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Running the Family Business Does Not Make CEO Jack of All Trades

August 16, 2000|JUAN HOVEY

Jack Gaglio faced two big obstacles--one personal, the other purely objective--in expanding A&J Cheese Co., an Upland family business his father founded in 1958.

For starters, he knew very little about bookkeeping and next to nothing about the intricacies of business finance or mergers and acquisitions. Worse, A&J Cheese Co. was a distributorship--a high-volume, low-margin business, thus not a good candidate for complicated debt financing.

In the end, none of that mattered. Gaglio used borrowed money to expand the company. His story shows what can happen if, before you sit down with a banker to negotiate a loan, you listen to people who know more about such things than you do. It also shows that smart financing strategies can help almost any business grow, even under difficult circumstances.

Gaglio's story begins in 1972 when his father, recovering from open-heart surgery, couldn't work for six months. Gaglio, then 13 years old, left school to help out. At the time, A&J Cheese did $6 million in sales and employed only Gaglio himself plus two sisters, his brother, and his parents. Gaglio showed unusual skill as a marketer; he became president of the company only six years later, in 1978, when he was 19. He never got a college degree, much less a high school diploma.

A&J Cheese grew steadily, generating $13 million in sales in 1994, the year before Gaglio's father died. But Gaglio wanted to grow rapidly, and he needed help to do so.

He had a key contact in David Krajanowski, CPA, a partner in the accounting firm Singer Lewak Goldstein & Greenbaum, with offices in Los Angeles and Orange County. Krajanowski set up Gaglio's back-office systems and introduced him to another key advisor, Mitchell Gaswirth, a partner in the Century City law firm Proskauer Rose. Gaswirth specialized in business and tax law and shepherded Gaglio through the intricacies of sophisticated business finance.

Meeting regularly with Gaglio, Krajanowski and Gaswirth helped him:

* Analyze the profitability of each product he sold;

* Train his salespeople to push high-margin items and sell not just on the basis of price but on quality and service;

* Jettison unprofitable customers, including those who bought only low-margin items or paid late;

* Speed cash flow by focusing on the collection of accounts receivable.

All of this was nuts-and-bolts stuff, and it had an impact on Gaglio's bottom line. It also made A&J Cheese Co. attractive to bankers, positioning Gaglio for an acquisition campaign.

Gaswirth introduced Gaglio to Comerica Bank, a business lender with expertise in asset-based lending--an effective financing technique for distributorships and other businesses showing high values in such assets as receivables and inventory. Comerica gave Gaglio a line of credit for working capital that now totals $40 million and, sometimes working with other lenders, financed an $8-million expansion campaign involving a dozen acquisitions. The result: Sales went from $31 million in 1994 to $170 million this year, and Gaglio now employs about 75 people.

One deal in particular stands out. Gaglio wanted to buy only the assets of the target company, not the stock, so that, in accordance with federal tax law, he could depreciate the assets. The seller, however, wanted a stock sale to limit his capital gains taxes.

Gaswirth's solution was to structure the deal under a little-known section of tax law allowing Gaglio and his seller to treat the transaction in different ways. The deal satisfied both parties, and it would not have happened had Gaglio tried to fly solo; he needed help from people who knew more about business finance than he did.

That, in fact, is the key to Gaglio's growth, and he knows it.

"I can buy and sell cheese all day long, and nobody can teach me about that," Gaglio says. "But I needed the experience of people with just as much schooling in finance as I had in selling cheese. Mitch and Kraj do this stuff every day."

Adds David Krajanowski: "Jack was willing to recognize that he didn't have all the answers. Most entrepreneurs think they know it all, and their egos get in the way and they don't listen to other people. Jack is willing to listen and to act. He also knew what he wanted, and he was willing to learn how to do it."

Gaswirth sees another important characteristic in Jack Gaglio--his ability to run A&J Cheese Co. as if it were a large publicly run company.

"He knew he was going to need help in structuring the acquisitions," Gaswirth says. "He wanted to acquire those companies with debt, and that meant accounting and legal help to implement the borrowing relationship and do the deals. Jack was the decision maker. We gave him the input."

*

Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.

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