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The smiles and banter among owner Pat Sorensen and longtime customers at the original Penn Cycle store in Richfield last week belied what had become a tumultuous end to the 61-year-old company.
Poor financial performance in recent years had led to sale discussions with a friendly competitor, as well as a lawsuit against Sorensen filed by his siblings.
"Our discussions began two years ago," said Kevin Ishaug, owner of Freewheel Bike, who acquired the assets of Penn Cycle for an unspecified sum. "I have a great deal of respect for Pat and his family. The timing of the lawsuit last year was unfortunate. It never went to trial."
Sorensen was challenged by his siblings over management of Penn Cycle, starting several years ago, according to a 2018 lawsuit brought by a brother and sister. The initial concerns were resolved in 2013 when Sorensen acquired the 80 percent of the company that had been owned by his siblings. Part of the payment included a contract for deed and a mortgage on several Penn Cycle properties.
According to the lawsuit, Penn Cycle lost hundreds of thousands of dollars in 2016-2017 and was heading toward insolvency.
By late 2017, Sorensen was seeking about $140,000 in annual rent reductions, about a quarter of the rent received by the family-owned partnership that owned the properties. Meanwhile, Penn Cycle's bank was reducing its line of credit. By 2017, the siblings and their vendors were discussing a restructuring, including selling the real estate. The siblings also were divided over Sorensen's roles as owner of the business, the sole renter, and also general partner of the land partnership from which he was seeking concessions.
Those and other questions seem to have been resolved by the pending sale of Penn Cycle's assets to Freewheel. The family retains the real estate.
Pat Sorensen, whose airline-mechanic father started a bike-repair business as a part-time gig in 1957, declined to comment last week.
Ishaug, a guy who has had success in technology and bicycling businesses, declined to reveal the price for Penn Cycle. But he expressed confidence that the consolidation into Freewheel would work. He has offered jobs to Penn Cycle workers.
Ishaug, an avid bicyclist, worked during his University of Minnesota college years as a mechanic and salesman at Freewheel, located near the U's West Bank campus. He studied economics and accounting. Ishaug was CFO of a telephone-tech company called MarketLink that he left in the late 1990s, after it had gone public.
"I wanted a family and more control over my life," he said of the long hours. And he really liked cycling.
Ishaug was recruited by the then-five cooperative owners of Freewheel, a one-shop business with $1.2 million in sales. They were dealing with discord over their roles and the shop's future and struggling to balance the books. He bought the company in 2000.
Today, Freewheel Bikes sells Trek products, fat-tire and other high-end bikes made by Bloomington-based Quality Bicycle Parts, and a ton of merchandise and services. Penn Cycle was overly dependent on one brand, Trek.
Steve Flagg, the founder of Quality Bicycle Products, was one of the founders of Freewheel in 1974 and longtime mentor to Ishaug.
"We've always been ahead of trends," Ishaug said. "Including fat-tire, gravel bikes and now electric bikes. We offer customers choice. And our secret sauce is excellent hospitality and customer service."
Freewheel has profitably grown to four stores, including locations in Roseville and Eden Prairie, on sales approaching $7 million.
Freewheel owns the Midtown Greenway "bike center" below the Allina Health headquarters complex on the busy bicycle route near Chicago Avenue, south of Lake Street.
It generates exposure and good will with repair services, a cafe, showers, bike storage, classes, security measures and more.
"It's like a truck stop for bicycle riders," said Ishaug, who opened Midtown in 2007. "I've lost money doing it, but it's a community service. I feel a debt to the cycling community. And I'm stubborn."
Freewheel generates more revenue from fewer stores than does Penn Cycle.
Ishaug's bet is that he can accelerate sales-and-service revenue through the six Penn Cycle stores. He's going to save money by consolidating back-shop financial operations, which Penn Cycle had outsourced.
"We're going to create scale that will give us buying power," Ishaug said. "The industry doesn't reward small dealers."
Freewheel was early with industry trends such as internet sales and scheduling, as well as a mobile-repair service.
Ishaug boasts high-end industry grades for customer satisfaction. He's not running a co-op, but he said he's a customer-and-employee focused owner who has proven long-term results at Freewheel.
"We have one team-bonus program," Ishaug said. "Everybody gets paid something.
"I am the lowest-paid employee on the senior-management staff. I don't take out a lot. I've put [my] earnings back into the growth of the company."
Neal St. Anthony has been a Star Tribune business columnist and reporter since 1984. He can be contacted at nstanthony@startribune.com.
