stores, each bringing in an average of $4 million. He toyed with the idea of going public. Mechanic and his advisers decided to expand Zaks into Florida. "It seemed like the perfect market, with all those retired people," Mechanic says. He finally consented to seek some venture capital and raised $5 million to fund the expansion. He also secured a $100 million credit line.
The plan was to open 15 stores in Florida in 24 months. Projections called for 5 stores by the end of 1989. Unfortunately, "because of late timing and the lack of urgency in Florida's real estate market," only two were open by Thanksgiving. And although they did very well, the others missed the all-important Christmas season completely.
"That was really the beginning of all our problems," Mechanic says. "We had overbought merchandise, and we never really caught up." Because Zaks missed its projections, the bank started to get nervous. It asked for more venture capital money -"which the VCs were happy to do," Mechanic says, "but under onerous conditions to me."
Things went downhill fast after that. Mechanic sold more stock. The venture capital firms put in more money. "To keep the credit line, we had to have aggressive projections," says Mechanic. "We hoped for the best, but of course we missed those projections, too." By the end of 1991 the venture capitalists were unwilling to contribute any more, and the bank pulled Zak's line. "We had 17 stores in Florida with sales less than our projections but still good," Mechanic says. "And the bank swept our account. We bounced a million dollars' worth of checks."
Mechanic's creditors were, for the most part, very understanding. He went to Cleveland to meet with one of them, and that's when he got the call from the reporter. Three creditors had gotten together to force Zaks into Chapter 7. One of them (unbeknownst to him at the time) was the company he had just visited.
"In some ways, today, people look at bankruptcy as a relief," he says. "But actually, it's like an anchor being thrown off a tall building. You're just out of control." Mechanic fought hard to bring the company through bankruptcy and succeeded. As for his own stake in Zaks, "I lost everything. Whatever equity and wealth I had was in the company." But by then, his title of chairman of the board was only a courtesy. He was fired in September 1992.
"I was emasculated," he says. "But what can you do?" Never one to just sit around, he immediately started looking for something to do next.
Comeback Rule # 4
He had always loved the importing part of his business, so he tried that. In mid-October he went to a fair in Guangzhou - the former Canton - in China. There he bought all kinds of knickknacks, from handheld sewing machines to refrigerator magnets.
In the meantime Mechanic had set up a deal between a friend of his, an importer of artificial Christmas trees, and Michael Dupey, the founder of Michaels. When Mechanic returned from China, his importer friend offered him a job selling the trees on commission. He also gave him some space in his showroom to sell the stuff he'd brought back. "I had this little card table set up," Mechanic says. "It was really terrible!" It was the inauspicious beginning of Don Mechanic Enterprises. But Dupey liked the magnets and bought 50,000 of them.
Little by little, Mechanic built his line of imports and list of clients. His new company will make $4 million this year. "I had run a $50 million business that was losing money," he says. "Here I can do $4 million and make a lot of money. This one's been profitable from the very beginning."