12 Feb How a corporate bankruptcy experience led me to validate multiple markets for my startup
We were young, care-free, and rolling in cash.
We had just purchased a hotel with a combination of family funds, borrowed funds, and an assumed note. Total deal value $1.1 million with only a $100k down payment – yeah for leverage!
We had done our homework on how to operate hotels and had several experts (who were also in the hospitality industry) validate our deal. We thought we were on the right track. We were ready for competition and to experience, firsthand, the American dream. We renovated rooms, installed vending machines, pool tables, pin ball machines and many others ‘cash’ generating items.
However, the one question we did not ask was, “What if all our customers were told not to stay at our hotel?”
You see, the property we purchased was built outside the gates of an Air force base, and had actually been built for Airmen and family members of the base to stay at while visiting.
So what went wrong? There were some underage drinking incidents that took place at some establishments around the base and the base commander placed a curfew on all establishments within a 1 mile radius of the base.
Overnight our business dried up.
So we started scrambling and thinking of different ways to generate income. But there are only so many things you can do with a hotel. We rented out our restaurant space for parties, we cut deals with construction companies that would come to town on a weekly basis, we even rented highway billboards.
But nothing we did brought our occupancy rate up to where we could break even.
Eventually we had to face the reality that we could no longer continue down this path, so we started researching our options. Corporate bankruptcy seemed to be our only way out.
For those of you that are not aware, corporate bankruptcy can be an expensive proposal. Our lawyer advised us to attempt a ‘cram down.’ What this means is that we had the property reappraised, based on current revenues, and then ask the judge to effectively rule that the some of the unsecured debt be ‘forgiven’ and also rule that the value of the asset be adjusted to reflect the new value.
This of course was not going to sit well with our primary lien holder. So we spent multiple thousands on lawyers, accountants and appraisals getting ready for our hearing.
To make a long story short, the judge ruled in favor of our lien holder and we were given 30 days to evict the property.
Essentially, we went from a chapter 11 to chapter 7 with the smack of his gavel.
In our post mortem we realized that we had overlooked one very important aspect of our evaluation of the deal: what if a ‘higher power/authority’ told our customers that they could no longer patronize our establishment?
This a question that I have asked all of my clients during my consulting engagements and this is the same question I am asking myself as I proceed on my own startup journey.
This is also the reason that I am taking the time to validate several markets, not only to protect against competitors but also protect against my customer disappearing overnight.
We often hear the great ones (Steve Blan, Eric Ries) speak and write about validating the customer and strongly agree with them.
But depending on who your customer is, especially in the B2B world, don’t forget to ask: who could stand in the way or prevent them from them using your product?