Minneapolis' 2% solution helps

Ward Johnson, a 1995 graduate of the University of Minnesota's Carlson School of Management, had an inauspicious start on his way to becoming a successful dog food entrepreneur.

"I started as the kennel boy at a veterinary clinic in Uptown," recalled Johnson. "I would go over there after school my senior year and clean the kennels and get the clinic ready for the next day. After I graduated, the owner made me the clinic manager."

In 1996, Johnson, a jeans-clad, hands-on CEO, bought Sojourner Farms, a dog food company, from a couple of Wisconsin women for $27,000. They manufactured batches of grains, nuts and herbs in an old bathtub. Johnson paid for his initial one-third stake in the company by working up to 80 hours a week and within a few years had bought out two partners.

The business will grow a whopping 45 percent in sales this year to about $3 million, and to $4 million in 2011, Johnson predicts. However, Johnson, who has financed growth with reinvested cash flow and equipment loans, needs to buy a second freeze dryer this year to process an additional 800 pounds of turkey meat daily.

He can do the job for two-thirds the cost of his outside contractor. That will improve profit margins and he won't have to worry about deliveries.

But Johnson lacked sufficient capital for the $130,000 purchase and he didn't quite qualify for a full commercial loan.

His banker, Dave Scott at Franklin Bank, turned to the Metropolitan Consortium of Community Developers (MCCD), which works with small growth businesses to secure a minority portion of the credit with a 2 percent loan through the city of Minneapolis.

A significant percentage of the loans go to women, immigrants and minorities. The idea is to help small businesses expand profitably to the point where they are fully bankable by commercial lenders. And the program has had some high-profile successes.

In 1997, an entrepreneur named Robert Stephens got a $25,000 loan to expand his small computer-repair shop into leased space in an industrial park north of downtown. By 2002, Stephens, founder of the Geek Squad, had repaid the loan, employed 55 service technicians and had a multimillion lending relationship with nearby Northeast State Bank.

That same year, the Geek Squad was acquired by Best Buy Co. Inc., where Stephens is now chief technical officer. And it has thousands of employees.

"The city helped me establish a credit rating," Stephens said. "I love Minneapolis."

The default rate on the program is 2.68 percent since 1986, according to city staff. And the $28.3 million loaned by the city's revolving loan fund has leveraged about $87 million from banks, created more than 2,000 jobs and retained about 9,400 jobs in Minneapolis.

Reverse engineering

Back in northeast Minneapolis at his 14,000-square-foot factory, Johnson talks about how Sojos concentrated food comes out costing about the same as premium brands on a meal-for-meal basis.

Through a sort of reverse engineering process, Johnson, aided by his wife Maggie since 2001, reduced his reliance on contract manufacturers as he slowly brought milling, baking and freeze drying in-house to make a growing line of Sojos raw, nutrient-rich foods. Ingredients include turkey, sweet potatoes, eggs, fruits and vegetables, grains (or grain-free), to which a dog's owner need only add water.

Sojos mixes and $6.50 boxes of "Big Dog" and "Good Dog" treats are sold at Lunds, Byerly's, food co-ops and pet stores as a premium alternative to traditional pelletized dog food sprayed with vitamins.

"We're growing profitably on paper," Johnson said. "But the IRS thinks I'm doing better than I really am."

"Sojos is a good business with pretty good cash flow, but they're a little highly leveraged and the collateral is a little light and this program helps mitigate a little bit of the risk," said Iric Nathanson, finance coordinator at the consortium, which also is taking a minority share of the $130,000 loan. "This is an ideal, job-producing project. I wish we could do a loan like this every week."

Sojos added two new employees on Monday, for a total of 22. Johnson expects to add another one when the new freeze dryer is installed next month.

Johnson, 39, who after 15 years as CEO pays himself under $100,000 and forgoes the annual holiday bonus given to his other employees, takes pride in resurrecting a once-derelict factory and creating good-paying manufacturing jobs that include health insurance. Growing the enterprise and jobs has been worth the endless nights repairing equipment and scrambling to meet new orders.

The Johnsons, parents of two young children, are making a living and building a sustainable business that also generates no waste; everything gets recycled.

"I think this business matters," Johnson said. "The staff is like family. We've had offers to buy the business, but it's not something we want to do. This is our passion."