Adam McFarland

It’s the dirty little secret of running a business. I hear about it all the time, but rarely hear it publicized. It’s glossed over by Karen Northup of Corefino in this Churchill Club Video, and it’s mentioned by store owner Dan Fox in this article: founders of seemingly successful businesses who don’t take a penny of salary for themselves.

The reasoning is quite simple: it’s expensive to run a business, and faced with the choice of paying themselves or furthering the business, most entrepreneurs will choose the latter 10 times out of 10. This past weekend we made a similar decision to not pay ourselves any salary from now until June.

Crap. I thought you guys were doing great. How are you going to live? Should you be moving in to a warehouse? Why did you get rid of clients if you need money? Aren’t you freaking out?

I’ll get to those in a second, but since I was the one who pushed for the idea, let me explain my reasoning.

Our Problem

We are thriving in our current situation. We could continue to ship from Greg’s basement, pay everyone’s salary, chip away at our revolving credit card debt, and save some money. But we’d be slowing our growth…to the point where we’d be turning down great opportunities solely because we couldn’t handle the capacity.

While cash flow is good, it’s not good enough to cover:

• The costs of moving into a warehouse. Hidden expenses are everywhere: a $700 deposit to the electrical company, oil heating (meaning we need to fill our tank in advance), the Town of Guilderland requiring a Knox Box, etc. On top of that, there are the not-so-hidden expenses like almost $10k down (first months rent, last months rent, February pro-rated, + a security deposit) and the cost of furnishing the place.
• Expanding Detailed Image. We have vendors that want to work with us, with products that we know will sell at great margins, but we don’t have the space to carry them right now. At a minimum, we’ll probably need $10k - $15k to do this right.
• Initial expenses for Tastefully Driven. On top of development and marketing, we are going to need to spend $10k + on initial inventory to do that right.

All of that adds up on top of normal operating expenses. It was causing us quite a bit of stress.

Our Options

Here are our options to pay for it all:

1. Take on more debt, something we don’t want to do. Revolving credit card debt for inventory is one thing…building up credit card debt and maxing out every line we have is another.
2. Ask for a personal loan. Banks don’t like loaning money to companies that have been incorporated for less than 3 years. We know a handful of people willing to loan us money, so this would be a definite possibility.
3. Give up equity in the company for an influx of cash. This is what most growing companies in our situation would do (I think). However, we’re not really into giving up our stock and our control.
4. Pay for it ourselves.

What would you do? #1 would put us in a bad spot for the next few years. We’d constantly be floating credit between cards and taking on new lines/cards to pay it off. #3 is something we just don’t want to do at this stage in the game. We’ve put in so much sweat equity that we want to have 100% of the company when it reaches the next level. #2 is a good idea, but it’s my belief that you should never ever ask anyone else for money until you’ve exhausted every penny that you have. How hypocritical is it to ask for $50k or $100k and then pay over half of it back to yourself in salary? Just doesn’t seem right to me.

Which leaves us at #4. Each of us has done a good job saving money, so it would seem to make the most sense to have the owners pay for the growth. We certainly have enough cash between the four of us to make it happen.

FAQ About Our Solution

Why not just take the money out of your bank, give it to the company, and keep having the company pay salary?

Every time we do payroll, we have to pay the payroll company and pay taxes (matched by the company in some instances…so it’s double). But by living off savings and taking $0 salary, we avoid those expenses and make the impact on the company’s bottom line all that much better. Plus, we will all show less income on our taxes at the end of the year, which is another tax break. Doing it this way will add an extra 30%+ to the money we’re all putting in.

How are you going to live?
As I said, we all have enough in savings to live for 3 months. We wouldn’t have done it if we didn’t. Down the road when we need another wave of funding to expand we might have to consider other options, but this solution is ideal for this instance. Sure I’ll have to be a bit more careful with how much I spend, but nothing extreme.

I thought you guys were doing great?
This is the hardest to explain to people. We are doing great. Revenue for February 2008 is over 3x what it was in February 2007, our first full month with DI as part of Pure Adapt. Sales have grown exponentially and will likely continue to do so. But there’s only so much you can do with your revolving cash flow without giving it a “boost”. We needed that “boost” to get us to the next level, and we’ll probably need another one in a few years.

Why didn’t you just keep client work for a little longer?
The cash from client work was nice, but it was offset by the impact it was having in slowing down that exponential sales growth. The time required to raise $30k - $50k in client money would wipe out so much of our time that we wouldn’t be optimizing the use of our best assets: our e-commerce platform and our warehouse space. To be blunt: I’d rather take $0 salary and work on what I believe is best for the company and what I enjoy the most. My partners all agreed.

Aren’t you freaking out?
It’s kind of the opposite. We were freaking out when we were worrying about where the money was going to come from. Now we can all focus on the task at hand. Consequently, I think we’ll all be happier and be more productive.

There’s also something to be said for sacrificing for something you believe in. Had someone swooped in and gave us $2 million I don’t think we would have had the same unity, focus, and drive as a team that we do by making a common sacrifice. We’re all giving up a lot to make sure we do it right.

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In the end, I feel like by doing this for 3 months we’re advancing our company by at least 9 months. It’s the quickest means to the end that we are working towards.

I *almost* didn’t write this post. I thought it might be a case of too-much-information. I thought about it for a few days, and I still wanted to write it - mostly because I felt I’d be cheating the readership of this blog by not painting an accurate picture of our company and how it impacts my life.