Build up funding base, firm advised

CK Arts Inc. has done a good job cementing its future to the increasing interest in Southern California’s historic buildings by putting in place many of the basics needed to position the small business for growth, financial consultant Maryellen Galuchie says.

In addition to the masonry restoration expertise of business partners Charles Kibby and Anthony Tucker and the proven demand for their services, they’ve got a good accounting system, an experienced accountant and, with the addition of Tucker, professional financial management.

“This is a conservative company from a financial standpoint. They are not over-leveraged, they are not over-extended,� says Galuchie, a managing partner based in Riverside for RSM McGladrey Inc.

The company is exploring options for long-term financing for its development: Sales are expected to triple this year to as much as $8 million. Tucker has worked out projections that show how cash flow will cover the Los Angeles company’s growth through the end of the year, when receivables are expected to triple to $3 million from the current $1 million.

Supporting sales of “$8 million kicks over to uncomfortable -- not undoable, but uncomfortable,� Galuchie says. Galuchie’s ideas to fund CK Arts’ growth could serve as a primer for many small businesses.

* Permanent capital. This is money that company owners put into a business. It is also the assets, such as inventory and accounts receivables, that result from spending that “owner equity� to create sales.

CK Arts easily had enough when revenue was around $2 million to $2.5 million a year because it was putting profit back into its operations.

It’s important for a company to do so, says Galuchie, because that capital is what a bank or other lender looks to as a financial cushion in case a job falls through or a client delays a payment. The cushion could be used to cover the bank loan payment.

She recommends that Kibby and Tucker enhance their business plan and cash flow projections to show how they will build up that permanent capital through additional reinvestment in the business -- “hopefully in a short amount of time because they are pretty profitable.� The amount needed to fund growth is different for every industry. Piling up capital is especially important in today’s uncertain economy, she says.

“You have to have a certain amount of that, then the banks, the lending institutions, say, ‘OK, you have enough skin in the game, I’ll start lending to you.’ � Galuchie says.

* Bank loan. The consultant suggests that CK Arts build a relationship with a profitable community bank with assets of around $100 million to $200 million. Preferably they will find one that hasn’t suffered losses from lending to residential builders or making subprime mortgage loans.

The business owners should use their industry contacts to find banks that specialize in construction lending. Their goal will be to find a bank that can separate the company’s niche in historic preservation from the troubled residential construction industry.

“Their main challenge is that they are in the construction industry and most people that would be in a position to lend to them are nervous, where a couple of years ago they probably would have had banks very interested in them,� Galuchie says.

* Joint venture. The owners could solve that problem in part by considering a joint venture with a partner that clearly knows the difference between struggling industry sectors and those that are healthy, the consultant says.

She suggests CK Arts explore a joint venture with a larger construction-related company. For a share of the profit, say 30%, the larger company could provide money and maybe even specialized workers such as project managers, needed by CK Arts to land and pay for a new, big job.

A recent study by Intuit Inc. said large companies will increasingly look for such alliances with smaller companies. They may want to share the profit from a high-growth opportunity such as CK Arts but don’t want to acquire a small firm outright or start their own niche venture.

* Line of credit. Galuchie advises the small-business owners to request an increase of their line of credit to $100,000 or $200,000, either from their existing big bank or from a smaller community bank.

“They can take that little line of credit, which any individual with a house and a few other things can get, and increase it,� she says. “That could be right-away money.�

* Factoring. The small business pays around 10% to 12% to borrow as much as 50% of the value of its receivables. Galuchie would like them to be able to leverage 75% or 80%, but says they will need the permanent capital structure -- more equity -- to do so.

In the short term, she suggests they ask the factor company to consider the nature of each contract. A 90-day job billing, for example, should be able to be leveraged more than 50% because chances are the company will get paid sooner.

Kibby and Tucker are “thinking big,� Galuchie says, “and they are positioned to do well.�

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Meet the expert: Maryellen Galuchie

Maryellen Galuchie is managing director of RSM McGladrey Inc., overseeing the firm’s Southern California consulting practice. Based in Riverside, she provides financial management and business planning services and directs a team of consultants on major projects for manufacturing, distribution, construction and professional service clients. Galuchie also is a certified public accountant and partner at sister firm McGladrey & Pullen. She is a board member for Cal State Fullerton’s Family Business Council.