By Scott Bushkie
I’m working around the clock right now, working with my M&A firm while also starting up a new, complementary company. As I watch the sunrise from my office window, I am painfully reminded of how much time and energy it takes to launch a new business.
I’ve had to look myself in the eye and commit to this project, and I’ve had some difficult talks with my wife about the risks of starting a business. It’s that risk, reward thing—the upside can be great, but right now it’s a lot of investment for no brand, no sales, and no customers coming in the door.
Risk and reward—it’s why for so many would-be business owners, buying makes more sense than trying to maybe-just-maybe build something successful from scratch.
I’m working on a new idea that doesn’t exist in the marketplace, so I have no choice. But if I could, I’d be trying to buy it instead. In my opinion, the benefits of acquisition outweigh any costs.
Why? Because at the end of the day debt does not kill a company. Cash flow, or lack thereof, is what kills. If you run out of money, you’re dead in the water. But you can have millions in debt as long as you have the cash flow to cover it.
When you go into debt to buy a going operation, you get proven cash flow to cover those payments. When you go into debt to start something new, you’re done when the money’s done.
If you’re starting a business, it’s easier to go in undercapitalized. All the lender has to go on are your assumptions, and they don’t have time to research them all.
On the other hand, a lender has lots of experience analyzing existing businesses. They’ll study the cash flow and make sure there’s plenty to cover debt service.
You can do all the due diligence you want, but it’s easy to miscalculate time, resources, and demand. I was talking with someone about my start-up budget recently, and he suggested I increase it again by half because things always take longer and cost more than expected.
When I started Cornerstone back in 2001, I wrote a business plan and got a loan. But little came out the way I expected, and early on we figured out we should have structured our debt differently.
With financing a start-up, you never know when things are going to take off. You have to bring people on board and get them trained and everyone (yourself included) is bound to make some early mistakes. Learn how to start a business by buying an existing one.
Time flies and you may be amazed how fast you have investors or lenders knocking at your door, looking for their return. Of course I’m hoping my new project goes according to plan—but I’m building in lots of extra time, knowing that it probably won’t.
Scott Bushkie is Principal of Cornerstone Business Services. To request a book (at no cost) with advice on the exit planning process contact Scott at (888) 829.9061 or [email protected]