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Entrepreneur, July, 2000 by Cynthia Harrington

... OR NOT. THERE'RE TWO WAYS TO GET OUTSIDE CASH INTO YOUR BUSINESS: YOU KEEP ALL THE PIECES OF THE PIE OR YOU DON'T. TAKE A LOOK AT TWO ENTREPRENEURS BALANCING THE ETERNAL CHOICE BETWEEN SELLING EQUITY AND BORROWING.

HOW A COMPANY RAISES EXPANSION CAPITAL CAN HAVE PROFOUNDLY DIFFERENT EFFECTS ON ITS OWNER. ROBERT ROBISON, AN INDEPENDENT CONSULTANT IN SANIBEL, FLORIDA, WHO WORKS WITH ENTREPRENEURS GETTING FINANCING, SAYS, "MOST ENTREPRENEURS WOULD CHOOSE DEBT [EQUITY] IF THEY COULD GET IT, BECAUSE THEY BELIEVE THEY WOULDN'T HAVE TO GIVE UP ANY CONTROL. BUT IT'S NOT ALWAYS A CHOICE. FEW NEW COMPANIES HAVE ASSETS TO COLLATERALIZE--LIKE LAND, EQUIPMENT OR A PATENT. ENTREPRENEURS WHO DO OFTEN END UP LEVERAGING THEIR MOST VALUABLE ASSET, AND THERE GOES THE BUSINESS IF THEY DON'T SATISFY THE DEBT."

Of course, there's the psychology of ownership. Certain entrepreneurs just don't want to give up anything. According to Robison, "In [my] 15 years at PricewaterhouseCoopers, my biggest task in advising entrepreneurs was getting their mind around sharing control."

A look behind the scenes at two entrepreneurs who made it through the financing process highlights the profound differences between debt and equity financing. Entrepreneur Jane Witheridge reveals what happened when she borrowed money to purchase and expand her small business. Farhad Mohit, on the other hand, opted instead to sell ownership of his BizRate.com to venture capital investors-and has a different story to tell.

ROAD TO GARDEN-VILLE

Witheridge is what you might call a reluctant entrepreneur. At 41, she was an upper-level executive at Waste Management Inc., a garbage collector in Oakbrook, Illinois. Her perks included limos to the airport and first-class accommodations. Five years later, she's sitting in an unadorned two-person office at the end of a San Antonio, Texas, dirt road. A wood sign bears her company's name: Garden-vile.

Garden-ville sells mulches, composts and fertilizers to landscapers, distributors and individual gardeners. Witheridge's enthusiasm shows when she describes ingredients in her company's compost: "We take animal bedding from race tracks and the zoo: the heavier and wetter the better. Paunch, that's the undigested contents from cows' stomachs, comes from the packing plants. We get guano from the largest bat cave in the world, just down the road. All this organic matter mixed with dirt makes the best compost in the world."

Her trip from Fortune 500 executive to Garden-ville started with the realization that there was money in garbage. As vice president of strategic operations at WMX Technologies, which owns Waste Management Inc., she analyzed numbers and predicted the future. But her advice that sales could be made from garbage fell on deaf ears, so she opted to capitalize on the idea herself.

She quit her executive job to purchase companies occupying unique niches in serving landscapers.

"We needed $3 million to $8 million to buy the companies and install the efficiencies," Witheridge says. "Over a hundred capital providers turned me down." But she regrouped. "I looked at the four companies we had letters of intent with and chose the one with the best brand name."

That company was Garden-ville. In late 1998, she renegotiated the deal to buy it. For $500,000 upfront, the seller would hold the note for the remainder of the equity. "Where was I going to get the cash?" she remembers. "I was able to pull in a favor from a friend, who got me a second mortgage on my house for the upfront payment."

After closing the deal, she still faced the balloon on the company debt. "I needed a bank," Witheridge recalls. "A local bank saw the asset base of land and buildings. They took a risk, taking out the balloon and extending us a line of credit. That was a very happy day."

CAPITALLY CONSTRAINED

After failing to raise equity for one business plan, after moving her family from Chicago to San Antonio, after putting her house up to secure a loan, Witheridge was an entrepreneur. "There's no gentle way to get into the water," she says. "You've just got to get in, but it's cold."

The water metaphor took on a whole new meaning when Witheridge took over Garden-vile--just before a major flood. Everything washed out--roads, phone lines, electricity. "We had to start over with everything," she says.

With an eye on making payments to the seller and the bank, Witheridge and her team feverishly went to work. Garden-ville had over $3 million in sales but had been generating losses and needed to pay debts. They streamlined product lines, ended unprofitable contracts, and trained sales people to focus on products that added to the bottom line. Says Witheridge, "I thought I'd have the time to do all this once the capital was there. But we had to hit the ground running. We had no margin for error."

Three years later, Witheridge is philosophical about financing. "I may own equity, but I'm still paying off the previous owner. Even now, we are capitally constrained. But I have the confidence now we can make it on our own. It could be a 'grass is greener' situation, but I often wonder what we could have done if we'd raised equity financing. I'm sure we wouldn't have found our way to the efficiencies as quickly."