Debt or Capital - not just a financial decision; a strategic one
Today, we are talking about Debt vs. Capital. And part of that conversation requires financial insight. A big part of it in fact. We will touch briefly on the finances and more time on the strategy., since this is interestingly more a strategic decision rather than a pure financial one.
Though, the finances do underpin which path you choose.
Path 1: Debt
Debt gets a bad rap typically, but isn’t necessarily all evil. In fact most businesses and we in our everyday lives use debt. Our mortgages, our credit cards, that time we wanted to go out with friends when our spouse wanted to go to dinner and we paid for it later.
All debt.
The part that gets uncomfortable is the collateral often required to take on debt. The lending institution will want to secure most of its debt.
The big financial calculation here is can you cover the debt payments?
Simply enough, you will need to look at your cash flow and the debt payments. If you have a strong ratio of cash to debt, then you should be able to carry it. However, it will obviously reduce your cash flow on a monthly basis, a calculation to take into account.
Path 2: Capital
Capital is what the hoodie wearing tech bros go after. Money in exchange for ownership.
This is often a path that entrepreneurs consider because it doesn’t increase expenses and you need cash to grow the business. Now, there are two big categories of capital.
Working capital
Investment capital
Working capital keeps the lights on. It’s what you need for operations to continue.
Investment capital is what you need to start or grow. Buying the new C-Arm or building the new ASC.
Either way, the thing about taking on capital has more to do with the terms of the capital. For example, in our modern day health system and investment ecosystem, many private equity groups will invest capital, however, that capital is often just debt. That debt is then put onto the business to repay. So the worst of both worlds.
Capital can be a solid tool, but so can debt. It’s much more about the terms than the math with capital. Though some mathing should be done for ownership percentages and potential payouts upon sale.
The Strategy Part
This is perhaps the more important part.
Which do you pick? Let’s say you can afford the debt, but it’s not a no brainer. Let’s also say that Grow-For-Broke LMTD wants to invest so you can expand.
Two options. Math looks fine. What’s the move?
Well, what’re your goals? In business and in life?
This is the first step. The alignment.
If you want to maintain control and are very happy to slowly grow and serve the community on your terms, that may not match with Grow-For-Broke’s roll-up and 5 year flip plan. And while they say they will only take 20%, they actually have more voting rights than you and effective control.
There is a saying, “your price, my terms.”
Terms make or break the deal far more than numbers.
The second, is what does the back end look like? The outcomes.
Debt has two outcomes. You carry it and it’s fine or you don’t and it’s not fine. You restructure or go under.
Capital has a lot more outcomes, again set by the terms. The piece here is to make sure that the outcome works for you.
Obviously, no one it trying to go bankrupt, but it still needs to be part of the outcome calculous. Conversely, with capital, it’s possible to end up with almost nothing if certain things don’t go right.
Which outcomes are you most willing to accept?
Finally, all the other stuff. The intangibles
Maybe the capital guys are amazing and smart and will help you achieve your goals faster. Maybe you have seen how they work and you are looking for partners just like them. Or maybe they are overbearing, needy, and bring a terrible dynamic to your practice.
Maybe debt is just stressful to you. The numbers check out but the idea of paying interest and owing money just feels bad. Or maybe, it’s no big deal, one more line item. But maybe the numbers look good, but you just can’t find a lender.
The intangibles may seem like details, but they are details that can make a large difference over time.
Wrapping up
Debt is a tool. Capital is a tool. The key is knowing what you are getting into and how you will use it to carry you towards your ultimate goal.
3 pieces of the decision strategy:
The alignment
The outcome
The intangibles
Ask the tough questions and choose your path!
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