Rounding up the cash to expand
Cash and lots of it.
That’s what Memory Glass owners Nick Savage and Loren Dion will need to pay for the growth they want for their Santa Barbara business, said consultant Gerald W. Harter, chairman of the Santa Barbara chapter of SCORE, formerly known as Service Corps of Retired Executives.
The 5-year-old firm has the financial strength to get at least a $250,000 loan, Harter said after examining financial statements for the business, which sells glass orbs and pendants that incorporate a small amount of the cremated remains of people or pets.
The money would cover a major marketing push, including targeting their top five states for sales of the glass keepsakes and expanding export sales, he said.
“It’s key to their growth,” said Harter, who owned retailer Shoetown in Santa Barbara for 24 years before selling it to one of his sons.
A bank loan is a better choice for the small business than going after an angel investor or venture capital, he said. The latter two typically look for larger companies and require an ownership stake.
His recommendations were welcome news to the young glass blowers. They’ve been so swamped filling the growing number of orders from funeral and cremation businesses, as well as from consumers through their website, that they have had no time to tackle their growing pains.
“It’s fantastic,” said Savage, president of the two-man operation. “The growth rate and the valuation of the company -- we look at them just for fun to say ‘Oh, we made this much money this month.’ But to say, ‘What does this mean? How does it affect our future? All this other stuff,’ we just don’t have the experience to do.”
To get the loan, the pair will have to update their financials and adopt a more formal business structure, including incorporating, put expectations for each player in writing and create an exit strategy, the consultant said.
Here are his main suggestions:
* Apply for a loan. This will require the business partners to provide documents that prove the strength of the company, chart its growth and project sales over the next five years.
Business owners can find plenty of free online sources on how to assemble a package -- plus in-person help -- at nonprofit organizations such as SCORE or a small-business development center, both funded in part by the Small Business Administration.
“Nobody is going to loan you money without it,” said Harter, who also sits on the loan committee of the California Coastal Rural Development Corp. The Salinas, Calif.-based group is a financial development corporation chartered by the state to provide capital and other financial services to businesses and farms on the Central Coast. Harter recommended that Memory Glass apply for a loan from the organization.
* Update financial statements. Savage and Dion, who is trained as an accountant, use QuickBooks accounting software but need to update their records back to the day the company was founded, Harter said. A lender will then be able to see the slow but steady growth in sales as well as the equity in the company, including the value of the glass-blowing equipment.
The statements should include an up-to-date balance sheet showing assets and a current profit-and-loss statement.
The numbers will show that Memory Glass’ cost of goods sold is “peanuts,” Harter said, compared with its revenue, which was $100,000 in 2007. The glass they import from Holland has risen to 81 cents a pound but still gives them plenty of room for a healthy profit margin, another plus for a potential lender.
* Incorporate. Memory Glass’ informal partnership arrangement doesn’t provide the legal protection or the formal structure needed by a growing company, Harter said. The small business should incorporate. To do so, the partners will have to prepare their corporation’s bylaws. That document will be the place to include the information the pair will create once they follow Harter’s next two steps.
* Put expectations in writing. This is an important step for a business of any size. For Memory Glass, it will clarify the roles and rights of each owner, including those who have invested in the company but aren’t involved in the day-to-day operations, such as Savage’s father, Michael C. “Craig” Savage.
The team also should create a written agreement to guide the involvement of the marketing executive who has helped the company in the past and will join it for a six-month trial period later this year. This agreement might include a non-disclosure clause, Harter said. It also can reassure the younger Savage that he will not lose control of the marketing of his company while he and Dion are busy creating its products.
* Create an exit strategy. This document should outline how each of the owners can leave the company under different scenarios. If the company hits $10 million in sales, for example, and one of the partners wants to leave or is disabled, exactly how will that person exit the company and with how much money? Too many small-business owners avoid taking these steps because they worry about locking their businesses into predetermined outcomes. Creating a formal business structure doesn’t mean a small business can’t change its tack in the future. In the meantime, it has the protection and guidance that much larger companies value.
“They are at a junction with so many avenues to pursue that they don’t know which to pursue,” Harter said. “They can’t tell the forest from the trees but they’re ready to learn.”
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Meet the expert: Gerald W. Harter
Harter is chairman of the Santa Barbara chapter of SCORE, the former Service Corps of Retired Executives, which he joined in 1994. He owned Shoetown, a Santa Barbara retailer, from 1968 to 1992 before selling it to one of his sons. Harter, who also sits on the loan committee of Salinas, Calif.-based California Coastal Rural Development Corp., is a former member of Santa Barbara County’s Private Industry Council and helped create the area’s first small-business development center.
