Near-death by debt

William Scott knows he’s a pretty lucky guy. For the past four months, while he was desperately trying to put together a rescue bid for his company, experts, journalists and investors were telling him the same thing – you have very little chance of avoiding administration.

William has proved them all wrong, pulling of a recapitalisation deal that will see the company’s debt slashed in half, a number of businesses closed or sold off and Scott himself shifted out of the CEO chair in about six months’ time.

Scott’s paid a heavy price financially (he’s one of the company’s largest shareholders) but he is justifiably pretty pleased with having brought the company back from the dead.

He’s also painfully aware of some of the lessons from this mess. Firstly, going on an acquisition binge as CommQuest did at the top of the market is never a good idea. Secondly, making these acquisitions with debt is a very good way to (almost) kill your company.

Scott admits he had too much debt for the group’s earnings, but he also claims that the market moved so quickly when the credit crisis struck in September last year that business strategies that once looked sound suddenly look stupid.

Yes, the credit crisis did hit suddenly, but this is simply not a good enough excuse.

Entrepreneurs must be prepared for the market to change. They must build business models that can work in bull markets and in bear markets, in markets that are flush with funding and markets that are credit constrained.

That’s the problem with debt, as Scott, Eddy Groves, and the leaders of MFS, Allco and Babcock & Brown can tell you. Having too much simply leaves you with no options when the economy turns, rates rise and growth slows.

It’s the exact same reason companies collapsed in the recession of 1990, the dotcom crash of 2000 and in this downturn.

It makes you wonder when entrepreneurs will learn that debt is dangerous?