Making a decision to borrow money or accept investment capital while under pressure or without a credible business plan, can be a decision you regret for a very long time. When an over eager entrepreneur meets a shrewd investor or banker, the long term results can have a devastating impact on what might have otherwise been a good business opportunity. Entrepreneurs who don’t have someone in their corner with experience helping them understand how to execute properly on a big vision, can find themselves in a tough spot financially when their plans don’t unfold as expected. There is no such thing as easy or cheap money when it comes to saving a business.
Founded in 1933, Fairway Market has been serving the New York community through its eclectic supermarket locations. In 2007, the partners at Fairway agreed to sell 80% of their shares to Sterling Investment Partners, a private equity firm that financed the purchase by adding $150 million dollars of debt to Fairway’s balance sheet. By 2012, the company had more than $200 million of debt on its balance sheet and because of a poorly executed expansion plan that required more cash than the company had, they decided to go public. Of the $177 million dollars raised, $80 million was used to pay dividends to shareholders (like Sterling Investment Partners) leaving less than $100 million to fund the business. In 2016 Fairway filed for Chapter 11 bankruptcy with more than $267 million of debt on its books. The company has changed hands a few times since 2016 and has not been able to stabilize itself.
In my experience, when a business needs money because of pressure or desperation chances are very good that the business doesn’t actually need money. What the business needs is a plan and some time. A plan that involves returning to profitability and the time needed to put into action the changes or adjustments that are needed to ensure a business returns to stability. Taking money from a bank, lender or investor may seem like a good idea but the truth is that you can end up digging a deeper hole for your business that may be harder or impossible to get out of. If you have a long term vision or goal for your business then don’t make short term financial decisions that involve borrowing debt or taking investors when you and your business are most vulnerable. Work through the challenges and do the work to change the results before accepting cash.