Brian and Ann Turbeville made a series of common small-business mistakes on their way to a Chapter 11 bankruptcy filing in July 2009.

The good news is that the process taught them some crucial lessons that left the company comfortably in the black as it emerged from bankruptcy in April. But it was an intense nine months that tested many of the business decisions the couple has made in the past five years.

The Turbevilles are proprietors of Minnetonka-based Wallace Carlson Printing, a commercial printer they acquired in 2005 for $1.7 million.

The transaction left them with a substantial debt load that included a $200,000 loan from a commercial factoring firm, a company that provides alternative financing at comparatively high interest rates to small businesses that can't qualify for conventional, lower-interest credit.

But the Turbevilles saw the purchase as a necessary move. Wallace Carlson's larger commercial projects were less susceptible to the growing competition from Internet-produced documents that were threatening the instant-print business they had been operating.

The numbers proved them right: Between 2000 and 2009, the number of quick-print shops in Minnesota fell 57 percent, to 66, according to the trade group Printing Industries of America. Larger commercial printers also were affected by a general decline in the printing industry, but their numbers in Minnesota fell just 15 percent to 374.

The sizable debt the Turbevilles took on to buy Wallace Carlson was only the start of their troubles. Next came a faulty decision that I've seen plaguing dozens of small businesses over the years.

In Brian Turbeville's words, "We were trying to buy business." Translation: With their eyes fixed firmly on the top line of the P&L statement, the Turbevilles were chasing projects that too often offered low to no profit margins.

The result was steady revenue growth, from $5.1 million in 2005 to $7 million in 2008 and 2009, enough to produce consistent operating profits before deductions for amortization and depreciation.

But after accounting for amortization on an expensive updating of corporate headquarters and depreciation on $2.3 million worth of equipment they'd acquired with the business, net losses added up to $700,000 over a five-year span. A $17,000 net profit in 2007 produced the only dribble of black ink.

That, in turn, prevented the Turbevilles from acquiring conventional financing to carry their accounts receivable. And that forced them to rely on the factoring company for operating capital.

And even that source dried up as the credit crunch accompanying the recession bore down. In July 2009 the lender cut off Wallace Carlson's credit line and advised the Turbevilles to file for bankruptcy.

Paying cash

Initially, they were left "feeling like victims," Brian Turbeville said. "Our sales were growing every year, and we hadn't missed any lender payments." In the end, however, the decision proved to be a major turning point -- and we're not just talking the $360,000 in vendor debt that went away in the process. That left the Turbevilles with about $240,000 owed to vendors, which they agreed to repay over a five-year period.

But more important, they vowed to pay cash for all future purchases, a decision that persuaded all but one of about 40 vendors to stick with Wallace Carlson. Better yet, the cash-only approach meant better prices than they saw before the bankruptcy, when they were delaying payments for 60 to 90 days.

So where's the cash coming from? For one thing, the Turbevilles slashed their inventory by 75 percent from the pre-bankruptcy level of $200,000, much of which was well in excess of current needs. Now they're adding inventory only as needed and have cut the total to about $50,000.

Better yet, they're avoiding projects that do not generate at least a 5 percent margin, a move that cost them a handful of clients and reduced the amount of work from many of the customers that remained. As a result, they expect 2010 revenue to be about 9 percent below the year-earlier total, to about $6.4 million -- but with a significant profit.

Other decisions also helped propel the company out of bankruptcy: The workweek for Wallace Carlson's 45 employees was reduced by five hours and the Turbevilles took 10 percent pay cuts. They also negotiated a 27 percent rent reduction and loan extensions of one to two years from the lenders who helped them buy the company.

And they instituted a more aggressive collection process that trimmed several days off the average payment period and bumped cash flow up about 9 percent.

The bottom line: Despite this year's revenue decline, the Turbevilles estimate that net profit will approach $50,000, nearly three times the 2007 gain.

Which leaves them with a new goal: to keep the profits rolling in so they can become "bankable," as Brian Turbeville puts it, and qualify for a conventional credit line at significantly lower rates.

Dick Youngblood • 612-673-4439 •