I started with a Sherline mill and have modified/upgraded everything on it to the point where the spindle is the only sherline part left on it. I use a 650W brushless motor to drive the spindle, which was a nice upgrade to the Sherline motor.
The limitations/irritations that come to mind are...
- for wood and steel you will want the high rpm pulley set (or make your own) so you can get 10krpm for wood and 2krpm (or lower) for steel.
- tramming: the spindle comes with a keyway. It will have a small amount of slop. You may want to design a better mounting scheme than the Sherline keyway & set screw/mounting post. The design is not terribly rigid, especially if the Sherline headstock spacer blocks are used.
- tool holders: Sherline makes lots of tools & accessories for their spindles, but not too many other people do. I use holders that thread onto the nose for everything and have sold my drawbar style tools. Having one method to change tools is a little more convenient. The Sherline endmill holders are nicer than the other ones on ebay, IMO.
The nice thing about Sherline is that you can easily buy and sell lots of their stuff on EBay. As I sold my Sherline stuff, I got about 2/3 of the list price, so you if buy a Sherline product and find you don't use it, you can sell it on ebay without feeling like it was a total waste of money.
Alternatives would be a X2 head from Little Machine Shop. It's bigger and the fit and finish may not be as nice as Sherline out of the box. Huge advantage in R8 spindle though. Top speed would be lower.
You could also use a Bosch Colt router with collets from Precise Bits and the Super PID speed controller.
OR... there's the Chinese spindles on eBay and get a Hitachi VFD (don't get chinese VFD on eBay frequently paired with these spindles) from Automation Overstock or similar site.
Good luck with your project.