I am a Startup Guy. I build sustainable businesses from cash flow. Once the business evolves into what it is meant to be, I move on to the next project. I have been in this game for 30 years. What follows is the executive summary of what happened to the one business I built with borrowed money.
I bootstrapped my first business — an advertising agency — when I was 22. By then, I had worked door-to-door. I knew I was a closer. I had worked at two radio stations and three television stations. I lived the business and creative sides of advertising. I read everything I could on the subject. I saw a clear opportunity to serve companies in Vermont and New Hampshire who were ignored or abused by the blue chip advertising houses. It worked great.
At 28, I became enamored by a shiny object. Ben & Jerry’s had recently gone public and they were franchising.
My wife, our sons (then, 3 and 1) and I, lived in Norwich, Vermont; a bedroom community of Dartmouth College located directly across the Connecticut River from Hanover, New Hampshire. The two largest employers in the region were non-profits: a hospital and a college. Our little town was mostly professors and doctors. Julie and I moved there to give the place a little class.
To my mind, Hanover was the perfect location for a Ben & Jerry’s. In less time than it takes to write this sentence, I decided to put a scoop shop near the Dartmouth campus. I did not do any market research. I did not have any experience in food service. I did not even particularly like ice cream. I did, however, believe this would be a very cool and fun family business.
Ben & Jerry’s sold me the franchise rights to Hanover for $15,000. The agreement was good for 20 years. Finding and outfitting a shop was going to cost whatever it was going to cost. My perfect credit was a time bomb in my back pocket.
Our 3,000 square foot home, with a finished basement, home office and recording studio where I produced radio commercials, sat on 10 acres of land we purchased for $35,000. The lot was easily worth $75,000. We hired a local logger to clear cut three acres and he paid us $7,000 for the wood. We built our home for $125,000. When finished, the bank said the property was worth $450,000. The year was 1986. I didn’t have money. But, I had net worth.
If you asked rent or own, I’d say own. But, we didn’t. We had a $150,000 mortgage. If you have a mortgage, you do not own the property. You have a shared interest in it.
My Dad was a renter. He still is. When I was a kid, if you wanted a mortgage you had to clear The Four Cs of Banking: Cash. Collateral. Character. Credit. My Dad had one C. He was a character. He paid the bills with bad checks, thereby earning the nickname “Rubber Hands.”
Eventually you have to move.
Try as I might, I could not find a suitable location in Hanover at any price. The town was fully leased. With some patience and discipline, I could have certainly found a location within a year. But, I wanted a store now. I asked Ben & Jerry to add nearby Lebanon, New Hampshire to the franchise agreement. They refused. We agreed Lebanon would be substituted.
Had it occurred to me, I would have walked away. But, I was willfully unstoppable.
I borrowed $100,000 against our home and six months later opened my first store in Lebanon. It was an immediate success.
I am a quick study. It took me about five minutes to learn the more money you want, the easier it is to borrow. If you could fog a mirror you could get $1 million. As proof, within 18 months, I had four ice cream shops, three delis, 120 employees, and was $3 million in debt.
I lost two homes, 60 acres of land, and owed IRS several hundred thousand dollars. One bank loaned me more money than it was legally allowed to lend to any one individual. When the Feds came sniffing around, you’ll never guess who had the largest loan in the history of this little bank.
When the Feds investigated me, they learned that for several years in my early 20s I didn’t pay my taxes on income earned in the advertising business. Why should I? One of my clients was that little bank. The teller cashed all my checks. No paper trail. When I applied for business financing I gave banks my unfiled tax returns. Consequently, as detailed in Fool For A Client — my memoir – the judge gave me a time out. He sent ice cream boy to the cooler.
Here I sit — 25 years later — 54 and militantly anti-debt. You have to be an excellent salesperson to convince me borrowing is better than bootstrapping. The rules of accounting say that when you borrow money, you book it as a “liability.” The bank books it as an “asset.”
In my small book, that’s all you need to know.
If I could unring the bell, I would have:
- built my advertising business until it threw off enough cash that I was able to amend my returns with IRS
- settled with IRS, thereby cleaning up my biggest mistake prior to becoming a father
- learned the restaurant business by working in a locally owned restaurant for one year
- located a spot in Hanover prior to entering into a franchise agreement
- solicited cost estimates from an architect and bids from general contractors prior to entering into a franchise agreement
- saved the $100,000 prior to entering into a franchise agreement
Had I adhered to these bullets, I would have never opened a store. Ben & Jerry’s was very difficult to do business with. It was their way or the highway. They would not have played along with my to do list prior to my agreeing to enter into a franchise agreement, even though the foregoing steps would have all but guaranteed my success as a franchisee.
What sin did I commit by borrowing $100,000 against my home? As a father, I hold a position of trust. This was not our house. A house is something you rent to someone else. This was our home. It was a long term play. We expected to live there at least until our sons were off to college. And I — recklessly and arrogantly — took out a second mortgage for an ice cream shop.
An individual who scrimps and saves for five years is an individual committed to an idea. It takes a few minutes and zero commitment to walk into a bank and get a second mortgage. Today, you’re a click away.
I materially misrepresented the status of my relationship with IRS to the banks. Congress calls that bank fraud. In a civil suit — Lender v. Borrower – it is an affirmative defense to say the bank could not have possibly relied on my misrepresentations as the basis for extending such large lines of credit. In a criminal case — United States v. Borrower – the crime is causing a false document to be placed in the files of an FDIC insured bank, thereby undermining the integrity of that institution’s financial records. Reliance? Not a defense. Bank’s failure to lend? Not a defense. Repayment in full? Not a defense.
I did not lie about my:
- relative youth
- lack of tertiary education
- lack of experience in the restaurant business
- lack of back office skills
- lack of experience as an employer
- inability to repay but for future success
Banks sell money. If you have good credit — and personal or business property — pretty much any tangible thing a bank can dub collateral — it writes the loan, books the asset, bends you over, and moans, “Congratulations.”
I gave one bank a list of restaurant equipment I typed up on a sheet of paper. I didn’t say how much it was worth and they didn’t ask. I didn’t even include serial numbers. They appended that list of equipment as the sole collateral for a $900,000 loan. At my trial, an expert testified the equipment was worth $7,000.
My bankruptcy lawyer said we deserved each other and he was exactly right.
Had I waited, I would have learned a majority of Ben & Jerry’s original 100 franchisees ended up in bankruptcy court; including many with prior restaurant experience. But, I couldn’t wait. Not me. I had to run out and be an early adopter.
Knowing what I know now about the right way to start and grow a small business, there is no way that at the imagined age of 33 — with a young family — I would have bet my imagined life savings on Chunky Monkey. I would have been too vested.
I was never vested in the debt.