The Turning Point
Stephanie Prosenjak, a former cheerleader for the Denver Broncos, has something few entrepreneurs can claim: a Super Bowl ring. "I was right in front of John Elway when he leapt into the end zone," she says, referring to the Broncos' quarterback and the team's 1998 win. Now Cherry Creek Dance, the $1 million, three-employee Denver company she owns with her husband, Lee, needs to take a leap of its own. Says Lee: "We've really outgrown our space and we're renting, which drives me crazy."
GOAL: TO BUY A BUILDING
To help Cherry Creek Dance expand, BusinessWeek SmallBiz turned to Robert W. Hochstadt, CPA and director of GHP Financial Group in Denver, and Matthew J. Kelley, CFP and president of Gold Medal Waters in Boulder.
Both advisers think buying a building is a good move for the company, which has $61,000 in credit-card debt and total assets of $275,000. Owning would increase Cherry Creek's value and replace its $8,600 monthly rent with a partially tax-deductible mortgage payment, says Hochstadt. Last year the company generated $286,000 in pretax income for its owners. "With net income in that range," Kelley says, "they need to be thinking about how to offset taxes."
Lee has been looking at buildings from $1.5 to $5 million. "I'd get him to zero in on a smaller range," says Kelley. With buildings in the Cherry Creek neighborhood fetching about $400 to $500 a square foot, notes Hochstadt, they would have to spend $4.5 million for the 10,000 square feet they want. With a Small Business Administration loan that lets them put down 10%, the downpayment of $450,000 dwarfs the $268,000 in their savings account. And the monthly payments, about $32,000, could overwhelm them.
To come up with the money, Lee is considering taking equity out of apartment buildings he owns in Ohio. Bad idea, the advisers say. "He should be creating the downpayment out of savings, not leveraging off other properties," says Hochstadt. Instead, he advises the couple to look for a building priced under $2 million, "even if it is located outside Cherry Creek," which would bring monthly payments closer to $11,000.
KEEP THE CUSHION
Kelley thinks the owners could save $175,000 more in each of the next two years. That would let them put down about $500,000 on a conventional mortgage -- which tend to be cheaper than SBA loans -- while leaving plenty to cover expenses during the slow summer season. "My concern is keeping a fairly sizable cash cushion in the business," says Kelley. He suggests they move their savings out of a low-interest-bearing account into a money-market mutual fund. And Hochstadt advises them to pay off high-cost credit cards using a lower-cost line of credit. Finally, they recommend that Cherry Creek clean up its financial statements. For example, they list office supply expenses of $121,800, the result of lumping many credit-card charges, including merchandise from suppliers, onto one line.
The Prosenjaks are determined to stay in Cherry Creek. If they leave, "some clients would follow us, but some wouldn't," says Lee. But he thinks they can find a building for $2.5 million. And he's still willing to tap the equity in his Ohio holdings if needed. "I feel you need to use leverage to accomplish your goals," he says. The two will hire a bookkeeper or part-time CFO to keep the books and will try to save more if it means reaching their goal. Says Stephanie: "Getting the building would mean the world to me."
By Virginia Munger Kahn