“Bootstrapping” in a business context means starting your business using the least amount of your own or others’ capital resources. In other words, you control the ownership of the enterprise because you don’t have any other investors.
I love bootstrapping. It has alway annoyed me that so many of those involved in teaching or supporting entrepreneurship or new business start-ups today act as if everyone has to do a “capital raise” as soon as the ink dries on their initial business plan. Not so. The majority of businesses – and certainly the preponderance of architecture and engineering firms – are founded by people who use their own money and/or borrow what they need to get started and fund their initial growth.
There are so many benefits to keeping all of your ownership to start – you can always add employee owners later as a motivational tool and to generate additional growth capital. You are your own boss. No one else can tell you what to do or how to do it. And no one can take your business away from you.
But one of the best benefits of bootstrapping is it teaches you frugality. That is something that you will never forget, and in my opinion greatly increases your firm’s long-term chances for success.
As it turns out, what is good for a start-up is also good for an established business that wants to grow. Preserving every bit of precious capital by employing the tactics of bootstrapping start-ups can help you keep control of your business while creating a culture that leads to continued growth and success.
Here are 13 bootstrapping tactics that any established A/E firm can use to help finance their growth:
- Always ask for a retainer or initial “mobilization” fee. Of course, the first response of people in this business is, “My clients won’t pay that.” But when is the last time you asked them for it? And if you had far more work than you can handle, this is one way to weed out some clients so others can prosper along with you.
- Use “vendor statements.” These are something you can send out to every single supplier, subconsultant, and subcontractor each year around November 15. It is a form where you ask them to fill out all of their basic information and then also have a line for discount and payment terms. They will assume that they are competing for your business and literally bid against themselves to give you the best deal. Try it – you might be surprised at the results.
- Increase the speed of billing. Bill everything the moment you can with no lengthy review processes that gum up the works. Most companies have so much unnecessary bureaucracy in their billing process that they waste days of time. The sooner you get the bill out the faster you get paid and the less of your own money needs to remain in the business.
- Rent or lease everything. You don’t want to use up your precious capital buying anything and paying in full for it. Rent or lease, if possible. And if not, finance it. Remember that the average A/E firm generates more than a 60 percent return on equity. When you can borrow money for just about anything at rates of 6 percent or less, using precious cash for buildings or vehicles or expensive equipment just doesn’t make economic sense.
- Get a line of credit based on your accounts receivable and don’t use it unless you need it. It’s amazing to me how many companies in this business still don’t have a line of credit. They would rather give away or sell expensive equity than borrow money at low rates. Makes no sense from a financial perspective.
- Get your landlord to make the tenant improvements for any facilities you need. You never want to put a dime of your own cash into an office buildout. Get the landlord to do it even if it means you pay a higher rental rate for the space. Let them use their cash versus you using yours.
- Write leases with free rent on the front end. This is another good way to save cash. Negotiate a rent free period into the front end of the lease, especially for new businesses or new offices. You will be glad you have the time to ramp up your volume with lower overhead initially.
- Write leases with escape clauses if specific performance metrics aren’t achieved. This is one of my favorite tactics. Write into the lease a requirement that the volume of a new office has to achieve a certain number and if it doesn’t, you are off the hook and released from the lease at some point in time.
- Slow up disbursements (payments). Push everything out as far as you can and keep your cash as long as possible without screwing up your relationships with critical subs and providers.
- Create an incentive program with lower base pay and more pay based on company performance. Again – not easily done as base salaries are so critical for recruiting, but then again very few companies in this business actually commit to and follow through with a bonus program that pays out a certain percentage of profits to ALL employees every month. If they did, maybe more of them could have a system like this. Leave it subject and pay it out once a year and you won’t be able to use this bootstrapper’s tool.
- Sub out everything vs. hire if it reduces your need for facilities, tools, equipment, training, etc. If you cannot make a long term commitment to keep a particular person or group busy on profitable work at all times, maybe you would be better off using subs or temps for the work. There is a lot of associated overhead with every employee you add to the payroll.
- Provide incentives to clients for quick payment. Sometimes it makes sense because the cash is more valuable to you than the discount you are providing.
- Buy another firm and get the sellers to finance it to you. Always a classic bootstrappers’ growth tactic. Some sellers may be willing to finance 100 percent of the deal. Even if you buy book value for cash, you get cash and AR for cash – and you can hopefully get the seller to finance the rest of the value to you over time.
Mark Zweig is Zweig Group’s chairman and founder. Contact him at firstname.lastname@example.org.Click here to read the full issue.