Machine Shop Works on Its Long-Term Fixes

The company has a reputation for quality among some of the most demanding customers in the world, the owner is known for his integrity, the market for his products is growing and yet, year after year, sales don’t budge past $500,000.

Ripa Engineering Co., a family-owned machine shop in Chatsworth, has carved out a successful niche making small parts to exacting standards for fighter jets, military cargo planes, even tanks. It hasn’t grown faster because Anthony Della Ripa, who founded the company in his garage while working at Hughes Aircraft Co. in the late ‘60s, didn’t want it to.

“Ninety percent I did myself for so many years,” said Della Ripa, 62, his native Italian still coloring his speech. “If you get a lot of work on your shoulders and don’t have enough helpers, you get sick, destroyed, upset, frustrated.”

His solution has been to limit how much business he takes on. He does that partly by setting aside a few months each year to return with his family to his small village in Italy. He also has shunned debt, paid cash for $100,000 machines and resisted hiring help to do what he feels he can do better himself.

“His old European ways,” as his son Tony fondly calls them, have laid a solid base for the company. But now the 33-year-old, who joined Ripa Engineering two years ago at his father’s urging, is eager to build on that foundation and boost sales at the government contractor.

Tony doesn’t pretend to have his father’s mechanical ability. Instead, he has used his computer savvy to find new business faster, pushing company sales toward a record $1 million this year.

Tony would like to hire more employees to handle the extra work, but he said he worries that he may run up against his father’s reluctance to “relinquish authority.” The Della Ripas also need to double their current space and want to decide on a plan that allows the father to retire soon. Tony wants help finding new customers outside of the U.S. government, perhaps commercial airlines or customers in the medical or electronic industries.

Consultant Likes ‘Great Market Niche’

The company is on the right track and has the competitive advantage of a “great market niche,” said business consultant Paul Ratoff, after visiting the shop crowded with the large lathes and mills, some now run by computer, that turn copper, stainless steel and lightweight alloys into pins and pistons for Pratt & Whitney engines, landing-gear parts and other small metal components. The company has won blue-ribbon vendor status for its ability to meet the military’s exacting specifications.

Ratoff advised Tony against giving up that advantage to pursue nongovernmental sales, at least for now.

“I don’t think they have exhausted the market,” said Ratoff, a management and financial consultant at Moss Adams in Los Angeles. “Even within his own category, he could do another $1 million or $2 million. That would make him a very profitable business.”

He also recommended that the company position itself for additional growth by creating expansion and succession plans, fine-tuning financial reports and landing some outside financing.

At the current pace, sales could hit $5 million within three years, Ratoff said. At that point, the company will be ready to go after commercial clients.

Right now, Ripa Engineering needs to make a few critical additions to its financial reports, the consultant said. During his review of the company, for example, he found that it did not have an accounting of work underway in the shop.

“He had $160,000 of work in process that wasn’t on his books,” Ratoff said. “That makes a big difference in profits for a little business.”

Lacking information about work in progress also gave the father and son a falsely negative picture of their finances, helping to convince them they couldn’t afford to hire help or pay for their other expansion plans.

The final pieces of the company’s financial picture can be filled in with the addition of a production backlog report and a proposal backlog report that includes the estimated success rate for each outstanding bid, Ratoff said. These tools will help Della Ripa and his son track and schedule future work, an important task in a business where missed delivery dates mean financial penalties.

Unless they create a proper expansion plan, their company’s growth could also carry hidden financial costs, Ratoff said.

“It’s one thing to plan it out verbally and list all the tasks, but each task has a financial implication,” the consultant said.

For example, moving the machine shop to bigger quarters--and Ratoff recommends they find a spot with adjacent space they can take over in the future--means production and revenue generation will be interrupted while employees still must be paid. It can take days to set up equipment at a new site. New power sources may need to be installed, fixtures bought and other improvements made before the business begins to hum again. Without careful planning, a move can bring a business to its knees, he said.

“I had a client that almost went bankrupt because of a move,” Ratoff said. “They ended up having to keep two facilities running simultaneously for three months and lost over $700,000 in a very short period of time.”

The best way to figure out the costs involved is to use a cash-flow model, which projects monthly revenue and income and shows the effect on cash flow of each step in the expansion plan, Ratoff said.

“You can take that tool, that report, to a bank and say, ‘Look, this is what I’m going to be doing. This is the financial implication. Can you help me out?’ ” he said.

The cash model, which typically would be set up by the company’s accountant on a computer spreadsheet using numbers supplied by the owner, then serves two purposes, he said. It will help Tony and his father thoroughly evaluate the costs of expansion and it will lay out for a lender the company’s solid growth prospects. That means that, despite the temporary cash crunch likely during a move, new equipment purchases and a work force expansion, Della Ripa and his son can get a loan if they want one.

Borrowing money to pay for expansion may be a difficult move for the senior Della Ripa, who has always run the business on a cash basis.

“I don’t have to worry when my responsibilities are paid. I sleep better,” Anthony said.

Sometimes Debt Is the Only Way to Grow

Although debt makes some small-business owners nervous, Ratoff acknowledged, it is often a necessary part of expansion. “When a business grows at a rapid pace, the internally generated funds aren’t sufficient,” he said.

Succession planning is the other big issue the father and son must address, said Ratoff. Anthony is tired of working 60 hours a week at this stage of his life. But the recent increase in sales has made slowing down impossible, said Ratoff.

Anthony agreed that he is eager to have his son run the company. Tony’s success to date has pleased his father, although he doesn’t often say that to his son’s face.

“I’m very proud,” Anthony said.

Hiring a production manager to replace the company founder is the pivotal piece of a succession plan, Ratoff said. An experienced production manager can gradually take over from the bid estimating, machine setup and supervision of the shop and subcontractors.

Tony, who has a bachelor’s degree in business administration, can eventually rely on the production manager to get the work out while using his own skills to win new business and manage the company, the consultant said.

Ratoff worked with the father and son to outline a succession plan that would reward Tony for his future contributions to the business, compensate Anthony for the equity he has poured into the company over the years and fit with Anthony’s other assets in a way that is fair to the rest of the family, including Tony’s two sisters, who are not involved in the business.

Ratoff is optimistic about the company’s prospects with Tony at the helm.

Anthony Della Ripa said he has always pushed his son to join the business. After a decade “outside,” Tony said he now appreciates the lure of running his own show.

“It’s a secure job,” the father says. “It’s like a gold mine. He can make more money, be his own boss. That’s what they call freedom. I have enjoyed that very much.”

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This Week’s Company Make-Over

* Name: Ripa Engineering Co.

* Headquarters: Chatsworth

* Type of business: Precision machining

* Status: Sole proprietor

* Owner: Anthony Della Ripa

* Founded: 1969

* Start-up financing: $8,500 from personal savings

* 1997 Sales: $450,000

* Employees: Three full-time, one part-time

* Customers/clients: U.S. government, including Air Force, Army, Navy

*

Main Business Problems

Needs to expand beyond government sales, add employees and move to a bigger facility. Succession plan needed for son to take over the business.

*

Goals

To remain relatively small while profitably growing sales by 25% and diversifying client base.

*

Recommendations

* Increase government military sales. Beef up financial reports to include work in progress, production backlog report and proposal backlog report.

* Develop an expansion plan, then create monthly income and cash flow projections that can be submitted to a lender to fund growth.

* Hire a production manager so father can retire.

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Meet the Consultant

Paul Ratoff, a business consultant for more than two decades, is a financial and management consultant at Los Angeles-based Moss Adams, one of the 15 largest U.S. accounting and consulting firms. Previously he was vice president and chief financial officer at a high-tech company.