You can’t afford to quit

You might be an entrepreneur if…you can’t afford to shut your business down because if you do you won’t be able to keep up with the debt payments unless you were miraculously able to land a job making $250K per year.

Aside from the question of whether I would do something different if I could (I probably wouldn’t), I don’t even have that option. You might recall the story about Cortez, or Columbus, or whoever that guy was who, when he reached the Americas, burned his ships to motivate his men to get things done over here rather than just packing up and leaving? That’s sort of what I’ve done. I have two choices; declare bankruptcy or make my business succeed. Folding up my business and getting a job somewhere else isn’t an option unless it involves a bankruptcy, and since I would view a bankruptcy in my case as being tantamount to stealing I don’t see that as a real option either.

Without telling you the exact amount of my business debt, let me put it to you this way–If I were to pay off $10K of debt per month, it would take me years to pay it all off. I am required to pay a minimum of around $6K per month. That is, if I don’t pay off at least that much per month then bad things happen. Not broken knees or anything, but consequences I’d rather not have to deal with if at all possible.

How does one get into that much debt? About 1/8 I would attribute to factors outside my control, at least with the information and experience I had at the time. That is, other people did things to me that cost me money. I won’t say stealing but…well, yes, it was basically stealing. The other 7/8 I have to take responsibility for myself, and that’s easy to explain. I took business risks that appeared logical to me at the time, and those risks didn’t pay off. The major risk I took was hiring people before I had the business to support them. But I had to support them somehow, and that meant going into debt. I took the risk with the hopes that we would land enough business to cover expenses and pay off the debt, but it didn’t work out that way, and when you’ve got 10 people on payroll with some of them getting paid as much as $70K/year then you can get into a couple hundred grand of debt real fast.

Back to paying off the debt. I’ve got to pay off $6K per month, whether or not I have my business. Even if I close down the business I still have to make those payments. If I keep the business open, I can pay off that debt with pre-tax dollars. If I go get a job I pay the debt off with dollars that have already been taxed. It’s a difference of whatever tax bracket I fall into, but let’s say it’s 25% just for fun. That means if I earn a dollar with my business and use that dollar to pay off debt, I can use the entire dollar to pay off debt. But if I earn a dollar from a job I have to pay 25% of it to the government, and then I only have 75 cents left over to pay off debt. That’s reason #1 for using the business to pay off debt rather than getting a job.

Reason #2 is that I can earn a lot more money from the business than I would be able to from a job. Let’s say I got a job that paid me $250K per year. That’s probably unlikely, but even if it happened, let’s see how fast I could pay off debt. First of all, we take out 25% for taxes, which leaves $187,500. That means I’d have around $15K per month to use towards paying off debt, assuming I kept living off my wife and didn’t spend the rest of it on anything else. Sounds pretty good, right? But there have been months with my business when I’ve paid off $20K of debt. That’s abnormal, but it has happened more than once. I’ve paid $10-15K off many times. The average is probably in the $8-10K range. That’s less than $15K, but what are the chances of me landing a job for $250K, or even $150K? And so in my mind the best method for paying off my debts is to keep running the business, which has consistently allowed me to pay off substantial amounts of debt for almost two years now.

Plus we’re working on some ideas right now that might generate a strong recurring cash flow that will speed up the rate at which I can pay off debt, and which could be managed by someone other than myself. Then I could keep the business running and get a job somewhere else and have the best of both worlds.

And so if a client ever asks “How stable are you guys? I mean, are you going to be around?” Sometimes I’d like to tell them that I don’t have a choice. I have to stay in business. I can’t afford to go anywhere. But what I usually say is that we’ve been around for seven years, and the plan is to stick around for the foreseeable future.