Reprinted with permission of the Rochester Business Journal.

VOLUME 22, NUMBER 35 DAILY EDITION: http//www.rbjdaily.com DECEMBER 1, 2006

PUBLISHED WEEKLY

BY VELVET SPICER

John Iannone has ambitious goals forAuction Direct USA L.P.: to be thearea’s f irst nationwide used-car fran-

chise, and to conduct an initial public of-fering in the next three to four years.

But f irst, Iannone plans to open a sec-ond location in an A-market—a city witha population of 2 million or more—in ear-ly 2007.

“Atlanta, Houston, Phoenix and Dallasare the four cities that we’re really keyedin on,” the CEO of the Victor-based used-car auction house says.

Long-term goals include the opening of17 stores across the nation, he notes.

“Or, if we’re having fun, keep it privateand just keep growing,” he says.

Iannone and other investors chose theRochester area for the startup because heis from the area and the concept of a na-tional eBay Inc.-like car dealer—or anyfranchise—“is very tough to prove in smallmarkets,” Iannone says. He wanted to seeif it could be done here before venturinginto other regions.

“We’re from Rochester. It was kind ofour incubator, our test model, our proto-type here to iron out any issues that we mayhave before we did our national rollout,”he explains. “I can’t think of any automo-

tive chain that’s started in Rochester. We’dbe the f irst ones to do a national expan-sion.”

He and his business partners—includingJohn Gabriele of Marina Dodge Inc.—areproud of Rochester, he says, but the areahas had its share of black eyes with past lay-offs at Eastman Kodak Co. and other localf irms, and its general economic decline.

“We do have some glimmers of hopewith Paychex and University of Rochesterand what they’re doing, andWegmans,” Iannone says.“But I really would loveto say ‘headquartered inRochester, N.Y.,’ (about)Auction Direct USA.”

A new conceptIannone grew up around cars, he says.

His father was a mechanic and he alwayshad vehicles around to tinker with.

Though he had an interest in cars, Ian-none went to Rochester Institute of Tech-nology and received an associate’s degreein applied machine tool technology. But in1985, one semester shy of a bachelor’s de-gree in engineering at RIT, he got his firstjob selling cars at the former Koerner Ford.He opted not to f inish the four-year de-gree, he says.

“I started really enjoying working withpeople and did pretty well my f irst year

CLOSE-UP

John IannoneTitle: CEO, Auction Direct USA L.P.; presidentand CEO, Auto Depot USA LLCAge: 43Home: PenfieldFamily: Wife, Cheryl; daughters Olivia, 10, and Gianna, 6Education: AAS, applied machine tool technology,Rochester Institute of TechnologyHobbies: Golf, outdoor sports, familyQuote: “In the used-car business it’s just likeproduce: It’s never going to be worth as much as the day you put it out there.”

John Iannone has big plans for Victor-basedAuction Direct USA, including an IPO

and, as they say in the business, ‘got thebug,’” the 43-year-old husband and fatherof two says. He ended up staying at thedealership roughly 15 years.

The commission-only job taught Iannonea valuable lesson, he says. “You’re goingto get out what you put in to something.”

In late 1998, a subsidiary of Ford Mo-tor Co. bought several local Ford dealer-ships and they collectively became knownas the Rochester Ford Auto Collection.Shortly thereafter Iannone met ToddHoagey, who was brought in as RFAC’schief f inancial off icer.

The two became friends and stayed intouch after RFAC folded in 2001, Iannonesays. Hoagey went to work at Holtz Houseof Vehicles, while Iannone started AutoDepot USA LLC, a used-car dealershipon West Ridge Road.

Meanwhile, Iannone also was at workdeveloping the concept for Auction Direct.The company works somewhat like eBay inthat used vehicles are offered for a “buy-it-now” price and if they do not sell with-in a certain timeframe—typically 30 to 40days—the cars are put on seven-day auctionson the company’s Web site.

A few years ago Iannone pitched hisidea to Hoagey, who liked the conceptenough to leave Holtz and begin workingwith Iannone on a business plan.

“One thing kind of flowed into the otherand I haven’t taken a breath since,” Hoageysays of his move from Holtz to become CFOof Auction Direct.

Developing a business plan was a lengthyprocess. Some 18 months after Iannoneapproached Hoagey with the idea, the busi-ness plan was in place. The companyopened in October 2005.

“We documented everything,” Hoageysays. “You always prepare. You can prepareuntil you’re blue in the face and then youopen the doors and say, ‘Oh no, I forgot this.’So the more preparation, the less chance youhave of having one of those ‘oopses.’”

That preparation caught the attentionof investors at Trillium Group LLC andthe New York State Common RetirementFund, who earlier this year gave AuctionDirect a multimillion-dollar package thatwill enable the company to expand na-tionwide, Iannone says. The Trillium por-tion is funded through its Lakefront Part-ners III Fund and typically ranges from$2 million to $5 million. Trillium was at-tracted to Auction Direct because it em-ploys both the traditional bricks-and-mor-tar atmosphere and an online selling op-tion.

Iannone wanted Auction Direct to beless about profit per car and more about in-ventory turnover. He likens the conceptto a grocery store, where it is about shelfspace and “how fast you can turn the product on the shelf.”

“In the used-car business it’s just like pro-duce: It’s never going to be worth as muchas the day you put it out there,” he says.

Iannone also wanted the business to becustomer-driven, one in which clients feltno pressure when visiting the dealership.

The company’s showroom features a re-search center equipped with computers to al-low customers the opportunity to researchvehicles before buying them. More com-puters are available on the dealership’s horse-shoe-shaped bar, behind which sit sales-people and managers. The monitors faceoutward for customer privacy, Iannone says.

“The reason we did that is so they canget on cars.com or autotrader.com and justhave the assurance that if they’re shop-ping that Corvette in the showroom theprice is outstanding,” he explains.

Iannone opted not to include hidden of-f ices in his dealership’s floor plan, andthere are no long hallways with closeddoors. Additionally, the offices that do ex-ist off the showroom have windows, but noglass, for a more open feel, he says.

Another low-pressure tactic Iannoneemployed was to strip the commissionfrom his salespeople.

“They don’t care if you buy the $5,000car or the $50,000 car,” he says. “They’retruly here to try to f ind exactly what yourneeds are, what your budget can affordand to advise you the best that they canabout buying a car.”

Auction Direct tends to hire more peo-ple from service industries, Iannone says,rather than the automotive industry.

“I think the biggest challenge that anycompany has is surrounding yourself withgreat people,” he says. “Rather than find-ing car people we hire mostly people thathave been in some kind of a client serviceindustry.”

He has hired banquet managers, cus-tomer relations staffers from Kodak and awaitress.

“Because of the way we sell cars here,you don’t need that car-haggling experi-ence that most dealers are looking for,” Ian-none says.

Auction Direct wants car buying to bestress-free and fun, Hoagey says.

“There are certain things about the carbusiness that have always bugged me,” hesays. “And when we started to develop theconcept of what we wanted it to look like,we took a look at the things that we likedand disliked about it and kept the goodstuff and threw out the bad stuff.”

Buying a car is stressful and it should notbe, Hoagey notes.

“I think that stressful experience basi-cally starts when you walk in the frontdoor,” he says. “From the moment youwalk in the front door of a traditional cardealership you have immediate con-frontation because you’re there to buy a

car for the lowest price and they’re thereto sell you a car for the highest price.”

While he declines to disclose revenues,Iannone notes in its f irst year of businessAuction Direct sold more than 1,500 usedvehicles—and he expects to grow the busi-ness by 10 percent to 15 percent annual-ly. If the average used-car sale was $10,000,the company’s first-year sales would havehit $15 million.

The company keeps some 250 cars—purchased through dealer auctions or thegeneral public—on the lot at any giventime and its lineup ranges from $5,000vehicles to a $200,000 Ford GT the com-pany sold. The company also takes re-quests and in most cases can locate a ve-hicle for a customer within hours or days.

Auction Direct employs some 47 people,while Auto Depot, the used-car dealershipin Greece, has 12 staffers. Though cus-tomers range from the 18-year-old outlooking for his f irst car to the seasoneddriver shopping for vehicle No. 30, Iannonesays Auction Direct’s typical customer isthe family of four in their mid-30s.

The company circumvents the high costof traditional advertising through customerreferrals. Auction Direct started off withroughly 30 to 35 new referrals a monthand that has grown to more than 70.

“Our customer referral equals what wespend in advertising on TV as far as traf-fic,” Iannone says. “We feel that’s viral; it’sstarting to take hold.”

The company sees a slight majority ofits business come from Internet traff icversus foot traff ic, Iannone says, and herefers to the business as more of a “clickand mortar” company as opposed to thetraditional car dealership.

The company’s lack of conventional tel-evision, radio or print advertising has nothurt the business, Auction Direct manag-er Stephen Satterwhite says.

“You can throw thousands of dollars atadvertising in the newspaper, in radio andTV,” he says. “The best form of advertis-ing in the world is your neighbor comingover and saying ‘I’d like to show you thisbeautiful car I just bought and the won-derful experience I just had.’ Nothing isas strong as word-of-mouth.”

AtmosphereBecause the company does not rely on

commissions to compensate its salespeo-ple, teamwork is more evident in the show-room, Iannone says.

“It is total teamwork,” he says. “Wehaven’t seen any signs of any big egoshere. And if we did they probably would-n’t last long. They probably wouldn’t fit.”

Hoagey notes the teamwork he sees is aculmination of excitement over the compa-ny’s upcoming expansion and the unique-ness of the business. Additionally, he says,

Reprinted with permission of the Rochester Business Journal.

Auction Direct salespeople are not afraidto run into customers off the job.

“If you’re in a traditional car dealershipyou don’t want to run into people you soldcars to, historically,” he explains. “Oursalespeople, they don’t mind if they go tochurch and they see somebody they solda car to. They’re not afraid to run into theircustomers on the street because the cus-tomers have received a good experience.”

Satterwhite describes the dealership at-mosphere as fun, for both employees andcustomers.

“Unfortunately, I think in the last 80years since the f irst car was made, the in-dustry has not been exactly straightfor-ward on how to deal with their customers,”he says. “And we have decided to revolu-tionize and legitimize this business. We’vetaken the B.S. out of the business.”

Satterwhite equates the price negotia-tion that goes on at some dealerships withgoing to the dentist. It is painful, he says.

“The negotiation process to go back andforth to the manager 120 times is not some-thing that anyone likes to do, so we de-cided we’re going to offer the lowest priceand there’s no negotiation,” he explains.“And if we can’t sell the car for that muchmoney, we’ll take it back to auction. It justremoves all of that nonsense that usuallygoes on at the traditional dealership.”

Employees are the company’s mostvaluable asset, Hoagey says, and Iannonebelieves that work is not necessarily

everything.“A lot of people in the car business at-

tribute their success to their franchise ortheir location,” Hoagey explains. “But inthe car business the single most impor-tant success factor is the people.”

Satterwhite adds: “As an employee, if Iever have a problem, a concern or any-thing, (Iannone) has an open door. It’s de-lightful coming to work here. I wish thateveryone could say that about their job.”

Iannone says his greatest strength is healways is looking for a better way to sellcars or improve his work, and getting a voteof conf idence from a satisf ied customeror employee is the best part of his job.

Auction Direct recently held a jamboreefor all of its previous customers, employ-ees and their families.

“That gave us an opportunity to bondeven further than most companies,” hesays. “When you tear down all the job ti-tles and break bread at a table and all havea good time, they get to realize that theCEO is exactly what they are: family peo-ple that just come to work every day andtry to do the best they can.”

At homeHis biggest accomplishments, Iannone

says, are the birth of his two daughters,Olivia, 10, and Gianna, 6, and his wife,Cheryl, who stood by him through theplanning and opening of Auction Direct.

Friends describe Iannone as a straight

shooter, down to earth and levelheaded.Iannone is a sports fan and avid golfer, sayslongtime friend Michael Cerretto, and muchof what he does is with charity in mind.

“I think he’s a special kind of guy. He’sreally good with charity,” Cerretto says.“A lot of things that I’ll golf with him in arestuff for fundraisers, charity. He does a lotof that. He’s really community (centered).”

Brother-in-law John Myers agrees anddescribes Iannone as honest, generous andfriendly.

“He’s always in a good mood. I’ve nev-er seen him (without) a smile on his faceand in a good mood,” he says.

Myers also notes that while Iannone isbusy with expanding his business, “youcan tell he has a strong love for family.”

His immersion in Auction Direct doesnot leave much time for family though andthat is his one regret.

“I don’t spend much time with (my fam-ily), as much as I should,” he says. “That’sprobably, from my heart, the thing thatbothers me the most.”

Iannone recalls a recent Sunday—theday in which he does not go into the office,rather he spends time with his wife anddaughters—when his youngest daughterhad a bowling party to go to. She decid-ed she did not want to go, he says.

“She told her mom, ‘It’s my day to spendwith daddy. I’m not going to this bowlingparty,’” he says. “That just crushed me.”

vspicer@rbj.net / 585-546-8303

Reprinted with permission of the Rochester Business Journal.