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Partner Power!

“Partner Power!”

Taking on a financial partner not only solved a space problem for Sheryl McCaleb but also created a valuable new asset.

In 1997, just two years after launching her company, Sheryl McCaleb needed more elbow room.Hair Prosthesis Institute (HPI), which makes custom-hair prosthetics for women and children, was growing faster than McCaleb had anticipated. She had already increased her physical space to 1,200 square feet from 800 but needed to expand again.

Unfortunately, rents near HPI’s location in Nashville, Tenn., were higher than McCaleb was willing to pay. Shifting her strategy, she began to look for property to buy and found a 9,000-square-foot office building a mile from her original office. One problem, however, was that the building needed considerable “TLC.” Not only would McCaleb need to raise more than $700,000 to buy the building, but she would also need a sizeable amount for repairs and renovation.

McCaleb didn’t have that kind of capital — or enough collateral for a jumbo mortgage. Her solution: Find a partner with financial wherewithal.

She joined forces with a friend in the building-supply business, and the two formed a limited liability company (LLC) to make the purchase. “He asked for controlling interest, but I didn’t mind because he brought so much to the table,” McCaleb says. Besides financial liquidity, the partner had a long track record of business success and could mentor McCaleb.

What’s more, the partner’s building-supply connections enabled the duo to get discounts on materials needed for the renovation. McCaleb also bartered as much as possible, exchanging HPI’s services for lower rates on everything from cleaning to new carpeting. The lower renovation costs enabled McCaleb to keep rents down, which benefited HPI as one of the building’s new tenants.

Buying the building has given HPI tremendous flexibility, McCaleb says: “The way the building is laid out makes it easy for us to expand as we need to.” HPI’s business has increased every year with 2003 revenue reflecting a 25% increase over 2002.

Here are two lessons McCaleb learned in the process:

  • Research the details. Before buying the building, McCaleb obtained rental records from the owner. Just in case HPI experienced any downturn in business, McCaleb wanted to be sure her rental income from the other tenants could cover mortgage payments.
  • Determine an exit strategy. McCaleb and her partner carefully defined the terms of their alliance. From the get-go, they planned for McCaleb to eventually take over, and this past year, she bought out her partner.

In this win-win scenario, McCaleb’s partner made a healthy profit on his investment, while McCaleb acquired commercial property, established strong credit and gleaned more financial savvy.

“This has been one of the best business moves I’ve ever made,” she says.